Felix Salmon

Trish Regan, Einhorn apologist

Felix Salmon
Mar 24, 2014 17:56 UTC

Ever since the story first broke, more than five weeks ago, that David Einhorn was suing Seeking Alpha, the Israeli financial website has been very, very quiet on the topic. Sometimes they have simply failed to respond at all to requests for comment (including mine); other times, as with Andrew Ross Sorkin, a spokesman will formally decline to comment.

So it was a big deal when Seeking Alpha president David Siegel appeared on Bloomberg TV today, and answered Trish Regan’s questions about the Einhorn lawsuit. Or, at least, it would have been a big deal, if Regan had actually bothered to ask him any of the obvious questions. Like, for instance, whether he’s going to fight it, or what he thinks of the merits of the case.

Instead, however, Regan decided that the best use of her time would be to deliver to Siegel a lecture on (and, presumably, an example of) Proper Journalism:

Trish Regan: David Einhorn has expressed his concern. He would like to know the name of the Seeking Alpha blogger who revealed one of his investments. Who was it?

David Siegel: (laughs, in a WTF kind of way) Well, we’re not going to tell you right now. But, um…

TR (interrupting, just as Siegel might be about to say something newsworthy): Why — Why hide behind anonymity? Why not put your name on something?

DS: We vehemently believe that it’s critical to have an open platform, where everyone can discuss, and debate, without necessarily having any repercussions to that. With that said, we have 24/7 monitoring on everything… it’s incredibly important to us to create the right forum, and we believe that that forum is —

TR: But why, why…

DS: — is a, anonymous…

TR (pushing over anything Siegal might want to say, because she has something more important of her own to declaim): I know but why — why not reveal — I mean, to me, and call me old-fashioned, but part of journalism is when you write an article, you put your name on it. You don’t hide behind anonymity. Why allow your bloggers to do that?

DS: It’s part of our philosophy. We need to have an open environment, and a flexible environment, for people to feel comfortable posting what they need to. We have a very, very rigorous background check process.

TR (giving Siegel four seconds to answer the big question, and burying it under another one): You can understand why David Einhorn would be upset, why he’d want us to actually know who this person is. I mean ultimately will you guys be held responsible?

DS: David Einhorn is a legend, and we have tremendous respect for him, absolutely.

The whole interview is just bizarre. I have no problem with aggressive, adversarial journalism, but the proper place for that is when your interlocutor is refusing to give a straight answer to a straight question. Seeking Alpha has always been very open about offering anonymity (or, more precisely, pseudonymity) to bloggers who request it, for very simple and obvious reasons: many of them are financial professionals whose jobs might be at risk if their identity were made public. Journalists like Regan give anonymity to their own sources on a regular basis, for exactly the same reason.

What’s more, anonymity is hardly unheard-of even among very mainstream publications: the Economist, for instance, has no bylines at all, while even the NYT will occasionally withhold a byline from a reporter in a dangerous country, if revealing that person’s identity would put them at risk.

Let’s say that the blogger in question had phoned up Regan and told her (off the record, but with Regan knowing her source’s identity) that Einhorn was buying up shares of Micron Technology. That might have turned into a nice little scoop for Regan, if she had confirmed it with other sources — all of whom would themselves surely have insisted on anonymity as well.

If Regan had published that story, Einhorn would surely have been annoyed, since he was taking great care to accumulate his stake in Micron as quietly as possible. But here’s the thing: Einhorn would never have dared take Regan and Bloomberg to court, trying to force them to reveal her sources. If a journalistic organization finds out a true fact and publishes it, that might inconvenience a hedge-fund manager, but it’s not going to result in a court case.

In the Micron case, however, Einhorn saw an outlet which was small enough to bully. If he wins, as Sorkin says, “the case could have a chilling effect on the free flow of information to traditional news outlets” — it would damage not only Seeking Alpha and its pseudonymous blogger, but also Trish Regan and all other journalists with confidential sources. Einhorn wants to be able to keep his own information confidential; he just doesn’t want Seeking Alpha to have a similar right.

