Carl Icahn is right….again
The “debate” between Carl Icahn and Larry Fink at the Delivering Alpha conference last July stirred up the media, but was not not the best theatre, in part because Carl Icahn hijacked the discussion with a rambling, disjointed critique of bond ETFs. You can view the exchange here.
What a difference a couple of weeks make. The China-induced market crash not only exposed liquidity and pricing challenges in ETFs presaged by Icahn, but also that the risk extends to vanilla equity ETFs.
The Wall Street Journal reports about price drops in ETFs that exceeded the declines in prices of the underlying holdings and halts in trading among large ETFs, resulting in “outsize losses for investors who entered sell orders at the depth of the panic.” In a similar examination of a disconnect between investor expectations and market function, Reuters writes that certain mutual funds focused on syndicated loans are opting to hold more cash to prepare for redemptions in a market where liquidity and trade settlement risk are well known to insiders.
So it turns out that Mr. Icahn was right (again). Icahn is unique among activists because he addresses the marketplace issues that affect all investors. Corporate governance is a mainstay of the Icahn platform and at Delivering Alpha, he shows us that market structure, product suitability and risk disclosures are equally important. Hedge funds need to join the debate on these issues.
At a time when the reputation of hedge funds, especially activists, is at a tipping point, managers should be increasingly vocal on topics that trigger automatic support from the media, regulators and the public: fair play in the markets, transparency and misrepresented risks, and even HFT.