Lipstick on a Pig

Cliff Asness & colleagues have just published a paper demanding critics rethink the "Japanese equity markets are a momentum graveyard" thesis. They attempt to salvage the pursuit of price momentum in Japan by arguing that momo and value should be seen as a system, and not in isolation. Fair enough. As a result, they argue, momo strategies have utility in such a system, and therefore, the nil return (before costs) that have acrued to momo in Japan over the past 29 years is a veritable virtue. IF, that is, a more optimal Sharpe Ratio is one's goal, and so it follows, therefore, that a nil-return dollar-neutral portfolio, which furthers this pursuit, shouldn't tarnish the pedestal upon which momo strategies rest, both in other equity markets and across other asset classes.

As Noam Chomsky is often revealed be, (a comparison Dr Asness will abhor), Asness is correct within the narrow epistemological framing of the question. But this is not setting the bar particularly high. Not in a discipline where descriptive information is abundant, and where the pursuit should yield something better than a "Dawkin's Skyhook" approach to describing the faceless catch-all that is in each occurance a likely alias of some more descriptively-articulate phenomena. Of course, we can foregive this oversight for Dr Asness, wouldn't be a very good business-man if he revealed what lay beneath this nebulous outer layer of the onion skin.

One would hope that, for their investors, they are delivering higher-calibre solutions to the task of delivering a more optimal - primarily value-based - dollar-neutral portfolio in Japan, for they do exist. But do not expect in this paper a monumental revelation, or a raison d'etre to crank up a 6-1, or 12-1 portfolio in Tokyo. This is just lipstick on the Japanese momentum pig.

Pyramid Scheme

"Corrrrr......Blimey DM! $30,000,000,000 to $50,000,000,000  $40,000,000,000 to $70,000,000,000 ?!??!!!!" That's what some were estimating the Mubarak family has smashed-n-grabbed (and pilfered and extracted) from three decades as errr.... ummm...Beach King in the land of the Pyramids.

That seems like a lot of zeros, at least in comparison to Ben Ali (and his wife's family) who are reputed to have walked off with $3,000,000,000 to $5,000,000,000, though they are comparable on a per capita basis insofar as  Egypt's 85mm population is roughly proportional to Tunisia's 10mm inhabitants.

Russia's kleptocrats, by the same measure, seem positively munificent in their relative financial benevolence, even without eye-poppingly large round estimates.

Keeping consistent with comparisons, the piggiest, however, seems to be the recently deposed Dr Ewart Brown of Bermuda, who according to critics is reputed to have extracted some $300,000,000 to $500,000,000 on a lilliputian population base of a mere 60,000 island folk. This is approximately $6,000 per head taking a modest midpoint, versus the Mubarak clan's almost $600 per head or Ben Ali's more modest $400 per head "contribution" (on similar midpoints).

In all fairness, Bermuda's 2008 GDP per capita was an eye-popping world-beater at $94,000, making their contribution to Dr Brown's retirement fund (should he survive an almost certain imminent audit) a mere annoyance at 6.3%, not far off US State sales tax levy.  Ben Ali's was a more substantial 10% tariff, not even half of the Egyptian leader's near 22% of GDP per capita. Of course one might counter that the former army officer toiled long and hard (or long anyway) for more than 30 years picking up those wads of large notes along the way to presumably stash in UBP where his daughter serves on the Board, though few of his opponents would cite longevity as one of his virtues. Finally, when one considers that the size of the average Egyptian household is substantially larger than the average Bermudian one, the size of his take per household appears even more egregious in relation to per capita GDP. And we roll our eyes at Mssr's Clinton and Blair's multi-zeros bouquet per speaking engagement!!

Pyramid scheme indeed!!

Bare Ruined Choirs

OK, it's not THAT bad (cotton is at 1.74lb!!). Day-job. Family obligations. An occasional hard night of drinking. Etcetera. More importantly, little perspective to add that is worthy of the volume required to rise above the ambient noise and chatter of those extrapolating yesterday's trends into tomorrow. Yet the fact remains that eleven of my last fourteen posts remain in draft form. Stillborn. Aborted satirical foetuses.  Wonder what W.P. Mayhew would think of that? If you need me, I'll be at"the Earle"...

Farewell A&P...

So, farewell then

Great Atlantic & Pacific Tea Co.

(a.k.a. A&P. Waldbaum's, Pathmark,

The Food Emporium, SuperFresh

and 

Food Basics).

Some would say 

that you were caught 

between 

a rock

and 

a hard place.

Others might 

suggest that

you were

just a hard rock

when you needed 

to be 

otherwise.

My five year-old self

fondly remembers 

eating cookies from 

open packages 

on the shelves of your

Confectionary 

Aisle...

But I doubt 

you will truly be missed -

except 

by 

your landlords

and 

creditors.

(With apologies to EJ Thribb aged 110, and Private Eye)

Gifts For Someone With (Almost) Everything

It's that time of year when loved ones buy loved ones that special gift...or, for the unlucky and ill-planned, whatever is left on the shelf. But buying gifts for the titans of finance, the men (and a few women) with almost everything (except a sense of thrift) is never easy. Enlightening books are likely to remain unread by the singularly-driven, whereas more thoughtful tokens such as a poem, one's favorite pressed wildflowers, a short story, or indeed a humorous or poignant blog post are likely to remain under-appreciated. Despair not, however. At least for those UK-based gift-seekers, yours truly has searched high and low (surely "low and high" -ed.) and acquired for re-sale, a selection of number plates assured to be highly prized by the large minds of finance for their Astons and Carrera's alike. Note: these are NOT garish easy-to-source personalized plates, but actually-issued specimens, randomly assigned in the course of issuance - serendipity that should make them all the more valued.   

Bids start at GBP10,000....

B0N U5E5

UG3 F33S

R15K 0NN

A11 B3TA 

G0T CH4

S3LL V0L

I1UV HFT

QE15 3NUF

B1G 5H0RT

AU5 O0OO

N0N D0M1

B41L 0UT

I4M HFM1

GR3 3DY 

Z3R0 T4X

EZ3 M0NY

K4B 0OM

Sinkhole

I have always been socially liberal and fiscally conservative. Not to the extreme in the sense insofar as I take no issues with debt raised for long-term investment be it education, R&D, trains, Chunnels, or the like, things likely to maintain value and use for many years, and which yield externalities that are in the Public Interest. Nor do I find fault with a bit of counter-cyclical intervention now and then. However, I take issue with credit as a seeming birth-right, and believe that pricing credit too low is more often than not, as dangerous and ultimately dislocating as setting the price of credit too high. I am on record as such for a rather "extended period" (in Fed speak). After all, I am a saver, so it is natural to desire one's savings afforded protection in real terms.

