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Matt Levine

Levine on Wall Street: The Activist Becomes the Activisted

Anti-activist activism

The ideal activist hedge-fund scenario is that you come into a sleepy dumb company, buy a big stake, and mount an offensive against a clearly overmatched management team not used to the cutthroat world of modern capital markets. And then there is Herbalife. Herbalife and its bankers at Moelis & Co. are trying to meet with investors in Bill Ackman's Pershing Square Capital Management to try to convince them to pull money from Pershing, in an obvious but delightfully nasty inversion of the usual activist tactics where Pershing meets with investors to try to convince them to pull money from Herbalife. This inspired securities law professor John Coffee to say, "Herbalife and Ackman have been fighting in one theater, and now the warfare has moved into an additional theater" and "All’s fair in love and activism," which is not strictly true, but you can see why this story might inspire him to say that. This story does feel like it can end only with the total destruction of either Herbalife or Pershing.

What does your hedge fund say about you?

One theory of hedge funds is that they are where you go if you are really good at investing and really bad at self-presentation: They're for the rebels and outcasts who don't fit in at traditional banks or money managers but who are nonetheless valued for their ability to make money in the markets. I mean this is a theory. You will hear it from hedge fund managers. This article about hedge fund branding presents maybe the alternative theory, emphasizing marketing and self-presentation rather than the making of the money. This is not hedge fund advertising, recently allowed under the JOBS Act. This is branding, which involves hedge fund managers really saying things like, "You have to decide what you stand for, what value you offer to investors, employees, the broader community" and "Branding is about solidifying a lasting memory. And it's all about building a lasting relationship." A good brand for a hedge fund would be "we will make you a lot of money." BlueMountain comes pretty close: "BlueMountain is about creating an enduring partnership that consistently delivers the performance our investors expect."

Interest-rate trading might be in trouble

Tabb Group thinks that "Dealer revenue from negotiating interest-rate swap transactions is poised to plunge about 45 percent as new rules boost trading costs," which is sad for the dealers but I guess should make the people who write those rules happy. Increased transparency and public markets do tend to drive down profits. And risk? Maybe risk. That is less clear. "Swaps dealers currently get about 95 percent of their revenue from trading fees and from profiting off the difference between bid-ask spreads," which is the nice sort of market-making that bank reformers want. In the future, they'll make money putting up margin for hedge funds: "With clearing, it’s that they’re charging for deployment of balance sheet."

Not all Cerberus investors want to be invested in guns

Cerberus Capital Management, a private equity fund with a frankly evil name, owns the Freedom Group, a gun manufacturer with an absurdly euphemistic name. Freedom Group made the gun used in last year's Sandy Hook Elementary School massacre, which prompted Cerberus to put the company up for sale to avoid the negative PR associated with it. No one bought. One rational reaction here would be to conclude that memories are short and Cerberus has done what it needed to do to dissociate itself from Freedom, and can continue to own it. And in fact that seems to be what Cerberus has concluded. But not all of its investors feel that way, with Calstrs for instance still unhappy owning Freedom Group through Cerberus. So Cerberus is apparently offering to redeem those investors' economic interest in Freedom Group: You can own shares in the Cerberus fund -- which sounds evil but is basically neutral -- without thereby owning any interest in Freedom Group, which sounds good but feels evil to at least some investors.

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