8 ms·

Hedge-Fund Son Thought Hedge-Fund Dad's Trades Were Fishy

156 points by clbrook 10y ago

savanaly 10y ago
How did I know it was going to be Matt Levine just by the title?
- mbesto 10y ago
  His writing is pure gold. For anyone that hasn't ready Money Stuff, I'd highly recommend it. https://www.bloomberg.com/view/topics/money-stuff https://www.bloomberg.com/view/topics/money-stuff
- Overtonwindow 10y ago
  Brilliant writer!!!
- mayukh 10y ago
  Hands down best writer/explainer in finance. I'd read anything this guy writes. No bs moralizing, just plain rational agents maximizing their own perceived 'profits'
hkmurakami 10y ago
Levine's opening paragraphs are always so strong. The content marketers within us all would be wise to learn from his methods.
- ISL 10y ago
  I've wondered for months now how large his staff might be. The quantity of work that he publishes is substantial, and the quality is quite consistent. I'm a fan, to be sure, but I'd love to know how it's all put together.
  - PhantomGremlin 10y ago
    I wonder if he has a staff at all? If not, then it's even a more impressive body of work! I'm pretty sure that when Matt wrote for http://dealbreaker.com/ http://dealbreaker.com/ he did it without any support staff. It was probably that gig that got him noticed by Bloomberg. I'm a fan, to be sure You can always go back in the Dealbreaker archives and read his earlier stuff. It's pretty equivalent to what he now writes for Bloomberg View. It's a long strange trip for him from "high school Latin teacher": https://www.bloomberg.com/company/announcements/matt-levine-joins-bloomberg-view/ https://www.bloomberg.com/company/announcements/matt-levine-...
    - hkmurakami 10y ago
      Well his HS Latin teacher stint was his gap year before heading to Law School (likely post acceptance), so I'm not entire sure that counts ;).
    - dtnewman 10y ago
      I always enjoyed his articles on Dealbreaker, but I think his writing is very well suited for Bloomberg. However, I feel like his training as a writer for Dealbreaker taught him a style of prose that feels very fresh in a more mainstream news venue. I remember when he first started writing for Dealbreaker and in opinion, his writing quickly improved within a few months there.
  - SonOfLilit 10y ago
    Data point: I once emailed him and got a personal response in a few minutes, then same for my response.
chollida1 10y ago
I think he brings up a dynamic that most people don't fully understand about investor/company relationships, atleast one I didn't understand until I saw it happen many times over. Once a company has a large investor, typically a hedge fund, its very common for the CEO/CFO to have a good personal relationship with that investor. I mean, this just makes sense, under the Warren Buffet theory of investing one of the big things you invest in is the management. And from that it follows that management will often use this investor as a sounding board for ideas. So if a company is going to raise money why not ask the money manager what they think about - how the market will react to an equity vs debt raise, - should they offer warrants as a sweetener? - even things like how they believe the market will react to certain news. And i mean why not? Do you think the companies that Warren Buffent invests in don't call him for advice? And once you allow for this, then as Matt says, things get grey. I don't know how all funds do it but the typical dance is the executive will call up and ask the fund manager if they will be willing to: 1) be locked up from trading 2) for a certain period, typically under 2 weeks. and if the money manager says yes to both, then the executive is free to discuss pretty much anything and everything, including non public information because the hedge fund has agreed to be locked up for the period until the company makes this knowledge public. Where this goes wrong is sometimes executives, or more often, sell side( tiny little investment banks) acting on behalf of the company will call the hedge fund and before asking if they want to be locked up, just blurt out the news. it's an awkward conversation that typically goes something like: "Hey Chris, just wanted to let you know ..... something that will crater the stock in the short term like raising money in a bad market.... This isn't public information yet so you'll be locked up for 2 weeks." And just like that they've fucked you. Now you either have to choose to be locked up knowing that your investment will drop or take the risk of selling and knowing that you'll have to defend your actions to the SEC. Now in the case Matt's talking about they were trading on good news. The only suspicious thing is that Leon Cooperman's fund has been around since about 1991. it really seems weird that he would use short dated options to trade on insider information. That's almost the financial equivalent of going out and buying a gun, using it to commit murder on the same day, and then leaving it at the scene of the crime. The SEC can trace back every option trade to the fund who made it, its not like they can hide and if you are buying a whole whack of out of the money short dated call options then you are either covering a large short position or you are essentially telling the market that you know something is up.
Tinyyy 10y ago
Matt Levine is a great writer and he often brings insights into finance, about what the rules are exactly, and why they are that way (even though they go against our intuitive judgement). I hope that people here would read 'Money Stuff' so we can avoid the inevitable morality bashing whenever a finance article is posted. The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.
