Hedge Funds, Spoofers and Sauce

Also private equity, bond market liquidity, and The Most Interesting Man in Banking.

Steve Schwarzman.

Here is a story about how Steve Schwarzman is not satisfied with Blackstone's enormous success, but has instead "spent countless hours over the last year struggling to convince investors that Blackstone’s shares are drastically undervalued when compared with those of its peers." The trouble is that Blackstone's core business -- certainly its historical core on which it built its reputation -- consists of charging clients large fees for producing above-market returns on a relatively small portfolio of large risky lumpy leveraged buyouts, and it is hard to convince people that that is a stable repeatable defensible business. Obviously there are things you can do -- institutionalizing the firm and diversifying into businesses that rely less on hitting home runs in private equity -- but Schwarzman remains worried about Blackstone's "doggy multiple," which is considerably below that of less-alternative managers like BlackRock and T. Rowe Price.

The other problem is that the firm is so closely associated with Schwarzman; one consultant "wonders whether the firm can sustain its pace without Mr. Schwarzman at the helm." We learn that "on one occasion he cursed out an investment partner over a bet gone bad," and I feel like  if Schwarzman has actually cursed out an investment partner on one occasion then he is the mildest-mannered person in private equity.

Phil Falcone.

Here is a story about how Phil Falcone is not satisfied with his five-year ban from the securities industry and is mounting a comeback via a public company called HC2 Holdings that buys and builds other companies. HC2 doesn't necessarily stand for anything, but it is sure reminiscent of "Harbinger Capital 2," a sequel to Falcone's former hedge fund; in a sense it is more of an HC3, in that the first sequel was a public company called Harbinger Group (now HRG Group) that Falcone left last year. "People kind of look at me as I am unbelievably aggressive, and I probably do make some people nervous," says Falcone. And: "As the youngest of nine kids in a three-bedroom house, I learned how not to give up." 

One odd criticism of HC2 is that Falcone doesn't own much of it:

While the latest HC2 proxy lists him as owning 2.4 million shares for an 8.9 percent stake, most of that count represents options he has not exercised. As of April 15, he owned only 565,951 shares outright, currently worth just $4.2 million.

That means Mr. Falcone gains more if the stock rises than he loses if it drops. Trying to build HC2 quickly to reap such rewards could heighten the risk for other investors. But Mr. Frischer, the Seattle investor, said the upside from HC2’s speculative holdings “could be very high.”

But if you think of HC2 has a hedge fund (or private equity firm) in public company form, it might make more sense: Hedge fund managers are compensated via performance fees, which have the payoff structure of options; Falcone's option-based ownership gives him the usual upside-biased hedge fund incentives. 

Elsewhere in hedge funds.

Bridgewater had a not so great month; its "'All Weather Fund' fell 4.2 percent in August and is down 3.76 percent so far this year," amid a lot of worrying that risk parity investing contributed to the recent market volatility. And here is James Stewart on how hedge funds generally had a bad August:

“August was a fair test, and many hedge funds had a tough time,” said Simon Lack, founder of the financial consultancy SL Advisors and author of “The Hedge Fund Mirage” and the forthcoming “Wall Street Potholes.” Hedge funds “have failed to beat a 60/40 mix every single year since 2002, and they’re on track to repeat this year.”

said yesterday that perhaps the recent volatility "will make it harder to talk about hedge funds as a unitary asset class with an undifferentiated strategy and similar, sub-market returns." Nope!

Legal stuff.

Yesterday U.S. federal prosecutors unsealed the indictment of Navinder Sarao, the alleged spoofer who allegedly helped cause the 2010 Flash Crash. Apparently the indictment alleges that he used the word "spoof" in e-mail, which I have to say is a no-no. The line between "spoofing" and just putting in and canceling a bunch of orders because you are an "old school point and click prop trader" who "changes his mind very very quickly" is, if not exactly blurry, at least possible to blur to a jury. I mean it is just hard to explain to non-experts what spoofing even is, or to prove that someone did it. Unless, you know, he wrote an e-mail using that exact word.

In other legal news, "The lawyers for three former executives of Dewey & LeBoeuf must feel confident that prosecutors have failed to prove that the men used accounting gimmicks to defraud lenders and creditors of the once-prominent New York law firm," says Matthew Goldstein at DealBook, since they rested their case without calling any witnesses. I don't know; I have never been a real courtroom lawyer, but I am always a little worried when real courtroom defense lawyers show confidence in their case by not calling witnesses and trusting that the jury will see the error of the prosecutor's charges. If I were a defense lawyer I'd probably put my client on the stand and have him explain everything in a reasonable tone of voice and persuade the jury of his innocence. That would probably go very poorly for me, and him, but doesn't it just feel right?

