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REAL TALK ON
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BUSINESS & FINANCE

Modern Trader
Why are Hedge Funds Hiring Poker Pros?

Garrett Baldwin

The platform for news and unique perspectives on the timely business & economic issues that impact alternative and private investors




In April 2010, New York Times reporter Andrew Ross Sorkin tabbed a column that highlighted the similarities between the casino mentality of some Wall Street banks and traditional sports gamblers leading up to the financial crisis.

“One side bets the value will rise, and the other side bets it will fall. It is no different than betting on the New York Yankees vs. the Oakland Athletics, except that if a sports bet goes bad, American taxpayers don’t pay the bookie,” he wrote.

The comparison is touchy on Wall Street, Capitol Hill and in trading pits. That’s why it seemed important to seek the insight of hedge fund manager, mathematics professor, probability theorist, Blackjack Hall of Fame member and best-selling author Edward O. Thorp.

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Is there any difference between a quant who goes to Wall Street and one who goes to Vegas? There are two schools of thought on this question.

The first school argues that there is little meaningful difference between most investing and most gambling, and therefore investors don’t deserve an extra dollop of sanctimony and grandeur; in fact, they need to be cut down to size and labeled for what they are: Glorified gamblers.

The second school argues that investing differs in kind (and not just in degree) from gambling, and this difference carries moral weight because investors benefit society by producing a net gain in social value, whereas gamblers compete in zero-sum games among players (or negative sum games once we factor the cut given to the house). An investor improves the world. A gambler may improve his own world, but he leaves the outside world unchanged.

Let’s break them down and find out how and where these two ideas came to a head.

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In its simplest form, gambling is when a person risks money specifically for the mere chance of receiving more money. Chance is the probability that a particular outcome will occur—e.g., on a spinning roulette wheel, how likely it is that a ball lands in a red compartment marked “13.”

Notice that our knowledge about the gamble, about the odds of winning, is irrelevant to the outcome of the gamble. Thus, if we are asked to guess a number between 1 and 24, our knowledge of the odds of guessing correctly has no influence on whether our guess is the correct one.

The outcome is solely based on probabilities. Furthermore, there is no underlying product or service exchanged in a gamble. When we walk away from a slot machine, our pockets only contain either more or less money than when we arrived. So, there is nothing with any inherent value in a gamble.

Finally, in order for organized gambling to exist, the house (the organizers of a gambling game) must win the vast majority of the time. Put another way, the sum of gambling winnings must be less than the sum paid to gamble. This certain loss of money is why no rational person goes to the casino to fund their child’s education or earn money for groceries. This last point cannot be overstated as it introduces the main problem with gambling: Imprudence. It is imprudent to participate in a venture that requires the participants to ignore what they know to be true. In the case of gambling, this knowledge is that the gambler will, on average, lose.

So, the one gambling must willingly believe a lie.

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Gambling
Where Gambling Meets Trading

Modern Trader, William Ziemba




The debate about whether “trading” is a high-class sobriquet for “gambling” is not a mere parlor game. It has real-world consequences.

For if trading is really gambling (as some in Washington have proclaimed since the financial crisis), then perhaps gaming authorities should regulate stock markets instead of the Securities and Exchange Commission. Perhaps all the gains of investment managers should be taxed as gambling profits instead of capital gains. And, on the psychological front, investors would need to rethink their own appearances; right now, investing carries the imprimatur of logic, foresight, measured reason and prudence; whereas gambling has negative connotations of illegality, recklessness and desperation.

Many in the financial community feel degraded by the gambler label. Yes, they wear suits, have ornate offices and trade massive amounts of money on exchanges.

But what, precisely, is the elemental particle that distinguishes trading, or its more respected “investing” activity from professional gamblers?

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I’ve just slogged through all ninety-two pages of Donald Trump’s financial disclosure submission to the Federal Election Commission, and I can’t make heads or tails of it.

