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Why hedge funds should love @GSElevator

September 1, 2015 Leave a comment

Hedge funds should love @GSElevator and not just gselevatorfor 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.

In many ways, the unmasking of @GSElevator has liberated him to embrace a wider and more important mission in our market: truth telling about what Wall Street mentality means for all of us.

And now for my favorite @GSElevator tweet:

gstweet

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Activists bash old media, but don’t get new media

Wall Street Week is back. No, not on PBS, its home for 35 years, wswbut 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.

Week in review

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!

The end of spin.

While the juicier stories swirl around Berkshire Hathaway, Warren Buffett and their corporate governance standards, the story of GE and how much federal income tax the company pays or doesn’t pay catches my eye this week.  In short, GE got into to a debate on Twitter with Business Insider about the veracity of a story claiming that GE pays no federal income tax that appeared in the New York Times on March 25.  The fact that the story is still making headlines is an important point.  (The fact that a corporate PR department took on a Twitter master like Business Insider on their own turf should just make us scratch our heads.)  It turns out that GE pays little or no federal income tax.  Not exactly a shocker.  What is instructive is how this story played out and how it new media guaranteed that GE could not control, corral, and quash it.

Pre-Twitter and pre-blogs, corporate PR departments had the advantage when confronted with an inquiring reporter exploring an incriminating story.  The advantage was two-fold:  first it was hard to pierce the corporate veil, giving companies the information advantage; second, there were a limited number of investigative news organizations and, typically, a significant amount of smoke was required to overcome standard PR resistance to unwanted inquiries.

That has all changed.  First, it is easier than ever to access information, especially regulatory and financial filings, so facts are at the fingertips of reporters who only need to work so hard as Google demands.  Second, Internet media has given rise to a new segment of specialist journalism that can chase even the tiniest whisps of corporate smoke and justify stories on the basis of peeling back the onion by just one more layer and, in effect, passing the baton of the story on to another Internet publication.  Columbia Journalism Review’s The Audit blog calls this phenomenon iterative journalism.  Furthermore, in many cases, for Internet media, unlike traditional media, the cost of investigating allegations like GE’s tax position are low to none.

This spells the end of spin.  How can you spin if you can’t control access to information and create the narrative from the facts you selectively make public?  Nope.  It’s over, Mr. Spin Master.  Some crafty journalist will have to come up with a new name for what we do, because it’s not spinning any more.

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