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The Secret of Billions
- gesman 10y agoBeing hedge fund psychologist seems to be much safer bet than being a trader. Regardless of market direction - you always win (a stressed clientele with reasonably deep pockets).
- rjeli 10y agoA form of selling pickaxes.
- notliketherest 10y agoHow hard is insider trading to catch, really? I'd assume a high level conversation between two executives over golf and bourbon is pretty damn hard to audit.
- kleer001 10y agoYup. Cigars, Masons, Yacht clubs, Golf clubs, vacations to Ibiza. There's an endless list of rich only completely private locals. If people can just keep their damn mouths shut then it's all good. And I would suppose that there's an acceleration with wealth, right? Like a cosmological constant of wealth gap, reset in some places every once in a very rare.
- ethbro 10y agoIsn't the extreme upper end of a progressive tax code essentially an understanding that "look, if you're making this many multiples of everyone else's income, you're probably doing something illegal. So help fund the military / social welfare and we won't prosecute you"? Edit: I realized I didn't use the most accurate language. "... you're probably doing something unfair" would be a better characterization.
- madelinecameron 10y agoIt doesn't even have to do with making a lot of money. Everyone breaks laws every single day. It isn't a question of 'if', it is a question of 'when'. Did Bill Gates 'break the law' by essentially creating a monopoly? Technically yeah, but is that really a law anyone actually cares about?
- seizethecheese 10y agoCreating a monopoly is not illegal, it's illegal to use monopoly power to damage opponents.
- TheCoelacanth 10y ago> Creating a monopoly is not illegal No, read section 2 of the Sherman Act. > Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony The only legal form of monopoly is one that comes into existence without anyone intentionally creating it.
- seizethecheese 10y agoCreating a monopoly is not illegal, it's illegal to use monopoly power to damage opponents.
- ryanl0l 10y agoNo, it isn't.
- ethbro 10y agoIf not, then what moral basis does a progressive tax code rest on? Or do you disagree with a progressive code?
- amitdeshwar 10y ago
- cloudjacker 10y agoIt's pretty hard One hacker group was trading ephemeral insider trading tips on snapchat. They got busted because some old fart had an email of a screenshot of the tip. "I don't get snapchat" use your imagination
- zekevermillion 10y agoI'm sure the vast majority goes unpunished. But they do make an effort. It is relatively easy to find suspicious trades using statistical methods. Once the regulators decide to pursue a particular trade or event, they are quite exhaustive in establishing ties between insiders and the suspicious trading activity. For example, as a young lawyer, I played a small part on an M&A deal where there was suspicious trading by some UK-based hedge funds. All the lawyers, bankers, and principals on the deal received a letter from the SEC asking for a list of every person who may have had knowledge of the deal, what they knew, and when they first knew it. That went as far as listing secretaries who were physically stationed near our office, whether or not they worked on the transaction. Nothing came of that investigation, which as far as I know may be the usual result. There are certainly stories where the SEC or DOJ have managed to establish amazingly tenuous connections between tippers and tippees. Presumably the badguy will not just volunteer "hey I give stock tips to my college buddy". But I think if the suspicion is high enough, the regulators can be quite systematic in tracking down leads.
- partycoder 10y agoWell, one of the secrets is this: https://en.wikipedia.org/wiki/Greenspan_put https://en.wikipedia.org/wiki/Greenspan_put Which is a form of subsidizing speculative bubbles.
- Cyph0n 10y agoExcellent article. Loved the informal style! If you haven't already watched "Billions" [1], it is an absolutely thrilling show. I was uncertain about it after the pilot, but I continued because of my experience with Showtime's "The Affair" [2]. I did not regret that decision. It is in my opinion the second best show of last season, after "Fargo" [3] of course. [1]: http://www.imdb.com/title/tt4270492/ http://www.imdb.com/title/tt4270492/ [2]: http://www.imdb.com/title/tt2699110/ http://www.imdb.com/title/tt2699110/ [3]: http://www.imdb.com/title/tt2802850/ http://www.imdb.com/title/tt2802850/
- fiatmoney 10y ago"Insider Trading: But basically, if you know information that is private (“Company A is buying Company B”) then you are not allowed to make money on that information." I see this misconception all the time & I'm really surprised to see it in this context. The sine qua non of "insider trading" is being an insider. If I know of a merger because I overhear the parties talking about it in a restaurant, or I've hired private investigators to see who's visiting who's offices, there is no issue. There has to be some relationship that obliges me to keep that information private. The only way markets work is by surfacing "private information". "The essence of stock market law in the US is this: every transaction has to have risk in it. If you eliminate risk by, for instance, paying for information that nobody else knows, then you have committed a crime." That's just completely wrong. If I hire a satellite to track car dealer inventories, buy Ford as a result, and make a ton of money, I'm doing my damn job. No one has committed a crime. Ditto if I sell that data rather than trading on it directly.
