Adam Parker's high-flying fund has hit a patch of turbulence.
Center Lake Capital, a New York-based firm running more than $650 million, has lost its top two analysts in the last month. The two analysts, Anjelo Austria and Andrew Morton, joined the fund in 2018 and 2019, respectively.
The firm's investment team now consists of just Parker and senior analyst Matthew Greenberg, who joined in January after a four-year stint at now-closed hedge fund Valinor Management.
Center Lake declined to comment, and Austria and Morton did not respond to requests for comment.
The departures come at the end of a rough three months for Parker, who was named to Business Insider's 2019 rising stars of Wall Street list. His flagship fund, which returned more than 41% last year, fell by 9.3% in the first quarter thanks to an 8.9% drop in March alone, according to a fact sheet. The firm's new long-only fund was down roughly 17% for the first quarter, sources tell Insider.
The average fund, according to Hedge Fund Research, was up more than 6% through the first quarter.
Already though, Parker — who worked for legendary investor Stanley Druckenmiller's Duquesne Capital and spin-off fund PointState Capital — has started to recover his losses.
The flagship fund is now only down 2% through mid-April for the year while the firm's long-only fund is down roughly 4% through the same timeframe. A source familiar with the firm tells Insider that both funds had inflows in March.
This source also tells Insider that the firm is looking to hire a senior analyst. Parker's strategy focuses on making bets on tech and software stocks.
It's been a dramatic year for financial markets so far. Retail traders pumped up GameStop in January, captivating the financial world and whacking hedge funds who had been betting against the stock.
Then in March, the Archegos investment fund spectacularly imploded, wiping out a $20 billion fortune and sending banks scrambling to distance themselves from the collapse.
Yet, despite this turbulence, banks and hedge funds just had one of the best quarters in recent memory, smashing expectations and earning big bucks for their clients.
How did they do it? JPMorgan boss Jamie Dimon put it well himself when his bank's earnings came out: "Stimulus spending, potential infrastructure spending, continued quantitative easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic."
Hedge funds turn it around after rocky January
The year got off to a bad start for many hedge funds, when a band of online retail traders decided to pump up GameStop stock. A number of high-profile funds, who had been betting against the ailing company, were hit hard.
A narrative built up in the media and among the retail investors themselves that a day-trading army was laying siege to Wall Street. And in some places it was: Gabe Plotkin's Melvin Capital, for instance, was left nursing a 49% loss on its investments in the first quarter, according to reports.
But the GameStop saga was only felt by a handful of firms, says Andrew Beer, managing member at Dynamic Beta Investments, an investment firm that follows some hedge-fund tactics.
Hedge funds made a gain of 4.8% in the first three months of 2021, the best first-quarter performance since the heady days before the financial crisis, according to data from Eurekahedge. North American hedge funds gained 6.8%.
"GameStop to me was a tempest in a teapot," Beer told Insider. "Most funds actually did fine… because what was more important for them was getting the value rotation right."
The first quarter saw volatility in stock markets as investors positioned for stronger growth, rotating out of big tech into stocks in neglected sectors such as finance and industry.
Beer says that with the market going through "regime changes," hedge funds did well because they had the flexibility and agility "to be tech investors in 2019, but value investors and small-cap investors today."
There were also opportunities for hedge funds who specialize in betting against, or shorting, stocks, says Mohammad Hassan, head analyst at Eurekahedge.
"The growth factor struggled in Q1, creating opportunities on the short side of the book for hedge fund managers as non-profitable technology stocks got a 'speeding ticket', so to speak," he told Insider.
Banks smash earnings expectations as market income booms
Wall Street's banks also escaped largely unscathed from the Archegos implosion. Morgan Stanley posted a record profit despite taking a $911 million hit tied to the fund.
Like hedge funds, the big banks also reaped rewards from highly active financial markets, helping big names like JPMorgan and Goldman Sachs wow analysts with record earnings.
Earnings at S&P 500 banks grew a staggering 248% year on year, according to FactSet. Investment banking revenue at Goldman Sachs shot up 105% as the lender's traders cashed in on rising and volatile markets.
Even at the more consumer-focused Bank of America, sales and trading revenue rose 17% as clients played the market, helping its profit more than double.
The boom in retail trading, which lay behind the GameStop saga may also have helped, says Filippo Alloatti, senior credit analyst at Federated Hermes.
"[Retail investors] may trade with some of the bank's platforms, but [it also] brings more inflows into equities and therefore facilitates equity capital market business," he told Insider.
Crucially, the brightening in the economic outlook after the arrival of COVID-19 vaccines. In addition, the announcement of more major stimulus measures helped banks release $10.2 billion from the provisions set aside to cover loan losses, according to FactSet.
"There's just no doubt that the… bear case scenarios that the banks had put into those forecasts around building their loan-loss reserves have gotten less bad," Ken Usdin, US banking analyst at Jefferies, tells Insider.
But there are a few dangers on the horizon for banks. Although many of those involved seem to have escaped the Archegos affair unscathed, Swiss lender Credit Suisse is still struggling and similar events could yet have broader ramifications.
Meanwhile, banks' traditional business of making loans has slowed, as stimulus money has helped people pay down their debts.
The Federal Reserve looks set to keep the party going
Underlying the very strong quarter for banks and hedge funds has been the Federal Reserve, analysts say, which has made borrowing ultra-cheap and pumped cash into the economy and markets.
William McChesney Martin, Fed chair in the 1950s, famously said the Fed's job is to provide the punch at the party but take it away just as things start warming up.
Beer said this no longer seems to be the case, with the central bank saying it wants to see a hot jobs market and will tolerate higher inflation. "The Fed has basically said, here's the punch bowl, have at it, and the party is going to go on well past curfew," he said.
JPMorgan's Dimon is bullish, despite residual concerns about lower loans and rising coronavirus cases around the world, saying: "We believe that the economy has the potential to have extremely robust, multi-year growth."
Until the blow-up of London-based Greensill Capital, asset manager John Hempton wasn't having a good few months.
"I short nonsense stocks and shorting nonsense stocks gave me the worst three or four months of my career in the lead up over the Christmas period, and then has suddenly become exceedingly nice," Hempton told Bloomberg's "Odd Lots" podcast on April 19.
The Australian hedge fund manager, whose firm has around $644 million assets under management, sat down with Bloomberg editors Tracy Alloway and Joe Weisenthal on the podcast to discuss his shorting of Credit Suisse based on its financing to Greensill and the current bull market.
"We're making money on both sides of the book at the moment, we're making money on longs, because we're long ordinary stocks in the markets making new highs and we're making money on shorts cause the nonsense stocks have been blazing," Hempton said on the podcast. "And I don't know how long this will last, but it's extremely pleasant, having been extremely unpleasant."
Shorting Credit Suisse
One of Hempton's big bets was shorting Swiss bank Credit Suisse over its role in lending to Greensill Capital, a supply chain financier that was domiciled in Australia, but operated in London.
Short selling is when an investor borrows a security that they then sell with the expectation that the price will drop and they will be able to buy it back later more cheaply and pocket the difference.
Hempton recognized supply-chain financing was a shrinking business. Yet, Greensill was still securing significant amounts of money from big name players in loans, such as Credit Suisse and Softbank.
Greensill ended up becoming a lender of last-resort to many sketchy creditors, Hempton said in his March partner letter, and was undertaking significant risk-taking, which eventually resulted in bankruptcy in March and major losses for Credit Suisse.
"I am short Credit Suisse, but I was short Credit Suisse in fairly big quantity in the past," Hempton said on the podcast. "I'm now short Credit Suisse in very small quantities. You can probably think of me as a Credit Suisse buyer to cover."
During the podcast, Alloway highlights that Bloomberg asked Credit Suisse for a comment on Hempton's short position and it declined to do so.
"The real problem is that this bank is a shadow of its former self, its revenue opportunities have disappeared," Hempton said.
He expects more evidence of fraud to emerge at companies that have been lent money by big banks that can then profit from those loans.
"I'm actually chasing down, and I'm not going to name, another very big European fraud, where we think that Credit Suisse is going to have in the low 10 figures of losses, something in the billion range," Hempton said.
And then, there was Archegos
Despite spotting the problems at Greensill, Hempton did not see Archegos coming.