I cannot tell how much Trump is worth, if anything. His empire, if he has one, is as mysterious as his haircut, and as impervious as his skyscraper in Chicago - a gigantic phallic mirror named after himself.

But if I had to guess, I would say he is worth very little in terms of real, lasting assets - probably a few bps (one-hundredth of one percent) of his professed net worth of $10 billion.

The mainstream press erred horrendously by taking seriously Trump’s disclosure to the FEC, by asking reporters to sit down with the document and try to understand it on its own terms, so to speak. This approach yielded nothing but exhaustion and bewilderment. No one dared speculate that Trump’s purpose in disclosing so much was to disclose so little. It was a 52-Card Pickup, a maze of trees without a forest. The assets - some as small as the single digit thousands - pile up like obsessive compulsive do-dads in the claustrophobic home of a hoarder. The range of projects goes beyond greed and passes into desperation. High rise buildings and golf courses are one thing, but the list of assets quickly degrades into obscure wineries, Israeli vodka and energy drinks, a mattress and clothing line, television shows, a pension from the screen actors guild, bottled water, book royalties, speaking gigs, and endless inchoate and impossible to value ‘marks’ (i.e. trademarks) and positions in partnerships that have his own name.

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Sin City is spreading out. And Vegas-style casino gambling has moved way beyond the Strip.

In fact, 23 states now have commercial (not tribal) casinos. And, Vegas is sharing its favorite vice with the world. Because the most significant growth is overseas.

Macau’s gaming revenues hit a record monthly high in December 2012, growing by 13.5% to reach $38 billion in 2012.

But recently, Macau’s hot streak has lost its luster. Gaming stocks like Wynn Resorts Ltd. (WYNN), Las Vegas Sands Corp. (LVS), and Galaxy Entertainment Group Ltd. (GXYEY) are in focus this week after new data indicated casino traffic continues to plummet in Macau, China. According to reports, gaming revenue slumped 34.5% in July compared to the same month in 2014. In June, revenue slipped 36%, a signal of a broader downturn in economic spending in China.

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During what we now call my “single years,” I played a lot of poker, most of it online.

After years around the psychological soup of the stock market, I found the combination of math and psychology to be highly entertaining and occasionally profitable.

I played then, and still do, a very tight, aggressive style of poker. I always kept in mind poker legends Doyle Brunson’s advice to get my money in the middle when I had the best of it.

I would go on long winning streaks, but always got caught by gamblers ruin and my own ego. I would take a carefully built bankroll and try to move up to higher limits and get crushed by players who were a lot better than I was. (They were also very inconsiderate. They never even bothered to thank me for my generous donations to their stack.)

Then I ran across David Sklansky’s simple system for tournament poker.

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On July 8 at 7:30am EST, United Airlines grounded all of its flights, worldwide, due to a system-wide computer glitch.

A spokesperson for the world’s largest airline, Charles Hobart, issued a statement, via email, that it had “experienced a network connectivity issue”. However, it was not until after multiple passengers flooded Twitter with live updates on the situation that the airline issued this official statement on the so called ‘computer glitch’. According to United passengers, the airline’s entire computer system was down and agents were handing out hand-written boarding passes. This interruption affected more than 3,500 flights in the busy morning travel rush.

The transportation disruption causes a large impact on its own; however, it came shortly before an unprecedented, nearly four-hour halt in trading on the New York Stock Exchange (NYSE) occurred for undisclosed ‘internal technical reasons’. Immediately, executives at the NYSE issued a statement that the problem was due to a problem with their computer systems and not the result of any sort of external cyber-attack. As if these two ‘glitches’ were not enough, the Wall Street Journal’s WSJ.com site was down. Also, due to another undisclosed technical issue.

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CNBC presents a paradox in the hedge fund community.

It plays constantly, but hardly anybody watches it.

The channel mostly functions as white noise emanating from wall-mounted monitors on trading floors and in financial firms.

Given its ubiquity, one might think it was highly regarded.

But traders and portfolio managers treat CNBC with scorn or indifference.

