A Brief History of the Hedge Fund(newyorker.com)
newyorker.com
A Brief History of the Hedge Fund
https://www.newyorker.com/culture/culture-desk/a-brief-history-of-the-hedge-fund
84 comments
Buffett is fairly quantitative but on measures of fundamentals rather than technicals.
Took the words out of my hands. I feel like few people are as mindful of the raw fundamental financial metrics of companies. As you said, that's just not the same math PhD type technical stuff that hedge funds and others work on.
The fact that Ed Thorp made such a killing trading warrants suggests that warrent prices were not very efficient before BS.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3444897
As far as I know Ed Thorp also made a lot of money after B-S was published. So it doesn't necessarily follow that B-S made the market more efficient. Also, doesn't his discovering B-S before it's publication and using it to make money support what I'm saying?
As far as I know Ed Thorp also made a lot of money after B-S was published. So it doesn't necessarily follow that B-S made the market more efficient. Also, doesn't his discovering B-S before it's publication and using it to make money support what I'm saying?
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Very true. The earliest hedge funds did not rely on option pricing, or options for that matter.
> In the midst of a global crisis, the hedge fund has prospered.
The opening line itself should give away the bias. Despite the pandemic and everything else going on, there was no market crisis last year. Quite the opposite in fact. It was basically impossible to lose money, no matter what you invested in.
The article talks about hedge fund managers making record amounts of money – that's because that is what hedge funds are designed for. In an era where you can buy pretty much any security for free with a few clicks, their standard 2% of assets/20% of profits annual fee structure is absurd.
Sure hedge funds have made their investors money. The S&P 500, small caps, crypto, commodities, treasuries, currencies all have as well (and for a lot cheaper).
Here is a much more neutral take – https://www.investopedia.com/managing-wealth/hedge-fund-over...
The opening line itself should give away the bias. Despite the pandemic and everything else going on, there was no market crisis last year. Quite the opposite in fact. It was basically impossible to lose money, no matter what you invested in.
The article talks about hedge fund managers making record amounts of money – that's because that is what hedge funds are designed for. In an era where you can buy pretty much any security for free with a few clicks, their standard 2% of assets/20% of profits annual fee structure is absurd.
Sure hedge funds have made their investors money. The S&P 500, small caps, crypto, commodities, treasuries, currencies all have as well (and for a lot cheaper).
Here is a much more neutral take – https://www.investopedia.com/managing-wealth/hedge-fund-over...
"Despite the pandemic and everything else going on, there was no market crisis last year."
There absolutely was a crisis. Perhaps several, depending on how you break up the time period.
The crises were very short lived and did not have much long term impact but, make no mistake: the VIX shooting to almost 90, oil pricing dropping below zero and continued instability in the repo market / money market rates ... those were all crises and they were, indeed, global.
There absolutely was a crisis. Perhaps several, depending on how you break up the time period.
The crises were very short lived and did not have much long term impact but, make no mistake: the VIX shooting to almost 90, oil pricing dropping below zero and continued instability in the repo market / money market rates ... those were all crises and they were, indeed, global.
The market corrected around Q1/Q2 last year and this is one of the events which causes hedgies profits to soar.
I think both articles kind of miss the point: people aren't usually allocating to hedge funds in order to earn monster return. I mean that would be nice as well, but if a hedge fund delivered about the same returns as the market net of fees but with lower volatility and/or correlation, people would be happy with that as well.
Why would anyone give more fee to basically perform like market but for less volatility?
I think the word "correlation" is the more important one.
Lack of correlation can be very valuable even if the returns are mediocre to poor.
I don't remember or understand how it works, but I think I read once about how a fund manager claimed to be able to take more risk with the "long" part of a portfolio because of the uncorrelated "short" part, even though the returns of it were unimpressive.
Lack of correlation can be very valuable even if the returns are mediocre to poor.
I don't remember or understand how it works, but I think I read once about how a fund manager claimed to be able to take more risk with the "long" part of a portfolio because of the uncorrelated "short" part, even though the returns of it were unimpressive.
I've worked in the industry, and yeah is a good explanation. The problem is that there is a reason why some strategies are uncorrelated to the market ; because they are not trading liquid vanilla products. Institutional investors cannot invest in crazy stuff that easily. Renaissance and other unicorns are not always open to new institutional investors, and certainly not one with tons of compliance to deal with.
1) Portfolio size, 2) low market correlation, 3) above market performance.
Choose two. You cannot have all three.
1) Portfolio size, 2) low market correlation, 3) above market performance.
Choose two. You cannot have all three.
The expected value of the sum of two random variables is the sum of their individual expected values. The variance of the sum is the sum of the individual variances plus twice the covariance.
So, if you have two different assets with the same expected value and same variance, but with zero correlation, then all mixtures of the two will have the same expected returns, but a 50/50 basket of the two assets will have 0.707 (1/sqrt(2)) times the variance of either of the two assets alone.