"It didn't surprise me that the lender that lost the money [in Archegos] was Credit Suisse," Hempton said. " ... Now, we got lucky, because we didn't know that Archegos was going to happen. But we did know that we looked in several places and we found sh— knee deep at Credit Suisse. And if we can find cockroaches, there are probably a few more."
Archegos Capital was the family office of Bill Hwang, a former protégé of Tiger Capital's Julian Robertson, a legend of the hedge fund industry. Hwang managed a concentrated portfolio of stocks and held highly leveraged positions.
When Hwang couldn't make a margin call from various banks, his positions were liquidated and many of the counterparties, such as Credit Suisse and Morgan Stanley, had to sell off his holdings in large chunks at whatever price they could get. Credit Suisse reported a loss of $827 million for the first three months of the year on Thursday that stemmed from both those situations.
One of the aspects that caught Hempton's attention was Hwang's investments in "yesterday's stocks", such as ViacomCBS (VIAC).
"The idea that you can get you to blow yourself up buying a stock that is flat year to date on leverage is pretty astonishing," Hempton said on the podcast. "And the only reason this was possible is that it went from $36 [at the start of January] to $39 via the princely sum of about $100. So every time it went up, he must have bought more."
Buying more of illiquid stocks is an old tool used in the fund management industry, Hempton said.
Managers can buy illiquid stocks, walk them up, buy more and then the performance looks great, Hempton said.
"Retail investors are often not very sophisticated, so money flows in and eventually you're left as a giant bag holder full of illiquid stocks," Hempton said. "And that can be done directly, or can be done accidentally, by a deluded fund manager."
Hempton doesn't expect the blow-ups to stop at Archegos.
"The tide isn't out at all, I mean, markets are at all-time highs and we've already seen people that are swimming naked, Hempton said. "It's a bizarre market."
However, when the market will turn from "unbridled euphoria" to "realism", Hempton has no idea.
He would be the richest hedge fund manager in the world if he knew, Hempton said.
"There's gonna be 15 or 20 Archegos out there, there's going to be a bunch of really stupid stuff out there that blows up and we're going to think, 'How the hell were we that stupid?'" Hempton said.
It's not possible to have a bull market at this scale and not have some people running around with no clothes on, Hempton said.
"It's just the emperor is going to get exposed. I wish I knew who all were, I know who a few are, right?" Hempton said. "And the surprising number of times when I know who the Emperor wearing no clothes is, the lender to that Emperor is Credit Suisse."
Location data company Placer.ai announced today that it has raised a $50 million Series B round. The round was led by Josh Buckley, tech investor and CEO of Product Hunt, and included participation from largest proptech investor Fifth Wall, as well as previous investors JBV Capital and Aleph VC.
This round brings the total raised for the Bay Area- and Israel-based company to $66 million. The company declined to provide a valuation.
Placer uses mobile phone location data to provide a wide range of customers with information about foot traffic and migration patterns.
Location data is a key piece of the puzzle for forward-looking real estate firms, which are turning to data sets to make decisions about their portfolios. Traditionally, the data was used by retail landlords and retailers themselves to quantify their foot traffic and provide another metric than overall sales performance to understand how a location was doing.
But now, office managers could use location data to figure out how to structure a socially distant floor plan, while multifamily landlords might analyze it to figure out how to build rentals where Americans are moving.
The company launched its service in November 2019 and now has more than 500 customers, including commercial real estate services firm JLL, mall landlord Taubman, Dollar General, and Planet Fitness.
The company originally "braced for impact" when the pandemic hit, said Noam Ben-Zvi, Placer's CEO and cofounder. What does a location-based data firm do when people aren't leaving their homes? For one thing, it is able to track which retailers they do choose to leave the house for as soon as restrictions lifted.
"The data probably tells the story that many historians will know anyway," Ben-Zvi said. "Humans are very resilient, and they love leaving the house."
The team actually tripled its customer base and revenue during 2020, Ben-Zvi added. This led the company to raise a convertible note to meet rising demand, double its engineering team to 50 people, and offer webinars and free data tools on its website that showcased many parts of the pandemic's impact.
While some customers did have to scale back their budgets and stop paying for Placer, others looked to the startup's data as a way to gain a competitive edge.
"If a commercial real estate company is doing really well and has all of its spaces leased out for the next five to 10 years, they don't really need our data," Ben-Zvi said. "They don't need our data if there's no change or future uncertainty, but they do need it when there's a lot of turbulence."
Over the last year, Placer found its customer base expanded from retailers and their landlords to include more than 50 municipalities hungry for data on tourists and people looking to relocate to their area, hedge funds looking to predict company performance and beat earnings calls by following foot traffic, and consumer packaged goods manufacturers that wanted to learn more about the movements of their in-store customers.
The company's next step is to integrate more data into their product, said Ethan Chernofsky, Placer's vice president of marketing. The company began by offering "answers" to customer questions using mobile data, but can provide even more value by combining their data with other sources. The owner of several properties, for example, might wonder how the weather impacts foot traffic to different sites; it can purchase meteorological data from Placer's new marketplace and combine it with location-based tracking to analyze cause and effect.
"Mobile data is only an ingredient to that answer," Chernofsky said. "Different data sets — demographics, crime, weather, credit card purchases — could and should be layered on top of our data, and make for better answers."
Genius investor Ed Thorp predicted the pandemic's brutal fallout, stocked up on supplies, and isolated himself weeks before authorities declared a national emergency and imposed lockdowns last year.
In early February 2020, Thorp forecast the US death toll by analyzing the number of unexplained deaths in Wuhan, and researching past pandemics such as the Spanish Flu in 1918. He went as far as calculating his own odds of dying at 2% to 4%, journalist William Green said on a recent episode of "The Acquirer's Multiple" podcast.
"He calls his entire family together and says, 'We're going to lose somewhere between 200,000 and 500,000 people in the US over the next 12 months,'" Green said. Thorp made the estimate before a single COVID-19 death had been recorded in the US, he added.
"A month before all of the shelves get cleared of things like detergent and toilet paper, he's out there actually buying things like masks," Green added.
Thorp also stopped seeing anyone except his wife, he told Green last June in an interview for the writer's new book, "Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life."
The investor's precautions were vindicated in the coming months as the pandemic tore through the US. The national death toll passed 500,000, the high end of Thorp's estimate, on February 22 this year — just over 12 months after the former math professor made his prediction.
Thorp, now 88, previously ran a hedge fund that beat the market for two decades without a losing quarter, Green said. He also pioneered card-counting in blackjack, co-invented the first wearable computer to give him an edge at the roulette table, and penned a book called "Beat the Dealer" about his exploits.
Bill Miller, a veteran investor who lost 90% of his wealth in the financial crisis but is now a billionaire thanks to Amazon stock and bitcoin, told Green that Thorp is something special.
"He's the best, I think. As great an investor as Warren Buffett is, I think Ed Thorp is better because he figured out stuff nobody knew," Miller said.
"Thorp's record is just so much better and with almost no volatility, and he figured the whole thing out himself and invented statistical arbitrage," he added.
Citadel has poached the head of equity derivatives trading in North America from Citigroup, the latest in a string of buy-side defections from Citi's derivatives unit.
Dan Baranovsky, who ran North American equity derivatives and cash trading at Citi, has resigned to join Citadel as a portfolio manager, according to sources familiar with the matter.
A Citadel spokesperson confirmed the hire. A Citi spokesperson declined to comment.
Baranovsky joins a division at the $35 billion hedge fund that has grown rapidly over the past year and a half. Pablo Salame joined Citadel from Goldman Sachs in October 2019 as global head of credit, and one of his first hires was David Casner, a former Goldman partner who was the head of US equity volatility trading and global co-head of equity flow derivatives trading at the bank.
Baranovsky is the second portfolio manager Casner has poached from a big bank for the strategy this month. David Kim, the head of equity client solutions at Bank of America and the firm's most senior derivatives trader, has also joined Citadel, Bloomberg previously reported.
Salame has more than tripled the number of portfolio managers in the credit division since joining.
For Citi, Baranovsky's exit adds to a growing list of departures from its equity derivatives desk, one of the hottest corners in Wall Street trading. Seok Yoon Jeong, a managing director in flow volatility trading, resigned and is said to be joining Brevan Howard, according to sources familiar with the matter.
