James Comey, the former general counsel of global hedge fund Bridgewater Associates and current director of the FBI is, according to thought-leaders across the technology industry, “doing more to break the brand image of the country’s top law enforcement agency than it is in doing its job properly” as it continues to battle Apple Inc (NASDAQ: AAPL) in an effort to force the world’s biggest tech company to crack the iPhone encryption protocol and effectively break its own technology in a manner that will destroy the trust of millions of Apple customers.
In his appearance before Congress yesterday, Comey acknowledged that FBI technicians “screwed up” by failing to follow steps that most tech-savvy people would never have made.
According to one financial industry hedge fund manager specializing in computer-based strategies, and whose three sons are each considered to be computer programming savants (as evidenced by each graduating at the top of their Ivy League schools and each since heavily-recruited by the two most successful quant-trading firms on Wall Street where in less than 12 months, they have now risen to the top tiers of those firms), “Even my kids have said that it doesn’t take a rocket scientist to accomplish the basic objective of what the FBI attempted to do in the San Bernardino situation.”
Added that HF manager, “Contrary to what some have speculated, this is not a case in which the FBI was reticent to hack the device in question because of concerns with regard to privacy laws. To their credit, they tried to investigate what most of us would consider to be a crime scene perpetrated by bad actors seeking to wreak havoc in accordance with Islamic Jihadist idealogy. The issue is that our top national law enforcement agency experts bungled their job because they apparently have no internal resources who understand modern technology or the most ubiquitous mobile device on the planet. It seems they are now trying to undermine the integrity of one of the world’s most important companies. The ineptitude is mind-boggling.”
The battle between business news pontificaters across the 4th estate is in full season, as evidenced by a smart article yesterday by Bloomberg LP’s Eric Balchunas and suggests that MarketsMuse curators are apparently not the only topic experts who noticed and took aim at a recent WSJ article that proclaimed savvy hedge fund types are increasingly exploiting exchange-traded funds by arbitraging price anomalies between the underlying constituents and the ETF cash product that occur in volatile moments.
That original WSJ article, “Traders Seek Ways to benefit from ETF woes …At the Expense of Investors” was misleading, and as noted by MarketsMuse Sept 30 op-ed reply to the WSJ piece, one long time ETF expert asserted that WSJ’s conclusions was “much ado about nothing.” Bloomberg’s Balchunas has since reached a similar conclusion; below are extracted observations from his Oct 12 column..
Hedge funds may need to get back to the drawing board if they’re planning to turn around their performance struggles by capitalizing on “shortcomings in the ETFs’ structure” via some unusual trade ideas, as highlighted in this recent Wall Street Journal article. Most funds do nothing of the sort.
The vast majority of ETF usage by hedge funds is very boring. They love to short ETFs to get their hedge on and isolate some kind of risk. For example, they may short the Health Care Select Sector SPDR ETF (XLV) and then make a bet on one of the health-care stocks in the basket in order to quarantine a single security bet. Hedge funds have about $116 billion worth of ETF shares shorted, compared with only $34 billion in long positions, according to data compiled by Goldman Sachs last year.
The $34 billion in long positions is them using ETFs like everyone else — as a way to get quick and convenient exposure to a particular market. For example, the world’s largest hedge fund, Bridgewater Associates, has a $4 billion position in the Vanguard FTSE Emerging Markets ETF (VWO), which it has held for six years now. There’s also Paulson & Co.’s famous $1 billion position in SPDR Gold Trust (GLD), which it has been holding for almost seven years. Like anyone else, they like the cheap exposure and liquidity VWO and GLD serve up.
With that context in place, yes, there are a tiny minority of hedge funds that engage in some complex trades like the ones highlighted in the article. But each trade comes with at least one big problem.
Before anyone tries any of these at home, it’s important to deconstruct them.
Trade #1: Robbing Grandma
How it works: During a major selloff, try and scoop up shares at discounted prices put in by small investors using market orders.
The problem: It’s super rare. Aug. 24, which saw hundreds of ETFs trade at sharp discounts amid a major selloff, was basically an anomaly. At best, a day like that happens once every two years. Thus, to capitalize on discounts of the 20-30 percent variety is like standing on a beach waiting for a hurricane to hit. And you won’t be the only one, so you may wait two years only to find you can’t get your order filled on the day the big one hits. In addition, no large institutional investors are putting in market orders. So this low-hanging fruit is sell orders for tiny amounts put in by unknowing small investors. Essentially this is the white-collar equivalent of robbing Grandma for some loose change in her purse.
Moreover, Aug. 24 may never happen again, at least the way it unfolded. ETF issuers are working with the exchanges, the regulators, and the market makers — and even making significant recommendations — to make sure those kinds of small investors aren’t exposed again like that.
It should be noted, though, that arbitrage between the ETF price and the value of the holdings happens day in and day out with ETFs — that’s how ETFs work. They rely on a network of market makers and authorized participants to arbitrage away the discrepancy between the ETF’s underlyings and its net asset value (NAV).
Trade #2: The Double Short
To continue reading the straight scoop from Bloomberg columnist Eric Balchunas, click here
MarketsMuse editors were relieved yesterday after the Fed announcement for two reasons; the first being we were reminded that at least half of Wall Street’s Fed-watching pundits who get paid big bucks to predict events can be replaced by anyone who can flip a coin, as half of the pundits were wrong and arguably, at least half of those who were right, were probably right for the wrong reasons. One would need to have a transcript of the entire meeting to know what those Fed governors were thinking and saying.
The second relief comes from having watched a post-announcement color commentary on CNBC “Fed Winners and Losers”..which had sober and well-thought out thoughts from Rareview Macro’s Neil Azous and SocGen’s Larry McDonald