Family Offices, Pensions and Cabals
As I have mentioned, I'm working on a sitcom in which a character based on Steven A. Cohen, barred from the hedge fund industry after an embarrassing insider trading incident, moves to a charming small town and has a series of awkward and amusing run-ins with new neighbors who are suspicious of his old way of life. Judging by this Fortune profile of the real Cohen, though, the town might as well be Greenwich, Connecticut. Here's what happened after Cohen's former firm, SAC Capital Management, was charged with insider trading:
A portfolio manager was stunned when fellow parents at the school drop-off prohibited their children from talking to the kids of someone who worked at “that bad company.”
Imagine growing up in a place where the cool kids' table in the school cafeteria is determined not by those kids' personal charm or physical attractiveness or athletic prowess or even wealth, but by the recent performance and compliance records of their fathers' hedge funds. Don't you kind of want to watch a "90210"/"The OC"-style show about Greenwich High School? Or is the vibe more "Harry Potter," with hedge funders and their kids as wizards, everyone else as Muggles, and a bitter rivalry among the houses of Gryffindor (equity activist), Ravenclaw (global macro), Hufflepuff (funds of funds) and Slytherin (insider traders)?
Anyway there's other stuff about SAC's fall (its last Christmas party "was held in the lobby of the Stamford headquarters; there wasn’t even top-shelf Scotch"), its reinvention as a family office called Point72, and the possibility that it will again re-open to outside money in 2018, when Cohen's suspension expires. ("I think we're leaning that way," Cohen told the New York Times.) There's a description of Cohen's travel trading rig:
Everywhere he goes, Cohen brings his five-screen trading apparatus, the way Arnold Schwarzenegger used to travel with a portable gym. The screens go with him even on vacation. On his week off in the Mediterranean, he heads below deck on his boat when the markets open in New York, to trade until dinnertime.
And an explanation of where Point72 gets its informational edge these days:
Cohen has been making pilgrimages to Silicon Valley, talking to startups that generate data that Point72 might use: “I’m like a kid in a candy store,” he says. The firm is already experimenting with credit card data from fast-food restaurants and satellite images to predict corporate earnings and more. A bonus? Nobody can argue that a camera in space illegally disclosed materially nonpublic information.
But the most interesting thing to me was Cohen's demurral on whether he will take outside money again: “I just want it to be a great asset management firm, where people can come and accomplish the things they want to accomplish in their career.” I joke sometimes about financial firms being socialist paradises run for the benefit of their workers, and of course a family office -- a firm that manages only its own members' money -- is almost literally that. But that's not just a matter of its legal structure and source of funds. Cohen cares about the employees' sense of accomplishment, rather than, say, attracting lots of investors, or making a lot of money for them. Those things might come, but they are secondary, just incidental offshoots of the real focus, which is making an attractive place for money managers to work. The money managing is the thing, the goal, the higher calling; the money is just an afterthought.
In less cheerful workers'-paradise news, "Wall Street Is Doing Just Fine With Fewer Workers."
A different approach to money management.
I'm sure Cohen has fun, and he is a billionaire, and he owns Picassos and a shark in formaldehyde and so forth, but it is just possible that Steve Edmundson, who runs the Nevada Public Employees' Retirement System's investment portfolio, has the best job in the investing business. "The Nevada system’s stocks and bonds are all in low-cost funds that mimic indexes. Mr. Edmundson may make one change to the portfolio a year." He does not, it is safe to say, take five screens with him wherever he goes. He works from 8 a.m. to 5 p.m., and spends his days "preparing board-meeting materials and on administrative tasks," pondering his lunch ("'Great days,' he says, are when his wife makes lunch—a BLT or tuna-fish sandwich"), and blowing off Wall Street salespeople:
Mr. Edmundson returns emails and calls from money managers pitching him products.
The typical call lasts about five minutes. He lets callers down gently, deflecting advances by concluding the offering isn’t a good fit and thanking them for the information.
“I’ve become very good at saying no,” he says. “I don’t try to lead them on, so they don’t get false hope.”
Look, it's obvious that getting paid six figures for doing nothing would be a pretty good job. But it might get a little boring. A job that lets you mostly do nothing, but break up the monotony with comical five-minute phone calls from money managers desperate for business that they have no chance of winning, seems like the perfect mix of relaxation, entertainment, and that feeling of smugness that makes for a truly fulfilling career. Sign me up. Also he is outperforming Calpers and many other state pension funds.
One of the more interesting criticisms of the rise of passive and passive-ish investing is this, from Nevsky Capital's final investor letter:
In such a world dominated by index and algorithmic funds historically logical correlations between different asset classes can remain in place long after they have ceased to be logical.
