Money Stuff

Hedge Funds and Trump Treasuries

Also the bitcoin guy, Apple moonshots, IEX, unicorns and liquidity.

Hedge fund billionaires.

A year ago yesterday, and two years ago today, I wrote about Institutional Investor's Alpha magazine's annual "Rich List," which is "an annual ranking, by income, of the top 25 highest-earning hedge fund managers" over the previous year. So I assume the 2016 edition will be out shortly. Each year when this list comes out, it gets a certain amount of press attention for the same reason. DealBook 2014:

The 25 highest-earning hedge fund managers in the United States took home a total of $21.15 billion in compensation in 2013, according to an annual ranking published on Tuesday by Institutional Investor’s Alpha magazine.

They earned that hefty sum in a year when most hedge fund managers fell short of the market’s returns.

DealBook 2015: "For investors in hedge funds, like big pension funds, 2014 was not a lucrative year. But for those who managed their money, the pay was spectacular."

And each year I point out, well, no, that's not exactly right. Institutional Investor's Alpha doesn't measure hedge fund manager compensation, or pay. It measures income. And while the biggest and richest hedge fund managers get some -- a lot, really -- of their income in the form of "compensation" (fees on money they manage for others), they get most of it in the form of investment returns. After all, they are rich, they invest in their own funds, and if those funds go up, they make a lot of money. (Even if the funds fall short of the market's returns.)

I eagerly await this year's Rich List, but in the meantime I will point you to this Bloomberg article about rich hedge fund managers:

The world’s richest hedge fund managers, grappling with the industry’s worst start to the year since 2009, are feeling the pinch. The eight hedge fund billionaires who rank among the world’s 400 richest people have seen their fortunes drop by an average of 4.9 percent since Jan. 1, compared to a 0.9 percent increase in the net worth of the 37 other, non-hedge fund finance moguls on the Bloomberg Billionaires Index.

The overlap of "richest hedge fund managers" with the Alpha Rich List isn't perfect -- one is a stock, the other a flow -- but there is a little. Ken Griffin of Citadel was at the top of the 2015 Rich List, with $1.3 billion in 2014 income; the Bloomberg Billionaires Index shows him down $590.6 million in 2016 so far. That still leaves him with plenty of money, of course, and it's just four months, not a whole year. But when you read the articles about the next Rich List that talk about how the highest-earning hedge fund managers in 2015 took home a ton of compensation even while hedge funds in general didn't beat the market (even if their funds did), do consider that the lowest-earning hedge fund managers took home a ton of negative "compensation," and that a manager can be in the first group one year and the second the next.  

Elsewhere in hedge funds, "MetLife Inc., the largest U.S. life insurer, said it’s seeking to exit most of its hedge-fund portfolio after a slump in the investments." I have some sympathy for the divest-from-hedge-funds crowd, but I worry sometimes about their timing:

“It’s had up-and-down years and really it’s just too inconsistent, we think, in actual performance,” Goulart said. “What we’ll be left with is a small portfolio of really our most consistently performing managers in hedge funds.”

I am no expert, and I try not to give investment advice around here, but you want to get out after the up years, no? 

The Trump Trade.

Yesterday I mentioned a fun proposal that the Treasury should buy back off-the-run Treasuries (which tend to trade a bit wider than on-the-run Treasuries) and pay for them by issuing new on-the-run bonds. The appeal of this trade is that it might improve dealer balance sheets and Treasury market liquidity, but it would also be a moneymaking trade for the government: It could issue new bonds at a premium, and buy back old bonds at a discount, in each case relative to some average fair value. This is apparently being discussed at Treasury, but it's not clear how seriously, and of course a new administration might just forget about it. But if that new administration were a Trump administration? I said yesterday that "it's such a Trumpian trade, honestly: It's basically a debt restructuring where the debtor makes a profit."