Jeong joined Citi from JPMorgan in 2018 as head of flow volatility trading in the Americas and was promoted to MD later that year. He was layered last year when Mark Chen was hired back from Deutsche Bank to lead flow derivatives trading for the bank.
Benjamin Texier, a director in equity derivatives trading, joined Millennium Management, according to sources familiar with the matter, while a junior equity index options trader name Dake Zhang left for Citadel in December.
Representatives for Brevan Howard and Millennium each declined to comment.
"These guys have no clue," a senior volatility trader at a top Wall Street bank recalled thinking last March, after President Donald Trump announced a travel ban to Europe and erroneously said that trade and cargo would be blocked — causing global markets to convulse.
For weeks the trader, and others on equity derivatives desks across Wall Street, had watched the public-health calamity unfolding in Wuhan, China, with alarm. As they purchased options to put on protection trades that pay off in rare cases of intense volatility, most of the rest of the world trudged on, complacently assuming the virus wouldn't rear its head in the US and Europe.
"When I saw what was going on in Asia, I thought it was inevitable it would happen here," the trader told Insider last year.
On Thursday, March 12, the day after Trump's ham-handed speech, an already jittery market started ringing the alarm bells. The CBOE Volatility Index spiked nearly 22 points, or 40% — the largest single-day increase ever. That record only held till Monday. The day after a surprise rate cut from the Federal Reserve, with a national emergency in effect and the spectre of a full-blown global pandemic short-circuiting the economy, the VIX surged 25 points, or 43%, while the S&P 500 dropped a staggering 12%.
The volatility traders who'd feared such an outcome and positioned their books accordingly saw massive windfalls. As Wall Street circuit breakers triggered over and over again, individual bank desks were reaping nine-figure trading days.
"By far, the craziest market in history," a head derivatives trader at a big bank told Insider on March 19, several days before the stock market hit its nadir last year.
A full year later, the derivatives traders that thrived during 2020's once-in-a-decade market shock have become some of the hottest commodities on the street. But unlike recent years, where Wall Street banks snatched senior talent from each other, marquee hedge funds like Balyasny, Citadel, and Millennium are plundering the rosters at Bank of America, Citigroup, and Goldman Sachs as they deploy their massive hordes of capital and chase riches with expanding volatility strategies of their own.
Volatility hasn't died down in 2021, with frenzied trading in January around GameStop and other meme stocks causing market gyrations and helping banks once again produce robust equities results — Citi, JPMorgan, Goldman, and Morgan Stanley each lauded equity derivatives performance in first-quarter earnings calls.
Whether volatility remains elevated or fades away like it did after the financial crisis remains a question mark, but the talent war has left some sell-side firms shorthanded. Firms that haven't suffered defections are primed to grab market share — if the talent war doesn't reach their doorstep in the coming months as well.
Banner years
Traders often reevaluate their options and make moves after stellar performance, when they can leverage their elevated market value for more money, responsibility, or a more prestigious firm.
There was no shortage of strong performance at investment banks last year — the $194 billion in revenues across the largest firm was the highest mark in a decade, with substantial gains across dealmaking and sales and trading, according to Coalition. But derivatives traders generated strong results not just in March but throughout the year.
The last time bank equity derivatives desks were raided en masse was 2018, when the VIX unexpectedly lurched to life in early February — producing the largest single-day spike on record to that point— after sitting idle the previous year. Traders who believed volatility would rebound from record lows reaped enormous gains, and many exchanged their chips for new roles.
But back then, it was primarily other banks poaching from each other — hedge funds weren't involved in the talent war in a meaningful way.
"Usually it's just sell-side musical chairs," one veteran volatility trader told Insider. "This is making things more interesting as the buy-side is scooping up so many people," leaving fewer senior traders at the banks.
For many traders who wager on volatility, 2020 was a career year, far eclipsing 2018 or any other year in recent memory.
"First and foremost, last year a lot of these derivatives desks, specifically the vol teams, had very good years," Dyllan Beck, a partner at search firm Carrington Fox with expertise in recruiting equity derivatives traders, told Insider. "You're talking 100% to 200% markups compared to previous years."
Barclays, for example, recorded a $250 million trading day in March, aided by its volatility desk. The global derivatives team at JPMorgan generated $1.1 billion in a little over a month — on par with what it made in all of 2019 — after the market began to swoon, Insider previously reported.
But it wasn't just the initial sell-off and volatility surge that boosted derivatives teams — volatility remained elevated throughout the year, with an average VIX closing level of 29.25, nearly double the average of the previous five years and the highest mark since 2009.
Meanwhile, options trading in aggregate scorched its way to new records. The Options Clearing Corporation cleared an all-time high 7.5 billion options contracts in 2020, up 52% from 2019.
Equity derivatives revenues doubled in the fourth quarter compared with 2019, and for the year equity derivatives volumes at the 12 largest banks reached their highest mark in a decade, according to industry data firm Coalition.
While overall heightened trading activity contributed to the boon, the revenue uptick wasn't simply expert market making and execution for clients. Traders who positioned their books with specific views that paid off when volatility struck demonstrated trading chops and instinct that hedge funds naturally prize.
"The years where you have these outsized P&Ls, you're always going to get the demand," a sell-side equities exec told Insider.
With a banner year in the books, volatility traders were well positioned to cash in — and this time around, deep-pocketed hedge funds were ready to pounce.
After blowout performance, a string of departures
At least eight senior sell-side traders have resigned in recent months, with seven going to the buy-side.
Traders told Insider the bids from the buy-side were considerably higher than previous years — no surprise given the blowout performance in 2020 — with one trader noting offers from hedge funds were twice as rich as previous years.
Citadel, the $35 billion hedge fund managed by Ken Griffin, has been one of the most aggressive hirers, bidding on several marquee traders, sources told Insider.
The fund poached both Daniel Baranovsky, Citigroup's head of equity derivatives in North America, and David Kim, the head of equity client solutions at Bank of America and the firm's most senior derivatives trader.
Those banks suffered other losses, too. Brevan Howard is said to have hired Seok Yoon Jeong, a managing director who joined Citi in 2018 as Americas head of flow volatility trading but was layered last year when Citi hired Mark Chen. A director and an associate in derivatives trading left Citi for Millennium and Citadel, respectively.
BofA meanwhile lost Mitchell Story, their No. 2 volatility trader, to Goldman Sachs — one of the few bank-to-bank moves reported thus far.
But Goldman suffered defections of its own. Travis Potter, one of the most coveted sell-side volatility traders according to industry insiders, left for Balyasny, Insider previously reported.
Her departure followed Goldman hiring Story in a more senior role, sources told Insider, and she was passed over for Goldman's 2020 partner class this fall. A Goldman Sachs spokesperson declined to comment.
Goldman lost two other junior equity derivatives traders to BlueCrest and Jane Street.
Barclays lost Aaron Katzman, an MD in single-stock derivatives trading, to Jane Street, Insider previously reported, while Michael Hosana joined Millennium as a PM this spring.
Hedge fund hiring spree
Few buy-side firms came in to 2020 in better position to make a splash than multi-strategy funds, which collectively had fewer outflows and higher returns during the turbulent pandemic trading year than the rest of the hedge fund industry, led by strong performance at Millennium, Citadel, Balyasny, and Brevan Howard.
While equity volatility isn't new to these funds, some have made concerted efforts to build out these strategies in recent years amid an overall uptick in hiring.
With tens of billions in capital to put to work, they're constantly looking to add new traders, and their investors, especially pension funds, have increasingly clamored for uncorrelated strategies that provide exposure beyond the traditional equity and fixed-income markets, according to Don Steinbrugge, CEO of hedge fund consulting and marketing firm Agecroft Partners.
"These multi-strats are looking for managers often that add diversification to the portfolio and are focusing on markets that are somewhat inefficient," Steinbrugge told Insider. "Trading volatility is a separate asset class that isn't correlated with the equity or fixed-income markets."
Citadel has more than tripled the number of portfolio managers in its global credit division since hiring Pablo Salame to lead it in October 2019. One of the first orders of business for the long-time Goldman partner and trading executive was hiring an old colleague — David Casner, also a former Goldman partner, who oversaw US equity volatility trading and co-headed global equity flow derivatives trading at the bank.
