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Hedge Funds Pumped Up Silicon Valley, Now They're Pulling Out
- stephenitis 11y agoMaybe viable business models after seed stage funding has run out might become a thing again.
- FussyZeus 11y agoWait wait, you want companies to make money off the product they sell? That's so 90's.
- ConfuciusSay02 11y agoWhat? Revenue? No, no, no, no. No revenue. Why would you go after revenue? If you show revenue, people will ask how much, and it will never be enough.
- slug_tro_AWAY 11y agoHow Freudian!
- iaw 11y agoExit value volatility was a known risk when the hedge funds started investing in the Valley. Exit timing volatility is a new phenomenon. It's one thing to say, "within 5 years they'll be publicly traded/acquired and I'll have liquidity at an unknown value." It's another entirely to say, "in an unknown amount of time the company will be publicly traded/acquired and I'll have liquidity at an unknown value." The latter prevents the hedge fund from actually creating hedges.
- discodave 11y agoIt doesn't prevent them from creating hedges, just makes it harder.
- iaw 11y agoCould you elaborate? My first inclination is to strongly disagree having worked on hedges before, but if you know something I do not I'd like to hear about it. Edit: You can create hedges on unknown time-horizons with unknown returns but rather quickly the cost of maintaining the hedges should drastically outpace their value as hedges. Time volatility on the order of years is harder (read much more expensive) to deal with than revenue volatility with a known time-horizon. So, while you can create a theoretical hedge instrument, the application of such an instrument is untenable as a profitable hedge in practice. (from my personal experience, would still love to be proven wrong here)
- shostack 11y agoWould you mind giving an ELI5 explanation of how hedge funds currently handle exit value volatility (minus the unknown time-horizons aspect) for those of us who haven't worked on hedges before?
- iaw 11y agoLets assume no fundamental issues with the economy, e.g. we're only worried about companies competing with eachother not a financial crisis. The expectation of a startup is typically that it will disrupt an existing industry or fail to do so. If it disrupts an existing industry, existing market participants will lose marketshare. Knowing who the competitors are in a given space, and how they contribute to the overall market, allows the hedge fund to model what the long-term revenue streams of a startup could look like. More importantly, they model how much money competitors and contributors to the space will make or lose due to the market change. Having these expectations they can then acquire futures contracts (contracts that allow them to fix the price and date they pay or receive for a publicly traded security) opportunistically during normal market fluctuations. If the hedge is working perfectly they will make money back regardless of whether the company succeeds or fails. Trains vs. Buses vs. Cars with inputs of fuel is a classic hedge model example (although rather simplistic). Lately hedge funds (and other early investors) are building their hedges into the investment itself with liquidity preferences which are creating their own sets of problems. Basically, liquidity preferences can be thought of as a hedge on their investment but they lose a lot of hedge value when they don't know when the liquidity event will occur. Sorry if that isn't ELI5 enough, hedges are a pretty complex animal and it's hard not to jump down every rabbit hole detail.
- ConfuciusSay02 11y agoIt's been quite a while since hedge funds were actually in the business of hedging.
- eldavido 11y agoyeah, we need a different name for these things, like FAM, "flexible asset managers", or AIMs, alternative asset managers. The key point is that they can do whatever they want, not that they "hedge" anything.
- tim333 11y agoThe business of a lot of them amounts to sticking 80% of the money in whatever's trendy, 20% in the managers pockets, roughly. Not a bad deal for the managers if you can pull it off.
- marcusgarvey 11y agoParaphrasing the lede here[1]: Hedge funds produce little to no alpha and investors have known that for quite a while. 1 - http://www.nakedcapitalism.com/2016/02/the-financial-times-revisionist-history-on-hedge-funds-failure-to-deliver-manager-outperformance-or-alpha.html http://www.nakedcapitalism.com/2016/02/the-financial-times-r...
- nissimk 11y agoIt's unreasonable to assume that the faucet for investment money will be open indefinitely, especially when investors don't get the benefits they would have with a public company: liquidity, transparency, etc. Staying private indefinitely is not just regulartory arbitrage, it's also maintaining significant control and information assymetry between managers / early investors and the rest of the investors and employees.
- pbreit 11y agoOr "The dumb money showed up, got burnt, bailed."
