The Daily Alpha: Alternative Thinking on Uncle Carl, Dell’s Penalty, and Impact Investing

The Daily Alpha: Alternative Thinking on Uncle Carl, Dell’s Penalty, and Impact Investing

Garrett Baldwin

June 1, 2016 

"I got into trading about two, maybe three years ago, and it seemed to really capture my interest so I figured, what's the best way for me to be able to do this and make money?"

That’s Greg Piechota, a business school student who wants to work for a hedge fund.

Piechota is part of a CNBC profile about the challenges that hedge funds face when seeking new talent.

Here’s an interesting little part that comes shortly after his quote about his rejection from Bridgewater Associates.

Piechota “was impressed with their job screening, which included watching videos about the culture of the firm and a typical day there as well as submitting to a Myers-Briggs personality inventory.”

That… sounds… like… a… wonderful… interview… process…

Not like the Myers Briggs test can’t be rigged to make a person sound like they have one personality that works for a specific firm, but they’re really an ESTP who has very bad team work skills.

The CNBC piece is interesting as it goes deeper into the world of Citadel and its recruiting process in recent months. The firm has a strong culture focused on winning. While everyone else is watching videos… Citadel is picking up talent left and right.

‘‘We have recently acquired a large position in Allergan and are very supportive of CEO Brent Saunders."

That’s Carl Icahn discussing his recent decision to take a big stake in Allergan – the manufacturer of that forehead paralyzing megatrend known as Botox.

Icahn didn’t disclose the size of the stake in Allergan, but it appears that the financial media is more interested in – and already rooting – for Icahn to wage a corporate battle.

After all, what would the financial media write about if Icahn doesn’t warn Brent Saunders about stock performance in the future? After all, we know they aren’t going to actually help investors make money, and they certainly aren’t going to hold bad soothsayers responsible.

It’s been one year since Modern Trader discussed “False Prophets” in our first issue of the magazine. Luckily, we have seen some changes in how certain media outlets are embracing financial technologies to improve the content they are developing.

But there’s still a long way to go.

"This is just one of the pitfalls with appraisal, and it's not for novices."

So, Michael Dell and Silver Lake Partners underpriced their 2013 buyout of Dell…

That’s not surprising.

If you recall, there was a lot of fuss about the $24.9 billion deal.

Now, a judge has ruled that those who fussed about not receiving fair compensation for their stock were right. The deal was underpriced by roughly 22%, so sayeth the court.

Now, Dell and the private equity firm are going to have to pay compensation to the tune of tens of millions dollars to those who protested.

That’s just a sliver of this popcorn drama.

Apparently, hedge funds have been ramping up lawsuits designed to unlock more money from merger deals through a procedure known as “appraisal.” Don’t like a deal for your shares that was approved by other shareholders?

Go to a judge and demand that the judge set a fair price for your stock.

And while the process of appraisal is happening, they are paid a 5% premium on their holdings.

That’s what happened here. But the situation gets pretty wild when one explores the procedure of this case alone. The angry investors wanted $28.61 per share, more than double the actual deal price of just $13.75.

The judge sided with the protesting investors. The judge ruled that the buyout party had taken advantage of a dip in the stock price and that the board of directors spent little time determining the “intrinsic value before negotiating,” according to Reuters.

With so many deals ramping up – particularly in the energy sector – this appraisal angle could get a lot of airtime this summer. Expect it to also land on the desk of one Elizabeth Warren.

“Some of the worst pain is being felt in the UK’s listed hedge fund sector, which at its peak in 2008 and more than £9 billion in assets spread across 80 funds. Today, the figure has fallen to £3 billion across just 17 funds according to research from Winterflood Securities, the brokerage firm.”

That’s ValueWalk – hinting that things are about to go from bad-to-worse for hedge funds.

According to Blackstone Group’s Tony James, the $2.9 trillion hedge-fund industry could see a decline of assets under management by as much as 25% over the year.


"Impact investing is hitting the mainstream."

It’s time to take the other side of this bet.

Roughly 93% of Millennials say that social impact is the most important component of why they will invest money… When you see a number like this, it’s usually time to bet against the herd.

Yes, it’s important to have a social impact on the world, but this is tied up in a pretty bow.

First, it has a very significant impact on charities.

Second, impact investing is extremely vague.

Third, everyone has a different cause… and capital is scarce.

Impact investing is a marketing premise… and that can be found in the most basic sales pitch.

“All talk of double- and triple-bottom lines aside, there really is only one bottom line,” writes Kevin Starr at the Stanford Social Innovation Review. “It’s either impact or profit.”

It seems that these investors don’t know the difference… and some may find out that their $3 million is not worth the paper on which a promise has been made.

What should you invest in instead?

Yield-producing energy companies that have little debt at a time that oil prices are set to rise over the next few years, and the technology that will replace human beings as the costs of labor increase.

Both of those might fall in the 7% of people who don’t believe that social impact is as important as profitability… but we’re also way more realistic about how the world works.


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