Millennium started ramping up its equity volatility presence four years ago — around the time Pete Santoro and Bobby Jain, two derivatives veterans, joined senior management — amid a broader diversification effort, and it's become a core strategy within its equity arbitrage group, according to sources familiar with the matter. Izzy Englander's $49 billion fund grew to 265 investment teams in 2020 — the most in its history — amid a flurry of new hires.
The fund last month hired Paul Russo, who has a background in derivatives and served as the chief operating officer of equities at Goldman Sachs until 2018, to run risk in its equities strategies, the Financial Times reported.
Balyasny, the $9 billion fund run by Dmitry Balyasny, has been on a hiring spree the past year as well, bringing aboard 40 new money managers and nearly 100 analysts in 2020, according to a January report from Bloomberg.
"We are constructive on volatility strategies right now," Kevin Lyons, senior investment manager at Aberdeen Standard Investments, told Insider, noting the explosion in options volume over the past two years. "We think there are going to be high levels of economic dispersion and it will provide a good opportunity across regions and asset classes."
The caveat, Lyons added, is whether volatility will grind lower, as it did in the years following the 2008 economic collapse.
"Can the strategy be sustained? I think that's to be determined," Lyons said.
Depleted banks
While multi-strats are hoovering up traders, some investment banks have been left shorthanded. As one senior bank derivatives trader put it, there are lots of open seats and "not a lot of seasoned traders."
Some may fill the gaps by promoting from within, but "at some point they probably do have to start looking externally for solutions," Carrington Fox's Beck said.
But the hedge funds, notorious for firing as quickly as they hire if performance isn't up to snuff, could leak talent back to the sell-side.
Mitch Story, Goldman's recent hire from BofA, for instance left JPMorgan for Citadel in 2018 but lasted less than a year at the hedge fund.
"Those places tend to churn pretty high at the end of the day," the sell-side equities exec said. "If volatility settles in and the VIX goes down to 16 again, all of a sudden there's not as much opportunity."
Some banks are positioned to capitalize on their competitors' misfortune and steal more business.
JPMorgan, the top derivatives trading firm last year, and Morgan Stanley, a consistent power player, haven't suffered notable losses the way their competitors have — at least not yet.
While the sell-side's ranks have been somewhat depleted, there are still talented volatility traders. Some will be promoted internally and given an opportunity to shine.
"It's a cycle," a veteran sell-side volatility trader said. "Then the next wave of standouts will rise up with the opportunity."
After more than a decade at billionaire John Griffin's Blue Ridge Capital and a few years off, Eric Wong is launching his own hedge fund.
The portfolio manager, who is in the early stages of launching the fund, will focus on investing in China, according to sources. Wong lived in Beijing while working for Griffin, according to his LinkedIn, as well as New York.
He worked for Griffin from 2007 to 2018, reaching the title of managing director. Prior to Blue Ridge, Wong spent three years as an analyst for Morgan Stanley in Hong Kong. Wong declined to comment when reached by Insider.
China-focused funds are in demand, as the country allowed for more foreign investment in the region via private funds at the end of last year. US-based managers like Bridgewater, BlackRock, and Two Sigma have registered in the country to offer private funds.
Blue Ridge, which managed $12 billion at its peak in 2013, returned outside capital in late 2017, averaging annual returns of more than 15% over two decades.
It's unclear if Griffin will back Wong's new fund, as the billionaire could not be reached by Insider.
Griffin was one of the original Tiger Cubs, spin-off firms from billionaire Julian Robertson's Tiger Management, so Wong will become a part of the larger Tiger family tree. There's already been an addition this year to the tree when former Lone Pine managing Paul Eisenstein announced the creation of his new firm, Vetamer Capital.
Blue Ridge doesn't have as many spin-offs as Tiger Cubs like Viking Global or Lone Pine, but Griffin's former employees have started some well-known funds. Roberto Mignone's Bridger Capital and Rick Gerson's Falcon Edge Capital both stand out, and Angela Aldrich, the founder of Bayberry Capital, was a part of the Sohn Conference's "Next Wave" of managers a few years ago.
Most of the funds in the Tiger tree are based in the US but there is still a notable presence in Asia. The most famous Asia-focused Tiger Cub was back in the news recently thanks to the implosion of Bill Hwang's family office Archegos. Hwang had run Tiger Asia for years after working for Robertson before closing his fund after he pled guilty to insider trading.
Steve Cohen's decades-long career in finance has made him billions of dollars across two different hedge funds and led to the creation of more than 80 other firms.
Dozens of people who have worked for the famed stock picker — who was forced to close his first fund after a yearslong battle with the Justice Department — have gone on to found their own funds.
Notable names to come from now-closed SAC Capital and Cohen's current fund, the $20 billion Point72, include the founder of the $8 billion fund Melvin Capital, Gabe Plotkin, and the founder of $1.8 billion Honeycomb Asset Management, David Fiszel, as well as shuttered funds like Tourbillon Capital, from the HumanCo founder Jason Karp, and Hutchin Hill, from the Millennium portfolio manager Neil Chriss.
Recent launches include Charlie Antrim's Walnut Level Capital, Ladd Fritz's Polarity Investment Partners, and Jonathan Lin's L2 Capital, while Cohen's former right-hand man Tom Conheeney is still in the process of getting his EmeraldRidge Advisors up and running.
Former employees of the New York Mets owner have started funds around the world, with alumni putting down roots in places like Sidney, Hong Kong, London, and various cities across the US. (Story continues below graphic. A searchable table of the names is at the bottom of the article.)
Cohen's first fund, SAC, was forced to close at the end of 2013, though the liquidation of tough-to-sell assets pushed the closure date off for a few years. As a result of the DOJ's investigation, one of his traders ended up going to prison for insider trading, and the firm had to pay a $1.8 billion fine.
Many employees continued to work for Cohen at his family office, Point72 Asset Management, named after its Stamford, Connecticut, office location, managing his multibillion-dollar fortune as well as their own wealth.
In 2018, after the Securities and Exchange Commission lifted Cohen's two-year ban on managing outside capital, he relaunched his hedge fund under the Point72 moniker and has been growing it steadily since.
Many who have worked for Cohen have also gone on to start companies that have nothing to do with hedge funds. Karp is the most obvious example, with his health-centric food company growing rapidly and signing on celebrities like Scarlett Johansson to consult on products.
The former trader Bill Shufelt also started a food and beverage company, nonalcoholic brewery Athletic Brewing, while Bryan Binder — a onetime portfolio manager at SAC — cofounded the esports tech platform Vindex in 2019. Bree Jones, who was a vice president of data analytics for Point72, started the affordable-housing-focused real-estate development company Parity in Baltimore in 2018.
Since relaunching his hedge fund, Cohen has been focused on talent development as the large multistrategy hedge funds battle one another — and Silicon Valley — for the cream of the crop.
At Point72, this starts for an entry-level analyst with the Academy, the firm's 10-month crash course on all things investing. The firm's Launchpoint program boasts of its ability to help its emerging portfolio managers launch their teams and understand how to run a business.
Stats from the firm's site state that roughly half of the managers to come out of Launchpoint were internal promotions while others came from outside the firm, and more than 80% of the managers who have launched their portfolio using the platform since 2016 are still at the program.
"I want a place where people can do what they do best and feel free enough to try different things. If we're squashing new ideas, we're going to go nowhere," a quote from Cohen reads on the site.
But unlike recent years, where Wall Street banks snatched senior talent from each other, marquee hedge funds like Balyasny, Citadel, and Millennium are plundering the rosters at Bank of America, Citigroup, and Goldman Sachs as they deploy their massive hordes of capital and chase riches with expanding volatility strategies of their own.
"Usually it's just sell-side musical chairs," one veteran volatility trader told Insider. "This is making things more interesting as the buy-side is scooping up so many people," leaving fewer senior traders at the banks.
A young star has left Ole Andreas Halvorsen's $44 billion Viking Global.
Divya Nettimi, who has worked for Viking since 2014 as an analyst and a portfolio manager, is no longer at the firm, according to sources. She joined the billionaire Halvorsen's firm after getting her MBA from Harvard and four-year stint at Goldman Sachs, respectively, according to her LinkedIn.
