Unstructured Finance http://blogs.reuters.com/unstructuredfinance Where Wall St. and Main St. intersect Sun, 21 Dec 2014 19:56:52 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Jeffrey Gundlach, on his year as new ‘King of Bonds’ http://blogs.reuters.com/unstructuredfinance/2014/12/15/jeffrey-gundlach-on-his-year-as-new-king-of-bonds/ http://blogs.reuters.com/unstructuredfinance/2014/12/15/jeffrey-gundlach-on-his-year-as-new-king-of-bonds/#comments Mon, 15 Dec 2014 20:46:01 +0000 http://blogs.reuters.com/unstructuredfinance/?p=15248 Gundlach, star bond investor and head of DoubleLine Capital LP,  is photographed during an interview in New YorkWhen Bill Gross shocked the investment world on Sept. 26 by storming out of Pimco, the most prominent bond investor in the world didn’t stop leaving people stunned.
It was later revealed by Reuters that Gross had paid an unlikely visit to his fiercest rival: Jeffrey Gundlach.
For two decades, the two had no relationship or interaction at all, even though their personas were intertwined, compared and contrasted often in the financial media and by other bond market players. (Morningstar named Gross “Fixed Income Manager of the Decade” in 2010, an award for which Gundlach was a finalist. Then in 2011, Barron’s magazine anointed Gundlach as the new King of Bonds.)
Gross not only unexpectedly departed his firm for under-the-radar Janus Capital but also considered joining Gundlach’s DoubleLine Capital. Gundlach said the so-called “Dream Team” didn’t work out but “you never know what will happen in the future.”
Overall, the gesture by Gross officially affirmed the investment world’s long-held view that Gundlach had been anointed the new Bond King.
What follows are excerpts of my hour-long interview – unfortunately, not on the north loggia of Gundlach’s Los Angeles home — about Gundlach’s investment calls (old and news ones), his competitors, the future of fixed income and his firm’s fifth year anniversary which was celebrated on Sunday.

WHAT HAS BEEN THE OVERRIDING THEME THIS YEAR?
This year was rates aren’t gonna rise. That was the theme this year for sure. Long Treasuries would outperform junk bonds and emerging market debt would be a good performer. Treasury rates were not going to fall as much as they did, but they weren’t gonna go up. Junk bonds most overvalued in history versus long Treasuries and they massively underperformed this year.

HOW DID SO MANY GET THE RATES CALL WRONG?
People extrapolated the rate rise and the reason they did that is they basically said that the Federal Reserve is going to be cutting bond purchases, and there’s going to be an incremental negative for Treasury bonds because there is going to be one major buyer that’s gone and they also thought themselves, “Gosh, the absolute level of rates at 3.03% on the 10-year is still very low, so there’s lots of room for the yields to go up and just to continue to  momentum from the end of April until the end of December of last year.”
You’re either still at a relatively low absolute level and the track had been kind of in place for 8 months and the Fed was going to stop buying. And now what I talked about was there were a number of variables people weren’t thinking about.

The three biggest variables were 1) Relative value Treasury bonds in the United States looked very attractive versus junk bonds and other developed sovereign bonds. And that was a theme that people were slow to get on to. It took them probably five months. And now you hear that all the time.
People now understand that the Treasury market, still sadly, at 2.25% represents decent relative value versus not so much junk bonds anymore but certainly developed market bonds. Italy is less than 2% now. Spain is down at 1.75%. I mean, that makes Treasury bonds look incredibly attractive particularly because the dollar was likely to strengthen this year and it did strengthen this year – a lot, particularly in the last few months.

The second variable was that stocks went up 30 percent last year. Bond yields rose. This meant that corporate pension plans had a substantial improvement in their funding status and they were likely to shift from stocks to bonds early in the year and many did. So there is a source of demand is that crossover buying into Treasuries.
And then finally, the positioning of the market was so overwhelmingly short and negative, you looked at duration surveys, you looked at Bull-Bear surveys, you saw what people had poured their money into during 2013, which was unconstrained bond funds, which were short Treasuries to take the interest-rate risk down. And leveraged ETFs that are leveraged
short against long-term Treasuries. That’s where the money was.

HOW DOES THE PLUNGE IN OIL PLAY INTO ALL OF THIS?
The first quarter of this year commodities went up. They actually had a very good start to the year. It’s hard to remember because they are down so much. The CRB index started the year at 280 and at the end of April, it was at 310 – it was up 10 percent. And so, there was some logic to this kind of inflation concept leading to the Fed raising rates. And you saw so many people talking about how the long end was so vulnerable. Oh, long rates are going to go up! Well, no they’re not. They’re not going up when you have crashing – at this point – crashing commodity prices particularly in the energy complex.  I mean the CRB is now at 248, down from 310. It’s down 20% in six months. The theme of this year has been the lack of progress towards higher interest rates against the consensus view point of exactly the opposite.

‘GO AHEAD, MAKE MY DAY’
More interestingly, in a historical context, it is interesting that rates fell when everyone thought they were going to rise but what’s more fascinating is how there was never any significant setback for yields ever during the year. Like ever. I mean, it’s just not that they fell – it’s that they never went up. If you look at 2011, you see, a big drop in rates in 2011. You see the 30-year Treasury bond in 2011 – that was a big rate decline year – it declined from a high of 4.75% at the end of January down to a low at year end of 2.90% so it fell 200 basis points. But there was a setback when the yield rose 75 basis points in about three weeks. So there were times during 2011 which had a huge rate decline where rates backed up and gave the people who were long Treasuries, some anxiety. This year the biggest rate rise from trough to peak was from using closing data was from August 28 at 3.08% to Sept. 17 at 3.37% — I mean, not 30 basis points. So it’s just a persistent decline. No ability for rates to rise all year in the context of history.
As I’ve said repeatedly in the last several months, it’s like the long end of the bond market is taking the line from Clint Eastwood in Dirty Harry: “Go ahead, make my day. Raise short
interest rates.” Because all you’re going to do is import deflation if you raise short-term interest rates. The dollar is going to get smoking hot – even hotter than it is and there’s deflation everywhere. If you use one variable econometric model which is a great oversimplification, but it’s one that works pretty well, if you use the price of oil, to predict inflation, inflation is going to be zero at some point. So where’s this inflation problem?