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Modern Trader
False prophets

Garrett Baldwin, Illustrated by Mario Zucca

Art by Mario Zucca
Art by Mario Zucca

This is a story about trust. About why many Americans have tuned out and lost hope in financial “experts.” It’s about the insights, foresights, reckless predictions and lack of conviction from media outlets, Wall Street analysts and talking heads that monopolize today’s market dialogue.

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In the world of fashion, they say trends from years ago always come back. Well, the same is true in the not quite so glamorous market of over the counter (OTC) derivatives. Seven years after the crisis, the same contracts once more vilified than a Supermodel’s waist size are once again the talk of the street – that’s Wall Street not the high street. So, what does that mean for investors?

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Except for Food Services and Drinking, Retail figures do a lousy job of tracking recreation. Disneyland’s multi-billion dollar ticket sales? Not included. Airline tickets, hotels? Not included. And gambling. And prostitution. And drugs. That’s where Moneyball Economics comes in and set the record straight.

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Stony Brook University boosts an enrollment of more than 26,000 students, and counts talk show host Joy Behar, major league pitcher Joe Nathan, and Pulitzer Prize winner Scott Higham among its notable alumni.

What you don’t know about the public university—housed along the shores of Long Island – is that the school’s alumni are proving that you don’t need an Ivy League diploma to be a successful investor. Take a sneak peak at Modern Trader, and learn how Stony Brook alumni are beating the S&P 500 handily.

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In simpler times, American workers relied on pensions to secure their retirement.

Those who desired a supplement to their pension income opted to save during their pre-retirement years. Like television stations, investment options were primarily limited to three main providers.

Instead of having choices bog them down, savers had their pick of placing money in interest bearing savings accounts, stocks, or bonds. With the exception of the occasional need to get up from the sofa to change the television channel, life was rather uncomplicated.

Then the 70s arrived – bringing a rash of polyester and laying the groundwork for sweeping changes throughout the financial system.

Ever since, our capital markets have been in a perpetual state of transformation fueled by innovations in brokerage services, advisory tools, investment products, retirement plans, financial technology, and shifts in both the political and economic climates.

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Today, there are nearly seven million young adults unemployed in the United States; however, there are 3.6 million jobs unfilled, with a large share of these jobs requiring backgrounds in science, technology, engineering and mathematics (STEM).

Where can these individuals obtain the skills needed to fill so many STEM-related positions, particularly in the financial sector? That’s the center of a new effort by GFT, a financial services firm that works with 9 out of 10 of the world’s largest banks and well-known hedge funds. And this project could be a major step in solving the stunning talent gap facing Wall Street.

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On Tuesday, April 7, the news media reported that the White House, home to the most powerful family on Earth, was hacked and that foreign spies were the likely culprits.

Understandably, the details surrounding the incident are scattered and unclear. According to sources at the White House, there was no real harm since the hackers were unable to breach classified networks. In fact, the White House Press Secretary, Josh Earnest, was quoted as describing the attack as a simple “inconvenience”. As much as the White House wants to minimize the situation, the fact still remains, that someone gained unauthorized access to important systems that contain sensitive but unclassified information.

In order for the White House and businesses to to stop future attacks, we must address the problem at the core of many breaches: That problem is the human element.

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The thing that excites me most about today’s crowdfinance-inspired path of capital formation is its unprecedented ability to mitigate shareholder risk and groom more productive businesses. It does this by allowing companies to gauge consumer demand and presell products prior to it outlaying any manufacturing, marketing or other expenses.

Now that crowdfunding has reached the mainstream, there is really no excuse for any company – from startup to corporate conglomerate – to risk significant capital expenditures on an unproven product. In fact, the failure of a rewards-based crowdfunding campaign can usually be the earliest determinant of whether a startup should pivot or fold.

Yet what about those companies that aren’t launching new products, but are instead finding that their existing offerings have simply gone stale? At what point does a CEO stop wasting valuable time and shareholder money on undesirable merchandise and flawed business models, and start thinking about pivoting or folding? The answer may lurk in the clues listed below.

