BlackRock's Robo-Quants Are On Pace To Post Record Losses

BlackRock’s quant hedge-fund strategies were on track for losses in 2016, according to a monthly client update sent out in late December, and according to Bloomberg, of the five included, four were set for their worst returns on record.

Bank Of America Psycho Killer Was Busy Helping Hedge Funds Avoid Taxes During His Business Hours

The most bizarre story of the weekend was that of Bank of America's 29-year-old banker Rurik Jutting, who shortly after allegedly killing two prostitutes (and stuffing one in a suitcase), and called the cops on himself.  The answer, as the WSJ has revealed, is just as unsavory: "he had been part of a Bank of America team that specialized in tax-minimization trades that are under scrutiny from prosecutors, regulators, tax collectors and the bank’s own compliance department, according to people familiar with the matter and documents reviewed by The Wall Street Journal."

Another Deutsche Banker And Former SEC Enforcement Attorney Commits Suicide

Back on January 26, a 58-year-old former senior executive at German investment bank behemoth Deutsche Bank, William Broeksmit, was found dead after hanging himself at his London home, and with that, set off an unprecedented series of banker suicides throughout the year which included former Fed officials and numerous JPMorgan traders. Following a brief late summer spell in which there was little if any news of bankers taking their lives, as reported previously, the banker suicides returned with a bang when none other than the hedge fund partner of infamous former IMF head Dominique Strauss-Khan, Thierry Leyne, a French-Israeli entrepreneur, was found dead after jumping off the 23rd floor of one of the Yoo towers, a prestigious residential complex in Tel Aviv.  Just a few brief hours later the WSJ reported that yet another Deutsche Bank veteran has committed suicide, and not just anyone but the bank's associate general counsel, 41 year old Calogero "Charlie" Gambino, who was found on the morning of Oct. 20, having also hung himself by the neck from a stairway banister,

Congressional Hearing On Hedge Fund Tax Evasion Through "Fictional Derivatives" - Live Webcast

As reported yesterday, at 9:30 am this morning the permanent subcommittee on investigations will hold a hearing in which it will expose the latest tax-evasion loophole used by select high-frequency trading hedge funds which has the technical name "basket options", but which, thanks to Carl Levin's mnemonic of fictional derivatives" will be better known as such (read the full story How RenTec Made More Than $34 Billion In Profits Since 1998: "Fictional Derivatives"). It will be interesting to learn, although we doubt it will be discussed, how in light of collapsing trading volumes for underlying securities, how much of the record derivative and future trading volume in recent years is directly related to this kind of tax-evading trading, and perhaps just as important, whether Congress and the IRS will crack down on such practices in the future.

How RenTec Made More Than $34 Billion In Profits Since 1998: "Fictional Derivatives"

From 1998 to 2013, Barclays and Deutsche Bank sold 199 basket options to hedge funds which used them to conduct more than $100 billion in trades. The subcommittee focused on options involving two of the largest basket option users, Renaissance Technology Corp. LLC (“RenTec”) and George Weiss Associates. The hedge funds often exercised the options shortly after the one-year mark and claimed the trading profits were eligible for the lower income tax rate that applies to long-term capital gains on assets held for at least a year. RenTec claimed it could treat the trading profits as long term gains, even though it executed an average of 26 to 39 million trades per year and held many positions for mere seconds. Data provided by the participants indicates that basket options produced about $34 billion in trading profits for RenTec alone, and more than $1 billion in financing and trading fees for the two banks.

Quant Giant RenTec Has Best Month Ever In October Thanks To... Shorts

For all purists still stuck in a world in which humans are the most efficient allocators of capital, and where, under Ben Bernanke's centrally-planned New Normal, shorting stocks has become blasphemy, the following table showing the monthly return of quant giant RenTec's chief equity fund open to the outside world, the Renaissance Institutional Equities Fund (RIEF B), whose AUM has ballooned to $8.7 billion in the past few years, will come as a shock. Because the quant strategy-driven fund, which does not look at fundamentals but purely at technical relationships and quant arbs, just posted its best month in history in October returning 8.65% nearly doubling the 4.60% return of the broader market. But the truly stunning aspect of RenTec's October performance is that it was not driven by a highly levered beta position (2x leverage on the S&P would do it easily) which is how virtually everyone else does it (a strategy that works great as long as the market is going higher), but instead thanks to that nearly forgotten aspect of a "hedge" fund's exposure - shorts.

