HFM Advertising or How To Take The Management Out of Risk Management

I have advertising in my blood. One of my relatives invented the Coca-Cola's first brand extension. Yet another relation miraculously figured out how to convince housewives to buy boxes of ordinary baking soda and, quite literally, pour them down their drains and flush them down their shiny white toilets. Kerplooosssssshhh. He was paid handsomely for his efforts.   

Hedge Fund Management Companies, and their owners, must be salivating at the imminent opportunities advertising will afford their businesses (and please please please will dewey-eyed pseuds use the correct language:  'Hedge Funds' do NOT advertise; 'Hedge Fund Management Companies' are the not-so-altruistic interested parties here). 

Traditionally, Managers kept low profiles. They maintained anonymous sounding names, discreet offices, unpretentious business cards and few titles. They rarely gave interviews, to keep their secrets, well.....ummm errrr ....secret. But if you make a billion dollars in a single year, or, less discreetly, do it for several years in a row, it is, it must be said, rather hard to keep you (and your Gulfstream IV and your divorce) out of the limelight.

So as the business of Hedge Fund Management converges with Traditional Asset Management, Hedge Fund Managers must begin the arduous and fickle process of branding, identity, and positioning in what is arguably an increasingly-crowded space. Where does the successful manager start, without taking one's eye off the proverbial investment ball? Not being too mercenary here, I'd suggest you contact Cassandra, who has taken the liberty of conjuring (and be warned, copyrighting) some apt off-the-shelf tag-lines and slogans that capture the bona-fide essence of these truly unique entities that will shortly serve the other 99% of the investing public. (Please feel free to contribute your own in the Comments Section)   

     

Blackstone 

 "When Everything Is Not Enough"

Blackrock 

 "Have We Got The Trades For You!!"

Clive Capital 

"Working To Help You Try And Make it Back"

Zweig-DiMenna 

"Thank God For 'Dead Pet Trusts' "

Henderson (Absolute Return Fund) 

 "At Henderson, We're Redefining 'Absolute'"

Marshall Wace  

"The Closest [Legal] Thing to Getting The Call Before The First Call"

SAC Capital 

 "Systematically In Front" 

IKOS  

"Fighting For Return To The Bitter End" 

Bridgewater Associates 

 "We do it OUR way…(And it Works!!)

Campbell & Co 

"There are Leaders. And There are Followers. We are Followers."

Greenlight Capital 

"When We Talk Others Act. When Others Talk, We Act"

Paulson Capital 

"All It Takes Is One Big Trade"

or

"A Piece of Your Own Private Lottery"

Eclectica Asset Mgmt

"It's The Thought That Counts"

Pershing Square 

"'The Squeaky Bird Gets The Worm"

DE Shaw 

"We're So Annoyingly Smart…So You Don't Have To Be"

Blue Sky Japan 

"We Take The Management Out of Risk-Management"

Citadel Investment

"No Comments. Just Returns."

Appaloosa 

"Hedging is for Sissies" 

RAB Capital

Helping Investors Make a Small Fortune (Out of a Large One)

Hayman Capital 

 "Strong Conviction Walks the Line Between Brilliance and Ignominy"

ESL Investments 

"Redefining Concentration"

Highfields Capital 

"The Keys To Better Returns"

Winton Capital 

 "Making Trends Your Friends"  

Elliot Associates 

"We Are Paid To Be Greedy, And We Do Not Disappoint" 

Kynikos Assoc 

"[A Bit] Smarter Than The Average Bear" 

League of Extraordinary Gentlemen

I get depressed from time-to-time thinking about "The Edge" SAC and other "well-informed" investors can (and seemingly often do) achieve in comparison to an uninformed, but nonetheless reasonably systematic investor, such myself. Certainly, some of this is derived from good security analysis, and old-fashioned vision. But "The Edge" historically appears to be disturbingly pervasive across a variety of analysis such as the penchant for the slightly weaker of the highest momo stocks (many of which were formerly the highest momo stocks), but which haven't (yet) been torpedoed by preannouncements or estimate revisions to underperform their close highest momo kin, and have a meaningfully elevated probability of being torpedoed in the next interval. While there may be other explanations for this phenomena, Occam's law would lead one in the direction of selective disclosure and trading upon material non-public information. Not that one should be surprised at this.  The sheer number of people with privileged information is vast as is the trade in such information via "expert networks", even before considering friends, family, old boys' networks or similar networks of obligation and opportunity.exchange.

