Boring Banks and Vanishing Hedge Funds

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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Bank earnings. 

JPMorgan reported earnings yesterday afternoon (press release, presentation, supplement). Revenue was down, "driven by a slump in trading and mortgage-banking results," and chief financial officer Marianne Lake said that "analysts' estimates appear high" for the fourth quarter too. Some of this is just that, according to Lake, "across asset classes, the markets are pretty quiet." "But some of the bank’s shrinkage was by design, an effort to become simpler and less sprawling as new capital regulations are set to roll out in coming years." Assets are down by $160 billion over the last six months, and "the bank scaled back its holdings of debt and equity trading assets during the quarter by 13%, reflecting efforts to reduce risk and decisions by some trading clients to stay on the sidelines." 

I suppose this is what making banking boring looks like: Fewer assets, lower risks, quieter trading markets, a focus on expenses. It is ... boring? "We continue to focus on our commitments, optimize our balance sheet and manage our expenses," says Jamie Dimon's quote in the press release

Bank of America also reported this morning (press release, presentation, supplement), beating estimates with net income of 37 cents per share, and again the theme seems to be lower expenses.

Jes Staley.

Meanwhile, people are still trying to figure out if Jes Staley will make Barclays less boring again:

Choosing Staley “would suggest Barclays’ intention to retain its core investment banking franchise,” Martin Leitgeb, an analyst at Goldman Sachs Group Inc., said in a report to clients. “His appointment would imply further scaling back the investment bank is unlikely, although we still expect some further refinements” and cost cuts, said Leitgeb, who has a buy recommendation on the stock.

But "If investors were unclear about Barclays’s strategic plans before, they could be even more puzzled now," and if Staley is the next chief executive officer he will be constrained by regulation, by Barclays's powerful chairman John McFarlane, and by the general sense that Barclays's last investment-banking expansion didn't work out so hot. In any case, the new CEO "faces an early challenge in deciding what to do in wealth management after a decade of disappointment." 

Meanwhile, here is John Gapper on the "diaspora of former JPMorgan executives, such as Mr Staley, with an unusual depth and breadth of experience," who "are often headhunted for vacancies at other banks." There are worse things imaginable than exporting the culture of JPMorgan to other banks; for one thing, it seems like an unusually successful example of a giant universal bank that treats investment banking and capital markets as core businesses. I guess if you want your universal bank to retreat from those businesses, JPMorgan may not be an attractive role model, but on the other hand who is?

Different hedge funds are different.

Renaissance Technologies is shutting down the Renaissance Institutional Futures Fund, its $1 billion managed futures fund, which "has returned 2.86 per cent annualised since its establishment in September 2007," but is down 1.75 percent so far this year. It seems to be obligatory to note that RIFF is not the only fund to have had a rough time recently:

David Einhorn’s Greenlight Capital, Bill Ackman’s Pershing Square Capital and Leon Cooperman’s Omega Advisors have all been hurt by the recent turbulence in financial markets. Fortress Investment Group announced on Tuesday that it would shut down its $2bn macro fund led by Mike Novogratz, after a run of poor performance and outflows. Claren Road, a Carlyle Capital-owned credit hedge fund, could also be shut after a dismal year and an investor exodus.

And: "Hedge funds with more than $16 billion have announced shutdowns so far in 2015."

Of course macro and activism and long/short credit and algorithmic managed futures are all different strategies, and you could ask what links all these funds in underperformance. I feel like it is not the name "hedge fund"? Nor is it hedging, or failing to hedge, come on, the name "hedge fund" is an accident of etymology. Mmmaybe there is some meta-strategy common to many types of hedge funds -- selling volatility, lookback straddles, I don't know -- that has caught up all these funds during a period of market turmoil? (One adviser identifies the "inherent flaw in the hedge fund business model" as being that "A lot of investment themes for hedge funds are of a longer tenor than the investor is committed to the fund.") Or maybe it is just, you know, there are a lot of hedge funds, they do different things, some go up, and some go down. In bull markets, they mostly go up, because the ultimate meta-meta-strategy of most hedge funds (except Universa!) is to own assets, and if asset prices go up they tend to make money. In down or choppy markets, more of them go down.

Anyway, even in this market:

Some lesser-known macro-focused hedge funds like Element Capital Management and Atreaus Capital have made double-digit gains for investors so far this year.

“Whenever you have a challenge, that is in itself an opportunity,” said Ari Bergmann, founder of Penso Advisors, a global macro manager.

On the other hand: "China asset management executive stabbed by disgruntled investor."

How to buy stocks.

In general, I think that it should be harder, not easier, for retail investors to buy individual stocks, so I am suspicious of stuff like this:

In a new twist on the bustling gift-card business, retailers such as Kmart and Office Depot this week are starting to roll out cards that give the recipients small amounts of stock in some of the country’s best-known companies. 

But actually it is rather sweet: You can't lose that much money ($25 cards), and the founder "came up with the idea when he wanted to give a Christmas gift of stock to his nieces and nephews, and found the need to first gather personal information such as their Social Security numbers too burdensome." I'm the sort of uncle who would probably give stock for Christmas, so I am okay with this. As long as the fees are ... wait no what "The Stockpile cards cost $4.95 for a $25 card"!? Don't pay a 20 percent commission for a stock trade, even for your nieces and nephews, come on.

