Felix Salmon

Counting intersections

Felix Salmon
Sep 19, 2011 16:30 UTC

Emily Badger — you might remember her from her great article on slugging in DC — has a fantastic post on street-map design over at The Atlantic Cities.

Garrick and Marshall’s research into street network patterns began in Davis, California. Often cited as the most bike-friendly city in America, it has the country’s highest rate – more than 16 percent – of people commuting to work on two wheels. It turns out, though, that Davis also has one of the lowest traffic fatality rates in the country, a counterintuitive discovery for traffic engineers who consider biking a riskier alternative to driving.

Inspired by Davis, Garrick and Marshall compiled data on 230,000 crashes spanning 11 years in 24 medium-sized California cities. And they began to parse and classify street patterns in a kind of taxonomy. There are networks that look like square grids and others that resemble trees, with one trunk, many branches. There are networks that have tributaries, like a river, and others that have main roads radiating out from a central hub. There are hybrids of all these, and street blocks of different lengths, and networks that have 45 intersections per square mile (like Salt Lake City) and others that have as many as 550 (Portland, Ore).

In their California study, Garrick and Marshall eventually realized the safest cities had an element in common: They were all incorporated before 1930. Something about the way they were designed made them safer. The key wasn’t necessarily that large numbers of bikers produced safer cities, but that the design elements of cities that encouraged people to bike in places like Davis were the same ones that were yielding fewer traffic fatalities.

These cities were built the old way: along those monotonous grids.

FHA 3_.jpgWhen streets are built to a human scale, rather than being built for cars, those streets are friendlier and safer. More generally, the metric of intersections per square mile is an incredibly useful idea to keep in mind. It’s correlated with density, but it’s not the same thing at all. For instance, Badger reproduces these maps from the Federal Housing Authority, back in the 1930s: we’re seeing two plans, here, with identical housing density. But the one labeled BAD has ten intersections, while the one labeled GOOD has only seven. And of course the distance you need to travel to get from any random point to a given house is much shorter, on average, in the BAD map than it is in the GOOD one.

Shorter distances mean that you’re more likely to walk or bike; they also make the neighborhood feel smaller. For many decades, suburbia was designed on the idea that Americans want to feel as though they’re far away from each other, but the fact is that we need community and linkages just as much as we need a space of our own.

A city with high density still feels inhuman if it has enormous blocks; it doesn’t matter how many people you squeeze into downtown Phoenix, it will never feel like a vibrant, high-density city. Even in New York, the distance between 5th Avenue and 6th Avenue is far too big: the shorter blocks east of 5th Avenue, between, say, 5th Avenue and Madison Avenue, are much more pleasant, as are the small blocks in the Financial District.

It’s astonishing to me that Portland and Salt Lake City can differ, in terms of intersections per square mile, by a factor of more than 12. According to Wikipedia, Salt Lake City has a density of 1,666 people per square mile, compared to Portland’s 4,288. Which means that Portland has almost five times as many intersections per person as Salt Lake City does.

Which raises another question. Do street intersections make you liberal?


Hmmm… How do fatalities in the Village or financial district compare to those in Hell’s Kitchen, where i hang my harness?

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With all due respect to Reed Hastings, the Netflix-Qwikster split sucks for customers

Sep 19, 2011 15:28 UTC

This post originally appeared at Business Insider.

We have nothing but respect for Netflix CEO Reed Hastings, who has demonstrated again and again a willingness to take the long view instead of an easier short-term one — making tough decisions that cause near-term pain in order to improve the company long-term.

In the middle of last decade, for example, Reed decided to cut Netflix’s pricing to neutralize a competitive threat from Blockbuster. Hastings and Netflix were scorned at the time for this decision — Netflix would obviously go broke — and Netflix’s stock collapsed.

Well, we know how that one turned out: Netflix won the battle, and its stock blasted off for the moon. Blockbuster, meanwhile, went bust.

And now Hastings has gone and made another earth-shaking decision — enacting a major price increase for DVDs-by-mail and splitting Netflix into two companies. And the market has responded by chopping Netflix’s stock price in half.

We suspect, eventually, that Reed Hastings will once again be proven right about the price increase and that those who have written the company off for dead will once again have to hang their heads in shame.