More generally, for a basket of non-correlated assets, a basket that maximizes expected returns divided by standard deviation of returns will never be 100% one asset. Returns are a linear function of the individual weights, but std. deviation of returns are a non-linear function. (This is true, regardless of statistical distribution of the random variables, as long as std. deviation is well-defined... no assumptions about normal distribution are involved.)
So, if you have two different assets with the same expected value and same variance, but with zero correlation, then all mixtures of the two will have the same expected returns, but a 50/50 basket of the two assets will have 0.707 (1/sqrt(2)) times the variance of either of the two assets alone.
More generally, for a basket of non-correlated assets, a basket that maximizes expected returns divided by standard deviation of returns will never be 100% one asset. Returns are a linear function of the individual weights, but std. deviation of returns are a non-linear function. (This is true, regardless of statistical distribution of the random variables, as long as std. deviation is well-defined... no assumptions about normal distribution are involved.)
Nice writeup. The catch is it's very hard to measure correlation reliably for badly behaved random variables (like the ones we have in finances).
Because volatility drag reduces the rate of compound growth. Less volatility = faster growth = greater wealth sooner.
To allow higher leverage!
Pretty much everyone? Return is always measured as a function of risk (i.e. volatility). For example, it's trivially easy to get twice as much return if you're willing to take twice as much volatility - just use leverage to juice your returns (and your losses). However, to get twice as much return with the SAME level of volatility is exceeding difficult (you would essentially be a Warren Buffet at that point).
Similarly, to get the same about of return with much less volatility is just as difficult. It's why people were so willing to put money into Bernie Madoff's ponzi scheme, and why his years of steady returns with very little volatility turned out to be too good to be true.
Similarly, to get the same about of return with much less volatility is just as difficult. It's why people were so willing to put money into Bernie Madoff's ponzi scheme, and why his years of steady returns with very little volatility turned out to be too good to be true.
A $40B manager once told if I could deliver 6% annual return with 1% volatility, he would give me all his money. Yeah, they want as little volatility as possible.
Because you can leverage more and earn more return for the same volatility. Which hedge funds often do (they are typically leveraged)
>It was basically impossible to lose money, no matter what you invested in
It's always possible to lose money. One obvious way was to say "I'm not panicking, there's no reason to panic" as the market crashed and capitulate right as it hit bottom, and spend the rest of the year saying "why is the market going up, it makes no sense, the world is ending".
It's easy to second guess yourself. Suppose you were entirely invested in biotechnology for several years prior to covid. Surely that is a good position to be in. After over a year, in retrospect, it is. But in the initial selloff, biotech crashed with everything else. Psychologically, how do you react? Do you say to yourself, everybody (the market) is wrong? Or are you conditioned to think the market knows better than almost any individual. The market was wrong as it turned out. I mean, covid treatment and vaccines are not gold mines for the private sector in themselves, thank god, but the pandemic is obviously driving and will continue to drive a realization of how important biotechnology is in general.
>their standard 2% of assets/20% of profits annual fee structure is absurd
I wonder when that became the "standard". Before I heard of the term "hedge fund", I heard of people charging 1% and 10%. Like in the early 80s.
A joke I heard (not sure if apocryphal) was someone naive asked "if you charge 10% of the profits, does that mean you give back 10% of the losses?" The answer: "Oh, no, that would be unprofessional"
> that is what hedge funds are designed for. In an era where you can buy pretty much any security for free with a few clicks, their standard 2% of assets/20% of profits annual fee structure is absurd
I don't understand, you seem to imply that any decent hedge fund makes obscene amounts of money, but if they did, then high fees would not be absurd - problem is, they mostly don't.
It's always possible to lose money. One obvious way was to say "I'm not panicking, there's no reason to panic" as the market crashed and capitulate right as it hit bottom, and spend the rest of the year saying "why is the market going up, it makes no sense, the world is ending".
It's easy to second guess yourself. Suppose you were entirely invested in biotechnology for several years prior to covid. Surely that is a good position to be in. After over a year, in retrospect, it is. But in the initial selloff, biotech crashed with everything else. Psychologically, how do you react? Do you say to yourself, everybody (the market) is wrong? Or are you conditioned to think the market knows better than almost any individual. The market was wrong as it turned out. I mean, covid treatment and vaccines are not gold mines for the private sector in themselves, thank god, but the pandemic is obviously driving and will continue to drive a realization of how important biotechnology is in general.
>their standard 2% of assets/20% of profits annual fee structure is absurd
I wonder when that became the "standard". Before I heard of the term "hedge fund", I heard of people charging 1% and 10%. Like in the early 80s.
A joke I heard (not sure if apocryphal) was someone naive asked "if you charge 10% of the profits, does that mean you give back 10% of the losses?" The answer: "Oh, no, that would be unprofessional"
> that is what hedge funds are designed for. In an era where you can buy pretty much any security for free with a few clicks, their standard 2% of assets/20% of profits annual fee structure is absurd
I don't understand, you seem to imply that any decent hedge fund makes obscene amounts of money, but if they did, then high fees would not be absurd - problem is, they mostly don't.
