Thursday, April 24, 2014

Are There Really Good and Bad HFTs?

After writing a half dozen HFT posts all which remain unpublished in draft form, I will cut right to the proverbial chase in a last-ditch attempt to vomit my thoughts into the public domain: despite my predisposed feelings to the contrary, I reckon there is little practical difference between "good" and "bad" HFT and therefore market-structure should be leveled to reflect this.

Let me state at the outset: I am naturally sympathetic to bona-fide market-makers like Tom Petterfy & Timber Hill (one of the earliest and most thoughtful innovators using computerized technology for market-making purposes) chiefly because, in the main, they are attempting to a capture a portion of the bid/ask spread in exchange for risking capital by providing immediate liquidity. Likewise, I am naturally suspicious of predatory HFTers who have no natural raison d'ĂȘtre to transact and are, at best parasitic, and worst, criminal. These participants in the market ecosystem, like frigate birds, prey upon bastardized market structures,  ultimately disadvantaging, on-average, bona-fide buyers and sellers evidenced by the extraordinary profits derived from the undertaking.  In the increasingly vocal debate following Lewis' PR onslaught, and Schneiderman's attention, for the record, I think Dave Lauer (@dlauer) has it right, "@ModernMarkets" is no more informative than Radio Pyongyang, Craig Pirrong (@StreewiseProf) is thoughtful with a usefully wide-reaching analytical framework but off-the-mark in estimating the ratio of nefarious activity, while the NANEX/Themis (@nanexllc & @joesaluzzi) nexus has consistently been the most vociferously transparent shiners of light into the darkest most contentious corners of both structure and abusive practice - a position sadly not helped by their too-often overly-strident timbre and their adoption by the tin-foil hat brigade as anti-establishment marauders.  

On the basis of the preceding, one would have thought I would support advantages to bona-fide HFT market-makers and desire to impose restrictions upon predatory HFT. Both views suffer slippery slope arguments, and they are, despite what I consider to be divergent virtues, in essence, more the same than different.

Dr. Pirrong makes an important contribution highlighting the drive that electronic market-makers pursue to combat adverse selection resulting from informed trading.  Informed trading can range from immense orders, for quantities and a time-scale larger/longer than even the best capitalized bona-fide market-makers can supply, to private possession of material non-public information. Bona fide market-makers pursuing spread-capture strategies, typically have no view, and will always be on the wrong side of informed trading which is why Petterfy protests so loudly when there is obvious malignant activity before a high-profile takeover.  The depth and breadth of private material non-public information being acted upon in the market, remains underestimated. Whatever MMs capital and time-frames, their spread-capture, must exceed the drag of this adverse selection (being on the wrong side of liquidity supply that never comes back). The more informed the trading, the greater the necessity to avoid adverse selection by widening spreads, diminishing quote size, narrowing stops, or outright limiting or eliminating exposure where one estimates the presence of informed trading. And make no mistake: this is highest in the equity shares of public companies. In its simplest distillation then, bona-fide market-makers seek to deploy their capital, to the greatest extent possible, only to random or noise-like activity to capture some of the spread.

Predatory HFT (of which there are many flavors and time frames), in its simplest distillation,  seeks to avoid the deployment of capital in bona-fide market-making activities where they are exposed to adverse selection, focusing instead on strategies that commit as little capital as possible to pay lip-service to market-making for structural advantages (latency, rebate, order information) that allows either a risk-less arbitrage between venues, or high-probability predatory bets that for all intents appear indistinguishable from front-running.  On average, this intermediation increases the cost of trading, though likely moves the price more rapidly in the direction where its going in the presence of informed trading. Some term this movement greater efficiency, but as highlighted in Stiglitz' argument against HFT, it taxes information, transferring wealth from those with information (however appropriated) to the (free-riding) frigates who are adept at spotting others heavy with information.    

