Blackstone Is for Everyone

If you work in financial markets and are very smart and diligent, you might occasionally notice something weird. Some stock is trading at too high a price, or too low. Some company is being run inefficiently, and if you take it over you can make it worth more. Some company has violated the terms of its bonds, and if you buy up the bonds you can put the company into bankruptcy and extract a lot of value. Some asset is trading at a tiny discount to some economically equivalent asset, and if you buy one and sell the other and lever up the trade you can make some money. The Ruritanian stock market goes up on Tuesdays when it rains, so you should buy Ruritanian stocks on Monday afternoon when the forecast is for rain. All sorts of anomalies and dislocations and inefficiencies and opportunities.

These opportunities have different scales. By some measures, one of the greatest of all trades is the reverse split arbitrage: When a tiny company does a reverse stock split, it will often round up, so if you buy one share of a company as soon as it announces a 1-for-10 reverse split, you can end up with a quick and reasonably certain 900% return on your investment. But this only works with one share; you cannot in any sensible way scale it up.1 You can make, like, $4.50 on a $0.50 investment: It is a true market anomaly that you can exploit, but not very much. Other trades have much bigger scales. Jane Street Group was able to extract perhaps a billion dollars from, uh, let’s say noticing some anomalies in the Indian options market. Renaissance Technologies has spent decades taking billions of dollars out of financial markets by noticing anomalies on an industrial scale.