A Simple Question For Senator Schumer

As many already know, earlier today Senator Schumer announced the cleverly named Ex-PATRIOT act, which seeks nothing short of exile for anyone who effectively declines their US citizenship for tax avoidance purposes. So far so good. We have, however, one simple question. In light of recent media reports of rampant abuse of various international tax loopholes by US corporations (recall the Double Irish with a Dutch Sandwich), but much more importantly, the glaring abuse of offshore tax shelters by hedge funds - organization such as Paulson & Co., RenTec, York Capital, etc., and financial institutions, such as Lazard, Blackstone, and Credit Suisse, can Senator Schumer please rep, warrant and guarantee that none of his corporate sponsors, i.e., his Top 100 Contributors, have ever engaged in any form of explicit or implicit tax avoidance, tax offshoring, and tax shelter. To facilitate his checklisting, we have presented his top 100 contributors below. Because if he can't, one may be left with the impression that his whole anti-tax tirade and legislation is, you know, hypocritical.

It's Not 2008, It Is 2007: Goldman Global Alpha Just Blew Up All Over Again

Those who have been around for more than one trading generation (which in the old days was 3-4 years, but in the current centrally-planned, vacuum tube-traded times, is more like 3-4 months), will distinctly recall that the first rumbling of the financial crisis started not with the bankruptcy of Lehman, or even the handoff of Bear (and its massive silver legacy short) to Jamie Dimon, but in August 2007, when days after the market hit its all time high, something went massively wrong in the quant market segment (nobody still knows what it was but many speculate that is was simply every algo being on the same side of the trade and trading out all at the same time following the blow up of the Bear Stearns hedge funds). What the first week of August 2007 was notable for, in addition to massive losses for such legendary quants as RenTec (very well described in Scott Patterson's book titled appropriately enough "The Quants"), was that for the first time ever, the infallible Goldman Sachs... fell. Specifically, its heretofore mythical Global Alpha quant fund, which had the mythical allure of a 33rd degree Freemason dinner, imploded, and crashed, forcing the end of a quant generation, and the beginning of the end of Goldman's aura of invincibility. As Bloomberg recalls those August 2007 days: "Goldman Sachs Group Inc.'s $8 billion Global Alpha hedge fund has fallen 26 percent so far this year, a decline that may prompt more investors to withdraw their money, according to people familiar with the fund...On June 26, Goldman said Eric Schwartz, co-head of asset management since 2003, would step down in the next few months and leave Peter Kraus in charge of the fund unit. Global Alpha decreased 8 percent during the last full week of July and was down 16 percent from the beginning of January through Aug. 3. There is an Aug. 15 deadline for Global Alpha investors who want to redeem money on Sept. 30." Well, the reason we bring all of this up, is because unlike what everyone claims, it is not 2008.... it is 2007 all over again. To wit: Goldman Global Alpha just blew up, for the second and probably last time.

Retail Renaissance Revolt: Best Buy Plunges As Top Line Misses, Cuts Forecast, Comp Stores Down And Sees Pervasive Weakness

Is the retail revolution over? Best Buy, which was seen by many as the best indicator of retail hunger for all sorts of irrelevant Made in China Gizmos is plunging in pre-market trading, now down over 10%, after the company announces a massive top line miss of $11.89 billion in Q3 revenue on expectations of $12.45 billion. We can't remember when a retailer had a nearly 5% miss in top line, and is certainly a major cause of concern for not only the retail renaissance but for... Apple, for whom the store is the second biggest seller. Some other horrendous data points: Q3 comp sales down 3.3%; domestic Q3 comp sales down 5.0%, the company sees year EPS USD 3.20-3.40, saw USD 3.55-3.70, vs. Exp. USD 3.59, and notes domestic sales were softer than expected (as if it wasn't obvious). Broader market futures are also moving lower on the news that the market has managed to extract as much as it could out of a consumer base that is no longer paying its mortgages. Incidentally, how this could be a surprise is stunning: on October 31 we wrote that "TV pricing bloodbath threatens already razor-thin retailer margins" - of course, what is obvious to some, is completely opaque to the robots who only focus on positive headlines news. Perhaps a number for RenTec to tweak that algo a little?

Late Day High-Beta Selloff Ends Nasdaq 8 Day Rally

Out of nowhere, a late day selloff in high beta tech names ends the Nasdaq's 8 day winning rally, and causes a red close to the tech index which as we presented over the weekend, has the highest bull/bear ratio since the dot com days. Various rumors are swirling to explain this stunning event, among which one of the more provocative ones is that the universe of Rentec alphaclones (namely the moderate money momos, which have recently taken over the market, and which mimic Rentec RIEF B public holdings, which many believe are broadly indicative of Medallion's portfolio) is slowly starting to pocket year end profits, comparable to the action in gold last week, when gold sold off after a couple of macro funds closed out gold positions at massive profits. Is the now extinct process of profit taking about to reemerge from the ashes? On the other hand, this could merely be a brief respite to what has become the most ridiculous tech-driven momo market in many current traders' lifetimes.