Bona-fide market-makers attempting to avoid adverse selection creates a slippery-slope. Where is the line and what is time frame? There appears no possible line of demarcation between limiting or avoiding adverse selection and using the same information for positive selection.  Just a smooth continuum. Why, one might ask, be content just limiting negative exposure? Why not, where one suspects the presence of PIN, warehouse or positively discriminate one's markets to get on the right side of it? Few, if any, in my two and one-half decades of experience - not specialists, not jobbers, not market-makers, not brokers, have shown themselves able to avoid using the possession of an advantaged position for private profit. So despite my distinction centered on intention and virtue, I see no reason to confer advantage to someone rather likely to abuse them.    

Predatory HFT are cynically trying to do the same thing using their conferred advantage within the markets as presently allowed and structured. There are many calls for all manner of outright restriction and regulation. The slippery slope centers on what, precisely, is "bad". Is it short-term speculation? If so, how short? Yes, certainly some things are illegal (quote  stuffing, spoofing etc.) But the essence of the most egregiously blatant abuse (with respect to the market and welfare) is the abuse of a structurally-privileged position - be it proximity, latency, or order information.  Some argue such abuse of privilege has existed for as long as markets have existed. And this is true, but so what. This is not setting the bar very high. We cannot, and with high likelihood, should not prevent speculation at almost any time frame given its slippery slope.  But we have the means to be better, and fairer and we certainly shouldn't positively promote and effectively subsidize the activity whether by selective designation and privilege, promotion of fragmentation or similar.

There are undoubtedly people who understand the minutiae SIPs and regs better than I. Like Dave Lauer.  Fundamentally, I am certain technology is good for markets. It is both democratizing and empowering. More importantly, I believe that bona-fide activity and integrity are good for markets; that if you enter the market to buy are sell a quantity, you should be willing to trade at the price and in that quantity, whatever the next quote-change or print. I am in favor of punting at whatever timeframe - whatever its utility. Without conferred structural advantage, guessing games can be minimized by execution games (as they have for time immemorial).  I think fragmentation is bad for markets. It may be good for certain brokerage participants, sponsors and exchange shareholders, but  I have yet to see a convincing argument how this fragmented structure can possibly deliver utility, fairer, more equitably, more efficiently, with more integrity than a single, well-run venue where everyone is equal before the rules, and the rules are laid down to best promote trade in as frictionless, cheap, and transparent mode as possible. Yes, perhaps back then, it was easy to do something better and fairer than the NYSE or NASDAQ market-making club, when neither exchange, nor their members, nor captured regulatory or oversight body had any concern for something one might term the Public's Interest.

There... its out. This was more for me, and now I feel better. It really should't be contentious. But sadly, most participants seem to put their private agenda's before the public interest. Nothing new about that, in America at least…..

Friday, March 21, 2014

A Bridge To Far (for Snookered HFs)

Germans may have been resoundingly defeated in two world wars, but they can claim some vicarious pleasure from Porsche's unilateral victory in their legal fight with Allied Hedge Funds over Porsche's perfect corner of VW shares, the irony of which I discussed on separate occasion here, and here. The decision is final, and while there are no formal surrender documents, the Germans must be feeling rather satisfied.

When the HFs sued Porsche, you have to wonder what the HFs were thinking. Presumably, one would have thought they assessed the probabilities of success - something they do for a living.  And as any good decision-makers do, they must have taken the advice of expert legal counsel, taking into account that top lawyers, as Madoff and Lehman creditors can attest, in a complicated case, aren't cheap.

Yet, something is not right. Did they really think that a German commercial judge was going to give nefarious offshore hedge funds - primarily American-run and British-run - a couple of billion dollars from one of the poster-children of German industrial success? I'm no lawyer, but I know a thing or two about assessing probabilities, and this one always looked like long odds from every angle. Heavens knows what the aggregate legal bills of the case and two appeals came to, but likely sufficient to alleviate poverty in more than few under-developed countries for a reasonable period of time. One might wonder about how impartial an advising counsel can be as he mentally tabulates the hours involved in the case and its appeals.