BONDS vs STOCKS
There were bond inflows in the first part of the year but  they are quite flat in the last few months. First, they dropped because of Pimco. so there was an artificial drop. They recovered but they’ve been largely flat for a while. What you are seeing is the money moving around. I think bond flows will probably stay about where they are unless rates rise. The bond flows are a lagging indicator of interest rates. What happens is when interest rates rise, bond investors pull money if they sell low. People pull their money out of bonds when they should’ve been putting money into them. The greatest example is my hedge fund. Last December, I did a call for my LP, the hedge fund. And I told the investors that we are going to make money on bonds because rates are probably going to fall and I took the duration to 9. And an investor said, “What?” And I said, “Yeah, I think we’re going to make money on bonds. Profits.” And the guy says, “I don’t want to be long the 10-year (Treasury).” I remember one guy specifically said that. And I said, “we’re not long the 10-year. we own other things but we do have a duration that’s longer than the 10-year by a little bit.” And the guy said, “Forget it, I am pulling my money out.” And I said, “I thought you wanted me to manage your money with my highest-conviction best ideas?” And the investor said, “yeah, that’s true but not when your ideas are stupid?” That fund is going to be up potentially 20% this year. It’s already up 17 and change through November. So a third of the investors nearly pulled their money out because I allow redemptions on a 45-day notice at month end. And so 30% of investors pulled their money out. and They’re like: “We’re not interested in this bond thing. we hate interest rate risk.” I said, “Well, I am not going to be second guessed on this. You can second guess me on other strategies but not in my best ideas strategies.” I’m not going to be moved by the fact that you don’t like it.

WHAT HAS LIFE BEEN LIKE AT DOUBLELINE AFTER THIS REORDERING OF THE BOND MARKET POST-BILL GROSS?

Have I turned accounts down? Yes. I’ve turned accounts down on fees, I’ve turned accounts down on just contractual issues. What happens is, “I’m looking for a new manager in place of Pimco. Yeah, yeah, take a number.” And then, they’ll say, “we’ve asked a bunch of firms and here’s the fees that they are doing — we want to hire you but we can’t pay — you need to match these other fees.” I say, “Sorry, it’s not gonna happen. I’m not matching them.”

If you want a Porsche, you gotta pay for a Porsche. You can’t pay for a Volkswagen and get a Porsche. You should turn down some business. If you take all the business, you’re probably making a mistake. You gotta have some sort of a vetting process.

VANGUARD’S GLOBAL BOND CHIEF RECENTLY SAID THE FIRM HAS TIGHTENED CONTROLS AT SOME OF ITS LONG-TERM BOND FUNDS TO SCREEN OUT “HOT MONEY” AMID HEAVY CASH OUTFLOWS FROM PIMCO

Vanguard is particularly susceptible to hot money because they run an index fund. The money that initially leaves Pimco first either goes to cash or goes to an existing manager or fund an investor has or it goes to an index fund. So Vanguard is correctly and intelligently looking at this and saying, if this money, if $100 billion comes from Pimco, it’s probably going to be here for like six months because it is fleeing from Pimco, it’s not fleeing to an index fund. It’s just a way station for them to figure out where ultimately they want to put the money, so they are smart. They are saying all that is going to happen in a market where the opportunities are not exactly a cornucopia, we’re going to have to dump all this money into the market only to redeem it in a few months. And they’re smart. When people come to me, they’re not coming to me for six months. Most of them who came in the first two months came because they already had money in my fund. They already know it. So they’re just doubling the size.

HOW DO YOU RESPOND TO CRITICS WHO SAY YOUR TOTAL RETURN FUND SHOULD BE CHARACTERIZED AS A MORTGAGE FUND RATHER THAN AN INTERMEDIATE-TERM BOND PORTFOLIO?

It is very heavily in mortgages, that’s true. We do have some Treasuries and we have a little bit of the CLOs which is corporate credits but it’s securitized.

But look, I’ve been dealing with that one for nearly 30 years. When competitors are under performing, what they do is try to find something to make the comparison look less difficult to them. So they pull something out of the hat. What matters in categorizing an investment is its risk profile. That’s what matters. So if we invest the portfolio so that it has a mix of government credit and a mix of non-government credit and those mixes are not that dissimilar from the index against which we are measured, then it is a completely appropriate comparison.

PIMCO AND ITS ‘BLOAT’ PROBLEM

Pimco had so much market penetration that them being close to $2 trillion meant that they were really 10 firms, sort of. In terms of they’re deliverable to the market. Let’s say that the SEC decided that asset managers fell into a too-big-to-fail category and should be precluded from growing to that too-big-to-fail stage, and so the SEC implements a law that no money management firm can be over $200 billion. Well, there’d be nine more substantial fixed-income firms, at least, if they were all exactly $200 billion. Well, there’d be nine of them that don’t exist today because of the lack of that rule. So Pimco’s bloat $2 trillion not just puts tons of money in motion, it also necessarily creates the environment where there aren’t that many places to go. Let’s be extreme about it. Let’s just say there was one fixed-income firm in the world that managed the entire market and people decided that didn’t like that organization anymore. There’s nowhere to go. There’s only the one firm. So with one firm being so big, it meant that there are necessarily – it’s not a coincidence – it’s cause and effect.

There are fewer alternatives because of the size of that one fund.

WHAT DOES THE FUTURE HOLD FOR DOUBLELINE NOW THAT YOUR FIRM CROSSED $60 BILLION IN ASSETS UNDER MANAGEMENT? ARE YOU LOOKING TO GROW YOUR FIRM EVEN MORE FROM HERE?

I was told that Charles de Vaulx (of International Value Advisers, LLC, IVA, since May 2008) had the record for the most successful mutual fund complex start-up in the one-year mark. In May 2011, for some reason, Charles and I had some line of communication through the president of my mutual fund company. So I went to visit him and he was open to the meeting.

I went in and I said: “Hey, I’ve got this great idea. We’re looking for sub advisories and joint ventures to help build our firm. How about if we do this, You, Charles, do the stocks. And I do the bonds. We’ll take over the world. You’re the most successful stock start-up and I’m the most successful bond start-up. It is a winning combination. This is great.”

And Charles says, “I love it, I love it. I’m not doing it!” And I said: “What? Why?”

He said: “I’m closed. I like it the way it is. I manage $18 billion. I have a manageable firm. I like what I am doing. I like the people I work with. Enough is enough.”

And it just opened my eyes. I said: “Wow. You know what. I think there is something to this ‘closed’ concept.” Most people think the definition of success is more. It’s gotta be more all the time.

Charles de Vaulx opened my eyes and said, “That’s not true.” There’s a quality of life aspect and a way of maximizing the probability of success.

What you don’t want is to raise a bunch of money and go around the world saying: “I’m sorry” because of poor performance.

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Alexander Soros says environmental activists should be considered ‘great heroes’ http://blogs.reuters.com/unstructuredfinance/2014/11/17/alexander-soros-says-environmental-activists-should-be-considered-great-heroes/ http://blogs.reuters.com/unstructuredfinance/2014/11/17/alexander-soros-says-environmental-activists-should-be-considered-great-heroes/#comments Mon, 17 Nov 2014 16:32:50 +0000 http://blogs.reuters.com/unstructuredfinance/?p=15239 ALEXSOROSAlexander Soros, the son of legendary investor George Soros, said the death of a Peruvian environmental activist fighting to save the Amazon rainforest moved him to act.

