Hedge Funds Fight to Keep Short Sales Secret

December 13, 2023

Hedge funds are fighting hard to keep short sales secret. An industry association has sued the SEC to stop new disclosure rules, according to a new report in Barron’s.

Hedge funds sued the Securities and Exchange Commission, alleging that the agency broke the law when it finalized a pair of rules aimed at collecting data on short sales earlier this year.

The lawsuit, filed in the U.S. Court of Appeals for the Fifth Circuit by the Managed Funds Association and other groups on Tuesday, is attacking rules adopted by the SEC this fall that require the reporting of short sales and securities loans. The reports are anonymized, but the funds argue the agency ignored how the rules interact and that they harm investors.

Why the SEC Is Requiring Disclosure

Before the new SEC rule, funds had to disclose what stocks they owned, but not what stocks they shorted.

Long positions must be disclosed under the fund’s own name. Given that longstanding rule, I don’t see why requiring anonymous disclosure of short positions is unlawful.

The new SEC rules are a direct result of the meme stock boom of 2021:

The SEC adopted the short-sale and securities lending rules in the wake of the GameStop fiasco, in which retail traders drove a huge short squeeze in the stock and caused large losses in some hedge funds that had bet against the company. The rules require hedge funds to report their short positions to the SEC and for companies that lend out shares to report those transactions to the Financial Industry Regulatory Authority.

Hedge Funds Fight Back

If short sales are publicly disclosed, it’s easier for retail traders and other hedge funds to attack short sellers. They can buy up shares of heavily shorted stocks, engineering a short squeeze like those in 2021.

Short sellers are doing whatever they can to avoid becoming another Melvin Capital. That now-defunct fund lost nearly $7 billion betting against meme stocks like GameStop and AMC.

A Systemic Risk

However, the public has a right to know about systemic risks to the financial system. Short sales, which can trigger huge losses for hedge funds, could pose such a risk.

In fact, the Dodd-Frank financial reforms required the SEC to collect more information on short selling. That 2010 law was designed to prevent another financial crisis.

Wrap-Up

Hedge funds may have some legitimate interest in keeping their trades confidential. But that is far outweighed by the interest of the public in preventing another 2008.

What do you think of short sellers? Leave a comment and let us know!

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Major Hedge Fund Falls 50% — Billions Lost

December 12, 2023

The multibillion dollar Haidar Jupiter fund has lost 50% of its assets in 2023. The macro hedge fund made bad bets on bonds and other securities, magnified with borrowed money.

From a new report in Institutional Investor:

Haidar Jupiter Fund all but assured it will finish the year deep in the red when it suffered an 18.11 percent loss in November.

The heavily leveraged macro fund is now down about 50 percent heading into the final month of the year, making it one of the year’s worst-performing hedge funds.

While the exact amount of losses is not publicly disclosed, they likely total around $2 billion. The fund had $4.3 billion in assets as of October 2022, according to Bloomberg.

A Turbulent Macro Environment

Rapid fluctuations in Treasuries and interest rate expectations caught many macro funds by surprise this year. Ten year Treasury yields have fallen from 5% to less than 4.2% in under two months.

Haidar’s fund has been prone to wild swings in the past. It saw huge gains last year, but has lost much of that capital in 2023.

The fund’s heavy use of borrowed money magnifies its gains, but also its losses.

I’m skeptical of leverage. Borrowed money makes your wins and losses bigger — but it doesn’t make you a better investor.

What’s more, it only takes one really terrible year to put you out of the game, for good.

Can Haidar Recover?

Haidar has notched some amazing returns in the past. His only other down year in the last decade was 2015, with a 21% loss.

His highly leveraged bets could lead to another giant gain in 2024. But will his investors wait that long?

When investors see you fall by half, they assume you can go down all the way. And once they start thinking that way, they only care about one thing: getting their money out.

This can cause a spiral of withdrawals, forcing you to sell positions for whatever you can get. Losses deepen, and the withdrawals escalate.

Wrap-Up

Haidar may make another gutsy bet and win back its losses. But as long as the fund continues to pile on leverage, it will be walking a tightrope.