All this makes Porsche's Volkswagen ummm.... errrrr....call it a pecadillo, all the more incredible, and the losses suffered by the investment equivalent of "The League of Extraordinary Gentlemen" all the more schaudenfraudelicious. Larry Robbins prescient Glenview, David Einhorn's wily Greenlight, Halvorsen's mighty Viking, Singer's calculating Elliot Associates, Carlson's swaggering Black Diamond, as well as SAC, Tiger Asia, and Perry, and another more than forty, well-snookered, plaintiffs all got smoked. There were undoubtedly many more, who, like the guy who tried to open a bottle of Champagne with a corkscrew, were too embarrassed to put their name in the lights.    

Some think, and argue persuasively that Porsche is well-guilty of outright fraud. I am certainly not qualified to judge the legal merits, but as a detached observer, and one who tries hard NOT to be a

hypocrite, I am amused that the guys who persistently pursue, and often obtain,The Edge (by hook and/or by crook) are suing because they were, on this occasion, on the very wrong side of The Edge. Porsche managed to keep their intentions so private, NONE of The League had sufficient suspicions to prevent getting hammered. And impressively, there were no apparent leaks by Porsche's option counterparty banks, accountants, lawyers, or administrators. Or perhaps The League were just so overconfident in their fundamental assessments, they didn't feel that they needed to go the extra mile to obtain the requisite Edge.

So despite my opening lament, upon  reflection, I finish with a tad more optimism, knowing that The League are not infallible, and that they do, from time-to-time, get it horribly wrong. Maybe this should be Martoma's and SAC's defense ("what the hell! i was at RISK!! the Doc coulda been talking out his ass!!). But it also seems that in continuing to pursue the suit to the end that there is a fundamental asymmetry, a lack of sportsmanship in taking one's market lumps. One wonders if Martoma's expert network Doc WAS fabricating material non-public information...would he be sued?

Another One Bites The Dust (yet another update)

Things, people, and/or ideas believed to have integrity now seemingly compromised...(the second updated and expanded version)


Reinhart & Rogoff
Gold
Jérôme Cahuzac
Japanese Yen
Jamie Dimon/JP Morgan
Bitcoin
Banca Monte dei Paschi di Siena 
LULU
IKEA Meatballs


Wen Jiabao as "Humble Servant of The People
Lance Armstrong
Top Ten Lists
NYSE
Facebook
Austerity as an Economic Panacea
Harvard Students' Academic Honesty
BLS Statistics
Cyclical Recovery
Book Reviews
Strong Computer Passwords
Toyota
'Organic' Food
Money Velocity
Patents
Undecided Voters
Hospitals
The Food Pyramid
Purity of '.999 Fine Gold Bars
Penn State Football
"Top of the Pops" 
Fareed Zakaria
The "risk-free" rate
LIBOR as a Benchmark
Public Sector Pensions
HFT as a Beneficial Provider of liquidity
Diversifying properties of Hedge Fund's
Einstein's Theory of Special Relativity 
Celtic Rangers
Macroeconomic Forecasts
John Paulson
FRB Open Market Operations
Standardized Educational Testing
Swiss National Bank
A Relaxing Cruise
WTI as Oil Benchmark 
Olympus Corp.
TEPCO
Payment Protection Insurance
DSK
HM Revenue & Customs
Sony Playstation Network
Google
Privacy
Social Mobility
Actuarial Return Assumptions for Pension Funds
Marmite
Ryan Giggs
Acupuncture
USA Govt AAA
France   AAA
Voicemail
Boob Jobs
Snooker
David Einhorn
Nuclear Power
Deepwater Drilling
Tiger Woods
Professional Cricket
Sumo
Professional Cycling
High-Frequency Trading
Professional Baseball
FIFA
Professional Tennis
Municipal Bond Underwriting
The Catholic Church 
Track & Field Athletics
NCAA Sports
US Congress
UK Parliament
Analyst Research
Credit Ratings
Banks
Newtonian Physics
The Stock Market
The Food Pyramid
Incentive Stock Options
Reinsurance Brokerage 
Lou Dobbs
The Mortgage-Backed Securities Market
Hedge Funds
Social Security
Government Balance Sheets
Tooth Fairy


Errr ummm Professional Wrestling is starting to look good by comparison - at least it makes no pretensions to be anything other than it is. What's left?

In Search of Sonmi-451

I will gladly admit to anyone who asks that I adore the writing of David Mitchell.  He conjures like Murakami on steroids (unashamed of being influenced by the master's technique). And like Murakami, he is a masterful and imaginative storyteller, weaving wonderful tapestries of surreal sub-plots, and creating characters with voices that must make even the most accomplished of authors jealous. I suffered mild depression finishing the last of his novels, The Thousand Autumns of Jacob de Zoete, knowing there was nothing to (immediately) follow. I've been meaning to see the screen version of Cloud Atlas, but haven't quite got around to it yet, pre-occupied as I have been with markets and The Yen.

