Competition has forever been fierce and at times may not be entirely fair. Thus, a student of the market must be ever aware of the trends around them so they can promptly identify growing areas of opportunity which haven’t yet been revealed to the majority. Mr Madoff made a very good living (while it lasted) offering clients a steady ~10% return on their investment. Bush league stuff, it turns out. The real maestros of money are doing rather better.
Accounting and legal researchers at the University of Kansas have identified a bull market in influence-peddling: returns on the order of 22,000% for firms who “invested” in lobbying efforts to favorably modify the tax code. These people obviously learned that it’s important to play by the rules.
I’ve written some decent strategies and have been blessed with moments of great luck, but I’m ashamed to note that I’ve never gotten remotely close to these kinds of returns. Can you imagine the sharpe ratio these guys can claim? And it’s a repeatable process. Although the Kansas researchers don’t mention it, there are many other cases of such legal arbitrage as pointed out in an AP piece on the subject:
The nonpartisan group recently released a study comparing the amount spent by bailed-out banks on political contributions and lobbying with the amount of money they got from the Wall Street rescue fund, known as the Troubled Asset Relief Program. The results produced eye-popping rates of return, an overall 258,449 percent for the $114 million they spent on campaign donations and lobbying.
Now this number - ~260,000% ROI - is clearly a bit inflated as $114M barely covers what Citi paid out to Mr Rubin for his services over the relevant period, but we’re probably in the ballpark. Perhaps the banks only made 100,000% on their investment, but we can still see why they’re “the pros.”
I’m wracking my brains trying to figure out how to shoe-horn this marvelous alpha-generator into my trading algorithms. I confess that I haven’t yet figured it out. But I take solace in the knowledge that, as an American, I have the best government money can buy!
dereferenced, our managed markets
one view on the important stuff
There seem to be two kinds of economists in today’s world.
Keynesians and Austrians? Freshwater and saltwater? Macros and micros? Voodoos and uh well-adjusted?
No. These may be valid distinctions ordinarily, but in today’s debate on how to solve the great self-inflicted wound known as the credit crisis the only two that matter are those who’ve worked for prop trading outfits (or perhaps more broadly, those who would someday like to once their time of public service is up) and those who just practice economics, typically academically.
Among the former, the solution is uniformly, as Mish so memorably put it, “to patch the busted dam with water” and to do it now or the consequences could be incomprehensibly bad.
Among the latter, the views are many and divergent, but they at least agree that throwing trillions of dollars about is a serious bit of work and should be undertaken with deliberation, transparency and a long view.
I’m not qualified to opine on which type of economist has a better chance of saving us from ourselves. But I can observe that the only kind sitting at the decision-making side of our president, pre- or post- January 20th 2009, is the prop trader.
Read more…
dereferenced, our managed markets
"We've run out of Federal Firearm Licenses"
Yesterday I read this article in the New Yorker: The New Paranoia: Hedge-Funders Are Bullish on Gold, Guns, and Inflatable Lifeboats.
In his book Wealth, War, published last year, former Morgan Stanley chief global strategist Barton Biggs advised people to prepare for the possibility of a total breakdown of civil society. A senior analyst whose reports are read at hedge funds all over the city wrote just before Christmas that some of his clients are “so bearish they’ve purchased firearms and safes and are stocking their pantries with soups and canned foods.”
It reminded me of my experience on 9/11 and my thought that a really handy item for the paranoid Manhattanite in uncertain times might be a conveniently inflatable raft.
Yes, I was a little warped by the experience. Evidently I’m not the only one, though…
These guys would prefer to be in a high-speed boat or ex-military vehicle, heading off toward their fully provisioned compounds in pursuit of the ultimate goal: to win the chaos.
Then today I came across the above notification from the ATF indicating that we’ve literally run out of firearms licenses. I guess the optimistic interpretation is that there’s “always a bull market somewhere…”
I was gambling in Havana
I took a little risk
Send lawyers, guns and money
Dad, get me out of this
- Warren Zevon
dereferenced, hedge funds, our managed markets
This is *not* Hank Paulson's Piggy bank...
I came across this Bloomberg story on the state of Hank Paulson’s piggy bank. As a dutiful steward of our Nation’s interests, he was forced to place his fortune into a blind trust upon accepting his current position as Treasury Secretary. Now he gets to find out what happened to his money. Always a charmer, he jokes about it:
“I’ve got to find out where my money has been invested,” Paulson, 62, said today after a speech, drawing laughter from the Washington Economic Club.
“You know the old joke about how you make a small fortune? And that is, give a large fortune to a person in a blind trust,” he said today. “I haven’t even thought about how I’m going to be investing my money.”
Ah what fun. Of course, given the impact of his visionary stewardship on most Americans’ portfolios, it’s easy to imagine that many will have forgotten that he likely only accepted his position of unfailing public service for the >$100M tax loophole it afforded him.
Before taking the Treasury job, Paulson sold his Goldman Sachs shares and wasn’t required to pay capital gains taxes, according to a June 2006 divestiture notice about a stake that was valued at the time at about $485 million.
In this day and age, no self-respecting citizen so much as blinks at a mere ~$170M looting of the nation’s coffers. But it does raise the question: which is more ironically piquant? Our ring-side seats for the hollowing out of the American Republic or our knowledge that we paid through the nose for the privilege?
our managed markets
Back when Microsoft was considered a very smart company, they inspired the phrase “eating one’s own dog food“. This meant that they used their own products and was understood to be a superlative practice.