What do you think will happen to Haidar? Leave a comment and let us know!

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Elon Musk (Part 3): How Elon Leads

December 11, 2023

“A maniacal sense of urgency is our operating principle.”
Elon Musk

Elon Musk is not your typical CEO.

He doesn’t have a corner office. There’s no executive dining room.

In fact, shortly after taking over Twitter, Elon slept on a couch in the company library. A typical meal: cereal out of a paper cup.

The excellent new book Elon Musk by Walter Isaacson tells us how Musk transformed Twitter, built Tesla and SpaceX, and more.

How Musk Runs Companies

Musk designs companies differently from most other CEO’s. He places engineering, design and production right next to each other, and puts himself in the middle of it all.

Musk designed SpaceX’s factory to get his people to cooperate the way he wanted:

“…Musk followed his philosophy that the design, engineering and manufacturing teams would all be clustered together. The people on the assembly line should be able to immediately collar a designer or engineer and say, ‘Why the f— did you make it this way?’”

Musk picks the people for those teams carefully. He looks more at personality than skills.

“’When hiring, look for people with the right attitude. Skills can be taught. Attitude changes require a brain transplant.’”

Shaking Things Up

Several times a year, Musk orders an all-out burst of activity at one of his companies. Then he camps out there to make sure that an ambitious goal, like getting out the Model 3, happens on time.

Musk also makes decisions quickly, which lets his companies move fast.

”Musk’s method, as it had been since the Falcon 1 rocket, was to iterate fast, take risks, be brutal, accept some flameouts, then try again.”

Musk is not afraid to be wrong. He doesn’t fear losing, and doubles down repeatedly in the face of risk.

Does it Take a Maniac to Build Something Great?

Elon Musk is a maniac. He’s said so himself.

For both his employees and his family, that can be hard to be around. Is this the price of success?

“Could you get the rockets to orbit or the transition to electric vehicles without accepting all aspects of him, hinged and unhinged?” Isaacson asks.

I don’t know. But what I do know is that we don’t have any examples of a relaxed, balanced person creating companies like Tesla.

How Sequoia Missed Tesla

Michael Moritz of Sequoia backed Elon at PayPal and had the opportunity to invest in Tesla early.

Musk took him for a ride in the company’s new roadster. Moritz was impressed, but thought Tesla was too risky.

“‘I really admired that ride, but we’re not going to compete against Toyota,’ he said. ‘It’s mission impossible.’”

Moritz passed.

What he got wrong was that Musk had very rare skills as a leader. Musk sold PayPal for $1.5 billion when he was just 31, netting Sequoia millions.

When you have a founder like that in front of you, you back him, no matter what.

Wrap-Up

Elon Musk drives his companies, and himself, hard. His goals, like reversing climate change and reaching Mars, are all that matter to him.

It’s fanatics like Musk that build great things. After reading this book, I’m looking for entrepreneurs with an audacious goal and the tenacity to get there.

What have you learned from Elon Musk? Leave a comment and let us know!

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More on tech:

Elon Musk (Part 1): Overcoming the Odds

Elon Musk (Part 2): Saving Tesla and SpaceX

The Hard Thing About Hard Things

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Elon Musk (Part 2): Saving Tesla and SpaceX

December 8, 2023

“As the situation got more desperate in the fall of 2008, Musk pleaded for money from friends and family to meet Tesla’s payroll.”
Elon Musk, by Walter Isaacson

In 2008, Tesla was in the depths of production hell. And with the world on the verge of another Great Depression, a speculative electric car company was just about the last thing anyone wanted to invest in.

But that wasn’t all. SpaceX had repeatedly failed to reach orbit and only had enough cash left for one more attempt.

Elon Musk left PayPal a rich man, pocketing a cool $250 million. But now that money was almost all gone, sucked up by SpaceX and Tesla.

If the companies failed, he faced personal bankruptcy.

Walter Isaacson tells this fascinating story in his new book Elon Musk.

Saving Tesla

Even though Tesla was near death, Musk didn’t give up. Neither did his people.

Bit by bit, they resolved the production problems. Soon, the first Model S’s began to roll off the line.

“Many of the workers waved American flags. Some cried,” Isaacson writes.

