The coronavirus pandemic sent the stock market spiraling and unemployment surging, sparking worries of a bad recession and stress for many investors. But not Mark Yusko, the longtime bear who has built his Chapel Hill-based Morgan Creek Capital Management for tense times.
The COVID-19 crisis has fueled pessimistic views on the American economy that Yusko has trumpeted for much of the decadelong bull market that sent U.S. stocks soaring to record levels through late February. During his 30-plus year career in money management, including six years leading UNC Chapel Hill’s investment arm, Yusko, 57, has advocated alternative investments that don’t correlate to traditional stock and bond returns. It’s a strategy that isn’t favored when markets are roaring, but looks savvy when fear mounts.
He foresees a lot more pain ahead. “The real problem is the responses all around the world. Closing borders, closing supply chains. Businesses have inadvertently done exactly the same thing that happened in 1930,” Yusko says, referring to the Great Depression.
While some forecasters and President Donald Trump predict a fairly rapid rebound, Yusko says, “It’s just not possible. It’s really tough to see how you’re going to get back to economic growth.”
He predicts the skyrocketing unemployment rate will blunt consumer spending, the source of more than 70% of gross domestic product. Between mid-March and mid-May, 36 million Americans filed for unemployment benefits, including a fifth of North Carolina’s workforce. The jobless rate hit 15.4% in April and continued to climb through May.
Those still working are also unlikely to spend, he warns. “If you’re worried about uncertainty in the future and a second wave of the virus, you’re going to save more, consume less and get prepared for a rainy day,” he says. Flat or declining housing prices are another threat, he says. “Most small businesses are financed with equity out of people’s homes, and we’re going in the wrong direction there.”
Yusko has questioned inflated stock prices for years. It’s a stance that has affected his work: A Reuters story in 2013 noted that Morgan Creek managed $7 billion, while the company reported $3.3 billion in assets in 2016. Now, Yusko says the company’s 25 employees have $1.7 billion under management, mostly in six major funds, though it also oversees some other private client assets.
About 90% of Morgan Creek’s investments are in private equity, venture capital, energy, natural resources and hedge funds. Its long-short fund, which includes bets that stocks will slump, was up 7% through early April, ranking among the top 10% of U.S. hedge funds, Yusko says. When the S&P 500 index declined more than 25% in late February through mid-March, another Morgan Creek fund declined 4%.
Even its traditional long-only stock fund, which focuses on stocks in emerging markets, has outperformed the indices this year, he says.
“Put all that together, markets are still down about 10% to 12%, and we’re marginally positive. So that hedging strategy worked beautifully,” Yusko says, referring to year-to-day results through April. “Now, full disclosure, it lagged last year, as you’d expect, the market [was] up 30%, and we were up significantly less than that.”
Yusko founded his company in 2004 with a team from UNC Management, the endowment office where he was president and chief investment officer for six years. He had been a senior investment director for his alma mater, the University of Notre Dame. Buoyed by his early success at Morgan Creek, he and his wife, Stacey, pledged $35 million to the Fighting Irish in 2009 to sponsor a merit-based scholarship program.
Yusko’s basic goal at Morgan Creek is to provide “the endowment model of investing” so individuals, families and smaller institutions could invest in different asset classes. His funds typically have five- or 10-year investment horizons, minimizing short-term market swings. “The volatility rises, and you could lose a lot of money because you’re forced to sell at the wrong time,” he says. “If you’re a long-term horizon investor, that volatility really helps you because you get to buy things when they’re cheap.”
The firm’s hedge strategies are “designed to do well when the market doesn’t,” Yusko says. “Clearly, you didn’t need to be hedged up until the last few months,” but Morgan Creek has outperformed most peers with a similar investment approach, he adds.
In the last two years, Yusko has focused much of his attention on Bitcoin and other digital currencies, which are marked by high volatility. Morgan Creek is raising $250 million for its Digital Asset Index fund. He has invested in the space since 2018, when Bitcoin was trading between $4,000 and $5,000, Yusko says. It has since traded between $3,100 and $12,000 and was in the $9,100 range in mid-May.
Adoption of cryptocurrencies has been on a mostly steady incline because the technology provides advantages in security and privacy and has great growth prospects as confidence in the dollar and other currencies wanes, he says.
“It’s a great business because there’s less competition like the good ol’ days of banking, before it became such a low-margin business.” He likens the volatility of digital currencies to the erratic trading of Amazon shares in the e-commerce company’s early days. “People don’t really understand the nature of innovation,” he says. “The newer an asset is, the higher the volatility.”
About 80% of Morgan Creek’s cryptocurrency investments are in software and equipment that mine, transfer and store digital currencies, while about 20% is invested in liquid Bitcoins and other cryptocurrencies. The infrastructure investments will prove much more profitable once cryptocurrency has more mass market appeal, he says.
For now, the focus is on the coronavirus pandemic’s impact. For all his pessimism, Yusko remains confident that things will work out. “Human beings are incredibly creative and industrious. If you look at the history of wealth, it’s all created from innovation,” Yusko says. “If you swing for the fences, good things happen. … And the same is true for innovation.”