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Season 2, Episode 18, Transcribed: The Methods of a Short Activist, With Gabriel Grego

Last updated on September 3, 2020

Moderator 0:02
Welcome to Contrarian Investor Podcast. We give voice to those who challenge the prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. guests were not compensated for a period, nor day supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed. This is our urge to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E. Baker,

Nathaniel E. Baker 0:36
Gabriel Grego, Quintessential Capital Management. Thank you so much for joining this podcast. You are a short activist investor. There are probably few things more contrarian than being a short, especially nowadays when markets are rallying like crazy. You have a very specific process. And you only do a couple of trades a year, I think about three or four of these very high conviction trades. And you find these companies to short. And a lot of these have turned out to be outright frauds. And obviously, this approach has worked very well for you, as these stocks have traded down, in many cases to zero. So for you and your investors, obviously, this has worked out and so I’m very grateful that you have taken the time to come on this podcast.

Gabriel Grego 1:36
Thank you very much for having me. It’s a pleasure.

Nathaniel E. Baker 1:39
So yeah, so maybe start from the beginning. How does this — How does it start? Like, how do you go about locating these ideas?

Gabriel Grego 1:47
Well, I think the locating is one of the most important parts. And I think one of the reasons why I believe I have a high percentage of success as defined in terms of shorting companies that then end up going to zero within days or weeks is as much a matter of the selecting the right targets, as all doing the right type of research on the company. So it’s very important to find the right target, which inevitably entails rejecting a lot of a lot of good ideas, which for some reason or another are not good enough. So, what I chose to do at the beginning of this activity was basically to focus myself on what I called extreme corporate catastrophic situations, which typically means only looking at companies where there is total or almost total accounting fraud and/or where management is committing some kind of serious crime. And of course, this this situation must must be somehow hidden to the public and to the market. Otherwise, there is nothing to bet on. So the important thing is looking for this situation, which are by definition not easy to find, obviously, because management wants it wants to keep the situation hidden. And the key word here is flexibility and open mindedness. So you cannot stick to only one strategy or procedure to look for these kind of ideas because they’re very rare. And unless you have an open mind, you’re gonna have a very hard time finding them. So you need to use a combination of approaches. The most obvious approach is to come up with some kind of screening mechanism, like an automatic software say, that looks for companies which have certain red flags, that in my experience, and other investors’ experience have turned out more likely to have a risk of fraud.

I’ll tell you a few of the obvious determinants for example, You want to look for companies that are not using a Big Four auditor or which are using Big Four auditor, which lately has been involved in a lot of fraud. And I won’t say any names here but people who follow my activities will know what I’m talking about. You want to look for companies where they have a large unexplained discrepancy within cash flows and earnings in industries where you wouldn’t expect it. Perhaps you want to look for situations where receivables and inventory are abnormally high for a very long time, or maybe four companies we start to acquisitive. And finally, you might want to look for people that keep committing fraud, because it tends to be a lifelong bad habit. So very often, in order to make a sophisticated accounting fraud in a public company, it’s not enough to have a matter of his which is determined to do fraud. You need a whole bunch of accomplices or stakeholders which give you a hand, for example, the investment banks taking you public, for example the auditor, for example a law firm, for example all sorts of service providers. So you will see that very often, there is what I call a fraud ring. So not only the company’s involved in fraud, but it’s enabled to do this fraud by a bunch of service providers, such as the ones that I just mentioned, which tend to be known probably in the industry for not minding being associated with this kind of situation. So the advantage here is if you identify who those parties are, then you can you can keep looking at what it is that they’re doing and you will see that you will find a very high likelihood of finding something interesting within the competence of this gentleman or this entity are involved with.

Finally, again, you gotta keep, you got to keep an open mind and you know, reading newspapers and, you know, keeping track of whatever industry is very trendy at the moment, very sexy, because that’s where a lot of fraud, fraudulent behavior is going to be clustered. So until recently was the cannabis industry as as you know, because you followed our Aphria play. Before that it was all the cryptocurrency blockchain craze. And now arguably it’s the COVID craze,

A lot of companies are exploiting people’s fear and greed about COVID and it’s cure that a lot of companies are trying to pump their stock price just by claiming that they’re doing something COVID related. So you want to keep track of this trend and identify them and be aware that that’s where you want to go fishing because that’s where you’re likely to find something interesting.

