Idea Brunch with Fahmi Quadir of Safkhet Capital
Idea Brunch with Fahmi Quadir of Safkhet Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Fahmi Quadir!
Fahmi is the chief investment officer of Safkhet Capital, a concentrated, short-only fund she founded in 2017. Before launching Safkhet, Fahmi was an equity analyst at Krensavage Asset Management and a senior associate at Deallus Consulting. Fahmi has earned the nickname “The Assassin” by multiple media outlets for her detailed work on frauds such as Valeant and Wirecard and her work was a subject of the Netflix series Dirty Money.
Fahmi, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Safkhet Capital?
My pleasure, Edwin. I remember when you were still a sophomore in high school and it’s incredible to see how far you’ve come!
I’m a child of immigrants and was raised with moral clarity around my privileges and the importance of using my gifts to pay it forward. Finance wasn’t the obvious choice, and for much of my life it was exactly where I didn’t want to be.
Instead, I spent a lot of time thinking about math, my first love. This led to a passion for analyzing knots in Euclidean spaces and I dreamt about how I would earn my doctorate and make some incremental contributions to my field, using algebra to explain natural phenomenon. Graduate students aren’t exactly well-paid, and I hadn’t had any work experience outside of academic research, so it made some sense to take a bit of time first. I found myself at a place with a lot of PhDs who eschewed academia for corporate life.
They needed a math brain to work on a project for a big pharma client that would use various sources and types of data to predict shortages in essential medicines. Call me naïve, but I believed the work I was doing was important because it would allow our client to preemptively step-up production to meet those shortages. Instead, the client used the predictions to opportunistically increase prices and worsen the shortage. This became a line-item in their annual budget.
I was livid, but what point is there in being angry if you aren’t going to do anything about it? My life’s direction took a stark turn, and through various serendipitous encounters at the Museum of Mathematics, I found myself in charge of building out the short book of a long/short healthcare fund. Short selling found me and after that, we couldn’t be separated. I haven’t been more certain of something in my life, and to find that sense of purpose and fulfillment so early was really a blessing.
Starting my fund was part of my natural evolution; to do this kind of work takes a massive toll, it’s too easy to get burnt out. With Safkhet, no matter the battles we find ourselves in, we know that the work we are doing is important, for markets and hopefully for the broader public.
And all this isn’t to say we aren’t adaptable; though our core vision remains steady, we are always exploring newer and more effective ways to monetize our work or affect lasting change.
Can you please tell us about your research process and short-selling strategy? Why did you decide to be short-only?
One of the missteps I often see with fund managers is straying further and further away from their original niche or skillset to more broadly appeal to the big allocators; this marketing push tends to dilute a manager’s alpha. Considering I’ve never had any aspirations to manage money, it’s a lot easier to take a stubborn approach in the face of marketing challenges. I am at peace with the decision to stick to what I know and what I’m exceptional at, rather than venture into other strategies just for the sake of being a bigger fund. I’ve never been one for measuring contests of that sort.
So, I don’t waste time on the things I don’t care for. As a short seller, managing your stress and mental agita is as important as having the best research, because without that kind of clarity you can rarely generate the conviction you will need in the market’s toughest moments. And no matter what others may say, conviction is ultimately what drives the memorable returns on the short side.
And we take this even further at Safkhet, by only focusing on situations where we genuinely believe the markets, if not society-at-large, will often be better off without these companies. We work exclusively on issuers where we suspect fraud, predatory practices, or outright criminality. We like sprawling, multi-national, corporate structures that have more of a paper trail for us to follow. Research always starts with the fundamentals, mostly to help determine where the vulnerabilities lie, the cracks beneath the surface that will eventually provide us with a well-timed position. This also allows us to narrow our research priorities, critical for a two-woman shop. We don’t want to be overwhelmed by noise and want to ensure our precious hours are spent on things like speaking with high-value sources, not chasing white rabbits.
Once we have our conviction, we like to take massive positions – the kind that might send some managers into the ER.
You’ve played a role in exposing numerous frauds including Valeant, Wirecard, and Ebix. What are some of the common red flags or themes you see across the companies you short that ultimately disclose major fraud?
There is one thing in common between these three companies: they were all historically targets of short sellers and journalists.
Both groups are positively incentivized to convince markets of contrarian views on a company, especially to expose fraud. Considering the reputational or even legal risks associated with being wrong, this is not a task either group takes lightly. So, we listen when our peers have something to say.
Valeant, Wirecard, and Ebix have been mired in controversy since they became publicly traded. What we had was the benefit of time and the increasingly risky, even reckless, decisions of narcissistic operators. When you evade justice for as long as these guys had, then it’s easy to develop a strong sense of invincibility.
As these guys were also incredibly acquisitive, with most roll-ups, deal quality deteriorates with size. Valeant’s takeover of a channel-stuffed Salix, Wirecard’s move into the US through Citi’s prepaid cards, and Ebix’s fintech binge in India all sang like canaries, foretelling a downfall within two to three years.
Now, understandably, the work doesn’t end once you find these fulcrum points, you also need to figure out what you can do about it; for us, that usually means identifying which stakeholders are empowered to actually put an end to the behaviors we identify and then engaging directly with them, sharing our analysis and hopefully compelling them to action.
In a recent interview, you said you focus a lot on companies that take advantage of the elderly, the poor, undocumented immigrants, or non-English speakers. Why focus on these areas? And what are some of the common schemes you see targeting these demographics?
Everyone can be defrauded, even me! That said, companies that target vulnerable populations with usurious schemes are particularly heinous. No good, morally upstanding citizen wants to run those companies so they tend to attract real scum of the earth: payday lenders, for-profit colleges, supplemental insurance policies and brokers, debt collectors, it goes on.
Conviction short selling is an exercise in storytelling. And every good story evokes a visceral emotional response in the audience. Companies selling worthless life insurance policies to grandma can enrage even the most Socratic managers. And the others will at the very least feel shame when called out for enabling these businesses.
Beyond markets, these are also the stories that resonate with the public more broadly, which of course pressures policymakers eager for punchy campaign material.
Personally, focusing on these sorts of businesses also helps keep me motivated because I know this fight could have implications far beyond my own portfolio and that I have a duty to those victims, beyond just my fiduciary duties to my investors.