Hedge funds should love @GSElevator and not just for the funny tweets. John LeFevre, the man, the myth behind @GSElevator is beginning to comment more broadly on the implications of the culture he ascribes to Wall Street.
First topic up: women in the workplace. In a recent article, he dismisses the notion of a pay gap between men and women, but acknowledges a “work environment that is subtly exclusionary.” Expect LeFevre to publish more commentary about the state of investment banking and it’s sure to make the industry squirm.
From the beginning, what made @GSElevator compelling was its pitch perfect capture of the culture of highest tiers of Wall Street. To outsiders, it was shocking for its materialism, Machiavellianism and misogyny. To those on the Street it was a captivating example of how fiction is truer than fact.
Of course, @GSElevator is not the first to examine the world of investment banking. Bonfire of the Vanities coined the phrase Masters of the Universe. Wall Street showed us one tried and true way to make it in finance. What’s different this time around? Timing. Things have changed since the 1980s. Banks are bigger and more interconnected. Many more Americans are directly invested in the markets. The health of the stock market and the health of banks contribute to the health of the broader economy.
If banks are more important to our economy and individual prosperity, what are the implications of the Wall Street culture John LeFevre chronicles? If the culture results in bad outcomes for banks and the economy we are all at risk. LeFevre realizes this and he will continue to write about the consequences of Wall Street culture.
For hedge funds, the key question is: If the Master of the Universe culture is rooted in ultra-high compensation, what does that say about the business relationship between banks and their clients (hedge funds and other types of institutions)? Is everyone a “muppet” getting “their faces ripped off?” Certainly in fixed income trading, the massive asymmetry of information between sell and buy side is slow to change. LeFevre should address this, to the delight of hedge funds and all institutional investors.
And now for my favorite @GSElevator tweet:
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.
Bloomberg Markets Magazine features this infographic on the history of Carl Icahn. A picture is definitely worth a thousand words. Wouldn’t it be great if he did his own infographic on his view of the world?
Wall Street Week is back. No, not on PBS, its home for 35 years, but streaming online courtesy of Anthony Scaramucci of SkyBridge Capital. SkyBridge has billions invested in activist hedge funds and activists feature prominently in the early episodes of Wall Street Week. Jeffrey Smith (Starboard Value), Carl Icahn and Barry Rosenstein (Jana Partners) are recent guests.
Online TV is the newest channel to be taste tested by the hedge fund industry in its quest for alternative ways to get its message to investors. In general, blogs, video, Twitter and LinkedIn are underused media for hedge funds, despite the fact that hedge funds are critical of the state of traditional media. According to the Wall Street Journal, at the Ira Sohn conference, Barry Rosenstein of Jana Partners lamented “the media covers activist campaigns like political campaigns, focusing on the horserace rather than on the substance of their suggestions.”
That’s the reason the industry, particularly activists, need to pay attention to new media. It provides the manager the ability to control the message, communicate complicated ideas (concepts that do not lend themselves to short form journalism and sound bites) and create a permanent searchable record that can be accessed by anyone, including journalists, researching a company or idea.
The benefits of new media are not lost on activists. Carl Icahn is the activist most committed to new media. Years ago, he hired a Reuters reporter to be his blogger in residence. Recently, he relaunched his blog under the moniker Shareholders’ Square Table. @Carl_C_Icahn is also active on Twitter. Pershing Square is famous for its live town halls.
Success in digital media (or social media, or new media or whatever you want to call it) hinges on engaging with the market on a topic that has lasting importance/interest and being consistent about discussing it across multiple channels. No hedge fund manager is doing this effectively.
Icahn has the right idea, but his commitment to the corporate governance mantle targeted by Shareholders Square Table comes in fits and starts. In November 2008, Pershing Square told investors it was “important for the hedge fund industry to come out of the shadows and defend the importance of our work.” Less than a year later, Pershing Square reversed course, telling investors “we will do our best to fade into the sunset as far as the media is concerned.” Most other activists focus only on the tactical requirements of their campaigns and pop in and out of the public sphere, accordingly.
Is it any wonder, then, that so many journalists and other influencers are unconvinced that activist hedge funds are a productive, corrective force in the capital markets.
A year ago Anthony Scaramucci suggested that an activist can usurp Warren Buffet as the preeminent voice in the market for good governance and how to create value for shareholders. That opportunity still exists and, with Wall Street Week, Scaramucci gives activists yet another platform with which to convince people.
