Hedge-Fund Son Thought Hedge-Fund Dad's Trades Were Fishy
bloomberg.com
bloomberg.com
The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.
I don't know enough about finance to comment on the article itself but the idea of "that's it's purpose so you can't judge it that way" rings hollow for me. Scrutiny applies regardless of purpose. The article itself even suggests there are ways the story could play out where Cooperman is guilty, it's just not clear at the moment.
Former finance person here. I understand but don't accept. The individual's point may be maximizing profits. The societal point of what we reward, permit, hinder, or ban? That is definitely not maximizing profits.
One way to look at it is to compare it with video games. An individual player's proximate goal might be to maximize points scored. But the game designer's goal is broader. The society's goal is broader still. One could even look at the evolutionary purpose of play itself.
For those interested in this sort of distinction, I strongly recommend James Carse's "Finite and Infinite Games": https://www.amazon.com/dp/B004W3FM4A/
In both cases the goals are complimentary in some ways but conflict in others and one is purely monetary while the other might be progress towards many different societal goals.
Well it is if you tax those profits, obv closing loopholes.
Societies work when all the participants interests are aligned. If farmers can get rich growing crops, there will never be a famine.
You're not considering that food has a limited shelf life, seasonal, difficult to distribute efficiently and the customers have highly variable purchasing powers. Also local production is incredibly sensitive to local environmental variation. We already produce enough food to feed nearly twice the global population, and yet plenty of people are malnourished.
I would personally suggest that the best way to prevent famines is to improve food storage and distribution methods, and have robust systems for environmental or conflict induced local famines. Though the unbalanced nature of consumer wealth is also important - it makes sense to waste 50% of your crop selling it in Europe if you can sell it for 3x as much than locally. So maybe the best thing is simply to raise the wealth of poorest people in the world?
If I'm missing a "wider point", can you elucidate?
For example, if my startup is renting servers from AWS our incentives are aligned in the sense that we'll buy more from AWS as we get more users; but unaligned in the sense that if we're using more resources than we need to AWS wouldn't profit from pointing that out. Indeed, even an externality-free positive-sum deal between two parties brings with it a zero-sum deal in deciding how to distribute the benefits.
I'm not explaining things well I think, hope you can make sense of that!
Tell that the Irish, they were exporting food while suffering from the Great Famine. The farmers and landowners had no reason to help during the famine as it was more profitable to export.
Even today we throw away food for the simple reason that a shorter fake shelf life has been shown to increase profits over the actual shelf life. There is simply no profit to be made from redistributing the over abundance of food to people in need, worse it would cost money making a profit oriented person just shudder at the thought.
> Societies work when all the participants interests are aligned.
with:
Regulation ensures that people don't work against the greater good for their own narrow profit and we all lose out.
But you went with people "getting rich".
Some would argue that if some people are getting rich, and there's no competitors entering to bid down their profits, by providing more of what is desired at lower costs, then economic interests are not aligned properly.
Sure, there is a certain strand of right-wing economist that has got the wrong end of Coase's argument about transaction costs would argue that virtually all forms of financial shenanigans could, in theory be solved by investor consortiums that stand to lose billions paying the bad actors more than the millions they could earn through malicious activity to desist. But I don't think any sane person believes that shareholders agreeing to overcompensate executives even more to avoid them seeking to profit from insider information at their expense actually is a more efficient solution than aligning those incentives through the legal system.
It works in general too - if there's a difference in quality when people focus on the thing they're making vs. money it's supposed to bring in.
Outside of finance for example, I'm fine with everyone trying to get the highest salary they can. But if you do it by telling lies about your colleagues then you don't deserve it. You earn a payrise by adding value to the production line, not by elbowing people out of the way so you take more than your fair share.
This applies to finance. If you're adding value to the system, you deserve your millions. If you're just exploiting loopholes and golf-buddy connections to move money into your bank account, then you deserve all the vitriol that comes your way.
Finance guys lend money to relatively impoverished inventors to bring their inventions to fruition.
Finance guys make deals with corporations to remove financial risks e.g. foreign exchange, interest rate, corporate default, that the corporation doesn't have the expertise to be exposed to.