2/20 seems to be the standard because that's what's charged by some prominent funds, so that's what gets quoted in articles, but I don't think it was ever the fee at even 50% of funds, and it's been declining back towards 1/10.
Buffett was 0%/25% (over a 4% hurdle IIRC).
That’s what he originally had. ...Then he had a rough patch and asked his investors to switch to 2/20, so that he could keep operations running also during bad years. His investors agreed and 2/20 was born...
He never had a rough patch running the Buffett partnerships, or changed structure. He made money every year and his returns were roughly 40% annualized. Source: I’ve read the partnership letters.
And I’m pretty sure 2/20 was already a common fee structure on Wall Street before Buffett started his partnership.
And I’m pretty sure 2/20 was already a common fee structure on Wall Street before Buffett started his partnership.
Not only was it possible to lose money, some hedge funds did. Just look at Renaissance's non-insider funds.
This is where people fundamentally misunderstand what hedge funds do. It's been nearly impossible to lose money as a long only. But hedge funds, which have massively underperformed as an industry have largely done so because the Fed has forced everyone to be maxi long risk assets. There is no alternative. And fundamentally, this isn't what hedge funds do.
I've often heard people say hedgies are just levered beta. Well, that's obviously not true as we've seen indices outperform. Some of the best long/short investors have been absolutely wrecked in the post 2008 QE environment (QEternity) because price discovery is meaningless. The Fed is in the driver's seat, and the managers who have killed it had one simple thesis: the Fed has your back, so BTFD. Front running the Fed has been the best and easiest strategy for over a decade now. And it will continue to be so until it isn't...
I've often heard people say hedgies are just levered beta. Well, that's obviously not true as we've seen indices outperform. Some of the best long/short investors have been absolutely wrecked in the post 2008 QE environment (QEternity) because price discovery is meaningless. The Fed is in the driver's seat, and the managers who have killed it had one simple thesis: the Fed has your back, so BTFD. Front running the Fed has been the best and easiest strategy for over a decade now. And it will continue to be so until it isn't...
Can you explain what you mean here?
> maxi long risk assets
I think you mostly mean "own assets", but would like to understand this phrase precisely.
> maxi long risk assets
I think you mostly mean "own assets", but would like to understand this phrase precisely.
Not the GP, but I think they mean that there has been no point in hedging (hence "hedge fund") risk in the world of Fed-driven asset prices. If the Fed has your back to BTFD every time (and just look at the S&P 500 since the Covid crash -- a 30% loss was made up for in just six months), why bother trying to seek alpha to beat the market by trying to buy under-appreciated assets and sell over-appreciated ones? Just buy everything. And if you still want alpha, you just apply leverage. This last part leads to big volatility whenever there is a trigger.
Alpha should be risk adjusted (a la Sharpe/Sortino), but broadly your answer is correct. Current Fed policies punish those who don’t take risk, by design. Hedge funds (in theory - ahem) are structured to maximize risk adjusted profits. But if there’s no risk, because the Fed has made it so, then there is nothing for hedge funds to do but accept the new casino world for what it is: play along and hope that the Fed can control whatever comes our way. It’s a fools errand to hedge...until it isn’t.
Maxi long = maximum ownership that a relevant risk grid would allow
Risk assets = anything but the dollar or bonds
Basically buy assets which (they believe) stimulate the economy more by either lowering financing costs (“the hunt for yield”) or through wealth effects (“my portfolio is up 50%, I’ll spend/consume more now”)
Risk assets = anything but the dollar or bonds
Basically buy assets which (they believe) stimulate the economy more by either lowering financing costs (“the hunt for yield”) or through wealth effects (“my portfolio is up 50%, I’ll spend/consume more now”)
Yea I remember reading about this in another thread: https://news.ycombinator.com/item?id=25953890
> Ray Dalio’s Bridgewater Associates and Jim Simon’s Renaissance Technologies ... each suffered negative double-digit returns in their main funds in 2020. Similarly, some of the industry’s most highly regarded names such as AQR, Two Sigma, and Dimensional Fund Advisors all suffered massive investor redemptions in the face of substantial underperformance in 2020.
> Ray Dalio’s Bridgewater Associates and Jim Simon’s Renaissance Technologies ... each suffered negative double-digit returns in their main funds in 2020. Similarly, some of the industry’s most highly regarded names such as AQR, Two Sigma, and Dimensional Fund Advisors all suffered massive investor redemptions in the face of substantial underperformance in 2020.
RenTech finished the year up over 70% in Medallion, however.