- blowski 10y agoI will admit to suffering from this misconception, so thanks for explaining it. What happens with the edge cases? e.g. I play golf with an insider and he tells me to buy Ford stocks, but doesn't profit himself (at least not directly).
- fiatmoney 10y agoUsually there is a sort of assumed propagation of the insider's duty to keep the info private. Edge cases (my brother-in-law the VP of Ford has started drinking heavily and having panic attacks, so I short the stock) and further degrees of removal are of course trickier. There is also a distinction between the SEC's civil remedies, which theoretically can reach out at a few degrees of separation (eg the Phil Mickelson case recently, where IIRC he unknowingly profited from a tip relayed from a guy who got it from an insider), and criminal liability.
- ikeboy 10y agoThere's a personal benefit test: if the insider didn't gain anything from giving you the information, you can legally trade on it. See https://www.sec.gov/news/speech/speecharchive/1998/spch221.htm https://www.sec.gov/news/speech/speecharchive/1998/spch221.h..., http://www.bloomberg.com/view/articles/2016-01-19/justices-will-know-insider-trading-when-they-see-it http://www.bloomberg.com/view/articles/2016-01-19/justices-w..., and https://www.bloomberg.com/view/articles/2014-12-10/appeals-court-not-so-keen-on-insider-trading-crackdown https://www.bloomberg.com/view/articles/2014-12-10/appeals-c... Or https://www.bloomberg.com/view/articles/2016-05-20/insider-trading-law-comes-for-more-golf-buddies https://www.bloomberg.com/view/articles/2016-05-20/insider-t... for a recent example
- digitgopher 10y agoThese colorful exposés by jaded ex-financial insiders are all the rage, and I'm not saying Wall Street rules/ethics aren't important to talk about, but it's easy to ignore more fundamental processes. The Fed, with the touch of a keyboard, writes money into existence out of thin air, purchasing securities with it. It amazes me that so few discuss the ethics of where the money comes from in the first place.
- lingben 10y ago> the ethics of where the money comes from not sure what you mean by 'ethics' it is clearly a construct, just like the concept of money in the first place or the idea of democracy or the authority of police, or the constitution, etc as a society we agree on certain things and then live within this framework "power resides where men believe it resides, it is a trick, a shadow on the wall..." https://www.youtube.com/watch?v=FpL6Fwu0wkw https://www.youtube.com/watch?v=FpL6Fwu0wkw
- witty_username 10y ago> The Fed, with the touch of a keyboard, writes money into existence out of thin air, purchasing securities with it. It amazes me that so few discuss the ethics of where the money comes from in the first place. Everybody's money loses value when they print notes. That's where it comes from.
- thrwawy20160421 10y agoI have noticed that any comment on HN that mentions the Fed's money printing gets downvoted to hell quickly
- bo1024 10y agoThe section "Hedge Fund Compensation" was very simple and clear, yet a really effective explanation of the problem with current incentive structures.
- tptacek 10y agoInsider trading increases the speed with which information is encoded into prices and thus speeds up price discovery, which is the core function of the market. But it does so by creating agency problems. Either directly or indirectly, the information being traded on in these schemes comes from people who work for the shareholders of the company. A particular problem is that insiders can profit both from the wins and losses of their employers; it's the magnitude that matters, not the sign. There's already a lot of evidence that company insiders, particularly in management, will routinely harm their employers for their own personal benefit (see, for instance, abusive stock buybacks). It doesn't seem smart to create new mechanisms for that to happen.