Nathaniel E. Baker 7:00
Wow, that’s all fascinating. And the COVID angle is admittedly not one, I would have even thought of. What type of stuff there is, do you think might be might be going on?

Gabriel Grego 7:13
Well, a lot. The most obvious reason — but now it’s already out in the open issue — was that there were a lot of companies essentially selling malfunctioning or non functioning COVID, diagnosis tests or antibodies tests, typically purchased in China, and then sold in the United States, taking advantage of the kind of moratorium that the FDA temporarily put on COVID testing because of the urgency of the issue. You know, whereas it would be so all of a sudden legal to sell and administer this Chinese COVID test, even without FDA approval. Now, it turns out a lot of companies, some are [inaudible] They started selling this test and this test had no reliability whatsoever. And some of them were even banned in China itself. So they get sold here in the West, but not not in China because they don’t work. A lot of these companies were engaged into this deplorable behavior. Actually my friend Nate Anderson from Hindenberg research, I believe, exposed a couple that do that. But then even more than that, I’m sure there is a lot of companies which are claiming to have an effective vaccine or an effective cue or to work toward an effective cure. You should be very skeptical. Yeah. And if you are in the long side of one of those companies, you got to watch out because if I were a fraudster today, that’s where I would operate. In the COVID space.

Nathaniel E. Baker 8:51
Very interesting. What kind of so it does sound like this is all a lot of it is all done by almost a cartel. The same individuals, like you say, or people attached to them?

Gabriel Grego 9:04
No, not always. Not always. But this tends to happen. And we’ve seen this happening, historically a lot. There were clusters of fraud. I mean to just give you one example, there was this guy in Florida, Barry Honig, was charged by the SEC for manipulating and pump and dumping and all that. I haven’t kept track there. So I don’t know whether the procedures are still ongoing. I think maybe he settled. But in any case, you will see that there’s individuals and the entities around it have been involved in more than one situation that has been defined by some people as pump and dump schemes. Right blockchain to give you an idea, but there were many others too. So it could have been a successful strategy for a short seller to keep track of what this guy was up to and and then call him on his pump and dumps. That’s one idea, but there are other frauds which are are not are not part of clusters, you know, they just arise out of the blue and obviously those you need different strategies to to find them.

Nathaniel E. Baker 10:18
Okay, so you have a screen here that you mentioned and you look through these certain things. That still is a pretty wide swath of companies. I think that would fall into into these categories. Probably most, if not, almost all of which are perfectly legitimate. But then what, what then is the next step and narrowing down your search?

Gabriel Grego 10:42
Well, there are certain for example, you want to be skeptical of companies which are trading in a country but there are domiciled in another country. I would say that a lot of the files that we expose had this kind of characteristic. And the reason why is is a because you make more money and raising money say in the US or in the UK and be because if you’re not domiciled, say in the US and you get caught as a fraudster, then it’s harder for you to get prostituted. You know, there needs to be extradition and the investigation is tougher. So that’s another red flag say but I will say that if you run you’re surprised not many companies come out with extreme discrepancies within say free cashflow and earnings and auditor changes. And maybe it is domiciliation anomaly that I just mentioned. If you do the search intelligently enough, you end up with maybe with a couple of dozen targets. And then the next phase is to dig deeper and see if you find otter favorites are suspicious. And there is no textbook here. So it’s it’s an art as much as a science and you need to look at what’s going on and look at it. Companies see they’re having, for example, complaints or rumors or lawsuits. And you will see that almost always, in any fraud. Say I won’t be the first person that raised and raised some doubts. If it’s a fraud, some people will have raised out, probably less vocal than I would. But you will find complaints, you will find negative reviews, you will find critical newspaper articles perhaps. So the next stage is a) see uf somebody else has had your same suspicion and see what they’re saying. And coming up with a kind of thesis. So you need to have a thesis, a wild guess, or an educated guess of what you think is going on company. So for example, we expose we do last month Akazoo. And the idea is that a lot of people only knew was was that there was a rumor that the company may have been a fraud. That’s it. And then I realized that the parent of that company five years ago was exposed by a publication similar to yours in the UK called And the the owner of that publication was a friend of mine had written a one page, very critical report of the company, suspecting that the number of users and the revenue of the company may have been fictitious. And now we didn’t go very deep with that article, but I think it raised some very good points. So I use that as a starting point. I said, Okay, this guy is claiming this. Let’s see if it’s true, then you want to ask yourself: assuming that it’s true, why, again, this is called the scientific method. So you run a hypothesis and you say you’ve got up with it is true, what kind of what kind of things can I predict about this competence? For example, if I claim that the number of Users of the of this music streaming Akazoo is inflated? Well, you can make a prediction that the number of reviews on say Google Play, or the Apple store will probably be smaller than you would expect. Okay? or maybe you can predict the number of downloads of the app, if you can figure out a way to estimate them will probably be lower. Or maybe you might get the the number of employees would be lower than expected and all of this in a proportional on a proportional basis. So what you do is you go check this is objective signs or markers and you see what are more or less they confirm your prediction. And if the prediction is not confirmed, that infer more prediction and if all of them are not confirmed, then you’re probably going to go off track. And you should either change the pieces or move to a different target because maybe we’re wrong. On the other hand, is a prediction is correct. And it multiple prediction from multiple unrelated directions are correct, then you’re probably on the right track. And once you convince yourself that the thesis is correct, at some point, your interests are safe from China understanding the thesis correct? To prove that it’s correct. And finally to find a way to convince everybody else that is correct. And all of these three phases entail very different strategies and tactics. And that’s why the process takes a long time.