And we can also certainly understand why, from the company’s perspective, it makes sense to split the DVD and streaming businesses into two separate companies: They’re different businesses, with different cost structures and different delivery, marketing, licensing, and management challenges, and they will be easier to run better if they’re managed separately.

But what’s better for the company, in this case, is worse for most of the company’s customers.

One of the big advantages of Netflix’s current service is that it’s a one-stop shop. Subscribe to Netflix, and you know that you’ll be able to watch basically any movie or TV show ever made. You may not be able to watch it instantly, via streaming, but if you can’t watch it instantly, then you can order the DVDs.  And you can go to a single web site, Netflix, to figure out what your options are.

This is very different offering than most of Netflix competitors have, which is access to some TV shows and movies, but not all.

Subscribing to a service that has access to some shows and movies, is very different (and distinctly worse for the customer) than subscribing to one that has access to all of them.

Searching a database that contains some shows and movies is very different (and distinctly worse for the customer) than searching one that has access to all of them.

And subscribing to two different services, with two different brands, bills, and customer support, is much more of a pain in the ass than subscribing to one.

What percentage of Netflix’s customers value its “one stop shop” feature? Half.

Netflix subscribers fall into one of three buckets:

  • DVD-only (~2.2 million target for Q3, by far the smallest)
  • Streaming-only (~9.8mm target for Q3)
  • Hybrid (12mm target for Q3)

Netflix’s largest customer segment, in other words, is still choosing to pay for the ability to either stream or order DVDs by mail, despite the massive 60% price increase for this plan that Netflix just enacted.

This suggests that half of Netflix’s customers very much value this option.

Will all of Netflix’s “hybrid” subscribers maintain their DVD service subscription now that they’ll have to search another web site and get another bill every month from “Qwikster”? We doubt it. And, in any case, it will be considerably more of a pain in the ass.

(One question we have for the company is whether both databases will still contain ALL movies and TV shows — or whether the databases will be limited to the movies that that particular service offers. If the streaming database does not contain the DVD movies, we imagine Netflix will lose a lot of free marketing for that service).

We understand that Netflix wants to discourage customers from ordering DVDs, and the split will certainly do that. We also understand that, eventually, Netflix’s whole business will be streaming (or other digital delivery) and that DVDs will go away. And so we understand why Reed Hastings and Netflix are being applauded for facing reality and embracing the future.


For the moment, and for the next couple of years, Netflix’s value to half of its customers has just dropped. Put differently, this seems a distinctly customer-unfriendly move.

It seems so customer-unfriendly, in fact, that one suspects there is more behind it than merely the desire to have a separate management team for each company.

Benchmark (VC) partner Bill Gurley offers one guess as to what this unstated factor may be.

Gurley observes that the licensing for content for DVDs versus streaming is entirely different. To rent a DVD, Netflix need merely buy it: The company does not pay any per-view or per-customer licensing fee to the studios. To stream a show or movie, meanwhile, Netflix has to pay a direct licensing fee, which is based on its number of subscribers.

Gurley believes that the Hollywood studios are now insisting that Netflix pay a per-subscriber-per-month licensing fee, whether or not its subscribers actually ever stream movies. This demand, Gurley reasons, may be forcing Netflix to pay per-month-fees on way more subscribers than it will ever recoup any value for (because many never use the streaming option).

By splitting the businesses in two, Gurley continues, Netflix will be able to negotiate streaming licenses on a much smaller subscriber base — say ~15 million, versus the ~25 million total subscriber base — thus reducing its streaming content costs.

This, too, makes sense from a business perspective, and, if true, it explains a lot.

But it still sucks for “hybrid” customers.

Henry Blodget is the editor of Business Insider.


The problem for Netflix in any configuration is that it is a middleman who doesn’t control any content…and in the end it is always the middlemen who get cut out of distribution systems/supply chains.

After all there is no reason whatsoever why the people who own the content can’t provide the exact same streaming service that Netflix provides…

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How to play the eurozone break-up, second-home edition

Felix Salmon
Sep 19, 2011 13:12 UTC

The lengths to which I’ll go for my readers: I’m currently sitting poolside in an Algarve villa, enjoying a perfect climate and gorgeous view of the Atlantic, and wondering if this could be one of the best ways for investors to play a possible eurozone collapse.