If anybody deserves a lecture on journalism in this case, then, it’s not Siegel, it’s Einhorn. Meanwhile, Siegel is faced with a very hard decision. Einhorn is not the kind of person to back down from a fight: he has essentially bottomless resources, and will happily spend millions of dollars on lawyers just to make Seeking Alpha’s life miserable and expensive for the foreseeable future. Big media organizations are set up to fight such threats; smaller startups aren’t.

So the big question here is not whether Einhorn is right or wrong: of course Einhorn is wrong, Regan’s misplaced self-righteousness notwithstanding. Rather, the question is whether Seeking Alpha can and will be able to afford to fight him. That’s the big question which every non-enormous media company wants to know the answer to — and that’s exactly the question which Regan didn’t ask.

Ensconced as she is within the massive Bloomberg borg, Regan doesn’t need to worry about the cost of defending her journalistic operation against litigious hedge fund managers. But even Bloomberg benefits from a diverse media ecosystem. And so it’s rather worrying that Bloomberg TV should spend its energies defending Einhorn in this case, rather than finding out whether we’re facing a very real threat to media freedom.

Update: David Einhorn has dropped the suit, after finding out through other means who the blogger in question is. Trish Regan covered that development, too:

We’re in an interesting time in journalism, because bloggers are in the blogosphere, and there’s a lot of information out there that’s not always necessarily with someone’s name on it… Is that a danger, nowadays, that we’re in an environment where people can have a very big effect on securities, on the markets, and do so anonymously?

Yes, Trish, bloggers are in the blogosphere. And sometimes market moves happen in reaction to pseudonymous information sources. Or even to fully anonymous sources, in things like Bloomberg articles. I don’t see the problem with this. Unless you’re just upset that Valuable Insights has his own outlet, now, instead of having to bring his story to you.


SeekingAlpha published this statement about Greenlight dropping its suit:
http://seekingalpha.com/article/2106353- seeking-alpha-and-david-einhorn-the-real -story

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When vultures land in the Hamptons

Felix Salmon
Sep 5, 2013 18:27 UTC

Today’s tale of hedge fund / Hamptons excess comes from Mitchell Freedman at Newsday; if that story is paywalled, you can find pickups in all the usual places. But it’s the Daily Mail which has the best map:

For most readers, this story is just another glimpse into the hedge-fund lifestyle, where one man will spend $120,000 for a one-foot-wide strip of land — not so that he can get beach access (he already has that) but rather to ensure that his next-door neighbor loses his beach access. As the Daily Mail puts it, Kyle Cruz, who owns the house behind Marc Helie, is now “hemmed in”, and can no longer reach the beach directly from his home. Here’s Freedman:

The auction “caused quite a stir,” Thompson said.

Based on reports from staffers who ran the auction, he said, “I gathered one guy really did not want the other one walking over his property to the water.”

Helie’s purchase effectively gives him narrow slivers of property on both the east and west sides of Cruz, who would have to walk on Helie’s property to reach the ocean beach a few hundred feet away.

To a small set of sovereign-debt geeks with long memories, however, it’s not the beach-access politics which jumps out from this story — it’s the name Marc Helie. For back in 1999, Helie was the man who loved to take credit for forcing what was in many ways the first ever sovereign bond default. And Helie’s actions 14 years ago are actually rather similar to what he’s doing now, in the Hamptons.

Sovereign bond defaults are relatively commonplace these days — even Greece got in on the game. But back in 1999, there was something special about sovereign foreign-law bonds (as opposed to loans): they always managed to avoid being restructured when a country defaulted on its debt. Even Russia, in its catastrophic 1998 sovereign default, always remained current on its Eurobonds.

When Ecuador got into fiscal trouble in 1999, then, its first instinct was not to default on its bonds — even though the IMF was rumored to be pushing it to do exactly that. The bonds in questions were Brady bonds — restructured loans — which included various guarantees, in the form of built-in Treasury bond collateral, which could be used to make payments if and when Ecuador got into trouble. So Ecuador proposed that it would pay the coupons on the bonds without collateral in full, and it would dip into collateral to make payments on its other bonds, while trying to work out a longer-term solution.

