
As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome - JaakkoP
https://www.nytimes.com/2019/02/19/business/mckinsey-hedge-fund.html
======
b_tterc_p
Seems highly unlikely that there’s any actual secretive insider trading
happening here. It would be a HUGE risk for practically no gain, distributed
across many individuals, committed by primarily people who wouldn’t stand to
benefit. The firm should probably switch to vanguard or whatever... but the
existence of this hedge fund does not mean the firm is using its insider
knowledge maliciously. Most consultants won’t even know what other people on
their team is working on, and most are in and out after 2 years.

The article buried the mitigating factor in the middle of the article. Hedge
fund managers don’t coordinate with consultants, and 90% of MIO’s capital is
managed by outside funds, including this one the article is about.

The problem mckinsey faces is that they consult for everyone.

~~~
FabHK
> a HUGE risk for practically no gain

Eh? A few dropped words during a social dinner, or even a knowing glance, you
call that a huge risk? And a hedge fund getting (even only 1 bit of)
information from some well-informed people, allowing them to adjust their
position on a firm, can lead to substantial gains, obviously.

> Most consultants won’t even know what other people on their team is working
> on, and most are in and out after 2 years.

This is not about junior guys.

> Hedge fund managers don’t coordinate with consultants.

Well, yeah, officially, of course. But that's precisely what the article is
about.

~~~
paganel
> a HUGE risk for practically no gain

The same thing happened in the Libor scandal, those involved took a very big
risk for not such a big gain and look what that caused: a market worth
hundreds of billions of dollars (if not more) being manipulated in exchange
for stuff like Champaigne bottles and some fancy dinners out (all of the
latter worth at most $10,000).

~~~
gotocake
The LIBOR scandal was predicated on them using online chat rooms, instead of
just the kind of proven “wink and a nod over drinks” that’s being alleged
here. In essence, they took an even bigger risk than what is being described
in this article, and as you say, for lesser rewards.

~~~
mruts
Things have changed _a lot_ since 2012. Of course, we don't have information
that we are not privy to, but I still think it's unlikely. I'm saying this as
a finance professional, but of course, I really don't know what other people
would do, but I know that my firm wouldn't traffic in something so high risk.
Not because of some moral opposition of course, but just because the potential
fines could potentially be an extinction event for the firm.

~~~
gotocake
I hope you’re right, but the skeptic in me says that people who commit crimes
tend to do so thinking they won’t get caught. It’s the problem with the death
penalty or any harsh regime of sentencing; the deterrence effect is
nonexistent.

------
tribune
From Matt Levine of Bloomberg:

 _Here is a New York Times story about the “McKinsey Investment Office, or MIO
Partners,” the in-house hedge fund of consulting firm McKinsey & Co., which
invests employee money, including in companies that McKinsey advises. “That
web of relationships underscores the unusual nature of McKinsey’s hedge fund,
and the potential for undisclosed conflicts of interest between the fund’s
investments and the advice the firm sells to clients,” says the Times, and I
suppose there are some shady elements: When McKinsey advises on a bankruptcy,
for instance, and its hedge fund owns one or another slice of the capital
structure, then there’s a clear potential for conflicts of interest.

Mostly, though, it’s hard to get too worked up about this. For one thing, most
of the fund’s money seems to be run by outside advisers, and even the stuff
run by McKinsey employees seems to be mostly walled off from the consulting
business. For another thing, the incentives are mostly good: McKinsey’s
consultants are trying to make the company better, and its hedge fund is
invested in the company and wants the company to get better, so there is no
problem here. “The firm’s partners stood to profit from their own advice,”
says the Times about McKinsey’s indirect investments in Valeant
Pharmaceuticals, but why would that be bad? If they do stuff to make the stock
go up, then they make money, but that is also what the company wants. (In the
event, Valeant’s stock went down, which was bad for both Valeant and
McKinsey.) Really companies ought to demand that their consultants buy some of
their stock, so they have some skin in the game with their advice.

Of course, what would really be scandalous is if McKinsey’s hedge fund shorted
companies that the firm advised, and then the consultants tried to give those
companies ruinous advice. You couldn’t advertise that strategy, but much of
the Times story is about how secretive MIO is, and if you can be secretive
enough then maybe you could pull off this trade._

~~~
crazygringo
The idea that there is no problem because both McKinsey and the company want
to make money seems... ludicrous to me, and completely misunderstands insider
trading.