- csydas 10y ago
  Well, I would imagine people do understand and accept that the point of financing is profit, but that doesn't free investors or financiera from legal and moral judgement, even when the goals of both act destructively towards one another. You don't get to eschew law/judgement because it's inconvenient to your goals. I don't know enough about finance to comment on the article itself but the idea of "that's it's purpose so you can't judge it that way" rings hollow for me. Scrutiny applies regardless of purpose. The article itself even suggests there are ways the story could play out where Cooperman is guilty, it's just not clear at the moment.
- wpietri 10y ago
  > The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion. Former finance person here. I understand but don't accept. The individual's point may be maximizing profits. The societal point of what we reward, permit, hinder, or ban? That is definitely not maximizing profits. One way to look at it is to compare it with video games. An individual player's proximate goal might be to maximize points scored. But the game designer's goal is broader. The society's goal is broader still. One could even look at the evolutionary purpose of play itself. For those interested in this sort of distinction, I strongly recommend James Carse's "Finite and Infinite Games": https://www.amazon.com/dp/B004W3FM4A/ https://www.amazon.com/dp/B004W3FM4A/
  - jacquesm 10y ago
    A game designers goal is (most of the time) to maximize his own profits.
PhantomGremlin 10y ago
I love Matt, but he actually made a (minor) mistake this time. He wrote in footnote 8: Once the options reached the minimum possible price, there's no reason to keep a short position open -- you can only lose money. So of course Omega should have bought in the position, regardless of whether it had good or bad or no news. That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32. But it was still a bid. The majority of options actually expire worthless. I.e. the "minimum possible price" is actually $0.00. This is often reported as "no bid" well before expiration. So it's wrong to say that Cooperman "can only lose money". He could have actually made an extra $0.07 per option had he not bought them back and potentially allowed them to expire worthless.
- jonknee 10y ago
  > That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32. He's not wrong, he was pointing out that almost all the potential profit had been realized, but there was still a way to lose it all. With numbers: they already made 95% of possible profit, but were able to lose 100%. It makes sense to close a position like that out and is indeed commonplace. Most shops don't like that type of negative asymmetric risk. However, what they didn't do is roll them forward to keep the short position, that's also a common technique.
  - PhantomGremlin 10y ago
    He's not wrong Matt certainly was wrong when he said: you can only lose money. I pointed out that Cooperman could have made a potential additional $0.07 if the options expired, and you're agreeing with that. I agree with you that it usually makes sense to close out or roll an asymmetric position. BUT, and this is an important BUT, holding a position to expiration is far from rare. Here are some statistics (but I can't vouch for their accuracy)[1]: 10% of options are exercised 55% to 60% of options positions are closed out (bought back) 30% to 35% expire worthless Option expiration shouldn't be glossed over. That final case occurs one-third of the time. [1] https://www.stockoptionschannel.com/slideshows/seven-myths/most-options-expire-worthless/ https://www.stockoptionschannel.com/slideshows/seven-myths/m...
dforrestwilson1 10y ago
Interesting perspective. One thing that doesn't get brought up here is that Omega Partners does seem to have a particularly aggressive culture when it comes to gathering information. Just my perspective interacting with them.. I wonder how much of it stems from Cooperman himself.
sjclemmy 10y ago
That's a great article - really well written. It managed to explain a key point of insider trading that I've often wondered about - if I know non-public information what are the rules around trading.
nazka 10y ago
A little bit off topic here but does someone know other great writers like him? I tried Bloomberg View, the Economist, WSJ... but I couldn't find a gem like him.
- lmm 10y ago
  What do you mean by "like him"? The only writer I find comparably insightful is Scott Alexander (slatestarcodex.com), and he has a quite different style and covers quite different subject matter.
  - nazka 10y ago
    I guess it is a combination of a great writing style with interesting stories. He gives us a real view of how it works inside and sometimes he shares his own knowledge. Like in his "Banking is boring."[1] article. [1] https://www.bloomberg.com/view/articles/2016-09-07/boring-banks-and-silly-cds https://www.bloomberg.com/view/articles/2016-09-07/boring-ba...
- oli5679 10y ago
  Two recommendations: Tim Harford - http://timharford.com/ http://timharford.com/ Tyler Cowen - http://marginalrevolution.com/ http://marginalrevolution.com/
  - nazka 10y ago
    Thank you!
  - lmm 10y ago
    I'd recommend against marginal revolution. It's sensationalist and often wrong or confused, IME.
    - jessriedel 10y ago
      I find Tyler Cowen to be insightful, even if he has strong political opinions (which he expresses). Can you point to a few sensationalist/wrong/confused posts so I can compare?
TazeTSchnitzel 10y ago
“and that's how Madoff became a household name”
thro1237 10y ago
How do you find out unusual option activity that the author refers to? Any references?