- jessaustin 10y agoInsider trading, as it is actually enforced in real life, only rarely inconveniences true insiders like CFOs and board members. Rather, the public's prosecutors typically concentrate on "outside insiders" like celebrity homemakers and golf buddies of golf buddies. One could speculate on what motivates this preference of prosecutors. Informed trading is a prisoners' dilemma, in which loyalty to "the pact" distorts markets while defections from it make information public. As you observe, C-suite reptiles benefit most from informed trading. Please note, however, that insider trading laws actually increase the benefits they receive, by punishing "outside insider" defectors. Eliminating this ill-conceived and inconsistently-enforced law would actually decrease the advantage that management takes of owners of public stock.
- tptacek 10y agoMy impression of this is that, like most issues of prosecutorial equity, this simply traces to the difficulty of making a case versus the rewards (yes, primarily to the prosecutor, but in theory also to the public in the form of deterrence) of actually winning the case. We also tend to forget that prosecutors are only supposed to be bringing cases that they are certain they can win. Criminal prosecutions aren't speculative. Finally, people like to point at the Martha Stewart case as evidence that prosecutors are celebrity obsessed. But Stewart was swept up in the earlier prosecution of several other people associated with ImClone.
- markbnj 10y ago>> And if you can’t make it there, as the song sort of goes, you can’t make it anywhere. The song sort of goes the complete opposite of that :). If I can make it there, I'll make it anywhere. It's up to you, New York, New York.
- nezumi 10y agoI'd love to make a small change to the English language. When speaking of speculation and rent-seeking activities, don't say "make money", say "obtain money". Reserve the term "making money" for activities which create value. Just try it: how successful and glamorous does your rich banker friend seem when you describe him as an obtainer, rather than as a creator of wealth?
- zodiac 10y agoNot all banking is rent-seeking; some of it creates some value
- rileymat2 10y agoSpeculation can create value by injecting capital into the right projects/resources that otherwise would not be funded.
- breischl 10y agoSpeculation actually does deliver value. Whoever sold to the speculator gained value - they got rid of some risk, and gained enough cash to make it worthwhile. The speculator might also deliver value to whoever they sell to, particularly if the speculator lost money on the deal. Plus they provided liquidity, which sounds like BS until you need that liquidity (eg, try selling a house in a slow market) Banks deliver value too, unless you prefer to do all your transactions in cash that you pull from under your bed and you never need a loan for anything. Rent-seeking is indefensible pretty much by definition, although I think people tend to perceive many things to be rent-seeking that actually aren't.
- pgrote 10y ago5 years ago Altucher advocated not buying stock as lead into buying his system: http://www.jamesaltucher.com/2011/04/10-reasons-you-should-never-own-stocks-again/ http://www.jamesaltucher.com/2011/04/10-reasons-you-should-n... Last year he started selling a system for buying stocks: http://www.timothysykes.com/2015/09/the-best-new-stock-market-tool-with-6-month-money-back-guarantee/ http://www.timothysykes.com/2015/09/the-best-new-stock-marke... http://www.thealtucherreport.com/one-percent.html http://www.thealtucherreport.com/one-percent.html
- thomnific 10y agoMaybe I'm jaded, but reading this I came away a little disappointed at not learning anything much. A lot of the behaviour seems strange, and yes, a little crooked. But "evil"? I think a better explanation is hidden in this phrase. The authour writes: >> Trading is very stressful. I hate it. I would make a bad trade and I would feel my blood pumping all over my body all day long. And then if the trade was a loss I would cry at night. I was so scared all the time. I hated it. On one hand it makes me feel a little better that this happens to even successful people. But on the other hand, you cannot be a trader with this kind of attitude. Suffice to say that not everyone has the same problem. Sounds to me like he's justifying his own actions in retrospect, at least a little. Does recounting a grab-bag of fun anecdotes say anything about the real problems in finance? I like James Altucher a lot, but I expected more here!
