| One possibility is that investing skill exists but is very hard to identify. The biggest asset managers would love to hire the people with the most investing skill, and they have the most money to pay those people, but they can’t find them in any particularly reliable or comprehensive way. Somewhere out there is a person who’s spent years running a 4 Sharpe ratio at her $5 million friends-and-family hedge fund, or her Robinhood personal account, but she never gets a job at a big hedge fund. Why? Perhaps there is no way for information about her performance to diffuse through the market; perhaps the big funds have some set of biases or constraints — they only hire people with the right background, etc. — that prevent them from hiring some of the most skilled people. And so the skilled investors are distributed somewhat haphazardly. Some of them run multibillion-dollar portfolios at big multimanager multistrategy “pod shops” like Citadel or Millennium. Some of them run their own multibillion-dollar hedge funds with their names on the door. Others manage mutual funds, or the local teachers’ pension fund, or their personal accounts, or the investment opportunity that you just saw advertised on Instagram. In some ways this is a hopeful story — you never know, maybe that Instagram investment opportunity is a great one! — but it is not very efficient. The point of a financial market is to allocate capital to its most productive uses. Someone who is very good at allocating capital should be allocating a lot of capital, not her own Robinhood account. And an efficient market would allocate a lot of capital to her: If she reliably earns high risk-adjusted returns on the capital she invests, she should get a lot of capital to invest. Another possibility is that, over the last few decades, the market for investing talent has become incredibly efficient, and now the biggest hedge funds can pretty reliably hire the best investors and allocate the most capital to them. In many ways that is an appealing story. For one thing, it suggests that capital is being allocated to its highest and best uses: The best investors get the most money [1] to allocate, and they allocate it in the best way to the best businesses. For another thing it is just a nice story of intellectual accomplishment. Identifying investing skill is not a trivial task, and if humanity has collectively figured it out then that’s sort of cool. The big hedge funds “are a massive filter of talent,” as Gappy Paleologo puts it, and the filtering works. This story is a bummer, however, if you run a medium-sized hedge fund. If all the best investors go work at the biggest hedge funds for the most money, where does that leave you? Closed. Bloomberg’s Nishant Kumar reports: Eisler Capital Multi Strategy Fund is winding down and returning capital to investors, the firm told clients on Monday in a letter seen by Bloomberg News. … The London-based firm said its returns failed to keep pace with expectations, while the battle to recruit and keep top traders capable of deploying capital at scale has only grown more expensive. … “After careful consideration of these factors and others, including the application of projected 2026 costs on an anticipated smaller capital base, we are no longer confident of our ability to achieve the fund’s investment objective,” the letter said. “The most responsible course of action now is to return capital to our investors.” ... Organizations like Ken Griffin’s Citadel and Izzy Englander’s Millennium have reached such scale that they can pay millions of dollars to lure the best traders — forcing competitors to spend big, often by charging investors pass-through fees, in order to keep up. “The economics of the multistrategy model — with its heavy infrastructure, high pass-through expenses, and dependence on large teams of traders — favor those with vast capital bases and diversified revenue streams,” said Bruno Schneller, managing partner at Erlen Capital Management. “Without sufficient scale, even well-regarded firms can find the operational and financial demands of this business model unsustainable.” Yes in an efficient market there would not be that many well-regarded multistrategy firms without vast capital bases. If you’re good at investing, Ken Griffin will give you vast amounts of capital to invest, which is better than investing less. It is very hard to sell the same car twice. If you simultaneously sell a car to me and to someone else, one of us will show up and drive it away, and then the other one of us will show up and not drive it away, and you will quickly have a problem. Similarly with car parts: If you sell me a set of windshield wipers, you will collect money from me, but you will not have the windshield wipers anymore to sell