This reminded me of Baron Thyssen-Bornemisza's bid, at the behest of his former-Miss-Spain (and fifth wife!!) "Tita", to dissolve The Baron's airtight Bermuda-domiciled family trusts that favored his children from previous marriages, at the expense of hers, resulting rather remarkably in what is now known as the most expensive court case in history. Now the skinny was this case never had a chance of success, trust law being inviolable. Yet Tita was sold the dream of success, and bought it whatever the cost. Armies of lawyers were dispatched to the case,  and more than a few visiting lawyers rented some of the expensive houses on the island,  flying to Bermuda so frequently, they were reputedly on a first-name basis with the cabin crew. The case had a predictable outcome, with everyone looking bad, but only the lawyers with anything tangible to show for their actions.

In the case of the plaintiff hedge funds suing Porsche, it is unlikely that the management companies paid the costs, more probably being expensed to the Funds' investors. If this were in fact the case, we have managers with mostly upside (potential performance fees receivable), egged on by litigators who cannot believe their luck at the cash-cow, working a case whose bill is footed, with only investors having the unfavorable pay-off pattern.

But monetary reasons are the less-than likely motive: after all, what are a few pennies to Croesus?? Rather, the relentless pursuit of legal action is likely a way for egoists to avoid culpability, to avoid admitting they were wrong, to preserve a proverbial "the clean sheet".  Not that there is anything shameful in getting royally squeezed out of a position. Supreme beings just don't like to admit it too loudly in public…for then, investors may start to believe they are mere mortals, easily taken out by a couple of amateurs, and where will 2&20 be then?

Tuesday, March 18, 2014

Hypocritic Oath

So David Einhorn is upset that someone was spoiling his game in MU before he'd fully loaded-up and had the chance to "leak" the information himself, or talk his book on the numerous bully-pulpits on offer. He is sufficiently upset to sue. Which he can do. Mostly because he is well-lawyered and can afford it.

I cannot say I feel sorry for him because I reckon talking one's book in the trading game is different than a long-term investor expounding on the long-term growth prospects of the apple of their affection. For those who do not know the difference, the former all-too-often uses the timing, publicity of disclosure and subsequent price reaction to shift their position to those who cannot distinguish between a trade and an investment. So while those enamored with, say someone like Mr Einhorn and his investment prowess, are buying - they are being sold the stock precisely by those touting its virtues. That doesn't mean I approve of violations of confidentiality. I do not. It is illegal, and talking your book is legal, even if you're doing the opposite which is merely devious and of a dubious ethical standard. But if, in the process, such leaking shines light (errrr Greenlight?) upon the practice of pump and dump, however slick, and/or professionally packaged, then I am tempted to focus upon its silver lining.

NYT's Dealbook today took note of the aggressive legal action. It said:
Mr. Einhorn contended in the petition that “the only persons who lawfully possessed information regarding Greenlight’s position in Micron were persons with a contractual, fiduciary or other duty to maintain the confidentiality of Greenlight’s position: Greenlight’s employees, counsel, prime and executing brokers and other agents.”

The irony and hypocrisy of this wasn't lost on me, again not because I do not agree with it, but because Mr Einhorn only a short time ago was censured for illegally dumping his 14% Punch Taverns position on a hair-trigger the just moments after he discovered (possibly even while he was discovering) material non-public information about forthcoming corporate finance activity, in breach of UK FCA code, (and probably every relevant line in CFA's code of conduct).

My point is clear: You cannot eat your cake, and then have it too (which, BTW I am told is the correct version of this proverb, not "Have your cake and eat it too"). If Mr Einhorn wants to play in, and profit from, the grey areas, be they regulatory or ethical, then he really shouldn't be hounding bloggers (or joining the plaintiffs suing Porsche over their snookering of VW shorts). To his credit, Mr Einhorn has an innocent-looking, impish grin that undoubtedly makes his grandmother very happy. But there is nothing nice or decent in his hypocritical actions.