She was named to Forbes' 30-under-30 list for finance in 2016, alongside Robinhood cofounder Vlad Tenev and IEX cofounder Stan Feldman. Her short bio on the list notes that she focused on e-commerce and retail for the Tiger Cub, and helped manage Harvard Business School's alpha fund while she was getting her MBA.
Insider was unable to determine where she is going or what she is doing next. Nettimi did not respond to requests for comment, while Viking Global declined to comment.
Similar to other Tiger Cubs, Viking's staff is relatively small compared to the assets the firm runs. The manager has 43 employees in "investment advisory functions" out of 214 total employees, according to a regulatory filing from March.
The firm's investment leadership has had some turnover in recent years, as former chief investment officer Dan Sundheim started his own fund, D1 Capital, in 2018, and then former co-chief investment officer Ben Jacobs launched Anomaly Capital in 2020.
Foxhill Capital founder Neil Weiner has been accused by his former analyst Joshua Nahas of insider trading in a new lawsuit filed in a New Jersey district court.
Nahas, according to the suit, was fired by Weiner after making an internal whistleblower complaint. He is suing for breach of contract and a breach of New Jersey's state whistleblower protections law.
Weiner, who founded $200 million Foxhill in 2005, is alleged to have traded in two stocks he had inside information on, Cambium Learning and GNC, according to Nahas' lawsuit.
Matthew McDonald, the attorney for Foxhill, Weiner, and chief compliance officer Patricia Young, declined to comment on the specifics of the lawsuit, but told Insider that "our clients are confident they fully complied with the law, in all respects, and will therefore prevail."
Nahas, who runs consulting firm Wolf Capital Advisors, declined to comment on the suit.
The first alleged instance of insider trading, according to the lawsuit, happened in 2013, in Cambium Learning, the education technology company. Weiner was on the board of the company, but ended up disagreeing with Cambium's majority owner, a private equity firm, that wanted to buy out the rest of the shares including Weiner's.
The price the majority owner was willing to offer was lower than what Weiner thought they were worth, according to the lawsuit, and he resigned from the board, but kept his shares. Nahas alleges Foxhill's outside counsel at the time told Weiner not to trade in the stock for at least 90 days since he had material non-public information — widely considered a key determinant of insider trading — because of his position on the board and the awareness of a potential deal.
The lawsuit claims Weiner ignored his counsel's recommendation, completing 30 total trades and adding more than 400,000 shares of Cambium to his coffers within the 90-day window laid out by his outside counsel. Eventually, those shares were worth more than $6 million when the company was bought, the complaint says.
The second alleged instance is more recent, and one of the reasons Nahas says he was terminated, leading to the lawsuit. Nahas claims he made an internal whistleblower complaint about Weiner's 2020 insider trading in GNC, the vitamins and supplements chain, and was fired as retaliation.
Nahas alleged the whistleblower complaint went to the firm's chief compliance officer, Young, and his complaint cites the firm's internal code of ethics saying whistleblowers won't be retaliated against if an employee acts "'in good faith in reporting a complaint or concern' and 'have reasonable grounds for believing a breach' had occurred."
"He expected the Company and Young to comply as well, particularly with the provisions of the [compliance] Manual promising protection for whistleblowers, including 'securing the reporting person's anonymity as well as managing his reported concerns 'in a timely and professional manner confidentially and without retaliation,'" the suit reads.
Nahas' complaint says that GNC was anticipating a bankruptcy due to the pandemic, and sought to renegotiate loan obligations, some of which were held by a fund advised by Foxhill. In June, the lenders of GNC entered into a NDA with the company to discuss the loan obligations confidentially which contained material non-public information, according to the lawsuit.
GNC was placed on Foxhill's restricted list internally, meaning employees were not allowed to trade the security, but Weiner bought options in the bankrupt company without informing the lawyers for the lenders or the other lenders, Nahas alleges.
After being alerted to this by Nahas, the complaint continues, Weiner and Young met for a brief time, and then closed out of the trades, with Weiner saying he had covered immediately. Nahas says he was terminated by the company that same month.
Nahas is asking for "appropriate equitable relief" and "compensatory, consequential and punitive damages" though no exact amount is specified.
After nine months, Dan Kamensky's prediction came true.
The founder of distressed-debt hedge fund Marble Ridge Capital received a sentence of six months in prison on Friday after being arrested for securities fraud, wire fraud, extortion and bribery, and obstruction of justice in early September.
"I feel quite confident in judging the defendant as a good man, but one who lost his moorings," said Judge Denise Cote. She also imposed a $55,000 fine and six months of home confinement to follow the prison term.
His crime was not one that happened over months or even days, but rather hours. On July 31 of last year, the news of a possible bid for shares of a subsidiary of bankrupt Neiman Marcus from a client of Jefferies — shares that Kamensky desperately wanted to win for his own fund — sent him over the edge, ruining his career and putting a well-regarded investor behind bars.
"I was surprised he broke the law because he's a smart guy, but I also wasn't surprised because he pushes the boundaries," one individual who had previously worked with him told Insider.
Prosecutors asked for a sentence of at least a year behind bars, while Kamensky's lawyers — including Joon Kim, formerly a top prosecutor in the U.S. Attorney's Office for the Southern District of New York — urged the court for a sentence of three years' probation.
The government said Kamensky abused his position as the co-chair of Neiman Marcus's unsecured creditors' committee and as a client of Jefferies to suppress a rival bid the investment bank made for shares of MyTheresa — an e-commerce unit of Neiman Marcus considered to be its crown jewel.
He then attempted to persuade Jefferies to cover up the scheme, calling his contact at the investment bank and urging him not to tell the unsecured creditors' committee about the attempt to suppress the bid, prosecutors said.
It was in that call with Jefferies' head of distressed-debt trading Joe Femenia where Kamensky predicted his own future.
"[I]f you're going to continue to tell them what you just told me, I'm going to jail, OK? Because they're going to say that I abused my position as a fiduciary, which I probably did, right? Maybe I should go to jail," Kamenksy said in the call, according to the prosecutor's complaint.
Jefferies disclosed Kamensky's actions to the unsecured creditors' committee when it became clear they were illegal, according to the prosecutors. Kamensky already pleaded guilty to one count of bankruptcy fraud on Feb. 3, and settled a civil suit with Neiman Marcus in December.
The sentencing Friday capped a bitter, long-running legal spat between Marble Ridge and Neiman Marcus. Marble Ridge was a longtime investor in the debt of the luxury retailer and had earlier alleged that the company improperly transferred the MyTheresa asset in a way that put it out of reach of unsecured creditors, which Neiman Marcus denied.
As part of the bankruptcy process, the unsecured creditors' committee negotiated with the owners of Neiman Marcus to obtain the MyTheresa shares in exchange for dropping the claims that the asset had been transferred fraudulently. Kamensky played a major role in those negotiations, his attorneys said in a sentencing submission to the court.
The back-and-forth between the fund and retailer was heated in the weeks before Kamensky's blow-up, according to a person familiar with the matter. This individual said that they considered Kamensky a friend as well as a smart investor, but that "he had convinced himself he had something really valuable that he didn't actually have."
This individual said that Kamensky's bid for the shares was lower than Jefferies', so Marble Ridge's offer would have never been considered seriously. Jefferies' bid was also rejected, and MyTheresa spun off and went public in January and currently has a more than $2.5 billion market cap.
"He worked himself into a frenzy, which is really sad," this person said.
Kamensky and his lawyers tried to persuade Judge Cote that his attempt to pressure Jefferies didn't result in any economic harm to Neiman Marcus's creditors, but the judge said she wasn't convinced. Prosecutors had also highlighted the need to deter other bankruptcy professionals from dishonest conduct, a factor the judge alluded to before imposing the sentence.
"The bankruptcy process depends on trust and honesty and good faith," she said. "Creditors must be able to have confidence in the committee process."
Trained as a bankruptcy attorney at white-shoe law firm Simpson Thacher & Bartlett before making a name for himself on the distressed-debt team at Lehman Brothers, Kamensky worked for Paulson & Co., once a hedge fund powerhouse and now a family office, where he steered the firm to big profits on the bankruptcy of his previous firm, before founding Marble Ridge in 2016.
He alluded to his legal background in an apology from his testimony to the US Trustee, noting the "sanctity" of the bankruptcy process.