Nathaniel E. Baker 15:35
Yeah. How often do you get kind of thrown off or turned, turned down? Or how often do you come across ideas that you have to abandon?

Gabriel Grego 15:47
Not very often. I mean, I get the ideas all the time, like people that very often like someone will suggested we look at a company for when we are another and almost always, they are unsuitable either because the thesis is wrong or because it’s very hard to prove. Or sometimes it goes, even though that is correct, and it’s easy to prove there is not enough moral. Unfortunately, that’s usually that’s the reason why we drop them and it is because they know that these companies are bad I can I could tell you right now a couple of companies that I know are fraud, no doubt about it. But we’re just not gonna do anything. It goes to the phone enough more.

Nathaniel E. Baker 16:37
Wow. Another reason to trade on a on a thin exchange if you’re a fraud, I guess right. So interesting. Wow. Okay. And then you do actual you go then a step further. And you also do boots on the ground research. And I say this just because I’ve watched your videos of you showing up at some of these company addresses and trying to find if anybody actually works there, which is pretty funny. Okay, so then, at what point do you go do that?

Gabriel Grego 17:05
Now that’s something that I leave for the very end. Because it’s very time consuming. It’s very expensive to do to learn the right way, in a professional way, and it’s potentially risky. So it makes sense to do the sort of thing only at the very end when when you think you already have a strong pieces, and I called it like the cherry on the cake. I don’t think that part is fundamental, but I like to have it nonetheless.

Nathaniel E. Baker 17:33
At what point is any, do you engage the company? Do you start asking them questions or any any of that stuff?

Gabriel Grego 17:42
I don’t

Nathaniel E. Baker 17:43

Gabriel Grego 17:44
I don’t like speaking to fraudsters, and I don’t like speaking to criminals. I don’t think they’re worthy of my, on my direct attention and anything, they’ll say, we’ll just be a lie. So we never approach them.

Nathaniel E. Baker 17:55
Okay, so then they won’t know about you until you come out with your report.

Gabriel Grego 18:00
That’s correct. Because it will be the worst day of their lives.

Nathaniel E. Baker 18:05
Yeah, and by the way, you mentioned the Akazoo just shameless plug that you you put this out there on our first ever virtual investing conference. And it was thanks to that actually that made it such a success and people can go back and listen to that and actually watch it on the website But so much for that, but how so? Okay, so did they ever find out about you being on to them at all or before the report comes out? Or?

Gabriel Grego 18:34
No, no, I am extremely careful with the secrecy in my investigation and the strict compartment ation. And I don’t do anything to to give them even the slightest idea that anybody’s sniffing around. So I’m very, very, very careful that I take it as a military operation.

Nathaniel E. Baker 18:56
Yeah. And you do this pretty much on your own. You don’t have as much of a team of analysts that do this,

Gabriel Grego 19:04
No, I, I do have a team where I have five people, including me that work on this kind of thing.

Each one has a very defined job and then also very often a outsource or I hire external consultants on an as needed basis to help out. So I will say that maybe on the know for sure, I’m probably the one doing most of the work. And I’m also the orchestra director. But it’s definitely not only me, and there’s a lot of people, a lot of courageous people that helped me out with this.