Elsewhere here's a big burrito that, if you eat it, confers on you 10 percent ownership of the restaurant where you ate it. 

Is reinsurance systemically important?

Warren Buffett says no, so that's pretty much the answer:

Walter Kielholz, chairman of Swiss Re, said he expected that regulators’ threat to label reinsurers as “systemically important” would fizzle out.

“There’s been absolute radio silence on this issue,” Mr Kielholz, chairman of Swiss Re, told the Financial Times. “I think nothing will come out of it this year and then it will fade away.”

Mr Kieholz said Mr Buffett’s status in US financial and political circles seemed to have helped global reinsurers fend off inclusion in the systemically important insurers list. “It’s always helpful when Warren Buffett is on your side,” Mr Kielholz said.

On the one hand, reinsurance really does not seem like the sort of run-prone business that ought to be subject to too-big-to-fail rules. On the other hand, if Warren Buffett himself has so much power to affect regulation, would his business really be allowed to fail if it ran into trouble?

Gaming IEX.

A while back we talked about IEX's application to become a stock exchange, and about its built-in 350 microsecond delay on orders designed to prevent abuses by high-frequency traders. The delay is a bit weird, under SEC rules relating to the "National Market System," but I was basically okay with it: "You might sometimes get slightly delayed, and get a slightly worse execution, because a stale IEX quote is protected," I said, "but it's hard for me to see how any nefarious high-frequency trader could use that fact to its advantage and your detriment."

But my readers are better nefarious high-frequency traders than I am, so this column has started a little sideline in ways to game IEX. I emphasize that, while nothing in this column is ever legal or investing advice, advice on how to game IEX is especially not legal or investing advice. Anyway, a reader at an electronic market-making firm proposed a game that goes something like this:

  1. The national best bid and offer is, say, $10.00 at $10.05.
  2. You post an offer on IEX to sell 100 shares at $10.01.
  3. You wait 351 microseconds for it to go live on IEX.
  4. Now the NBBO is $10.00 / $10.01.
  5. You go to all the dark pools and put in orders to buy as much as you can.
  6. You will be able to buy a lot of shares at the national best offer, because dark pools often have orders pegged to the NBBO. The dark pools see the NBBO as $10.00 / $10.01, so you are able to buy shares for $10.01.
  7. Your small sell order on IEX will soon be filled, but the delay gives you time to buy a lot of shares elsewhere.
  8. After you are filled, the market goes back to where it was, i.e. $10.00 / $10.05.
  9. Repeat the other way (post a 100-share buy order for $10.04, etc.) to get out of your position at a profit.

This seems to rely on an fairly specific assortment of circumstances -- wide NBBO spread, plentiful dark-pool liquidity, perfect timing -- and I don't know how often or how well it would work. Also it seems to me like obviously illegal spoofing, or a spoofing-like substance, at least in the stark form described above. But I leave it here for your amusement.

People are worried about bond market liquidity.

Here is a theory from UBS that bond market illiquidity might hurt stock prices:

US hybrid mutual fund assets total $1.4 trillion, but if the credit market suffers a liquidity crisis we believe the inability to sell the $243 billion credit component would trigger sales in the $843 billion equity component.

I suppose in the extreme form of this theory, a crisis in the credit market would involve no sales of bonds, no price moves in credit, and a plunge in stock prices. It might look like late August, when stocks plunged while bonds were eerily quiet. But, yes, all interesting bond market liquidity worries -- as opposed to just "I find it expensive to sell my bonds" -- are about mismatches between liquidity expectations and liquidity realities leading to contagion between bond prices and some other market.

Elsewhere, Treasuries are volatile and increasingly traded by high-frequency traders. And: "The disconnect between what the Fed is saying versus what the market is pushing as the root cause of the decline in market liquidity is unprecedented."

Me yesterday.

I wrote about Dell, EMC, VMware and tracking stock. Here is Steven Davidoff Solomon at DealBook on related topics.

Things happen.

Why General Electric Is Unwinding Its Finance Arm. "Six brokers accused of helping former UBS Group AG trader Tom Hayes rig benchmark rates used a range of excuses during questioning by prosecutors, including blaming colleagues and not knowing what Libor meant." Somehow the Dewey & LeBoeuf trial is still going on. Treasury rules don't allow negative rates at bill auctions. Jack Dorsey’s jargon-free firing memo, edited to remove the jargon. "Everybody likes a good comeback story, a good underdog story, and that’s what Detroit is." U.S. Examines Goldman Sachs Role in 1MDB Transactions. Brokers, Advisors, and the Fiduciary Standard. Activists Seeking Partnerships With Institutional Investors. Stock Market Prices and the Market for Corporate Control. Viacom’s Redstone Jumps Through Big Disclosure Loophole. Why Did So Many Subprime Borrowers Default During the Crisis: Loose Credit or Plummeting Prices? The Bank of England on property derivatives. "Strategic default rarely occurs." 'Do You Fear Intelligent Robots?' "We analyzed real-life examples where people called an action stupid." Most worker ants are lazy slackers.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Matt Levine at

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