As a small algorithmic trading shop, we certainly eat our own dog food. As we develop StratBox, we continuously trade on it. If we introduce bugs, we pay for them - quite literally and immediately. Believe me, we are highly motivated to ensure that it’s a bug-free environment. Likewise with our models. If we think a model is worthwhile, we trade it. If we’re not sure, we trade it in small size to see. We eat our own dog food - trading and software models alike.
One of the great attractions of wall st has always been its “eat what you kill” mentality which suggests potential for both great reward and, well, hunger. Motivation is clear. Interests are properly aligned.
Thus, the news we’ve been bombarded with out of wall st has been depressing indeed for finance professionals. The culture we admire about our industry has been perverted. After months of solidly horrible and generally worsening news, Credit Suisse’s bold move yesterday was a real ray of light. Their move to “feed” their top management the slop they’ve been creating is a sadly unique example of a finance firm ensuring that interests are ethically aligned.
And it’s the first genuinely good piece of news out of wall st that I can remember in a very long time. Happy Holidays, Credit Suisse!
dereferenced, our managed markets
I’m delighted that Scott Johnston once again allows me to share one of his excellent monthly newsletters. Scott’s an experienced hedge fund exec who’s currently a PM and principal at the Belstar Group, an asset allocator and fund-of-funds. Contact him at sjohnston {AT} belstargroup [DOT] com.
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Dear Partners and Friends,
The Madoff scandal has so many facets, it is difficult to know where to start. The sheer size of it is mind boggling. Many thought that the initial $50 billion number, which came from Madoff himself, was likely an exaggeration, but as of this writing, it may not be. I think back to Ivan Boesky, the singular scammer of the 1980s. I think he managed a few hundred million
Is this a hedge fund scandal? I think you’d have to say that it is, despite the fact that Madoff did not, himself, run a hedge fund. He accepted brokerage accounts, which he then managed through his own brokerage firm. But many formed de facto hedge funds around Madoff for the sole purpose of feeding money to him.
Scammers will always be with us. It should not be shocking to anyone that there are those willing to lie and cheat to make money. Bernie Madoff is simply the latest of a long line of con men: Charles Ponzi, Bernard Cornfeld, Ivan Boesky, Sam Israel, Dana Giachetto, Raffaello Follieri (Anne Hathaway’s boyfriend)…it’s a long list.
Read more…
guests, hedge funds, our managed markets
With all due respect to the auto industry and the worthies in washington, the big news this morning is about Bernard Madoff. Although it’s been very well covered by the always insightful and acerbic Cassandra as well as a variety of more traditional news outlets, this bit of news has a particular personal irony for me.
I had visited the offices of Madoff back in May. Situated in the striking “Lipstick” building, his multi-level offices were really gorgeous and impressive. His trading floor was large, modern and immaculate. You could trade there, perform open-heart surgery, make sushi or fab chips. Immaculate.
I was there as I had a trading strategy that I wanted to capitalize and I was hoping some sort of a deal might be worked out. Although they were extremely nice and gave me a fair hearing and asked good and detailed questions on the model, they ultimately declined the opportunity and sent me on my way. Nonetheless, I came away impressed by them and their remarkable money-generating enterprise.
Under-capitalized but game, the strategy I’d pitched them has made us over 200% since that May meeting.
You only find out who is swimming naked when the tide goes out. - Warren Buffett
hedge funds, our managed markets
"all the way down"
This post from the financial times both evokes an earlier post I’d written and pretty uniquely captures the zeitgeist of our times…
It’s good to see that the cast of usual suspects haven’t gone gun shy from losing billions and are still out there innovating.
For those looking to answer the question:
Q: How do we improve upon layers of opaque, illiquid and unregulated financial instruments?
The good people who brought us the “credit crisis” have engineered an answer to this puzzle:
A: just add another layer!
dereferenced, our managed markets
The New American Way: you pay, they profit
It’s not being characterized as such, but the bailout of Citi is really just a stealth tax on the citizenry of America.
~$1,000 for every man, woman and child in our country.
I saw the memo Pandit sent to his ebullient employees. It’s filled with some quality verbiage, but my favorite part is where he characterizes this as an “innovative market-based solution”…
This is an innovative, market-based solution that allows us to purchase insurance from the Fed to limit future risk. And while the global economic challenges are still not over, this transaction brings even greater clarity to our overall financial strength and ability to deliver on the promise of this great institution.
The use of the word “purchased” is also pretty splendid. This is just classic stuff from the head of a company that has engineered an absolutely historic destruction of value.
After the break you can see the remainder of this pristine example of doublespeak-as-modern-art. I hope you find it funny … you’re paying for it.
Read more…
our managed markets
I was looking for a couple of books on amazon today and came across this offering of a hoodie (pictured above) which reads: “I helped bailout the banking system and all I got was this lousy tee shirt!” which I’d (admittedly more rancorously) suggested only a few days ago…
Just as curious, the search that revealed this gem was meant to find books similar to one I’ve recently read by Dr. Andrew Lo, “Hedge Funds: an Analytic Perspective” (pictured left) and which, like all of his work, I found interesting and informative. I’m not sure exactly how Amazon matched these two products together, but it’s funny to imagine that the same people buying the one are also buying the other!
books, dereferenced, our managed markets