156 points by clbrook 10y ago

savanaly 10y ago

How did I know it was going to be Matt Levine just by the title?

mbesto 10y ago
His writing is pure gold. For anyone that hasn't ready Money Stuff, I'd highly recommend it. https://www.bloomberg.com/view/topics/money-stuff https://www.bloomberg.com/view/topics/money-stuff
Overtonwindow 10y ago
Brilliant writer!!!
mayukh 10y ago
Hands down best writer/explainer in finance. I'd read anything this guy writes. No bs moralizing, just plain rational agents maximizing their own perceived 'profits'

hkmurakami 10y ago

Levine's opening paragraphs are always so strong. The content marketers within us all would be wise to learn from his methods.

ISL 10y ago
I've wondered for months now how large his staff might be. The quantity of work that he publishes is substantial, and the quality is quite consistent. I'm a fan, to be sure, but I'd love to know how it's all put together.
- PhantomGremlin 10y ago
  I wonder if he has a staff at all? If not, then it's even a more impressive body of work! I'm pretty sure that when Matt wrote for http://dealbreaker.com/ http://dealbreaker.com/ he did it without any support staff. It was probably that gig that got him noticed by Bloomberg. I'm a fan, to be sure You can always go back in the Dealbreaker archives and read his earlier stuff. It's pretty equivalent to what he now writes for Bloomberg View. It's a long strange trip for him from "high school Latin teacher": https://www.bloomberg.com/company/announcements/matt-levine-joins-bloomberg-view/ https://www.bloomberg.com/company/announcements/matt-levine-...
  - hkmurakami 10y ago
    Well his HS Latin teacher stint was his gap year before heading to Law School (likely post acceptance), so I'm not entire sure that counts ;).
  - dtnewman 10y ago
    I always enjoyed his articles on Dealbreaker, but I think his writing is very well suited for Bloomberg. However, I feel like his training as a writer for Dealbreaker taught him a style of prose that feels very fresh in a more mainstream news venue. I remember when he first started writing for Dealbreaker and in opinion, his writing quickly improved within a few months there.
- SonOfLilit 10y ago
  Data point: I once emailed him and got a personal response in a few minutes, then same for my response.

chollida1 10y ago

I think he brings up a dynamic that most people don't fully understand about investor/company relationships, atleast one I didn't understand until I saw it happen many times over. Once a company has a large investor, typically a hedge fund, its very common for the CEO/CFO to have a good personal relationship with that investor. I mean, this just makes sense, under the Warren Buffet theory of investing one of the big things you invest in is the management. And from that it follows that management will often use this investor as a sounding board for ideas. So if a company is going to raise money why not ask the money manager what they think about - how the market will react to an equity vs debt raise, - should they offer warrants as a sweetener? - even things like how they believe the market will react to certain news. And i mean why not? Do you think the companies that Warren Buffent invests in don't call him for advice? And once you allow for this, then as Matt says, things get grey. I don't know how all funds do it but the typical dance is the executive will call up and ask the fund manager if they will be willing to: 1) be locked up from trading 2) for a certain period, typically under 2 weeks. and if the money manager says yes to both, then the executive is free to discuss pretty much anything and everything, including non public information because the hedge fund has agreed to be locked up for the period until the company makes this knowledge public. Where this goes wrong is sometimes executives, or more often, sell side( tiny little investment banks) acting on behalf of the company will call the hedge fund and before asking if they want to be locked up, just blurt out the news. it's an awkward conversation that typically goes something like: "Hey Chris, just wanted to let you know ..... something that will crater the stock in the short term like raising money in a bad market.... This isn't public information yet so you'll be locked up for 2 weeks." And just like that they've fucked you. Now you either have to choose to be locked up knowing that your investment will drop or take the risk of selling and knowing that you'll have to defend your actions to the SEC. Now in the case Matt's talking about they were trading on good news. The only suspicious thing is that Leon Cooperman's fund has been around since about 1991. it really seems weird that he would use short dated options to trade on insider information. That's almost the financial equivalent of going out and buying a gun, using it to commit murder on the same day, and then leaving it at the scene of the crime. The SEC can trace back every option trade to the fund who made it, its not like they can hide and if you are buying a whole whack of out of the money short dated call options then you are either covering a large short position or you are essentially telling the market that you know something is up.