Friday, March 14, 2014

I Was Sooooooo Wrong

It takes some honesty and fortitude to confront one's mistakes. Everyone makes them, though not everyone admits to them, perma-bears (like ZH & MISH) being, being amongst the worst offenders. Many Hedgies, most likely for reasons of ego and hubris, also have great difficulty accepting culpability for their errors, evidenced by their letters, blaming everything and everyone but themselves and wayward theses. Hugh Hendry, at least, maintains the intellectual flexibility to thoughtfully, and articulately throw in the towel, whereas the most effective do not invest themselves so fully into their investment theses that they cannot cut-and-run without inflicting egotistical self-harm. Because I operate in the land of the diversified portfolio, excising errant positions has never been traumatic, nor do I self-flagellate with cutters-regret. So long as my distribution is skewed-right, and the tail not overly kurtotic, I am sanguine.

Macro is different. The calls are fewer. Gestation time to trade maturity is longer. False breakouts and devasting swoons create further potholes. One can be very right and still get completely hosed in one's expression (and timing) of the trade (just look at Corzine if you have any doubts!!). Needless to say, one should ideally approach one's positions with the same sense of detached objectivity described above. Many, however, find this challenging whether it is due to personal political bias that clouds reasoning, or the resulting delusion caused by the 24-7 talking of one's book, whatever the evolution in ummm … errrr… let's called 'objective reality'.

Rest assured, I make no claim to be better. My worst prediction - the one that haunts most, confronting me each and every day - was not a trade per-se (though there are no shortage of bad ones). Rather, it was a political-economic scenario that not only hasn't panned out, but evolved (and, continues to do so) in completely the opposite direction. This was my forecast for what I call "Peak Inequality", along with all the deterministic knock-on effects such a scenario would have upon everything from luxury goods, and trophy real estate and high-end everything-else. For a short time in 2008, I smugly felt vindicated witnessing halts in construction of premier projects, bankruptcy of uber-luxury developments and the failure of high-end props to catch a bid. As things stabilized and bounced, and embedded counter-cyclical stabilizers blew gargantuan holes in Govt fiscal income statements throughout the world, I believed that 1) markets would [wrongly in hindsight] press for austerity 2) consumption was too fragile to raise taxes generally or cut govt spending; 3)the highest inequality and lowest marginal top-decile rates in generations would be the obvious target; 4)this would occur across the DMs, and draw the line-in-the-sand for inequality; 5)For IF the authorities were to bail out and make beneficiaries of asset-owners (levered ones in particular) in a pull-out-all-the-stops attempt to reflate, I reasoned the moons would be aligned for the State to recapture a meaningful amount of this (via tax) as a quid-pro-quo for not letting the soon-to-be angry hordes do "a Romanov"; 6) This would go some way towards capping and sustainably financing a yawning fiscal gap while maintaining general consumption and employment with a more constructive balance than otherwise might occur were reflation to float top-decile boats with scant participation by the median.

It would be understatement to say I was wrong, so far was I off the proverbial mark. On the surface, Like ZHers and MISH, I committed the cardinal sin of letting my political ideals get in the way of assessing the true probabilities. I had thought that under the circumstance, political expediency and policy pragmatism would extract 'sacrifice' from, or or co-opt, the top decile beneficiaries, given the backlash against the financial sector and the levered, that would in other times prove tortuous or impossible. Saving the system, at public risk and expense, with all its attendant property rights, is, after all, useful to the beach-masters, and the old adage of 50% of a goldmine being preferable to 100% of nothing must (so I thought) ring truer during such moments.