I say these things because in the process of the following provocation, I do not wish to be categorized as a perma-anything, excepting perhaps a perma-skeptic, but in particular do not wish to be labeled an apologist for overly loose money - something that would be patently false.

I must further admit in order to insure the proper stamping of my anti-easy-money-credentials that I am as concerned as anyone about the concept of quantitative easing. I understand that it can be seen as dilution. And in many circumstances - certainly historic ones, printing was hazardous.

But here, today, being inquisitive and hopefully provocative, I must ask the frank question, what is the big deal about a bit of quantitative easing under the present circumstances? Hear me out. Look back over the past 25 years . Witness the ballooning of asset prices. The credit that has been extended and therefore money created, has been, in a single word, enourmous. No, actually ENOURMOUS!! I do not need to reproduce all the graphs that luridly depict this vertiginous reality. And they [asset prices] are still high, as any owner Schiller-measure, or owner of an inner London 2br flat can testify to. This money has already been created. And not only has it been created, it has been spent. And the cascade effects too have already spilled over and paid for the beneficiaries' Porsches, and Hampton or Nantucket digs. Yes, these asset prices and the S&P 500, might continue to go higher. But credit is and will likely remain constrained for a long time. Deleveraging continues apace. Asset prices - both real estate and equity remain elevated, and could easily compress a great deal more under the continuing scenario of limited credit, limited domestic investment opportunities, diminishing construction and consumption spending as a percentage of GDP, aging populations, high and long-term rising energy prices and the perception of the fiscally-constrained state.

Now focus on Japan. Here, too, witness the slow inexorable grind of rates lower during, yes, twenty-five years. The aging of the population. The rising ratio of national debt to GDP. The falling asset prices. No matter quantitative easing. The conjured liquidity seemingly disappears into one black-hole after another, unable to have any meaningful priapic impact upon velocity of money, asset prices, inflation or economic activity. These are vivid images, but accurate depictions. And why? It is not clear we even know.

Lets look at some numbers on our turf. Not the real precise numbers because I am lazy and in a rush for you to contemplate my point before hurling insults back at me, but rough back-of-envelope numbers will do for illustrative purposes. US GDP is $14 trillion. Equities have quadrupled over twenty years. US public market aggregate Market Cap is, I don't know $14 trillion? And private unlisted values - maybe quarter to half as much again? US Bond Market values - combined Federal, corporate, mortgage, municipal, are probably close enough to $30 Trillion, and who knows what the size of privately extended loans are on US bank balance sheets, but it must be a couple of trillion. Net real estate equity value - the unencumbered portion NOT accounted for in market cap of listed and private companies, must be several trillion. These values reflect money already out there. Asset values that already inflated by the massive credit binge during more optimistic times. These, like Japan, are likely compressing in a very long term move. The aggregate net worth of $40, $50 maybe $60 trillion, could be compressing to $30, $40 and $50 trillion respectively. Or, like Japan, lower, and over a longer period. So, one trillion of QE has no bearing on anything (unless you are the guy who has sold them duff assets for real money that you can transform quite easily into a large edible Philadelphia Hoagie. For more or less the same price as one transformed it ten years ago. Would two trillion do anything? In the scheme of things, it would seem, probably not. Oh, sure it might get the speculative juices flowing for a nanosecond (as it did in intermitant intervals in Japan) when traders attempt to front-run this government stimulus package, special budget, or the much vaunted QE, but this would turn out to be but a small blip in velocity, as it flatlined, seemingly forever, or beyond the patience of any reasonable trader or even long-term investor.

So this must be good news, and you now think me an optimist, right? Well, if you recall, virtually all Japan's largest banks needed recapitalisations by ten years after-the-fact. As did the finance companies, and the brokers, and many life insurers. Some needed several and some still need them, twenty-five years later as the inexorable deterioration in asset quality and repayment was eventually reflected in diminished asset prices which was eventually reflected in capital conjurations by pen-stroke, to insure systemic "solvency". Quantitative easing? This was like throwing a few pebbles into a gigantic sinkhole, hoping eventually to fill it in. Inflationary fears? Yes. Inflation? Not in anything subject to Peak Credit and the overhang, like home prices, the S&P, or the wages you pay your secretary. At least that was the experience in Japan. Where did it all go? Why does it not, to this day, make people hyperbolic in their vilification of authorities who have, to the objective observer with no preconceptions about how large the BoJ's balance sheet should be, preserved a semblance of normality in what otherwise have been something else. Maybe that something else is preferred. Maybe that something would have been better. Tea-party-ers and inflationista's certainly seem to think so. Maybe Japanese asset prices are falling for other reasons, and our asset prices are different. Better. They will respond because, ummm, because they are American. Perhaps, but only if they were in aggregate NOT overrvalued by $10 or $15 trillion or some other equally large (or larger) number. I am not sure I would want to make the case that outlying commuter suburbs with no reasonable public transport links are fairly valued in an era of peak oil. What IS the right price? Who knows, but where is fat tail? Seems like the left side - before the right side, at least before desperation sets in, and a trillion here or there is hardly desperation in the grand scheme of market values. Is this better or worse than inflation? I do not really know...

Dear Mr Cameron

The Rt Hon Mr David Cameron
Downing Street
London SW1
UNITED KINGDOM
28 October, 2010


Dear Mr Prime Minister

Quite the performance during Question Time yesterday. Such Passion! Such Fire! Such Resolve!
You have started to make the most significant contribution of any politician in a generation (possibly two) to the cause of Austerity as a requisite cleanser for the moldy undergrowth of entitlement, mindless bureaucratic inertia, waste, and indolence, some would argue is necessary to prepare the land for sounder more robust growth than the Thatcherite assault on The Public Interest and new-labour's smoke-and-mirror attempt at wallpapering prosperity over cracked walls that rather obviously required sounder work and treatment than PFIs and Privatisations. I applaud your efforts which have exceeded any expectation. The British people are stoic and in the main understand and support your efforts, which I expect will kindle a similar flame across our boated peers.

Yet, I would highlight to you that the stoicism is not unlimited, and that your efforts will generally supported, have neither been implemented and felt, nor have the rippled through the chain of dependancies that will surely see the economy shrink by several percent as they are felt. My point is that you, and so your austerity and reforms, are vulnerable to the criticism of unfairness. While the working and middle class is, and will greatly impacted, mostly through unemployment, The Rich have only seen small rise in the marginal tax rate, a means-testing of benefit here or there, a tax on banks as payment for insurance backstop. You have left yourself vulnberable with little valid riposte when the moment occurs.