I dont think anyone is crying when they build a Chevy Silverado. But Musk had hired people with incredible dedication and knew how to inspire them.

“He has reality-warp powers where people get sucked into his vision,” said Reid Hoffman, who worked with Musk at PayPal. People often described Steve Jobs the same way.

In time, an investment from Daimler would save Tesla. The investment would also prove to be a bonanza for Daimler.

As Tesla grew, it began to dominate the auto industry. Shortly after its release, the Model 3 became the highest grossing automobile in America by revenue.

This was an incredible achievement for a fledgling company producing a brand new model using unproven technology.

SpaceX Hits Orbit

As Tesla found firm footing, SpaceX finally reached orbit.

Its fourth rocket launch had to work. As Musk and his engineers watched nervously, the rocket cleared the tower and the stages separated.

Soon, the rocket reached orbit. “tThat was frigging awesome,” Musk yelled.

Wrap-Up

Give the average person $250 million, and they’ll lay on a beach. But Elon Musk decided to plow his money into electric cars and rockets, ventures with little chance of success.

When they foundered, he could’ve lost everything. But Musk kept his nerve, worked even harder, and led his people to success.

Why did Elon persevere when most people would have given up?

Perhaps it was the hard times he endured as a young man, suffering bullying and abuse. If he could make it through that, he could make it through anything.

What have you learned from Elon Musk? Leave a comment and let us know!

More on tech:

Elon Musk (Part 1): Overcoming the Odds

The Hard Thing About Hard Things

The Contrarian

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The Fall of OpenView: Shocking Departures and an Uncertain Future

December 7, 2023

Major VC firm OpenView Venture Partners has abruptly laid off most of its staff and stopped making new investments. The departure of two top leaders under murky circumstances appear to have led to the firm’s sudden downfall.

The Collapse of OpenView

OpenView’s leaders departed suddenly after a recent fundraise, leaving the firm rudderless. From a new report in Forbes:

This week, OpenView Venture Partners shocked its employees and the venture capital industry by suspending new investments and laying off half its staff, including all its vice presidents and associates. With the future of the Boston-based firm uncertain, Forbes has learned that the fund made the decision because two of its three leaders — Mackey Craven and Ricky Pelletier — departed, just months after it raised a new fund, sources told Forbes.

Both seem to have left for personal reasons.

What Is Going On Inside OpenView?

OpenView’s fall comes at the most unlikely of times. The firm just closed a new $570 million fund.

If two of the firm’s top leaders weren’t sure they wanted to stay, why on earth did they raise over half a billion dollars from investors?

Even if the remaining staff try to keep OpenView going, winning back the trust of LP’s will be difficult, if not impossible.

Digging Into OpenView’s Returns

The Information, which first reported OpenView’s problems, has suggested that poor performance could be behind its demise:

The sudden fall of the firm, which employed at least 74 people and had raised a total of $2.4 billion, could be a sign of rising pressure on VC firms to generate returns in an era of higher interest rates. Its 2020 fund has lost money on paper, according to documents seen by The Information.

OpenView’s Fund VI, closed in 2020, is showing losses. It’s down about 12% so far, according to the Venture Capital Journal.

However, taking modest losses in the early years is normal. Years 3-5 can be particularly bloody — right where OpenView’s fund sits.

Companies that never find product-market fit tend to shut down within 2-5 years. Meanwhile, the big winners take 8-10 years to mature.

Even the very best investors, like Sequoia, tend to see their portfolios go negative early on. OpenView’s astute LP’s, like MIT, know this.

Wrap-Up

I don’t think performance is the reason for OpenView’s issues. I find it more likely that the departed leaders had personal problems we’re not privy to.

In any case, OpenView’s fall will be one of many in the coming years. Most venture funds have poor performance, and the 2021 vintage is likely to be especially horrible.

What do you think happened at OpenView? Leave a comment and let us know?

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Venture Capital Is a Terrible Asset Class

How to Spot Vaporware

How Product Velocity Can Make You a Unicorn

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Elon Musk (Part 1): Overcoming the Odds

December 6, 2023

“We have reason to believe Elon is retarded.”