I'd thought it would be obvious to largest asset owners, and the top-decile earners, that they had escaped by the skin of the proverbial teeth, and expected they would have been grateful (excepting Hank Greenburg), and that these people would have not reneged on their promises to the Supreme Being made as the plane was falling from the sky. Instead, they offered-up "austerity" rather than contributing, as the Koreans did in 1998, a bit of the family sailver. Mark Blyth @Brown said: "Democracy is 'asset protection for the rich'….Don't skimp on the payments!". But the incessant rise in inequality is, a sure sign, they've been skimping on the payments. This has had profound implications: delaying and muting recovery, swelling deficits unnecessarily, undermining fiscal confidence, and exacerbating political divisions and preventing pragmatic action where and when required.

While some has resulted from unabashed or calculated "smas-n-grab", globalization has laid the substrate for great windfalls for some while undermining real median incomes. This is not meant pejoratively, or suggest anything should be done to throttle the trend or pace of globalization, but rather as a statement of fact. But the strength of the current should be noted by those who argue against the ill effects of inequality on the basis of libertarian personal fortitude. Formerly domestic pursuits (entertainment) now have global audiences. Software, healthcare, and yes, asset management) often have fixed development costs and mind-boggling scalar effects producing unimaginable wealth while median wages are throttled by competitive global labour markets and technology that increasingly allows outsourcing to ever-lower cost venues. These dynamics have incredible inertia, and are lifting vast numbers out of poverty elsewhere, and are difficult to decry. But somewhere, in this process, democratic insurance payments have been missed, and responsibilities by the beneficiaries, ignored, resulting in a listing economic boat, a mis-firing distributionalengine, a drought of sorts, an entirely unnecessary and man-made creation as a result of the rules of the game as drafted.

If one use the Lord of the Manor, as an analogy, he would have had the property rights over his domain, but in exchange, would assumed responsibilities and obligations both up and down the food chain. He would support (albeit with a lower-case 's') those below during bad times, and would have fiscal obligations to the that above (not meaning god for the avoidance of doubt), and if required, raise men for armed conflict. Failing on either account might very well threaten the property rights granted, or worse, his life. They were not inalienable, despite his position. Today, the same metaphorical "Lord", has all the rights, and they are inalienable, but none of the responsibilities outside a modicum of fiscal contribution to the State which can, with effective counsel, be minimized to great extent. His properties are, excepting rights of Eminent Domain, fully enclosed in the medieval sense. The Modern State, over time, has assumed many of the responsibilities, with the provision of a social safety net, and a tax rate that can be raise or lowered according to the requirements of public finance. That is, until recently, it seems, with the War on the State, a war on what remains a social work-in-progress that is "government", one which at its extreme in the USA is seemingly stuck in a Mondale-esque deer-in-the-headlights inability to adjust (or even reform) the rates (and structure) of tax to meet the obligations and responsibilities of the State to her people. The Grover Norquists, if nothing else, have succeeded in framing the popular political-economic debate such that it is believed [in that parallel universe that exists in parts of the nation] that austerity is divinely good, that hyperinflation is around the corner, that the state should barely exist, and shouldn't have a strong sense of the public interest. And we can witness the result: no new taxes, less progressively on existing taxes, starved public investment, unnecessarily higher unemployment and lower wages, hardship, and an incessant rise in inequality that most economists believe is inimical to growth and a well-balanced economy. Few desire sharing their income - whether rich or poor. And few would choose to shoulder responsibilities, if they could be avoided. But we, and the economy upon which we depend, and/or thrive, all share fates and fortunes that are inexorably tied, that if not demand, then certainly benefit from civic responsibilities (mostly economic in modernity) that are not transmutably-minimalist, but should remain flexible so as to respond more pragmatically.

Yea, I got it wrong, which I wish wasn't the case. But I do not regret my lost investment opportunities. Rather I fret about the future threat property rights, of lawlessness, of the lost economic potential, of the diminished social mobility, and of the resulting coarseness and divisiveness that stems from all these negative pressures.

Tuesday, February 25, 2014

A Message To Shorts ?!?!?