Tinyyy 10y ago

Matt Levine is a great writer and he often brings insights into finance, about what the rules are exactly, and why they are that way (even though they go against our intuitive judgement). I hope that people here would read 'Money Stuff' so we can avoid the inevitable morality bashing whenever a finance article is posted. The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion.

csydas 10y ago
Well, I would imagine people do understand and accept that the point of financing is profit, but that doesn't free investors or financiera from legal and moral judgement, even when the goals of both act destructively towards one another. You don't get to eschew law/judgement because it's inconvenient to your goals. I don't know enough about finance to comment on the article itself but the idea of "that's it's purpose so you can't judge it that way" rings hollow for me. Scrutiny applies regardless of purpose. The article itself even suggests there are ways the story could play out where Cooperman is guilty, it's just not clear at the moment.
wpietri 10y ago
> The whole point of finance is maximizing profits; I think that people need to understand and accept this for us to have a meaningful discussion. Former finance person here. I understand but don't accept. The individual's point may be maximizing profits. The societal point of what we reward, permit, hinder, or ban? That is definitely not maximizing profits. One way to look at it is to compare it with video games. An individual player's proximate goal might be to maximize points scored. But the game designer's goal is broader. The society's goal is broader still. One could even look at the evolutionary purpose of play itself. For those interested in this sort of distinction, I strongly recommend James Carse's "Finite and Infinite Games": https://www.amazon.com/dp/B004W3FM4A/ https://www.amazon.com/dp/B004W3FM4A/
- jacquesm 10y ago
  A game designers goal is (most of the time) to maximize his own profits.

PhantomGremlin 10y ago

I love Matt, but he actually made a (minor) mistake this time. He wrote in footnote 8: Once the options reached the minimum possible price, there's no reason to keep a short position open -- you can only lose money. So of course Omega should have bought in the position, regardless of whether it had good or bad or no news. That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32. But it was still a bid. The majority of options actually expire worthless. I.e. the "minimum possible price" is actually $0.00. This is often reported as "no bid" well before expiration. So it's wrong to say that Cooperman "can only lose money". He could have actually made an extra $0.07 per option had he not bought them back and potentially allowed them to expire worthless.

jonknee 10y ago
> That's wrong. The options had an actual price. Granted, it was a low price, Cooperman bought them back at an average of $0.07, having sold for $1.32. He's not wrong, he was pointing out that almost all the potential profit had been realized, but there was still a way to lose it all. With numbers: they already made 95% of possible profit, but were able to lose 100%. It makes sense to close a position like that out and is indeed commonplace. Most shops don't like that type of negative asymmetric risk. However, what they didn't do is roll them forward to keep the short position, that's also a common technique.
- PhantomGremlin 10y ago
  He's not wrong Matt certainly was wrong when he said: you can only lose money. I pointed out that Cooperman could have made a potential additional $0.07 if the options expired, and you're agreeing with that. I agree with you that it usually makes sense to close out or roll an asymmetric position. BUT, and this is an important BUT, holding a position to expiration is far from rare. Here are some statistics (but I can't vouch for their accuracy)[1]: 10% of options are exercised 55% to 60% of options positions are closed out (bought back) 30% to 35% expire worthless Option expiration shouldn't be glossed over. That final case occurs one-third of the time. [1] https://www.stockoptionschannel.com/slideshows/seven-myths/most-options-expire-worthless/ https://www.stockoptionschannel.com/slideshows/seven-myths/m...

dforrestwilson1 10y ago

Interesting perspective. One thing that doesn't get brought up here is that Omega Partners does seem to have a particularly aggressive culture when it comes to gathering information. Just my perspective interacting with them.. I wonder how much of it stems from Cooperman himself.

sjclemmy 10y ago

That's a great article - really well written. It managed to explain a key point of insider trading that I've often wondered about - if I know non-public information what are the rules around trading.

nazka 10y ago

A little bit off topic here but does someone know other great writers like him? I tried Bloomberg View, the Economist, WSJ... but I couldn't find a gem like him.

lmm 10y ago
What do you mean by "like him"? The only writer I find comparably insightful is Scott Alexander (slatestarcodex.com), and he has a quite different style and covers quite different subject matter.
- nazka 10y ago
  I guess it is a combination of a great writing style with interesting stories. He gives us a real view of how it works inside and sometimes he shares his own knowledge. Like in his "Banking is boring."[1] article. [1] https://www.bloomberg.com/view/articles/2016-09-07/boring-banks-and-silly-cds https://www.bloomberg.com/view/articles/2016-09-07/boring-ba...
oli5679 10y ago
Two recommendations: Tim Harford - http://timharford.com/ http://timharford.com/ Tyler Cowen - http://marginalrevolution.com/ http://marginalrevolution.com/
- nazka 10y ago
  Thank you!
- lmm 10y ago
  I'd recommend against marginal revolution. It's sensationalist and often wrong or confused, IME.
  - jessriedel 10y ago
    I find Tyler Cowen to be insightful, even if he has strong political opinions (which he expresses). Can you point to a few sensationalist/wrong/confused posts so I can compare?

TazeTSchnitzel 10y ago

“and that's how Madoff became a household name”

thro1237 10y ago

How do you find out unusual option activity that the author refers to? Any references?