Bubbles Up

I'm not going to have much of an open here this week, which stinks coming back from two weeks off, but there was too much work to be done outside this week. My title is, yet another Jimmy Buffett song . The thing is the song is about bubbles under water always going up and they get you back to home or surface. The thing is that the bubbles in our industry aren't associated with that, but when you think about it, maybe they just do. You see bubbles in markets often lead to some of the best inventions periods or improvements in productivity. The rush of capital funds things most consider crazy. We all get a bit of a bruise from the fall, but in the end, we make out in the long term. This week we have a bunch of bubble talk.

Best of the Week

Another fantastic episode of Forward Guidance here. Jack is joined by Jonathan Treussard and they're talking about bubbles. They talk first about what is a bubble and Jonathan notes them as markets that are unsustainably expensive versus fundamentals. They're most likely to happen around new things. They focus on credit bubbles for a bit and note that the current market in private credit while concerning is not actually a bubble. Part of the concerning thing is that they are being pushed into wealth shops. Jonathan says that wealth management is more often sold than bought and when Wall Street rolls out the proverbial red carpet to ask, "why?" The guys talk about the risks for Nvidia around global tensions and continue on that from a wider lens. There's also a discussion around T-Bill and chill and how that is impacting all investing. Listening time: 71 minutes

Is There A Bubble Forming In Stock Market & Private Credit? | Jonathan Treussard

Best of the Rest

Continuing on the bubbles theme. This Reuters article walks through some of the more recent bubbles, what drove them, and what caused them to pop. There are a few good charts in this post, but the one below is one I find most useful. With everyone screaming about bubblicious valuations, forward PE isn't even really that high. In fact, it's lower now than the 2020 highs, which are about half of the '99 tech bubble. Are they rich? Sure, but when I hear the argument, I'd expect them to be 50x or higher.

Stock market crashes are rare, equity bubbles even rarer

Index Ventures Partner Hannah Seal explains how friendlier regulations on employee share ownership are helping EU-based entrepreneurs fill that gap. Hannah notes that there have been four unicorns already this year out of Europe. She thinks AI will become table stakes going forward as it disrupts every way we operate. Investing should not be pre-occupied by regulation as it will always be there and changing. The UK and Germany are creating regulations to be more entrepreneurship. The US has always had employee share ownership and this development is going to help some EU companies. Listening time: 20 minutes

How New Stock Rules are Boosting Europe's Startups

Robert Mitchnick , head of Digital Asset at Blackrock, joined Anthony Pompliano on stage at the Bitcoin Investor Day a few weeks ago. Robbie reviews the process for one of the premier asset managers to launch a Bitcoin ETF. The firm started "way" back in 2021 to prep for the launch by working with Coinbase to integrate into Aladdin. He talks through how client demand and their frustration of not being able to get an allocation in Bitcoin because of the wrapper. Robbie also discussed the how they think about alt coins. Essentially, it's Bitcoin, then some Ethereum, then everything else way down the list. Anthony's best question was essentially, what does it say when a firm with the reputation such as Blackrock stands behind Bitcoin? Robbie also explains how Blackrock is giving digital assets in the traditional finance (TriFi) wrapper with IBIT, but are also giving those that do understand blockchain traditional assets in that way too. Watch time: 25 minutes

The REAL Reason Why Blackrock is Buying Bitcoin

This Opinion piece from Christopher Carrano via Institutional Investor discusses the challenges of assessing private equity (PE) performance and its implications for asset allocation decisions. Chris argues that traditional metrics used to evaluate PE performance, such as IRR, can be misleading due to factors like fund size, vintage year, and valuation practices. These factors can artificially inflate returns and obscure the true risk-adjusted performance of PE investments. One key issue is the practice of smoothing valuations, where PE funds may use conservative valuations during fundraising to attract investors but then use more aggressive valuations to report higher returns later. This can create a false impression of consistent, high returns and make it difficult for investors to accurately assess the risk and return profile of PE investments. Chris suggests that investors should take a more nuanced approach to evaluating PE performance, considering factors such as fund size, vintage year, and valuation practices. It also highlights the importance of understanding the underlying drivers of PE returns, such as operational improvements and multiple expansion, rather than relying solely on IRR. In terms of asset allocation, he argues that investors should be cautious overallocating to PE based on misleading performance metrics. Instead, investors should consider the unique risk and return characteristics of PE investments and ensure they have a diversified portfolio that includes other asset classes.