to someone else. What if you really want to sell a car twice? Well, this problem can be surmounted, for a while, with a little creativity. The trick is that, when you sell me a car, I probably don’t just hand you the cash and drive away. I probably take out a loan to pay for the car, and you might get the loan for me. You give me the car, the bank gives you the money upfront, and over the next few years I pay you back and you pay back the bank. [2] But the bank isn’t sitting with us as we fill out the forms. You could just fill out the forms twice, for two banks. Tell Bank 1 that you sold me a car for $20,000, tell Bank 2 that you sold me the same car for $20,000, and get $20,000 from each bank, for a total of $40,000 for the same $20,000 car. Each bank will want the car as collateral for its loan, but in a somewhat abstract sense. (It’s not like the bank locks the car in its vault: I have to drive it.) Perhaps you can fudge this. Of course now I owe you only $20,000 (plus interest), while you owe the banks $40,000 (plus interest), but, you know. That’s a problem for later. You have the $40,000 now, which will cover your double payments for a while. Perhaps your business will boom and you can grow out of the problem. Perhaps you will sell the next car three times. You might think this would be harder to do with windshield wipers — people don’t normally take out loans to buy windshield wipers — but it depends where you sit in the supply chain. If you sell windshield wipers to car dealerships or auto part stores, your customers (the retailers) probably do pay on credit. You give them windshield wipers and you get back an invoice saying that they owe you some money. And then you can borrow from a bank with that invoice as collateral (this is called “factoring”). Maybe twice! I guess the point is that it is hard to sell the same physical product more than once, but it is easier to sell the same abstract financial product (like a loan) more than once, and in a world where products are normally sold on credit, you can kind of sell anything twice. That said, it is a bad idea? I mean, it is fraud. But also, it is relatively easier to sell a loan twice than it is to sell a car twice, but it’s not particularly easy. There are a lot of ways to get caught. The two main ones are: - People will check? I said above that each lender will want the car as collateral “in a somewhat abstract sense” — they won’t hold the car in their vault — but this is a thing that people think about. There are public filing registries for vehicle liens, so that lenders can check to make sure that no one else has claimed the same collateral. Invoice factoring firms do due diligence, asking questions like “did you already sell this invoice to someone else,” which you and your employees will have to answer with a straight face. It’s a lot of work to fool everyone.
- You have to pay back the two loans. I said above that “that’s a problem for later,” and perhaps you can grow out of the problem, but (1) later comes eventually and (2) perhaps you can’t.
There have been two big car-related bankruptcy filings this month. Earlier this month Tricolor Holdings, which sells cars and makes loans, filed for bankruptcy; yesterday First Brands Group Holdings, which sells auto parts, also filed. In each case, there are rumors of double-pledging. When Tricolor filed, the Financial Times reported: The Department of Justice is probing Tricolor over alleged irregularities related to car loans and had contacted people close to the company in recent weeks, according to two people briefed on the matter. ... One area of focus was whether Tricolor pledged the same collateral on multiple loans, two separate people familiar with the matter said. And the first-day declaration from First Brands’ chief restructuring officer [3] reports that it’s looking into potential similar problems: Following diligence performed by the Company’s Advisors, the Debtors believe that an unpaid prepetition balance of approximately $2.3 billion has accrued with respect to the Third-Party Factoring arrangements as of the Petition Date. The Debtors’ factoring practices are subject to the Special Committee’s ongoing Investigation including (i) whether receivables had been turned over to third party factors upon receipt, and (ii) whether receivables may have been factored more than once. … Recently, the Company Advisors became aware that certain inventory subject to a security interest in favor of Evolution [Credit Opportunity Master Fund, one of First Brands’ asset-based lenders] pursuant to the Evolution Facilities may have been commingled with collateral securing the ABL Facility [a different asset-based term loan and revolving facility led by Bank of America]. Subsequently, the Debtors and their