Also yesterday morning, Donald Trump was going on television and calling for ... this trade? Not quite this trade? Some other trade? Certainly a debt restructuring where the debtor makes a profit, anyway:

“I’ve borrowed knowing that you can pay back with discounts,” he said. He added, “Now we’re in a different situation with the country, but I would borrow knowing that if the economy crashed, you could make a deal.”

He specified later that he didn’t mean renegotiating bond terms, which countries like Argentina and Greece have done repeatedly. What he says he meant was buying back bonds at discounts after rates have risen, much as a company at risk of bankruptcy might buy its own bonds back at, say, 70 cents on the dollar and thus reduce what it owes. “I don’t want to renegotiate the bonds, but I think you can do discounting,” he said.

This is actually a good trade. If you issue, say, a 2 percent 10-year at par, and rates go up to 5 percent, your bond will be worth about $77. So you can buy it back by issuing $77 of 5 percent 10-year debt. This is not an improvement in, like, economic or net-present-value terms. But it is a reduction in the face amount of the debt, and politically, people seem to care about the face amount of the U.S. government's debt. We've talked about this before, when we discussed the idea of issuing super-high-coupon bonds to get around the debt ceiling; the Trump trade is "a more subtle variant" of that plan.

Of course, it is not an especially actionable trade these days: With rates historically low, Treasuries tend to trade above par, not below, and it would be counterproductive to buy back a 20-year bond at $138 to replace it with $138 of new debt. But, you know, elect Donald Trump and see what that does to rates! I assume that, like the debt ceiling standoff, it will cause the sort of paradoxical flight to safety that will lower Treasury rates, but you never know. Certainly his plan seems to be to reduce the creditworthiness of the United States so that he can buy back its debt at a discount.

Though "plan" is perhaps too strong a word for the string of words that Trump said on TV yesterday. Trump is "not necessarily a huge fan" of his own tax plan, so maybe don't buy up off-the-run Treasuries hoping to sell them to the Carl Icahn Treasury Department.

Elsewhere, here is a story about the strange relationship between Trump and Icahn. Trump is pro-Brexit this week. And Trump's new national finance chairman is Steven Mnuchin of Dune Capital Management, a former Goldman Sachs partner who once ran a hedge fund with money from George Soros. Disclosure, or whatever this is: The summer after high school, in the '90s, I worked for a few weeks at a debate camp in Eastern Europe that was funded by Soros's Open Society Foundations, which were hoping to protect the fragile post-Communist democracies and prevent the rise of authoritarian strongmen by promoting reasonable debate and thoughtful discussion of issues. So, you know.


The guy who said he was Satoshi Nakamoto seems not to be Satoshi Nakamoto, though his withdrawal from the Satoshi Nakamoto sweepstakes is hilariously passive-aggressive and evasive:

I believed that I could do this. I believed that I could put the years of anonymity and hiding behind me. But, as the events of this week unfolded and I prepared to publish the proof of access to the earliest keys, I broke. I do not have the courage. I cannot.

Imagine if it worked that way. Like, Craig Steven Wright announced he was Satoshi, and everyone was like "wow you're Satoshi," and he was like "yes here is the proof," and everyone was like "wait where is the proof," and he was like "it's coming," and they were like "hmm okay I guess," and he was like "you know what never mind I am too scared to give you the proof," and they were like "oh okay never mind back to your anonymous life as a bitcoiny guy who is totally not Satoshi then." Like he has definitely "put the years of anonymity" behind him, no? One way or the other? Proof or no proof?

Elsewhere, here are some (presumably tongue-in-cheek) claims that Craig Steven Wright might not actually be Craig Steven Wright. On the blockchain, identity is dissolved; we are all just our public keys. And "Cameron and Tyler Winklevoss’s Gemini Trust Company LLC has gotten a New York State regulator’s blessing to trade another kind of cryptocurrency on its bitcoin exchange," though shockingly it is not called the Winklecoin. Is there a Winklecoin? Ugh of course there is a Winklecoin, there is an everythingcoin. Anyway no the Winkletrust will be trading Ether, the coin of Ethereum, the smart-contracts-and-so-forth blockchain thing that I mentioned yesterday in the context of blockchain courts.  