On Monday in a New York City ceremony, the Alexander Soros Foundation will be honoring Edwin Chota, a Peruvian activist who campaigned against illegal logging in the Amazon, along with three of his colleagues, who were shot and killed in a remote corner of the rainforest in the Peruvian region of Ucayali.

Soros’ environmental and human rights activism comes as the United Nations Climate Change Conference takes place in Peru next month. Soros, 29, told Reuters in a telephone interview that his father, who founded the Open Society Foundations which supports democracy and human rights in more than 100 countries, inspired him to get involved with such issues.

“Nobody is really looking at environmental defenders as great heroes,” the young Soros said. “People who defend their environments are, often times, vilified because they are seen as crazy, anti-technology people. It is important that we show that these types of activists exist and they are risking life and limb.”

Soros, an advisory board member and major donor of activist group Global Witness, notes a recently released report by the group, which shows Peru ranking fourth in the world for murders of environmental activists with 57 activists in the country killed from 2002 to 2013.

Patrick Alley, co-founder of Global Witness, said: “The pressure on the environment, not just in Peru obviously but globally, is increasing as people are acquiring land, mining and logging concessions. And there is just not enough protection or rights given to the people who depend on these lands.”

For Peru’s part, more than half the country is still covered by rainforest, but those forests are being cut down at an ever-faster rate to satisfy voracious international demand for timber and related products, Soros said.

“The deaths of environmental activists like Chota are not the result of obscure disputes in wild, faraway places,” Soros writes in an op-ed on Monday for The Guardian. “They are a direct consequence of the developed world’s unrelenting demand for products like hardwood, palm oil,rubber, natural gas, and beef, and of poor regulation in the markets that supply them.”

As of July 2014, Forbes listed Soros, 84, as the 27th richest person in the world and no. 7 on its list of the 400 wealthiest Americans, with a net worth estimated at $23 billion.

The elder Soros once wrote about his take on philanthropy and activism: “My success in the financial markets has given me a greater degree of independence than most other people. This allows me to take a stand on controversial issues: In fact, it obliges me to do so because others cannot.”

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Pimco CEO Hodge still taking resumes http://blogs.reuters.com/unstructuredfinance/2014/11/10/pimco-ceo-hodge-still-taking-resumes/ http://blogs.reuters.com/unstructuredfinance/2014/11/10/pimco-ceo-hodge-still-taking-resumes/#comments Mon, 10 Nov 2014 19:03:31 +0000 http://blogs.reuters.com/unstructuredfinance/?p=15231 Pimco’s latest hiring – or rehiring — spree isn’t done just yet.

The bond giant has been rebuilding itself, and particularly its leadership team, since co-founder Bill Gross’ unexpected departure on Sept. 26, which came eight months after his top deputy Mohamed El-Erian quit amid acrimony.

Pimco, a unit of Allianz SE, which had assets under management of $1.876 trillion as of Sept. 30, has been aggressively reassuring clients through meetings, conference calls and advertisements that the firm remains committed to the same investment strategies following the exit of Gross.

Doug Hodge, the new CEO of Pimco, said at the top of his priority list, too, is hiring the best traders and portfolio managers in the business, he told Reuters on the sidelines at the annual SIFMA conference in New York on Monday. Hodge said the Newport Beach, Calif-based firm expects to announce more hires in coming weeks and months.
He declined to detail who those new staffers might be, but the company has already announced a string of new hires and rehires.

In late October, Pimco named Nobel laureate economist Michael Spence as a consultant on macroeconomic and global policy issues while Jeremie Banet, who left Pimco to operate a food truck selling croque-monsieur sandwiches in Los Angeles, returned as an executive vice president and portfolio manager.

Last week, Pimco rehired Marc Seidner as chief investment officer of non-traditional strategies, the sixth CIO named since El-Erian’s departure. Seidner starts his new gig on Wednesday.

Pimco has been working to stem the tide of outflows since Gross’ departure. Pimco suffered $48.3 billion of outflows from across its open-ended funds in October following Gross, adding to $25.5 billion of withdrawals in the previous month, according to Morningstar data.

But on Monday, Hodge said that the company welcomes evaluations of its post-Gross era by institutional investors, many of whom, such as endowments and pension systems, can take months to make investment decisions.

He emphasized that outflows have tapered somewhat since a spike on the day of Gross’ departure, but declined to detail what flows have looked like so far in November.
While praising Gross as a “legendary” innovator, he said that Pimco is a “team” of stars, and not just a particular individual, a perspective the company has worked to emphasize after the larger-than-life Gross departed.

We are Pimco,” declared its advertisements, featuring some of its new CIOs.

As institutional investors weigh in on their Pimco investments, Hodge said, the distance from Gross’ exit in fact helps.
“Time becomes an ally,” Hodge said on Monday.

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GMF @HedgeWorld West, World Bank/IMF and Financial & Risk Summit Toronto 2014 http://blogs.reuters.com/global-markets-forum/2014/10/03/gmf-hedgeworld-west-world-bankimf-and-financial-risk-summit-toronto-2014/ http://blogs.reuters.com/global-markets-forum/2014/10/03/gmf-hedgeworld-west-world-bankimf-and-financial-risk-summit-toronto-2014/#comments Fri, 03 Oct 2014 21:12:56 +0000 http://blogs.reuters.com/global-markets-forum/?p=2218 (Updates with guest photos and new links).

Join our special coverage Oct. 6-10 in the Global Markets Forum as we hit the road, from the West Coast to Washington to the Great White North.

GMF will be live next week from the HedgeWorld West conference in Half Moon Bay, California, where we’ll be blogging insight from speakers including Peter Thiel, former San Francisco 49ers great Steve Young and other panelists' viewpoints on the most important investment themes, allocation strategies, reputation risk management ideas and more.

 

 

Eric Burl, COO, Man Investments USA

Eric Burl, COO, Man Investments USA

Our LiveChat guests at HedgeWorld West include Jay Gould, founder of the California Hedge Fund Association, on Monday; Rachel Minard, CEO of Minard Capital on Tuesday; and Eric Burl, COO of Man Investments, on Wednesday discussing the evolving global investor. If you have questions for them, be sure to join us in the GMF to post your questions and comment.