> Despite the pandemic and everything else going on, there was no market crisis last year. Quite the opposite in fact. It was basically impossible to lose money, no matter what you invested in.
coughs in Wirecard, anything related to tourism, and Melvin Capital / Citadel
Jokes about fraud empires and short squeezes aside - the fact that the stock markets have prospered despite many millions of people losing whatever tiny remaining savings they had, their homes, their freedom, their jobs, their health and in way too many cases their lives is disturbing in itself. A market that decoupled from reality is dangerous.
> In an era where you can buy pretty much any security for free with a few clicks, their standard 2% of assets/20% of profits annual fee structure is absurd.
There is no such things as "buying securities for free". As a retail investor you're still paying something: your data, to offer hedge funds a way to front run your orders and to make them profits.
coughs in Wirecard, anything related to tourism, and Melvin Capital / Citadel
Jokes about fraud empires and short squeezes aside - the fact that the stock markets have prospered despite many millions of people losing whatever tiny remaining savings they had, their homes, their freedom, their jobs, their health and in way too many cases their lives is disturbing in itself. A market that decoupled from reality is dangerous.
> In an era where you can buy pretty much any security for free with a few clicks, their standard 2% of assets/20% of profits annual fee structure is absurd.
There is no such things as "buying securities for free". As a retail investor you're still paying something: your data, to offer hedge funds a way to front run your orders and to make them profits.
For all the focus this article seems to put on "hedge" I can't imagine there are many hedge funds left that are really market direction neutral are there? With the performance of the SP500 being what it is in the past few years you'd have to think you have some wickedly smart strategy to match that without going net long. Plus almost all assets, even things that were supposed to be countercyclical have been trading together so when the market really dumps even gold and silver get sold, if only to provide liquidity to cover other positions.
Global macro did well last year i think but long short equity not, it's like an existential crisis.
Exact opposite
Yea, the “hedge” part has seemed to have been lost to history long ago.
When the market really dumps, it's generally been quite temporary. All fundamental asset's have their time, cash's is just shorter and worse over time. If you think that's interesting, take it one step further and you have ultra cash: physical bills, not just bank IOU's and electricity. It has even a further niche time and even worse over time, 0% interest.
>the efficient-market hypothesis, the meaning of which can be grasped by an oft-repeated saying on Wall Street: for every person who believes a stock will rise—the buyer—there will be some other equal and opposite person who believes the stock will fall—the seller
is quite wrong really. The efficient market hypothesis implies market prices correctly discount the future and so you can't make money by figuring they are too high or too low. You still have a buyer and seller even if the prices are stupid.
is quite wrong really. The efficient market hypothesis implies market prices correctly discount the future and so you can't make money by figuring they are too high or too low. You still have a buyer and seller even if the prices are stupid.
> You still have a buyer and seller even if the prices are stupid.
First of all, this is broadly untrue. It's really only true for a certain set of meme stocks, but that's because the market allows for fun stupidity. But just because the market allows for fun stupidity, doesn't mean the mechanism doesn't work wherever there is an absence of fun stupidity.
Also, the status quo is arguably not a "market", at least as the efficient-market hypothesis defines it. Fed monetary policy basically breaks the usual flight-to-safety mechanism by providing no other alternative than to park capital in equities due to inflation and low interest rates (QE, basically). Additionally, Fed bailouts of junk bonds essentially removes all downside risk associated with risky assets while preserving the outsized reward; effectively guaranteeing stupid prices for certain assets.
First of all, this is broadly untrue. It's really only true for a certain set of meme stocks, but that's because the market allows for fun stupidity. But just because the market allows for fun stupidity, doesn't mean the mechanism doesn't work wherever there is an absence of fun stupidity.
Also, the status quo is arguably not a "market", at least as the efficient-market hypothesis defines it. Fed monetary policy basically breaks the usual flight-to-safety mechanism by providing no other alternative than to park capital in equities due to inflation and low interest rates (QE, basically). Additionally, Fed bailouts of junk bonds essentially removes all downside risk associated with risky assets while preserving the outsized reward; effectively guaranteeing stupid prices for certain assets.
I'm not sure what conclusion I'm supposed to draw from the implications here. Melvin lost money because they misapplied the Black-Scholes formula?
I took away the message that traders keep trying to make a perfect system in which there is no chance of losing money, but events like the GameStop fiasco prove they haven't managed to get there.
He says this as though it's a meaningful conclusion to draw, even though earlier in that same article he wrote that 2020 was "the industry’s best year of gains in a decade."
He says this as though it's a meaningful conclusion to draw, even though earlier in that same article he wrote that 2020 was "the industry’s best year of gains in a decade."
First big options trader was Russel Sage, the instrument were called privileges at the time, late 19th century into the very early 20th century.