The problems would be:

1) McKinsey learns about non-public good things on the inside, and so buys
even more stock than they otherwise would (pretty much the definition of
insider trading) and/or sells competitors' stock

2) McKinsey learns about non-public bad things on the inside, and so sells
stock they otherwise would have held and/or buys competitors' stock

I don't see how Matt Levine can possibly just brush that aside?

~~~
akozak
Insider trading would be bad and illegal. But absent evidence that it's
happening, I think his point is that merely having a stake by holding
securities isn't inherently problematic.

~~~
lordnacho
Well then McKinsey should just say which firms they have positions in, and
everyone can be satisfied that there's no problem?

~~~
solveit
McKinsey should do nothing because responding to a non-story is terrible PR.

------
takinola
I am a beneficiary of this hedge fund so I may be biased, but I feel pretty
confident that there is not much conflict of interest going on. As has been
attested to by multiple people on this, and other, threads, there is very
little proprietary information sharing between teams at McKinsey. In fact,
once you work for certain clients, you are automatically barred from working
for others. I was once privy to a situation where a consultant working with a
different client, unknowingly, shared some proprietary information with the
team I was working on. I saw the extent to which the partners freaked out and
tried to correct the situation. Of course, there are examples of people
violating this trust (people will be people) but there have not been any
examples of structural violations (ie the firm designed processes that
encouraged or tolerated unethical practices)

It does McKinsey, as a firm, very little good if their clients' business goes
down in flames. They, obviously, cannot bet against their clients (it would be
catastrophic to their core business if this was ever publicly disclosed) and
so they can only bet with their clients, even if they (unethically and
possibly illegally) used their clients proprietary information to trade.

It feels to me that there are some corporations that newspapers can just bash
confident that most of their readers will nod along without applying much
critical thinking. I understand the skepticism. I used to share it before I
got to see the inner workings of organizations like this. There is much to
criticize about organizations like McKinsey but violating clients' trust is
not one of them.

One last argument against the insider trading inference, the results I have
seen, while good, are not indicative of what is possible if smart people were
truly trying to take advantage of their knowledge of the inner workings of the
largest corporations in the world.

------
JaakkoP
As giving and receiving advice is fundamentally based on trust, it strikes me
as odd why anyone wants to do business with the likes of McKinsey or Goldman
Sachs who have repeatedly shown a pattern of screwing over their clients.

This is not a generic "all I-banks or management consultants are evil" \-
there are still plenty of specialized firms out there without these anti-
patterns.

~~~
adam
Hiring these firms is a major "cover your ass" move. If you're a CEO and you
hire McKinsey, your board is going to likely approve as they are from the same
East Coast/West Coast Ivy League fraternity as McKinsey consultants. And
because they only hire people from those schools or recruit former executives
from their clients, there is a strong signaling mechanism that you're hiring
"the best and the brightest."

Then if things ever go wrong, you always have the out of "I hired the best,
what did you want me to do?"

~~~
brootstrap
100% of my experience with McKinsey has been trash. Just started working with
new company and they wanted us to talk with these guys. We are reviewing some
database systems and this guy is a literal joker. His suggestion to speeding
up our database "well we can use REDIS, REDIS is fast because it's in-memory".
So we want to put how many TB of data into REDIS? We are talking about tons of
historic data that never changes. And we are going to load it ALL into REDIS
because it's fast. These McKinsey folks spend months talking about the data
lake and it turns out data lake just means a bunch of shit on s3.

It's like if you paid someone $50,000 to help you find a good car. Client
wants a fast car. Oh you want a fast car? Buy a ferrari they have big engines
and can generate tons of horsepower. Job done, can i collect my 50k now?

Mind you this guys linkedIn and resume read like a CEO wet dream. AI and
machine learning data science all over...

We spent months dilly dallying with different tech before they just left cold
turkey , havent heard from em since. And our 20% complete projects
experimenting with all kinds of DB tech have done nothing.

~~~
pradn
Somewhat related: as I've been interviewing candidates for SWE jobs, I've
found that many will talk about their recent machine learning projects. And
the way they can talk about that problem has no bearing on how well they do on
a simple programming question I give them later. You've gotta view big
data/ML/AI expertise with extreme scrutiny given how hot that stuff is. Best
to just ignore the candidate's assertions.