When Apple announced earnings last month, I wrote a little thing about how most companies have some limited set of competencies, and they milk those for all they are worth, but you can't expect most companies to constantly reinvent themselves to open new markets and create new businesses. There's a reason Kodak didn't become Instagram and Chrysler didn't become SpaceX. It is hard to do a thing that is totally different from the thing you are good at. One model of Apple is that it is really good at computer hardware design, and less good at other things, and that now that every human on earth has at least two iPhones, there's only so much growth available to Apple.

I don't know, though, it's just a theory. And of course it is not crazy to think that Apple can reinvent itself. It has done so before. It is a big prestigious technology company with endless money that can hire smart people and take interesting risks and build the next magic self-driving social hoverspaceship or whatever the kids will want in the future. Certainly that is Google's approach. And Amazon has had some success investing in a weird unprofitable noncore product that became huge and profitable and core. Why not Apple? Anyway here is Farhad Manjoo arguing that Apple should have more moonshot projects:

To thrive in the next era of tech, Apple needs to take a series of bigger, bolder risks.

Apple’s last decade and a half, mostly under Mr. Jobs, has been defined by perfectionist focus. As its executives and marketing videos repeatedly boast, Apple says no to a thousand ideas before it says yes to one. That attitude was perfectly suited to a particular era in tech — the rise of mobile devices, which were the ultimate expression of Apple’s expertise in creating jewel-like hardware.

Is there some cultural or managerial factor that makes moonshots less likely? Does a decade of perfectionism make it harder to do new things? I don't know. In other news, Apple Music is ... bad. (But maybe not that bad?)

Market structure.

Here is a strange Fortune commentary by Ted Kaufman about high-frequency trading and IEX that claims that, "by slowing trading down to give long-term investors equal footing with HFTs, a market disruptor such as IEX could move us at least one step closer to preventing the next flash crash." This seems ... obviously wrong? I have read a lot of comment letters on IEX's application to become an exchange, including IEX's own letters, and I don't recall any of them suggesting "preventing flash crashes" as a virtue of IEX. I don't really understand what IEX's 350-microsecond speed bump could have to do with the algorithmic dominance of equity trading that leaves the market vulnerable to flash crashes, and Kaufman doesn't really explain: He just complains about flash crashes for a while, and then praises IEX.

You see a lot of this in the IEX debate. People have some vague sense of the evils of high-frequency trading -- front-running, arms races, flash crashes, payment for order flow, lasers, whatever -- and some vague sense that IEX is Good and Against High-Frequency Trading, so they assume that IEX will cure all of the evils. It is often a frustrating conversation. Kaufman is a former senator and ... hmm ... a member of the Securities and Exchange Commission's Equity Market Structure Advisory Committee.

People are worried about unicorns.

Here's a really interesting post about "The Startup Zeitgeist" from Jared Friedman of Y Combinator, basically just graphing the popularity over time of various startup ideas, trends and buzzwords by measuring how often they are mentioned in Y Combinator applications. Particularly fun are the trends in whom startups see as their major competitors: Google has a solid, longstanding place near the top (mentioned by 4 percent or so of applicants), while both Twitter and Facebook have soared (Facebook got almost to 14 percent) before coming back to earth (though Facebook and Google are now neck-and-neck). Microsoft has always been near zero. Uber and Airbnb are rising. Yahoo, EBay and MySpace (MySpace!) have cratered. Also of interest, to me, is that blogging is pretty much dead, at least as a startup idea. And there is this:



People are worried about bond market liquidity.

