
Hedge-Fund Son Thought Hedge-Fund Dad's Trades Were Fishy - clbrook
https://www.bloomberg.com/view/articles/2016-09-21/one-cooperman-thought-another-s-trades-were-pretty-fishy
======
Tinyyy
Matt Levine is a great writer and he often brings insights into finance, about
what the rules are exactly, and why they are that way (even though they go
against our intuitive judgement). I hope that people here would read 'Money
Stuff' so we can avoid the inevitable morality bashing whenever a finance
article is posted.

The whole point of finance is maximizing profits; I think that people need to
understand and accept this for us to have a meaningful discussion.

~~~
ethanbond
Lame attitude. The purpose of war is to kill people, yet nearly everyone
agrees there are some particularly bad ways to do such - some of those ways
are bad solely by their shear effectiveness.

The whole point of finance is maximizing profits, sure. The whole point of not
"accepting" that as-is and thus regulating is because there are some
particularly awful ways to make profits.

~~~
daemin
The purpose of war is to get the other side to give you what you want. Killing
people is just a side-effect or method to accomplish your goals.

~~~
TheOtherHobbes
In the widest sense the purpose of war is profit.

~~~
simonh
Only for largely uselessly overblown interpretations of the term profit to
mean any perceived gain or advantage, or incremental progress towards any goal
whatsoever.

------
hkmurakami
Levine's opening paragraphs are always so strong. The content marketers within
us all would be wise to learn from his methods.

~~~
ISL
I've wondered for months now how large his staff might be. The quantity of
work that he publishes is substantial, and the quality is quite consistent.

I'm a fan, to be sure, but I'd love to know how it's all put together.

~~~
PhantomGremlin
I wonder if he has a staff at all? If not, then it's even a more impressive
body of work!

I'm pretty sure that when Matt wrote for
[http://dealbreaker.com/](http://dealbreaker.com/) he did it without any
support staff. It was probably that gig that got him noticed by Bloomberg.

 _I 'm a fan, to be sure_

You can always go back in the Dealbreaker archives and read his earlier stuff.
It's pretty equivalent to what he now writes for Bloomberg View.

It's a long strange trip for him from "high school Latin teacher":
[https://www.bloomberg.com/company/announcements/matt-
levine-...](https://www.bloomberg.com/company/announcements/matt-levine-joins-
bloomberg-view/)

~~~
hkmurakami
Well his HS Latin teacher stint was his gap year before heading to Law School
(likely post acceptance), so I'm not entire sure that counts ;).

------
nazka
A little bit off topic here but does someone know other great writers like
him? I tried Bloomberg View, the Economist, WSJ... but I couldn't find a gem
like him.

~~~
oli5679
Two recommendations:

Tim Harford - [http://timharford.com/](http://timharford.com/)

Tyler Cowen - [http://marginalrevolution.com/](http://marginalrevolution.com/)

~~~
lmm
I'd recommend against marginal revolution. It's sensationalist and often wrong
or confused, IME.

~~~
jessriedel
I find Tyler Cowen to be insightful, even if he has strong political opinions
(which he expresses). Can you point to a few sensationalist/wrong/confused
posts so I can compare?

~~~
lmm
Don't want to browse there where I currently am, sorry.

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chollida1
I think he brings up a dynamic that most people don't fully understand about
investor/company relationships, atleast one I didn't understand until I saw it
happen many times over.

Once a company has a large investor, typically a hedge fund, its very common
for the CEO/CFO to have a good personal relationship with that investor. I
mean, this just makes sense, under the Warren Buffet theory of investing one
of the big things you invest in is the management.

And from that it follows that management will often use this investor as a
sounding board for ideas. So if a company is going to raise money why not ask
the money manager what they think about

\- how the market will react to an equity vs debt raise,

\- should they offer warrants as a sweetener?

\- even things like how they believe the market will react to certain news.

And i mean why not? Do you think the companies that Warren Buffent invests in
don't call him for advice?

And once you allow for this, then as Matt says, things get grey. I don't know
how all funds do it but the typical dance is the executive will call up and
ask the fund manager if they will be willing to:

1) be locked up from trading

2) for a certain period, typically under 2 weeks.

and if the money manager says yes to both, then the executive is free to
discuss pretty much anything and everything, including non public information
because the hedge fund has agreed to be locked up for the period until the
company makes this knowledge public.

Where this goes wrong is sometimes executives, or more often, sell side( tiny
little investment banks) acting on behalf of the company will call the hedge
fund and before asking if they want to be locked up, just blurt out the news.
it's an awkward conversation that typically goes something like:

"Hey Chris, just wanted to let you know ..... something that will crater the
stock in the short term like raising money in a bad market.... This isn't
public information yet so you'll be locked up for 2 weeks."

And just like that they've fucked you. Now you either have to choose to be
locked up knowing that your investment will drop or take the risk of selling
and knowing that you'll have to defend your actions to the SEC.

Now in the case Matt's talking about they were trading on good news. The only
suspicious thing is that Leon Cooperman's fund has been around since about
1991. it really seems weird that he would use short dated options to trade on
insider information.

That's almost the financial equivalent of going out and buying a gun, using it
to commit murder on the same day, and then leaving it at the scene of the
crime. The SEC can trace back every option trade to the fund who made it, its
not like they can hide and if you are buying a whole whack of out of the money
short dated call options then you are either covering a large short position
or you are essentially telling the market that you know something is up.

