I’m Long for a “Big Short” Oscar

[This post was originally published in Risk.net’s Hedge Funds Review]

How would you have reacted if I told you, several years ago, that a Hollywood studio was making a movie about the role hedge funds played in the global financial crisis? That it portrayed hedge funds as the heroes? That within the first few minutes every moviegoer would be paying close attention to a detailed explanation of short-selling? What would an option to invest in such a film have been worth? Simply put: not enough. Today, The Big Short is up for five Academy Awards including best picture, best director and best supporting actor. It does an incredible job of taking a rather dry subject and turning it into an engaging story about a few eclectic characters that millions of people continue to pay good money to see. The two best reasons to encourage others to see The Big Short are straightforward: it entertainingly educates about the complexities of the financial system and, more importantly, it accurately portrays the positive role that hedge funds can play.

The Big Short gets the high-level story right and uses accurate details to support its tale. Hedge funds – indeed all successful investment managers – profit from access to scarcely known information. The Big Short tells the story of a number of persistent investors who didn’t accept the party-line explanation of inconsistencies in the mortgage markets. They dug deeper, asked uncomfortable questions and found opportunity. This is not just the story of a handful of investors who profited from the collapse of the housing market – this is the epic story of how to be successful in life: be different, be bold, find a niche, stick to your convictions and see the job through. Each of the subplots in this movie follow that inspiring David vs Goliath storyline.

Christian Bale’s character, Michael Burry, goes through a meticulous analysis of underlying home loans before deciding to bet against the mortgage-backed securities (MBS) in which they’re collateralised. The movie shows him struggling with his preliminary findings, gathering more data, performing more analysis and finally deciding to bet heavily against the US housing market. Day after day as he waits for the collapse, Blurry records his mounting loses by writing his fund’s negative returns in big numerals on a massive white board for all his employees to see. Chutzpah, writ large. His obsessive-like behaviour endears him to the audience. His lack of experience with MBSs strains his credibility with his mentor and investors. We love an underdog and this part of the story delivers.

Meanwhile, Mark Baum, played by a convincing Steve Carell, discovers the hollowness of the same market as he tours empty Florida housing developments and interviews mortgage brokers who brag about putting modest-income earners into palaces through interest-only loans. Following the very skeptical Baum as he pieces together the underlying fragility in the housing market, you can’t help but root for him. This is great acting and great direction coupled with great writing. It’s one thing to hear Steve Carell’s dripping sarcasm when he repeats what he just learned about “CDO”s but to hear him snide as he slowly pronounces “synthetic…” CDO is what makes movie going worthwhile.

The moral aspect of the entire topic is all too briefly – but quite neatly – addressed by Brad Pitt’s character, reclusive Ben Rickert, who left Wall Street to the comfort of his Rocky Mountain sanctuary. Brought back into investing to help two naïve hedge fund entrepreneurs, he admonishes them, “You just bet against the American economy. And if you win, hardworking people will suffer, so try not to celebrate.” Wall Street could use more conversations like that.

The use of cameos to explain complex financial concepts works rather well. The dialogue between Selena Gomez and Nobel Prize-winning behavioural economist Richard Thaler at a Las Vegas blackjack table is inspired, as is celebrity chef’s Anthony Bourdain’s explanation that subprime mortgages can be made to look appealing through collateralisation, just like last week’s fish can be made into seafood stew. Director and screenplay adaptor/writer Adam McKay makes it clear that these topics deserve to be understood and helps the audience by making the lectures entertaining. He seems to tell us “no shortcuts here – I’m going to force you to pay attention to otherwise boring but important stuff by having celebrities teach you. So there!”

To be sure, The Big Short won’t make everyone in the alternatives industry happy, nor will it change the perceptions of those who believe the solution is a radical reform of Wall Street. But it will explain some of the intricacies of the investment management world and how it operates. And it will allow more people to have an informed dialogue about the proper roles of regulation, free markets, finance and opportunity. And whatever side of the debate you’re on, that’s a good thing.

All in all, this is a movie worth seeing. This is a story worth telling. For those of us in the financial investment industry, this is a movie worth encouraging others to see. It’s entertaining, informative and provocative, just like a good movie should be.