But Ecuador’s tactics were atrocious: the country’s announcement came right in the middle of the IMF annual meetings, the one time of the year when all the world’s emerging-market bond investors converge on the same city at the same time. Those investors were not happy, and it wasn’t long before a vocal group of them, led most visibly by Helie, started agitating for highly aggressive action against the country.

Normally, of course, bondholders don’t want borrowers to default — and Ecuador was hoping that this case would be no different. But rather than accept Ecuador’s deal, which treated different classes of bonds differently, and which was very vague, Helie and other bondholders decided that they would rather force the matter. They discovered that if they could organize 25% of the holders of the affected bonds, and get them to write a very specific letter to the bonds’ fiscal agent in New York, they could accelerate those bonds. Rather than just owing a single coupon payment, Ecuador would then owe the entire principal amount, plus all future coupon payments, immediately.

No one expected that Ecuador could pay such a sum, but Helie and the other bondholders just wanted to make things simple. If Ecuador was going to effectively default on certain bondholders, then they would make it official, and force the country into a full-scale bond restructuring, the likes of which the world had never seen. Brady bonds were specifically designed to be very difficult to restructure: any change in the payment terms needed the unanimous consent of bondholders, and there were so many bondholders that unanimous consent was always going to be impossible to find.

Finding 25% of bondholders, however, to block what Ecuador wanted to do, was much easier — and that’s exactly what Helie did. Essentially, Ecuador expected that it could just walk down to the beach and do its bond exchange relatively easily. Instead, it found that hedge fund managers like Helie bought up property which would prevent it from doing that. When Helie et al accelerated Ecuador’s bonds, they forced it to enter into a far more elaborate and convoluted restructuring, in much the same way that Kyle Cruz now needs to walk much further to get to the beach.

Helie worked very hard and spent a lot of money on making life as difficult for Ecuador as he possibly could — in violation of the general assumption that bondholders tend to want what’s best for any given debtor nation. His plan worked, too: the exchange that Ecuador eventually unveiled was much more generous than the market expected, and Helie made a lot of money on his bonds. He was also lionized on the front cover of Institutional Investor magazine, under the headline “The Man Who Broke Ecuador”. It was all very welcome publicity for a man who was punching well above his weight: his hedge fund managed only about $10 million, and behind the scenes other, much more established (and much more publicity-shy) hedge funds had done most of the hard work of organizing the acceleration.

Helie was flying high, enjoying all the stories about the young hedge-fund manager with a ponytail and an office above a modeling agency, who was shaking up the world of sovereign debt. But while his hedge fund, Gramercy Advisors, went on to much bigger things, moving out of the small offices in Manhattan and into much larger digs in Connecticut, Helie didn’t last long. He was spending too much time at his beach house, and eventually his partners decided that he wasn’t doing enough work, and effectively kicked him out of the business.

Evidently, however, old habits die hard; Helie was so adamant that he didn’t want Cruz walking past his house to the beach that he spent $120,000 to make Cruz’s life as difficult as possible. It might even be enough to make a hardened hedge-fund manager start to feel a bit of sympathy for the government of Ecuador.


When psychopaths and sociopaths find a job, a vulture fund is perfect. No regrets, no empathy, no thought of the poor or others they might hurt… just greed and more money.

The choice is caring about your neighbour or caring about who has access to the beach you already feel is also your property … just who is surprised which path was taken. He will not be happy until “his” beach is privatized and he can fence it all in.

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The SEC’s prospects against Stevie Cohen weaken further

Felix Salmon
Feb 4, 2013 17:51 UTC

Andrew Ross Sorkin and Peter Lattman have uncovered an interesting wrinkle in the SEC’s case against Mathew Martoma, the most promising part of its huge investigation into Stevie Cohen. The SEC made quite a big deal of the fact that Martoma didn’t just sell his position in two pharmaceutical companies ahead of a big negative announcement; he even kept on selling after that, building up a substantial short position.