That was Elon Musk’s elementary school principal. Young Elon stared out the window and ignored his teachers, leading them to assume he could not learn.

Perhaps Elon found their lessons irrelevant. Or maybe he was tormented by what was going on at home.

A Dark Upbringing

Elon’s father Errol was a tyrant and a bully. Errol beat his mother, Maye, in front of him.

“I remember that Elon, who was five, would hit him on the backs of the knees to try to stop him,” his mother recalls.

The superb new biography Elon Musk by Walter Isaacson tells the story of Elon’s upbringing and business career. I dug into this fascinating book on my recent vacation to Portugal.

Danger at School

For some children living in a violent home, school is a refuge. But there, Elon only found more abuse.

Elon was younger and smaller than the other boys, which made him a target for bullies. They beat him mercilessly with little, if any, provocation.

Once, Elon was pushed down a set of stairs and kicked repeatedly in the head.

He could’ve been killed. The injuries he sustained that day would affect him for much of his life.

“Decades later, he was still getting corrective surgery to try to fix the tissues inside his nose.”

When he was able to leave the hospital, there was no respite from the attacks.

“When Elon finally came home from the hospital, his father berated him. ‘I had to stand for an hour as he yelled at me and called me an idiot and told me that I was just worthless.’”

Everywhere Elon went, he found himself surrounded with copies of his father: violent bullies who attacked him for no reason at all.

Escape from South Africa

As Elon grew older, he was able to find outlets away from school and his father. When he was 11, he used his modest savings to buy a Commodore VIC-20, one of the earliest computers.

He played video games like Galaxia and Alpha Blaster, a welcome escape. He also taught himself to program.

As he neared adulthood, Elon wanted nothing more than to get out of South Africa. He settled on Canada, where he had cousins.

When Elon left for Canada, his father said, “You’ll be back in a few months. You’ll never be successful.”

Making a New Life

Elon’s first days in Canada were anything but glamorous. He started out cleaning boilers in a lumber mill.

In time, he made it to Queens University, in Ontario. Finding it pleasant but unchallenging, he later transferred to the University of Pennsylvania.

After graduating from Penn, Elon went where most ambitious young technophiles were going in the 1990’s: Silicon Valley.

We’ll pick up Elon’s story there in the next installment of this series!

Wrap-Up

I sometimes think I didn’t have a lot of advantages growing up. But reading about Elon’s early life, I realize I had more than I thought. A lot more.

Faced with condescending teachers and vicious abuse, many people would’ve given up. But Elon only became more determined.

What have you learned from Elon Musk? Leave a comment and let us know!

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More on tech:

They Invented the iPad in 1989 — And Lost it All

Super Pumped (Part One)

The Contrarian

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Venture Investment in the Heartland Triples

December 5, 2023

Venture capital investment in the middle of the country tripled in the last decade, according to a new report from Heartland Forward. Investment reached $55 billion by the end of 2021.

The 20 heartland states as defined by Heartland Forward

We’re used to thinking of startupland as reaching a few dozen miles from San Francisco to San Jose. Maybe add on New York, if you’re in a generous mood.

While those regions still lead the technology industry, the middle of the country is catching up fast.

COVID pushed fundraising onto Zoom, where much of it remains. This has made it easier for founders all over America to get their slice.

Opportunities Where You Might Not Expect

One of the most exciting investments I’ve made recently is in a place you might not expect — Chattanooga, TN.

Krepling, an e-commerce SaaS company, is growing faster than just about anything in San Francisco or New York. And sure enough, investors lined up with their checkbooks out for its recent seed round.

If you have an awesome product with incredible growth, you can raise capital, wherever you may be.

Where the Runway Is Plentiful

Companies like Krepling have a secret advantage over everyone else — their costs are much, much lower.

You can rent a 1 bedroom apartment for less than $1000 a month in Chattanooga. Good luck doing that in New York City or Palo Alto.

Food is cheaper, office space is cheaper, everything is cheaper! All those lower costs mean more runway for your startup.

Raising money right now is hard. The venture market stinks, it’s stunk for almost 2 years, and it’s not showing any signs of getting better.