Paolo Pellegrini Is Coming Back As A Quant, Laments Loss Of Traditional Investment Thought In A Fed-Dominated World

It appears Paolo Pellegrini, the brains behind Paulson & Co. most profitable trade, is coming back... as a quant. As we reported in August, the billionaire manager's former fund - PSQR - had decided to return all capital to investors citing "challenging market conditions." It only took Paolo 3 months to realize that money is no longer to be made in a macro world dominated by central bank infighting, in which a schizophrenic market goes up or down by several percentage points on a daily basis depending on what word feels out of place in any given central banker's speech, and instead will focus on "quantitative disciplines" along the lines of DE Shaw and RenTec. And why not: the only ones left making money in this market are momentum chasing strategies which have millisecond frontrunning arbitrage over the rest of what is left of the heard. As to the visionary's current market views, his mantra is "don't fight the Fed" even as he sees bond trading at ridiculously high levels, although with a caveat: "of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis.  That is very difficult, though, to predict." As we predicted earlier in the year not only are macro funds soon going to be extinct but the same fate lies in store for the traditional long/short 130/30 group. Very soon every fund will need to have their own quant/HFT group (SAC has already quietly amassed almost 20 HFT pods) just to be able to attract outside investors. After all why else is the woefully underpaid SEC admitting it has no idea how to fix the market now entirely dominated by HFT, and will merely extend its completely worthless "circuit breaker" model for another three months, then another three months, and so on.

Jim O'Neill - Welcome To Your New Job

Everyone's favorite N-11 expert is shifting to a new position as head of Goldman Sachs Asset Management. Alas, according to Absolute Return + Alpha, the man who pretty much coined the term decoupling has a substantial uphill climb. Based on the AR+A hedge fund score sheet, GSAM ranks almost dead last in the categories of Alignment of Interests and Alpha Generation (in the last category only beaten by quants AQR and RenTec, where Jim Simons praises the HFT role in the Flash Crash. We wonder if he will change his (swan) song once the SEC finally discovers that it was the HFT's fault all along... some time in 100 years).

The Complete Q2 Hedge Fund Holdings Update (In Which We Discover That 181 HFs Hold Apple Stock)

The quarterly Goldman Hedge Fund Trend Monitor, aka the HF groupthink update, is released, chock full of HF holding trivia, such as that should Apple ever miss its priced to absolute perfection business model, a whopping 181 hedge funds are going to suffer, and 75 HFs, who have Apple as a top 10 holding, are going to get crushed. Also, we uncover the latest top 10 hedge funds ranked by equity assets (DE Shaw, RenTec and Paulson are the new top 3, although with 2,048 and 2,669 holdings for the first two, they are now receiving 2 and 20 for their quant models which as the NYT highlighted recently no longer work). On the other end of the quant spectrum, are the traditional hedge funds, and as of Q2, the typical fund had an average of 63% of its long-equity assets invested in its 10 largest positions, compared to 30% for a typical large-cap mutual fund, 17% for a small-cap mutual fund, 19% for the S&P and just 2% for the Russell 2000. The top 5 most concentrated hedge fund holdings are AutoNation (46% of market cap held by HFs), Sears (45%), AutoZone (32%), Pactiv (28%) and Novell (27%). Also hilarious perpetual LBO candidate Radioshack has hedge funds make up 24% of its market cap. In other words, any bad news here will kill the stock price faster than a HFT can frontrun the exponential pulling of bids. On the other side, or the names most hated by hedge funds, is Brown Forman, where only 0.2% of HFs make up its market cap, followed by Roper Industries, Stericycle, Hormel, and Praxair. From a surprise upside potential perspective, Goldman estimates that the most HF-shorted names is Crown Media, which has a 99 day short interest ratiom followed by Lifeway Foods, Isramco, K-Fed Bancorp, First South Bancorp, and Costar Group. Shorts Squeezes in these names could be violent. Looking at ETFs, the biggest gross long ETF held by HFs is GLD with $8 billion in long ownership, while the most shorted is SPY with $27.6 billion in shorts, indicating that funds are now "hedging" using this proxy for the entire market. Lastly, in confirmation that hedge funds are for the most part worthless "groupthink" contraptions which merely ride a leveraged beta wave, and suck out management fees, Goldman highlights that the "Most Concentrated" basket of stocks has underperformed the "Least Concentrated" stocks materially since February 2007, confirming that HFs have actually destroyed value in both the past 3 years and YTD, by underperforming the market.

Frontrunning: July 26

  • The secrets of the Afghan war released (WSJ)
  • BP set to announce Hayward departure (FT)
  • Must read: The death of paper money (Telegraph)
  • European Banking's Next Focus Is Funding (WSJ)
  • U.K. Growth Forecast Cut on Budget Curbs, Ernst & Young to Say (BusinessWeek)
  • Taleb: Government Deficits Could Be the Next 'Black Swan' (BusinessWeek)
  • Deficits Don't Matter as Geithner Growth Gets Lowest Yield (Bloomberg)
  • When will the US go the way of Rome (RCM)
  • More CMBS Defaults Coming this Fall as Special Servicers Try to Keep Up (Houseing Wire)