Levine on Wall Street: Top Performers and Record Fund Flows

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
Read More.
a | A

2014 in funds.

Bloomberg Markets ranked the best-performing hedge funds of 2014 and first place is Pershing Square, but that's an outlier; the rest of the top funds were mostly in fixed income. For instance there is number four Hildene Opportunities Fund, run by Brett Jefferson, up 23.6 percent last year through October. Jefferson claims that "he's probably the biggest holder of TruPS CDOs," and that "he and his staff watch the film 'Braveheart' to get fired up" about, presumably, buying more TruPS CDOs, or maybe about suing banks to get paid off on their trust preferred securities. Something. Really if there's something you can get fired up about, chances are that someone at some financial firm somewhere is watching "Braveheart" to get fired up about it. Less good performers include John Paulson (Advantage was down 25 percent for the year as of October) and the average hedge fund, up 1.6 percent, underperforming various benchmarks like the S&P 500 index (up 12 percent). The only real benchmark for an absolute-return fund is of course the daily-rebalanced perfect investment portfolio, which in 2014 returned some 26 billion percent. Not even the best-performing hedge funds got particularly close to that.

In mutual funds, records were set all around. Vanguard had the most inflows of any mutual fund firm ever, with $216 billion in new money, in part because as of last week, "about 74% of active stock funds in the U.S. were underperforming their category benchmarks," and Vanguard is a good metonymy for passive investing.  And Pimco's Total Return Fund had "the worst year of client withdrawals in the history of fund management," seeing $105 billion walk out the door before, during, and after the time that Bill Gross was walking out his own door. Also it underperformed its peers, though not by that much -- it "returned 4.7 percent in 2014, trailing 53 percent of comparable funds" -- considering that it had to sell like half its assets to meet redemptions.

2014 in deals.

In mergers and acquisitions, last year was "the biggest year in deals since 2007," and, man, 2007. I was an M&A lawyer in 2007. That was ... that was a fun year in which to get a bonus check. Otherwise I don't remember much of it. But it seems like the ingredients are the same now: Improving equity prices, cheap debt, confident strategic buyers, short memories. That article has league tables, too, with Goldman Sachs topping the financial adviser rankings and Skadden topping the legal table.

In equity offerings, last year was also very good, with $249 billion in global deals; the number is lower if you don't count Alibaba but, then, it would be. (Why wouldn't you count Alibaba?) More interestingly, the number would be higher if companies like Uber, Airbnb, Dropbox and Xiaomi hadn't raised billions of dollars at 11-digit valuations in private offerings: One research firm has "top technology start-ups" raising $12.9 billion in 2014, versus $5 billion in 2013. The public offering doesn't have quite the attraction that it used to have. "General rule of thumb: Any private company valued >$1B would already be public in any prior equivalent era," says Marc Andreessen. On the other hand, Shake Shack filed for an initial public offering last week; I was a bit aghast to see that Credit Suisse, whose New York headquarters is right across the park from the original Shake Shack, isn't one of the underwriters. Apparently eating a lot of Shake Shack wasn't the main criterion for picking bookrunners.

2014 in Berkshire Hathaway.

Sort of a funds-and-deals hybrid, this: Berkshire's shares significantly outperformed the S&P 500 last year, as it has become less "an equity mutual fund run by Warren Buffett" and more of a mergers and acquisitions machine. And I guess an operating insurance-and-whatever company. "The market’s realizing that it’s more than just that stock portfolio," says a guy, and Berkshire is now trading at more than 1.5 times book. The thing is, once you have a reputation as a great stock-picker, just picking more stocks is pretty much the worst way to monetize that reputation, either for you or for your investors. (Stock prices are a random walk, don'tcha know.) Giving money at attractive terms to people who want to rent that reputation from you is far more lucrative.

It's hard to buy brokers.

This is a story that I sort of don't understand? GFI Group, an interdealer broker, is planning a merger with CME Group in which GFI's brokers will end up spun off into a management-led consortium. But BGC Partners, another interdealer broker, owns 13 percent of GFI, doesn't like the CME deal, and is instead offering to buy GFI itself. But GFI's brokers "are worried about working within BGC's corporate culture," and so are threatening to quit. The specific way in which they are threatening to quit is by asking management to change their employment contracts to let them quit without losing deferred compensation if BGC buys GFI, which is a pleasant little M&A-law puzzle. (Should management, which obviously prefers the CME deal, be allowed to change those contracts to make the BGC deal less viable?) But more generally, how does a hostile takeover of a brokerage firm make any sense? All the assets, as the saying goes, walk out the door every night, and if they don't like the buyer they don't have to come back. And you can project that question back: Perhaps it makes sense for BGC to offer this deal now, since they own 13 percent of GFI and think they're being lowballed by the CME deal. But why have a 13 percent stake in the first place, given your lack of control as a non-management shareholder? 

2015 in banker lifestyle.

Here is a claim that investment banks are increasingly desperate to keep third-year analysts, or promote analysts directly to being associates, because they are tired of losing analysts to private equity and hedge funds and startups. So junior bankers have a lot of leverage and will have better lifestyles and so forth. Maybe? Losing all the analysts is of course sort of the business model; you might be sad about losing a particularly bright-eyed young analyst, but in time you get used to it. I guess the analysts always want to believe that they're special. Relatedly, it says here that all the business school students want to be entrepreneurs, and the interests of business school students are perhaps the most famous of lagging indicators. "Entrepreneurship is entering the mainstream in the economy and therefore it’s starting to enter the mainstream in the business schools," says a guy. Every sentence here reads like calling the top. 

2015 in Texas.

Speaking of calling the top, have you heard that oil prices (and not just oil!) are off a bit? Did you know that Texas produces a lot of oil? How will that go for Texas? Opinions differ. JPMorgan economist Michael Feroli is a bear -- "Texas is, if oil prices stay where they are, going to face a more difficult economic reality" -- pointing to the fact that Texas's oil and gas industry makes up "roughly the same share of its economic output" as it did in the mid-1980s boom and bust, which ended badly for Texas. Dallas Fed President Richard Fisher, on the other hand, argues that Texas is more diversified, and "likens the J.P. Morgan report to bull droppings," possibly in those words.

Things happen.

"We show that, on average, all of the abnormal returns on momentum strategies remarkably occur overnight while the abnormal pro…fits on the other trading strategies we consider primarily occur intraday" (via). The Consumer Financial Protection Bureau is looking into payday loans. Venture capitalists are unusually likely to be named Guy or Joanna; accountants are unusually likely to be named Charmaine or Mitzi (via).  "We will hire a lot of interns." I Am an Artisanal Attorney. Let me teach your economics seminarActioning forward

  1. Disclosure: Most of my taxable investments are in Vanguard funds, most (not all!) of them passive.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net