advisors reached out to the applicable stakeholders to make them aware of the foregoing and begin work to understand the facts (the “Evolution Collateral Dispute”). The Evolution Collateral Dispute is subject to the Investigation by the Special Committee, which is ongoing. I don’t really know what to make of this. Perhaps it’s nothing — perhaps neither company actually double-pledged anything and these are just misunderstandings. Or perhaps they did, but it is just a weird coincidence that two double-pledging disasters came to light in the same month. Or perhaps this is the sort of thing that happens in booming credit markets. Traditionally, when investors have lots of money and are desperate to lend it to someone, they do things like lend to risky businesses, or make loans at low rates, or make loans with few covenants. But I guess “not checking to see if the collateral is real” is another way to make loans quickly. Private markets are the new public markets | The basic situation is that individual investors want to buy stock in SpaceX and OpenAI and Stripe, but they can’t. Those companies’ stocks don’t trade on the stock exchange. They are private. But they have lots of stock (they are big companies) and lots of shareholders (employees, former employees, etc.), so somebody can find stock somewhere. You just have to, like, know a guy, and go to a back alley, and hand over a sack of cash, but then you can get some SpaceX stock that fell off the SpaceX stock truck. There are various forms of this, including forwards, special-purpose vehicles and some weirder stuff. This is an unsatisfactory state of affairs for individual investors (who want to be able to get SpaceX stock by pushing a button on their brokerage app), and for the companies (who don’t want individual investors buying their stock at all!), but it is a particularly unsatisfactory state of affairs for brokerage firms, who really want to attract individual investors by giving them what they want (SpaceX stock). And so there are various brokerage firm attempts to build a “Buy SpaceX Stock” button into their apps that abstracts away from the visit to the back alley to meet the guy who has the knockoff SpaceX stock. We have talked about Robinhood Markets Inc.’s plans to “tokenize” SpaceX stock to sell to its retail investors on its app. Robinhood’s app is not a back alley! Robinhood’s app is the Times Square of investing! [4] Getting SpaceX stock in your brokerage app is, like, 50% of the goal of modern retail finance! The other 50% is getting football bets in your brokerage app! Why is everything like this! Anyway here’s this: As investors of all types seek new opportunities and greater choice in their investment options, Monark Markets ("Monark"), a fintech startup that embeds private market investments and trading solutions within traditional brokerage and wealth platforms, and Apex Fintech Solutions Inc ("Apex"), an innovation launchpad for the global investment ecosystem, have teamed up to streamline investor access to a range of private markets. … Through the Apex Alts platform that brings alternative investments into the same brokerage accounts as traditional asset classes, Apex is removing barriers and simplifying access to private market assets previously reserved for the ultra high-net-worth and institutional investors. The first private asset class unlocked by Monark and Apex will be the Pre-IPO market, enabling investment opportunities in companies like SpaceX, Perplexity and Stripe with minimums as low as $5,000. Accredited investors* in the Apex network will be able to invest in single-asset Special Purpose Vehicles (SPVs) that provide access to private companies with high-growth potential through a familiar digital experience, funding transactions from the cash balance in their Apex brokerage accounts. Why not. I’m not entirely clear what the secondary market is going to look like here — what price will you get when you sell your single-asset SPV? — but that’s not the point. The point is there’s gonna be a button in your brokerage app to buy SpaceX. Earlier this month, the US Securities and Exchange Commission’s Investor Advisory Committee put out a set of recommendations on “Retail Investor Access to Private Market Assets.” From the summary: In the Committee’s view, the optimal way for retail investors to access private market assets is through registered funds, which allow retail investors to invest in broadly diversified funds that contain private market assets, often alongside public market assets. The investor protections embedded in the registered funds framework include Commission review, audited financials, professional fund management, diversification, various levels of liquidity, and the protections of the Investment Company Act.