The stoicism is based upon shared pain, and with it, still disspipate. Since the pain is likely to persist, you do I will suggest need to share it more evenly, for both appearances and to legitimately justify fairness of truly shared pain inherent in national austerity. You have tapped VAT, income tax, fuel and sin taxes. There is little more to gain here. But the number of Swiss registered and number-plated supercars roaming Chelsea of Swiss-forfaited super-rich is significant. There remains great injustice and unfairness in walking through Chelsea past the gated mini-palaces in which uber-rich reside for their maximum days, yet paying little in comparison the benefit of maintaining their business, their lifestyle, and the protection of their property-rights from the great unwashed, no to mention the superior road-paving, rubbish collection, policing, and other fringe benefits for which they do materially contribute.

Yes, the time has come to raise property taxes - less as a means to revenue generation than as a means to showing the soon-to-unemployed that you are serious about fairness and burden-sharing. And do it in a progressive fashion, since in many cases it is the only means by which one my capture the flag from loop-hole dodging owners (many of whom I might point out are indeed non-voting foreigners). It probably will not raise a lot of revenue - though it will raise some. And you can let property-rich, cash poor grannies have exemptions if that is important to your constituency. But proceed you must, for without fairness, when the austerity shit hits the proverbial fan, your stoic supporters will soon be organizing lynch-mobs for your party ack-benchers who supported what will be seen as draconian recession-inducing reforms.

It is the time to call upon YOUR party faithful to make the sacrifices that the average brit will be forced to suck up. It would be such a shame to squander a truly amazing start, and significant public support for fear of a backlash amongst our constituents. They surely will understand if you explain if the vernacular of shared pain.

Good night and good luck!

Respectfully,

Cassandra

Chelsea is Dead! or Why I Hate Urban Outfitters

URBN has over the years been both a personal boon and bane. This City of Brotherly Love-originated retailed founded by selling incense, bongs, dope-leaf tee-shorts and ultra-cheap imported bohemian stuff to skint college students has been loved (nearly to death) by growth investors and momo humpers alike. For the reversion-oriented plunger this affection of seeming endless relative outperformance on the way up, coupled with short-covering during risk-off regimes is the proverbial Scylla and Charybdis to one trying to make a buck on the short side. Fortunately, capitulation eventually occurs and patience is rewarded with outsized lumpy returns.

Frustrating as this has been over the years for a skeptic who refuses to buy-in to the growth forever mantra of this slick schlock retailer, today, I hate Urban Outfitter for another, more significant reason. For this morning I went to visit the venerable Chelsea landmark known as the Chelsea Antiques Market where stalls run by passionate niche specialists from antiquarian books to art-deco cut crystal formed a charming maze in the heart of the Kings Road. So one can imagine my disappointment to arrive there morning in search of an overdue wedding gift for a dear friend only to discover that it along with all its old-world charm has been completely and totally obliterated in favor of a gi-normous URBN "Lifestyle" subsidiary Anthropologie store one blindingly bright, filled to the brim with shite. I stood for a moment in horror, thinking of all the cappucino's drunk at a friends Cafe which [formerly] dwelled within before I cried.

This must be the the final nail in the coffin called Chelsea...a now souless vapid pit-of-a-bedroom-community devoid of one of it's few remaining tethers to humanity. RIP Chelsea...and F@#k Y*@ Urban Outfitters

Time Standing Still

Serendipity took my family and I to our nation's capital city,Washington, DC, ostensibly for a family holiday. My son was taken by the shiny metal and technology of the Air & Space center, while my daughters preferred the Smithsonian Natural History museum. I was keen too, since although I had spent reasonable amounts of time in DC with friends who worked the political circuit, I'd never actually been a tourist. So I was quite excited to visit the ground-zero of politics: The Capitol.

While I'd always been deeply interested in politics, an overtly political career never appealed. I skirted it via academia and applied research, my studies in economics, and philosophy, but had little lacked the convitction, missionary zeal for bottom-up activism. For every time I thought I knew for certain what was what, I would without faily later  discover how much I didn't know. This is not to fault those with vision, or those fighting for causes with obvious benefit for the public interest, though I remain suspect of those with too much zeal on issues where the ratio of concentrated parochial gain is large in comparison to that of the public interest.

With a tour arranged via the internet booking system - one that worked well enough to temporarily silence critics of governement ineptitude, we set out. I had few preconceptions of what to expect insude the halls of the Capitol, outside the idealized images  remaining from civics class, which had somehow displaced the more realistic and sordid images of K-Street lobbyists at their most insidious. I did imagine that we would be met by a knowledgeable guide, who would focus their considerable enthusiasm and proximity to power to enlighten the visiting public about the political process as it is - even if sugar-coated.

Once past security, our guide began their show. Yes they annoyingly spoke to us as if we were idiots. Mind-numbing detail about the physical building, the statues, the paintings, the cornice work - everything EXCEPT politics. Amazing. Here we were in the center - and everything was form, not function. Perhaps I was unrealistic in my expectations. No visit to committee rooms. No view of the big chambers despite the absence of congressional sessions.  No descriptions of torture methods employed by whips tto tame party rebels. Nothing of what makes Washington Washington.

Two images stuck in my mind. The first was a lunch visit to the Longworth Office building which houses offices of members of the House. Somehow (wrongly) I imagined (or wished) our leaders and their staff more elightened, but what I witnessed in the cafetaria was perhaps unsurprisingly a reflection of the nation: fried chicken, hamburgers, slathered in ketchup or mayonaise accompanied by a 20oz bucket of Coca-Cola. No wonder healthcare costs are 18% of GDP for non-universal coverage. Sure there was lip service to healthier food, but these lines were short to non-existant in comparison to the fried wings, french fries, ribs, and the like. No wonder logic and pragmatism seems unable to assert itself and unseat parochial interest. How can lawmakers and their staff - nourished as such, fight the focus their better nourished lobbysists.

The second was that while civic and administrative life in Washington itself seems to function beautifully  - transport, cleanliness, gentrification, zoning, sufficiently so to challenge the convention wisdom of administrative ineptitude, I couldn't help but notice that in the Capitol building itself, two of the three large ornate clocks were broken - freezing time. And I couldn't help thinking just how emblematic this is of American politics. A bold experiment in its time, now ossified, incapable of introspection, or evolvultion beyond the prevailing sad state of wholesale capture by those who can. On the lower floor, beneath the rotunda sits the exhibit I was expecting from the tour itself. A history of laws, documents displays of important laws enacted in our nations history along with the embellishing colour to ehance one's understanding. But like the broken timepieces, this proud timeline of legislation - from emancipation, womens, suffrage through to civil and social rights  - trails off dramatically as we approach the 21st century with increasingly abusurdly-named acts like "The No Child Left Behind Act" or insubstantive focus like steroid-use in professional sports, or banning assault weapons from public schools. The US must surely be alone amongst advanced nations in misusing the people's resources for such legislative folly. Where are the adults. Who will fix the clock, so the important matters of State facing our nation can be tackled and discussed pragmatically as citizens who share a common nation and common reality, rather than as two species inhabiting entirely separate realities - one characterized by Murdochian Fox, and the other resembling some L. Frank Baum inspired Land of Oz, where the responsibility is wholly-separated from the individual.

