Paul Singer, Doomsday Investor | Hacker News Reader

Paul Singer, Doomsday Investor

newyorker.com

88 pointspm2460142 comments

I've been on both sides of the table here.

I worked for a company called Corel early in my career and we were taken private by a private equity firm. We had about $95 million in the bank and they bought us for around $130, so they used our own money to buy them. When the takeover was done the money was taken to pay back the banks for the short term loans.

The company changed and I left. I thought Vector was the worst PE firm ever. Now to be fair they don't have a great reputation at all due to their buy, strip, merge and flip tactics have caught up to them.

On the other side of the coin we've published short reports on companies and had that set off a wave of harassing phone calls about how we were the worst people on earth and why did we want to ruin everyone's life.

And this was a case where we were right, the company finally did admit that the items we highlighted in our short report were correct.

If you come out on the "I don't like these types of funds and their tactics" side, then ask your self what is the appropriate measure when you find a company that is under performing, or is down right corrupt with its books, or is just coasting.

What should the correct response be?

1) Build up a position in the firm so the fund has skin in the game?

2) Then ask for changes to be made?

3) Then ask for the management who was responsible for the under performance to leave so this doesn't happen again?

To me that all seems very reasonable and is the typical playbook of a firm like Elliot.

The very reason passive investing works is that there are firms out there in the market buying the good stocks and shorting the bad ones.

It seems a bit much to on one hand claim people should be passive investors which requires active investors to price the market and on the other hand get mad when an active investor points out flaws in a company and correspondingly asks a company to fix those flaws.

TL/DR

It's shitty when someone comes along and points out your flaws. It's often the low level employees, who aren't really at fault, who pay the highest price. On the other hand you can't just expect to become CEO and be able to run a company into the ground without someone complaining.

I think the basic premise of the hostile takeover strategy is totally fair, but contracting with Mossad guys a la Black Cube to stalk the personal lives should be disclosed to the board. CEOs should expect the board to not retain firms that investigate their personal lives *to that extent. If he was secretly a heroin addict maybe that's a different situation.

That said, they didn't need ex-spies to put together the stock chart timeline superimposed with Bush's instagram party pics. That's just savage and clever.

On the other hand the way they handled Argentena and Peru was pretty monstrous. Even taking both sides into account this isn’t like forcing employees to find a new job because you tanked their company. Innocent people were hurt by something they had very little control over. You don’t get to choose where you’re born. It really drives home the point that while these people might be acting as checks on the system they are fundamentally vultures. No matter what they tell themselves and others their performance of that role is incidental at best—a coincidence used as cover for being a bastard.

I'm from Argentina. Our government was the monster at that time.

Hey, at least it wasn't Pixelon.

Problem is there's no knowing, in any case, what resolution would have been reached had the activists not intervened. Maybe a turnaround would have been around the corner, but having the activist there scared off someone? Or no activist -> management/government continues being profligate.

Main downside to a world of activists is you get guys who, like at poker, can see that they can intimidate others, perhaps from previous reputation. You could easily make a game theoretical scenario where once you've won a few rounds, it makes sense to do a few extortions as well.

Main downside of not having them is more obvious. Nobody points out the flaws of the current leadership.

Do activist investors serve a valuable function to the market, and their investors? Yes

Do activist investors sometimes pursue strategies that are less than scrupulous, and perhaps values a quick buck over the long term success of a company? Yes

Are management teams sometimes really looking to execute on a long-term strategy that can’t be measured over a couple of quarters? Yes

Are management teams sometimes incompetent, corrupt, and absentee? Yes

If you want to read some scathing activist letters check out Dan Loeb’s, sample below:

https://www.sec.gov/Archives/edgar/data/1040273/000089914004...

From the outside, it can seem as if Elliott is causing the drama, but the firm argues that it simply identifies preëxisting problems and acts as a check on the system.

It's safe to ignore this. Their only goal, I assure you, is to beat their benchmarks and maximize their fee income.

What are Elliott's benchmarks?

No idea, this is general comment about all hedge funds. I'm not an investor in the fund, but based on a quick search they're a 2/20 fee structure so they better outperform the SPX.

Hedge funds generally do not track benchmarks as the point of them is to provide diversified return streams. Over a specific time window, any hedge fund worth its salt should outperform vs SPX but really shouldn't be month to month.

Yes, and their long term returns support this. My phrasing was regrettable, but my feeling is that they are doing a post hoc rationalization for what maximizes their profit (or are describing themselves as an amoral agent in a complex system, at best).

Obviously their entire reason for existence is to make money and no one believes anything different. I think that they also provide a valuable service to the markets and that Paul Singer (at least at this stage in his life) sees himself as an activist beyond the investment world.

I don't agree with all of their methods but think that they're a necessary boogieman in order to prevent shareholders from getting ripped off. Definitely the most aggressive in their space and they attract a lot of attention for it but no one ever seems to ask about why these companies were run in such a poor fashion to begin with.

they are not trying to beat the spx... they are trying to produce positive, low volatility, uncorrelated returns...