Indeed, on the latter front, Abe must presently be feeling rather good. Speculators have (to date) done all the heavy lifting - front-runing official intervention, thereby reversing half of the de-risking puke of carry-trades that vaulted the Yen from 115 to 85 back in 2008.  It is important to note that this move is convergence upon "normal" from its lingering (and rather dumb, stupid, ludicrous - choose your adjective) divergence caused by the Yen's safe-haven masquerade.  What is normal? Licking my finger and sticking it up on the air, I would offer that 105ish would hardly offend anyone official. But who knows. What I do know is that short yen is now the most crowded trade in the world. And if you recall in 1998 and 2008,  we all (or should) know how THAT worked out for those left holding the shitbag position. That said, the bank of Japan appears committed to taking everyone out of their positions this time. Or so the thinking goes. Perhaps that is what makes it (to them) such a proverbial lay-up? Short as many Yen as you want (with no cost of carry) and no matter what, the BoJ will allow you to "redeem" your position at a profit (provided you haven't done anything stupid with the proceeds, like, for example, buying French 10-years, or Gold - the former yet to egg investors' faces. But before, as The Cleaner (Harvey Keitel's "Pulp Fiction" character), uttered to Travolta & Samuel L., "Well, let's not start s*cking each other's d!ck$ quite yet!", it is worth contemplating the unpopularity of writing very large 10-digit checks (in dollars!) to hedge funds - many of whom have no qualms themselves using WWII market-torture techniques upon sovereign governments - which will be required for the franking and banking of Speculators paper gains on their aggregate monster positions.

Commentators have been using some rather big and important phrases to describe Abenomics. "....Biggest blah blah blah in generation...", "...blah blah commitment not seen before blah blah", "will ahieve their inflation target of blah blah blah" because blah blah it's different this time blah ..." (these are conjured and not verbatim, but you undoubtedly understand the rhetoric).  To be sure a weaker yen will flatter balance sheets from the ginormous overseas investments enterprises have made during the past two decades of industrial hollowing. And currency translation will make income statements look prettier too - both for exporters and those translating external sales and earnings. This will have some virtuous feedback effects as investors raise expectations that may impact stock prices, and even encourage some further investment on tghe margins. But, after all is said and done in whatever timeframe this feedback loop takes to work its way through markets, there is, and I believe, there will remain, a decided lack of demand for money to make physical investments in Japan as the demographic determinism that is Japan's irrefutable course over the next thirty years, bears down upon the population, economy and markets. It is an event that I have no recollection of ever having been witnessed as a result of something wholly voluntary, non-environmental, non-plague, non-externally-induced and non-military related. And to me, it is fast-approaching, coming into closer view like a large and solid rampart-of-a-wall, and printing money is like pissing on the wall in some Joshua-like hope this little stream of urine will bring it down.

Which brings me back to David Mitchell. What Japan needs is NOT monetization, nor Abenomics. What Japan needs is Clonenomics, or more specifically, what Japan needs is Sonmi-451 and her brothers and sisters. Not Asimo - which consumes not - but living, breathing, Clones. Or, if technology is still wanting, or morally repugnant, at least more babies and bodies - lots and lots of little Yoshi's and Kumiko's. New consumers to replace (and support) the old. Immigrants, BTW, work too. In the absence of a concerted policy to this effect, it is difficult (for me) to imagine how QE, or monetization, or any other policy will somehow spur the desired effect is sufficient size to overcome the demographic steeple. Try as I might, it remains, in my mind, fanciful to attach too-high a probability on a profound result. What is likely is that - as before - these attempts will find themselves goosing asset prices in unexpected places until .... the next puke.

On Bitcoin....

Ocassionally, an image can describe a phenomena better than words. Not often, but sometimes....

Path to the Ignoble Investment Hall of Fame

And so yet another long/short equity fund launches. Good luck, and I wish you success with your investments and the growth of your company. Ummm, just one question. Your press release states you will "target an annual return of between 15 and  25%", presumably buying shares you think will go up and selling shares you think will, in a perfect world, go down, or, at worst, go up less. I just want to know: How the frick do you "target" long/short returns on a calendar-year basis in the equity market!!?!?? And you are not alone in purporting to whip up this secret return sauce ex-ante. Surely you mean that you are "expecting" returns of 15 to 25% and hopefully, this expectation will be based upon historical experience over a sufficiently long and diverse period, as well as a dumb strategy composite that at the very least might provide a benchmark. Not that investors should expect there to be any correlation between YOUR expected returns and your actual returns. Indeed, if one had $5 (not the inflation in the metaphor) for every basis point drift on every managers' expected versus actual, one would be rather well-off. But if one really does target return, one would surmise that there are conditions under which you would have no positions, or others in which your returns would be much much bigger, and that you could, would or should target returns of 100%. Or mightn't you just keep an eighth to a  quarter of the position so you could continue to "target 15 to 25%"??!? Or maybe, should volatility become comatose, and expected returns get squeezed quite low, you might employ mondo-mondo leverage in order to achieve your target, kinda like Merriweather and LTCM did in 1998 (and Merriweather did yet again with JWM). THIS, I suspect, is the problem with targeting return. It could - and often does - lead you right into the Absurdist Wonderland of Nonsene for those silly enough to religiously pursue such a course.