Follow GMF’s conference coverage and post questions live via our twitter feed @ReutersGMF as well, where we’ll post comments from other HedgeWorld panelists. They include: 

  • Peter Algert, Founder and CIO, Algert Global
  • Adrian Fairbourn, Managing Partner, Exception Capital
  • Nancy Davis, Founder & CIO, Quadratic Capital
  • R. Kipp deVeer, CEO, Ares Capital
  • Judy Posnikoff, Managing Partner, PAAMCO
  • Caroline Lovelace, Founding Partner, Pine Street Alternative Asset Management
  • Cleo Chang, Chief Investment Officer, Wilshire Funds Management
  • Brian Igoe, CIO, Rainin Group
  • Mark Guinney, Managing Partner, The Presidio Group

In a preview of the HedgeWorld West conference, Rachel Minard said what matters most to investors today is "not so much what something is

Rachel Minard, CEO of Minard Capital

Rachel Minard, CEO of Minard Capital

called but what is its behavior," she told the forum. "What investment instruments are being used -- what is the ROI relative to cost, liquidity, volatility, market exposure, price/rates and is this the most "efficient" method by which to achieve return. What's great from our perspective is the meritocracy of the business today -- the proof necessary to validate the effective and sustainable ROI of any fund or investment strategy."

Those topics, and more, will be on tap, as top global hedge fund managers and members of the California Hedge Fund Association gather this week. Meanwhile, the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group each year bring together central bankers, ministers of finance and development, private sector executives, civil society, and academics to discuss issues of global concern. The Reuters GMF editorial team will cover real-time interviews and blog throughout the event to highlight Reuters' best analysis and interviews. 

Thomas Caldwell, founder and chairman, Caldwell Securities

Thomas Caldwell, founder and chairman, Caldwell Securities

 

GMF also will kick off our Financial and Risk Summit in Toronto, starting on Monday, with a LiveChat with Thomas Caldwell, founder and chairman of Caldwell Securities on Canada and the global economy. The conference starts on Tuesday, with keynotes including Tom Kloet, TMX Group CEO; Luo Zhaohui, China's ambassador to Canada; Ron King, Scotiabank’s compliance head; and more to come.

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How Babel became Symphony http://blogs.reuters.com/unstructuredfinance/2014/10/01/how-babel-became-symphony/ http://blogs.reuters.com/unstructuredfinance/2014/10/01/how-babel-became-symphony/#comments Wed, 01 Oct 2014 16:26:01 +0000 http://blogs.reuters.com/unstructuredfinance/?p=14946 The communications platform announced this week went through several different names before Symphony.

The idea for a communications platform went through several names before Symphony.

In late-2012, Goldman Sachs traders started to notice something unusual. News was sometimes breaking on social media faster than it was breaking on sophisticated information terminals that cost the bank millions of dollars each year.

The realization set in motion a series of events that would lead Goldman to team up with 13 other financial firms and invest in a new communications platform called Symphony. But before it was called Symphony, it had a lot of other names. What follows is the story of how Symphony got its name, as told to Unstructured Finance by people involved with the project.

A group of engineers at Goldman called “strats,” who work closely with the trading division on technology issues, set about finding a way to get relevant social media content in front of traders in real-time. They launched an internal platform called LiveCurrent in 2013 that combined elements of messaging, social media, research and other information in one central place. Because it was developed internally, the platform could be used by all employees across front, middle and back-office functions without significant additional cost. That made communicating about active trades much quicker and easier for all the staff involved.

As Goldman’s trading desk was grappling with this issue internally, its principal strategic investments team began picking up on the same theme of fragmented communication across Wall Street. That group, co-headed by Darren Cohen, makes investments with the bank’s own capital in the financial-services industry. It began looking for startups that had a solution to the problem. Cohen’s team code-named the project “Babel” because they saw their task as simplifying a wide-ranging set of communications systems that were speaking in different tongues.

In late-2013, Cohen approached David Gurle, who built his career doing new things with chat at Microsoft, Thomson Reuters and Skype. Gurle’s Palo Alto startup, called Perzo, was working on chat technology that could bring Goldman’s LiveCurrent features to a wider set of users. Gurle had been thinking about the next steps with Perzo – selling it or merging it with another tech startup – but the idea of partnering with Wall Street banks intrigued him. (The name Perzo means “prices” in Italian, though it’s not clear why Gurle chose that name for his firm.)

Cohen and Gurle met for breakfast in New York in January. After seeing a LiveCurrent demo, Gurle agreed to team up with Goldman to merge their software. The two also decided to find a group of Wall Street firms that could invest capital in the venture and adopt its technology.

Then came the hard part: coming up with a name that could stick.

The idea was already operating under at least three different names, and some Goldman employees believed LiveCurrent was actually called “Goldman 360,” another internal information platform. (More confusion ensued as some people mistook the word “Babel” for “Babble.”)

For days on end, Cohen asked Gurle for a name, which he needed to market the project to potential partners. Gurle wanted a name that captured the exact opposite idea of the Tower of Babel, but was drawing a blank.

The 47-year-old Frenchman went home to reflect on the idea while listening to his favorite classical music, “The Four Seasons” by Antonio Vivaldi. Suddenly it hit him: Symphony. As Webster’s defines it, a “consonance of sounds” that has  “harmonious complexity.”

Despite how common the word seemed, the website www.symphony.com was available, and the project, finally, had its name.

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Lessons from Buffett-palooza: Six months in http://blogs.reuters.com/unstructuredfinance/2014/07/02/lessons-from-the-buffett-sphere-six-months-in/ http://blogs.reuters.com/unstructuredfinance/2014/07/02/lessons-from-the-buffett-sphere-six-months-in/#comments Wed, 02 Jul 2014 15:43:22 +0000 http://blogs.reuters.com/unstructuredfinance/?p=14390 Buffett.jpgSure, there were the prosaic T-shirts with Warren Buffett’s face at the annual Berkshire Hathaway meeting this May. But there were also boxers. Ketchup bottles. Rubber ducks. Why not? The country’s most famous investor is also its most consummate pitchman – only one of the distinctions that differentiate Berkshire Hathaway from other companies.

 

Of course, Warren Buffett is so iconic an investor that the word “iconic” seems inadequate. He’s the fourth richest person in the world, an avuncular-seeming investor who nonetheless made money off Goldman Sachs, who themselves are hardly pushovers. He’s got a humble, down-to-earth demeanor and a personal fortune somewhere around the entire GDP of Croatia  (WB: $65 billion; Croatia, around $60 billion).

 

It’s now been six months since I started covering Berkshire, and it’s been a learning experience, to say the least. Covering this company is not like any other (can you imagine AIG selling out of Bob Benmosche-emblazoned shirts? How about just giving them away?). Below I’ve compiled a roundup of things the Berkshire beat has taught me at the half-year mark, along with things to watch for in the rest of 2014 and beyond.

1. While Buffett’s been rightfully lauded for his investing track record, his biggest gift might simply be in hiring. In his annual letter to shareholders, he lavishes praise on managers such as Ajit Jain (Berkshire Hathaway Reinsurance Group), Greg Abel (at MidAmerican Energy, now Berkshire Hathaway Energy) and Matt Rose and Carl Ice (BNSF), but many, if not all, the analysts, shareholders and more to whom I speak echo those words. And on the investment side, he’s got Todd Combs and Ted Weschler, as well as rising star Tracy Britt Cool. Buffett makes a big deal of finding the right people because he knows he can let them handle things without his constant interference. That’s part of what makes Buffett able to head up such a sprawling company – Berkshire Hathaway includes dozens of businesses and employs, in total, more than 330,000 people. That’s larger than the entire city of Cincinnati.