Collective punishment has been employed extensively throughout history, long preceding the Geneva Convention and its modern consideration as a war crime. Occupying or invading powers used such forms of retaliation primarily against the wider group to discourage attacks on their own - particularly by resistance or guerrilla forces - to great demonstrative effect. Far from punishing perpetrators, it's primary goal is for show - to make others contemplating similar actions aware of the potential, dramatic consequences.

When a penny stock doubles or triples, it is tempting to imagine nefarious operators pumping and dumping, in process, lightening the investment accounts of unsuspecting victims. And one would, most often, not be mistaken in such an assertion. Moving the prices of such (often fictitious, or nearly fictitious shells) is, after all, both easy and cheap. And in the off-chance the company itself proves uncooperative, well, one might surmise bad things might follow to key people. As one crawls up the cap scree, however, it gets more expensive for operators to move the price. Not only is there is a greater diversity of shareholders, who, in response to to a pump, might themselves very well dump before the operators themselves, but companies themselves might use the pop to issue stock, or make takeover plays with newly inflated scrip. Of further interest to the curious, in the grey areas, exist some bold traders who, with capital and a long leash, have learned the dark art of reflexively employing similar techniques (both long and short) to push entities into, and out of indices, dragging the not inconsiderable community of indexers (and their investors) haplessly along with them. Such operations are not without considerable risk, but thoughtfully researched and executed, more than compensate the brave with commensurate rewards. Get it right, and you can shift your considerable position to index funds who are reasonably obliged to purchase the stock, or buy back your short from their sale of shares in the eliminated company who market cap no longer qualifies them for inclusion (as the very result of the perps considerable short sales).

Sometimes operators - either alone in collusive groups - do manage to operate upon much larger companies. Sometimes this is because the operator themselves is a leviathan, and is willing to take their collective investment to well into the high teens precent of shares out. Sometimes, because the proverbial moons align, where price momentum, a narrow float, and other useful considerations allow something that, to traders or tape-readers, comes close to a classic "corner", of the likes perpetrated by The Hunt Brothers in silver, or Volkswagen shares by their friendly cousins at Porsche AG.  The former was well-chronicled in Timothy Green's book "Beyond Greed", whilst the latter remains the subject of lawsuits by embittered hedge fund managers, suckered and snookered at their own game - lawsuits as hypocritical as David Einhorn's attempted pursuit of the "Micron Leaker", given that Mr Einhorn himself saw nothing amiss with dumping his entire 14% Punch stake the moment he discovered materially non-public info regarding the companies likely share sale.

One might ask whether these two subjects - the notion of "Collective Punishment" and "The Corner" -  intersect at a now $2bn dollar market cap Japanese electronics manufacturer called "Micronics" (Code# 6871).  One could talk about absolute and relative valuation, growth prospects, market share, competitive analysis etc., all of which are at odds with a 60-fold increase in its share price since the start of 2013. As the chart up and left reveals, this is NOT a typo. SIXTY FOLD. And as with the focus of previous post about Altisource (AAMC), Micronics is not a penny-stock - depressed as its 2013 market cap was. They have no cure for cancer; they do not possess 3-D printing patents; they have nothing directly to do with the internet be it - gaming, e-payments, nor are they involved in biotech or nuclear cleanups or the newly-awarded Olympic games.

But whatever such incidentals as thematics fundamentals or valuation may reveal, they are more than likely wholly irrelevant to what very-well might be the world's single greatest non-micro-cap ramp-of-a-move. Yes, Mirconics is witnessing a recovery in their business and associated profit - an event that could (being generous) support a YEN2000 share price assuming one attaches a >20+ multiple to peak earnings, as it saw it do during the last recovery and accumulation in 2006. THAT move would have been nearly a 10-bagger from the depths it plunged - impressive by any means.

Apologists for such a move might suggest it is merely old-school retail speculation - the kind that vaulted Godo Shusei (2533), Nippon Carbon (5302), Matsuzakaya (8235) and Shinegawa Refractories (5351) to previously unimagined heights in back in1991, though these were likely the result of index art manipulation games employed on the least liquid names in order to game the absurdity of the Nikkei 255's price-weighting calculation method.