Nathaniel E. Baker 19:41
And then you do partner also with other shorts, like you mentioned, Nate Anderson of Hindenburg research, and others.

Gabriel Grego 19:49
For sure, well, very often, I get leads from other source for example, and there’s a lot of fun. We have great ideas, but They don’t have the in house investigation capabilities to turn those ideas into actionable back in the short. And some time even if they do have those capabilities. There are many funds, which are very reluctant to engage into a public acting short campaign. Because it’s it’s risky, from a legal and promoter from a reputational perspective to these are intense, it’s very stressful and it requires a different skill set that your average lunch for lunch one has one would have. So for example, it requires some legal expertise and requires the ability to handle the media and to communicate in a certain way. So not necessarily a great investing hedge fund would be a great actor responded. Very different.

Nathaniel E. Baker 20:55
Very cool. All right. Gabriel Grego, thank you so much for all that that stuff fascinating. conversation here. I want to come back and ask you a little bit more about you, and how you came to acquire all these skills that are necessary for this type of work. But let’s first take a short break.

Moderator 21:15
You’re listening to Contrarian Investor Podcast on iTunes, Spotify, Stitcher, and other platforms where podcasts are found. Subscribe and supply and almost rating me on social media search for Contrarian Investor Podcast on Twitter and Instagram. You can find us on LinkedIn as well go to forward slash contrarian podcast. We want to hear from our listeners email your thoughts to feedback at contrarian a repository of all podcast episodes and materials is available on our website contrarian pod calm. Now back to the program. Here’s Mr. Baker.

Nathaniel E. Baker 21:57
Okay, welcome back. We’re back with Gabriel Grego, Quintessential Capital Management. Gabriel. This is the segment of the show where I ask the guests a little bit more about themselves and how they came to this type of investing and their career so far. And you mentioned a bunch of different disparate skills that are required to do this type of work. So I think it’s your case might be particularly interesting to talk a little bit about your background and where you came from and how you came about this type of invest.

Gabriel Grego 22:30
Sure. I’m originally Italian. I lived in Italy until it was 19. I started college in the US. And then after college, I worked briefly for Orange County, London, and then I moved to Israel for the following 15 years or so. And at this time, we did some breaks and other work experience in various other countries in Europe. career wise, I graduated in economics. I’ve been taking a lot of courses in psychology. I have an MBA. And I’m on my way to finish a degree in mathematics and physics. As far as the professional experience, I worked at Shell for a period, the oil company, and it was part of their internal consulting team strategic consulting team. And I would say probably for this job, the most formative experience was working for an investment bank in Israel, where I was in charge of the large scale, real estate transaction, project financing, and leveraged buyouts. So that was like traditional bread and butter investment banking. And that probably gave me a lot of skills because the idea was to receive some kind of a project. It could be an asset to acquire a property or an infrastructure project, analyzing it in depth, especially from a financial and strategic perspective. Coming up with a financial model and then pitching it to, usually to lenders, to banks, or sometimes to private equity funds, or debt or equity. So that was a good training in understanding an asset and communicating a thesis effectively. I worked as I mentioned in London for years for a hedge fund. It was a hassle that was not an activist fun or not fun, but it probably taught them a little bit how the capital markets work and what are the ABCs of managing hedge funds. And then, you know, I had other experiences in my life, which were not related to work, for example, I served in the military for a period. I was in the in the paratroopers, and I think that probably taught me also a certain approach to how to receive, call it a mission, how to plan it in a certain way and how to execute it. Even if the mission is very daring and potentially dangerous but executed in a way that limits the risk to an acceptable level. And that taught me that there was always a way to limit risk and to maybe execute an operation in a easier or smarter, more efficient way than he would be intuitively possible in the beginning. It just takes a little more thinking. And probably, I would say, to be a good activist, short especially you need good resilience and you need to be able to deal with with adversity and setbacks and frustration and fear and really control your emotion, the level of emotions that are present in a at the early stages of a successful activist campaign can be maybe almost unlike anything I’ve ever encountered in the past. It’s scary stuff and you’re basically pissing off issues corporate entities which are found for their survival and whose management is fighting for physical freedom, and they know that their freedom and their survival depends on trying to destroy me. And these guys have vastly more financial and other resources at their disposal that that we do, especially when I did this in the beginning when we were much smaller and less experienced found that maybe we are now. So deal with that is really no joke takes a lot of a lot of thinking, a lot of strategic analysis, a lot of thinking out of the box, but most importantly, it takes a lot of mental fortitude. Because again, the attacks of this company can mountain you after you mess around with them. It can be extremely, extremely difficult to to withstand, and it’s important that you keep the fight all the way to the end. There are many of my calls Legs that have different strategies, you know, they hit the company at the beginning and then kind of walk away a day or so afterwards. And I’m not like that, if I if I attack is to kill, and it doesn’t matter if it takes me one week or six months, the company’s gonna go down. And of course, they’re going to try and fight as much as they can to avoid the beat. And the fight is not going to be easy for me. For my team, yeah.