2. Buffett is very aware he’s not going to live forever. He’s 83 years old (turning 84 in August), and he knows that his time left at the head of his company is limited. He’s consciously shifting the company to run without him in the future, toward operating businesses with solid managers that do not need him to keep running smoothly. While he hasn’t publicly disclosed his designated successor, he (and his business partner, 90-year-old Charlie Munger) have gone out of their way to reassure investors that the board has eyeballed Berkshire’s roster and has picked out some potential heirs. Whoever takes those reins will, I’m sure, be very competent… but they won’t be Buffett. The kinds of deals that Buffett has managed to pull off have come in part on the strength of his considerable fame. Think of the Goldman Sachs deal during the crisis; it was a big boost for Goldman to be able to say that the most famous U.S. investor had given them a sort of de facto vote of confidence (at what would become a nice profit). Buffett’s lieutenants do not have that same fame, and they won’t be able to command that sort of fame premium that Buffett does.

3. Do not underestimate the power of Buffett. At the annual meeting in May, I talked to people who waited in line for hours in the dead of night to get good seats in the stadium. Extra credentials for the meeting went on sale on eBay. People completely ignored Bill Gates on the exhibit floor to strain on tiptoes for the merest glimpse of Buffett. Some of this makes me wonder how much some of his shareholders really know about the company. I would certainly hope large fund managers are combing through the company’s data, just as they would with any other company. But are they? And what about retail investors? I talked to plenty of people at the stadium who said they skipped most of the Q&A and shareholders’ meeting so they could go shop among the various booths for Berkshire businesses, from NetJets to Geico to Dairy Queen to Clayton Homes. Clearly, Buffett’s investors trust him. But some of them do so blindly.

4. Doing nothing can be a lot harder (and therefore a lot more lucrative) than doing something. Buffett et al. are just as good at sitting on a giant mattress of cash as they are at making deals. They will take the pain of waiting until the right thing comes along. There’s much to be said for that approach. Because his shareholders trust him so much, he can wait on a $50 billion pile of money until the right target comes along. He has nothing to prove to anyone. He will wait until he’s ready, thank you very much.

Hmmm. Is Buffett whispering stock tips in my ear? Or is he just telling me I have something on my shoe?

Hmmm. Is Buffett whispering stock tips in my ear? Or is he just telling me I have something on my shoe?

5. Berkshire is not the only Berkshire to ever Berkshire. On Tuesday, I saw at least one tweet about how Buffett is buying Portillo’s hot dogs… except it’s actually Boston-based private equity firm Berkshire Partners, not Omaha-based conglomerate Berkshire Hathaway. (One woman at Berkshire Partners told me that her parents are convinced she works for Warren Buffett…)

6. Get a selfie with Warren Buffett at every opportunity.

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‘Bond King’ Gross speaks to 700 at Pimco client event in Big Apple http://blogs.reuters.com/unstructuredfinance/2014/06/24/bond-king-gross-speaks-to-700-at-pimco-client-event-in-big-apple/ http://blogs.reuters.com/unstructuredfinance/2014/06/24/bond-king-gross-speaks-to-700-at-pimco-client-event-in-big-apple/#comments Tue, 24 Jun 2014 20:15:08 +0000 http://blogs.reuters.com/unstructuredfinance/?p=14382 By Jennifer Ablan

Bill Gross did something last week he rarely does — venture from his Newport Beach, Calif. home to meet with investors twice. 

First in Chicago at the Morningstar Investment Conference where he made waves for donning sunglasses and joking he’d become “a 70-year-old version of Justin Bieber,” and then, the next day at a less-publicized event for 700 clients in New York City. 

The meetings are a sign that Gross, dubbed the market’s “Bond King,” is trying to make amends with investors and the media after a brutal first half of the year. 

Last Friday, Gross gave a keynote address and took some questions at Pimco’s annual investment summit in the Big Apple, which was the largest Pimco-hosted client event in its history with over 700 institutional investors and clients, Doug Hodge, ceo of Pacific Investment Management Co. told Reuters.
At Friday’s event, Hodge spoke reverentially about Gross, describing him in visionary language one might reserve for a great inventor or artist.
“Time after time, Bill has broken with conventional wisdom as he has seen opportunities where others have not, and he has been prepared to put it on the line, over and over again, and it has been this process of taking measured risk that has led to extraordinary long-term benefits to you, our clients,” Hodge said.
Gross is facing no shortage of investor attention.
Pimco’s flagship Total Return Fund, the world’s largest bond fund run by Gross with $229 billion in assets under management, saw net outflows totaling $15.67 billion for the year-to-date ending May and subpar performance.
Gross, co-founder of Newport Beach, California-based Pimco, has also been under intense scrutiny since his public falling out with El-Erian and news reports about Gross’s demanding and sometimes abrasive management style.
But for its part, Gross’s performance at his Pimco Total Return Fund is showing some signs of stabilization.
In the 12 months ending last Friday, the Pimco Total Return Fund, which has $229 billion in assets under management, is now beating its benchmark Barclays U.S. Aggregate Bond Index by 32 basis points, Hodge pointed out.
“At the end of the day, Pimco and Bill Gross should be judged by the value that we deliver to our clients. That’s the test,” Hodge told Reuters in an interview. “Through the Total Return Fund and other strategies, Bill has created more value for more investors than anyone in the history of our industry.”
The half-day summit on Friday featured Gross but also showcased Pimco’s new deputy chief investment officers and Rich Clarida, Pimco’s global strategic advisor.
After the client event, Gross also did a town hall meeting with employees in Pimco’s offices, which was also attended by several hundreds of personnel, a Pimco spokesman said. Pimco declined to comment on what Gross discussed at Friday’s client and employee events.
While many say Gross appears more engaged with colleagues, some institutional investors are still waiting for a turnaround in his performance.
The Pimco Total Return Fund’s three-year Sharpe ratio – a measure closely followed by pension funds, foundations and endowments — is hovering around 1.02. That is trailing the Barclays Aggregate at 1.24 and the average intermediate-term bond fund category at 1.26 (The higher a fund’s Sharpe ratio, the better a fund’s returns have been relative to the risk it has taken on).
Hodge added: “Generating alpha is more than simply buying and selling bonds, it is about breaking with conventional wisdom and ultimately about putting yourself on the line.”