Hedge funds and Hedging have little to do with each other besides that both can involve derivatives, leveraged speculative contracts. Hedge funds took off in the 1990s after a quite rise in the 1980s. SEC Regulation D is what set off this economic catastrophe from the USA to the world. Reg D was implemented to enable venture capital. Proprietary traders like Paul Tudor Jones had been doing speculative trading in financial derivatives since the 1970s using various often offshore locations to base the supposed business presence. Reg D was intended to fund startups with a nice help to the manangers who took the risk to carry forward their gains from one successful project to the next tax free as a balance to the frequent losses. The carryforward amount only gets taxed when it exits the investment fund. The Prop Traders kept the carry tax break to them selves and passed their monthly wins and losses over to their investors, in the 1990s long term capital gains got a lower tax rate and a new scam arose where these and so called private equity funds passed all gains, even short term trading gains over to the investors as long term capital gains this exploded the Hedge fund scene and are at least partially responsible for the crashes of 1997, 1998, contributed to the dot com bubble and pop, and the early 2000s real estate bubble and pop and on to our current tax cut fueled bubble.
The joke is Hedging is supposed to reduce risk exposure While Hedge Funds are risky and speculative with the incentives for the investor and manager misaligned, the only hedge these funds provide to an average rich person is it balances the conservative take most fund manager's take with investment funds.
Hedge funds also often use more leverage than a retail investor is allowed to.
Is there a problem with this article? It's only two paragraphs long. Seems like most of it is missing.
Please subscribe to the New Yorker. It is a shining light in US journalism.
I am not much of an e-reader and prefer physical objects but I do subscribe to the kindle version of The New Yorker and find it pleasing to consume in that way.
I think it's $1.99/mo or something ? You couldn't spend a better two bucks ...
I am not much of an e-reader and prefer physical objects but I do subscribe to the kindle version of The New Yorker and find it pleasing to consume in that way.
I think it's $1.99/mo or something ? You couldn't spend a better two bucks ...
You must have a special deal. The price I see (USA, Kindle store, current pricing) is $9.99/mo after the first month.
That said, I agree that journalism deserves to be paid for, and even the price I mentioned above (about $2.30/issue) is very reasonable.
That said, I agree that journalism deserves to be paid for, and even the price I mentioned above (about $2.30/issue) is very reasonable.
Hmmm .... you're right. I see I am being charged $8.99 each month for the New Yorker.
Yes, indeed - very reasonable. Again, I don't like the idea of reading on the kindle but somehow it works just fine, aesthetically, with this particular magazine...
Yes, indeed - very reasonable. Again, I don't like the idea of reading on the kindle but somehow it works just fine, aesthetically, with this particular magazine...
God bless them. Take so much flak yet are inarguably the backbone of our society.
You’re being downvoted, but hedge funds’ positive impact on price discovery is under-rated.
Matt Levine (Bloomberg’s extraordinary finance opinion writer / jokester) had a pretty good articulation of this in a recent post about GameStop and Melvin Capital (https://www.bloomberg.com/opinion/articles/2021-01-28/knowin...):
“The point of the stock market is to Enable Price Discovery or Encourage Capital Formation or something boring like that. Stock markets exist so that companies can raise money to fund their projects, and so that the smartest analysts of companies can work diligently and compete fiercely to put the proper value on those companies so that we as a society can know what projects are most valuable. Stock markets exist so that regular people can invest their savings in those companies, making everyone better off: Companies get funding to pursue socially beneficial projects; regular people get an ownership stake in economic growth. Or whatever.
This theory has some obvious flaws in its real-life application, but it’s a decent theory. It is, if not exactly true, true-ish; it describes the fundamental underpinnings of the market if not necessarily its everyday operation. It posits a social purpose for financial markets, beyond making funny memes on Reddit.
It is just the case, just inevitably the case, that if you are going to have financial markets that are optimized for those purposes—that are liquid and complete, that attract smart people, that are open to everyone—they are also going to have a certain amount of nonsense. It’s not like WallStreetBets invented financial nonsense! Financial-market nonsense is, like, 70% of what we talk about around here on a normal day. How many times have I written about hedge funds tricking each other using credit default swaps? Financial markets exist to foster price discovery and capital formation, but the way they do that is mostly by letting smart people mess with each other all day. WallStreetBets is a new class of smart people messing, quite effectively, with the old ones.”
Matt Levine (Bloomberg’s extraordinary finance opinion writer / jokester) had a pretty good articulation of this in a recent post about GameStop and Melvin Capital (https://www.bloomberg.com/opinion/articles/2021-01-28/knowin...):
“The point of the stock market is to Enable Price Discovery or Encourage Capital Formation or something boring like that. Stock markets exist so that companies can raise money to fund their projects, and so that the smartest analysts of companies can work diligently and compete fiercely to put the proper value on those companies so that we as a society can know what projects are most valuable. Stock markets exist so that regular people can invest their savings in those companies, making everyone better off: Companies get funding to pursue socially beneficial projects; regular people get an ownership stake in economic growth. Or whatever.
This theory has some obvious flaws in its real-life application, but it’s a decent theory. It is, if not exactly true, true-ish; it describes the fundamental underpinnings of the market if not necessarily its everyday operation. It posits a social purpose for financial markets, beyond making funny memes on Reddit.