The WSJ recently ran a big article on the way that second-home prices in the eurozone periphery have been falling dramatically of late, especially in Greece and Portugal. And in Portugal, especially, they’re coming down from pretty low levels, since the country never had a property bubble to begin with. On top of that, the weakening euro is making prices even more attractive for dollar investors.

But wouldn’t a eurozone breakup be very bad news for second-home buyers? Here’s the WSJ:

Fear of a revalued euro, or even the extremely unlikely possibility of some countries losing their membership in the euro zone, continues—either of which could dramatically devalue any current purchase.

I’m not at all sure. Property is a real asset, which tends to hold its value reasonably well over time — even during devaluations. Look at home prices in Buenos Aires after Argentina’s devaluation — they didn’t fall much in dollar terms.

But the situation for investors could be much better than a modest decline. Here’s Nouriel Roubini, talking about how to structure a Greek exit from the eurozone:

This process will be traumatic. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and firms would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933* when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral “drachmatization” of euro debts would be necessary and unavoidable.

Major eurozone banks and investors would also suffer large loses in this process, but they would be manageable too – if these institutions are properly and aggressively recapitalised.

Nouriel’s point is well taken: there’s a long history of countries successfully devaluing their way to economic recovery, with Iceland being only the latest example. When that happens, lenders take losses. And when lenders take losses, borrowers gain.

Here’s my point: in the event of a Greek devaluation, Greek mortgages would be drachmatized. And similarly, if Portugal were to leave the euro, Portuguese mortgages would be escudified. Second-home owners, instead of paying interest on their mortgages in euros, would switch to paying in devalued drachmas or escudos — an enormous overnight savings, which would continue for the duration of the mortgage.

A devaluation by Greece or Portugal would involve a big one-off write-down by lenders to Greek and Portuguese borrowers, and a concomitant one-off gain by those borrowers. If you have a mortgage in Greece or Portugal, that’s a great way of becoming a borrower in that country. Yes, getting a mortgage is non-trivial, but it might well be worth it.

*The FT actually printed 1993, here, not 1933, but it’s clear what Nouriel meant.


I think I follow:

So imagine we want to buy a house in Greece.

Ok so our funding currency is USD and the Liability currency is Euros (that eventually converts to Drachmas).

So imagine that the value of the house we want to buy is worth $500,000. We put a 20% down payment of $100,000 and take an 80% mortgage of $400,000. So we have a 20% equity stake in the value of the house.

Now imagine a redenomination happens so that all Euro liabilities are converted into Drachmas.

The Drachmas then depreciate by about 40% against a broad basket of currencies. (probably more against the US Dollar because there would be a flight to safety in a crisis, but for the sake of conservatism lets assume its 40%).

Our mortgage then becomes redenominated into drachmas and in dollar terms is worth (400,000*0.6)= $240,000.

Now since housing is a real asset and prices in Greece are already at rock bottom, the value of the house should stay more or less constant in dollar terms.

Our property is still worth more or less $500k in dollar terms (and by implication our equity stake is still worth $100k).

What in effect happens is a massive mortgage write down that is financed by Greek Banks. The net gain of $160,000 (160% of our initial investment) is substantial.

The gain would be even greater if:

Our funding currency appreciated in relation to a broad-basket of other currencies.
We are more leveraged. In other words, we put a smaller down payment and a larger mortgage.
A devaluation spurs growth in Greece and property values rise from their rock-bottom lows.

Reasons to worry

The Greek government might not re-denominate foreigner’s loans.
Political and Social unrest following an exist from the euro
Greece might be forced out of the E.U. (unlikely).

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WSJ branding datapoint of the day

Felix Salmon
Sep 19, 2011 01:36 UTC

Last year, I kicked off quite a big fight with Henry Blodget after posting this to Twitter.

