Mall Short Seller Shuts Down Before the Malls He Bet Against Alder Hill Management aimed to profit by betting against debt tied to some of the country’s weakest malls Eric Yip, founder of Alder Hill Management, in 2015. Photo: Bridget Badore By Esther Fung Oct. 15, 2019 7:00 am ET The business of running malls has been reeling, but Wall Street is learning it isn’t always easy to make money from their troubles. Alder Hill Management LP, which aimed to profit by betting against debt tied to some of the country’s weakest malls, ended this trade over the summer, according to a person familiar with the matter. Eric Yip, a founder of the New York-based hedge fund, is also winding down the entire $300 million hedge fund, this person said. While some of Alder Hill’s other trading strategies had been profitable, its 2½ years of losses shorting mall debt convinced Mr. Yip to shut down, according to the person familiar with the matter. Alder Hill and other short sellers—or traders who bet that the price of a bond, stock or other asset will fall—have found that their wagers against commercial mortgage-backed securities tied to retail property didn’t go as planned. Losing BetA slice of an index called the CMBX 6rebounded as losses among mall-based loansdidn't materializeTraded price per swapSource: IHS Markit2018’190.8000.8250.8500.8750.9000.925$0.950 Oct. 5, 2018x$0.88 That is largely because the rise in retailer bankruptcies and store closures since 2017 didn’t produce a significant increase in missed loan payments by mall owners, according to data from commercial mortgage tracker Trepp LLC. Since a significant number of these loans require interest-only payments, or have a partial interest-only payment schedule until they mature, property owners have been current on their loans despite weaker rents, said Dylan Wall, a research analyst at Trepp. The short sellers took a short position on the CMBX, a little-known credit default swap index that tracks the values of bonds backed by mortgages of malls and other commercial real estate, such as offices and hotels. The short sellers make money when bond values fall as loan defaults occur. Prices of one slice of the CMBX Series 6 securities—which had a large exposure to loans made to underperforming malls—fell in 2017. But then they rebounded in 2018. This year, it has continued to rise and is now close to levels when Alder Hill published its first report in early 2017 laying out his mall short, according to data from IHS Markit. That has made it difficult for short sellers to profit, especially since the bet requires them to make a regular 3% coupon cost as part of the short-sale process. SHARE YOUR THOUGHTS Do you think shopping malls have a future in America? How so? Join the conversation below. Only three of the roughly 40 malls tied to the CMBX 6—Fashion Outlets of Las Vegas in Primm, Nev., Salem Center in Salem, Ore., and Westgate Mall in Brainerd, Minn.—had delinquent loans. Occupancy in these centers now hover between 58% to 79%, according to Trepp. Vacancy rate in malls rose to 9.4% in the third quarter, the highest it has been since 2011, and up from 9.1% from the same period a year ago, according to Reis Moody’s Analytics Inc. Weaker malls generally take a long time to close, in part because they have locked in many retail tenants with leases that have staggered maturity dates, which means malls usually have some tenants still under contract. Mall landlords have also become more flexible in negotiations with tenants over lease terms. They have filled vacated space with more nontraditional tenants, such as medical offices, churches, health clubs and offices. This has helped to keep many of them still occupied. Short sellers focused on the shares of listed mall owners have done much better than those focused on the debt. Total returns from mall landlords fell 2.7% and 7% in 2017 and 2018, respectively. In the first nine months, they are down 4.6%, according to data from Nareit. WSJ Archives The Hedge Fund Manager Who’s Shorting America’s Malls (April 26, 2017) Alder Hill isn’t an outlier among hedge funds, which have suffered poorer-than-expected returns. Overall, hedge funds have generally underperformed, recording less than half the returns of the stock market in the first half of 2019. Write to Esther Fung at esther.fung@wsj.com https://www.wsj.com/articles/mall-s...shareToken=st0a6747f0313d4a88a4b2832ece4ffefa