------
ackbar03
I always get the feeling that the whole white collar capital game is all about
skirting conflicts of interest and doing it in a legal way. It's like pretty
much what the entire industry is abput

------
phantom_oracle
Maybe someone familiar with securities law can chime in here.

Isn't this something similar to insider trading?

They provide a service that is supposed to improve some aspect of a business,
then they can internally do predictions on how successful they think their
services will benefit/harm the firm and then make a bet either for or against
that firm.

~~~
elliekelly
Securities attorney who worked for a hedge fund here. MIO (the fund adviser)
would have to implement "ethical screens" to prevent the fund from acting or
appearing to act on information from McKinsey consultants. There are a few
major problems with how ethical screens work in practice:

\- It's based almost entirely on self-reporting. If a MIO employee has access
to material non-public information (whether from a McKinsey consultant or
elsewhere) MIO's compliance department has virtually no way of knowing that
investment needs to be restricted unless the employee tells them.

\- Insider Trading is one of the most difficult allegations to defend against.
You're innocent until you can prove otherwise. How do you prove you _didn 't_
do something? Typically through records outlining the rationale for your
investment decision. The quality of the notes, and investment decisions for
that matter, of Portfolio Managers varies significantly from PM to PM.

Rather than simply rely on policies and procedures it seems MIO has contracted
most of the investment responsibilities out to sub-advisers and/or has some
sort of fund-of-funds structure to their investments. Whether that's to make
sure the transactions are _actually_ untainted by inside information or
whether that's to obscure transactions that _are_ tainted by inside
information is anyone's guess. It seems most of the issues outlined in the
article stem from McKinsey failing to disclose their ultimate beneficial
ownership of securities (by looking through to the fund's holdings) rather
than anyone being able to demonstrate (yet) MIO has acted on insider
information.

I also did a brief stint as an accountant at a big four firm. There's a reason
accountants aren't permitted to invest in their corporate clients. Not only is
there potential for insider trading but it could cloud their professional
judgment. As the lines between the big accounting firms, law firms, and
consulting firms blur it no longer makes sense that they operate under vastly
different regulatory and ethical obligations.

Edit: Others might also be interested to know that while McKinsey's setup is
apparently unusual for the consulting world, there are many large law firms
who are also SEC-Registered Investment Advisers and deal with the same
conflicts of interest. The potential for insider trading in those cases might
be even higher as the law firms are often filing disclosure documents with the
SEC on their clients' behalf.

------
tripnine
This is interesting because McKinsey alumni and consultants at Nielsen seemed
to be shopping an insider trading scheme around the time that they got
involved with Equifax. The partnership was leaked way before it went public
and the stock subsequently popped. This was pre data breach.

------
leroy_masochist
Former investment banker here with lots of experience consulting for
professional investors.

The substance of the article strikes me as, "potentially really bad, but no
obvious smoking gun".

MIO is a special situations hedge fund, meaning that it looks for companies
that desperately need capital for one reason or another, and who have been
poorly served by the market for capital because some aspect of their story is
messy and/or tough to understand, and provides them capital on terms that give
MIO a lot of upside if the company gets back into good shape.

An important thing to understand about special situations investing is that
it's usually very active relative to other types. That is to say, I can run a
successful long-short equity fund and literally never once interact with any
of the leadership of any of the companies in which I take positions; I can,
for example, go long Verizon and short T-Mobile and never have to deal with
either of those companies' management teams. For special situations on the
other hand, the entire value proposition of the fund manager is what they can
deliver through their active involvement with the portfolio company that takes
the fund's money. So, you'll see special situations funds get super involved
in issues like renegotiating long-term leases, or investing in sales teams, or
reconfiguring operations to run on a single ERP system, etc -- activities
which are right in the wheelhouse of former Big 3 consultants, whose work
consists of bouncing from tough problem to tough problem at high-paying
clients.

So it's not hard to understand why McK made the decision to found MIO. It
kills multiple birds with one stone:

\- Makes partners more money through an asset class that tends to post good
returns

\- Helps their recruiting pipeline because it makes it easier to capture
aspiring buy side bigwigs out of college (perennially McK's Achilles heel vs.
i-banking)

\- Provides outgoing partners with something to do in semi-retirement; MIO
employs a shit-ton of semi-retired McK partners to do deep dives on various
topics. This importantly has the positive effect on McK's culture of helping
clear out the top of the pyramid so young partners don't feel like their
career is going nowhere

Anyway, much of what's in the article sounds concerning. For example, the
still-serving head of McK's bankruptcy practice was on the board of MIO when
it was considering an investment in a coal company that was going bankrupt. On
the one hand, this raises hackles; on the other, it's really only a PROBLEM
problem if McK was advising that coal company, or had advised them recently
prior to the MIO investment. And that might have been the case, but the
article does not say whether it was.

The description of the McK's interactions with Guo Wengui is....I'm not sure
what point they're trying to make? And similarly, with Valeant, the NYT's
gripe is that another fund in which MIO invested went long Valeant at the same
time that McKinsey was advising Valeant to increase the price of certain
medications.

If I had to guess I'd say that McK has advised 90% of the F500 at one point or
another and is actively advising about 30 or 40% of the F500 on something at
any point in time. So, I really don't think that McK giving Valeant pricing
advice through a consulting project at the same time that a fund MIO invested
in was buying Valeant -- with both parties expressly prohibited from
communicating with each other and no evidence they did -- as incriminating,
though a multiple-hundred percent increase on pricing for any drug is
obviously icky.

Anyway, there could be other shoes to drop here, and they could be really bad
(e.g. if there were secret backchannel communications regarding the coal
company). But I don't see anything in this article that's incriminating on its
face.

And the attempt to make Guernsey look like some shady nefarious offshore
destination that confers fishiness on anyone whose business dealings go
through that jurisdiction? GIVE. ME. A. BREAK. Probably almost half of the
hedge funds in Europe are domiciled there, it's like the Caymans or Delaware,
talk about a red herring.

------
FabHK
> Tom Peters, the management guru and co-author of “In Search of Excellence,”
> said that during his time as a McKinsey partner in the late 1970s, managers
> rejected the notion of having financial stakes in their clients.

> “You can’t be advising people and have a fiduciary interest in the people
> you’re advising,” Mr. Peters said in an interview.

That's weird, though, in a sense. Wouldn't you want the people consulting you
to have a stake in your company? Wouldn't that "align incentives"? Shouldn't
you pay the consultants in shares that vest over the next 5 years?

------
nimish
Well I guess this beats the time that a McKinsey partner gave insider tips to
his hedge fund buddy, but frankly not by much.

------
jayalpha
I made some decent profits by looking into investments of Bain Capital and
following some. You could look up who was buying and selling shares here:
[http://www.fatpitch.biz](http://www.fatpitch.biz)

Unfortunately the site seems dysfunctional now.

------
tyingq
I don't know that their clients really care. The real motivation for bringing
in these firms is having a credible scapegoat if things don't pan out for your
project.

------
samstave
Duh, this is the goldman sachs model.