That is: We seem to be hurtling inevitably toward a world in which ordinary investors are going to be pushed to invest in private equity and private credit. One way to do that is by letting ordinary investors buy stock directly in private companies. Another way to do it is by letting ordinary investors invest in professionally managed SEC-regulated funds that have access to good private investments, do due diligence, and construct diversified portfolios of private companies. The SEC advisory committee wants professional funds, because (1) those might do a better job than individuals in their brokerage apps but also (2) of course a committee of professional investors wants retail investors to pay fees to professional investors. Anyway the actual answer is going to be both. Yesterday I was … perhaps somewhat dismissive of the role that Affinity Partners is playing in the $55 billion leveraged buyout of Electronic Arts Inc., in that (1) the lead investor in the deal is Saudi Arabia’s Public Investment Fund, (2) PIF already owned a big chunk of EA, (3) PIF is also an investor in Affinity’s fund and (4) Affinity just doesn’t have that much money so could not have provided much of the equity in the deal. But Bloomberg and the Financial Times both have stories about how, actually, Affinity — which is run by Jared Kushner — was crucial to getting the deal done. From Bloomberg: Jared Kushner brokered the initial connection between the Redwood, California-based video game maker and Saudi Arabia’s Public Investment Fund, and for months acted as a central figure in the talks, according to people familiar with the matter, who requested anonymity to discuss private conversations. When the deal’s momentum slowed around mid-year, Kushner pushed to keep it going, some of the people said.
And from the FT: Electronic Arts has for years been coveted by Saudi Arabia’s sovereign wealth fund and the billionaire dealmaker Egon Durban. But it was Donald Trump’s son-in-law Jared Kushner who unlocked its $55bn takeover. Kushner, who is married to Trump’s eldest daughter Ivanka, began sketching out the largest buyout in Wall Street history earlier this year with Durban, who co-heads tech-focused private equity group Silver Lake. ... Durban had been studying a takeover of EA for more than a decade. But it was Kushner who convinced PIF to go for the take-private bid, said people briefed on the matter. So Affinity earned its cut of the deal. Though both stories mention the other thing. From the FT: While a deal of this kind could face regulatory scrutiny in Washington, several people said they expected the transaction to go through fairly easily, citing the influence of Kushner and Saudi Arabia on the White House. “We are in a regulatory environment that is welcoming of [Saudi Arabia]. We are not in what was the previous regime,” said a person briefed on the transaction. They said Kushner’s participation in the consortium could prove valuable if the deal were to unexpectedly hit a snag. Or, as another person close to the inner workings of the Trump administration put it: “What regulator is going to say no to the president’s son-in-law?” Is it better to defraud dumb people or smart people? I mean, intuitively it’s probably easier to defraud dumb people, but if you get caught and prosecuted and convicted and are facing sentencing, would you rather have dumb victims or smart ones? This is not legal advice — don’t defraud anyone! — but I would have thought that defrauding dumb victims would go worse for you. “Your Honor, my victims were all sophisticated wealth professional investors who did their due diligence and could easily bear their losses”: fine, sure, better. “Your Honor, my victims were dum-dums and stealing their money was so easy that nobody could have resisted”: wait, no, bad. Charlie Javice, who founded the financial technology company Frank and sold it to JPMorgan Chase & Co. for $175 million, is in an odd situation in that (1) arguably JPMorgan is the single most sophisticated and well-funded possible victim of a fraud but (2) everyone seems to agree that, in this particular case, JPMorgan was a dum-dum and stealing its money was so easy that nobody could have resisted. Yesterday Javice was sentenced to seven years in prison, and there was at least some debate about whether her victim’s stupidity was a mitigating factor. Bloomberg News reports: On Monday, one of Javice’s lawyers, Ronald Sullivan, suggested that JPMorgan’s failings should be considered in the “background” of her sentencing. But Hellerstein indicated he wouldn’t be taking “JPMorgan’s very poor due diligence” into account. “A fraud is a fraud, whether you