.@hblodget‘s business model: Take a story about M&A fees associated with AIG. Illustrate with 2 hot babes kissing. http://bit.ly/dexECw
Mar 26 10 via TweetDeck Favorite Retweet Reply


The Business Insider post in question was illustrated with a black-and-white photo, 400 pixels wide. It was provocative and gratuitous, but it was nothing compared with this:

This is a full-page, full-color ad on page 8 of last week’s New York magazine; apparently it’s appeared in Time, as well.

I’m not even going to hazard a guess as to the thinking behind this ad; its timing does however coincide vaguely with an online request from Saabira Chaudhuri, a WSJ reporter who says that she’s “writing a culture piece on furries” and is “interested in furry couples who have got together using furrymate”.

All of this is, frankly, quite a few steps beyond anything even Blodget would have considered acceptable. Running titillating stories about furries is one thing (although there’s no good reason for the WSJ to write about furries  in the first place.) But branding your entire publication with a huge full-color photo of two hot babes* in animal costumes, kissing — well, one does wonder who the intended audience for this ad is, and what they’re likely to think if and when they actually pick up a copy of the WSJ, only to find a decided lack of this kind of photography.

Rupert Murdoch’s fingerprints are all over this ad — this is exactly the kind of photo that his Sunday Times loves to splash with great prominence, in its perennial attempt to boost circulation at all costs. And I half suspect that the real audience for the ad is not the readership of Time or New York so much as it is the WSJ’s own reporters and editors — people who now know exactly what’s expected of them.

In any case, Henry, feel free to go ahead and break out the hot-babes-kissing pics at any and every opportunity. If it’s OK by the WSJ, this is clearly a battle I’ve lost.

*Update: My commenters reckon that the hot babe on the right is actually a male hot babe. They might well be right.


As one of those interviewed by Ms. Chaudhuri, I assure you that there are plenty of reasons for the WSJ to write about us. Indeed, there was enough for both the Financial Times and the BBC to articles in past years:
http://en.wikifur.com/wiki/Timeline_of_m edia_coverage

Perhaps Reuters will be next?

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Nick Rizzo
Sep 17, 2011 01:02 UTC

Home prices are down, but rents are rising — NYT

Google Propeller, the Facebook/Flipboard killer, might be pretty cool. Or not – AllThingsD

BofA’s nuclear option: a Countrywide bankruptcy — Bloomberg

The Official Secrets Act forces the Guardian to reveal their sources – Guardian

What could America be good at? – Econobrowser

How opaque ETFs lead to UBS’s huge rogue trader losses  — FT Alphaville

UBS’s loss “came from lots of small trades over months.” No word about the Swiss Franc. – BBC News

And leveraged lending activity is up 74% year-over-year — WSJ



He was saying it was wrong? We must have been reading a different article.

Anyone with a passing acquaintance with the UK media knows what fraudulent, dishonest, self-righteous, hypocritical scum the Guardian are.

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Why didn’t the Fed release a statement on the dollar liquidity bailout?

Sep 16, 2011 22:00 UTC

Felix here. I’m about to head out of town for a couple of weeks, on a mini European tour. I’ll try to check in occasionally, but I’m not sure how often that’ll be, so I’m experimenting with guest postings. With any luck, there’ll be some fabulous stuff coming up from Mark Dow and Barbara Kiviat. But also, I’m trying to take advantage of all the great blog posts that Ryan McCarthy is finding as he edits Counterparties. The idea is that if we find something wonderful, we’ll ask if we can reprint it, while linking back to the original. Edward Harrison has already said yes, so here’s his post today on the Fed. Enjoy!

By Edward Harrison

Overnight, a group of us were exchanging e-mails on the recent coordinated central bank action to provide European banks the funding being denied them by the markets. I haven’t been active on the e-mail chain, but I did find some of the commentary interesting.

I had a few comments of note I wanted to address, but here’s why I am writing this post:

“See NYT report which says clearly that the Fed did nothing to cooperate since the swap was already in place and would make no statement.”

When I read that I realised it was true. Look at the post yesterday from the BoE, “Additional US dollar liquidity-providing operations over year-end”. At the end of that press release, there is a link to the statement of every other central bank participating in the liquidity measure… except the Fed. In fact, I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed).

I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?

I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed.