~~~
lenticular
Yeah, I was under the impression that widespread double-dealing was basically
an open secret in finance.

------
code4tee
The New York Times has been running a whole series now on McKinsey with a new
article about once a month or so highlighting example after example of alleged
serious ethical lapses at the firm. Have things really gone downhill or do
some journalists just have an ax to grind with McKinsey?

~~~
coderintherye
I talked with one ex-McKinsey person who went from a true believer to
questioning recently, starting with when McKinsey held a corporate retreat a
mile away from a Chinese internment camp
[https://www.businessinsider.com/mckinsey-china-uighur-
corpor...](https://www.businessinsider.com/mckinsey-china-uighur-corporate-
retreat-china2018-12)

~~~
jahlove
The New York Times should get credit for doing that reporting, not BI (who
just summarized NYT):

[https://www.nytimes.com/2018/12/15/world/asia/mckinsey-
china...](https://www.nytimes.com/2018/12/15/world/asia/mckinsey-china-
russia.html?module=inline)

------
theNJR
Man, the NYT really has it out for McKinsey. Anyone know why?

~~~
brootstrap
all of my experience with McKinsey has been an utter waste. Worked with
multiple contractors on multiple backend database projects. They work like a
walking ad for AWS services but dont actually know shit. We have a 10+TB
dataset (growing by gigs each day) that is spread across a few postgres
servers. These servers are decent but foreseen as bottle neck in coming years.

This guys suggestion is to put our data in redis b/c it's fast and in memory.
Looking up hosted REDIS solutions, (redislabs, we use for other smaller cache
redis things). To put 1 TB of data in standard redis server would be
~50k/month :p