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America has an investing problem. An overwhelming number of millennials claim that either they lack the education to make their own investment decisions, or they lack the confidence to do so. So, who is doing something about it? Acorns, a company disrupting the savings and investing industry, one penny at a time.

Earlier this year, the Alpha Pages conducted an interview with Acorns, a fintecy company that won the “A Penny Saved, Penny Earned” category the Benzinga FinTech Awards in April 2015. The firm was also a finalist in two other categories: “Robo Advisor Tools – Best in Class,” and a nomination for “Founder of the Year,” which was shared by its co-founding father and son Walter and Jeff Cruttenden.

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Yield cos – dividend growth-oriented public companies – are not everything they are cracked up to be. Here’s the problem: Despite expectations of 10% to 15% annual returns, they’re actually not much higher than ten-year U.S. treasuries, clocking in at 3%. This disconnect isn’t a death knell for the structure but offers a pause for thought. If you’re an institutional investor and willing to wait it out as the market matures and expands, then yield cos hold great potential, but you might be waiting a while. The reality is that you can do better.

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Want to know the current state of the U.S. economy? Pay attention to how Americans are spending money on vices… sure that corner bar might be the place to have a chat about politics, but the monthly Vice Index is a comprehensive analysis of the world from booze to late night escapades. In the end, this is the black market, and it’s the clearest signal of how Americans are using their hard earned cash in arenas that government officials don’t have the resources to measure. All bartenders and prostitutes can say is “Thank God” for the end of bad weather.

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In a 1949 article called Why Socialism, Albert Einstein addressed his concerns about impact of technology on employment. “Technological progress frequently results in more unemployment rather than in an easing of the burden of work for all,” he wrote. Einstein idealistically proposed the establishment of a socialist economy as a solution to dealing with technological unemployment. Of course, he wouldn’t live long enough to see the glorious consequences of socialism in Russia, Cuba, or even Venezuela today. Putting both capital and technology in the hands of government has proved to be a remarkable disaster historically. But he got a conversation started, and that’s what Part II of this article series attempts to do…

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James Pethokoukis was late to the party. Last month, The Week author modernized a question dating back to economist David Ricardo in 1814 and the Luddites’ chief worry about the automatic loom during the Industrial Revolution. In the article, “Is the internet killing middle class jobs?” Pethkoukis reignites an age-old debate on the role (or non-role) of technology in fueling unemployment.

For more than 200 years, economists have debated the concept of “technological unemployment,” and today’s radical digitalization of the economy has reignited concerns that robots and automation could lead to widespread job destruction at a time that new industries are not emerging quickly. So how should investors protect themselves against the Robot Apocalypse?

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A lack of a true free-market price mechanism has long made water too inexpensive to warrant long-term investment or proper conservation, and decades of political and environmental mismanagement by California’s politicians have disproportionately rewarded one favored class:

Farmers.

But the current water crisis could lead to systemic changes in water investment and the future of California agriculture, says Sprott Asset Management Founder Rick Rule. “This [crisis] is the result of political mismanagement, and the fact that an industry that comprises 3.5% of California’s GDP uses 85% of the water. There’s no free market price for water, which is why we’re still growing cotton in the desert.”

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On April 3, the Second Circuit let stand, without further review or dissent, its December ruling in United States v. Newman, 773. F.3d 438 (2d Cir. 2014). The decision threw out two convictions and increased the government’s evidentiary burden in insider trading cases.

In its original decision, the Second Circuit held that the government is required to prove – and did not prove in Newman – that company insiders, who disclosed material non-public information (MNPI), received a consequential personal benefit for the tipped information and that the defendant tippees knew about that benefit.