Finance guys insure me against certain catastrophic events that would bankrupt my family should they occur uninsured.
I've also heard that finance guys keep the white, fluffy cat and secret volcano residence franchises afloat but that may be apocryphal.
If we don't agree with your axiom, we're not worth joining the discussion?
Everybody agrees that regulations are an extremely important and unavoidable part of finance, even when they go against profit maximization.
And indeed, many regulations are intended to work by improving that correspondence (by internalising externalities).
I’m not arguing about whether there should or should not be regulation, but about the purpose of regulation - it’s rarely about ‘ethics’. If you look at the SEC enforcements, most of them are about fraud or about a breach of duty. Fraud - you’re not allowed to lie, that is pretty self explanatory. Breach of duty - someone else places trust in you to act in their best interests, and you violate that trust. This is broad and can be applied in variety of ways, but a duty has to be established. Other than these two and some other exceptions, you’re free to do whatever you want - and that’s to maximise your profits.
Financial regulation is not and has never been about ethics. It’s about providing a market for exchange, without fear of being lied to, or worry about your agents[0] not acting in your interests. If you’re looking for equity or want to solve problems with corporations, you need to do it somewhere else.
And then: > ... SEC enforcements, most of them are about fraud or about a breach of duty. Fraud - you’re not allowed to lie, that is pretty self explanatory. Breach of duty - someone else places trust in you to act in their best interests, and you violate that trust.
Fraud and duty identify ways of operating with other people, in other words "ethics". I'd argue laws codify community agreed ethics or create a common language for debating these agreements.
I think the specific argument would be better framed in terms of the standards or levels of ethics being applied, rather trying to hide a weak application of ethics behind a poorly defined role for the scope of law.
The whole point of finance is maximizing profits, sure. The whole point of not "accepting" that as-is and thus regulating is because there are some particularly awful ways to make profits.
Do they, really? Ethics and rules in war are a luxury, and usually imposed by the rich and dominant. When things are truly desperate it all flies out the window. I think history (and its multitude of atrocities, including by the US) supports this view.
To fight and conquer in all your battles is not the supreme excellence. Supreme excellence is to defeat the enemy without fighting. -- Sun Tzu.
Infact the whole Art of War is about avoiding fighting wherever possible, and when you have no other choice, fight to win but with no more destruction of people or property than you absolutely need.
Very rarely. The purpose of a battle is to take and hold ground, usually. If you do it without killing anyone it's still a victory. A lot of Gulf War 1 was fought this way, the Iraqis took a look at Western tank divisions and simply surrendered. Another reason is to degrade the enemy's ability to fight subsequent battles. You could do this by destroying all their equipment and supplies. If you do it without killing anyone it's still a victory. An example of this is catching an enemy's air force by surprise and destroying their planes while still on the ground. The Israelis are masters of this technique.
No sane general wakes up and thinks, I just want to kill some people today, I don't care about strategic objectives.
You haven't factored in your thought that there are no monopolies in the financial world, unless they're state backed. Competition is everywhere. Competition decides the profit, not the firm.
I'm a fan, to be sure, but I'd love to know how it's all put together.
I'm pretty sure that when Matt wrote for http://dealbreaker.com/ he did it without any support staff. It was probably that gig that got him noticed by Bloomberg.
I'm a fan, to be sure
You can always go back in the Dealbreaker archives and read his earlier stuff. It's pretty equivalent to what he now writes for Bloomberg View.
It's a long strange trip for him from "high school Latin teacher": https://www.bloomberg.com/company/announcements/matt-levine-...
[1] https://www.bloomberg.com/view/articles/2016-09-07/boring-ba...
Tim Harford - http://timharford.com/
Tyler Cowen - http://marginalrevolution.com/
Once a company has a large investor, typically a hedge fund, its very common for the CEO/CFO to have a good personal relationship with that investor. I mean, this just makes sense, under the Warren Buffet theory of investing one of the big things you invest in is the management.
And from that it follows that management will often use this investor as a sounding board for ideas. So if a company is going to raise money why not ask the money manager what they think about
- how the market will react to an equity vs debt raise,
- should they offer warrants as a sweetener?
