The Michael Burry drawdown is one of the best case studies on the cost of being early. Burry started buying credit default swaps against subprime mortgage bonds in 2005, spent roughly two years under water while paying premiums and fighting his own investors, and only got paid when the housing market cracked in 2007.
Michael Burry’s legendary housing market bet earned him $100 million personally and delivered $725 million for investors. But behind those spectacular numbers lies a brutal story of survival through one of the most painful drawdowns in hedge fund history.
Key takeaways
- Burry’s thesis was right, but the trade bled for about two years before it paid off.
- The carry cost (CDS premiums of roughly $100 million on $8 billion notional) and mark-to-market losses hurt as much as the direction.
- Investor redemptions forced him to cut the position by about two-thirds, which shrank the final payoff.
- Scion Capital still returned 489.34% net of fees from November 2000 to June 2008 against just over 2% for the S&P 500.
- For retail traders the lesson is about sizing and survival: a correct view only pays if your capital and your nerves last longer than the drawdown.
The Conviction Trade That Turned Into a Nightmare
In May 2005, Burry began purchasing credit default swaps on subprime mortgage bonds after analysing deteriorating underwriting standards in the US housing market. Through 2003 and 2004, he had noticed mortgages being offered to borrowers who clearly couldn’t afford them, bundled into securities with “teaser rates” that would reset at much higher levels within two years.
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By October 2005, Scion Capital had accumulated over $1 billion in CDS exposure, betting against what Burry saw as a house of cards. His analysis was thorough – he had studied individual mortgage pools and predicted the real estate bubble would collapse as early as 2007.
But the market had other plans. Housing prices continued climbing through 2005 and 2006, turning Burry’s position into a bleeding wound.
Paying Premiums While Watching Equity Evaporate
Credit default swaps function like insurance policies. Burry had to pay ongoing premiums – roughly $100 million in total – for his $8 billion notional exposure. These payments drained capital month after month while the housing market seemed unstoppable.
By Q3 2006, Scion Value Fund was down 17.36% year-to-date. This was devastating for a fund that had previously delivered 242% returns through mid-2005. Investors who had made fortunes with Burry now watched their capital shrink as he paid premiums on what appeared to be a misguided macro bet.
The mark-to-market losses compounded the pain. The CDS contracts themselves declined in value as the housing market climbed, making Burry’s positions look increasingly foolish on paper.
When Investors Turn Against You
The financial losses were manageable compared to the human cost. Investors who had trusted Burry’s stock-picking ability revolted when he pivoted to a housing market short. They demanded withdrawals, threatened legal action, and questioned whether he had lost his mind.
The pressure to capitulate was immense. Some investors attempted mass redemptions that could have forced him to unwind positions at the worst possible moment. Even Burry’s own team members began doubting the thesis as 2006 wore on with no signs of vindication.
Ultimately, Burry was forced to reduce his position from $8 billion to approximately $2.3 billion in notional value – a two-thirds reduction, to satisfy redemptions and quiet angry investors. This meant he would capture only a fraction of the eventual payoff.
The Long Wait for Vindication
The drawdown lasted nearly two years. From mid-2005 through most of 2006 and into early 2007, Burry endured mounting losses, premium costs, investor rage, and public ridicule. His fund’s performance suffered while paying insurance premiums on bonds that the market insisted were safe.
Adding to the frustration, investment banks that sold him CDS contracts manipulated pricing to protect their balance sheets. Despite deteriorating loan performance data, these firms delayed marking positions to fair value, artificially extending Burry’s pain.
By mid-2007, cracks finally appeared. The subprime mortgage market began collapsing in dramatic fashion. Burry’s CDS contracts exploded in value as defaults cascaded through the system. By early 2008, when most positions were closed, the trade had delivered outsized returns.
From November 2000 through June 2008, Scion Capital returned 489.34% net of fees, compared to just over 2% for the S&P 500. But the victory came at enormous personal cost.