No. Something else is at work here. It is no ordinary speculative move or typical squeeze. It is a corner by ballsy operators. If the measure of success is the heights achieved by the share price, then they have been successful. They were in fact successful by any yardstick at the end of the calendar year 2013, an endpoint that raises suspicions as to whether the ultimate purchaser(s), whether individually or in concert, (who BTW have not filed requisite change of ownership details with the MoF), collected performance fees with respect to their achievements. And though shorts were granted a brief respite, the doubling again from YEN 5,000 to YEN 10,000 this month is curious. What is the endgame? Perhaps it is to squeeze the shorts completely in order to defray the eventual costs of exiting, which will come inevitably, and will be painful for longs on board for the ride. This is possible, but it ignores the breathtaking increase of risk. Perhaps, this unthinkable move is intended as a demonstrative form of collective punishment to shorts, who in the ordinary course of business, make operations more expensive, and less profitable, for speculative groups operating pump and dumps, and attempted corners on the long side. Killing innocents for the actions of the few has long proved to be an effective deterrent for future insurrections. Killing the shorts in a demonstrative show of force in Micronics, just might have the same effect upon pesky traders with a penchant for shorting the absurd.

Finally, one might wonder, for the sake of market integrity, just where is the MoF and exchange surveillance stand - whatever their residual loathing of (mostly foreign) short sellers might be….  

Wednesday, February 19, 2014

Something for Nothing ??

For a skeptic, I am generous in granting "the possible" underlying an investment thesis in pursuit of something like a boundary to its worth, however incredulous it, or its assumptions, may be. One can subsequently quibble over the details be it the forecasts, rates of discount, exogenous risk factors and so forth. As a skeptic, I am often at odds with the optimist, or a central case that involves the alignment of astral bodies, but it is rare that I just don't get the thesis, however flawed it's assumptions may be or prove to be, or however misplaced my Scottish sense-of-doubt.

AAMC is one of those rare instances where I continue to rub my eyes in disbelief at the market value attributed to income streams yet to materialize, however magical the annointed touch (and ownership) of Mr Erbey, or lucrative fruits of contractual obligations that will eventually flow to this obscure, though highly-prized vehicle, whose market cap peaked at more than $2,500,000,000, and currently resides still-north of the two-large-unit mark. My feelings oscillate between derision, awe, and wonderment. The awe derives from the reality that its value, as attributed by "the market", has increased twenty-fold in not much longer than it takes to bake a cake, emphasizing that it this not a twenty-fold increase in a penny stock. It is $2.2 billion of market cap approx 30% of which Mr Erbey, if he so chooses, can monetize into real currency to buy real things like a Yellowstone Club chalet, Gulf. IV or London Chelsky-Prospekt town home. And, for all we know, through structured transactions he may have already constructively done so. The wonderment derives from my ignorance into what future course of events will provide this fee-splitting recipient entity with the demonstrably large cash flows required to justify its ambitious market value (a wonderment which is less a skeptic's DOUBT as to their eventual arrival than a cry for some numerical quantification and justification). Network effects, scalability, rapid adoption and a global market are concepts I find easy to understand, and visualize in a spreadsheet with figures that rapidly add zeros to the end of increasingly-large numbers over time, and while I freely admit that I am not well-wired to invest effectively in this way on the long-side, such tangible forecasts of growth scare the bejesus of out of me on the short-side. This wonderment then leads to a plea: will someone please share their spreadsheet of the same for AAMC - the one that spawns additional zeros in future years like cancerous cell division - to satisfy my curiousity.

