Money Stuff

Unicorn Swaps and Falling Complacency

Also perfect storms, personnel moves, insider trading, index funds, bitcoins and penny stocks.

People want new ways to worry about unicorns.

We talk from time to time around here about how to short unicorns. There is a popular view that many large private tech companies are overvalued; that this overvaluation is caused in part by the structure of the market, which encourages long investors but doesn't allow short selling; and that if you could just sell those companies short, you'd make a lot of money. Themes of our past discussions include:

  1. Really if you believe all of that, the right move is to start a dumb private tech company, get dumb venture-capital funding, pay yourself a big dumb salary, and laugh maniacally when the bubble bursts.
  2. Failing that, you could just find someone -- a friend, or a bank -- to take your bet against unicorns, but it's complicated. A bank will probably demand the sort of formalities -- collateral, ISDA agreements, limiting bets to big "eligible contract participants" -- that will limit the reach of the Unicorn Failure Swaps market.
  3. Also the bank will probably want a natural counterparty on the other side. Lots of people want to short unicorns, but who would take the other side of the bet? I mean, lots of people want to go long unicorns too. But if you want to go long unicorns, and you're the sort of accredited investor who could write Unicorn Failure Swaps, you should probably just invest in unicorns instead. They keep raising money!
  4. In any case, don't try to do this on the cheap in some sort of unregistered blockchain-based unicorn swap exchange; that will not end well.

So much for the theory. Here is a Medium post from Avish Bhama of Mirror, who is actually trying to make unicorn swaps happen. His team met with 65 potential counterparties, got a sense of the market appetite, drew up an ISDA and "partnered with a valuation firm to help us mark these illiquid swap positions on their books." But he didn't find much of a natural two-sided market in most names, though interestingly the one-sidedness is not all on the short side:

Most of the interest we received was one-sided interest on the top dozen Unicorn names (e.g. everyone wanted to short Theranos, Dropbox and WeWork, or go long Airbnb and Snap).

"There are so many structural obstacles to overcome," he concludes, "that long-term success — measured by market scalability — becomes highly unlikely." I think that's right. But if I were really committed to building a unicorn swaps market, I'd make two tweaks to Bhama's plan.

First, I'd do it at a bank. I know, I know: Fintech startups are supposed to disrupt banks and steal their business. But a tiny startup with a clever idea that meets with 65 investors has barely scratched the surface of potential interest in unicorn swaps. What about the mid-sized mutual fund manager who wants long unicorn exposure but doesn't get invited into late-stage rounds? What about the in-house hedge fund of a giant tech incumbent that wants to double down on its plans to crush a unicorn competitor? What about the thousands of rich private-wealth clients who fancy themselves tech geniuses? The target list is long but the hit rate is low. You need a massive sales force, longstanding relationships, standardized marketing materials, existing ISDAs and account agreements. Disruptive financial innovation just works better at an incumbent bank. 

Second, I'd find the natural interest, and then try to build a product to take the other side. This again is a very bank-y move. (It describes a lot of the financial crisis!) As I've said previously about unicorn failure swaps:

You could even imagine starting a Synthetic Unicorn Fund that invests in the long side of a lot of UFSes, giving it exposure to big tech unicorns without actually buying any shares. Register it with the Securities and Exchange Commission -- it is not obviously worse than other exchange-traded products that invest in illiquid derivatives with their sponsoring banks -- and you could even sell it to retail investors as a way to get access to hot tech startups before they go public. Then line up accredited-investor unicorn skeptics to take the other side of the Synthetic Unicorn Fund's swaps.

I still think this is kind of a good idea? If all your big investors want to short unicorns, let them. Then package the other side and market it to retail. True financial innovators know that the trick is not to survey investors and see what they want; you have to also take what they don't want and find a way to make them want it.

Stocks went down.

Some real rough math. Last week, when everyone was talking about how the "stubbornly low VIX" -- the CBOE Volatility Index, the so-called "Fear Gauge" -- was "flashing signs of complacency," the VIX was trading between 11 and 12. An 11 reading on the VIX reflects an implied volatility for the Standard & Poor's 500 Index, over about the next month, of 11 percent annualized. The rule of thumb is you can divide the annual volatility by 16 to get the daily volatility. So an 11 percent volatility represents a standard deviation of daily returns of about 0.7 percent. That means that 95 percent of the time, the S&P's daily move should be somewhere between down 1.4 percent and up 1.4 percent. The other 5 percent of the time -- one day out of 20, or about one trading day per month -- the moves should be bigger. If half of the big moves are up and half are down, then about once every two months you should have a move down of more than 1.4 percent. None of this is right -- stock returns aren't really distributed like that, and those numbers are rough rules of thumb rather than accurate calculations -- but it gives you at least a vague sense of what the VIX might have been trying to tell us.