Here’s what’s happening:

  1. European politicians are paralysed and are only doing enough to push off the day of reckoning. Muddling through means deepening crisis for the euro zone. Only when all other options have failed and the euro is about to break apart will the Europeans think about fiscal union and the like. I believe the sovereign debt crisis will deteriorate further for just this reason. And then we will just have to see what the politics of the individual countries in Euroland look like. If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse. If not, the Europeans will push forward with greater integration.
  2. In the interim that means bailouts, not just for sovereigns but for banks as well. You remember the dust-up over ECB Target2 liquidity? Well that was the beginning of the German revolt against the ECB’s quasi-fiscal policies. These moves, while absolutely necessary to prevent a Lehman-style crisis because of Euro politicians’ dithering, are politically charged. We now have seen two major ECB defections from Axel Weber and Juergen Stark. I think that there is even more discord behind the scenes.
  3. Even so, the ECB has now been forced because of the wholesale market bank run now ongoing in Europe to go further. In order to deflect criticism, the ECB’s bailout of the Euro banks has been coordinated with four other central banks.
  4. But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.
  5. Meanwhile Tim Geithner thinks the Euro-TALF bazooka is the right way to buy significantly more time. He is over urging the Europeans to take out the bazooka by leveraging up the EFSF ten to one in order to buy the Europeans $2 trillion euros of fire power. Now, that’s a bazooka.

If Stark and Weber resigned over this, what is the likelihood that the ECB is going to go for a Euro-bazooka $2 trillion TALF? I say it’s not going to happen. And that means, European politicians need to get that rabbit out of the hat soon because things will most certainly continue to deteriorate.

P.S. – It is now 154PM EDT and the Fed press release is STILL not there. You would think they would issue a press release if this really were a coordinated effort, right? Check here.


Ok sorry, been conditioned to article complaining that the Fed is doing some super secret “bailout” that turns out to have been announced on their page.

Anyway given how much the press adds to the volatility of the current markets by distorting noise into some sort of hypothetical signal it is good to see it go the other way.

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The euro zone shuns Geithner

Felix Salmon
Sep 16, 2011 20:55 UTC

Tim Geithner has experience flying around the world to address finance ministers and instructing them on how to solve their problems. He was a senior executive at the IMF from 2011 to 2003, after all — a period which coincided with major sovereign crises in South America.

So it may or may not be surprising that his latest attempt at such activity, in sunny Wroclaw, fell spectacularly flat. He waltzed into a meeting of euro zone finance ministers (he took a private car, they shared a bus), and informed them that they should follow his lead and leverage the money in the EFSF. In unison, the finance ministers responded by saying “why, Mr Geithner, that’s a simply spectacular idea, we’re shamefaced to admit that we didn’t think of it ourselves. Thanks for your advice, we’ll follow it, to the letter, forthwith!”

Or, not so much:

Mr. Juncker said, pointedly, that the euro group was not discussing “an increase or expansion” of its bailout fund “with a nonmember of the euro area.”

That’s Jean-Claude Juncker, president of the group of euro area finance ministers, and he was being diplomatic.

“I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone that they tell us what we should do and when we make a suggestion … that they say no straight away,” Maria Fekter told reporters afterwards…

“We can always discuss with our American colleagues. I’d like to hear how the United States will reduce its deficits … and its debts,” Belgian Finance Minister Didier Reynders said somewhat tartly.

It’s pretty clear, here, that in the wake of the debt-ceiling debacle Geithner has lost a significant amount of international heft. And it’s also clear that the euro zone has absolutely no cohesion, nor any real ability to do anything at all to resolve the current crisis.

Clashing with U.S. Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.

I’m not sure that Geithner was the right person to send to Poland to try to knock European heads together. As the biggest shareholder of the IMF, he would probably have been better off conferring with Christine Lagarde and getting her to make his point for him. The Europeans were never likely to take well to the Americans telling them what to do, especially when their gentle attempts to ask something of Geithner (maybe you might consider getting on board with a financial transactions tax?) were unceremoniously dismissed out of hand by the Treasury secretary.

In any case, Geithner seems to have failed in whatever it was that he was trying to achieve: the only unanimity he managed to foster was in the belief that he had no business telling the euro zone what to do.

