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.