"Anything I have done to put that process at risk is unacceptable, and I apologize to the Court, to the US Trustee, to the committee, and the professionals who worked so hard to make this case a success," he said.
The $2.3 billion hedge fund has long been an infrastructure and utilities investor, run by former SAC Capital portfolio manager Jos Shaver, and many of its top holdings still include legacy energy players like PG&E. But the firm's banner year last year, sources say, was driven by renewable energy companies, and the manager is expecting interest to only increase in the space as the Biden administration sets its policies.
The fund returned 37.7% last year, and has made 6.3% through April this year, a recent factsheet states. The average hedge fund was up 11.8% and 8.7%, respectively, according to Hedge Fund Research. Last year was the best on record for Electron, according to the factsheet.
The firm's renewable bets are no small wagers either. Among the firm's top positions are investments into solar battery-maker Sunnova Energy International and NextEra Energy, which generates the most wind and solar energy of any company in the world. Those two positions were worth more than $180 million, regulatory filings show.
The manager believes utilities like NextEra will be the drivers of the energy transition, not legacy energy companies. A presentation from earlier this year seen by Insider outlined how "utilities are best positioned to capture cost reductions at scale" of renewable energy sources like wind and solar.
"In the United States, clean energy technologies grew strongly during a Trump administration and should grow even faster under a Biden administration where federal policy drivers that were absent for the past 4 years are taking shape that could potentially accelerate growth to record levels," according to the presentation.
A chart on another page of the presentation shows off-shore wind energy generation capacity projected to grow by 21% annually over the next decade.
"Renewable generation costs have plummeted making these technologies profitable without a subsidy and causing rapid displacement of fossil fuels," the presentation read.
Biden's constant calls for a massive infrastructure package could provide another boost to Electron. The presentation cites the Federal Highway Administration projected concrete needs for the country's bridges and roads to sit at nearly $1.2 billion, while asphalt needs are more than $1.6 billion. Electron has significant stakes in concrete-makers Cemex and Forterra.
"There has never been a more supportive backdrop" for infrastructure spending from the government, the presentation said.
After a yearlong bout of SPAC mania, the red-hot market for blank-check companies is cooling down as regulators direct their attention to it.
March was a record-breaking month for special-purpose acquisition companies, with over 100 new deals, while April only saw 10 SPACs raised, the data provider SPAC Research found.
The Securities and Exchange Commission stoked fear in the SPAC market on April 12 when it issued new accounting guidance. The change, which would reclassify the warrants issued by SPACs as liabilities rather than equity, may force many current and future SPACs to restate their financials.
Early investors that back SPACS are given warrants, which give them the right to buy more shares of the company at a specified price in the future. The proposed rule change would increase the scrutiny and bureaucracy surrounding this key feature of SPACs, potentially making them look less attractive and more volatile to investors.
The SEC is also considering a rule to rein in the often optimistic growth projections made by listed SPACs, Reuters reported. Companies are not allowed to provide these forward-looking forecasts in typical IPOs. Conversely, the ability to lure investors with projections has been a pull for companies looking to go public through a SPAC.
Regulators, who had left SPACs largely unencumbered until recently, have been paying extra attention to the market as concerns rise that retail investors are losing out at the expense of hedge funds and other institutions that enjoy favorable terms because of the deal structure.
Celebrities such as former Speaker of the House Paul Ryan, basketball star Shaquille O'Neal, and former New York Yankees player Alex Rodriguez have put their names behind SPACs, boosting their popularity among retail investors.
Americans for Financial Reform and the Consumer Federation of America said in a February letter to the House Financial Services Committee that the SPAC boom is "fueled by conflicts of interest and compensation to corporate insiders at the expense of retail investors."
Hedge funds, which often invest in SPACs before they go public, have won big because of the structural benefits of the vehicle. They can buy cheap shares, which come with warrants, using money borrowed from investment banks, and they often act as pre-IPO investors who can easily back out of the deal after the initial post-IPO "pop" or after a merger is announced.
A group of influential hedge funds that some industry watchers call the "SPAC Mafia" have piled into the asset class, Forbes reported. While scrutiny toward SPACs grows and the market cools, many of those funds remain bullish. Insider spoke with some of them to see how the proposed regulation and recent slowdown are informing their long-term outlook for SPACs.
'They're investing in SPACs, they're investing in meme stocks, they're doing online gambling, and they're sitting in their houses'
While the proposed changes do not alter the deal structure for investors such as hedge funds, they do contribute to the slowdown in the SPAC market that some insiders said already began before the SEC increased its oversight in mid-April.
Hedge funds such as Westchester Capital Management, which manages $5 billion and has been investing in SPACs since 2008, are not too worried.
Roy Behren, the managing director of Westchester, said the decline could be attributed to "indigestion in the market from the massive issuance." Many institutional players, not just retail investors, Behren said, "got caught in a downdraft" of SPACs that haven't performed well after announcing a merger.
"I just don't think that the SPAC mania that existed around the end of 2020 and beginning of 2021 will persist forever. But there are a number of great SPAC issuers that will continue to be successful," Behren continued.
Behren added that SPACs were so attractive to retail investors in particular because they essentially offered them the opportunity to participate in venture capital through late-stage, pre-IPO startup investments.
He attributed the frothy 2020 SPAC market to retail investors' boredom during lockdown.
"They're investing in SPACs, they're investing in meme stocks, they're doing online gambling, and they're sitting in their houses," Behren said. "They have these stimulus checks, and, you know, you've read the same articles I have — it's not all being spent on food, although a lot of it is."
"Once everything opens up, they'll be out at their jobs and not in front of their computer all day. Things might be different," Behren said.
Mark Yusko, the founder and chief investment officer of Morgan Creek Capital, manages a SPAC exchange-traded fund and a SPAC arbitrage hedge fund. Yusko said the impending regulation has not changed his view on SPACs, and that "right now, it's all speculation and conjecture."
Yusko said the regulatory threats may constitute "pressure by incumbents to slow down the disruption that's been happening with SPACs, which are taking a bigger and bigger market share of IPOs."
He said regulators often say they will ban or impose rules around trendy asset classes such as SPACs and crypto but that "nothing actually happens." Morgan Creek's view, Yusko said, is that the proposed rule changes are not material to the SPAC market.
Why scrapping forward-looking projections isn't going to save retail investors from themselves
Yusko said companies being acquired by SPACs should be allowed to provide forward-looking projections because "their best days are ahead." He said that SPACs allow nonaccredited investors to enjoy venture-style returns in an environment in which companies are staying private for longer periods of time, and that providing projections is an integral part of informing these investors.
One "SPAC Mafia" hedge fund's chief investment officer, who requested anonymity to discuss regulatory considerations, told Insider that in their view, banning SPACs from making projections would not change retail-investor sentiment, which is already predicated on the "vibe" of the market.
"Unfortunately, I don't think retail investors are going through the financials of companies or understanding the warrants in the first place," the source said.
Doug Ellenoff, the managing partner at Ellenoff Grossman & Schole, one of the most active law firms in the SPAC sector, said the SEC is trying to "protect retail investors from themselves."
He said that while the accounting change for warrants temporarily halted SPAC IPO issuance as SPACs restated their financials, such regulation is unlikely to "considerably or meaningfully" slow down the secular trend toward companies choosing to go public via SPACs.
A Perceptive Advisors up-and-comer has keyed in on a rising star in the biotech world.
Ellen Hukkelhoven, an analyst at $8.8 billion Perceptive, presented at Wednesday's Sohn Conference about BridgeBio, the firm's flagship hedge fund's third biggest position, revealing how the company matched up "perfectly" with what Perceptive looks for in a biotech investment.
Hukkelhoven, who has a doctorate in molecular biology, explained that the firm looks for companies where the science drives decisions, not the money. While it might seem intuitive that biotech companies are led by the scientists in the lab, Hukkelhoven explained that the capital-intensive process of creating a new drug can force companies to focus on a single drug because that's what has the most backing.
While this can be good for short-term survival, companies that rely on a single drug often run into problems. Hukkelhoven said only 10% of Phase 1 drugs succeed.
BridgeBio, which Perceptive has a stake worth more than $470 million in, has optimized the process by learning how to "fail fast," she said. The company is constantly testing different types of drugs for genetic-linked diseases and deformations, and then a small team of executives determines which should get more funding and which should be scrapped.