Timeline of the Michael Burry drawdown
| Period | What happened |
|---|---|
| 2003–2004 | Burry studies deteriorating mortgage underwriting and teaser-rate loans |
| May 2005 | Starts buying CDS on subprime mortgage bonds |
| Mid-2005 | Scion is up 242% since inception; the housing short begins |
| Oct 2005 | CDS exposure crosses $1 billion |
| 2005–2006 | Housing keeps rising; premiums and mark-to-market losses mount |
| Q3 2006 | Scion Value Fund down 17.36% year-to-date; investors demand withdrawals |
| Mid-2007 | Subprime defaults cascade; CDS values explode |
| Early 2008 | Most positions closed; about $100 million personal profit and over $700 million for investors |
| 2008 | Scion Capital shut down |
The Price of Being Right Too Early
In 2008, exhausted by lawsuits, IRS audits, and the psychological toll of investor battles, Burry shut down Scion Capital. He later reopened as Scion Asset Management in 2013, but never again took outside capital in the same way.
Burry’s story did not end there. In November 2025 the SEC database showed the registration of Scion Asset Management as terminated (as of November 10), and Burry said it no longer runs a fund for outside investors (Business Standard). He then started writing a paid Substack newsletter, Cassandra Unchained (Wikipedia). Once again, he chose to be early and loud on a view, this time on AI-related stocks, without the pressure of outside capital.
The housing trade lasted roughly two and a half to three years from initiation in mid-2005 to final payoff in early 2008. Of that period, approximately two years were spent underwater, paying premiums, suffering mark-to-market losses, and fighting investor revolts.
For retail traders managing their own capital, Burry’s experience offers a sobering lesson in conviction versus timing. Being right on direction means nothing if you cannot survive the drawdown period. His $100 million payday required holding through two years of pain that would have broken most investors.
The difference between a legendary trade and a failed bet often comes down to one thing: the psychological fortitude to maintain positions when everyone, including your own investors, believes you are wrong. Burry had that fortitude, and it made him a Wall Street legend. But the scars from that drawdown stayed with him long after the profits were banked.
Lessons from the Michael Burry Drawdown for Retail Traders
Most of us will never run an $8 billion CDS book, but the same mechanics show up in everyday Indian trading: buying options that decay every week, holding a hedge that costs money every month, or running a trend-following system that goes through long flat periods. Here is how I would translate Burry’s experience into practical rules.
1. Know the carry cost of your view
Burry’s problem was not only that the market moved against him; he had to keep paying to stay in the trade. Before you take a position that costs money to hold (long options, a protective put, a calendar), write down the monthly cost. If a hedge costs 1.5% of capital a month, two years of being early costs about 36% of capital before the view even starts working. That number tells you whether you can afford to be early.
2. Size for the drawdown, not for the payoff
The final payoff was smaller than it could have been because Burry had to cut his position by two-thirds. Position sizing that looks conservative at entry can become unbearable after 12 months of losses. Size so that the worst realistic drawdown on the trade does not force you out. If you backtest systems, track maximum drawdown and time under water, not just CAGR; this equity drawdown and MaxDD Pine Script code is a simple way to see it on your own equity curve.
3. Separate “wrong” from “early”
Burry kept checking the data (loan performance, reset dates) rather than the price alone. Define in advance what evidence would prove your thesis wrong. If that evidence has not appeared and only the price has moved, you are early; if the evidence itself has turned, you are wrong and should exit.
4. Protect yourself from forced selling
For a fund, forced selling comes from redemptions. For a retail trader it comes from margin calls, leverage, borrowed money or money needed for expenses. Keep the capital behind a long-horizon view free from those pressures.
5. Expect the psychological cost
Even Burry’s own team doubted the trade. Long drawdowns test discipline more than analysis. Writing down your plan, reviewing it on a fixed schedule and processing trades as a routine, as described in Risk Management – Conveyor Belt Processing of Trades, helps you avoid emotional exits. For the crowd-psychology side of bubbles like the 2005–2007 housing boom, see How Financial Bubbles Form.
Frequently Asked Questions
How long was Michael Burry’s drawdown?
About two years. He started buying CDS in mid-2005 and was under water through 2006 and into early 2007, before the subprime collapse in mid-2007 turned the trade around.
How much did Michael Burry make from The Big Short trade?
About $100 million personally and more than $700 million for the investors who stayed in Scion Capital. From November 2000 to June 2008 the fund returned 489.34% net of fees.
What was Michael Burry’s hedge fund called?
Scion Capital. He shut it in 2008 and reopened as Scion Asset Management in 2013; its SEC registration was terminated in November 2025.
Why did Burry have to reduce his position?
Investors pushed for withdrawals while the trade was losing money, so he cut the notional exposure from about $8 billion to roughly $2.3 billion to meet redemptions and calm investors.
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