‘The Big Short 2.0’: How Hedge Funds Profited Off the Pain of Malls

Before making their bets, some investors who shorted the CMBX indexes engaged in labor-intensive research. Mr. Mudrick and his analysts walked all 39 malls in the CMBX 6 index, from the Northridge Fashion Center in Los Angeles to the Town Center at Cobb in Kennesaw, Ga. Wearing casual clothes, his group paced the perimeters and food courts, snapping photographs and taking notes.

A slide deck on the Crystal Mall in Waterford, Conn., that Mudrick Capital prepared in 2017, when the firm first did the trade, contains maps of the two floors, facts and figures on competing shopping centers and a summary of the tenants classified into categories like “distressed” (Gymboree, Claire’s), “local/non-national” (Lord’s & Lady’s Hair Salons, FroyoWorld) and “notable” (Hollister, Aéropostale). A caption above one picture that prominently displays a J.C. Penney store and few shoppers in the atrium reads: “Interior physical product ok, but tired. Vendor renting ride-able stuffed animals for kids in middle of photo.”

Mr. Mudrick said security workers in the malls sometimes hassled him or his employees. “When we took photos, we tried to do it sort of in a clandestine way,” he recalled.

When Ms. McKee, who this year became a portfolio manager at MP, and Mr. McNamara, her colleague, met Mr. Icahn, their main fund had already invested more than $100 million in the short trade. They were hoping to do more, but some of the investors they were pitching were uncertain, which was why Ms. McKee was hoping for Mr. Icahn’s endorsement.

In February, Ms. McKee and Mr. McNamara started a fund with $30 million in investor capital that was dedicated solely to the mall short. Within a month, they had more than doubled that money, so they closed out the fund in May and distributed the proceeds to investors. MP still retains a short position in its main fund.

“I’m definitely bearish on malls,” Ms. McKee said. “But I think it’s a very case-by-case basis. I don’t think all malls are dying.”