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GUEST BLOG: Edge over the markets and do you have it? http://blogs.reuters.com/unstructuredfinance/2013/12/20/guest-blog-edge-over-the-markets-and-do-you-have-it/ http://blogs.reuters.com/unstructuredfinance/2013/12/20/guest-blog-edge-over-the-markets-and-do-you-have-it/#comments Fri, 20 Dec 2013 11:36:33 +0000 http://blogs.reuters.com/unstructuredfinance/2013/12/20/guest-blog-edge-over-the-markets-and-do-you-have-it/ This is a guest post from author and former hedge fund manager Lars Kroijer. The piece reflects his own opinion and is not endorsed by Reuters. The views expressed  do not constitute research, investment advice or trade recommendations.

Most literature or media on finance today tells us how to make money.  We are bombarded with stock tips about the next Apple or Google, read articles on how India or biotech investing are the next hot thing, or told how some star investment manager’s outstanding performance is set to continue.  The implicit message is that only the uninformed few fail to heed this advice and those that do end up poorer as a result.  We wouldn’t want that to be us!

What if we started with a very different premise?  The premise that markets are actually quite efficient.  Even if some people are able to outperform the markets, most people are not among them.  In financial jargon, most people do not have edge over the financial markets, which is to say that they can’t perform better than the financial market through active selection of investments different from that made by the market.  Embracing and understanding this absence of edge as an investor is something I believe is critical for all investors to understand.

Consider these two investments portfolios:

A) S&P500 Index Tracker Portfolio like an ETF or index fund

B) A portfolio consisting of a number of stocks from the S&P 500 – any number of stocks from that index that you think will outperform the index.  It could be one stock or 499 stocks, or anything in between, or even the 500 stocks weighted differently from the index (which is based on market value weighting).

If you can ensure the consistent outperformance of portfolio B over portfolio A, even after the higher fees and expenses associated with creating portfolio B, you have edge investing in the S&P 500.  If you can’t, you don’t have edge.

At first glance it may seem easy to have edge in the S&P500.  All you have to do is pick a subset of 500 stocks that will do better than the rest, and surely there are a number of predictable duds in there.  In fact, all you would have to do is to find one dud, omit that from the rest and you would already be ahead.  How hard can that be?  Similarly, all you would have to do is to pick one winner and you would also be ahead.

Although the examples in this piece are from the stock market, investors can have edge in virtually any kind of investment all over the world.  In fact there are so many different ways to have edge that it may seem like an admission of ignorance to some to renounce all of them.  Their gut instinct may tell them that not only do they want to have edge, but the idea of not even trying to gain it is a cheap surrender.  They want to take on the markets and outperform as a vindication that they “get it” or are somehow of a superior intellect or street-smart.  Whatever works!

The Competition

When considering your edge who is it exactly that you have edge over?  The other market participants obviously, but instead of a faceless mass, think about whom they actually are and what knowledge they have and analysis they undertake.

Imagine the portfolio manager – let’s call her Susan – of the technology-focused fund for a highly rated mutual fund/unit trust who like us is looking at Microsoft.

Susan and and her firm have easy access to all the research that is written about Microsoft including the 80 page in-depth reports from research analysts from all the major banks including places like Morgan Stanley or Goldman Sachs that have followed Microsoft and all its competitors since Bill Gates started the business.  The analysts know all of the business lines of Microsoft, down to the programmers who write the code to the marketing groups that come up with the great ads.  They may have worked at Microsoft or its competitors, and perhaps went to Harvard or Stanford with senior members of the management team.  On top of that, the analysts speak frequently with the trading groups of their banks who are among the market leaders in the trading of the Microsoft shares and can see market moves faster and more accurately than almost any trader.

All research analysts will talk to Susan regularly and at great length because of the commissions her firm’s trading generates.  Microsoft is a big position for her fund and Susan reads all the reports thoroughly – it’s important to know what the market thinks.  Susan enjoys the technical product development aspects of Microsoft and she feels she talks the same language as techies, partly because she knew some of them from when she studied computer science at MIT.  But Susan’s somewhat “nerdy” demeanour is balanced out by her “gut feel” colleague, who see bigger picture trends in the technology sector and specifically sees how Microsoft is perceived in the market and ability to respond to a changing business environment.

Susan and her colleagues frequently go to IT conferences and have meetings with senior people from Microsoft and peer companies, and are on first name basis with most of them.  Microsoft also arranged for her firm to visit the senior management at offices around the world, both in sales roles and developers, and Susan also talk to some of the leading clients.

Like the research analysts from the banks, Susan’s firm has an army of expert PhD’s who study sales trends and spot new potential challenges (they were among the first to spot Facebook and Google).  Further, her firm has economists who study the US and global financial system in detail as the world economy will impact the performance of Microsoft.  Her firm also has mathematicians with trading pattern recognition technology to help with the analysis.

Susan loves reading books about technology and every finance/investing book she can get her hands on, including all the Buffett and value investor books.

Susan and her team know everything there is to know about the stocks she follows (including a few things she probably shouldn’t know, but she keeps that close to her chest), some of which are much smaller and less well researched than Microsoft.  She has among the best ratings among fund managers in a couple of the comparison sites, but doesn’t pay too much attention to that.  After doing this for over twenty years she knows how quickly things can change and instead focuses on remaining at the top of her game.

Does Susan have edge?

Do you think you have edge over Susan and the thousands of people like her?  If you do, you might be brilliant, arrogant, the next Warren Buffett or George Soros, be lucky, or all of the above.  If you don’t, you don’t have edge.  Most people don’t.  Most people are better off admitting to themselves that once a company is listed on an exchange and has a market price, then we are better off assuming that this is a price that reflects the stock’s true value, incorporating a future positive return for the stock, but also a risk that things don’t go do plan.  So it’s not that all publicly listed companies are good – far from it – but rather that we don’t know better than to assume that their stock prices incorporate an expectation of a fair future return to the shareholders given the risks.  We don’t have edge.

When I ran my hedge fund I would always think about the fictitious Susan and her fund.  I would think of someone super clever, well connected, product savvy yet street-smart who had been around the block and seen the inside stories of success and failure.  And then I would convince myself that we should not be involved in trades unless we clearly thought we had edge over them.  It is hard to convince yourself that this is possible, and unfortunately even harder sometimes for it to actually be true.

Investing without edge

For someone to accept that they don’t have edge is a key “aha” moment in their investing lives, and perhaps without knowing it at first, they will be much better off as a result.  At this point you are hopefully at least considering a couple of things:

1. Edge is hard to achieve and it is important to be realistic about if you have it.

2. Conceding edge is a sensible and very liberating conclusion for most investors.  It makes life lot easier (and wealthier) to acknowledge that you can’t better the aggregate knowledge of a market swamped with thousands of experts that study Microsoft and the wider markets.

Once you have conceded edge you are unfortunately not done.  In fact you have only arrived at the starting point and started your journey as an investor who has conceded edge.  There is every change that you will be a far wealthier investor as a result of this.