Yesterday "the S&P 500 sank more than 1 percent for the first time since Oct. 11," which by my calculations was more than five months ago. The S&P closed down 1.24 percent. (The VIX itself closed at a marginally less complacent 12.99.) Even judged by the historically complacent standards of last week's VIX, we were long overdue for a move like yesterday's -- for a bigger move, really. But in fact the stock market has been much quieter than the VIX implied. Last week, when the VIX (a measure of how much investors expect the stock market to move) was trading in the complacent 11s, 30-day realized S&P 500 volatility (a measure of how much the stock market had actually moved) was in the 6s.

To me, what is interesting is not the supposed forward-looking complacency of stock investors. Wild stuff is going to happen in the future, sure, and the stock market seems -- or seemed until yesterday -- preternaturally chill about it. But what's really strange is that wild stuff happened in the recent past, and the stock market was even more chill about that. Honestly, what's going to happen in the next month or two that's weirder than Donald Trump being elected president? 

Elsewhere! "Fund managers now say stocks are the most overvalued they have been in nearly 20 years, according to a survey done last week by Bank of America Merrill Lynch." (Good timing!) Robert Burgess of Bloomberg Prophets: "Maybe investors should forget the Trump trade and start prepping for the Trump correction." And Alexandra Scaggs: "The Trump trade has been looking a bit, err, flaccid lately." 


The Wall Street Journal reports that "U.S. authorities intend to file criminal charges against" Jho Low, the Malaysian financier at the center of the 1Malaysia Development Bhd. scandal. Low has been a target for a while -- the U.S. Department of Justice forfeiture complaint filed last year says that he "laundered more than $400 million of the funds misappropriated from 1MDB" and used them for "personal gratification" -- but he remained undaunted:

Mr. Low, a 35-year-old known for hanging out with Hollywood celebrities and hosting lavish parties in Las Vegas and elsewhere, struck a confident tone in a New Year’s message to friends this January. “2016 was the Perfect Storm; but the calmness and resolve of our Captain, led his loyal Sailors whom placed their lives with utmost trust in his leadership weathered the storm,” Mr. Low wrote in a WeChat message viewed by The Wall Street Journal. “The men and women that came out of the storm were not the same men that walk in. Through struggle, they established new strengths they never knew they collectively had,” he wrote.

“The very moment they were brought to their knees, and their world was about to fall apart,” Mr. Low added, “their Captain’s exemplary leadership guided them to safety; and through this experience, they achieve a new level of humility, nobility and higher intelligence ready to set sail for greater achievements in 2017 for their people!”

I think that's the greatest (also only) financial WeChat I've ever read. Okay new rule: If you ever say that any financial market event is a "perfect storm," you have to continue the nautical metaphor for at least a paragraph and follow the relevant ship all the way to port or to the bottom of the ocean, as the case may be. Like: "The collapse of our biggest holdings combined with the lack of bond market liquidity to create a perfect storm, and we sank. Our chief compliance officer bravely went down with the ship, and was last seen being eaten by sharks. Our captain and a few trusted mates managed to get into a lifeboat, using the oars to scrape off several junior analysts who were clinging to the gunwales. They drifted for several days, and resorted to cannibalism quite a bit sooner than you might have expected, but most of them were eventually rescued by a passing multi-strategy fund and are now safe, dry and well-compensated. Happy New Year!"

Personnel moves.

It seems to be an odd week for financial-industry hiring. For instance there is this, from Wells Fargo & Co.:

Chief Executive Timothy Sloan said at a company town hall Tuesday that the bank is aiming to survey all its roughly 269,000 employees about its culture, working with an academic who specializes in this area. The bank declined to name the academic, though the 20- to 30-minute survey will roll out in May.

What ... sort ... of academic? A pollster? A sociologist? An anthropologist? An ethicist? A management scientist? The answer says something about what they're expecting to find. If they hired an academic criminologist, that's probably trouble.


Japan's top investment bank Nomura has hired England rugby union coach Eddie Jones to impart his wisdom on leadership and teamwork to its clients in Europe.

Oh yes right the goal of hiring a sports figure is to teach clients leadership and teamwork, not to plop a celebrity in front of the clients. "How can we work better as a team," companies across Europe ask themselves, and the answer is overwhelmingly: "Let's call Nomura and ask them to send us a rugby coach."

In less odd news, former U.S. Attorney Preet Bharara "is joining the New York University School of Law as a distinguished scholar," which I guess technically makes him an academic, if that's of any interest to Wells Fargo. Goldman Sachs Group Inc. is hiring someone to help build "a so-called robo-adviser geared to mass affluent customers." (Also: "Goldman Sachs is to start moving hundreds of staff out of London before a Brexit deal is struck.") And Paddy Power Betfair Plc., the Irish bookmaker, is looking to hire a "head of Trump betting."

Insider trading.