Today the U.S. Treasury launched a new series of blog posts about ... you'll never guess what! No, you will, you have context clues. Like: You are reading a section called "People are worried about bond market liquidity." Or: It is 2016, and if a government agency is launching a series of financial blog posts, it's going to be about bond market liquidity. Strictly, Treasury's series is about "fixed income markets" broadly, but the first post is "A Deeper Look at Liquidity Conditions in the Treasury Market." As is generally true of these things -- see, e.g., the New York Fed's occasional considerations -- the conclusion is hedged but optimistic:

While no individual metric is dispositive, these measures together suggest that liquidity in the Treasury market is consistent with historical levels. Importantly, however, these data only reflect a portion of transactions in the inter-dealer marketelectronic platforms where traditional dealers interact with each other and, increasingly, with PTFs. Official sector access to data related to transactions in the dealer-to-customer market remains limited.

The measures that Treasury considers include daily trading volumes ("well within recent averages"), bid/ask spreads ("have remained tight over the last five years"), trade size (mostly stable, though declining for the 2-year), price impact (edging up in the 10-year), market depth (declining somewhat), and a composite index that shows that "current liquidity conditions are broadly similar to levels that have prevailed since 2010." There is also a measure of the "G-Spread," the spread between on-the-run and off-the-run Treasuries, which presumably compensates off-the-run investors for illiquidity; those spreads "have increased slightly since 2013 but remain a fraction of levels observed in 2009." So not too worrying for liquidity, but a great opportunity to consider (my version of) the Trump Trade!

Elsewhere in liquidity, "Bank of America Corp. has been dropped from the rotation of banks leading Ontario’s Canadian dollar debt sales after the province reviewed support lenders provide to trading its bonds after the initial sale." One worry about bond market illiquidity -- besides the generic worry that it might cause losses for investors, and the semi-systemic worry that it might lead to runs on mutual funds -- is that it will drive up costs for borrowers, since illiquidity makes bonds less attractive for investors, who will therefore demand higher rates. This is a complex system: The borrowers, on this view, are the losers from illiquidity, while the investors are the instrument of their loss, and the dealer banks -- who used to make markets in bonds but now don't as much -- are the only ones who can do anything about it. But Ontario closed the loop:

This year’s annual review of the banks that manage Ontario’s debt sales introduced a survey of investors that asked them to rank which banks were most willing to facilitate trading in the province’s bonds after the initial sale. Investors have begun rewarding issuers whose bonds are easier to trade with lower borrowing costs as new global regulations and global volatility has caused liquidity in the bond market to dry up.

Good idea! If you want more bank-provided liquidity, you should pressure banks to provide it. Large fee-paying debt issuers might be well placed to exert that pressure.

Elsewhere, "the financing markets are back -- they’re back in all their glory,” says Josh Harris of Apollo. "The good times are rolling again, at least for this month.” And here is a Chuck Norris joke about bond market liquidity, I guess.

Things happen.

Goldman Said to Extend Fixed-Income Job Cuts to 10% of Staff. Hamilton Nolan went to the Berkshire Hathaway annual meeting for some reason. Energy Transfer Sees a Way Out of Its Williams Pipeline Deal. Banks Skewer Proposal Limiting Arbitration. Herbalife shares jump 13% after it says FTC talks are in advanced stages. Valeant Forms Committee to Oversee Drug Prices Under New CEO. 'Paralyzing Volatility' Means Trouble for Wall Street Giants. US stock funds suffer $11bn of outflows. A Push for Greek Cuts Even Creditors Think Go Too Far. How About a Real Federal Bailout for Puerto Rico? The Party’s Over in Alaska. "The only reason we have a retirement crisis today is because, for the first time in history, everyone expects to retire rather than working until they die." Cobots. Employers are not allowed to mandate a "positive work environment." New York Times to Start Delivering Meal Kits to Your Home. "Yes, the meme vanguard was mourning the discovery of dat boi by the memestream media." "I have a jar of peanut butter and sometimes I take a big spoon of it and eat it, and the next 45 seconds of my life is chaotic and upsetting." Young art collectors. Alleged recidivist Home Depot scammer. Can dogs be immortal?

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