Nathaniel E. Baker 27:29
Okay. I mean, that does sound genuinely terrifying. But I would think that jumping out of an airplane having people hoot at you as a paratrooper is a little bit more terrifying, no?

Gabriel Grego 27:39
Well, it’s terrifying in different ways. I would say that the military and this is probably a cliche, but it’s, it’s a different experience, mostly than what most people expect when they say, look at army life, the life of a combat soldier see on television And a lot of the life is is can be boring is routine manual work very hard manual work and lots of physical fitness, lots of training and the the parts where you really see strong action or danger that are few and far in between when they do occur It is very scary in training something can be very scary and very dangerous. You know, you train all the time with live ammunition. There are accidents happening all the time. So it is scary but it’s a different type of fear. It’s a fear that is very short term. So if that’s your last only as long as the exercise last or the battle last and which is usually from a few minutes to a few hours and then you go to sleep very nicely at night because you know that your long term needs are taken care of by the army. You don’t need to worry about anything except except being alive and performing. Your job is as long as you can. But when you go to sleep, you go to sleep soundly. We activism is very different in activism until the battle is over. And sometimes a battle can take, in my case can take months sometime in case on my call, this can take years. You don’t sleep well at night until the battle is over. Because, you know, the justice system moves very slowly. And there are many more moving parts. And so the battle when you’re attacking one of these companies on multiple fronts, it’s, of course on the front of convincing to investors. On the front of convincing public opinions on the media front, which is your real expertise, it’s on the legal front sometime in our investigation or Legal Group, a participant proceeding on the financial front is the company’s trying to secure credit. It’s a multiple front battle. Very complex, very pumped. We carry that takes a long time. And stress that takes a long time is a different beast from, say the experience, rather the experience in the military if you’re getting into a firefight see, yeah, it helps, but it’s not a complete substitute.

Nathaniel E. Baker 30:17
Totally. Okay. So then, as far as your fund, it’s been around for a couple years, right? Because and this is your first fund that you don’t know. Okay,

Gabriel Grego 30:26
My fund, no my fund has been around for six, seven years now. We launched in 2013. And before that, I was running managed accounts. The fund that opened two years ago, it’s a short only Fund, which is basically a it’s a privilege that we offer to the investor in the long short fund, in case they want to get additional exposure, only to react to this operation. So that fund is called quintessential pure activist fund. The flagship fund, which is long and short, is called quintessential capital fund. That launched in 2013.

Nathaniel E. Baker 31:08
Okay, so this is only a select, like invest ideas type of thing. So you do actually invest in that as well. Yeah, so what you do okay. So I guess that would lend me a good lead into the next question, which is your views of the markets and where are you invest? Yeah, like, what is your book look like these days? As far as exposure? What is it typically the exposure of the long short book, like what is a very

Gabriel Grego 31:37
well, it’s two slightly different questions, because I think these are not normal times that we’re living these are, by all means extraordinary times. And I think the portfolio reflected this until recently, like recently, I started to normalize things a bit. Let’s say the idea behind the font is, is that we only have a handful Back to the shores operation for a year. But you still need to have capital because you need collateral for for the for selling short socks. And the idea is why would they leave all this collateral in cash when I can invest it in high quality, long term compounding stocks hopefully purchase at the at a discount in terms of fear and crisis. So my idea is yes, we spend 70 or 80% of the time short selling. We spent some time going long as well and get used to two for one decision stocks. So like, again, very high quality stocks with competitive advantages good management teams and healthy industries. And the idea is we wait for extreme fear to buy those and then once we buy them, we’ll just usually keep them in the portfolio for years and never touch them again. Okay. To give you an example, we did a lot of buying in mid March when there was a peak of the fear for the epidemics. And we bought a lot in December 2018. There are the December 23. Yes, yeah. And the Christmas, almost bear market. So that’s the timing we do the bind the rest of the time, we usually do nothing. Alongside we do some activist Long’s. So we are involved right now in in one activist normal operation in Japan. But most of the time we focus on the short so I think this is an advantage because I believe that alpha in the long side is very hard to find. So if you are an average farmer, that is, you feel this urge of acting all the time and most of the time there isn’t a lot. So additional action doesn’t bring any benefit. I think the few times where you do find off in the market equipment or is panic That’s when we’ll just what we do most of the long work in terms of right now. We entered the 20 year very well because we had a very good performance last year. And I thought valuation were a little expensive in general. So what it is, since the 2019, I started creating some liquidity another way to sell the existing position, but not deploying new capital coming into the fund. And maybe shifting some of the investments to market neutral ones, like either activist operations, or we do a little bit of merger arbitrage as well. Usually safe merger. So when the credit crisis started approaching the horizon, I had a feeling that it was going to be really bad. I hash the portfolio at the beginning of the market downturn, nothing Very not immediately, but very soon.