There are a number of relevant indices, I've put a link to one below [1]. the short version is that they would probably be categorized as a multi-strategy event-driven manager, and as such would be compared against other similar managers investing in similar strategies (distressed debt, activist, etc). Most hedge fund managers are focused on risk-adjusted returns rather than relative returns and people often use either a sharpe ratio [2] or sortino ratio [3] as a rough proxy in addition to measuring pure absolute returns.

[1] https://www.hedgefundresearch.com/family-indices/hfri [2] http://www.morningstar.com/InvGlossary/sharpe_ratio.aspx [3] http://www.morningstar.com/InvGlossary/sortino_ratio_definit...

Surprisingly mild NY piece given Singer's reputation as a lowest of the low vulture capitalist. https://www.newyorker.com/business/currency/argentinas-ratio...

I'm from Argentina and I'm glad Singer helped to put a stop to our disastrous government at that time. That said, probably to act in this situations should be a UN prerogative, but UN is outdated in its institutions design. A country like Venezuela is an example of this.

Have you read 'confessions of an economic hitman'? https://en.wikipedia.org/wiki/Confessions_of_an_Economic_Hit... I became a lot more cynical after reading that

Not read, but it doesn't look a serious piece of work. I'm not naive. Of course Singer's people probably wants to win a lot of money and of course you have lobbyists trying to make fast money everywhere. But that's not the main problem we face.

The main problem is the lack of control to dictatorships. You can have a disastrous government like the one we had here or Trump's. But it is damage-controlled by a democratic system. Dictatorships on the other hand are unhinged, lasts forever, and flood the democratic World with their migrants.

UN institutions were designed for a PostWar scenario that doesn't exists anymore.

so what makes a company a target for activist investors?

what are various steps a company can do to avoid being a target?

Are shares still held by the founder an important factor? Is it realistic for the founder to hold shares looking that far down the road for the day an activist investor starts evaluating their company as a target?

When activist investor look at Amazon, is the number of shares personally held by Bezos a relevant factor to their analysis?

Stepping back a bit. My impression (from afar in the UK) is that US capitalism, which used to be dynamic and innovative, has slowly become like a shark tank in which the sharks have eaten everything else and are now trying to eat each other. I know that's very vague and high level... but is it fair? What's up with you guys... are you OK?

I have to agree, but I thought the UK was pretty clearly sharing the same tank.

...no :(

Instead of sharks, I would generalize it to the entire food chain. Early in the history of capitalism, corporations grew organically. They were essentially 'herbivores' . But they have since realized that there are many more calories (dollars) to be gained by moving up the food chain and consuming organisms which are doing that work. Ultimately, too many predators and not enough workers.

Agar.io :)

All this bs happens because we are allowed to used capital derived from financial profit to reinvest in financial transactions - leading to a vicious inflationary cycle of increased valuations without increased value. The solution is to have two currencies. Financial currency (money derived from financial transactions (option redemptions, stock sales, hedge fund investment, etc) that can only be invested in the REAL world of products, services. OTOH, REAL currency (money derived from the sale of products[NOT FINANCIAL PRODUCTS] and services[NOT FINANCIAL SERVICES]) can be invested in anything. This simple gate will restore the synchronization between the financial and the real world. How did it come to pass that markets like the FOREX have an order of magnitude more 'value' that the non-financial product and non-financial service output of the entire world?

who downvoted? some short seller? some day trader? somebody who doesn't work for a living but lives off the work of others?

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Interesting idea, although it seems that it would more likely wind up forcing the creation of money-laundering schemes than doing real good.

While it wouldn't really solve the activist investor issue, I favor a strongly time-based capital gains tax system, designed to favor long-term investment, over short-term financial extraction. The rate table might resemble: <1 minute = 95% cap gains tax rate

<1 hour = 80%

<1 day = 70%

<1 week = 60%

<1 mth = 50%

<1 qtr = 40%

<1 year = 30%

<2 yrs = 20%

<5 yrs = 10%

<10 yrs = 5%

>10yrs = 0

Obviously a mere first-draft, subject to tuning. But the general concept should be clear - the short end would eliminate the volatility, unfairness and flash-crashes created by submillisecond trading. The encouragement to the longer end would get everyone to think longer-term. The 0% for decade+ holdings would prevent a lot of silliness around inheritance (e.g., you inherit a few shares from your grandfather, and have no records or reasonable way to figure the cost basis, but are required to assert one).

Of course, I doubt it would happen because it isn't in the short-term interest of the bankers.

yes this reminds me of the 70s when marginal tax rates on short term income was as high as 90%. But the problem here is that the money from tax goes to worthless, fat, lazy, stupid, ancient, corrupt, ineffective politicians.And the trickle down to the people is as weak as the urinary stream from those decrepit politicians with prodigious prostates.

Yes, some of it goes to the politician's waste, but the trickle-down via government is FAR better than the trickle-down from merely expecting the extractive class to create jobs and maintain a robust middle class.

Heck, when the tax rates were that high, we had: * the GI bill, enabling all vets to go to college for free, * built road systems like the Interstate highway system * built schools * built libraries * WENT TO THE MOON.

Seriously, if you want to complain, you will find waste in absolutely ANY large organization, corporate, philanthropic or govt. -- it just comes with scale -- there's economies of scale and inefficiencies of scale.

