It may be a slow news day, but…

Felix Salmon is a financial journalist with Reuters that’s been around for quite a while, so we thought we’d take a look at his article, “Why JP Morgan’s gamblers need to be spun off.” The title (and the second half of the article) as it related to JP Morgan was pretty on point, but the lead-in? Well, let’s just say it was sloppy to say the least.

Maybe you’ve seen it, and maybe you haven’t, but there’s a story out about how QIM manager Michael Geismer made a killing in the casinos at SALT. You can read the details here, which was mildly entertaining in our minds, but Salmon took it in another direction entirely, framing Geismer’s blackjack prowess as an indication of careless systemic risk in finance:

This is why SALT will always be in Vegas, and why Vegas will always welcome SALT with open arms. I’m sure the casinos made very good money on SALT even after accounting for Geismar’s winnings, and they’ll probably make money from Geismar too, on net, over time. If nobody ever won big money, no one would gamble at all. But in the end, the house always wins — and all of these hedge-fund managers are smart enough to know that. And still, left to their own devices, what they do is gamble, and they even layer on silly “risk management” techniques which don’t reduce risk at all — in this case, after a losing hand, Geismar would bet a little less, reckoning that somehow “laws of averages” would help him as a result.

Delevingne’s story makes for great reading, but it’s also pretty much impossible to imagine why anybody would invest in hedge funds in general, or Geismar’s hedge fund in particular, after reading it. SALT is the brainchild of our old friend Anthony Scaramucci, of course — and while I’ve definitely met people who like Scaramucci, or are charmed by him, I haven’t met anybody who thinks that Scaramucci’s fund-of-funds is near the top of any list of the best places to invest money. Whatever you think of gladhanding and gambling, they’re not really the kind of behaviors you’re primarily looking for in a fiduciary.

If Salmon understood the hedge fund space, he would know better than to call risk management techniques “silly” (unless that part of the metaphor attempt only applies to the card game, in which case, maybe).  Perhaps they’re silly when they’re a set of suggestions for high-powered banking leviathans, but for structured hedge funds – particularly systematic ones – those “silly” tactics have built them an empire. Speaking of empires, the black jack player that Salmon so cavalierly dismisses? Yeah, he’s running one of the largest managed futures shops in the world. And QIM is not playing it fast and loose out there. They’re 100% systematic, which means that, even in a world where you believed that Geismer’s enjoyment of a card game somehow made him bad at his job, it’s not him making the call – it’s a set of mathematically driven rules, expertly crafted by some of the smartest guys in the room. That doesn’t mean QIM won’t face drawdowns (they’re currently recovering from one), but it does mean that Salmon looks like he has no idea what he’s talking about.

Salmon tries to paint the hedge fund world as one of money hungry sharks, burning cash for sport. But one of the commenters on the article, in our opinion, gets it right:

Geismar is CLEARLY stinking rich.

If he took home a mere 10% of the management fee on his $4.6bn fund then that’s a $9m year.

So a $1,000 tip to him, is the equivalent of a $10 tip to someone earning $90k per annum.

However, the more egregious point you are attempting and fail to make is that his gambling behaviour and risk appetite is somehow linked to they way he exercises his fiduciary duties to his investors.

He’s running a QUANT fund for God’s sake!

To be fair, the blackjack story is not what most investors want to see out of their managers, and we’re sure that QIM is roiling in the midst of one heck of a PR headache, but it’s the extension of the story as a metaphor for hedge fund industry strategic development that we take issue with. It’s easy to read a story like Geismer’s and roll your eyes, but having money isn’t a crime, and enjoying card games doesn’t make you some kind of risk junkie, nor does it have any implication on the quality of the QIM program. Sure, it’s a slow news day, but, seriously, Salmon? You can do better.

One comment

  1. If Salmon had any idea, he would know QIM doesn’t charge ANY management fees, they are 100% performance fee driven.

    Of course, that doesn’t make what Michael Geismar did (as QIM’s CEO) any reassuring, if he wasn’t counting cards, it means he was betting with the odds against him, there is absolutely no system that can make you a winner in the long term with that situation. It means that a person who is supposed to look after other people’s money gambles a lot of money in gambles where he is sure to lose in the long term, very worrying indeed.

    I wouldn’t have an issue with somebody betting on blackjack with an edge (Ed Thorpe style), but in that case I am 100% sure that he wouldn’t be surrounded by people shouting like if it was the Super Bowl.

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RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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