Thomas C. Davis, the former chairman of Dean Foods Co., testified yesterday "that he had provided 'an enormous amount of inside information' about the company" to Billy Walters, the sports gambler charged with trading on that information. Insider traders often have terrible tradecraft:

In an attempt to foil any surveillance, the men referred to Dean Foods, one of the country’s largest dairy processors, as “the Dallas Cowboys” and used a prepaid cellphone they called the Bat Phone. Mr. Walters would leave messages saying, “Let’s go get a cup of coffee,” when he wanted information, Mr. Davis testified. Sometimes, he added, Mr. Walters would use code to inquire about Dean Foods by asking, “How’s the milkman doing?”

All of that is sneaky enough to be suspicious, but not sneaky enough to foil suspicion. 

Should index funds be illegal?

Nah, suggests this Federal Reserve Board preliminary staff working paper by Jacob Gramlich and Serafin Grundl, who "propose an alternative approach for analyzing the competitive effects of common ownership: to directly analyze the weights that firms place on each others’ profits rather than using measures of industry concentration." 

We apply our approach to data from the banking industry, and our preliminary results mixed and overall rather muted. The sign of the competitive effect is sensitive to specification, and the effects we estimate are economically quite small.

Bitcoin and scale.

Here is Izabella Kaminska on the supposed purpose of bitcoin:

These purists cite the likes of Hal Finney, one of bitcoin’s earliest developers, who noted in 2010 that: “Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain”. They also quote Amir Taaki, a bitcoin activist, who said in 2014 that: “This vision of Bitcoin as a faster, cheaper and better payments-network is simply not tied to any technological grounding of what Bitcoin is really about.”

The counter-narrative goes on to claim bitcoin was intended from day one to be a neutral, transferable and less corruptible international reserve asset akin to the SDR or Keynes’ bancor – a.k.a a reserve unit against which local banking systems could square self issued units against. The elimination of middle-men, consequently, was never a direct objective.

Of course the financial-services industry has mostly moved on from its fascination with bitcoin, but you still see hints of the notion that "the blockchain" -- or a single unified blockchain -- could comprehend all of the world's financial transactions.

A disclaimer.

Here is a funny disclaimer from a penny-stock touting service, which was sent to me by a dentist, David Nelson, who says "me and my other dentist buddies at work got a kick out of it." So did I, and you might too, whether or not you are a dentist. It is incredibly honest!

What will happen to the shares that we hold during the Campaign?

We will sell the shares we hold while we tell investors to purchase during the Campaign.

People are worried about unicorns.

The board of Uber Technologies Inc. held a call yesterday to explain that everything is fine, this is fine, how are you:

“The board is confident in Travis, and we are proceeding ahead with the search for the C.O.O.,” Ms. Huffington said during the call. “Put very simply, change starts at the top.”

Put a bit too simply really! You know what Einstein supposedly said. Put less simply but more accurately, change starts one level below the top: Rather than replacing chief executive officer Travis Kalanick with an "adult in the room," Uber's plan is to hire a chief operating officer to perform whatever operations are required to help Kalanick "grow up" himself.

You can see the board's point though. Uber is facing a list of scandals and embarrassments too long to even summarize here, but on its key business metric -- rider growth -- it's still doing great. Of course sometimes businesses look at other metrics. Here is a story about the departure this weekend of Jeff Jones, Uber's president:

Among Jones’s objections, he thought the company should have pursued a path to profitability, which it had set in some developed markets last year, said one of the people. ... Jones joked to at least one group of people that when he came to the company, he expected a P&L, meaning a profit and loss statement, but he’d found only an L, said a person at the meeting.


Things happen.

INSIDE CREDIT SUISSE: A day in the life of a 28-year-old private banker. Deutsche slips in global investment bank rankings. Dublin Is Best EU City for Bankers Fleeing Brexit, Study Says. London’s trading infrastructure retains edge despite Brexit. ETF Trading Glitch Fuels Worries Over Modern Markets. High-Frequency Traders Fall on Hard Times. High-Speed Trader Teza Sells Assets to Rival Quantlab. Boaz Weinstein’s Saba Hedge Fund Settles Investor Lawsuit. Why white-collar crooks may be cheering this Jeff Sessions memo. Outlook for US corporate profits dims. Saudi Arabia’s Oil Supremacy Falters. Dole Case Illustrates Problems in Shareholder System. As Skills Shift for High-Paying Jobs, Women See AdvantagesContract theory and bank regulation. Why Won't Anyone Buy the Most Expensive House in New Jersey? "Diana Li, a BCG associate who participated in the trial, said the lounge’s new salad bar was a 'game-changer' that has prompted her to leave her desk more often." Desk horrifying. Bees on a plane.

If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Thanks! 

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

    To contact the editor responsible for this story:
    Tobin Harshaw at

    Before it's here, it's on the Bloomberg Terminal.