- jerryhuang100 10y agoShowtime "Billions" is probably the smartest show so far this year (maybe before Mr.Robot S2). Fun background info: even though the author denies it, the show is loosely based on Steve Cohen of SAC Capital (now family office Point72, after insider trading charges from US Attorney), who the author had a short encounter with. And the "career coach" psychiatrist in the show played by gorgeous Maggie Siff bears resemblance of the famous psychiatrist Ari Kiev floating on the SAC floor. [1] http://www.bloomberg.com/news/articles/2016-01-14/showtime-s-billions-greed-is-gripping http://www.bloomberg.com/news/articles/2016-01-14/showtime-s... [2] http://nypost.com/2015/08/14/embattled-hedgie-inspires-showtime-series/ http://nypost.com/2015/08/14/embattled-hedgie-inspires-showt...
- albertwang 10y agoExcept Bobby Axelrod doesn't have a "Billionaire Pig" which gets to live in it's own room and retire on a vegan farm: http://www.businessinsider.com/steve-cohen-did-have-a-pig-2015-6 http://www.businessinsider.com/steve-cohen-did-have-a-pig-20...
- jerryhuang100 10y agomaybe that's what Lara's vegan farm (for her farm-fresh restaurant) is based on??
- Jerry2 10y agoIsn't Steve Cohen a major investor in some Y Combinator companies?
- turar 10y agoThe US Attorney is widely believed to be loosely based on Preet Bharara. This is a good recent profile: http://www.newyorker.com/magazine/2016/05/09/the-man-who-terrifies-wall-street http://www.newyorker.com/magazine/2016/05/09/the-man-who-ter...
- ppod 10y agoHere's the idea with sounding important: short sentences. It makes you sound urgent. Even knowledgeable. Don't believe me? Throw in a question. And then answer it. Exactly. But the big gun, to hold in reserve? New. Paragraph.
- leroy_masochist 10y agoI'm calling bullshit on this guy being who he says he is (a former hedge fund manager) based on the following two passages: "I would estimate 90% of hedge funds commit crimes along the way." No way. It's a material number, but it's not 90%. Even if the author is using "hedge funds" here to refer to "long-short equity hedge funds"; the latter are often quite sketchy and operate close to the line in terms of hiring consultants who basically traffic in insider information. But the 90% estimate is asinine hyperbole. "The 20% is the percentage of profits that the hedge fund manager takes. So if a one billion dollar hedge funds returns 10% (about the same as most mutual funds on a good year), then the profits are $100 million and the hedge fund manager makes an extra $20 million for himself (20% of $100 million)." NOOOOOOO NONONONONONO. The 2/20 fee structure gives GPs 20% of the carry above a specified hurdle rate that is usually in the mid-high single digits. So, in this example, if the hurdle rate were a relatively industry-standard 8%, the GPs would have earned $4mm. Not $20mm.
- matco11 10y agoThere are several things that give away that he is unlikely to have been a real hedge fund manager (oh well, maybe he managed $5mm of friends and family money, but that does not make him a pro!), but what he says on the fee structure is not one of them: several hedge funds would have the standing to claim 2/20 (or even more) without hurdle rates. A tiny fraction of hedge fund managers would be infringing any laws, if at all. Excluding the over-the-counter markets(!), the better you are as a hedge fund manager, the more you know what can make you money, what can lose you money and which of your decisions were wrong and which were right: there is no room to blame it on other people doing insider trading.
- leroy_masochist 10y agoInteresting, I'm not familiar with any funds that have no hurdle rate whatsoever. I've heard of some that have what people in the industry describe as arrogantly low hurdle rates (like in the 3-4% range), but have never heard of a situation where there is none at all. I agree with you that there might be a few funds that are considered so hot that their GPs could get away with not having a hurdle rate; do you know of any by name? FWIW, my understanding is that if you're a super-in-demand fund, the power move is keeping the same hurdle rate in place (maybe even raising it as a demonstration of confidence in your skills as a money manager) and also raising the carry rate. In other words, going from a 2/20 structure with an 8% hurdle rate to something like a 2/33 structure with a 10% hurdle rate. I believe a few of the Tiger baby funds have done this.
- marcusgarvey 10y agoSome investors like Calpers, biggest pension fund in the U.S., are falling out of love with hedge funds. http://wolfstreet.com/2016/04/21/whats-hammering-hedge-funds/ http://wolfstreet.com/2016/04/21/whats-hammering-hedge-funds...