I reckon the truth, in long/short equity where one is following a strategy which is not the equity equivalent of the Grand Unified Theory , is that one cannot target jack-shit. The market giveth what it does, when it wants to, and it will laugh - often derisively - until you and the majority of others  cry proverbial "Uncle!". And if its in the mood, it will carry out those that follow the taken and position accordingly thereafter, before yielding. Allocate accordingly, attenuate your leverage depending upon your orientation to the ever-present tail risk, take what the market gives you, but for heaven's sake, don't target return, and just get rid of it (along with the meaningless attempt-to-impress summation of the Management Team's aggregate years of experience) from any and all published material else your potential investors think of YOU in the same sentence as the Investment Ignoble Hall -of-Famer, John Merriweather.

Cork-Screwed?

Often, when one sees something incredibly absurd - one struggles to find a logical explanation. "The Dartford Crossing" is one such infuriatingly-stupid example that should make both economists and motorists weep.

To being with, the UK, has few toll roads. Road license fees and petrol taxes ostensibly are meant to fund the upkeep and maintenance of highways.  Outside of the M6, and a handful of bridges/tunnels, there are no additional usage fees outside the taxes/fee mentioned. This is both good and bad. No tolls certainly speeds traffic. But it also provides a hidden subsidy lowering transport costs, suffers from the tragedy of the commons where every stray beer-can and plastic shopping finds its way to roadside, and there is little incentive to maintain roads which are potholed and it seem chronically underfunded and poorly-maintained. There are also fairness issues associated with this. The French, by contrast,  have gone the private route for their major arteries, which delivers a large network of amazingly smooth, quiet, clean, safe roads, with excellent technological investment and adoption to further speed the flow, albeit at eye-wateringly expensive prices of something like EUR10 per hundred km.  One need only take the A6 out of Paris from the Porte d-Orleans in order to experience the difference between the public and private management. And though there are the occasional "bouchon"  (cork=traffic jam), price DOES keep people (and HGVs) off the motorways, and there is choice with the N-roads or "Route National" adjacent to most motorways that remain free, though subject to congestion, and vagaries of local traffic. Switzerland takes a somewhat middle ground, adopting a peculiarly Swiss-style solution: the Vignette. This is a CHF45 annual decal one must affix to their windscreen if they wish to use the (generally clean, safe and well-kept) motorways. Excepting those crossing the border into Switzerland via a motorway who are forced to buy one by commercially-minded border guards, it relies on the honor system, with harsh penalties for rule-breakers. The result is a hybrid pay-by-use with the efficiency gains that result from eliminating toll booths and collection bottlenecks. Their alternatives are typically more limited by the geography of Switzerland, and in any event HGVs (trucks) are often forced to traverse the nation via the rail network, or take a large and long detour through France or Austria.  

Now, back to Dartford. The day I am sitting for half-an-hour in a tailback caused by toll-collection, I read an article extolling transport pricing's positive externalities.   In it, Krugman is thankful for a VoxEU piece quantifying the benefits of investment in public transport, and road pricing in causing people to switch to public transport. All well and good. Dartford's tolls were kept ostensibly as a means to use pricing to discourage use, as much as they were kept to generate revenue for a threadbare Treasury. But Dartford is the ONLY passage to the east of London (that is not a boat), and it is the most critical and vital link in the ring-road around London, and the only way for HGVs to get to and from the Channel Tunnel. There are no rail links or alternative routes. In effect, the supply curve is completely inelastic, and so too, are the demand curves. The only result from toll collection is the cause of massive negative externalities in the form of endless traffic jams, pollution, inefficient lost output and waiting time, and increased consumption of fossil fuel. There is are no redeeming qualities to the imposition of tolls (the infrastructure has been paid for and then some) other than pecuniary short-term gain to the Treasury at the expense of massive negative externalities. It makes you want to rip your hair out. Worse still given the inelastic demand and supply curves, they charge during the busiest times yet waive the charge when its empty, when, the public interest would be served by the opposite: making it free and zooming everyone through when its busy and charging when it's empty, and the negative externalities are greatly diminished.

Am I missing something? Analysis by more competent economists would be appreciated....