This may sound jaded and harsh, and unfairly focused upon what I wanted to see. Yet the problems facing this nation require a pragmatism -  free from dogma - such as we've rarely seen for many decades. And not just at the Federal level, but at the State and municipal level too. And if we were as a people, the least bit curious and introspective, we would see other nations and people that are already wrestling with the issues we face, challenging the parochial interests to re-examine what we've promised and what is feasible, what is desirable. Even hear, other nations seem farther on the road to viewing the world of the possible and plausible through similar eyes. I can nly hope we fix the clocks, and begin to approach the problems through a common reality.

DGDF? TGIF...

ADAD. QE..QEII? IITM. YAFIYGI. EMRTW, RT? YSIC? FUBAR? UR POV - RGO LY TIPS AU CRB JPY CHF BRICS?  UTM...DGDF FTASB?!? OMFG ONNTA. LMK SOL? IBTD. KYPO, TSP AWTTW: PDQ AFAHMASP, JMO!  TGIF! BYOB. G2G POAHF  (LOL) EOM

Who Needs PM's Anyway?

The money-management business has indeed changed. One would be forgiven for wondering whether it even has anything at all to do with investment. While I have suspected such for a long time from mere observation of the long-only world, it was confirmed, again, today from an Advent Software Press release that I came across:

About Advent Portfolio Exchange(R) Advent Portfolio Exchange(R) (APX) is an end-to-end portfolio management solution that integrates the front-office functions of prospecting, marketing, and customer relationship management with the back-office operations of portfolio accounting and reporting.

Yes it's official: Portfolio Management, not only doesn't rate as "Front-Office", but seemingly has no place in Advent's Characterization of the Investment Management organization - strange for a company dependent upon a continuation of errrr ummm investment. Revenge of the organizational bureaucracy indeed!

Please Don't Eat The Daisies

Like Doris Day, Carlson Capital's name is sprinkled with alliteration. And like her role referenced above, and the bucolic burbs of its setting, so Carlson Capital was caught and censured for disturbing otherwise calm waters, by violating Rule-105 - a polite reference to the rule prohibiting the practice of pounding secondaries before, and or into pricing, and covering (typically) via the offer . It goes without saying that (as was the case the GLG) it is obviously not permitted to pound the shares of an issuer (of equity, or equity-linked debt) PRIOR to the public announcement of the issue. Some would argue the former is OK because the practice is not without risk: shares hammered beyond management's pain threshold can always be pulled by the issuer leading to mother-of-a-squeeze, or or the perp of the low-risk arb could be denied stock by the syndicate forcing it to cover higher.

And politely, the SEC and its enforcers found Carlson culpable despite their protestations that the offending transactions (and presumably their covering counterpart) were initiated by separate portfolio managers, running independent portfolios. Admittedly, the WFC transgression (which was involved in a deal)  could have been bad luck. But just typing this justification made me smile. And then laugh. And thinking about it causes me to chuckle further. As an excuse, this falls into to pathetic "My Dog Ate My Homework", or "I Was Kidnapped and Violated By Aliens" categories of plausibility. Is there not another category of censure (and fine?) that says: "You broke the rules, and you were caught, but your attempt at a defense and subsequent justification is sooooo lame (and ridiculuous) that we will automatically multiply it by 10". If there isn't, there should be. Legally, this may not be defensible, or consistent, but the threat of such not-so-arbitrary enlargement might help put an end to Americans predilection for attempting to evade culpability for anything and everything - even when caught red-handed.

Indeed, their defense would have us believe that on the cited occasions one desk decides to drop big chunks of stock of the soon-to-be-issuing company, and then, completely independently there is another guy, whose strategy arrives at the decision to place orders from the secondary's underwriters for similar amounts of stock.  And this is in a reasonably small shop, with a central trading manager who is in the loop and presumably with advanced trading, middle-office and risk-management systems, Sure.

But it begs the question - is this an isolated incident (at CC and hedge funds generally), or is it exemplary of pervasive financial don't-ask--don't-tell, and that no omlette was ever made without breaking eggs? And if so, should we care? Actually, the question was rhetorical, and have no doubts that I think we should as these activities are zero sum, reflective of a real larceny probably from YOUR pension fund, and the reason it continues is because the spoils are concentrated, and losses widely diffused. So, 10x (or more), admission of guilt, even industry banishment might be a real and useful deterrent to such stealing.

Dog Days Revisited

And so venerable Ginza department store operator Matsuya (Code #8237) continues to revert (or, choose one: has reverted; will revert more; will overshoot) to some ltime-honoured level commensurate with some long-term market market-memory. It's present cap is just below YEN30 billion, which could just as easily be YEN20billion as it was during the millennial puke a decade ago, and little would change (except for the wealth of any levered specs still long of the stock). Though it must be said, this has been sympathetic with a malaise of similar magnitude amongst Japanese asset prices. Recently however, its decline somewhat oddly has taken on new vigour, particularly on market up-days. One might guess that  the remnants of its largest foreign holder are being puked to perhaps meet investor redemptions at the September quarter-end. So illiquid is the stock in comparison to the magnitude of their holding, even at their reduced levels, they need to start early and stomach (or rather subject their investors to) the resultant impact in order to meet obligations.

Long gone are the glorious thoughts of dismemberment, redevelopment, and pie-in-the-sky valuation estimates per tsubo. One wonders if they ever even met with management, and if so, how frosty and uncomfortable the timbre of such a tete-a-tete. Tumbleweeds like those from a Sergio Leone western, it would seem, will roll through Ginza before foreign carpetbaggers are rewarded for their efforts with a Mori Ark Hills-scale-project where specs are hoisted out of positions at large premia to their average acquisition prices.

