The Sixth Sense
What if the trend of hedge funds going public proliferates, wouldn't that circumvent the regulatory parameters for hedge fund investment?
It was a Succofest of the grandest order. After an intense day of meetings, mindmelds and CNBC appearances (I don't have a lazy eye--it's just slightly unmotivated!), we headed to our corner nook at the Four Seasons Hotel Bar in search of hugs, handshakes and a dose of balance. President
Miss Stephanie Pomboy, the maveness of all things macro, joined us and before long, our table was abuzz with global themes and cocktail dreams. She's a pretty sharp cookie, that Steph, and we spent some time talking about what I could have said during my three minutes of small screen face time. In particular, we touched on the upcoming reset of adjustable rate mortgages after Elmer's swan song ARM-twisting campaign. "The numbers I've seen are $1 trillion this year, another $1.7 trillion next," she said as the rest of us digested the magnitude of those numbers. "The disturbing thing is that, of the $1 trillion resetting this year, about half ($550 bln) is sub-prime. That's roughly 60% of the entire subprime market that will reset...this year!" Gulp. Hey Janie, bring us another round!
Uber-Minyan Michael Santoli pulled up to our growing corner clan and dove directly into the conversation. As I watched the Buzz and Banter from the corner seat (a habit I picked up from Ruby, who taught me to always keep my back to the wall), I'm quite sure that a slight smile pierced my lips. Pomboy, Santoli, Wassong, Mangano--these were pretty snazzy thinkers and, what's more, they are genuinely good people. In a world that has conditioned us to race ahead, meet deadlines and continually reset goals, mindful moments are a commodity in our attention deficit, immediate gratification society.
We found our way to BLT Steak on 57th Street and, shortly thereafter, Mr. Succo arrived from the airport to claim his rightful seat at his namesake dinner. John and I have been doing these Wednesday night feasts for five years and they've become a thread of normalcy in a world that's anything but. It didn't take long for the table to fill with steak, the glasses to rise with wine and the conversation to turn to the tape. There's a lot going on out there and Succo and I typically dig through a slew of issues during our weekly vibe time. The topic of this particular session? Liquidity, for one, which naturally migrated into a broader discussion about hedge funds.
As the discussion matured and the topic of hedge funds going public arose, I had an epiphany. After scribing yesterday's Five Themes for Five Years, I had a Sixth Sense on what may eventually unfold. As Succ and Santoli bantered, I interrupted them without realizing I did so. "What if the trend of hedge funds going public proliferates," I offered, "wouldn't that circumvent the regulatory parameters for hedge fund investment? In other words, you don't need to be a qualified investor to buy a share of stock." I paused to let the idea resonate. "Could this be the last bastion of liquidity, one that draws on the public and harnesses (leverages) that liquidity in the hands of fund managers?
John and I often discuss how Wall Street has come full circle, with top talent leaving the sell-side for the sirens of hedge fund wealth. Those hedge funds, in turn, became a source of liquidity and, in many cases, they absorb the "other side" of the trade from the sell-side shops. To bring it back home, many broker-dealers have become proprietary trading shops that mimic hedge funds, both in style and risk-profile. Given the evolution of Wall Street and its ability to recreate and repackage risk, I wouldn't be surprised to see an increased number of hedge funds go public and tap a new source of liquidity (only to return that liquidity to the marketplace in spades).
We'll touch more on this in the future but, for now, I'm gonna flip lids and jump over to the Buzz. Please know that I will be out tomorrow and Tuesday as I take the Queen to Costa Rica for some 30th birthday hurricane surf school lessons. As it stands, my current risk profile is balanced (deltas) and I'm keeping a slew of gamma on (it's cheap enough that I can justify it). I think September could be a wild month and my humble sense is that there's a disconnect between perception (VXO) and reality. Which way will the fray stray? Watch the CRB, Minyans, if it breaks lower, equities should follow. If it Snaps higher, I expect the homebuilders to lead stocks and the dollar to get rocks.
Good luck today.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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