This is really bad news: Europe’s private sector seems incapable of acting in unison, with the public sector being just as bad. This crisis exists on a pan-European level, and can only be solved at that level. But so long as Europe’s finance ministers just keep on talking and don’t actually do anything, this crisis is going to get bigger and bigger — and more and more expensive to address. This crisis has been a long time coming. But it could accelerate violently and devastatingly at any time. And right now the euro zone has no idea what it might do if and when that happens.


I’m not sure why Felix Salmon wasn’t sent to Poland to try to knock European heads together.

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Why the mass affluent should avoid hedge funds

Felix Salmon
Sep 16, 2011 18:18 UTC

A fund-of-funds manager emails to take exception to my post on Anthony Scaramucci. “Your piece definitely has a negative bias,” he writes (guilty!), before adding:

I also take exception with your point that the mass affluent shouldn’t be able to invest in hedge funds. why not? 90% of active mutual fund managers underperform each year. these funds are 100% long in all market scenarios. Why is that good for the mass affluent—or anyone else for that matter?

I’m certainly not saying hedge funds are a panacea for underperformance. But there is no shortage of excellent hedge funds to choose from and I see that many now come in registered vehicles, offer daily NAVs and daily liquidity just like a mutual fund. if one can avoid the gambler, speculators and pretenders, I would think a hedge fund option for the mass affluent actually makes a lot of sense.

I think this is simply false. Let’s grant, for the sake of argument, that “there is no shortage of excellent hedge funds to choose from”. It’s a long, long way from there to saying that there’s any overlap at all between the set of excellent hedge funds, on the one hand, and the set of funds which come in registered vehicles and offer daily NAVs and daily liquidity, on the other. In fact, I feel quite comfortable in saying that no excellent hedge fund offers daily liquidity. If you can name one, do let me know. But so far it seems to me that funds offering daily liquidity are generally small, untested, and dangerous.

Even if my correspondent is right, then, that a hedge fund option for the mass affluent makes sense in theory, he still runs into the problem that it’s actually impossible to “avoid the gambler, speculators and pretenders”. Investing in hedge funds is really difficult — very few people are good at it, and doing due diligence on hedge funds is an extremely expensive and time-consuming process. It’s something that a mass-affluent investor is utterly unqualified to even attempt.

In general, fund of funds are sold, not bought. Insofar as they’re available to the mass affluent (however that’s defined), they’re generally made available by brokers working for the likes of Merrill Lynch or Morgan Stanley. Those brokers phone up their millionaire clients, and persuade them to put some portion of their money into a fund-of-funds of some description. Sometimes, as in the case of Fairfield Greenwich and other Madoff feeder funds, the fund-of-funds should properly just be called a fund-of-fund.

And of course it goes without saying — because it’s almost never openly discussed — that the reason brokers are so keen to pitch these products is that they get whopping great commissions for doing so. As a result, the funds that mass-affluent investors buy into tend to be the ones which are most generous to brokers, rather than the ones which might objectively be the best.

On top of that, the brokers themselves, even if they’re not driven by commissions, have no real ability to do due diligence on the funds or fund-of-funds that they’re recommending. Indeed, I’m not sure that anybody has worked out a way of doing thorough due diligence on a fund-of-funds.

More generally, there has been no remotely reliable study, as far as I know, of the relative merits of mutual funds as opposed to hedge funds accessible to retail investors, when it comes to returns either risk-adjusted or nominal. Quantifying the ability of mutual funds to beat the market is hard enough, given survivorship bias and other problems in measuring the universe. For hedge funds, it’s much, much harder, since there’s no public listing of the total returns of these things, especially net of fees, and it’s pretty much impossible to find third-party verification of hedge-fund returns.

Yes, mutual funds are 100% long in all scenarios. The alternative is that they become market timers, which is very hard and prone to going disastrously wrong. But if you are going to become a market timer, it’s far from clear that the best way of doing that is to invest in hedge funds, rather than just investing more or less money in stock-market index funds, depending on whether you think they’re overvalued or not. Hedge funds might be smarter, but they’re also more expensive. If you don’t have the resources to do a deep dive into the fund in question, working out whether it’s a good bet compared to its peers, then you’re better off steering clear of the asset class altogether.


thanks for this very good article Felix.