At such times, it is worth contemplating the chastened hedge fund manager's options, having acquired illiquid positions earning incentive fees on the way up from self-impact, and now forced to liquidate into a near-vaccuum. He can act the fiduciary and attempt to obtain the best prevailing prices (which in any event are unlikely to be favorable to investors). He can say "fuck it" and just bang out positions without concern, justifying it with him (or herself) that since they are redeeming they deserve it, and anyway, he has acquired sufficient fuck-you money in the process to not care about being a fiduciary again. Or, and possibly this is the dark underbelly of interest conflicts, he could, knowing that the fund and business are "toast", really hammer the stock into the redemption date, and in some form, be it directly or indirectly, take the other side or collude with friends (with more capital) to take the lion's share of the other side at quite literally knock-down prices. The potential benefit is obvious since it is one of those moments when a manager has a true information asymmetry as he knows precisely "why" something is going down, and precisely "when" it will stop. This is not without risk, for  it may be the final ignominious descent to oblivion, Ginza jewel or not.

This may seem a cynical interpretation of possible realities. But they are worth pondering for allocating investors - particularly if one considers the lack of hesitancy by managers to exploit the asymmetries of incentive payments based on mark-to-market returns on the way up. The question is: Is there anything an allocator can do to minimize them? For one, prior to an investment, an investor (allocator) where the manager has or may have large illiquid positions in public market securities, one should demand the manager make explicit representations about actions to be taken in such eventualities, and guarantee to warehouse (and provide upon request) time&sales transaction activity. One can demand (in the Info Memo or by legal representation) blanket prohibition by the manager, its affiliates, its employees and their families, upon dealing in any securities in which the Fund has, or may have an interest in. This seems obvious, but it is rarely codified as such. This is applicable to all liquidity-constrained strategies. Anchor investors can (and should) further demand clawbacks where fees are paid on mark-to-market, or at the very least, non-disbursing fee accruals that float up and down until exit, or some suitably long investment horizon, effectively removing the traders' option. It would be wonderful to simply trust your manager. But jail, or threat of serious legal action under circumstance of contravention may be sufficient inducement to insure one's fiduciary remains, in fact, one's fiduciary.

ETFs For a Brave New World

ETFs clearly can provide some advantages for obtaining otherwise-expensive-to-obtain exposures for thematically-oriented investors. More noteworthy perhaps is the way that such vehicles have captured the imagination of Promoters and Managers as a salvation for otherwise stagnant revenue growth. This has lead to a proliferation of ever-more-focused ETFs to cater to the evolving fancies of investors looking for errrr... umm... something, indeed anything different. I would like to add my two-cents worth here and now, so BlackRock, take note: Here are some candidates for your marketing machine to focus on for the next decade:

Rent-Seeking ETF - While the maxim "Death and Taxes" is known to all, few realize that the original phrase was "Death, Taxes and Corruption". Indeed Companies that purchase influence, contracts, and favorable legislation/regulation are worthy of investor attention (not because they are more dynamic, which they aren't) but because they have a definable edge - something many others cannot boast about. Of course, ETF marketers would need to sanitize the pursuit into something like "Government Partnership Focused ETF" or

Gilded-Age ETF - Anyone who does their own shopping cannot ignore the the increasing gulf between winners and losers. As the a large portion of the former middle class sinks lower, a smaller but not reasonably-sized segment is promoted higher. This phenomena has meaningful effects ETF marketers can exploit as those companies focused upon the top-layer and growing underclass relatively prosper as the expense of the middle market. This ETF might have Whole Foods (WFMI) and Coach (COH) alongside pawnshops, check-cashing firms, pay-day loan enterprises and dollar discount stores.

Sin-City ETF - Booze, Cigarettes, Recre-ceuticals, Trans-Fats-In-A-Bag-To-Go, Espionage and surveillance equipment, Gambling, Porn, all in a neat little exchange-traded bundle. Reasonably recession-proof. High-profitability. Growing (except tobacco). Need I say more...?


Follow-The-Insider ETF - Alpha is getting harder to achieve these days. Covert insider-trading is getting riskier (just ask Raj!). But we know from some of the recent academic research that there is information contained in selective but systematically definable insider purchases and sales that yields abnormal excess returns. This is an easy one to flog, and panders to the twin pillar retail beliefs that "the market is rigged" and "it is nearly impossible for Average Joe to beat the market.

New Age ETF - Even tree-huggers have money to invest and would benefit from a convenient vehicle. And their numbers along with greater public awareness of what is environmentally good an bad, healthy or unhealthy, kharmically or spiritually desirable will make this a winner. The allure of this ETF is that it has many degrees of freedom in which to invest - from alternative energy, to agriculture and food science, from any company with sustainable approach to yoga-mat and acupuncture needle manufacturers. Build it (and advertise it convincingly) and they will come...

Bugger-The-Shorts ETF - This ETF, which will concentrate highly-shorted and crowded short stocks, may appeal to several classes of investor. First there are those that philosophically dislike the short side of the market - whether for moral or philosophical reasons. But there are also those devilish mischievous investors who can smell easy prey, and get sadistic pleasure out of squeezing weak (or system-driven) shorts out of their positions for fun and/or profit. This could potentially be popular with hedge funds as a way of quickly reversing exposure when they've been plunging themselves and find their positions on the wrong side of vicious pops so characteristic of bear-market rallies.

Activists Choice ETF - An ETF focusing on trumpted or reported positions disclosed by so-called activist investors are a so-called lay-up for ETF promoters. Primarily because activists themselves are such wonderful self-promoters, and quite adept at talking their own books. But also because they can tout "a hedge-fund strategy and performance without hedge fund fees" - always a winning slogan in the aggregation of retail funds.

Orlov's ETF - With an increasing number of doomsdayers crawling out from all crevices, under the svengali-like piping of Glenn Beck, subscribing to Dimitry Orlov-like visions of the future, perhaps an ETF focused on a belief in the coming unravelling would sell well. Manufacturers of home generators, self-sufficiency tools, small arms and ammo, micro-water-purification systems, drought-resistant seeds, land-mines and barbed-wire, as well as gold-miners, and private prison and security services all could have a place in this portfolio. The only draw back is the non-sequitir if investors peer too far into the future where property rights and the financial system dissolve into complete chaos...

The "US Healthcare System Is The Best" ETF - Americans have a peculiar love affair with their Health Care system, irrespective of how completely buggered it is in comparison to the rest of the civilized (and much of the recently civilizing) world for the insured (as well as the uninsured, and financiers of both). ETF promoters can exploit this inexplicably visceral love-affair by helping them put their money where their mouth is, and creating the market-traded basket that invests a portfolio of companies prospering from a continuation of US Healthcare haplessness.

Greying Demographics ETF - Another obvious marketing target with many degrees of investment freedom, that are increasingly visible to investors. Motorized buggies, time-shares, home-health monitoring, nutraceuticals, senior-assisted living, bingo and slot-machine manufacturers, all in a single portfolio.

