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naraburns  nihil supernum  2yr ago (text post)   33543 thread views

Culture War Roundup for the week of January 2, 2023

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I’ve been thinking about where to post this because it only has some culture war connection.

Citadel posted +38% in their main hedge fund this year. They do better in Citadel securities which is HFT. This isn’t a huge finance sub. But in my opinion this is the greatest hedge fund performance I’ve ever seen. Their hedge fund business is what’s called a multi-manager with various pods getting capital allocated to them. Their sales pitch to investors is they average out all these managers (and fire losers quick who don’t make money) and run tight risks management. Other players in the space are Millenium, Balyasny, Schonfield, Point 72 (cohen Mets owner). These firms are suppose to never have down years. 6-10% after fee returns are fine because no down years. A big year I’ve seen before was high teens.

For non-finance people some firms do have higher return years. Old macro guys have had huge years. But they also take big concentrated bets and have big losses. Rentech has better returns but they’ve been capital constrained (past $4 billion not sure now) and closed to new investors for decades. Close to 40% return at large Aum (50 billion) and tight risks management seems very impressive.

Culture war wise Griffin moved firm HQ to Miami and is a big Desantis backer. And the Amc/Gme crowd calls him a market manipulator etc which I believe is false.

I'm not sure it makes sense to draw conclusions for a single year of returns. Maybe they are geniuses. Maybe the found an exploit in the markets. Maybe they just bet on 15 black and it came out 15 black. How would you know from the dataset of 1?

Citadel sells options through buying orderflow from all those discount brokers. So I'm not surprised to hear they're doing well post GME and in a year when Tesla and other retail darlings took it on the chin.

That is the citadel securities part. Which did have a record year and is closed to outside investors.

As you said, Renaissance Technologies is even better . I would always take hedge fund returns with a gain of salt ,especially if it's closed off to the public. Imagine if some of the biggest tech companies were private and rather than retaining shareholder wealth, paid huge dividends annually from profits to a small circle of insiders and employees. It would technically have among the highest returns ever. Its returns would look really good on paper, but that is what a private company is. It is not trying to make shareholders rich. It does not have to be investing related.

Now does Rentech make so much? who knows

I don’t think that is right.

Private companies are in fact trying to make shareholders rich. There are two ways of doing. Either distributing profits or selling shares. Corporate finance tells us that all things equal a company should distribute proceeds when the shareholder can get a larger return on the market compared to what the company can do with the cash. But of course all things are not equal.

In a private company, liquidity is constrained (ie I can’t sell a few shares today). So there could be a preference for dividends from a liquidity perspective.

In a public company, management often faces zero real oversight from shareholders. Management has an incentive to empire build even if that isn’t ideal for the shareholders. This is because paradoxically management has more invested in the company compared to shareholders. That is, management has spent years building networks within the company whereas shareholders probably own at least 30 other companies — shareholders are concerned with their portfolio’s return of which company X is but one factor. Shareholders might prefer each company taking on individually a bit more risk if it leads to a more efficient allocation of risk whereas corporate management wants the company to take on less risk. Therefore, if shareholders can’t restrain management, management may make suboptimal allocation of resources at the benefit of reducing risk at the company level.

Finally, you need to layer in taxes. There is a second layer of tax when PubCo distributes earnings. That isn’t the case for many private companies (often structured as pass throughs for US tax purposes). Therefore the calculus changes again. When I’m looking at a dividend from PubCo v. PrivateCo the first is going to be taxable while the second will generally be tax free. Therefore, there is often an incentive for me to want the PubCo to hold onto its money even if on a pre tax basis I can get higher returns outside the Pubco compared to what Pubco can obtain if I can’t get higher returns post tax.

The same is not true for private companies that are pass throughs. Not that suggests that pass throughs (ie private companies) are more efficient for shareholders and therefore more likely to make them rich.

This does gloss over different tax rates. Effective rate for most pass throughs of decent size is now 37% minus the 199A deduction whereas corporations are taxed at 21% and then when distributed the after tax returns are taxed at a 20% rate. So there can be timing benefits for corporations that aren’t there for pass throughs.