It is just the case, just inevitably the case, that if you are going to have financial markets that are optimized for those purposes—that are liquid and complete, that attract smart people, that are open to everyone—they are also going to have a certain amount of nonsense. It’s not like WallStreetBets invented financial nonsense! Financial-market nonsense is, like, 70% of what we talk about around here on a normal day. How many times have I written about hedge funds tricking each other using credit default swaps? Financial markets exist to foster price discovery and capital formation, but the way they do that is mostly by letting smart people mess with each other all day. WallStreetBets is a new class of smart people messing, quite effectively, with the old ones.”
> Stock markets exist so that companies can raise money to fund their projects
The amount of money corporate America raises from initial and secondary offerings in the stock market is negligible relative to corporate bonds, lines of credit, bank loans etc. Companies don't raise money from the stock market in any real sense. It has been this way since World War II (and possibly before).
The amount of money corporate America raises from initial and secondary offerings in the stock market is negligible relative to corporate bonds, lines of credit, bank loans etc. Companies don't raise money from the stock market in any real sense. It has been this way since World War II (and possibly before).
That’s certainly true in absolute numbers, but there are certain subsections of the market where stock offerings remain a primary capital instrument. Biotechs will often do an IPO even 5-10 years before the product is ready to launch, and then do several secondaries along the way.
Moderna, foe example. And I imagine a few companies going through SPACs today.
that only addresses one side of the story - banks/credit decision makers often use market capitalization as a factor in underwriting. The easiest example of how equity prices influence credit is NFLX - their 1st big debt raise was in 2015 (2b?) when NFLX's burned 700M in cash and was pledging to be cash flow negative for the next 3+ years. Also see all the converts that a lot of recent tech IPOs have started offering
edit: changed the unit from billions to millions.
edit: changed the unit from billions to millions.
(quoting your quote) "Stock markets exist so that companies can raise money to fund their projects"
This is said a a lot but surely things like it just exist, and any purpouses we assign are stories. The majority of the effect on the world of the stock market seems to be what happens with existing stocks and not IPOs & share issues.
This is said a a lot but surely things like it just exist, and any purpouses we assign are stories. The majority of the effect on the world of the stock market seems to be what happens with existing stocks and not IPOs & share issues.
This is a popular thing to say, and it's something that people say a lot because they like to say it.
I don't know all the forms that companies file to issue stock in the US, but I think S-1 and S-8 are a couple of them. Lots of these are constantly filed with the SEC.
Yesterday, Monday, there were:
I don't know all the forms that companies file to issue stock in the US, but I think S-1 and S-8 are a couple of them. Lots of these are constantly filed with the SEC.
Yesterday, Monday, there were:
40 S-1s (or amendments) which are registrations for issuing securities.
23 S-8s (which I believe are registration of securities used to pay employees).
11 F-1s (which are for foreign issuers of securities)
12 S-6s (which are for unit trusts issuing securities)
I think getting into the numbers is the right idea. I wouldn't know where to look for the $$ volumes of issues/IPOS vs eg dividends or stock trades, if someone does please chime in :)
My gut feeling is that despite being common, issuing stock is still peanuts compared to the old stock trades/dividends.
My gut feeling is that despite being common, issuing stock is still peanuts compared to the old stock trades/dividends.
I don't think the numerical comparison you want to make has any meaning at all, let alone something to do with the relative importance of the activities of trading vs. issuing stock.
The ratio of stock traded to stock issued can be anything from zero to infinity.
We could imagine having "high frequency trading" of car loans producing a huge volume and it wouldn't change the fact that the car loans exist because people need transportation.
The ratio of stock traded to stock issued can be anything from zero to infinity.
We could imagine having "high frequency trading" of car loans producing a huge volume and it wouldn't change the fact that the car loans exist because people need transportation.
The existence of a secondary market with lots of liquidity gives people the confidence to invest in IPOs. There would be a lot fewer participants if there was no secondary market.
In the same post I linked, Matt Levine actually provided an example of exactly that happening to another similarly over-hyped company, AMC:
“In talking about GameStop, I have occasionally tried to tie the goofy stock-price dynamics to corporate finance. I suggested that maybe GameStop could sell stock at these absurd prices and use the money to, you know, be a better company. It’s tricky, selling stock at these prices, but in theory that’s what the prices are for: People are telling you that they want to buy your stock to fund your projects, so you might as well sell them the stock and do the projects.
AMC has done that! On Monday it announced that it had raised $506 million of equity (and another $411 million of debt) in various transactions that “should allow the company to make it through this dark coronavirus-impacted winter.” Good work. Even better, that same day AMC launched an at-the-market offering to sell up to 50 million shares into the market at prevailing prices, allowing it to sell opportunistically to any redditors who wanted to buy. Yesterday it announced that it had finished the offering and raised $304.8 million from that and a previous stock sale, at an average price of about $4.80 a share. Of course yesterday the stock closed at $19.90, so AMC would have done better to wait a day, but nobody’s perfect. When redditors are clamoring to buy your stock you should sell it to them before it’s too late; there’s no reason for the company to try to time the endgame perfectly.