The Two-Cent Nickel ETF - Americans can rarely resist a bargain. As America slides closer to Japanification, ETF marketers might take a page from the Japanese Investment Trust playbook which for years has sported The Hidden Asset Trust or similar fund focusing upon companies with net substantial real assets well below market values, particularly where such assets are not reflected on the books of the company at current market values. Some of these assets are land, subsidiaries, other securities that provide seductive teasers to bargain-hunting investors. Of course, they must be careful not to rely too heavily upon Japanese experience for performance comparisons.


Fund of Fund of Hedge Funds ETF - The Coup de Grace offering must be the Fund of Hedge Fund-of-Funds to give the punter access to the broadest participation of hedge funds, something the small-punter has arguably had difficulty in obtaining. And in an exchange traded vehicle where they can dump their exposure at the first sign of distress. The remarkable attribute of this ETF (from the industry's perspective) must be the multiple fee dollops that are removed from investors' investments on a monthly basis. This is truly the ETF Triple Dip straight from the in the Wall Street's finest creamery! But even better for the true skeptics, I know that you are thinking more like John Paulson, so if only someone (Hello GS!) can create for us a synthetic version of this that we can short, we too might find a good way to participate in the fee bonanza.

Of course, this is by no means an exhaustive list, as I am certain to have left some other crumbs on the table, so please feel free to submit your own additions.

Ask A Stupid Question

I am sure that in readers' search for a quick buck and a sure thing they will appreciate the recent output from Cassandra's "quantitative" meat grinder which analysed the returns for the second trading week of September following a  > 6.2% fall in August, where the first day of Sept falls on Wednesday, AND the return on such a first trading day of the month is greater 1.6% (when coincidental to a Democratic administration and NFC Superbowl victor). Forecast strength is further enhanced if Paul the Octopus gives a polyps-up. Dear readers, this is almost a sure thing with 100% of priors exhibiting positive scond week returns, yielding an average weekly return of an outsized 3.7%. Better start loading up the truck. The only caveat is that there was only 1 prior (though when I ran it across ALL developed global markets, I found one other instance that yielded a 3% weekly return lending weight to the interpretation that this must be based on some strong seasonal anomaly.  More comprehensive results are available on this blog with a Premium Subscription*, and for a limited time with Gold and Platinum Membership's, you get a my personal phone number and two similar custom quant analyses per month!!) to provide sound basis for investing. 

If such numerical contortions impress you or excite you, or give you cause to open your wallet then I have some other large pieces of infrastructure I might wish to offer to you for sale.            


Recall that wonderful scene in "Something About Mary" where our hero, "Ted" played by Ben Stiller, picks up a psychotic hitchhiker enroute to tracking down Mary. The psychotic starts telling Ted  about his great business idea: "7-Minute Abs". With 10 minute abs being such a hit, he implores, why would anybody buy 10 minute abs if they could have 7-minute abs....right??!?" For my next quant-crobatic feat, I will analyze the last-hour returns for Thursdays, following Wednesdays (in September only) where the Wed. had a >1% opening gap, and finished the day up >2% where such a move returned the index level to within its trading range. Unfortunately for readers, you'll need a Premium Subscription to find the answer. As I used to say to my sister (when I was six): Ask a stupid question - get a stupid answer...

Another One Bites The Dust

Things formerly with integrity now seemingly compromised...

Professional Cricket
Sumo
Professional Cycling
High-Frequency Trading
Professional Baseball
FIFA
Professional Tennis
Municipal Bond Underwriting
The Catholic Church 
Athletics
US Congress
UK Parliament
Analyst Research
Credit Ratings
Banks
Newtonian Physics
The Stock Market
The Food Pyramid
Incentive Stock Options
Reinsurance Brokerage 
Lou Dobbs
The Mortgage-Backed Securities Market
Hedge Funds
Social Security
Government Balance Sheets



Errr ummm Professional Wrestling is starting to look good by comparison - at least it makes no pretensions to be anything other than it is.

Pop-Quiz: Terms of Trade

Terminology is important but often abused. Some employ it to obfuscate the truth. Others to legitimize something that oughtn't be. I doubt this Pop Quiz will ever be given to MBA students but I reckon it's worthy of a go....

Instructions: Choose the Word, Phrase or Answer that best describes its preceding passage:

1. It's nearing the end of the fiscal quarter. The CFO is concerned that leverage ratios are too high. You've located  some friendly (reasonably-rated) counterparties who've more cash than investment opportunities and who are happy to take the other side of temporary financing trades that will reduce ratios to levels that won;t offend analysts, provided you guarantee the counterparty they will make their spread and not lose money.  This is termed: 

(a) Balance Sheet Reporting Optimization

(b) Window-dressing 

(c) Lipstick on a Pig

(d) Repo 105 (tnx WT!)

(f)  Rather Illegal

(g) Bigger (unearned) Bonuses All-Around (Again)

(h) All the above

2. You are the senior manager of an Equity Trading desk at a large Investment Banking  firm. Amongst your activities, you act as agency broker for customer flow, employing some algorithms that fill customer agency orders at the prevailing best bid or best offer. In addition, your high-frequency trading desk, using it's co-located servers, market-maker status and memberships on multiple-venues and dark-pools, has tools that allow your desk (with a very high-degree of certitude) to execute inside  the spread. Many of your customers give you discretion (assuming execution risk) yet, you always fill customer orders at the prevailing best-bid or offer - always keeping the spread achieved on internalization of orders for The House . This is termed:

(a) Advanced Customer Facilitation Algorithms

(b) A conflict of interest

(c) Great business  (if you can get it)!!

(d) Stealing and Questionably ethical 

(e) The funder of your coveted house in the Hamptons

(f)  Within the letter of the law but not the spirit

(g) All of the Above

3. You started an FX bucket shop that offers an electronic trading platform and extremely high leverage to retail clients. The platform gives the impression you are executing their trades in a a large central and open marketplace.  You use all manner of advertising to entice the punters in.  Initially, of course, you did execute their trades in the marketplace in order to hedge your risk, but you found that the life expectancy of the average small-time retail FX punter to be measured not far beyond nano-seconds, and that they are, en masse, usually wrong.  As a result, you've stopped "hedging" and now more or less take the other side of all their risk, despite little regulation, oversight or capital adequacy. This situation is termed:

(a) Optimal Use of Scarce Risk-Capital Resources

(b) Dead clever

(c) The logical thing to do

(d) "a Bonnie Situation" (*)

(e) Less than ethical

(f) An accident waiting to happen

(g) disingenuous for not adequately disclosing the credit risk of acting as principal

(h) Eponymously...The Sting  

(i) All the above

(*="Bonnie Situation" as seen in Pulp Fiction)

4.  For your investment bank employer, you structured a fantastic deal (meaning your bank made lots of money when it was inked!). While the initiator of the deal was its impetus, you easily found counterparties for the other side of the deal requiring only a smidgeon of truth-stretching, the normal amount of obfuscation and truth-dodging, in addition to the requisite amount of white-lying necessary to get it done. Sadly the deal went raaather pear-shaped for The Bank, the Buyers, The American People, and indeed you - everyone except the initiator (who subsequently became a folk hero, not to mention richer than Croessus).  From your view, it's best termed:

(a) Sacre Bleu!!