But as Sorkin and Lattman have worked out, that’s not really the case: SAC was flat going into the announcement, rather than being short.

The NYT’s spin on this news is that it suggests “a possible line of defense for the portfolio manager”, but it’s not entirely obvious from the report what that possible line of defense is, so let me spell it out.

First, it’s worth stating quite clearly that profits are the same as avoided losses in the eyes of the law. The SEC says that Martoma made $75 million in profits and avoided $194 million in losses as a result of the trading, for a total of $269 million; in the light of the NYT’s new information, that should probably just be $269 million in avoided losses, and nothing in profits. The total amount of money is the same, so the severity of the charges is unchanged.

But here’s the thing: if your trading book is long ahead of a big announcement, you’re basically making a bet on that announcement. Similarly if you’re short. But if you’re flat, that’s the one way of not betting on the announcement. And it now seems that SAC was flat, rather than short.

Of course, if Martoma traded on inside information, then he’s guilty whatever the final position of SAC’s trading book was. But if that position was flat rather than short, it’s no longer circumstantial evidence that SAC thought the announcement was going to be negative.

And there’s another line of defense here, too. As the NYT says, “SAC is well known for its aggressive, rapid-fire trading style, and several former employees say that there is nothing unusual about the fund’s exiting a large position over just a few days.” And this is the defense that has now been opened up. SAC was sitting on substantial paper profits, on its position in Wyeth and Elan. It knew an announcement was coming, and it knew that announcement could move the stocks substantially. If it made the sensible determination that the downside was bigger than the upside, there was every reason for the fund to move to a flat position ahead of the announcement, whether it had any inside information or not.

If I were a defense lawyer here, I’d be coming up with hundreds of previous cases where SAC exited a large position in a short amount of time, ideally ahead of some big announcement. Some of those exits will have been smart, in hindsight, while others will have been silly: SAC would have been better off holding onto its position rather than going flat. But the decision to go flat and take profits (or cut losses) is a common one within SAC, and can happen at any time for any of a million reasons. And as a result, SAC’s trading activity is not in and of itself prima facie evidence of insider knowledge.

Frankly, this isn’t much of a defense. Trading activity is what the SEC uses to try to find possible abusers of inside information; it’s not what the SEC uses to try to prove such cases. In this case, the SEC is relying on the testimony of Sid Gilman, the doctor who leaked the trial results to Martoma before the official announcement.

But the news does help insulate Cohen, even if it doesn’t help Martoma very much. No one knows what Martoma told Cohen before Cohen made the decision to go flat, but SAC’s trading action is entirely consistent with a simple declaration that Martoma wasn’t comfortable being long any more. (The rest of SAC was already making a strong case against being long at this point.) If Cohen knew that an announcement was imminent, and that the one person who wanted to be long no longer wanted to be long, then it would have made sense for him to go flat ahead of the announcement, even if he had no inside information at all. And there’s no particular reason to believe that Martoma would have admitted to Cohen that he had illegal insider information.

As Sorkin and Lattman say, the statute of limitations on this trade is rapidly running out: if the SEC will have to either bring charges against Cohen soon, or not at all. And so long as Martoma is refusing to cooperate with the SEC, it increasingly seems as though the SEC’s best chance yet to nail Cohen is going to slip through its hands.

Stevie Cohen, collector of traders and art

Felix Salmon
Jan 18, 2013 10:15 UTC

Gary Sernovitz, a research analyst turned novelist, has 3,500 words in n+1 about Stevie Cohen, trading, and art collecting. That’s about 3,000 words too many: his core thesis is really pretty simple. Cohen’s art collecting, says Sernovitz, holds up a mirror to his professional life: both are about the “struggle against the mortality of the edge”.

