Jamesian Philosophy Refreshed

Harvard University recently issued its annual report. Here is a link: https://finance.harvard.edu/files/fad/files/fy19_harvard_financial_report.pdf Finance nerds will be especially interested in the report on Harvard's famous endowment, a landmark example of institutional investing with an unlimited time horizon.  The university gets revenue from a number of sources: research oriented subsidies, gifts, tuition ... but distributions from the endowment accounted for roughly one third of the income in the fiscal year that ending on June 30, 2019.  The report of that endowment consists of pages 12-17.  You can learn there that the balance sheet consists of 46% equity. That is a rather high percentage (it is broken down almost evenly between public and private equity). Another 33% consists of hedge funds. Harvard has gotten only a mediocre performance out of its hedge fund allocation, less than it has gotten out of public equity and far less than it h...

A recent submission to the Journal of Business, Entrepreneurship, and the Law looks at the “Brokaw bill” of 2016 and at the facts said to have motivated it. There are lessons to be drawn from this about how things work in the world, about how the managers of failed enterprises like to think they work, and about who politicians believe. In March 2016, Sens Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) introduced a bill to “increase transparency and strengthen oversight of activist hedge funds.” Bernie Sanders, then in the midst of a campaign for the Democratic nomination for POTUS, signed on as a co-sponsor. The proposal was said to have been inspired by the cloture (five years before) of a paper mill in Brokaw, Wisconsin. That paper mill had provided jobs to some of Senator Baldwin’s constituents for years. According to Baldwin and Merkley, the mill closed because a predatory activist hedge fund bought control of the Wausau Paper Company and demanded immediate returns “at th...

By "alpha seekers" for the purposes of this list I mean the managers of funds that invest actively in a range of markets, and that work to do better than average (by various benchmarks). This is a list of big stories of the year ending from their point of view, and it differs from a more general list of financial/economic top stories, which I will present tomorrow. This, 2016, has been an eventful year for seekers of alpha, their counterparties, and their service providers. For example, the Federal Trade Commission cut a deal with Herbalife this year, disappointing those seekers of alpha who had hoped the FTC would crack down on it as a pyramid scheme. A short side analyst for Macquarie was rather dramatically excluded from a Pax Global earnings briefing, laying bare some of the tensions in the financial community in Hong Kong. And "reverse carry" seemed to rise to prominence in the world of foreign exchange. But in my quite arbitrary and selective count, none...

When does the right to vote have a negative value, and why? Shares in one of Rupert Murdoch's concerns, Twenty-First Century Fox Inc., are divided into voting and non-voting classes. Both represent an equity interest, so both are inferior to debt in the event of a restructuring or litigation. The reason for the division is that Murdoch and his family want to maintain control, yet they don't want to have to own as large an equity share as they would need in order to do so. The two class share structure allows him effective control of the company, with 39.7% of the voting rights, even though he (and his family) have a total of only 12% of the equity. Twelve percent is still a large chunk of a corporation, but dissidents could conceivably challenge Murdochian control if both classes of stock were equity, challenges that are cut short since he controls almost 40% of the shares that count for purposes thereof. My curiosity is piqued, though, by the fact (a recent turn of eve...

Thomson Reuters is putting an end to what until days ago remained of HedgeWorld. Excuse me while I shed an inward tear. HedgeWorld, founded in 1999, was the first news operation to focus squarely, full time, upon the hedge fund industry. The founders lit this candle soon after the self-destruction of Long-Term Capital Management created a broad public desirous of information on this subject. Better to light that one candle, after all, than to curse the darkness. I was the first hire of those founders -- they brought me on board in the spring of 2000. HedgeWorld had a complicated corporate history, but in time it was captured by Reuters, and it was run as a semi-autonomous operation beneath that broad Reuteronian sky. Then, alas, Reuters merged with Thomson, and the Bigs of the two operations put their pointy heads together and decided where they could make cuts. They closed down HW as a news gathering operation in the fall of 2008. That was the end of my in...

In yesterday's entry here, I made what may have seemed to some a quite cryptic observation about "high water marks." To review, I said that the use of a 20%-of-gain element in the fee structure of hedge funds makes an issue out of the high-water mark, but that I would discuss this at another day. The underlying idea is this. A hedge fund manager takes as his compensation 20% of the increase in fund value over the last recorded maximum. Suppose a fund was worth $3 million at the end of year 1. Then it had a bad second year, and ended that annum worth only $2.5 million. No performance fee for them, of course (they have to content themselves with their share of the AUM.) In the third year, they do somewhat better, and get the value of the whole back to $3 million. In their heart of hearts, the managers would surely like to say that they grew their fund by $500,000 in year 3, so they are entitled to 20% of that, or $100,000. But they can't. By standard contract ...

In the hedge fund world, the phrase "2 + 20" remains at least a critical point in discussion of fees, even though there has been a lot of erosion over the years, and it isn't clear how much of the industry still gets away with actually charging 2 + 20. The idea is that the management takes 2% of the assets it has under management [AUM] regardless of performance, and separately takes 20% of the profit it makes for its investors. The 20% incentive fee never goes below zero. That is, managers don't have to make up for the fund's losses, they simply get a chunk of gains when there are gains/ The 20% is the big money (at least in good times), while the 2% management fee keeps the lights on and the staff busily employed even in bad times. The 20% also means that, in the hedge fund world, there is a lot of talk about getting back to a "high water mark," but I'll ignore that today. The structure has come under pressure for a number of reasons. As lon...

That graph comes from nine years ago, a Brad DeLong post on Argentina's interest rate spreads from four to six years before that. It's a neat reminder of how long the controversy over these bonds has been simmering along. Here is the recent Supreme Court decision on the litigation/discovery question. slip opinion Noah Freeman, of Bloomberg, offers his opinion that the near-simultaneous decision of the Supreme Court to refuse to hear opinions on the merits of the lower court orders   is "legally surprising, financially worrisome, and internationally questionable." Lyle Denniston of SCOTUSblog has this to say: No relief for Argentina. JURIST of the Un. of Pittsburgh School of Law, offered a simple two-paragraph statement. THE NEW YORK TIMES goes further, emphasizing for example the Republic of Argentina's statements that it would :"try to comply but that another default would be a possibility given the overall sums at stake for all...

My recent reading has included a novel kindly given me by a friend for Christmas, TOP PRODUCER written by Norb Vonnegut and brought out in 2009 by St. Martin's Press. SPOILER ALERT: On the off chance you haven't read this novel yet and plan to do so: please don't read further. The book begins by taking the metaphor of Wall Street as a "shark tank" quite literally. The boss of a hedge fund --or, strictly speaking, of a fund of hedge funds -- is murdered by being fed to the sharks at an aquarium. It turns out that the dead man, Charlie Kelemen, was engaged in various financial shenanigans that unsurprisingly made him enemies, and part of this was the blackmail of other people involved in financial shenanigans. The protagonist of the story is a friend of Charlie's named Grover O'Rourke, who works at the prop desk of a second-tier investment bank, and is a "top producer" there. Whether he was named after a president or a muppet is unc...