Hedge Funds, Hedges and Perpetual Bonds

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.
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Today in hedge funds.

Here is a fun story about how some hedge funds don't like to be called hedge funds. ("We actually don’t see ourselves as a hedge fund," says Seth Klarman of Baupost. Chuck Akre "said he would rather compare himself to a Warren Buffett-style investment firm," and I bet he's not alone in that.) The problem is that "hedge fund" is a largely meaningless term full of vague associations: Some people think it implies caution (that "hedge"), some people think it implies high leverage and wild recklessness, and lots of people think it implies high fees for mediocre returns. And since it doesn't mean anything anyway, why not use something without those associations? Still it is interesting that the term is losing its appeal. There was a time when anyone day-trading his $5,000 of bar mitzvah money would say he ran a hedge fund; now I guess that guy runs a ... "Warren Buffett-style investment firm"?

Meanwhile, Leon Cooperman's Omega Advisors "has been subpoenaed by the U.S. Attorney's Office in New Jersey and the SEC," but that seems to be about all anyone knows. "Regulators are seeking information about the trading of specific securities," which is usually how subpoenas work. A good data journalism project would be to try to figure out what percentage of publicly announced subpoenas actually lead to charges/suits/settlements, as opposed to being pure fishing expeditions that go nowhere. My guess is that the hit rate is fairly high but I actually don't have much intuition for this.

Speaking of fishing, I have to confess that I was not aware that one of the original "Tiger cub" hedge funds was named TigerShark Management. I guess back in the pioneering days of hedge funds, people didn't realize they were supposed to name their funds after expensive neighborhoods and so went with awesome animals instead. Anyway it's closing.

Some activism.

William Cohan had lunch with Bill Ackman at the "most expensive diner in Manhattan," and goaded him into offering Marty Lipton a $1 million bet to debate whether activist investors are good or bad for the world: "Either he has to make a donation to the charity of my choice or I make a donation to the charity of his choice if we have a real debate on the topic and the audience votes and whoever wins, wins. How’s that?" I would watch that. (Disclosure: I used to work for Marty Lipton's law firm, and I did high school debate, though not for money.) There is some other good Ackman stuff here, including the time that Michael Strahan complimented him on his "physical presence." ("The best compliment out of maybe the last 10 years," says Ackman, and you know he keeps track.)

Meanwhile Herbalife has kicked off a new television ad campaign "to make sure people know what we're about and what we mean to the community." And Citizens for Responsibility and Ethics in Washington, "a mostly liberal-leaning group that typically works to expose corruption among government officials," is urging Congress and the Securities and Exchange Commission "to investigate hedge fund managers who have enlisted government agencies and legislators to go after companies whose stock they’d sold short." Ackman and Herbalife, and also Steve Eisman's short on for-profit colleges:

Anne Weismann, interim executive director of CREW, says: “Our hook here is not short-selling per se, but using government processes for personal gain,” which she called “highly inappropriate.” She suggests that staking a financial bet against a stock and then assailing the company in public and in government offices falls “under the rubric of market manipulation.” 

I feel like a lot of people think this, and I don't understand it at all? To me, if Ackman and Eisman are right, then they're right, and the government should act and their profit motive is irrelevant. If they're wrong, they're wrong, and if they're dishonestly wrong then I'm sure that falls under some rubric of something. (Lying to anyone about anything is a felony, remember; this is not legal advice.) But CREW isn't arguing that they're wrong ("We're not here to defend" the targets, says Weismann), just that their motives are unseemly and therefore are or should be illegal. I don't get it.

Today in hedging.

Here is a story about how many energy companies are running into financial trouble, for fairly obvious reasons: The price of oil has plunged, and they have debt and fixed costs and covenants and borrowing-base capacity that all look a lot less pleasant in a world of $50 oil than in a world of $100 oil. But you know what looks awesome in a world of $50 oil? Forwards/futures/puts/whatever struck around $100, that's what. And so here is a story about how some oil companies are harvesting their hedges for cash. Sometimes this is just cashing in some mark-to-market gains: You take a $90 hedge, cash it in, put on a $50 hedge, and remain hedged against further downside moves but with $40 in cash to appease your lenders. And sometimes it's more like oh come on how much lower can prices go really:

Oklahoma City-based Continental Resources Inc. saw its share price hammered shortly after it dropped nearly all its oil hedges when crude was still priced at about $80 a barrel in early November. The oil company earned $433 million from the move, which was unanimously approved by its board, and it used the cash to cover operating costs and keep its investment-grade credit rating, Chief Executive Harold Hamm said in an interview in late February. 