(b) An Ethical Wake-up Call 

(c) An erreur of judgement (in use of e-mail and bravado)

(d) A montagne out of a molehill

(e) Being Hung-Out To Dry

(f)  Being The Scapegoat

(g) Poor Disclosure in not Insuring all representations are embedded in the fine print of the fine print of the Prospectus

5. Your company has a quality problem. As a result of - quite literally - the company's good luck, you will make TOO much money this year, and though questionable, you decide that you want to defer a portion of it over the next several years, since you know The Street has an inexplicable preference for "growth and stability" to "feast and famine", irrespective if both leave you in the same financial place. Just as fortunately, as it would happen, one of the richest men in the world can help you do this (for a price, of course) as he is as sweet, as anyone there is, with words as they relate to the letter of the law (not to mention The regulators and Politicians) . This is best termed:

(a) Temporal Income Statement Classification Optimization

(b) Do As I Say, Not As I Do

(c) Conservative Earnings Management

(d) A Public Relations Disaster

(e) Business as Usual

(f)  Criminal Fraud

(g) Finite Reinsurance

(h) All of the Above

6. You lucked-out and that little software widget you wrote has turned into a multi-billion-dollar company.  Your 25% stake in what is ostensibly a wildly-overvalued company is priced by the market at over US$ 300 million - most of which you'd like to "bank" (though, being a skeptic, not literally). One catch: the shares would immediately tank if you sold, so you arrange long-term structured collars, that you can borrow against and which lock-in your sales price within a price corridor. Fortunately you don't have to file anything with the SEC until the derivatives are exercised - likely years into the future. This is termed:

(a) An executive hedging transaction assisting portfolio diversification

(b) A de-facto forward sale

(c) Bona-fide smoke and mirrors sale

(d) A sham trade

(e) One that looks like a sale, smells like a sale, but ABRA-CADABRA!...It isn't!

(f) A regulatory free lunch

7. The private investment management company you founded has done well for investors and ostensibly yourself, and has grown into an international multi-billion dollar business. Clannishly secretive by nature, trying hard to avoid the spotlight , you wish to protect your profile by preventing any public dissemination or discussion of your investment performance by investigating and prosecuting someone responsible for alledged indiscrete violations to so-called privacy entitlements despite the huge number of external investors - many of whom have their own transparency and disclosure necessities. This is termed: 

(a) Enforcing Contractual Rights to Keep Private Information Private

(b) Being a First-Class Bully

(c) Hilarious

(d) Ludicrous 

(e) Pedantic

(f)  Hilarous, ludicrous, and pedantic.

(g) Oh, and Pointless - since any Competitor with the faintest urge to know can easily find out if they want

8. As a lawyer for a major Government regulatory organisation, you investigated and filed charges against a major Investment Bank for market abuse and trading transgressions in which they were, as the saying goes, caught "red-handed". Yet you have negotiated a proposed settlement of the charges for a payment of a large (though not excessively painful) sum of money, but as is customary with such settlements, the accussed will  "neither admit nor deny guilt". This is termed:

(a) Realization of a Positive Expected Return From a Regulatory Gamble

(b) No-Fault Financial Regulation

(c) Spoils of Rent-Seeking

(d) A Travesty of Justice

(e) A Bloody-Good Deal (for them)

(f)  Not Biting the Hand...(That Will Feed You When You Leave the SEC)

(g) All of the above

9. You like Peter Lynch before you, are the manager a now-massive-sized public fund. While you are not bigger than the market, you are often the largest marginal player. You've cultivated a public persona and use your soapbox to influence investor opinion to help shift your positions in sizes that would otherwise be impossible to move without eating all of your incremental return, rather than for the sake of bona-fide improvement in public-policy . This is termed:

(a) Free Publicity & Excellent Public Relations

(b) Talking your book

(c) Do as I Do, Not as I Say

(d) Beware of pseudo-"acquaintances" bearing seeming gifts 

(e) Less-than-ethical

(f)  Caveat Emptor

10. You ran a Hedge Fund (or commercial bank, or investment bank) that racked-up good returns (for a while), and then imploded due to amongst other things: hubris, overconfidence, mis-calculation and mis-extrapolation of equity and credit availability, common credit exposures, stupid and illiquid investments, excessive leverage, and subsequent negative impacts due to the redemption and liquidation cycle . Since the implosion happened when you were at your peak asset base, one can honestly say that you lost more money than you ever made, even if in the unlikely case early investors got their original investments back. Nonethless, despite your investors getting hosed, and remaining side-pocketed, you banked  $100mm - FREE AND CLEAR!!.  This is termed:

(a) Nice Work If You Can Get It

(b) I Wished On The Moon

(c) No Regrets

(d) Don't Explain

(e) These Foolish Things

(f)  Strange Fruit

(g) Mad World

Anchors Away

Long before the internet bubble, synthetic CDOs, asset-swapping convertibles and high-frequency front-running, the sexy strategy which added numerous zeros to many-a-skeptical portfolio manager's trust fund was the dull but reliable strategy of shorting IPOs. This used to rank near the top of tried and trusty ways to, in a rare pursuit, beat the house. After all, there never was any satisfactory justification for for the 2x to 4x-plus valuation leap between final VC financing rounds and the lipsticked-pig's tarted-up presentation to the public at-large as a listed entity. Of course, we realize, now, from indictments, accusations, kiss-and-tells, e-mail records seized by public prosecutors that even the nutty interlude was for the most part, not Salem-like, ergot-induced mass-delusion, but careful (and admittedly artful) manipulation and orchestration by the underwriting puppeteers - one which assured  (no pun intended)  that the ass of any shorts (besides the underwriter hisself and perhaps a few cronies), was blue, bluer and bluest. Masterful, yes, but not sufficiently discreet to pass my muster. And yes, some, with strong constitutions, deep pockets, low leverage, and locked-in investors, did manage a large when the lightwave phenomena was finally extinguished.