Here are the consequences of that decision…

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Vice spending is one of the most seldom used, but surprisingly accurate leading gauges of consumer strength and the economy. Everyone knows that when consumers have more money, they spend it on fun and luxury goods. That includes gambling, prostitutes, alcohol, and narcotics. And like any other luxury good, vice spending is a leading indicator: demand is quick to pick up when times are good and turns down fast when belt-tightening is the order of the day. Vice spending leads the way in terms of both inclination to spend and ability to spend. If luxury good spending is sensitive to shifts in the economic winds, vice spending is even more so.

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It took three years, but the SEC has approved equity crowdfunding for non-accredited investors.

Under the agency’s plan, certain private companies can raise investor capital over the internet without needing to register shares the SEC.

Crowdfunding enthusiasts have called this a boon for the American economy and entrepreneurialism, which began with President Barack Obama’s signature on the JOBS Act three years ago.

So, how much of a deal is this, really? It’s time to start asking real questions about the future of the industry.

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The intersection of sports and finance has long been a place of profits for statistics junkies and hobbyists.

In fact, many investors may be able to give you a better breakdown of their favorite team’s position players than they can the allocation of their portfolios. This week, we are profiling ten ways to profit from your sports fandom, examining the pros, cons, and additional readings that can help you boost your knowledge and locate new profit opportunities.

Some of these might even surprise you…

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Alshon Jeffrey, Chicago Bears WR,
Alshon Jeffrey, Chicago Bears WR,

On Super Bowl Sunday, John Elway’s Denver Broncos didn’t arrive in Glendale, Arizona to play in the NFL’s biggest game of the year. Led by future Hall-of-Fame Quarterback Peyton Manning, the Broncos fell short in the Divisional playoff round for the second consecutive year. But Elway’s other team was there for the Big Game and even bigger business opportunities.

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David Robertson knows his single-malt whisky—he was the Master Distiller at the Macallan on Speyside before moving to The Dalmore in 2006 to head their innovation team.

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E.J. Manuel
E.J. Manuel

A new investment strategy is shaking up the sports world, and could change the future of investing if the trend accelerates. It’s called Fantex, an online brokerage that allows investors the chance to profit directly from the multi-million dollar contract of today’s biggest NFL stars. This month, we break down the profit potential and the risk management issues in this new phenomenon.

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The Alpha Pages Interview
Senator Rand Paul

Jeff Joseph and Garrett Baldwin

Senator Rand Paul
Senator Rand Paul

Senator Rand Paul is an independent-minded thinker in the U.S. Senate, even challenging the conventional policy approaches of his own party on issues ranging from Iraq to drug sentencing. This month, Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.

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Off Topic
More Q&A with Senator Rand Paul

Jeff Joseph and Garrett Baldwin

Senator Rand Paul
Senator Rand Paul

More insight from Senator Rand Paul on a variety of matters ranging from finance to politics

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Liquid alternative investment funds saw the highest percentage of capital inflows last year in a head-to-head turf battle v hedge funds for investor assets. As regulatory efforts heat up in Washington, Deirdre Brennan of FinAlternatives considers new questions about management structure and fees.

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Bitcoin Poker sits at the intersection of currency speculation and online gambling. The potential to profit on only gaming is only fueled by the possibility of rising Bitcoin prices in the future. This month, Michael Friedman at Poker News breaks down how Bitcoin is reshaping the online poker world for everyday poker players, and what it means for gamers and speculators alike.

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THE ALPHA PAGES

"Real talk on alternative investments, business & finance"­ — that's what The Alpha Pages is all about.

Alternative investing is hardly a new concept.

With industry assets under management currently estimated at $10 trillion, the alternative investment world now encompasses a dizzying range of asset classes, trading strategies, derivatives and opportunity sets that are as arcane and sophisticated as the technologies that spawned them. From the acute algorithms of seasoned alpha-hunters to the bad actors promising big returns, it’s easy to get lost in the noise and it’s getting harder to understand the real profit potential.

The Alpha Pages will uncover the best and worst of the alternative investment industry, providing actionable data, insightful analysis and pointed commentary on issues that keep investors up at night.

That’s what we mean by "real talk".

@alphapagesceo, Jeff Joseph

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