A parachute-less fall from 25,000 feet, Bitcoin’s price volatility and the potential of a national charter for marketplace lending hit our radar this week. We also look into what some hedgies are doing fresh off a Jersey-style slap in the face, UBS’s comparison of Italian and US banks, tech’s publicly traded ascendency and health care insurance data collection. Finally, we highlight Brave Software, a start-up trying to boost micropayments.
What’s in your safety net?
This past week, Luke Aikins set a new Guinness world record when he jumped out of a plane at 25,000 feet without a parachute (on purpose) and landed safely in the California desert. Apart from his skill in knowing how to position his body during the fall, Aikins survived because he had a good net — actually, a really good net — waiting to catch him. That got us thinking about the parallels to how thousands of financial services professionals at Deutsche Bank and Credit Suisse must have felt this past week upon learning their firms were being removed from the Stoxx 50 index next year due to fallen share prices. Instead of asking, “When will the free fall be over?” a more apt question might be, “How good is my safety net?” Whether at DB, CS or one of the other battered giants, many bank employees these days feel like Aikins — dropping rapidly without a parachute. That’s why having a really strong net in the form of a viable back-up plan is necessary. Preparation is also vital. Aikins spent nearly two years preparing for this jump even though he is an elite skydiver who regularly trains military special forces. He invested considerable time and effort to master the techniques and aerodynamics necessary to enhance his chances of survival. The way he approached his free fall challenge should be a lesson to banking professionals, most of whom would be justified in thinking gravity is working against them these days.
Bitcoin volatility in full force.
On the back of a security breach at Hong Kong-based Bitfinex, a well known digital currency exchange, Bitcoin’s price dropped about 20% in one trading day. The hack, which resulted in the theft of 119,756 Bitcoins, is the latest in a series of several heists in which millions worth of digital currency have been stolen by cunning hackers who outfoxed security protocols. This particular hack is a big deal, and it’s not just about whether Bitfinex did or didn’t do something to deserve it. Fiat currencies of all types — dollars, yen, Bitcoins and Ether, to name a few — only have value if they inspire confidence. That’s doubly true of digital currencies, because unlike fiat legal tender, Bitcoin’s legitimacy is evolving and varies around the globe. Confidence = oxygen for Bitcoin, which in turn leads us to two conclusions: 1) The extent of Bitcoin’s volatility suggests the Bitcoin community has a lot of work to do to restore faith in the currency; and 2) It’s a great time to be in the digital currency security business.
National charter for marketplace lenders?
“The existing patchwork of state-by-state laws, though imperfect, has proven workable for many marketplace lenders and may be preferable to a national standard.” That’s the view espoused by several marketplace lenders, according to this Bloomberg article. Prosper, Can Capital and Fundera were cited as firms that expressed trepidation that an OCC-sponsored national standard governing marketplace lending would create new headaches for the sector because state-by-state maneuverability would be reduced. That may be true, but our sense is that the underlying reason for resistance to a national standard is that these platforms have spent great time and effort building state-by-state strategies. To replace those individual approaches with a common standard reduces the moat which larger platforms have used to gain scale over lesser capitalized players.
More tech, less long-short looks to be in the cards for hedgies. The New Jersey Investment Council is the latest pension fund to reduce exposure to hedge funds and will be jettisoning long-short and event-driven funds altogether (see here). In response to this national trend, several larger funds are amping up their computer-driven quant offerings. If performance of the quants continues to outperform strategies that rely on humans picking or shorting securities (a big ‘if’ given size constraints of many quant strategies), the inner workings of funds will continue to change. On the outside, they may still look like hedge funds, but on the inside, they’ll bear little resemblance to fundamentally-driven shops full of humans pouring over research and SEC filings.
UBS likens Italian and US banks. To paraphrase Mark Twain, there are lies, damn lies and not-so-neutral surveys designed to be provocative during the slow summer season. That’s our take on a new UBS survey stating Italian banks and US banks are most vulnerable to fintech disruption over the next 12 months. We’re not so sure about some of the survey’s other conclusions either: French and Japanese banks don’t need to worry about disruption and ATMs will go the way of phone booths.
What is a “tech” company? This past week, Apple, Alphabet, Microsoft, Amazon and Facebook — all so-called tech companies — made the new list of the top five largest publicly traded US companies. ExxonMobil and Berkshire Hathaway were bumped aside. Over time, this list changes with the fortunes of different industries, but to us, the characterization is the interesting thing. ExxonMobil, for example, spent over one billion dollars in R&D in 2015. Why isn’t it a tech company? Apple, meanwhile, could be alternatively categorized as a device maker and Alphabet could be viewed as having the world’s biggest advertising business. Thanks to our friends at Weekend Briefing for flagging this story. If topics related to society and innovation grab your attention, you should subscribe to their publication.
Calling all data start-ups: We need you. The finger-pointing over who is to blame for soaring health-care insurance premiums continues among drug makers and insurance companies. With premiums set to rise substantially in 2017, reports like this one from Avalere add fuel to the blame game. The problem, as Avelere admits, is that it is only able to collect data for nine states because “most employer plans do not go through an exhaustive regulatory review like the [Obamacare individual] plans do, and most states do not have comparable data about the drivers of rate increases [for large group health plans].” Can some start-ups fix this data collection problem before health care costs bankrupt the nation?
Machine-learning high-flier sees wealth management opportunities. On the back of a $21 million Series B financing led by Norwest and Intel Capital, CognitiveScale CEO Akshay Sabhikhi explained in a blog post why he’s taking an industry-specific approach that includes wealth management: “In financial services wealth management, trillions of dollars will change hands in the next six to eight years...and the new benefactors of this wealth are demanding a more personalized relationship with their investment professionals.” Later in the post, he said one private bank client is using his company’s products to serve ten times the number of customers that could be served otherwise.
Having egg on your face is relative. Hampton Creek, maker of eggless mayonnaise, is taking heat for getting caught buying its own product as a way to goose revenues and impress big-time investors, which include Khosla Ventures and Hong Kong’s Li Ka-shing. But before you condemn the company too harshly, consider this: Central banks have been buying billions worth of their nations’ own “mayo” for years now in the greatest goosing attempt of all time. At least Hampton’s manipulation has led to robust growth. Who’s got more egg on their face, really? Hampton’s CEO, Josh Tetrick, or the bond-buying members of the ECB, BOE, BOJ and the Fed?
Company of note: Brave Software.
Fresh off its $4.5 million financing, this San Francisco start-up is well-positioned to benefit from the burgeoning micropayment trend. Aiming to solve the problem of most browsers not being set up to promote micropayments for content, Brave promotes faster and safer browsing, enabling publishers to monetize their efforts more effectively. For more, check out the company’s site here.
Comings and goings.
Digital Asset Holding has bulked up its team by hiring eight professionals including Carol Mathis as the company’s CFO. Mathis previously was CFO at RBS Securities. Other hires include Andrew Pisano (business development), Josh Varsano (human resources), Gavin Wells (Europe) and Martin Korbmacher (strategic advisor).
Quote of the week.
It's very important to take risks. I think that research is very important, but in the end you have to work from your instinct and feeling and take those risks and be fearless. When I hear a company is being run by a team, my heart sinks, because you need to have that leader with a vision and heart that can move things forward.”
~ Anna Wintour