The Alternative Truth of Private Equity and What That Means for Asset Allocation

I found this chart via Callum Thomas Chart Storm. The chart shows the vast divide between the amount of equity ownership in the US versus in the UK and the rest of the Euro Area. I always heard equities were less of thing in Europe, but never thought of it to this extent.

Equity Ownership

This one is a little more niche for those of us following the trading technology space. Water Technology Magazine highlights the increasing popularity of systematic trading tools in the fixed-income market. Traditionally, fixed-income trading has been more manual and less automated compared to other asset classes like equities. However, recent advancements in technology and data availability have led to a growing interest in systematic approaches to fixed-income trading. The article explains how systematic trading in fixed income involves using algorithms and quantitative models to analyze market data and execute trades automatically. These tools can help traders identify trading opportunities, manage risk, and optimize execution. They can also improve efficiency by reducing manual intervention and human error. One key driver of the shift towards systematic trading in fixed income is the increasing complexity of the market. Fixed-income markets are diverse, with a wide range of instruments and issuers, making it challenging for traders to analyze and trade efficiently using traditional methods. Systematic tools can help traders navigate this complexity and make more informed trading decisions. Another factor driving the adoption of systematic tools is the increasing availability of data. The fixed-income market has historically been less transparent than other markets, but this is changing as more data becomes available. Systematic tools can leverage this data to improve trading strategies and performance. Overall, the article highlights the growing importance of systematic trading tools in the fixed-income market and the benefits they can offer traders. As technology continues to advance and data becomes more accessible, systematic trading is likely to become even more prevalent in fixed income, revolutionizing the way trades are executed in this market.

Systematic tools gain favor in fixed income

Compliance issues can significantly impact hedge funds' ability to adhere to their investment mandates, ultimately affecting their performance and competitiveness. This article discusses the various challenges faced by hedge funds in meeting regulatory requirements and the potential consequences of non-compliance. One major compliance challenge for hedge funds is ensuring that their trading activities align with their stated investment strategies and risk parameters. Failure to do so can lead to regulatory sanctions and reputational damage. Hedge funds must also navigate complex regulatory frameworks, such as the Dodd-Frank Act in the United States and the Alternative Investment Fund Managers Directive (AIFMD) in Europe, which impose reporting and transparency requirements. Moreover, hedge funds must manage conflicts of interest effectively, particularly when dealing with multiple investors or complex investment structures. Failure to do so can result in legal disputes and regulatory scrutiny. To address these challenges, hedge funds are increasingly investing in compliance technology and hiring compliance professionals with specialized expertise. The article also explores the role of third-party service providers, such as fund administrators and compliance consultants, in helping hedge funds meet their compliance obligations. These providers offer specialized services, such as regulatory reporting and risk management, which can help hedge funds navigate complex regulatory environments. Despite the challenges, the article suggests that compliance can also present opportunities for hedge funds. By demonstrating a strong commitment to compliance, hedge funds can enhance their reputation with investors and regulators, potentially attracting more capital. Additionally, compliance can help hedge funds identify and mitigate risks, leading to more sustainable long-term performance.

Compliance Issues Cost Hedge Funds Investment Mandates

One for the Road

The New York Times is planning to make most of its articles available through automated voice assistants like Amazon's Alexa and Google Assistant. This move is part of a broader effort by the Times to expand its reach and make its content more accessible to people with visual impairments or who prefer audio formats. The Times has been experimenting with audio formats, including its popular podcast series, and sees voice assistants as a natural extension of this strategy. I love this idea as there are so many use cases for this method of delivery.

Exclusive: NYT to soon offer most articles via automated voice

Thanks for reading. Have a safe week out there.

Michael