Consider the simplest possible algorithm, the market-cap-weighted index fund. Its algorithm is something like "when money comes in, buy all the stocks in proportion to what they're currently worth," meaning that index funds will invest more money in companies with high valuations and less money in companies with low valuations. If one of those high valuations is wrong -- if the underlying fundamentals don't justify the stock's valuation -- then the index fund will tend to perpetuate that mistake.
But other passive and passive-ish approaches can actually have the opposite effect. So a smart beta fund focused on the value factor will try to buy stocks that look cheap relative to their book value. But if lots of people do that -- if value funds are popular -- then they will tend to push up the price of those stocks, and they won't be value stocks any more. And then there are low-vol funds:
Low-volatility funds are supposed to insulate investors from the market’s bouts of turbulence. Lately, that’s been flipped on its head.
For six weeks, the most popular low-volatility exchange-traded fund has experienced price swings that were wider than the broader market.
Oops! The historically logical correlation here is something like: Stocks that have been pretty boring continue to be pretty boring. But if everyone notices that correlation, and starts betting on it, it tends to break down:
“They try to find the best combination of stocks to minimize volatility. That’s all fine and dandy if things work how they do historically, but in real life, historic relationships change,” said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors in New York. “The more crowding, the more overvalued these became, and eventually there’s a valuation correction. Maybe you’re seeing the crowding exacerbating the price swings.”
Elsewhere in exchange-traded funds, there are some pretty silly ones:
Welcome to the fun house world of niche ETFs, with their laser focus on single themes or industries. Other offerings this year include a Drone Economy Strategy ETF from PureFunds, which began trading in March, an Internet of Things Thematic ETF from Global X, which went live in September, and an ETF dedicated to investing in liquor, the Spirited Funds/ETFMG Whiskey and Spirits ETF, which hit the market on Oct. 12 with the apt ticker symbol WSKY.
Part of the marketing appeal here is just that people like whiskey or drones or whatever, so why wouldn't they want to invest in whiskey or drones or whatever? But another part is the rise of passive investing, in which words like "index" and "ETF" are taken as signs of virtue and probity. You're supposed to diversify and invest passively, the conventional wisdom goes, by buying and holding ETFs that track indexes. But tracking an actual broad market index is boring and conventional, and doesn't allow you to express your individuality as a person and investor and drinker. Tracking the whiskey index is technically tracking an index. As long as there is a whiskey index.
But there is also an institutional use case for focused ETFs, in which hedge funds and other big -- and small, for that matter -- investors dynamically allocate among different ETFs to get exposure to sectors rather than individual stocks:
“Active isn’t dying—it’s migrating,” said Ben Johnson, director of global ETF research at Morningstar Inc. “It’s gone from being Coke versus Pepsi to big asset allocation decisions that use passive building blocks.”
The US Securities and Exchange Commission is gearing up for a roots-and-branch review of the rapidly growing exchange-traded fund industry and its growing influence on markets and the financial system.
Is there a cabal of international banks plotting the destruction of U.S. sovereignty?
Donald Trump says yes, but Lloyd Blankfein says no:
“If there is an international cabal, once again I’m left out of the party,” the CEO said.
I like that the chief executive officer of Goldman Sachs, asked if he is part of a global banking conspiracy to control the world, replied with a joke about what a dork he is. "Blankfein: We're certainly not plotting the destruction of US sovereignty," is the perfect CNBC headline. I don't know! I mean, on the one hand, Donald Trump says a lot of things that are false, and there's no evidence of an international cabal of bankers plotting to undermine U.S. sovereignty, and that particular conspiracy theory has a long history of association with anti-Semitic slanders. On the other hand, if there were an international cabal of bankers plotting to undermine U.S. sovereignty, wouldn't you expect the CEO of Goldman Sachs to deny it?
Elsewhere in money and politics, here's a story about Bob and Rebekah Mercer, two of Trump's main financial backers:
While Mr Trump’s shifting policies are not always in line with the Mercers’ ethos, they would work with a Trump administration to ensure he stays “closer to traditional limited government and particularly the constitution than maybe Trump’s natural tendencies,” a friend said.
I have to say that it seems like a bit of a perilous plan to give a person the most powerful position in the world and then try to get him to care about the constitutional limits on his power, but I guess that's one reason that I'm not a political kingmaker. Here is Jessica Pressler on Secret Trump Theory:
For people who are repelled by the idea of Hillary Clinton — and there are many, among the libertarian-leaning one-percent — or whose main concern is their tax rate, it’s far less frightening to believe that the other candidate is a skilled strategist with a plan than to believe that he is an incorrigibly impulsive, sexist, racist charlatan whose famous hair conceals a belfry full of bats.