The idea here is that contemporary artists and stock-market traders — both of which Cohen collects — are similarly searching for the “edge”: that original and unique thing which sets them apart from everybody else. And if you look at Cohen’s art collection, it’s long on pieces from radical artists’ “incandescent years” — the years when they were doing something shockingly new. That’s what Cohen looks for in art, and it’s what Cohen looks for in traders, too: not people doing the same thing as everybody else in a slightly better way, but people who aspire to doing something that no one else is even attempting.

The “edge”, in art and in trading, never lasts long, and Cohen is himself exceptional in that regard: he’s been generating alpha for much longer than most traders ever can. But crucially he has done that by collecting: he himself is no Picasso, reinventing himself in one genius new incarnation after another. Rather, he finds the people who have that edge right now, he hires them, and then, when they lose their edge, he’s ruthless about firing them.

When Cohen looks around his trading floor, then, he sees the same thing that he sees when he surveys his art collection: a group of extremely talented and mostly quite young men, at the peak of their powers, engaged in a doomed and heroic struggle against their own inevitable decline, which will coincide with somebody else’s rise.

I like this idea, although I have no idea whether it’s true or not; I can certainly see how it would appeal to a novelist. Cohen, in this telling, becomes a latter-day Dorian Gray — only in this case his pictures, which reflect the way he seeks to dominate the world by collecting exceptional talent, are on full public view.

Naturally, if this were a novel, it would have a tragic ending: Cohen’s hubris would lead inexorably to nemesis. But real life is not always that tidy. Cohen might be facing unusually large redemptions right now, but he’s already made his billions; his wealth is liquid, and he’s not going to let a few insider-trading investigations damage his legacy as an art collector.

A lot of art-world observers are not-so-secretly hoping that Cohen will get his comeuppance and be forced to sell a large chunk of his collection. But it’s not going to happen. Cohen’s a master collector: he’ll sell only if and when he wants to. And given that he’ll never need the money, it’s hard to see why he’d ever feel so inclined.


Does anything really shock the bourgeoisie anymore?

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Goldman’s small internal hedge fund

Felix Salmon
Jan 8, 2013 15:32 UTC

When JP Morgan’s London Whale blew up, one part of the collateral damage was the publication of a detailed Volcker Rule. The Whale was gambling JP Morgan’s money, and wasn’t doing so on behalf of clients — yet somehow his actions were Volcker-compliant. And when the blow-up revealed the absurdity of that particular loophole, the rule went back to the SEC for further refinement.

So we still don’t know exactly what will and what won’t be allowed under Volcker, if and when it ever comes into force. We do know, however, that Citigroup is selling off its internal hedge fund, Citi Capital Advisors. If by “selling off” you mean “giving away“: it’s spinning the fund out as an independent entity, to be owned 75% by its current employees. Citi will retain a Volcker-compliant 25% stake, and slowly reduce the $2.5 billion of its own money it has invested in the entity so that the managers can “diversify the client base away from Citi and to build a stand-alone firm”.

It’s incredibly difficult to value a hedge fund, especially a relatively small one without a long track record. The high-water point for such transactions was probably Citi’s acquisition of Vikram Pandit’s fund, Old Lane, in 2007. Old Lane managed $4.5 billion, and was sold for $800 million, but even then the markets appreciated that the buy was more of an “acqui-hire” of Pandit than a fair price for a young and volatile business.

A few years later, Citi was on the ropes and selling rather than buying; that’s when it unloaded its fund-of-funds, Citi Alternative Investments, to Skybridge Capital. Skybridge paid almost nothing up-front for the business, but agreed to remit a large chunk of the group’s management fees back to Citi for the first three years.

Bloomberg managed to find one consultant who valued Citi Capital Advisors, which manages about $3.4 billion, at $100 million. I, for one, wouldn’t buy in at that valuation: less than $1 billion of the assets under management constitute real money, as opposed to simply being a place where Citi parks a small chunk of its balance sheet. And as the Citi funds diminish, the chances of Citi Capital Advisors becoming a profitable standalone entity have to be pretty slim.