Locating in a reasonably priced area can put your startup in a strong position. And the middle of the country is filled with low cost, beautiful towns to choose from.

Travel Is Your Friend

One founder I know who lives in the heartland has a very simple fundraising hack: the airplane.

Every 3 months, he visits either New York or SF. He meets as many investors as he can on each trip.

And sure enough, he’s got over $10 million in commitments for his Series A.

Meeting people in person can help. But you don’t have to live on the coasts to do it.

A Place to Focus

“There’s nothing to do here but work! It’s great!”

That’s what an investor in a small southern town told me recently.

Every day, more founders are joining him to work in a place where it’s easy to focus.

For generations, writers have gone alone to a remote cabin to finish a novel. Startup founders moving to small towns to grind aren’t so different.

Wrap-Up

Long neglected by the venture world, America’s heartland is having a moment.

Venture investment is growing faster in the middle of the country than anywhere else. More and more founders are relocating there, eager to extend their runway and minimize distractions.

I’m excited to see a new wave of unicorns coming from the center of our nation. And I hope to back a few of them myself!

Are you investing in middle America? Why or why not?

More on tech:

Venture Capital Is a Terrible Asset Class

How to Spot Vaporware

Never Let a Founder Pay, and Other Do’s and Don’ts

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Pizza and Homemade Mutz at Porta

December 4, 2023

A big ball of gooey mozzarella hit the table, drizzled with olive oil. “We’ve got to come to Jersey City more often.”

This is Porta, an excellent pizzeria on Downtown Jersey City’s lively Newark Avenue. I strolled down the pretty, pedestrianized street and ducked into the restaurant, grateful for the warmth on an unseasonably chilly night.

The hostess led me to a spacious downstairs area filled with family-style tables. As I perused the menu, my friends Tim and Matt* filed in.

I settled on the mozzarella appetizer and an arugula pizza.

The pizza is made with San Marzano tomatoes, mozzarella and truffle oil. It’s baked in Porta’s own wood fired ovens, quickly roasting in the scorching heat.

Ah, my mutz!

The mozzarella was creamy and unctuous, perfectly complimented with olive oil. Porta’s chefs make the cheese fresh every day, something you’ll rarely see at a restaurant.

Make sure to get some bread with it…there’s nothing like piling that cheese on top of bread and shoveling it into your mouth.

The restaurant is cavernous, and I thought for sure it would never fill up. But just a few minutes after we sat down, nearly every seat was taken.

The moment of truth — our pizzas were here!

Mine was piled high with beautiful, crisp arugula. This could qualify as a health food, right?

Perhaps not — but it was delicious.

The greens and olive oil provide a perfect contrast to the creamy mozzarella. The crust is crispy and nicely browned by the wood fired oven.

When a pizza cooks fast in intense heat, the crust is airy and crispy. This is one of the reasons it’s great to go out for pizza: no home oven can reach those temperatures (often 700 degrees or more).

My friend Matt fell silent as he dug into a plate of meatballs. Conversation grinding to a halt is the surest sign of great food.

Tim got a pizza I’d never seen before — a carbonara. On top was a fried egg, a lovely touch.

Stuffed and getting sleepy, we called for the check. Leaving this inviting atmosphere and heading out into the cold was hard to do, but we were already making plans to come back.

Porta has locations in Jersey City, Montclair, and Asbury Park. The Jersey City location is open 7 days a week.

Stop in for a delicious pie and some homemade mutz!

What are your favorite pizzerias? Leave a comment and let us know!

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*names have been changed

Why Stocks Could Rip in 2024

December 1, 2023

Stocks just had an awesome November. But 2024 could see an even bigger rally, driven by declining inflation and the return of retail.

The Year-End Melt-Up

The end of the year often sees a stock rally. This fall has been no exception.

The S&P 500 jumped 8.9% last month, the second best November since 1980. Throughout my time in Porto, I kept checking the market, thinking “I ought to go on vacation more often!”

Stocks were so beaten down that despite the rally, valuations remain reasonable. The S&P’s PE ratio is in the low 20’s, about average for the last few decades.

The End of Inflation?

