Weekly Briefing No. 32 | The Vampire’s Dilemma Hits Hedge Funds

Are hedgies modern-day vampires? We ask that question this week, as well as dive into Facebook’s fintech potential, disruptions in the shipping industry, Bitcoin as preemptive ransom currency, June as Blockchain Tech Month, Muhammed Ali as career inspiration and Rigetti Computing.

IN DEPTH

The vampire’s dilemma hits hedge funds.

Despite the castle living, nightlife and great hair, being a vampire has its downsides — including the fatal danger of being exposed to daylight. Increasingly, daylight is a real problem for hedge fund managers, too. That’s because most hedgies haven’t been able to deliver the kind of durable alpha implied by the formerly standard 2-and-20 fee structure — and the press is making sure to let everyone know. Unlike vampires, for whom the wooden stake is the extinction mechanism, it’s the relentless transparency being brought to most tradable markets that’s knocking off hedge fund managers who used to thrive in "nocturnal" market environments. Of course, executing differentiated trading strategies has never been easy, but today, it's near impossible in some markets. And for the source of the cleansing sunlight, we can thank innovative exchanges, financial data providers and fintechs. What's a hedge fund manager to do? One approach taking root among the larger funds is to cut fees and essentially swallow the same bitter pill as the sell-side. Another approach is to shift into markets where information flows remain murky, such as the private company world à la Tiger Global, but that’s a tough transition. Our favorite course of action is for managers to spend more of their (shrinking) resources to unleash technology that can reduce their fixed cost structures, promote greater regulatory controls and better nurture longer-term minded LPs. They may also want to put even greater emphasis on sourcing and incorporating alternative data streams into their models, which may not directly produce standalone alpha, but could mitigate risk (aka the “hedge” part of hedge funds) and foster new idea generation. Maybe those suggestions aren't enough to spark a return to 2 and 20, but tapping into the fresh blood offered by the ranks of innovative fintech start-ups is better than getting a sharp stick in the eye — or through the heart. 

For more, see this comprehensive BNY Mellon report on alternative investments.

Facebook’s bots coming to a brokerage near you…

Speculation abounds over Facebook’s potential game-changing role in financial services. Now, with its growing push to goad all Facebook users to embrace its Messenger platform, the giant’s approach is coming into focus. Messenger, led by former PayPal president David Marcus (read: he’s a fintech guy), was launched in 2011. It currently boasts 900 million monthly users with a core purpose of making digital interactions easier than those via typical mobile apps. Last month, Facebook announced that it would allow companies to use Messenger’s chatbots to provide customer support, content and general engagement with its users. That led to initial partnership announcements with companies such as 1-800-Flowers, but now it appears that the financial services world is getting on board. This week, UK discount broker AJ Bell became the first brokerage firm to execute a trade through Messenger, buying £500 worth of Facebook stock (wouldn’t it have been funny if AJ Bell had bought a Google share?). Bell also said it was revamping its system so that investors could buy and sell funds through Messenger’s bots too. Messenger may have had its share of security problems, but in the long run, it’s tough to keep a good bot down. Satya Nadella certainly confirmed this perspective when he recently declared that “bots are the new apps.” Our takeaway: banks and brokers may want to make sure they have enough developers comfortable in building bots for Messenger. In fact, there are about 900 million reasons to do so.

Check out AJ Bell’s announcement here.

IN BRIEF

Insurance needs Facebook’s affinity power. Speaking of Facebook, we’re taking note of Lemonade’s CEO Daniel Schreiber, who penned this Linkedin post for the Future of FinTech Conference hosted by CB Insights. In the post, Schreiber emphasizes the power of affinity users of insurance to help keep a lid on fraud and premiums. However, just as insurance companies have become massive, so has a cycle whereby “growth quashes affinity, alienation fosters fraud, and heavy-handed claims adjusters replace trust.” In order for insurance to recapture its glory, it should follow the Facebook path which, says Schreiber, has successfully balanced an affinity experience with huge growth. Schreiber proudly talks his own book when he states that in order for insurance to follow the Facebook way, it must be rebuilt from the ground up as Lemonade has done. But whether you agree with his last point or not, Schreiber’s diagnosis of the core problem of insurance is a worthy read.

Race to build Waze for the shipping industry. Global trade is a huge game of logistics, organized through a tangled mess of emails, faxes and other forms of paperwork. As such, there’s currently no easy way for freight forwarders to optimize the routing of shipments, constraining economic growth. The possibility of untangling the mess and unleashing productivity is why Paul Graham of Y Combinator is so bullish on Flexport. See more in this TechCrunch article, which also mentions other competitors in this unsexy but massive space.

Preemptive stockpiling of Bitcoin in advance of extortion. We were interested to read about a Citrix survey indicating that companies are building up stockpiles of Bitcoin in order to pay ransomware bribes when attacked: “Holding Bitcoin in reserve could help a company without backups get back online faster. Most companies have no reason to have a Bitcoin account otherwise. Having one ready to go could save precious time during which a company can’t operate as normal.”

June is Blockchain Tech Month. Didn’t know that? Don’t worry — this year’s 11 other months are essentially Blockchain Tech Month too according to this Wired UK article, which basically proclaims the death of the middleman (financial and otherwise) courtesy of distributed ledger technology. The piece references an estimate by Outlier Ventures (a European firm dedicated to “invisible” applications of blockchain tech) that 70% of the 878 blockchain companies that have been started in recent years will fail. Still, that leaves 260+ existing firms plus new ones that could build successful applications in the years to come.

Muhammad Ali as career reinvention specialist. Of the many different perspectives on this gigantic public figure that have been offered since his death, we’ve been especially interested in those focusing on his ability to reinvent his boxing style. Suspended from boxing at the height of his career for 1,314 days because of his conscious objection to the Vietnam War, Ali returned to the sport to the delight of his fans. Neither as quick nor as powerful as he was before the suspension, Ali more than compensated for his diminished physical skills by his bolstered mental toughness and agility. His is a great lesson for anyone.

Company of note: Rigetti Computing.

This Y Combinator-backed, Berkeley, California, company is focused on building a quantum processor. Its near-term mission is to build a prototype chip by 2017, which could spawn a new generation of quantum chips that have the potential to dramatically accelerate the development of certain machine learning capabilities. See here to learn more about the company.

Comings and goings.

Derek Meisner has joined algo trading idea-generator Quantopian as its new general counsel. The Boston-based start-up, which is backed by investors including Spark Capital and Bessemer Venture Partners, grabbed Meisner from RA Capital Management. Previously, Meisner had been a partner at K&L Gates and was a branch chief in the SEC’s enforcement division.

Quote of the week.

“The soul becomes dyed with the color of its thoughts.”

~ Marcus Aurelius, Roman Emperor from 161 to 180 AD, and all-around great fellow