And at the same time I liquidated all the market neutral operation that we had and created some liquidity. And those obviously didn’t move very much in the early stages of the Coronavirus bear market, because again, they’re market neutral. And then what happened is around mid March, I felt that the downturn and this in the short term was overdone. I saw the Fed moving very aggressively. So I did what I normally never do, which is kind of kind of market. And I said, Okay, fine. I close all the hedges. And they took all the liquidity that was coming from the liquidated merger arms and they put it into mostly new position and some old position that I thought had become too cheap. Now, the rationale was like this because you have three choices if you want to come by that period, right? The first choice was, hey, go value. So by the scars which have been killed the most, in that case would have been go for the industries that were directly affected by Coronavirus for example transport energy, hospitality, airlines, that sort of thing. And I thought that was too risky hold a because it’s too risky in general and B because I had to feel that this was going to be a longer crisis than then most people were expecting. Also because I’m from Milan, so all my friends are from Milan, I kept hearing all the time. What was the situation there? First time from my crime. The other option is the other way around completely is you buy stocks which are not at all affected by the Coronavirus crisis, which might even benefit that would have been buying the Netflix and the Amazons for example. And I didn’t do that either, because I figured those are the only ones that probably didn’t go down. And what I chose to do is so kind of a compromise So buying companies, which were not directly affected by the crisis touch, which were likely affected, to some extent, indirectly in the short term, to give an example, and the stock that I bought was Google and Facebook. I already had a large position in the portfolio and in the early stages of the downturn, those stocks went down severity as well, I think 40 40% each. And it makes sense. They go down because obviously they make money out of advertisement advertising is one of the first thing that gets caught if there is a recession. But I figured, hey, yes, advertisement gets caught, but they’re probably going to capture whatever advertisement is left. That’s not going to get caught because all of a sudden people are spending more time online. They’re spending more time on social media so they capture a wider proportion of eyeballs share so to speak. B this companies are very rich in cash and very cash generative. So they can, there is no doubt that they will weather the storm. And finally, consumer behavior is likely to change because of this prolonged lockdown and the sphere of the Coronavirus. And once you start increasing the amount of time you spend on social media, even when the situation reverts back to normal, probably you develop some habits which will be sticky. For example, if you didn’t use Facebook at all before to Coronavirus, but then all of a sudden Facebook became your own the venue for social interaction because the in the real life thing is not an option, then probably you’re going to be a regular user of Facebook even when things go back to normal. So you’ll find these companies left with probably more market share and wider and wider pool of users. arguably more experienced and those companies went down severity, not as much as our lives but feel very much. So I thought buying bills may make sense and along, I also bought from safer, safer things such as these upper levels with the position, we enlarge our position in American Express. Again, the rationale is overall spending will go down because the consumer spending less of that the short term phenomena and the long term, you’re going to have a lot of new people which are no longer going to touch cash, and they’re going to take the credit card even after the crisis over for example, that was pretty much the rationale. We left a little bit, a few hedges in place. So we went up a lot during a rebound, but probably a little bit less than the market. But I still found that I had the duty to protect my investors just in case. There’s a rebound in the market didn’t happen. And the velocity and the violence on this robot was actually a surprise to us, I guess, theaters together as everybody else.

Nathaniel E. Baker 40:00
Yeah, I was gonna say, probably surprise just about everybody. And so right now you see no reason to put these hedges back on and to protect the long positions at all.