Lawyers don't really understand computers.

Ahahaha "Citigroup's cyberintelligence center" (what?) "warned bank employees of the threat of attacks on the networks and websites of big law firms," because "digital security at many law firms, despite improvements, generally remains below the standards for other industries," and law firms are a good target for hackers "because they are repositories for confidential data on corporate deals and business strategies." The law firms themselves are generally unwilling "to discuss or even acknowledge breaches." I mean honestly even that is progress; I'm impressed that the law firms notice the breaches. Lawyers, huh? Everyone wants to hack into banks because they're where the money (and credit-card information) is, but if you're looking for deal information there are so many ancillary service providers -- law firms, public relations firms, financial printers -- that have cool stuff on their computers and probably spend rather less time and money on information security than the banks do.

Also is anyone else a little scared that Citigroup has a cyberintelligence center?

Should Treasuries be perpetual?

Here is a paper and blog post from John Cochrane proposing "A New Structure for U.S. Federal Debt," in which all federal debt would be "perpetual, paying coupons forever with no principal payment." Some of it would be floating-rate, so it would look and feel "like a money-market fund, or reserves at the Fed" (or, kind of, Treasury bills); some would be fixed-rate, some inflation-indexed, and "Some if not all long-term debt should allow the government to vary the coupon rate without triggering legal default." I appreciate the tidy-mindedness here; the proposal checks a lot of finance-theory boxes:

Structuring long-term debt as perpetuities means that the hundreds of issues now sold collapse to a single issue, with trillions of dollars outstanding. This change should enhance the liquidity and collateral value of long-term debt. Both changes should lower interest costs, by providing debt in a more useful and liquid form.

Indexed perpetuities offer an improvement over current TIPS. They will be much more liquid. The indexed perpetuity is the cornerstone investment of modern dynamic portfolio theory, and should therefore be quite popular.

One other thing that I like about this proposal is that you sometimes hear claims from politicians that the U.S. can't keep borrowing forever, that it needs to pay down its debt, etc. These claims are straightforwardly false -- the normal condition of national debt is for it to get rolled over and go up over time -- but that is not especially intuitive. Making the debt perpetual would make it more obvious. "We need to pay back our debt," a politician would say, and you'd say "No, actually, look, it says it right here in the contract, it never needs to be paid back, it's cool." Elsewhere, here is Kristi Culpepper on "Chicago's dysfunctional debt program."

No one wants to be a brokerage branch manager.

Honestly I was kind of surprised to learn that the job of branch manager of a Wall Street brokerage still exists? Is this a generational thing, or an I don't have enough money thing, or what? Like my money is in index funds and I interact with it through a computer; the idea of walking into a branch to talk about my money feels weird to me, and the idea that that branch would have not only people to talk to me about my money but also a silver-haired eminence in charge of talking to those people about how to talk to me about my money just feels like a wild luxury from the 1950s, like travel agents or drinking at lunch. But, no, apparently it's a real gig. But it's hard to find brokers who'll do it, because it involves less backslapping bonhomie and more cost-cutting and cross-selling than it used to, and because brokers don't want to give up their client list in a world of precarious employment and frequent job-hopping. 

Things happen.

Ruth Porat got more than $70 million to move to Google. Steven Davidoff Solomon on the details of the Heinzkraft deal. Joseph Cotterill on possible negotiating approaches for Ukraine's bonds. Euroclear and Clearstream have closed trading bridges on local-law Argentine bonds. Exchanging appreciated bitcoins for property triggers recognition of tax gains. A Physicist Is Building a Time Machine to Reconnect With His Dead Father. "Why would you want to work on Wall Street?" Correction beard. Lululemon's new "anti-ball crushing" pants for men. "Who would have known that sex would lead to losing money? Obviously, I didn’t."

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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