In his 1964 study of media theory, Understanding Media, Marshall McLuhan wrote “the medium is the message” to suggest that the way by which a thought is conveyed is more important that the actual message itself. In thinking about a flurry of recent profiles of hedge fund profiles in the press, all you need to know is the title (medium) to know what is being said about the hedge fund (message).
With a medium like Bloomberg BusinessWeek or Institutional Investor’s Alpha, you know what you are going to get: in depth analysis of a manager, what makes his/her strategy successful and some facts about how the fund handles risk management or other critical operating procedures. Recent profiles of David Einhorn/Greenlight Capital and Starboard Value follow a the traditional fund profile template. Two other, even more exemplary profiles, written last year were recognized with the Hedge Fund Article of the Year Award.
At the same time, with a medium like Vanity Fair, you also know what you are going to get: a personality-driven puff piece that is light on investment process and heavy on the cliches that all too often define successful hedge fund managers. This didn’t deter Pershing Square’s William Ackman from participating in a feature in the April issue focused on his well-documented short position in Herbalife. The result is an uneven account of Pershing’s investment that, by outlining fallings out between Ackman and other respected investors, like Daniel Loeb and David Einhorn, promotes the idea that Ackman has a “Superman complex” and “an uncanny knack for….pissing people off.”
If we believe that the medium is the message it should not be a surprise that Vanity Fair emphasized conflict, ego, drama and wealth (of course the writer could not refrain from weaving Ackman’s private jet into the story) over the business of running a multi-billion dollar hedge fund. So why answer the phone when a celebrity magazine calls? I don’t know. The outcome cannot be valuable to a hedge fund’s core audience of institutional investors. Maybe Pershing Square wants to reach a different audience — high-net-worth investors, for example.
Ackman has been playing the media game for a long time and understands the risks and rewards, but anyone else should hang up if Vanity Fair happens to call.
Questions over Herbalife’s business model have resulted in what has been described “the hedge fund equivalent of Stalingrad.” In the midst of this battle royale between hedge funds that on one side include Pershing Square and Greenlight Capital and Third Point on the other, the New York Times raises the question whether short positions should be publicly reported. In the interest of limiting volatility stemming from investor “panic,” the times writes that it if the SEC required that short positions be reported “it would help the market to at least know what the positions are when large short bets are announced, which might help limit panicked reactions.”
That question is above the pay grade of this blog, but what the Times itself does not fully disclose is that there is a high degree of information about short selling already in the market. A number of services track short interest and the cost to borrow stock. Algorithms and trading decision support tools incorporate those data, making the relative degree of short selling in a stock a factor for insitutional traders.
The Times argues that “celebrity investors” can move stock prices with their words alone and that fact might make it difficult for Main Street investors to discern the “truth” about a company. The influence certain asset managers have is undeniable, but it their reputations are earned and their opinions are an important part of the information flow in the market. In the short term, stocks with high levels of short interest might be volatile, but over time, the market sorts out the value. If the short seller is correct, they win. Fast-acting traders win. Mom and pop have a decision to make. That wouldn’t change with a reporting requirement.
And are there not always two sides to the trade? For every short-seller who has become a household name, aren’t there many more long managers with collectively more influence? The Herbalife case has attracted big guns on both sides of the argument — each talking their book — and that’s good for the market. Some, like Bronte Capital have taken to blogging their counterargument to Pershing Square’s thesis.
Is the default reaction of investors to “panic” in the face of potentially bad news as the Times suggests? I don’t think so. Some recent short-driven dramas (Sino-Forest comes to mind) involve very suspect companies, so it should not be surprising that those stocks moved lower quickly. On the other hand, shorts on MBIA and Lehman took years to pay off.
Short selling is a high risk endeavor and the track record of even the most renowned short sellers is mixed. The question of reporting aside, anything that puts a muzzle on short sellers to me will have a negative effect on the market. Don’t shoot the canaries in the coal mines.
Further reading: Oliver Wyman produced a study of effects of short selling curbs on equities markets in the wake of the credit crisis. It finds that markets that require reporting of short positions “become more expensive and difficult venues for all investors to execute both purchases and sales of securities.”