For the edgeless investor it makes sense to pick the most diversified and cheapest portfolio of world equities and combining that with some government and potentially corporate bonds through cheap index tracking products that suit your risk and tax profile.  Do this while considering your non-investment assets/liabilities, time horizon of investment, and a few other things, and you are doing extremely well.  Once you embrace that you don’t have edge it is fortunately pretty intuitive and really not that difficult to put together a simple and powerful investment portfolio.  More on that in the next blog!

 

Lars Kroijer is the author of “Investing Demystified – How to Invest Without Speculation and Sleepless Nights” from Financial Times Publishing. He founded hedge fund Holte Capital, where he was CEO, in 2002. You can follow him on @larskroijer.

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Jim Chanos, bad news bear, urges market prudence http://blogs.reuters.com/unstructuredfinance/2013/12/09/jim-chanos-bad-news-bear-urges-market-prudence/ http://blogs.reuters.com/unstructuredfinance/2013/12/09/jim-chanos-bad-news-bear-urges-market-prudence/#comments Mon, 09 Dec 2013 16:58:33 +0000 http://blogs.reuters.com/unstructuredfinance/?p=1905 Prominent short-seller Jim Chanos is probably one of the last true “bad news bears” you will find on Wall Street these days, save for Jim Grant and Nouriel Roubini. Almost everywhere you turn, money managers still are bullish on U.S. equities going into 2014 even after the Standard & Poor’s 500’s 27 percent returns year-to-date and the Nasdaq is back to levels not seen since the height of the dot-com bubble in 1999.

“We’re back to a glass half-full environment as opposed to a glass half-empty environment,” Chanos told Reuters during a wide ranging hour-long discussion two weeks ago. “If you’re the typical investor, it’s probably time to be a little bit more cautious.”

Chanos, president and founder of Kynikos Associates, admittedly knows it has been a humbling year for his cohort, with some short only funds even closing up shop.

But he told Reuters that the market is primed for short-sellers like him and as a result has gone out to raise capital for his mission: “Markets mean-revert and performance mean-reverts and even alpha mean-reverts if at least my last 30 years are any indication. And the time to be doing this is when you feel like the village idiot and not an evil genius, to paraphrase my critics.”

Chanos’ bearish views are so well respected that the New York Federal Reserve has even included him as one of the money managers on its investment advisory counsel. By his own admission, Chanos said he tends to be the one most skeptical on the markets.

Chanos knows bad news when he sees it as he is known as the man who almost single handedly vindicated short sellers by revealing the ongoing fraud at Enron and WorldCom. And he sounded the alarm bell early on struggling computer giant Hewlett Packard. Just last week, he sent shares of CGI Group Inc., the parent of CGI Federal, which is the main contractor behind the U.S. government’s glitch-plagued HealthCare.gov website, under selling pressure after Newsweek revealed that Chanos had placed a major short position.

Chanos spoke about his other shorts including Caterpillar and – yes, just in time for Christmas — coal stocks at the Reuters Global Investment Outlook Summit and even shared some of his observations on the 1 percent and what they owe the rest of us.

On the U.S. stock market

Chanos: “A few years back, I felt the U.S. was the best house in a bad neighborhood for a cliché hackneyed term and certainly there were better places that I think on a macro basis to be short like China. Our thinking is changed on that now. I think that the U.S. market is pretty fully discounting an awful lot of good news. While one can never be precise on markets and that’s not why my clients pay me, we’re finding many more opportunities (on the short side) in the U.S markets than we found a few years ago. The U.S. market at roughly 1,800 on the S&P is trading at 19 times earnings. I am always sort of befuddled because people use a much lower figure on that…we went back and triple-checked trailing 12-month S&P 500 earnings and they are only $95. A lot of companies report earnings before the bad stuff and we’re talking about GAAP earnings – actually talking about real accounting earnings – they are only $95. So for you to believe that the market is only at 14 times, 15 times next year’s number, you have to make some pretty robust assumptions on earnings growth to get to $95 to that $120 or $125 figure.”

Déjà vu all over again

Chanos: “I recall pretty vividly in 2007 at the top people were saying that ‘Well, the markets weren’t that expensive.’ And yet, we had a little bit of a dislocation following that. Of course, everybody will say, ‘Yeah but the markets could go to whatever…because it did in 2000.’ If you want to use as your benchmark, a once-in-a-lifetime, mainly the Nasdaq as your guidepost what is cheap or not, Good luck. We’re at the same kinds of levels we’ve been at in ’07 and in other periods where the markets had some difficulty. Having said that, the Fed is going to stay easy for a long time, so they tell you, so people are taking that as a given. But there are other some other signposts that are a lot different from four years ago.

Back then, you saw very little (stock) issuance, now issuance is picking up very, very quickly. We see three-four-five spot secondaries every night beyond the IPO market. You’re seeing hedge funds scrap the short side – and in some cases, bring out long-only funds. That was a hallmark of 2007 as well. In 2009, everybody wanted tail risk protection. I haven’t heard about tail risk protection in probably 18 months. We’re back to a glass half-full environment as opposed to a glass half-empty environment. If you’re the typical investor, it’s probably time to be a little bit more cautious. It doesn’t mean the market can’t go a lot higher. And as I say, we’re pretty much in our short-only business always defacto hedged but the risks are getting out there. And even in some stocks we’re you’re beginning to see research reports now stretched out and tell you the stock is reasonably priced based on 2020 estimates, most people can’t really forecast much beyond a few months — and we’re seeing more and more of those kinds of reports where stocks are justified based on some enormous growth way, way out into the future. And to some extent Fed policy fosters that because of the low interest rates people feel that they can be confident in predicting out reasonably high multiples with no hiccups going out in the future.”

You love art, so what do you make of the surge in Sotheby’s shares?

Chanos: “At Sotheby’s basically it goes from 10 to 50 seemingly in every cycle since the late 80s. There are some reasons for that — contemporary art is what I call ‘socially acceptable conspicuous consumption.’ So in any case, but it’s sort of an interesting point that every time we seem to see some sort of excess somewhere in the marketplace, Sotheby’s runs to 50 and then collapses to 10 and then runs right back to 50 and collapses to 10. It’s done that four times since the late 80s. And now we’ve seen the latest ramp to 50. And who knows.

Again, it’s more to me an indicator of what the 1% is doing than anything else.”

Are we in a hedge fund bubble?

Chanos:  “I think hedge fund fees are probably still in a bubble although I would point out that the reality is that the days of 2-20 are kind of well behind us and even a lot of shops that charge that effectively make a lot less.

Also, the investors have gotten a lot more sophisticated. Ten years ago, if you were dealing with a pension fund you really dealt with a consultant, by and large. And they were the gate keepers and if they liked you, then you get put on a list. Nowadays you really deal directly with the clients. They all have staff that are pretty sophisticated.”

Are you raising money now for your funds?