~~~
cubecul
Former McK here. You asked the wrong folks to come in...I'm not sure I would
ask b-school grads (my former colleagues - love them to death) to talk
technical stuff.

~~~
doktrin
Nobody with any technical competence is inviting a place like McKinsey in the
first place. Because of course not. Unfortunately McKinsey is quite happy to
talk a big game and sell sub-par technical services to their customers who are
either too dumb or too craven to see through the charade. Same goes for big-4
technical consulting in my experience, but less extreme.

------
randyrand
Isn't that normal? How strange would it be for me to tell my friends "this
stock is going to skyrocket, buy some!" without owning any myself? Anything
otherwise would come across as extremely disingenuous.

This is a non-issue.

~~~
Nasrudith
No it isn't. Pump and dump is another well established scam for one. And an
advisor who indirectly makes money from a recommendation is one in a really
untrustworthy position which is way worse than one detached. The later may
feel less of a need for confidence but the previous essentially gets rewarded
for doing what they are regardless of if it is a good idea. Lack of skin in
the game is a lesser evil than conflict of interest.

------
philip1209
Could something like this be considered racketeering?

------
mruts
I highly doubt that there’s any impropriety going on besides the lack of
disclosure. Investment banks have been dealing with conflicts like this for a
long time and the market has never cared.

~~~
bob_theslob646
There is something known as a "Chinese wall" that prevents that in banking. I
am not sure if there is one in consulting.

> A Chinese wall is an ethical barrier that prevents communication between
> members of an organization that might lead to conflicts of interest. For
> example, a Chinese wall could exist between departments where the exchange
> of information could unfairly influence trades. The "wall" is figuratively
> erected to safeguard insider information and protect private data that could
> create negative implications and legal consequences if improperly shared.

BREAKING DOWN Chinese Wall > Protecting client data and confidential
information is critical to any business but is especially important to
companies with diversified services, such as insurance companies, banks, and
other financial services firms.

> The Gramm-Leach-Bliley Act (GLBA) of 1999 repealed the Glass-Steagall Act
> that prohibited banks, insurance companies, and financial services companies
> from acting as combined firms, such as banks offering insurance products.
> The Gramm-Leach-Bliley Act resulted in a surge of mergers and increased
> diversification of services, as well as an increase in fears and public
> scrutiny. One concern was the protection and sharing of confidential
> information and personal consumer data with those of contrary interests. In
> response to growing concerns, many companies adopted the Chinese Wall
> concept.

([https://www.investopedia.com/terms/c/chinesewall.asp](https://www.investopedia.com/terms/c/chinesewall.asp))

~~~
mruts
That's a good point. And you're right, I don't believe there is anything like
a Chinese Wall in consulting. But I still don't think that they would risk
their reputation on _very_ risky collusion.

If there were evidence that there was insider trading on behalf of the hedge
fund, it would probably result in one of the largest SEC fine in recent years.
It would be a massive blow to their reputation. I tend to believe (maybe
naively) that firms act in their own best interest and that McKinsey wouldn't
dare do something as egregious as collude with their hedge fund.

I know I probably have more faith in the financial services industry than most
of HN, but McKinsey is a reputable firm with good people and I don't believe
that in a million years (will that might be an overstatement) they would do
anything like what the NYT is suggesting.

------
samfisher83
Goldman Sachs did the same thing. They told their client to buy subprime loans
while shorting it on the other side.

------
Bucephalus355
A few years ago I think the classic example of an embarrassing company to have
on your resume was Yahoo.

Now it’s McKinsey.

Yahoo source: [http://mobile.nytimes.com/2013/03/06/technology/yahoos-in-
of...](http://mobile.nytimes.com/2013/03/06/technology/yahoos-in-office-
policy-aims-to-bolster-morale.html)

~~~
TomMarius
I'm completely out of the loop. Why?

~~~
oconnore
The New York Times has been running a series of hit pieces on McKinsey over
the last few months.

see: [https://www.nytimes.com/by/michael-forsythe#latest-
panel](https://www.nytimes.com/by/michael-forsythe#latest-panel)

~~~
duxup
I don't think that actually answers the question... or is really that
accurate.