Also yesterday holders of $600 million of AMC convertible bonds converted them into stock at a conversion price of $13.51 per share. Six hundred million dollars of debt, vaporized by Reddit enthusiasm. “In the absence of significant increases in attendance from current levels, there is substantial doubt about our ability to continue as a going concern for a reasonable period of time,” AMC warned investors on Monday; four days and a billion dollars later, there is somewhat less doubt. A week ago it was not crazy to think this company was doomed; now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week. Capital formation!”
“In talking about GameStop, I have occasionally tried to tie the goofy stock-price dynamics to corporate finance. I suggested that maybe GameStop could sell stock at these absurd prices and use the money to, you know, be a better company. It’s tricky, selling stock at these prices, but in theory that’s what the prices are for: People are telling you that they want to buy your stock to fund your projects, so you might as well sell them the stock and do the projects.
AMC has done that! On Monday it announced that it had raised $506 million of equity (and another $411 million of debt) in various transactions that “should allow the company to make it through this dark coronavirus-impacted winter.” Good work. Even better, that same day AMC launched an at-the-market offering to sell up to 50 million shares into the market at prevailing prices, allowing it to sell opportunistically to any redditors who wanted to buy. Yesterday it announced that it had finished the offering and raised $304.8 million from that and a previous stock sale, at an average price of about $4.80 a share. Of course yesterday the stock closed at $19.90, so AMC would have done better to wait a day, but nobody’s perfect. When redditors are clamoring to buy your stock you should sell it to them before it’s too late; there’s no reason for the company to try to time the endgame perfectly.
Also yesterday holders of $600 million of AMC convertible bonds converted them into stock at a conversion price of $13.51 per share. Six hundred million dollars of debt, vaporized by Reddit enthusiasm. “In the absence of significant increases in attendance from current levels, there is substantial doubt about our ability to continue as a going concern for a reasonable period of time,” AMC warned investors on Monday; four days and a billion dollars later, there is somewhat less doubt. A week ago it was not crazy to think this company was doomed; now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week. Capital formation!”
AMC had previous filed to make those sales, btw, before the Reddit push. Wonderful timing.
GMC had not, and was in a quiet period. Not so great timing.
GMC had not, and was in a quiet period. Not so great timing.
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Given your username, bio, and the article itself, you’d think your comment is sarcastic, though it does not come off as such.
I like to think that most of us folk on HN can agree that hedge funds have had very little to do with the progression of the world beyond the growth of its key members’ pockets and convoluted new “investment methods”.
Pension funds - and similar - can easily be moved to ETFs and other asset classes without the management fees from these funds.
Pension funds - and similar - can easily be moved to ETFs and other asset classes without the management fees from these funds.
I am probably deeply biased, having spent decades in finance including massive funds, but I'd like to think you're wrong.
On the most simple level - ETFs and passive investments only work because they "invest along" with the rest of the market. With the rest of the market being the active investors, of which the large institutional ones make the most impact.
If they weren't there - then the passives would stop working. The dynamics take a while to visualize but think about the word - passive implies you're following someone who's active. My metaphor for this is water-skiing. The water-skier is MUCH more efficient than the boat that's towing them. However it would be wrong to think that the world would be a better place if everyone just had the skis and nobody had boats - w/o boats, the people are back to having generate their own energy (trading ideas/analysis) and we're back in the worse spot.
Then - on the very concrete level - there's a LOT of state teachers, firemen, policemen, etc. that are able to give their pensioners the what they promised them only because they made wise investments in funds that worked their asses off to provide returns required for that.
On the most simple level - ETFs and passive investments only work because they "invest along" with the rest of the market. With the rest of the market being the active investors, of which the large institutional ones make the most impact.
If they weren't there - then the passives would stop working. The dynamics take a while to visualize but think about the word - passive implies you're following someone who's active. My metaphor for this is water-skiing. The water-skier is MUCH more efficient than the boat that's towing them. However it would be wrong to think that the world would be a better place if everyone just had the skis and nobody had boats - w/o boats, the people are back to having generate their own energy (trading ideas/analysis) and we're back in the worse spot.
Then - on the very concrete level - there's a LOT of state teachers, firemen, policemen, etc. that are able to give their pensioners the what they promised them only because they made wise investments in funds that worked their asses off to provide returns required for that.
If an investor wants returns that are orthogonal to the market or that avoid exposure to specific factors, then ETFs aren't really an option. This is why pension funds etc. will have some investments in index funds but will also diversify into hedge funds and alternative investments.
Hedge funds and related investment vehicles aren't for most people, but they do perform an important function in the markets. Not everyone can invest passively -- someone has to actually enable price discovery.