Instead of relying on a single drug to become a hit, BridgeBio has several shots at profits, and the company can be "a nimble organization of truthseekers" instead of hypemen for a single drug to get more funding.
"It lets the science drive the financing, not the other way around," she said.
Perceptive, founded by billionaire Joseph Edelman, is known as one of the top healthcare and biotech investors in the world. It has launched four SPACs and raised several venture funds to find investments in the private markets. Wednesday morning, the firm announced a second venture fundraise of $515 million, and medtech company Juno Diagnostics said Perceptive led its $25 million Series A raise.
The firm's flagship hedge fund though has struggled this year, losing more than 18% through the end of April, according to HSBC's Hedge Weekly report. The $3 billion fund returned more than 29% and 52% in 2020 and 2019, respectively.
Sundheim, the billionaire founder of D1 Capital, which manages $20 billion, said at the Sohn Investment Conference Wednesday that his firm had changed its shorting strategy in response to the social-media-fueled trading frenzy that sent companies like GameStop and AMC soaring in January.
Plotkin's Melvin Capital was the target for many of these traders, who communicated with each other in the popular Reddit channel Wall Street Bets, after his short positions against GameStop were disclosed in regulatory filings. The resulting short squeeze caused Melvin to lose more than 50% of its capital in a month, while D1 fell by more than 20% thanks to a short position against AMC.
At a congressional hearing on the phenomenon, Plotkin said asset managers would most likely need to adjust their shorting strategies because of traders' ability to use social media to rally against a position.
The overall size of short positions at D1 is now smaller, Sundheim said in a conversation with Stripe cofounder John Collison.
"We haven't given it up, but we have altered our approach," he said.
He added that he wanted to keep his investing team small and focus more on private investments and long positions in public companies, where there's more of a chance for alpha.
"As you get bigger, shorting becomes harder," he said. "I don't think it's evil. I think it's healthy for the markets."
He said his first big break in finance came from a short report he posted on Joel Greenblatt's website under an alias.
But he said D1's focus on companies it can hold for years meant he didn't need to short companies "to hedge the companies I buy" and that he was comfortable with "short-term volatility" created by retail traders.
"The gambling creates excess volatility, and you just have to be aware of that, especially on the short side," he said.
Sundheim has mostly been able to bounce back from earlier stumbles, unlike Plotkin, recouping nearly all of his January losses, according to Bloomberg.
Still, when asked by Collison what advice he'd give young investors, he said "don't short GameStop."
Editor's note: This story was originally published on March 29, 2021 and later updated to include news about the CFTC's whistleblower program.
When Swedish billionaire Thomas Sandell reached a $105 million tax evasion settlement with New York State earlier this year, one lucky anonymous tipster walked away with $22 million.
But big payouts like these, which reward people for sharing tips about fraud with government agencies, are jeopardizing the programs that incentivize tipsters to come forward in the first place.
The Commodity Futures Trading Commission's whistleblower program is in jeopardy over a proposed $100 million payout to a former Deutsche Bank executive, which would deplete its funds, the Wall Street Journal reported May 11.
The ex-Deutsche Bank executive provided information to the CFTC and Justice Department that the bank manipulated the London Interbank Offered Rank, or Libor. The whistleblower's tip led to $2.5 billion in settlements from the bank in 2015, including $800 million to the CFTC.
When whistleblower information leads to settlements, the tipsters can earn a percentage of the financial penalties paid by wrongdoers. But the CFTC can only replenish its whistleblower fund when it drops below $100 million, the Journal reported. In the meantime, the money goes to the U.S. Treasury.
Since many of the CFTC's settlements are much smaller — around $5 million or less, the Journal reported — a blockbuster payout can drain the agency's whistleblower payment pool much faster than it can be replenished.
Massive whistleblower payments are rare across the board, but the tipsters behind them are responsible for bringing some of the most infamous financial fraud in recent years to light. Despite the cost, experts don't see the programs going away anytime soon.
US whistleblower laws date back centuries.
A whistleblower is someone who shares credible information about financial fraud, criminal activity, unsafe working conditions, or other improper conduct with a government agency. If the information leads to a settlement, whistleblowers earn a percentage of the financial penalties paid by wrongdoers. While the process can take years, tipsters stand to earn millions of dollars for their valuable information.
The US government has granted some protections to whistleblowers since 1778, and the False Claims Act — signed to law by President Abraham Lincoln in 1863 — paved the way for whistleblowers to share information about people trying to defraud government programs. Also known as the Lincoln Law, the False Claims Act allows private citizens, usually anonymously, to file cases against alleged fraudsters on behalf of the government.
In the financial world, the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), and the Commodity Futures Trading Commission (CFTC) have all built whistleblower programs over the last 20 years.
Whistleblower tips have uncovered some of the most notable cases of financial fraud in recent years. UBS in 2009 paid a massive $780 billion settlement for helping wealthy American customers evade taxes, and Merryl Lynch in 2018 paid a $415 billion settlement for misusing billions of dollars of customer funds. The whistleblowers who tipped off authorities in those cases made $104 million and $83 million, respectively.
Whistleblowers are among the most effective and efficient law enforcement tools.
Sandell, the Swedish billionaire, dodged his New York tax liability through an elaborate scheme in which he moved to London and opened a new Florida office in order to pretend his hedge fund wasn't operating in New York, according to the state's attorney general.
The settlement was reached in February, but it took years to get there. New York began its investigation in 2018 after an anonymous whistleblower, known only as "Tooley LLC," filed a False Claims Act case against Sandell. The case is a textbook example of the public-private law enforcement partnerships enabled by the Civil War-era law, according to Tooley's lawyer, Randall Fox. "It shows how persons with useful information can multiply the government's resources to help uncover and prove frauds that otherwise may never have been revealed," he said after the settlement was announced.
New York has recovered nearly $600 million from tax evasion cases since it started allowing tax False Claims Act claims in 2010. Those who blew the whistle earned more than $100 million, according to the firm representing Tooley. And that's just tax cases in the Empire State.
The Securities and Exchange Commission has doled out more than $700 million to tipsters since the agency launched its own whistleblower program a decade ago. Individual payments have ballooned in recent years: the SEC issued a $114 million whistleblower award last year—its largest-ever payment. Other agencies, like the IRS and CFTC, have paid whistleblowers record highs of $104 million in 2012 and $30 million in 2018, respectively.
"Whistleblowers are the most effective and efficient law enforcement tool in the modern era," Jordan Thomas, who helped create the current SEC whistleblower program and now leads law firm Labaton Sucharow's team of whistleblower attorneys, told Insider. "Whistleblowers are so efficient, they're basically auxiliary law enforcement folks who identify wrongdoing and provide evidence."
Whistleblowing is a long game.
Getting a whistleblowing payout isn't easy. It can be a stressful job and can take years of quietly waiting.
While various laws protect whistleblowers from retaliation, sharing a confidential tip is still a "very risky proposition" for employees who want to stay employed because there's no truly-safe roadmap, according to Wharton School professor Janice Bellace.
Lodging an anonymous complaint can also mean spending years in the shadows while government agencies investigate your workplace or peers.
The SEC, for example, said it usually takes between two and three years to investigate fraud claims. After the agency takes action, it takes even longer for a whistleblower to apply for an award; for the agency to review their claim; and for the whistleblower to appeal if they're not satisfied the award matches their contribution to the case.
"People who blow the whistle really have to have the long game in mind and keep a long-term mindset, knowing they won't get paid anytime soon," said Thomas. He stressed that it's not enough for a potential tipster to have information — it has to be detailed and correct, and the whistleblower needs courage as well as personal and professional allies who can support them through the lengthy process.
Thomas estimates that less than 1% of SEC whistleblower cases are eventually successful, meaning the tipster gets paid.
Even though the process can be long and arduous, Thomas doesn't expect whistleblowers to go away anytime soon. Government agencies are under-resourced and exceedingly rely on them, he said.
"The IRS is doing fewer audits of wealthy people than ever before while working with 1950s-level resources," he said.
Whistleblowing is also a boon for the lawyers that represent anonymous tipsters. Most whistleblower lawyers work on contingency, meaning they front the costs for trial prep and litigation and are then paid a portion of the whistleblower's award. Contingency fees vary, but successful whistleblowers can expect to pay their lawyers 30-40% of their award.