~~~
lmm
> Where this goes wrong is sometimes executives, or more often, sell side(
> tiny little investment banks) acting on behalf of the company will call the
> hedge fund and before asking if they want to be locked up, just blurt out
> the news. it's an awkward conversation that typically goes something like: >
> "Hey Chris, just wanted to let you know ..... something that will crater the
> stock in the short term like raising money in a bad market.... This isn't
> public information yet so you'll be locked up for 2 weeks." > And just like
> that they've fucked you. Now you either have to choose to be locked up
> knowing that your investment will drop or take the risk of selling and
> knowing that you'll have to defend your actions to the SEC.

Levine talks about this regarding the David Einhorn/Punch Taverns case. My
understanding of what he said: in the US the law doesn't work like that, if
they tell you and you didn't explicitly agree not to trade on it then you can
trade on it (the guy who told you could theoretically get in trouble for a Reg
FD violation, but you're in the clear). But in the UK it does work like you
say.

~~~
OscarCunningham
So in the UK can you deliberately stop all your big investors from selling by
telling them inside information? Like if you were about to announce bad news
and wanted to keep your stock price up?

~~~
yellowstuff
Yes, Matt Levine thought that the ruling in the Einhorn/Punch case meant
exactly that:

> Under UK law, as it appears from this decision, Punch can call Greenlight,
> shout “hey we’re raising capital and now you know about it suckers!” into
> the phone, and hang up. Now Greenlight, through no fault of their own, have
> inside information and can’t legally trade. That would be kind of
> diabolical, no?

In fact, in the actual discussion Einhorn explicitly _refused_ the opportunity
to discuss inside information in exchange for not trading on it, Punch told
him the information anyway, and then Einhorn traded and got in trouble.

[http://dealbreaker.com/2012/01/it-may-surprise-you-to-
learn-...](http://dealbreaker.com/2012/01/it-may-surprise-you-to-learn-that-
reasons-for-greenlights-punch-fine-are-not-entirely-clear-to-me-either/)

------
dforrestwilson1
Interesting perspective. One thing that doesn't get brought up here is that
Omega Partners does seem to have a particularly aggressive culture when it
comes to gathering information. Just my perspective interacting with them..

I wonder how much of it stems from Cooperman himself.

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sjclemmy
That's a great article - really well written. It managed to explain a key
point of insider trading that I've often wondered about - if I know non-public
information what are the rules around trading.

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thro1237
How do you find out unusual option activity that the author refers to? Any
references?

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savanaly
How did I know it was going to be Matt Levine just by the title?

~~~
mbesto
His writing is pure gold. For anyone that hasn't ready Money Stuff, I'd highly
recommend it.

[https://www.bloomberg.com/view/topics/money-
stuff](https://www.bloomberg.com/view/topics/money-stuff)

------
TazeTSchnitzel
“and that's how Madoff became a household name”

------
PhantomGremlin
I love Matt, but he actually made a (minor) mistake this time. He wrote in
footnote 8:

 _Once the options reached the minimum possible price, there 's no reason to
keep a short position open -- you can only lose money. So of course Omega
should have bought in the position, regardless of whether it had good or bad
or no news._

That's wrong. The options had an actual price. Granted, it was a low price,
Cooperman bought them back at an average of $0.07, having sold for $1.32.

But it was still a bid. _The majority_ of options actually expire worthless.
I.e. the "minimum possible price" is actually $0.00. This is often reported as
"no bid" well before expiration.

So it's wrong to say that Cooperman "can only lose money". He could have
actually made an extra $0.07 per option had he not bought them back and
potentially allowed them to expire worthless.

~~~
jonknee
> That's wrong. The options had an actual price. Granted, it was a low price,
> Cooperman bought them back at an average of $0.07, having sold for $1.32.

He's not wrong, he was pointing out that almost all the potential profit had
been realized, but there was still a way to lose it all. With numbers: they
already made 95% of possible profit, but were able to lose 100%. It makes
sense to close a position like that out and is indeed commonplace. Most shops
don't like that type of negative asymmetric risk.

However, what they didn't do is roll them forward to keep the short position,
that's also a common technique.

~~~
PhantomGremlin
_He 's not wrong_

Matt certainly was wrong when he said: _you can only lose money_. I pointed
out that Cooperman could have made a potential additional $0.07 if the options
expired, and you're agreeing with that.

I agree with you that it usually makes sense to close out or roll an
asymmetric position. BUT, and this is an important BUT, holding a position to
expiration is far from rare.

Here are some statistics (but I can't vouch for their accuracy)[1]:

    
    
       10% of options are exercised
       55% to 60% of options positions are closed out (bought back)
       30% to 35% expire worthless
    

Option expiration shouldn't be glossed over. That final case occurs one-third
of the time.

[1] [https://www.stockoptionschannel.com/slideshows/seven-
myths/m...](https://www.stockoptionschannel.com/slideshows/seven-myths/most-
options-expire-worthless/)

~~~
ikeboy
But what percent of $.05 options expire?