Apparently, some have such a spreadsheet or merely great confidence (or both) - in the thesis that will provide the cash-flow and the certitude of their arrival, evidenced by the large positions this unusual entity occupies in their portfolios. Long Pond Capital LP, Luxor Capital, Sab Capital Group, Tiger-Eye Capital, White-Elm Capital have (and it is not understatement) massive positions in this (with massive defined as a huge slug of said Hedge Fund investor's capital by any sensible risk-manager's measure). This is rounded out by FMR, Cap Research and Neuberger all with sizable positions, though not in relation to their behemoth size. Now, you would not be wrong if you detected a tad of derision (complementing the awe and wonderment), for all the arboreal southern-Connecticut-sounding buyers (except Long-Pond) appear to have hitched their investors' monetary wagons in Q3, no doubt the primary accelerating force in taking the shares from $250 at the end of Q2 to $500 at end of Q3. Together, (with the big-3), they represent approximately 50% of shares-out (80% with Erbey's apparent 30%), causing marginal purchases to have an amplified impact on the market price, and anyone who's been short, rather blue-in-the-ass. Though there is no evidence of collusion or a cartel, (however tempting this would be amongst friends) collectively, purchasers have, in Q3 and Q4 created "a lot of something-out-of-nothing".

Some will argue that mark-to-market is of less importance.  They will discount ebbs and flows in market value fully understanding that they are, rather often, ephemeral.  That may be true for a principal  investor with said shares in their portfolio, but it is not most NOT for a hedge fund manager purchasing, holding, and/or purchasing more of said shares, . The Hedge Fund Manager, it should be highlighted, for the avoidance of doubt, realizes their profitable interest at the end of the performance period, (rather often Dec 31st.) crystallizing their profit share - independent of whether market-to-market profits are ultimately realized. They do, for the sake of fairness, concede to the investor a "high-water mark", before which they will not extract further performance, but this is a small bone of uncertainty with little tangible value, juxtaposed against the certainty of receiving what are to most observers, unimaginably-large sums of money.  What remains for the investor, again for the avoidance of doubt, is still something ephemeral - minus 20% of the "profit" after costs. So looms that little chestnut known as "principal-agency conflicts".

Some (me included) will wonder why AAMC increased 40-fold from its opening print. Have it's prospects dramatically improved or was its initial post-spin-off price meaningfully undervalued (or perhaps both)? From cursory inspection, there appears to be no shortage of Machiavellian shell games within the Ocwen ecosystem that involve carving-up income streams and optimizing ownership amongst vehicles and and their domiciles.  The benefits to non-executive shareholders may be uncertain, but the potential advantages for optimally-structured executive owners to advantage from aggressive structuring shouldn't be lost. Housing recovery convictions have also firmed. Some prescient investors flagged AAMC early, touting it's target value incredulously at multiples above the post spinoff price - upwards of $250 to $300 a share - which it quickly achieved via a dramatic triple in Q2 of '13. Allowing for a large error term in their forecasts, one might grant $500/shr (a $1bn market cap equivalent) - the heights it climbed by the end of Sept 2013, and which was the basis of quarterly filings of the last known positions. Yet with further little change in the housing market, or the firm's idiosyncratic prospects during Q4, AAMC's shares went positively priapic straight into the end of the year performance hedge fund finish line, taking the shares to more than $1000, and the market value of AAMC well north of $2bn. This may be coincidence, happenstance, or serendipity. Only the DTC may know.

Of course, it is possible that, $2bn is the correct value for AAMC, and that Mr Erbey gifted a massive increase market value to potential purchasers when AAMC was spun out. This may even be likely, for the tax consequences of transferring interests to more advantageous structures at low value are far more advantageous than doing the same the same at high value. If so, nice work if you can get it. However, I cannot purge from my skeptical mind that there is something more to the story than a bull-case for growing earnings in an Ocwen affiliate; more than short squeezes and hard-to-borrow securities. I remain curious, and think investors in funds with large positions would be prudent, themselves to understand what motivated their agents to accumulate large concentrated positions in an illiquid stock, and/or perhaps more importantly, to hold and even increase said positions to what to the uninformed is the point where hope might legitimately begin to exceed potential. And, if you find out and wish to share it, I will happily share it here.