Gabriel Grego 40:14
Well, the hedges now are very expensive. So when I bought those, we hedge the portfolio with S&P puts. And the volatility at the beginning of the crisis was still not in beginning and at the end of February or very beginning of March. There was a window of maybe one week where volatility was still not crazy. And you could still buy those books at a reasonable price right now. puts on the s&p are very expensive.

So that’s not an option. The other option is you know, buying, you know, ETFs and having short position, single name short positions open and we did a little bit of that. I normally don’t do it. I go short. It activist campaigns. But in this situation, I made kind of an exception thinking that, hey, I want to have a little bit of a hedge in the portfolio as well. And so we made a selection of all the activist campaigns managed by other funds, which I think made sense and shorted some of those companies. To that extent, we have a little bit of a hedge and not much.

Nathaniel E. Baker 41:24
Interesting. What might people be able to expect from your next short idea? Obviously, after everything we just talked about? is keeping it secret is paramount. And you did mention some industry in the outset that you were looking at, but is there are there any other areas that you think might be good for looking for these activist shorts that you like?

Gabriel Grego 41:47
No, meaning, when I mentioned those areas, I was thinking only in general terms. In this case, we’re actually looking bottom up, not top down, so I’m scanning some companies which are, which are having signs of having something problematic, and not necessarily all of them are a nine of the industries that I mentioned earlier. I would say that probably Chinese companies traded in the United States. Some of them look very, very interesting. Many of them have surface recently and had been attacked by some of our colleagues. And I will say that Chinese trolls are a different beast. They behave in a different way for all sorts of reasons, so they must be tackled in a different way too. But that’s definitely another direction that we’re looking at. Because there is no shortage of fraudulent companies there.

Nathaniel E. Baker 42:51
But you haven’t done any activist campaigns against Chinese companies,, have you?

Gabriel Grego 42:56

Nathaniel E. Baker 42:57
So that will be a first for you guys.

Gabriel Grego 42:59
The reason why we haven’t is that is a place where you need the very good local expertise. So there are language barriers. There are, you know, cultural barriers and also as I said that are different issue that you don’t have with other companies, for example, I’m convinced that there is a concerted effort, deliberate effort to manipulate the price of the stocks to limit the impact of activist attacks. And this is only for China. I don’t know if you’d be calling what happened with GSX for example.

Nathaniel E. Baker 43:34

Gabriel Grego 43:35
So GSX is a Chinese education company traded in the US. A large company. Multi-billion dollar market cap. Was recently attacked by three funds. The grizzly bear I think was the person that Andrew left wrote something. And then finally Muddy Waters. All of them launched an attack. They attacked the company from different angles, but they were all saying the same thing that the company is a fraud. And I have very few reasons to doubt that the thesis is correct. So the company reacted, the stock went down a little bit, like less than 10%. But then within the day it rebounded all the way up pretty much. And then it’s trading on a very narrow band. And there is no reason for the stock to react like that. I mean, the consensus among its investor base is that this is a fraud. They haven’t even seen the, the outer side of the thesis except from what the company say, but the company always denies right. And so there is a discrepancy between the way the stock is reacting and the way the consensus has formed. And I have no doubt that this is the manager of the company, perhaps have called by some of your buddies in China [inaudible] to avoid the price from collapsing. Why am I so sure? Because I’ve seen it happening over and over. In other Chinese frauds that were exposed. So that is something which is very unethical. Illegal by the way. This happened and if you want to short a Chinese stock it is something to take into account. And we’re looking for ways to get around back and I’m not going to disclose the secret sauce but I have a few ideas how we can get around that problem if we ever want to attack a Chinese company.

Nathaniel E. Baker 45:29
Maybe in closing you just tell us where to tell listeners where they can find you. And we put that on the in the show notes as well. You have a pretty active Twitter there, which is what, @QCMFunds I believe?

Gabriel Grego 45:40
yep. @QCMFunds is our Twitter handle and we also have a generic email that if any of your listeners have a smart, short idea, please reach out and we’ll we’ll find some way to collaborate. The criteria are we won’t have This would be about our market cap. It must be either a total fraud or engaged in serious crime and traded in the major Stock Exchange. So, the email address is

Nathaniel E. Baker 46:19 I’ll put that in the show notes as well. All right, Gabriel Greco. Thank you again so much for joining us. Thank you all for listening. And we look forward to speaking to you again next time.

Moderator 46:32
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