Line blurs between long-only managers and activists. The battle for the hearts and proxy votes of pension funds that was the subject of our last posting is now examined by The New York Times and this account suggests activists are gaining the upper hand and that certain pension funds and activists are “constantly discussing a variety of companies.” Performance of the activist segment is one driver for the increase in engagement, but the story says “activists may have also done themselves a favor by cleaning up their image.” As we wrote in our previous post, the open question is which activists will create the brand and reputation that will become the trusted partner for pension funds. The reward for getting this right is enormous. The Times cites ValueAct and its thesis on Microsoft and explains “though ValueAct had bought less than 1 percent of Microsoft’s stock, the company granted the fund a board seat, recognizing that the hedge fund was speaking for other investors, too.”
Hedge funds turn up the volume with new media. Balyasny Asset Management generated buzz with its print ad campaign, the likes of which are permissible under the JOBS Act. The JOBS Act which eases the ban on general solicitation has emboldened hedge funds to also post commentary videos to their Web sites and to have managers appear more frequently on TV. Take that lawyers! In other new media news, Greenlight Capital is suing to find the identity of an anonymous blogger who supposedly disclosed a position taken by the fund, Carl Icahn expands his electronic media presence to Facebook, and Glaucus Research adapts a popular Hitler video on YouTube to jab Ocwen Financial, which the fund accuses of financial impropriety.
The long haul for the Herbalife short. Almost a year into it, Pershing Square is keeping the pressure on Herbalife. The newest lever pulled by the fund? Lawmakers. A detailed account of the multifaceted campaign organized by Pershing Square examines lobbying, grassroots organizing, letter writing and a focus on Latinos that are the newest tactics employed by the fund and its consultants.
Fighting fire with fire. Hedge funds have long realized the power of the Web to communicate and advocate directly to investors, the media and other audiences. Indeed, the range of tools available to activists and others seeking to influence perception about companies and issues in the marketplace expands by the day. I am sure that social media will soon be an arrow in the activist quiver. Companies, however are hardly standing still. Companies are launching charm offensives in order to maintain close relations with their institutional shareholders. In taking another page from the activist playbook, Herbalife has registered Internet domain names like TheRealBillAckman.com and BillAckman.net. Ackman’s fund, Pershing Square, maintains FactsAboutHerbalife.com which documents the reasoning behind his reported $1 billion short on Herbalife. While these Web sites, currently blank, are not likely to factor prominently in Herbalife’s defensive campaign, I do think that this counter-registering of domains is a first.
Activists tap into the oil patch. A growing number of energy companies are coming under pressure as hedge funds agitate for more growth, better stock performance and larger dividends, reports the Wall Street Journal. Hess, where Elliott Management is nominating five directors to the company’s board, is the latest target. IR and PR has never been the strength of oil companies, so this sector could be particularly vulnerable to pressure from activists. More broadly, though, this trend could signal hedge funds’ willingness to target increasingly large, global companies and companies in complex, engineering- and technology-intensive fields. Elliott cites Hess’ “crown jewel” assets in the Gulf of Mexico, North Sea and West Africa as “very long-life assets” that contribute to the “intrinsic value” of $126 per share it assigns to Hess. Presumably, these assets are in deep water, which amplify the capital requirements, time horizon and risk inherent to oil exploration. Elliott does not seem deterred.
Semi-social. Financial News looks at the financial sector’s lukewarm embrace of social media. Citigroup says it’s taking social media skills into account when hiring. Deutsche Bank has a global social media team and is active on several platforms. Anything a bank does pales in comparison to what social media juggernauts like Southwest Airlines and Frito Lay are doing online with customers, but you cannot compare the B to C world with the institutional marketplace — at least not yet. Limitations related to control, branding and even basic functionality of Twitter and Facebook are real hurdles for corporations looking at these platforms. Content strategy is an entirely different challenge. The article doesn’t mention Credit Suisse, but that bank is doing some nice work on Facebook.
What took you so long? Futures Magazine writes about the first press conference held by the Federal Reserve last week.
Less is more. Pensions & Investments writes that small hedge funds are getting a larger slice of the institutional pie as pension funds worry about how multi-billion hedge fund portfolios will generate returns. This marks a potential reversal of the big-getting-bigger trend we’ve been seeing in alternative asset management as the industry was rocked by the one-two punch of the credit crisis and the Madoff scandal. If pension funds are ready to listen, small managers need to do whatever it takes to get heard and distinguishing themselves through intelligent media relations is an important part of reputation building for small hedge funds.
News release 2.0. Dealbook writes about how companies, like Vice and Groupon, that target young people are dropping the stilted, formal press release language for a tone that resonates with their customers. Recent radical headlines: “The World’s Most Successful Media Moguls Align with Upstart Media Empire with the Goal of ‘Total World Domination” and “The World’s Most Successful Media Moguls Align with Upstart Media Empire with the Goal of ‘Total World Domination.” Sweet!