- st3v3r 11y agoAnd nothing of value was lost.
- ChuckMcM 11y agoWatching this version of tech bubble unwind has been very interesting. The hedge funds pulling out, the markdowns on unicorn value. If this is a typical cycle it means that the oxygen(cash) will be depleted for a few years while the losses are absorbed. The lack of investment will recharge funds as new money comes in, and everyone will wait for some breakout hit to come out. Then cursing themselves for having "missed" it by being to hesitant they will once again start opening the money taps. Circle of life in the valley.
- bRad389 11y agowhats your guess on how long before will housing be affected?
- nickpinkston 11y agoAverage SF commercial rents lags about 2 years after NASDAQ dips, so we've seen a pretty good dip, so maybe 1.5-2 years. This is overall though, not what people are offering now. I'm in the market and don't see rents coming down, but SF-proper inventory I'm looking at (more industrial "PDR" / mixed-use) is all many months old, so unsure if prices will come down soon to make them move.
- timr 11y agoParagon has been releasing some data lately that suggests a weakening of the high-end market in SF. In particular, it looks like luxury condos are becoming overbuilt: http://www.paragon-re.com/Luxury_Homes_Market_Cools_Affordable_Still_Hot http://www.paragon-re.com/Luxury_Homes_Market_Cools_Affordab... It's still early, though. Their March 2016 market report is inconclusive on what's happening with prices. However, this could really put the lie to the people who believe that indiscriminate building is the solution to high rents. Folks are likely to find out that when developers overbuild at the high end, they don't just keep building and let the new units go for a steal -- they stop building entirely.
- djb_hackernews 11y agoI don't think housing will be affected the way you think it'll be affected. Hedge funds are buying lots of real estate, Single Family Homes included [0] [1] [2] It's a flight to safety, and with jobs moving to cities, millennial preferences with them, and restrictive zoning/NIMBY, real estate is the perfect landing place. [0] http://www.motherjones.com/politics/2013/11/wall-street-buying-foreclosed-homes http://www.motherjones.com/politics/2013/11/wall-street-buyi... [1] http://dealbook.nytimes.com/2014/06/27/investors-who-bought-foreclosed-homes-in-bulk-look-to-cash-in/?_r=0 http://dealbook.nytimes.com/2014/06/27/investors-who-bought-... [2] https://newrepublic.com/article/112395/wall-street-hedge-funds-buy-rental-properties https://newrepublic.com/article/112395/wall-street-hedge-fun...
- chris_wot 11y agoOh man, I'm so going to be downvoted on this, but... "I’m done with intangible valuations, unknown exits, unknown liquidity, and I want something that if I put my money into it now, I’m not going to hit a grand slam, but I’m going to get something that’s immediately yielding." Since when has a combination of intangible valuations, unknown exits and unknown liquidity every been anything other than an extremely high risk proposition?
- prewett 11y agoSounds like what the author wants is a bond or dividend stock, not a startup fund.
- deleted 11y ago[deleted]
- datashovel 11y agoWhy own shares of a valuable business when you can buy the entire business for pennies on the dollar when they're about to go bankrupt? EDIT: Then sell them during the next bubble.
- paulpauper 11y agoyaaawn more misleading titles. 'Pulling out' would imply lower valuations, of which there is no evidence for startups like Snapchat, Pinterest or Uber. Instead of selling, what is happening is that we're seeing a flight to quality, which is something I predicted months ago.
- eruditely 11y agoThese things are going to happen anyways, a feature of anti-fragile systems is that they can handle and deal with volatility and stressors, so we're going to be fine. The easy times can't always be in, and you will never catch the next good times if you're not in it well beforehand.
- trhway 11y agowhen in the end of 2013 and in 2014 pension funds and similar money from out of state started to be 'absorbed' [through hedge funds of course] into the Valley, it kind of was pretty clear that this is the last, the 'IPO' wave, ie. the last fools who will be holding the bag (which is sold to them by Valley's VCs). The Valley has got these money now, will catch the breath and will be getting ready for the next wave... The thing can become interesting if somebody happened to have sold/bought a good [leveraged] amount of bonds and CDS on all those startups around - i mean it is pretty obvious that pooling startups together into a bond would make it an AAA bond the same way like pooling subprime mortgages before 2008 produced AAA bonds :)