But it does not follow from the existence of nontrivial inefficiency/waste/fraud/etc. that large organizations and their projects are therefore worthless; only that improvements might be sought.

Back in those days, tax rates were raised to pay ofr projects. I am opposed to increased tax rates that are not specifically earmarked for a purpose. Yes we went to the moon, but that was driven by cold war politics. Yes we had other good things too - the GI bill, infrastructure investment, etc. I'm all for that. Perhaps my vitriol got us off topic. I just feel that taxation is not the optimal way to redistribute financial profits. It's not sufficiently granular. And when we try and codify the granularity - we get a complicated, byzantine tax code that tries to accomodate all the 'nooks and crannies' that no one can really grasp. Rather, I would like to see a 'wall' in Trump lingo against the recycling of financial profits into more financial instruments which is just speculation. And an incentive for the reinvestment of financial profits into the REAL economy. Sure the ROI is greater in financial markets, but that is in large part because greater profits create greater demand for financial instruments which just raises their price.

ok, fair enough, so this is more a regulatory than a tax approach.

I'm not against it, but I wonder at it's effectiveness, as regs are subject to many of the same loopholes, exclusions, and workarounds as taxes, along with regulatory capture (see FCC and Net Neutrality).

Neither is perfect, and I think we need both.

E.g., rags/taxes to cap CxO pay multiples -- so they have to bring up the pay of the average worker if they want higher exec pay. Regs for minimum wage above the poverty line...

either way, I think we need to get the masses of idle capital back into the middle class if we want a robust country and society.

So they'll just buy any crap and re-sell it immediately afterwards (for a small loss, if needed). Who does that benefit?

Well, if they use financial gains to buy crap, then the seller of that crap benefits. Then the 'crap' market changes-demand decreases. If they want to sell crap - it wont be a small loss. And they cannot 'short' against buying crap. To make up for their 'crap' loss, they'll need to make more profit. And anyway, there are people who have to sell the crap, people to buy the crap, and people in between each transaction - more jobs.

Currently some importer makes a profit from buying desktop fans in China or Vietnam, and selling them in the US and EU. Say the finance investors just use their Finance Bucks to buy those fans themselves, pay that importer to ship them and then they sell them to the companies that were already buying the fans from the importer, getting Real Bucks back.

Literally nothing in the real world changed, except the importer now gets a bit of extra cash (probably almost nothing, since it doesn't cost him/her anything) to allow those investors to "own" those fans en route. There's no extra jobs, and the demand for fans hasn't really changed.

What's the point?

Well, the importer who would have spent his money on the fans now spends it on something else. The Finance bucks are now recirculated into the REAL economy.

They don't have that money to spend, because that money came from the sale of the previous fans, but now it's the investors that are selling them.

Before: Importer spends $100 to buy the fans, spends $10 to ship, gains $150 from sale. Net: $40

Now: Finance guys spend $100 to buy the fans, pay $50.01 to the importer to ship them, then sell them for $150. Net (for the importer): $40.01. The finance guys are down $0.01, but they get Real Bucks from that.

The real economy gained a mere penny. It just added complexity to the whole thing, for no real gain.

I get the feeling such a system would just be a bonanza for accountants. It's probably a lot harder to define the distinction between financial and non-financial than it seems.

What's to stop someone from trading something like forward agreements? So for instance I can sell you 1M backrubs, which are non-financial, to be delivered in a year? And you then sell those on to someone else? Now you've taken a non-financial thing and turned it into paper, just like we currently do with all sorts of things.

that's an option. When you sell such a 'potential service at a fixed future price to actually buy it' you are not ACTUALLY buying the product. In fact, options have been a windfall for this inflationary debacle we are in. You might argue it's fueled the silicon valley miracle, but really it's only bait. People going into CS courses because of the 'option' to make money. When in reality, the industry needs code monkeys so how do you attract them? It's a form of dishonesty tricking people into doing what they dont really want to do for money. And when they are rudely awakened, they feel justified in even worse usurious behavior.

Sure, I get what you're saying. But aren't you making it worse by trying this particular intervention? Chances are wealthier, better connected people have better access to whatever the workaround is. Just like with tax.

indeed, lawyers would find some offshore or foreign loophole where this restriction does not exist. Financial money would find financial instruments in other nations - Germany, France etc. Why do Apple and Google keep so much money offshore? The same can be said for any tool whose purpose is to redistribute income. But the reinvestment of financial gains in the REAL economy is ALREADY happening. We call that phenomenon a 'startup' and those who are doing it are angel investors and VCs. I just want to formalize it out of silicon valley to the rest of the US, to the rest of the industries, to the rest of the nation. Heck, why not get creative and have a kickstarter for building 'smart roads' - you know roads with built in telemetry that would make self driving cars a cinch. Sounds outlandish? Well building interstate highways back in the way was equally outlandish. If there was a restriction against financial reinvestment of financial profits, and maybe a tax credit for investing in the REAL economy, we would see these things happen. The tool of taxation and the bureaucracy of redistribution would be sidestepped and the money would go more directly to the REAL economy.

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