You are just expressing one key issue with HF: who are they? how do you select HF? Are the big asset managers offering access to HF or packaging active funds in mutual funds (with higher commissions!) qualified as HF? Are HF only independent firms? Some are in the FT listed everyday with fund pricing.

I agree that HF are not for mass affluent. And not only because of their illiquidity risks; because of non transparent business models, because of poor branding and business issues (organization, controls etc..). If you invest with an independent firm, you are potentially exposed to business risk.

Some argue that HF should be included in pension plans, it could make senses because in general they do offer better risk/return profiles. However, which HF firms can qualify? Very difficult case.

In my opinion, as long as HF are not totally transparent on their activities, as long as they do not communicate properly as asset managers do, they restrict themselves to the ones that understand what they do and how they do it.They are more in a logic pf production, not distribution.

Finally, they are good HF managers offering daily liquidity! I can send you the list. If they trade liquid assets such as Futures, stocks traded in listed markets, liquidity is not an issue, market pricing can become one under market turmoils.

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Whither UBS’s investment bank?

Felix Salmon
Sep 16, 2011 14:24 UTC

The UBS brand name hides a long and storied history of bold-name investment banks. You’ve probably never heard of Savory Milln, Banque Stern, or Ducatel-Duval, but you might remember Chicago’s O’Connor & Associates, you probably remember Dillon Read and SG Warburg, and you almost certainly remember PaineWebber.

Yet this historic merchant-banking behemoth now looks as likely to die as it is to live. Martin Wolf’s point is well taken among Swiss regulators: they didn’t like the idea that they were ultimately responsible for the actions of this huge investment bank, even before yesterday’s news broke about a rogue trader and a $2 billion black hole. UBS is a deposit-taking commercial bank based in Switzerland, and as such the Swiss government has to keep it solvent. But right now keeping the depositary institution solvent means backstopping rogue traders as well. So the Vickers idea is a good one, as Wolf explains:

Ringfencing is relevant, because it addresses what is now the biggest danger of all: rogue universal banks.

So here’s the question: What is UBS’s investment bank worth? Like all investment banks, its assets leave the building every evening, and if today’s bonus rumblings are true, a lot of them might choose not to return. The investment bank has made an unimpressive $1.4 billion in 2011 to date, and will almost certainly now finish the year with a loss. And that of course is on top of the $50 billion that UBS wrote down during the financial crisis.

I’m sure there’s real value in the investment bank somewhere, but selling or spinning it off would be decidedly non-trivial in the current environment. Few people want to buy global investment banks right now, not with all the regulatory uncertainty hanging over them, and the institutions who are in the business don’t seem to have much appetite for getting bigger. On top of that, it’s hard to see any non-Swiss domestic regulator embracing the idea that they should suddenly become responsible for a sprawling organization which — as we’ve seen more than once — clearly has wholly inadequate internal risk controls.

According to Robert Peston, UBS didn’t even discover rogue trader Kweku Adoboli’s losses — he volunteered the information to them. (My theory, by the way, is that the losses have to be related to the huge move in the Swiss franc: as Paul Amery points out, the famous “need a miracle” Facebook status update appeared on the same day the Swiss National Bank made its announcement, and the value of the currency plunged by 10%. Given that the Swiss franc isn’t going to spike back any time in the next few days, Adoboli must have known he could never make back those losses, and realized that he had no choice but to fess up.)

(Update: According to Peston, my theory is wrong: the loss “came from lots of small trades over months”, he writes, and “were not particularly associated with the decision earlier this month of the Swiss National Bank to force down the value of the Swiss Franc”.)

Peston also reports that “the Swiss government is putting intense pressure on UBS to separate or close its investment banking operations.” That comes as no surprise. The question is how rump UBS might achieve such a thing — and whether it can extract any value from its storied investment bank at all while doing so. One thing it’s certainly going to need: some extremely sophisticated M&A advice. Now, where to find such a thing?


It’s a good thing we can rest assured that this “rogue trader” was an isolated case and all the other traders are operating entirely within the strict oversight of the responsible corporate risk-management and accountability standards. I mean, they’ve all learned their lessons and play by the rules, right?

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