Equities had a rotten 2022, driven by rapid rate increases from the Federal Reserve. The Fed was hitting the economy with a stick to try to tame inflation — and it worked.

The Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) index, increased just 0.1% in October. Annualized, that puts inflation at just over 1%, well below the Fed’s 2% target.

Even year-over-year, the PCE is running at just 3%, not far from the Fed’s target.

The Top of the Rate Cycle

Declining inflation means the Fed may no longer need to raise rates.

Rate increases take time to work their way through the economy. With month-over-month inflation already running below the Fed’s target, why would they risk slowing the economy even more and risk causing a recession?

Indeed, if the economy is already beginning to slow, the Fed may need to cut interest rates next year.

A peak in rates could cause a rally. And if we see lower rates, I expect stocks to really rip.

The Return of Retail

Although the S&P has jumped 19% so far this year, retail investors have actually been leaving the market. Investors pulled $137 billion from equity funds this year, on top of $54 billion in 2022.

Many mom and pop investors probably got spooked in 2022. Even with this year’s strong performance, they may be too scared to reenter the market.

But sooner or later, greed trumps fear.

If we continue to see strong performance, retail is likely to return. And if interest rates decline, alternatives like high yield bank accounts become less attractive.

2021 saw $295 billion in retail money flood equity funds. If we see anything like that in 2024, it could push up stock prices significantly.

Wrap-Up

This year has seen a significant rally in stocks. But with a strong economy, declining inflation, and lots of retail money sitting on the sidelines, 2024 could be even better.

What do you think the new year holds for stocks? Leave a comment and let us know!

By the way, yesterday marked 3 years on the blog. Thanks for a great three years, everybody!

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Phishing Scams Skyrocket, Powered by AI

November 30, 2023

Recently, my grandma got a phone call. I had been in a car accident and needed money to get home. One small problem: it wasn’t me.

She almost gave the scammer money, until my aunt stopped her. My aunt contacted me to see if everything was all right, which I assured her it was.

Scammers nearly took her money using nothing more than a telephone. What happens when they discover AI?

AI Takes Fraud to a New Level

Some criminals already have. From a CNBC report:

Since the fourth quarter of 2022, there’s been a 1,265% increase in malicious phishing emails, and a 967% rise in credential phishing in particular, according to a new report by cybersecurity firm SlashNext.

“Gone are the days of the ‘Prince of Nigeria’ emails that presented broken, nearly unreadable English to try to convince would-be victims to send their life savings,” [security analyst Chris] Steffen said. “Instead, the emails are extremely convincing and legitimate sounding, often mimicking the styles of those that the bad guys are impersonating, or in the same vein as official correspondence from trusted sources,” such as government agencies and financial services providers.

AI lets scammers generate content in any language that feels natural and is tailored to the recipient. It can crawl the internet and mention details about you to build rapport.

How AI Could’ve Gotten Grandma’s Money

Let’s go back to that fraudulent phone call. What if the voice on the other end of that phone sounded exactly like me?

With AI, that’s easy to do. A couple hours of a person speaking is all you need to make an AI voice that can say anything.

At that point, even my aunt could’ve been fooled. Shoot, anyone could be!

I expect to see scams like this targeting the elderly very soon, if they’re not operating already. The best approach is to do what my aunt did — independently verify the facts.

Stopping AI Scams

The best way to stop AI scams is to take a page from the financial industry and adopt Know Your Customer (KYC).

AI models are powerful. Prolific users of them should have to provide identifying info like driver’s licenses.

You’re going to think twice about scamming people if they have your photo ID on file.

Putting a price on mass e-mails would also help stem the tide of fraud. Why should anyone be able to send a billion e-mails for free?

Charge the sender even a penny each and they’ve got a bill for $10 million. That message better be worth it.

Not only that, but you’ve got their payment info. If the messages turn out to be malicious, you can easily track the sender down and arrest them.

Wrap-Up

AI is a powerful tool that can do enormous good in the world. But all powerful new technologies have a dark side.

We should adopt KYC standards for major users for AI models. This will help us ferret out scams and make sure AI is used for good.

What do you think the next AI scam will be? Leave a comment and let us know!

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