outsmart someone who’s smart or someone who’s a fool,” the judge said, adding that he was focused on “her conduct, not JPMorgan’s stupidity.” And the Wall Street Journal reports: Javice’s attorneys told Hellerstein that JPMorgan’s failure to conduct proper due diligence should weigh in favor of her receiving a more lenient sentence. Other financial firms, such as Capital One, considered buying Frank but declined after looking at a sample of the company’s user data. “We would never ask you to punish JPMorgan Chase’s stupidity,” said Ronald Sullivan, one of Javice’s lead attorneys. “But we submit that it’s a relevant factor.” I feel like normally it’s the opposite? “My victims trusted me so completely that they didn’t ask any questions” does not normally make your fraud look better. Remember James Fishback? He worked at Greenlight Capital Inc. for a while, where he was an analyst (according to Greenlight) or the “head of macro” (according to him), and then he left and he and Greenlight sued each other over whether or not he was the head of macro. He later moved on to a career of running anti-woke exchange-traded funds, suing the Federal Reserve, and yelling repeatedly at Lisa Cook at Jackson Hole. Anyway last week he settled one of his lawsuits with Greenlight, “admitted sharing confidential information and agreed to pay the hedge fund’s costs to resolve a lawsuit it filed against him.” From the stipulation: At multiple points during his employment with Greenlight, Defendant [Fishback] electronically accessed and transmitted certain files between Greenlight’s systems and his own personal email addresses, without seeking or obtaining authorization from personnel at Greenlight. … Those instances include but are not limited to … the August 15, 2023 email … (the “Port Sheet Email”) … which contained Greenlight’s entire portfolio of investments. ... Defendant transmitted the Port Sheet Email to his personal email address on August 15, 2023, his final day of employment with Greenlight. Greenlight sent Defendant an email on August 15, 2023 informing the Defendant that he lacked authorization to transmit the Port Sheet Email to his personal email address, and that such transmittal was a violation of Defendant’s obligations under the Employment Agreement. Greenlight also requested Defendant to delete the Port Sheet Email, and Defendant responded the same day indicating that he deleted the Port Sheet Email. This statement later proved to be false as Defendant not only did not delete the Port Sheet Email, but the Port Sheet Email was later produced by Defendant in discovery in this case. Yeah you’re not really supposed to take a hedge fund’s entire portfolio out the door with you when you quit. What are you going to do with it? Well: Defendant also maintained a personal trading account in his name while employed at Greenlight and did not disclose the existence of such account to Greenlight. Defendant made investments in this account in the same instruments that Greenlight had invested in around the same time. Defendant did not seek or obtain authorization from Greenlight to make any such investments.
Yeah you’re not supposed to shadow your firm’s trades either. Fishback also discussed Greenlight’s trades with another person “on at least thirty-three (33) occasions during his employment with Greenlight,” though the stipulation doesn’t say who that person was. Bloomberg News has a hint: In a statement, Fishback said Greenlight found only a few dozen texts and emails out of 100,000 in which he said he was just “speaking about my work with friends and family.” “There is literally nothing damaging about telling your dad what you did at work,” Fishback said. “This was a frivolous lawsuit from the get-go.” I bet that most hedge fund analysts don’t tell their dads what trades they did at work? Anyway Fishback’s exchange-traded fund that buys Tesla stock and call options started trading today. Private Credit Could Amplify Shock in Next Crisis, Fitch Says. SEC Is Moving to Allow Stocks to Trade Like Cryptocurrencies. Elon Musk hit by exodus of senior staff over burnout and politics. OpenAI Lets Users Buy Stuff Directly Through ChatGPT. AI Data Centers Are Sending Power Bills Soaring. CoreWeave Inks $14 Billion Meta Deal, Highlighting AI Demand. JPMorgan Files Plans to Put Private Credit Into an ETF Wrapper. CSX Appoints New CEO Following Activist Pressure. Exxon to Cut 2,000 Jobs in Global Restructuring. Anthropic Says New Model Can Code on Its Own for 30 Hours Straight. Steve Cohen apologizes to Mets fans. Octopuses Invade the English Coast, ‘Eating Anything in Their Path.’ If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