Chanos: “We think now is a good time to do it. Now I think is not a bad time to be raising capital for what we do. When we got a rough going in the mid-90s, that was exactly the time to raise capital. It is counterintuitive and a lot of hedge funds don’t do it. But markets mean-revert and performance mean-reverts and even alpha mean-reverts in at least my last 30 years are any indication and the time to be doing this is when you feel like the village idiot and not an evil genius, to paraphrase my critics. And I think that’s the time as I say when everybody wanted tail risk insurance back in ‘09, we were pushing our hedge fund more than our short fund. And now I think the short fund actually makes more sense for institutional investors.

At this point I think it is prudent for people to think about hedging off some of their market exposure and that is exactly when they don’t wanna do it.”

On Caterpillar

Chanos: “One of our views is that we think the commodity super cycle has peaked. But the problem in saying that is that most analysts and investors have a very short time frame in looking at that. We took a look at the publicly-traded mining companies with one of our brokers and we went back and looked at all of their capital spending going back to the early 90s in the mining area and capital spending in the mining area is roughly 50% equipment and 50% the cost of digging the hole. And it’s pretty amazing what you see, that from 1991-2001, basically capital spending in the entire mining industry went from $5 billion a year to $15 billion a year. That’s about an 8-9% compounded growth rate. And then, the China boom came and then from ’01 to 2012, annual capital spending in the mining industry went from $15 billion a year to $145 billion a year! Which is a 24% compounded rate of return. It went from an arithmetic function to a geometric function in the post-millennium and it’s come off a little bit from that peak now. When you understand just what a massive boom we have had in digging holes in the ground globally to fill this voracious demand in China in building these cities and people say, ‘Oh, well, Caterpillar in the down cycle earned 4-5-6 bucks. Caterpillar used to lose money in the down cycles and that’s when it was basically only a duopoly in 80s and early 90s. Now, you have five, six or seven players in that market and all basically working on the assumption that the hockey stick chart is sort of the new normal and if we ever revert to the mean because China stops building one new city seemingly every every weekend, I think that a lot of equipment guys got has a lot of extra capacity and returns are going to be a lot lower than investors think. That’s the basic thesis.”

On Coal

Chanos: “We’re very bearish on coal for a variety of reasons. I think it’s the flipside of the shale gas boom in the U.S. But you’re even beginning to see some movement shockingly in China to cut back on burning coal because, let’s face it, the pollution issue there…I think that it’s still cheaper in the European markets and Asian markets to burn coal than natural gas but that’s because natural gas is $10-12 and $14-16 in Asia. There’s more and more coal being mined similar to this boom, so the supply keeps coming. In the U.S., there’s additional issues and that is, the EPA is on the case here pretty diligently — on top of the real substitution effect that natural gas has. We’re pretty much short all the leveraged coal companies with one exception, which is one of our hedges. But you can assume pretty much that we are short all of the leveraged coal companies. If you look at the numbers in the coal companies, these are companies, really, some of them in financial distress or about to be.”

Bill Gross, manager of the world’s largest bond fund, urged fellow members of the “privileged 1 percent,” earning the highest incomes, to support higher U.S. taxes on carried interest and capital gains to help the economy. (Carried interest refers to a large portion of the investment gains realized by private equity managers and executives at some venture capital firms, real estate and hedge funds.)

Your thoughts on carried interest & the 1 percent

Chanos: “I think it will ultimately go away. At some point, it’s going to be raised. I don’t know when. I’m shocked it’s lasted this long. But at the end of the day, it seems to me that the concept of – and make no mistake about it, we’ve been very public on this – that carried interest is fee income — no ifs, ands or buts about it. It is fee income. If I run money in a partnership, and I run money in a managed account, and I run the pari passu which I do, and one of them reallocates the profit partnership at the end of the year based on performance, the other actually pays me a fee based on the same exact performance, you’re telling me that one is capital gains and the other is income? It’s ridiculous. The fact that this loophole has stayed open for this long tells you a lot about the process in Washington and it does about economics.”

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What the? Money managers and the fog of bitcoin http://blogs.reuters.com/unstructuredfinance/2013/11/22/what-the-money-managers-and-the-fog-of-bitcoin/ http://blogs.reuters.com/unstructuredfinance/2013/11/22/what-the-money-managers-and-the-fog-of-bitcoin/#comments Fri, 22 Nov 2013 20:27:37 +0000 http://blogs.reuters.com/unstructuredfinance/?p=1867

“I still don’t even know what it is” – Jim Chanos, famed short-seller and founder of $6 billion Kynikos Associates.

“You know,  I don’t understand bitcoin” – Bonnie Baha, head of Global Developed Credit at $53 billion DoubleLine Capital.

“I don’t really know enough to have a view” – Chris Delong, chief investment officer of $8.1 billion multi-strategy hedge fund Taconic Capital Advisors

“I don’t have any insight at all. I don’t know how it should be valued. I have no anchor as to what it’s worth”–  Steven Einhorn, Vice-Chairman of Omega Advisors

“I like sound currencies. I have no interest in that. I would stay away”  – Margie Patel, senior portfolio manager at Wells Capital Management.

Bitcoin, the decentralized and controversial unregulated digital currency launched in 2009 , has been one of the biggest stories of 2013. In fact, this week bitcoin was the subject of two congressional hearings, which were reportedly more or less positive for a medium of exchange that has been linked to drugs, money laundering, murder for hire and other illegal activities. The digital currency is not backed by any government or central bank.

So when Reuters had the opportunity to ask some of Wall Street’s savviest money managers about the virtual cash at the Global Investment Summit this week, we did so. The takeaway? Most of them either don’t know what bitcoin is, or what its supposed value may be, with one or two exceptions.

Jason Ader, of Spring Owl Asset Management, purchased bitcoin (personally, not on behalf of clients) after the threat emerged that Cyprus could default on its debt, when the currency was trading at about $120. The price has since climbed, reaching a high of $675 on Monday, but Ader said he did not purchase “enough to matter.”

Two people who have acquired enough bitcoin to matter, are the Winklevoss twins. Cameron and Tyler Winklevoss, known widely because of their legal tussles over the founding of Facebook, say they own about 1 percent of the bitcoin market. The supply of Bitcoin is limited and “mined” by solving math problems. Earlier this year the brothers filed plans to launch the Winklevoss Bitcoin Trust, an exchange-traded product that would allow investors to trade the currency like stocks.

“I think the twins are ahead of their time,” Jason Ader said. He views this nascent bitcoin period as parallel to the early days of online gambling.

Todd Petzel, the Chief Invesment Officer for Offit Capital Management, which advises on $7 billion for wealthy investors, said he’s been getting questions from clients about bitcoin, asking, “should we be getting this?”

Colin Teichholtz, co-head of fixed income trading for $14 billion hedge fund firm Pine River Capital Management, thinks the virtual currency is fascinating.

“I’ve been researching it and have some idea of how it works,” he said, but he’s not buying it. “My guess is, somehow it all ends badly.”

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