- even things like how they believe the market will react to certain news.
And i mean why not? Do you think the companies that Warren Buffent invests in don't call him for advice?
And once you allow for this, then as Matt says, things get grey. I don't know how all funds do it but the typical dance is the executive will call up and ask the fund manager if they will be willing to:
1) be locked up from trading
2) for a certain period, typically under 2 weeks.
and if the money manager says yes to both, then the executive is free to discuss pretty much anything and everything, including non public information because the hedge fund has agreed to be locked up for the period until the company makes this knowledge public.
Where this goes wrong is sometimes executives, or more often, sell side( tiny little investment banks) acting on behalf of the company will call the hedge fund and before asking if they want to be locked up, just blurt out the news. it's an awkward conversation that typically goes something like:
"Hey Chris, just wanted to let you know ..... something that will crater the stock in the short term like raising money in a bad market.... This isn't public information yet so you'll be locked up for 2 weeks."
And just like that they've fucked you. Now you either have to choose to be locked up knowing that your investment will drop or take the risk of selling and knowing that you'll have to defend your actions to the SEC.
Now in the case Matt's talking about they were trading on good news. The only suspicious thing is that Leon Cooperman's fund has been around since about 1991. it really seems weird that he would use short dated options to trade on insider information.
That's almost the financial equivalent of going out and buying a gun, using it to commit murder on the same day, and then leaving it at the scene of the crime. The SEC can trace back every option trade to the fund who made it, its not like they can hide and if you are buying a whole whack of out of the money short dated call options then you are either covering a large short position or you are essentially telling the market that you know something is up.
If you're at a bar and happen to overhear privileged information, you don't work at that company and aren't a major stakeholder/advisor... then that's totally OK. You may get hassled by the SEC... but technically it's kosher.
Levine talks about this regarding the David Einhorn/Punch Taverns case. My understanding of what he said: in the US the law doesn't work like that, if they tell you and you didn't explicitly agree not to trade on it then you can trade on it (the guy who told you could theoretically get in trouble for a Reg FD violation, but you're in the clear). But in the UK it does work like you say.
> Under UK law, as it appears from this decision, Punch can call Greenlight, shout “hey we’re raising capital and now you know about it suckers!” into the phone, and hang up. Now Greenlight, through no fault of their own, have inside information and can’t legally trade. That would be kind of diabolical, no?
In fact, in the actual discussion Einhorn explicitly refused the opportunity to discuss inside information in exchange for not trading on it, Punch told him the information anyway, and then Einhorn traded and got in trouble.
http://dealbreaker.com/2012/01/it-may-surprise-you-to-learn-...
I wonder how much of it stems from Cooperman himself.
Once the options reached the minimum possible price, there's no reason to keep a short position open -- you can only lose money. So of course Omega should have bought in the position, regardless of whether it had good or bad or no news.
That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32.
But it was still a bid. The majority of options actually expire worthless. I.e. the "minimum possible price" is actually $0.00. This is often reported as "no bid" well before expiration.
So it's wrong to say that Cooperman "can only lose money". He could have actually made an extra $0.07 per option had he not bought them back and potentially allowed them to expire worthless.
He's not wrong, he was pointing out that almost all the potential profit had been realized, but there was still a way to lose it all. With numbers: they already made 95% of possible profit, but were able to lose 100%. It makes sense to close a position like that out and is indeed commonplace. Most shops don't like that type of negative asymmetric risk.
However, what they didn't do is roll them forward to keep the short position, that's also a common technique.
Matt certainly was wrong when he said: you can only lose money. I pointed out that Cooperman could have made a potential additional $0.07 if the options expired, and you're agreeing with that.
I agree with you that it usually makes sense to close out or roll an asymmetric position. BUT, and this is an important BUT, holding a position to expiration is far from rare.
Here are some statistics (but I can't vouch for their accuracy)[1]:
10% of options are exercised
55% to 60% of options positions are closed out (bought back)
30% to 35% expire worthless
[1] https://www.stockoptionschannel.com/slideshows/seven-myths/m...