State-based whistleblowing opportunities are growing.
The False Claims Act allows whistleblowers to bring claims against people defrauding the federal government, and federal agencies like the IRS, SEC, and CFTC use whistleblowers to investigate financial crimes. But state governments have also begun to see the value of whistleblowing.
New York is also part of a growing group of states that allow False Claims Act cases related to tax fraud.
That's what happened in Sandell's case. New York's attorney general said the state might not have ever known about his tax evasion without the whistleblower's help. The tipster's law firm, Kirby McInerney, worked with state authorities on the investigation after "Tooley's" lawsuit was filed.
Fox, the whistleblower's lawyer, said in an email that the case moved at "record speed," taking 28 months from complaint to settlement instead of the seven to 10 years estimated by the IRS program.
Erika Kelton, a whistleblower lawyer and partner at the law firm Phillips & Cohen, said the opportunity to work directly with the prosecution is an important element of state and local False Claims Acts. With federal agency whistleblower programs, whistleblowers do not initiate a lawsuit and there isn't a complaint filed in court. Tipsters who bring information to the IRS, for example, typically aren't involved in the agency's investigation, according to Kelton.
"The IRS really freezes out whistleblowers because cases take forever to be resolved, the agency is tight-lipped about the status of the investigation, and the IRS doesn't take advantage of the expertise of the whistleblowers or the attorneys who represent them," Kelton said.
This means tax-fraud whistleblowers will increasingly look for ways to bring their tips to New York law enforcement to be more involved in the investigation process. Tipsters can work with a state in addition to passing along the information to the IRS, Kelton said.
Fox added that New York provided a blueprint for other states to incentivize tax whistleblowers, which will "increase their tax revenues, encourage compliance among those who realize that violations will be caught, and promote fairness for the taxpayers who follow the rules."
The market for quant and data-science specialists has perhaps never been hotter. And the technologists, researchers, scientists, and traders developing cutting-edge investment strategies and platforms aren't just coveted by hedge funds.
They're the lifeblood of high-frequency-trading (HFT) firms and proprietary market makers, as well as investment banks building out their systems for electronic trading and execution. They're also coveted by Silicon Valley juggernauts, startups, academia, and the government. People working on hard-science Ph.D.s from top universities can expect the most elite institutions to start wooing them years before they defend their dissertations.
A cadre of Wall Street recruiters are at the forefront of this lucrative talent battle, and Insider assembled a list of specialists in the field.
$65 billion hedge fund Tiger Global has been on a startup investing spree this year, averaging more than one venture-style investment per business day in 2021, Insider reported.
As companies choose to stay private for longer periods of time and the number of public companies in the market has declined, hedge funds like Tiger Global and D1 Capital Partners are turning to startups as a source of differentiated returns. Tiger Global has won deals away from some of the most prominent venture capital firms, participating in 110 startup financings this year already compared to its next-fastest competitors in startup funding Andreessen Horowitz (101 investments) and Accel (87 investments), according to Pitchbook's estimates.
In early May, the tech-hedge fund was looking to raise a $10 billion fund from investors to keep scooping up deals, The Financial Times reported.
Tiger Global has also been active in private investment in public equity (PIPE) financing rounds to support special purpose acquisition company (SPAC) mergers including deals with satellite data specialist Spire and mobile monetization firm Ironsource.
According to recent reports in The Information and the Financial Times, Tiger Global is known in the venture world for approaching startups before they begin fundraising and offering to pay high premiums. The hedge fund could now be set to realize gains from its strategy this year as some of its key portfolio companies look to go public.
We outlined the companies Tiger Global has funded in 2021 that have either filed or discussed plans to go public this year below.
Filed:
Blend Labs
Blend Labs, a mortgage-tech company, filed its draft S-1 registration statement with the Securities and Exchange Commission mid-April, signaling its plans for an initial public offering. The digital lending platform closed $300 million in Series G funding led by Tiger Global and Coatue on January 13. The round, which valued the company at $3.3 billion, nearly doubled its valuation from its last funding round five months prior. Blend had a record year in 2020, expanding its coverage to approximately 30% of all U.S. mortgage volume, according to a press release. It also announced the acquisition of title insurance provider Title365 from Mr. Cooper Group in March.
dLocal
Five-year-old Uruguayan payments startup dLocal confidentially filed for a US IPO in May, sources familiar with the matter told Bloomberg. The fintech unicorn is working with banks including JPMorgan on its listing, which could happen later this year and is slated to value it at over $5 billion, which is the valuation it secured in its latest funding round in April. Alkeon Capital led that round with participation from Tiger Global, D1 Capital Partners, and others, providing $150 million in funding for dLocal. It raised its first institutional venture round in September 2020 led by General Atlantic, after which it shared its pitch deck with Insider.
Squarespace
Software-provider Squarespace is going public via a direct listing on the New York Stock Exchange on May 19 with the ticker SQSP. Unlike in an IPO, its debut price will be determined by post-listing orders rather than shares sold in advance. Tiger Global participated as a new investor in Squarespace's latest funding round in March, when the website-building platform raised $300 million at a valuation of $10 billion.
Zomato
One of Tiger Global's many bets in India is slated to go public this year on the Indian stock exchanges NSE and BSE. Indian food delivery group Zomato filed for a $1.1 billion initial public offering, which would make Zomato's IPO the biggest in India so far this year, per Bloomberg. The company, which counts China's Ant Financial as a large shareholder, was last valued at $5.4 billion after a $250 million funding round co-led by Tiger Global and Kora in February. Tiger Global also led its previous $160 million funding round in September 2020 alongside Temasek Holdings. Kotak Investment Banking, Morgan Stanley, Credit Suisse Group AG, BofA Securities, and Citigroup Inc. will serve as arrangers on the IPO.
Expected:
Dingdong Maicai
Chinese fresh-food grocery app Dingdong Maicai raised $30 million in a so-called "D-plus" funding round led by SoftBank on May 11, said its advisor, Cygnus Equity. The latest round comes on the heels of a $700 million Series D financing led by DST Global and Coatue, with participation from existing investors including Tiger Global and Sequoia Capital. The company is contemplating going public in the US as soon as this year, sources familiar with the matter told Bloomberg in February. Talks are in early stages for the deal, which the sources said could raise at least $300 million for the company.
Dreamsports
Dreamsports, the parent company of Indian fantasy sports platform Dream11, is reportedly in early talks with investment banks for a US public listing by early 2022, per the Economic Times in April. The 13-year-old startup is considering merging with a SPAC for its public market debut. It raised $400 million at a $5 billion valuation in March 2021 led by TCV, D1 Capital Partners, and Falcon Edge, with participation from existing investors including Tiger Global and TPG Growth. Dream11's valuation after the round brought it to the league of India's most valued unicorns like OYO ($9 billion) and Zomato ($5 billion).
Grofers
Hyperlocal Indian grocery-delivery startup Grofers raised $220 million in mid-May last year in a round led by SoftBank's Vision Fund with participation from existing investors Tiger Global and Sequoia Capital. The platform, founded in 2013, is now working with an adviser to go public via a SPAC merger, seeking a $1 billion-plus valuation, sources familiar with the matter told Bloomberg. The Economic Times reported in February that Grofers is in talks with Cantor Fitzgerald's SPAC to raise between $400 million and $500 million through a Nasdaq listing in May, which would make it the first Indian startup to merge with a blank-check company.
Gupshup
Indian customer engagement messaging platform Gupshup raised $100 million from Tiger Global on April 8 at a $1.4 billion valuation for the company. The round will be followed by a second close "with significant additional funds raised from more investors,"per the press release. The funding news comes after Gupshup CEO Beerud Sheth told MergerMarket in November 2020 that it might initiate an IPO process over the next 12 months or pursue a deal with a private equity buyer.
Patreon
Patreon, a platform facilitating payments from fans to support content creators, is considering going public as soon as this year, a source familiar with the matter told The Information. The startup has met with both banks and SPACs, though according to the source, a SPAC merger is not its preferred route to the public markets. The company's valuation tripled to $4 billion after its last funding round in April, in which it raised $155 million led by new investor Tiger Global with participation from existing investors including Wellington Management and Lone Pine Capital.
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