Here is Tim Harford arguing that the Ig Nobel prizes -- awarded for comical scientific accomplishments -- should have a better class of economics winners. Right now the hard-science prizes go to funny research that often ends up being important or at least thought-provoking, but the economics prize mostly goes to notable busts like Lehman Brothers. ("The first economics prize was awarded to Michael Milken, one of the inventors of the junk bond. He was in prison at the time." Har har har, but these days Milken's economic accomplishments tend to be rated quite highly.) Though sometimes the economics prize goes to worthy winners:
In 2001, the Ig Nobel committee did just that, awarding the economics prize to Joel Slemrod and Wojciech Kopczuk, who demonstrated that people will try to postpone their own deaths to avoid inheritance tax. This highlights an important point about the power of incentives — and the pattern has since been discovered elsewhere.
Empirical proof of the Second Law of Tax, that it is always better to die later than sooner! Anyway, Harford has some other suggestions for potentially worth economic research:
Psychologists Bernhard Borges, Dan Goldstein, Andreas Ortmann and Gerd Gigerenzer found they could construct a market-beating portfolio of stocks by stopping people on street corners, showing them a list of company names, and asking which they recognised. Surely an Ig Nobel in finance?
Sure, an Ig Nobel, but also ... an index fund? The Street Corner Randos ETF? Ticker HUH? Running that fund wouldn't be quite as relaxing as running the Nevada pension fund -- you'd have to actually schlep out to a street corner and talk to people -- but it might be more entertaining. But here's my favorite economics Ig Nobel candidate:
Another psychologist, Dan Ariely, already shared an Ig Nobel prize for medicine in 2008 for demonstrating that expensive placebos work better than cheap placebos. But in recent research with Emir Kamenica and Drazen Prelec, described in Ariely’s forthcoming book Payoff, Ariely paid people to build robots out of Lego. The researchers’ aim: to examine the nature of the modern workplace by dismantling the Lego in front of their subjects’ eyes, to see if they could dishearten them. (They could.) An Ig Nobel in management beckons.
The unstated premise of so many management techniques is "... to see if they could dishearten them (they could)." Like you could replace annual performance reviews with making employees build lego robots and then dismantling them, and get pretty much the same results.
People are worried about unicorns.
Well here is "The Tech Bubble Didn’t Burst This Year. Just Wait," which I guess is pretty worrying:
Since 2015, researcher CB Insights has counted 80 “down rounds,” instances of a startup accepting a reduced valuation to raise more venture funding. “There was this fog hanging over Silicon Valley in 2001,” says Botha, referring to the last big tech bust. “And there’s a fog hanging over it now. There’s no underlying wave of growth.”
And here is "Silicon Valley Asks What Happens If Tourist Investors Flee?"
Private companies have witnessed a surge of investment over the past few years, but virtually all of the new money has come from “tourist investors” led by hedge funds and mutual funds, according to data compiled by PitchBook Data Inc. While venture capital firms have continued writing checks at a relatively stable rate, these tourists have been ramping up their investing, adding to existing investor worries that a bubble may be forming.
And here is Travis Kalanick's "go-to metaphor that he deploys to duck a common question: When will Uber go public?"
“We’re like eighth graders; we’re in junior high, and someone is telling us that we need to go to the prom, and it’s just a little early,” Kalanick said at a Wall Street Journal conference a year ago. “Let us get into high school before we start talking about these sorts of things.”
It's almost time to start talking. Kalanick said on Wednesday that his ride-hailing company is an "early high schooler" or a ninth grader, again being invited to the prom. It's still a little too soon, he insisted during an interview at Vanity Fair's New Establishment Summit in San Francisco.
Would you watch a "90210"/"The OC"-style show about Uber's real-time progress through high school? No, you would not, come on. Still, points for consistency. I hope that Kalanick has a fully worked out imaginary life for high-school-Uber: what classes it is taking, what kind of grades it gets, who it has for homeroom, what it likes to do after school, and what it plans to wear when the big day arrives and it can finally go to prom.
Also: "Are Razor Companies Tech Startups?"
People are drawing double eagle unicorns.
Welp, yesterday I wrote about oil-and-gas unicorn Double Eagle Energy Permian LLC, and I said "you should look forward to an illustration of a double eagle unicorn in a future edition of Money Stuff," and here it is, from Twitter user @Mund2512:
Here's another from Rob Terrin:
Here's one from Braden Williams:
And from Alice Cogan:
Hey everyone thanks for reading my finance newsletter.
People are worried about bond market liquidity.
The Treasury market will get a bit more transparent:
The U.S. Securities and Exchange Commission said it approved a plan requiring broker-dealers to report U.S. Treasuries trading information by the end of the day the transactions occur.
The measure, proposed in July by the Financial Industry Regulatory Authority, Wall Street’s self-regulator, mandates that dealers report their Treasuries trades to Finra through its corporate-bond data-collection platform, known as TRACE, the SEC said in a press release.
But only a bit: "The collected information on trades will be available only to regulators, and not shared publicly." It will give regulators a bit more insight into trading patterns and flash crashes, but it won't offer public post-trade transparency, because people worry that that would be bad for liquidity.
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