Hedge funds and related investment vehicles aren't for most people, but they do perform an important function in the markets. Not everyone can invest passively -- someone has to actually enable price discovery.
Moreover, in a highly correlated world it is unsurprising that institutional investors are eager for less correlated sources of return. The problem is actually finding it: as an allocator you are being adversely selected against. If a hedge fund is willing to take your money, we'll maybe it isn't that great of an opportunity after all.
Alternatives don't make up the core portfolio of large institutional investors such as pension funds. Instead, they represent a percentage of the portfolio. The purpose of this percentage is to mix in uncorrelated (or less correlated) return streams in order to boost the return/risk ratio of the portfolio.
It would be foolish in my opinion to just replace an entire pension fund portfolio with a couple ETFs. This isn't to say the pension funds are doing a good job (I don't think they are) in their allocation, but to say that everyone should just take out all of their money from hedge funds and put them into ETFs is irresponsible and not something any large investor would ever consider.
It would be foolish in my opinion to just replace an entire pension fund portfolio with a couple ETFs. This isn't to say the pension funds are doing a good job (I don't think they are) in their allocation, but to say that everyone should just take out all of their money from hedge funds and put them into ETFs is irresponsible and not something any large investor would ever consider.
I first thought the article was a joke when I saw its length.
Their sympathy for Melvin Capital despite said “fund” seeking to make money by sinking American companies into the ground via massive “short” positions, as with GameStop, is just disgusting.
You don’t have to put others “down” to be “up”. There’s a way for us all to win. We certainly don’t need hedge funds to help us accomplish that.
EDIT:
“How they did it”:
Melvin Capital purchased substantial volume of short positions (many billions), collaborated with Wall St on how to best design the downfall of a business employing thousands during a pandemic, and even put out fake news articles & tweets to fool the Reddit mob out of fooling themselves. Did not work out in the end.
(No, I do not agree with Reddit’s current valuation. It is merely a remnant of the whole GME fiasco.)
Their sympathy for Melvin Capital despite said “fund” seeking to make money by sinking American companies into the ground via massive “short” positions, as with GameStop, is just disgusting.
You don’t have to put others “down” to be “up”. There’s a way for us all to win. We certainly don’t need hedge funds to help us accomplish that.
EDIT:
“How they did it”:
Melvin Capital purchased substantial volume of short positions (many billions), collaborated with Wall St on how to best design the downfall of a business employing thousands during a pandemic, and even put out fake news articles & tweets to fool the Reddit mob out of fooling themselves. Did not work out in the end.
(No, I do not agree with Reddit’s current valuation. It is merely a remnant of the whole GME fiasco.)
I love shorts the markets would be terrible without them
GameStop is incredibly overpriced. Incredible waste of capital being poured into it.
Gamestop was also incredibly underpriced when Melvin was shorting it.
That’s your view. A thing is worth what someone will pay for it, be that gamestock, tesla, a gallon of gas, bitcoin, an NFT, or a kilogram of rice.
If it were as simple as that, speculation wouldn't exist, because no one would ever buy anything thinking that it's worth more than the price on the table.
He's saying he doesn't think the market price for GME will hold, a position I happen to agree with. Might be more juice left in the rollercoaster, but I'm not buying it.
He's saying he doesn't think the market price for GME will hold, a position I happen to agree with. Might be more juice left in the rollercoaster, but I'm not buying it.
>Their sympathy for Melvin Capital despite said “fund” seeking to make money by sinking American companies into the ground via massive “short” positions, as with GameStop, is just disgusting.
Can you elaborate on how this is done? Did Melvin driving the stock price down empty GameStop's coffers or something?
Can you elaborate on how this is done? Did Melvin driving the stock price down empty GameStop's coffers or something?
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Nope. Short sellers are the white knights of the market. They take on incredibly difficult and dangerous trades, and keep market prices honest. Without them the market would be nothing but a lair full of pump and dump longs, like a certain Reddit forum we all know.
And I haven’t seen any evidence Melvin did anything unethical either. They got too deep into their position and paid a huge price for it. It’s about time Redditers stopped taking victory laps over Melvins mangled body.
And I haven’t seen any evidence Melvin did anything unethical either. They got too deep into their position and paid a huge price for it. It’s about time Redditers stopped taking victory laps over Melvins mangled body.
Financial "technology" pretty seldom actually originates in academia. It's more common that academics formally describe or justify something that market practitioners are already doing. The piece briefly mentions Bachelier doing this. There's good evidence that option prices were (relatively) efficient several decades before Black-Scholes was discovered. And Jones arguably came up with the notion of "beta" before CAPM was a thing. The only real exception I can think of is factor investing.
This might seem kind of petty. But the notion that academia drives (or should drive) finance is not a benign myth. The LTCM crisis and the 2008 GFC were arguably caused by the uncritical application of ideas developed in the academy. I expect more.