It’s not closed to public completely. $50 billion aum. Capacity constrained understandable. A lot of quit very profitable firms play that game (cit securities, jump, rentech, and a half dozen others).

He's not talking about Ren Tech, he's talking specifically about Ren Tech's medallion fund. It's only open to employees.

It is closed. impossible for outsiders to invest: only employees and some former employees and families can invest. if outsiders could invest it would be inundated with inflows and returns would likely be far worse.

Citadel by marketing material doesn’t take those risks. All factor neutral.

My theory is there’s been a lot of dumb retail flow to profit from for stat arb, but their still outperforming competitors by a lot.

My theories are

  1. AI breakthrough they employed

  2. Was up a lot early and reduced risks controls

I can tell this isn’t mostly finance but tech autistics because no one is getting that their the firm with tightest risks management (point 72 suppose to be a lot looser on market bets).

Citadel by marketing material doesn’t take those risks. All factor neutral.

Many funds that failed in catastrophic ways made similar claims.

See say https://en.wikipedia.org/wiki/Long-Term_Capital_Management - to say nothing about repeated outright scams claiming the same

Ltcm took risks they said they were taking. That’s my point on post Citadel says not taking risks but returns say they did something.

Many lost huge sums due in tech from 2000-2002 or housing/banking in 2006-2008. You had to survive two huge corrections, 8 years apart, in totally opposite sectors.

I doubt their risk management is as tight as you think, but 38% in a year with price movement like 2022 is totally believable. If in January you shorted bonds and high-multiple tech knowing that the fed was going to raise interest rates to combat inflation, and went long energy because of the Ukraine crisis, you could have made 38% no problem. Of course, timing it right isn't easy, but its certainly possible. Everyone knew Tesla was overvalued, the only question was when it would crash. Inevitably someone would time it right and make a killing.

If in January you shorted bonds and high-multiple tech knowing that the fed was going to raise interest rates to combat inflation, and went long energy because of the Ukraine crisis, you could have made 38% no problem.

well yeah if you have a crystal ball why stop at 38%, use 5-1 leverage and make 500%

They may well have already been leveraged as much as possible for the 38% return. Similarly I've heard that Rentech makes money by finding small but consistently profitable trades and leveraging the hell out of them, which would explain why they're capital constrained.

From what I’ve heard Citadel is almost always using 10x leverage

Their sales pitch to investors is they average out all these managers (and fire losers quick who don’t make money) and run tight risks management.

Well, which is it? If you're firing people who don't make money, then your staff are incentivised to go for risky but high-return picks, and if you have tight risk management, that is more cautious investment which likely won't make as much, or make it slower.

If comparable companies are making returns of "high teens" in best years but this lot are making 30+% yeah, something seems off. Either they had a lucky fluke year or there is something happening under the table.

Are they committing fraud? That’s my prior for suspiciously high returns on investment.

A major red flag is if the investment does not make sense or is not mathematically possible, like Madoff's option trading strategy or Enron.

I think no. I don’t see reason to. He’s already rich and the HFT part he gets a bigger share of profits. I don’t know exact numbers but my guess is he gets 2-3 billion in cash flow from Citadel securities and if the Citadel Hedge Fund has a 10% return Griffin makes $2 billion off that. ( 10% return is $5 billion and 20% is 1 billion plus 2% management fee on 50 billion is $1 billion).

My quick google on number 2 in multi manager is Millenium https://www.bloomberg.com/news/articles/2022-10-05/millennium-returns-15-billion-cementing-move-to-long-term-cash#xj4y7vzkg

There is no obvious reason to cheat and to cheat at a level that is standard deviations above. If you cheat it’s to meet the level you need to raise money and collect fees.

I don’t see reason to. He’s already rich

Ahem. I think there was somebody in the news recently about "what do you mean the magic beans were all a sham" who also had the reputation of "why would he do anything shady, he's already made a legit fortune" 😁

Don’t think Sbf actually made legit fortune

I thought the reference was to Bernie Madoff. Bernie did make a fortune legitimately as a market maker.

people were not able to determine that in advance, is the thing.

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