Which brings me to Multi-Strategy Investing, a small group of a dozen people within Goldman Sachs, who between them manage about $1 billion. As Max Abelson shows, MSI is unabashedly an internal hedge fund, concentrating on medium-term trades lasting a few months. (The idea is that if positions are held for longer than 60 days, that makes them Volcker-compliant.)

Abelson finds a lot of illustrious alumni of the MSI group; maybe the bank is keeping it on just for nostalgia’s sake. Because I can’t for the life of me see the point of it. Goldman Sachs has a trillion-dollar balance sheet; the $1 billion it has invested in MSI is basically a rounding error. And by the time you’ve shelled out annual bonuses to a dozen high-flying Goldman Sachs professionals, the contribution of MSI to Goldman’s annual profits has to be downright minuscule. (Let’s say the group generates alpha of 5%, or $50 million per year: that doesn’t go very far, split 12 ways at Goldman Sachs.)

Clearly, with a mere $1 billion under management, MSI doesn’t present Goldman with much in the way of tail risk. But by the same token, this really doesn’t seem like a particularly attractive business for Goldman to be in. As Abelson says, Goldman’s own CEO is adamant that the bank doesn’t make money trading for its own account: everything it does has to be for clients. Under that principle, MSI shouldn’t exist. And the profits from the group simply can’t be big enough to make it worth the regulatory and reputational bother.

Goldman should take a leaf out of Citi’s book, here, and spin MSI off as a standalone operation, if necessary retaining a 25% stake. If its principals can make a go of it, attracting real money from outside investors, great. If they can’t, no harm done. Alternatively, Goldman could just shut down MSI entirely, and put its valuable employees to work helping the bank’s clients, and making money that way. Either way, there doesn’t seem to be any point to keeping this small fund going as is.


While I can’t comment on MSI directly having never laid eyes on the group before this blog post I can say that banks would serve society and their customers well if they could do some very risky things.

Dig back into the Citigroup “Philbro” issue… I might be spelling that wrong from memory. Basically some guy there saw a massive opportunity to buy literally boatloads of oil at spot rent and insure supertankers to hold it all and sell it forward earning Citi hundreds of millions of dollars. Some called it speculation of the worst kind, worst still because it was done by an FDIC insured bank.

Pretty valuable though… it sent a price signal to the market that the market could respond to. Refiners, airlines, trucking and train companies all got to lock in oil and get cost clarity. Tanker companies were happy to have their boats leased. Who got hurt? Since most of the trade was hedged the minute the oil was bought there really was not very much risk. There was an is an economic interest in smoothing out swings in oil prices.

I don’t see why big banks can’t play in that or any other space if they can be regulated and well capitalized. Totally different ballgame but look at Beal bank. They basically loan to own buying up everyone elses failed deals. It’s litterally a FDIC insured private equity fund… it works though and I think they are the best capitalized bank in the country (because the regulators demand it.)

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What’s Ackman’s Herbalife game?

Felix Salmon
Dec 31, 2012 22:27 UTC

Bill Ackman sure knows how to make a splash: his presentation laying out his Herbalife short is rapidly approaching 3 million pageviews on Business Insider, plus many more from his own website. What’s more, it has already made him a lot of money: even with Herbalife stock up more than 12% today, at about $33 per share, it’s safe to assume that Ackman put on his short at between $45 and $50. If John Hempton is right and the short is on the order of $1 billion, then that means Ackman has made more than $300 million in the past couple of weeks.

And as Michelle Celarier notes, that $300 million is going to come in very handy when Ackman puts together his year-end report, not to mention if and when he ever tries to take Pershing Square public. As of the end of September, his fund was down for the year; Herbalife should change that.

Celarier also notes that Ackman’s broadside was carefully timed: it not only came just before year-end, but also came during a Herbalife “quiet period”, during which the company’s retaliatory arsenal is temporarily depleted.