Japan, aside from a precious few small-float growth issues, has remained proverbial fertile ground for new-issue skeptics - right up to today. Take, for instance, the much trumpeted $11bn dollar demutualization listing of century-old Dai-Ichi Life in April of this year. One would be forgiven for confusing chart (above left) with a ship's anchor, so relentlessly has it plummeted. I am certain you can imagine other metaphors (a skydiver, a sugar-cube sinking in a cup of mint-tea, or a twirly-whirly-gig falling from an oak tree). Nonetheless, despite the number of like-behaving IPOs, they (whoever "they" may be, though "they" is likely the people of Japan via their pension fund managers) have, over the years, kept coming back for more. Perhaps the repeated humiliation is as pleasant as playing a familiar video game, or cycling the same course. Unlike other pursuits, familiarity apparently doesn't breed contempt, and so Dai-Ichi was miraculously able to flog a reasonable slug of stock at YEN 170,000, sure in their knowledge of the ire and contempt investors might soon hold them.

So, here we now sit in mid-August - deep in summer lethargy, which is perhaps an apt time to ponder whether or not"they" have been punished enough. Perhaps those who took a flyer on it, have now all flown. And just as the moon has its reliable phases, perhaps the shorts too must soon cover. For those opportunistic folk didn't fund their trust funds holding out for the Rapture...

Hello Myrna Loy

Nineteen hundred and thirty-five was by most accounts another in a succession of crappy years. The dustbowl on the American plains, enactment of the Nuremberg Laws, a devastating Hurricane that slammed into Florida killing many hundreds though this paled to the devastation of Yangtze Floods that wiped out several hundred-thousands. This year also witnessed Italy's invasion of Ethiopia, as well as Japan's of Manchuria, presaging the horrors to come. Despite these ominous telltales, the march of progress saw rapid advances in many fields though particularly aviation, Jesse Owens setting a dramatic new long-jump record while the young Donald Bradman racked up a double-century in just 191 minutes somewhere in Queensland. More to the poiint of this post, nineteen thirty-five was also the year that the seductive Myrna Loy and handsome Spencer Tracy starred in the thriller "Whipsawed". I bring this to your attention not least since it was (by the NY Times account) a reasonably entertaining film worthy of a diversion on a rainy Sunday morning, but because like the film's eponymous title, Whipsaw has been eclipsed in the last decade by the success of the tribe of trend followers, and the ear-boxing and deprecation of the counter-trend trader.

Such style success has historically been, if not cyclical, then irregular at best. Older practitioners know this, and the more honest do not shy away from it in their marketing pitches, though many have admittedly watered-down its purity in recent years with diversified programmes and time-frames ostensibly to smooth returns for more risk-averse investors. In its purer form, the fat years have indeed been fat but historically fewer and farther between, whereas the lean years, though more numerous as they have been have (at least for the more disciplined) been negative, though of decidedly smaller magnitudes than the positive. The honest argument (stylistically) remains that such modestly positive aggregate returns with admittedly high variability and prolonged periods of drought have high utility due to their unusual lack of traditional asset class correlations during times of stress. Fair enough. And while intellectually I must admit that I remain snobbish about such a seemingly mindless pursuit, I do accept the premise of the arguments and their agnostic point of departure with regards to the underlying and believe there is a role for such in portfolios. A victory perhaps for function over form.

That said, I believe one can state that during the last decade, price trends across markets and asset classes have been reasonably attractive to this pursuit stylistically - perhaps more attractive than historically one might surmise or forecast it ought to have been. Now, of course, each epoch is different. This epoch may indeed be driven by forces that cause prices to maintain long extended trends that bear no relation to the apparent mean-reversion (stylistically-speaking) of the past. This is an argument one might make with fortitude, given the macro state of the world. But, then again, perhaps not. Perhaps not because perhaps stylistically too many moths may have been attracted to the stylistic flame. Perhaps because the volatility of volatility might have increased and (Hello Myrna) the return of episodic whipsaws might be both more numerous and of heretofore not seen magnitudes that, in a word, bugger existing model parameters, and perhaps more importantly to those who've over-specified, bugger the adaptations to emergent regimes.

It might be foolish to forecast with certitude such a future. Nonetheless, I suspect there is a sea-change about, a sea-change worthy of contemplation in the same thought as Myrna and Spencer. There can be no table-pounding in this regard, for it is not proverbial low-hanging fruit. But for the introspective (and Andy Grove paranoid) it is always worth looking around to see who is playing, how they are playing, and in what relative size they are playing. The now-hackneyed "Risk-on, Risk-Off" paradigm being exemplary. For when too many pursue the same, using similar methods, returns inevitably drop, while unexpected shit happens. So look around, observe, and ruminate upon the old saw..."too clever by half".

What Goes Up Might Come Down - Less 20% or So....

Having periodically spit venom at some notorious Japanese activists for pursuing business models that (at least in this observer's opinion) were rather obviously on a collision course to enrich themselves to a far greater extent than their less-fortunate investors, I was pleased to see the recent working paper released last quarter by Hamao, Kutsuna and Matsos entitled "Activist Investing in Japan: The First Ten Years".

The abstract echoing some of my sentiments, and noteworthy of attention for allocators reads:

This paper provides a comprehensive look at the first decade of foreign investor activism in Japan, the second largest stock market in the world with many underperforming and cash-rich firms. Barriers to shareholder activism have historically been high but we document an unprecedented wave of block acquisitions by hedge fund and other investors with a total of 916 stakes reported in the period between 1998 and 2009. There is, on average, a modest positive stock price reaction to the announcement of activist investments, particularly for events involving hostile funds. The long-run returns on activism are low overall, but positive for events involving hostile funds. We find that while activists have forced target firm managers to increase their payouts compared to peer firms, there is no evidence of major operational improvements or restructuring. Finally, after 2006 there was a widespread adoption of "poison pills" by firms, particularly those targeted by activists, and a subsequent drop in investor activism. Our paper illustrates the limits to shareholder activism in a country where the takeover market is thin and cannot be used by the activist investor as an exit strategy.

My vilification has NOT been of the seeming opportunity, nor of the potential benefits to shareholders (and society) of energizing possibly moribund managements, but rather the Activists apparently cynical disregard of their own shareholders by using the weight of new money (or available leverage) to goose prices of existing positions well-beyond the levels of a reasonable exit to either a trade-buyer or private equity buyer, or even levels that make sense for management to buyback shares, presumably for the sole purpose of parochial gain - notably around incentive-fee crystallization dates. In other words: the racket of unsuccessful pursuit. While the authors do not address my specific pet-peeve, their aggregate data do suggest pedestrian returns indicative of (at least in part) the omnipresent agent-principal conflicts of the investment manager, who by all account have not made out poorly despite the rather modest aggregates.

Errrrr...ummm....Did I hear someone say "Multi-Year Clawback Clauses"??!?