Elsewhere, here is what I find to be a pretty convincing argument that the Supreme Court should not review the Newman insider trading case. And here is the story of a Harvard Law School graduate accused of kidnapping, who gave an "off the record" interview with a reporter in a recorded jailhouse conversation and allegedly confessed to the crime. Come on. The jail doesn't have to respect the "off the record" thing. That is not how this game works.

People are worried about bond market liquidity.

Here is Robin Wigglesworth on a fascinating corner of bond-market liquidity worrying, the worry that the U.S. corporate bond market is too transparent, and that transparency is bad for liquidity. The theory is that Trace -- the Financial Industry Regulatory Authority's Trade Reporting and Compliance Engine, which prints many U.S. bond trades within 15 minutes -- makes it harder for banks to make markets (if customers can see how much a bond just traded for, they're less likely to pay more for it, compressing dealer profits) and for investors to sell bonds in down markets (since a sale at a low price will be public knowledge and could cause further losses). Against this there is the argument that, you know, it's kind of weird for trade prices in a public securities market in 2015 to be a secret. The compromise that some investors have put to Finra is to delay disclosure of trades bigger than $25 million, to make liquidity a bit better; "People close to the talks say Finra appears open to the idea at least."

A killer brunch.

Ian Hannam is, or at least was, The Most Interesting Man in Banking: He's a former investment banker at Salomon Brothers (he "believes he appears" as a composite in "Liar's Poker"), Robert Fleming and JPMorgan; a former captain in the British army's special forces; and, in the words of a friend, "no smoothy-chops in a pin-striped suit." He had a bit of a fall from grace for what the U.K. Financial Services Agency considered "market abuse," disclosing inside information about a client. Here he is having a "Big Boy" breakfast with the Financial Times:

His task, assisted by 300 local recruits, was to demolish the centre of Kano and build a road so that the Nigerian army could get in and out more easily. The locals were unenthusiastic about this remodelling. It did not help, he says, that “I killed four or five people in my first week, which, when you’re by yourself and you’re dealing with the families is a quite an eye opener”.

According to Hannam, the victims had returned to houses earmarked for demolition and were trying to reconnect their electricity just as the local power company switched the juice back on. He also managed to annoy the emir of Kano by demolishing his harem. He was briefly jailed for refusing to pay bribes. The experience was, he says, “exciting”.


As I have probably said before, my favorite micro-genre of business journalism is the one that examines the logic and economics and psychology and sociology of the menu decisions made by casual-dining chain restaurants. (I still tear up thinking about the perfection of this all-time classic.) I sometimes feel like I am alone in this enthusiasm, and that I am not articulate enough to convert anyone else, but anyway here is an article about how restaurants are adding more sauce options to appeal to millennials:

Restaurants are struggling to appeal to younger customers who've grown up on bolder flavors and prefer to tailor meals to their own tastes. Sauces give restaurants a way to accomplish both goals without the complexity and hassle of adding entirely new menu items.

"Customers want more options," said Amanda Norris, senior director of product development at Chick-fil-A. "They certainly want more flavors, so we're trying to respond to that."


New condiments may give fast-food and sit-down brands a chance to fight back and lure Millennials and Gen Zers who want to build meals based on personal tastes.


"Young people are growing up with flavor profiles and an expectation that things are not bland," KFC U.S. Chief Marketing Officer Kevin Hochman said. "It's a lot more than just the chicken. You also have to have a sauce that wins."


"There is a really unique group of people out there that are really looking for lots of heat," said Todd Kronebusch, vice president of innovation at Buffalo Wild Wings. The chain refers to them as "hotheads," he said.

Ahhh it is all so wonderful, so wonderful. Obviously I love credit derivatives, but I think we're never closer to the core of late capitalism than when a vice president of innovation is dreaming up ways for people to build meals based on personal tastes.

Me yesterday.

I wrote about the cumulative returns on Donald Trump, and why it's a bit unfair to compare him unflatteringly to the returns on the stock market. Here are Cullen Roche and Jordan Weissmann along related lines.

I also wrote about a guy accused by the SEC of defrauding investors out of $4.3 million so he could invest it with people who were defrauding him. This is apparently a theme in financial fraud.

Things happen.

How BNY Mellon fixed its fund pricing glitchMultitasking. "The European Union's executive will propose 'radical' changes to make listing on stock markets cheaper, consider pan-EU pension products, and streamline the bloc's patchwork of insolvency rules." Not Even 'Scissorhands' Can Cut Brazil Out of Its Fiscal Trap. Bank of America can use the "advanced approaches" capital framework. "Without question, an individual’s philosophic orientation has unfortunately become more important than their knowledge of the securities laws," says former SEC Chairman Arthur Levitt of the current SEC commissioner nomination process. Levered commodity ETFs are volatile. Person leaves finance job to make DJ software. Do Smarter Auditors Have More Important Clients? The Time Has Come For Twitter To Name Snoop Dogg As CEO. An Interactive Guide to Ambiguous Grammar

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(Corrects spelling of Jordan Weissmann's name in eighth item.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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

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