The amount of sheer theater surrounding Ackman’s short — he literally presented his idea from a stage, and followed up his presentation with a big round of media appearances — makes it clear that the presentation itself is part of the trade. Ackman’s an activist investor, who tries to make money by changing the state of the world, and in this case it’s very clear what change he wants to see: he’d like the US government to prosecute Herbalife for being a pyramid scheme.

Ackman says that he has a price target of zero on Herbalife stock, which is extremely aggressive given that this is a company which makes a lot of money every year. The only way that Herbalife goes to zero is if it gets prosecuted for being a pyramid scheme. But there’s no evidence that a prosecution is forthcoming: after all, Herbalife has been around for 32 years, and the FTC has done nothing so far.

Ackman, when asked, says that the purpose of the theater is to bring the “facts about Herbalife” to the attention of people who would otherwise be duped by its sales pitch: if those people knew the truth, he says, they would never sign up with the company. But there’s basically zero overlap between the kind of people who read 334-page slideshows, on the one hand, and the kind of people who dream of getting rich selling Herbalife products, on the other.

The vast majority of Ackman’s presentation is devoted to an attempt to prove that Herbalife is a pyramid scheme. That’s hard: the distinction between an illegal pyramid scheme, on the one hand, and a legitimate multi-level marketing scheme, on the other, is largely in the eyes of the beholder. All of these things look pretty skeevy from the outside, but that doesn’t make them illegal, and people like Kid Dynamite are doing a good job of chipping away at many of the key bits of Ackman’s presentation.

That’s the bit which doesn’t add up, for me. Ackman has a pretty good short thesis on Herbalife even if it’s a legal MLM operation: he thinks it’s running out of markets and demographics to exploit. But he buries that short thesis inside hundreds of pages of heavy-handed argument on the pyramid-scheme front, and claims loudly that he thinks that Herbalife is going all the way to zero.

The problem is that he doesn’t ever spell out his argument, and explain why he thinks it’s probable that Herbalife is going to zero. After all, in order for that to happen, you need a lot of things to break Ackman’s way:

  1. Ackman has to be right about Herbalife being an illegal pyramid scheme
  2. The FTC has to be persuaded that Ackman is right about Herbalife being an illegal pyramid scheme
  3. The FTC has to then make the decision to prosecute Herbalife
  4. The FTC then needs to win its prosecution against Herbalife
  5. The FTC victory over Herbalife needs to be so decisive that the stock goes all the way to zero.

No matter what probabilities you put on each of these events, the chances of them all happening can’t be particularly high. And the initial one — the determination of whether or not Ackman is right about the pyramid-scheme thing — is not even all that important: you can put that probability at 100%, and you still don’t have a compelling case that Herbalife is going to zero.

All of which makes the Ackman presentation look to me like it’s a lamb dressed up as a lion, and that Celarier might well be right: Ackman could just have been trying to engineer the biggest possible year-end drop rather than genuinely betting on the demise of the entire company. It wouldn’t surprise me in the slightest to see this story go nowhere in 2013, with both Ackman and Herbalife quietly dropping the matter rather than continuing to fight for no good reason. Ackman has made a lot of money on this trade already: it’s not clear that he has any particular need to kill Herbalife as a whole.

The question, of course, is the degree to which Ackman has now covered his shorts, and the degree to which he’s still betting on substantial further declines. It could even be that today’s rise was caused by Ackman taking profits on his trade. After all, it’s always nice to be able to cash such things in, rather than just see them on paper.


That not a scheme then great opp. for CEO to purchase bargain HLF shares an make a big buck. But he ain’t buying, is he? Why ain’t he buying?

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The efficient markets hypothesis in fund fees

Felix Salmon
Aug 30, 2009 14:39 UTC

Via Chris Addy, a Dilbert cartoon from January 2000:


The scary thing is this is actually true, when it comes to things like the Renaissance Medallion Fund. If it wasn’t for current and former employees only, it would have no difficulty raising many billions of dollars at 5-and-44. The only way it can keep the suckers at bay is by closing the fund to all outside investors.


felix. how do you know if the medallion numbers are actually up 80%. also, do you know if medallion engages in flash trading?

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