
The Secret of Billions - vishnuks
https://medium.com/@jaltucher/the-secret-of-billions-4a42b256eb7#.1b5xc3lr0
======
fiatmoney
"Insider Trading: But basically, if you know information that is private
(“Company A is buying Company B”) then you are not allowed to make money on
that information."

I see this misconception all the time & I'm really surprised to see it in this
context. The sine qua non of "insider trading" is being _an insider_. If I
know of a merger because I overhear the parties talking about it in a
restaurant, or I've hired private investigators to see who's visiting who's
offices, there is no issue. There has to be some relationship that obliges me
to keep that information private. The only way markets work is by surfacing
"private information".

"The essence of stock market law in the US is this: every transaction has to
have risk in it. If you eliminate risk by, for instance, paying for
information that nobody else knows, then you have committed a crime."

That's just completely wrong. If I hire a satellite to track car dealer
inventories, buy Ford as a result, and make a ton of money, I'm doing my damn
job. No one has committed a crime. Ditto if I sell that data rather than
trading on it directly.

~~~
cloudjacker
The SEC prosecutes people for trading on privileged information.

They also prosecute people for trading linked securities.

Everything you wrote was wrong.

[http://www.sec.gov/spotlight/insidertrading/cases.shtml](http://www.sec.gov/spotlight/insidertrading/cases.shtml)

You see friends, hackers, recipients of information, and more charged,
successfully.

~~~
downandout
No, he wasn't wrong. You can trade on nonpublic information. From [1]:

 _" The Supreme Court said in 1983 that people who trade on confidential
information can be prosecuted only if the insider reaped a benefit from the
leak."_

The convictions in this case were recently overturned:

 _" With Nvidia, the disclosure began with an employee in the company’s
finance unit who provided earnings numbers to a friend, who then passed the
information to an analyst. The information made its way to Newman and Chiasson
through the same circle of analysts involved in the Dell leak....Prosecutors
said the information earned $4 million for Newman’s fund and $68 million for
Chiasson’s."_

Of note: _" In overturning the convictions, the appeals court said prosecutors
needed to show that the person disclosing the information received a clear
benefit -- something more than the nurturing of a friendship...The appeals
court also said the person being prosecuted had to know about the benefit."_

In short, the only way to be convicted of insider trading is to directly pay
off someone inside the company for the inside information.

[1] [http://www.bloomberg.com/news/articles/2015-10-05/insider-
tr...](http://www.bloomberg.com/news/articles/2015-10-05/insider-trading-
cases-imperiled-as-top-u-s-court-spurns-appeal)

~~~
vadym909
I know at least once case where the insider (a famous Ohio State professor)
didn't profit, but his friends and relatives made $1M on his tip. He still got
5 years in prison.
[http://www.bizjournals.com/columbus/stories/2005/12/12/daily...](http://www.bizjournals.com/columbus/stories/2005/12/12/daily33.html)

~~~
downandout
He and his friends probably took plea agreements. There is nothing that says
the feds can't pursue bad cases, and if you don't take it to trial, then you
go to prison. But according to the most recent rulings, there are only very
limited circumstances where someone can be convicted on insider trading.

~~~
gherkin0
> There is nothing that says the feds can't pursue bad cases

It's unfortunate that there isn't something that says that.

------
tptacek
Insider trading increases the speed with which information is encoded into
prices and thus speeds up price discovery, which is the core function of the
market.

But it does so by creating agency problems. Either directly or indirectly, the
information being traded on in these schemes comes from people who work for
the shareholders of the company. A particular problem is that insiders can
profit both from the wins _and losses_ of their employers; it's the magnitude
that matters, not the sign.

There's already a lot of evidence that company insiders, particularly in
management, will routinely harm their employers for their own personal benefit
(see, for instance, abusive stock buybacks). It doesn't seem smart to create
new mechanisms for that to happen.

~~~
jessaustin
Insider trading, as it is actually enforced in real life, only rarely
inconveniences true insiders like CFOs and board members. Rather, the public's
prosecutors typically concentrate on "outside insiders" like celebrity
homemakers and golf buddies of golf buddies. One could speculate on what
motivates this preference of prosecutors.

Informed trading is a prisoners' dilemma, in which loyalty to "the pact"
distorts markets while defections from it make information public. As you
observe, C-suite reptiles benefit most from informed trading. Please note,
however, that insider trading laws actually _increase_ the benefits they
receive, by punishing "outside insider" defectors. Eliminating this ill-
conceived and inconsistently-enforced law would actually decrease the
advantage that management takes of owners of public stock.

~~~
tptacek
My impression of this is that, like most issues of prosecutorial equity, this
simply traces to the difficulty of making a case versus the rewards (yes,
primarily to the prosecutor, but in theory also to the public in the form of
deterrence) of actually winning the case.

We also tend to forget that prosecutors are only supposed to be bringing cases
that they are certain they can win. Criminal prosecutions aren't speculative.

Finally, people like to point at the Martha Stewart case as evidence that
prosecutors are celebrity obsessed. But Stewart was swept up in the earlier
prosecution of several other people associated with ImClone.

~~~
jessaustin
For other crimes, we accept various imperfections in the judicial system.
After all, murder is really bad, and the facts that some murders go unsolved
while others are pinned on innocents don't cause us to reconsider our laws
against murder. The imperfections don't make the problems posed by murder
worse for _everyone_ than would not enforcing the laws at all. (Convicted
innocents are an important exception, but let's set them aside in this
discussion.)

I consider insider trading laws to be of a different nature. As mentioned
above, these laws create a situation in which naive investors suffer more harm
and self-serving executives reap more gain than they would in the absence of
these laws. Without insider trading laws, new "inside" information would set
off a race on the part of all knowledgeable insiders to profit from that
information, thereby quickly informing the broader market. The positions of
public firms would be much clearer, to every investor. Investors could still
gain or lose money in the market, but executives could no longer structure
their investments and incentive packages over the medium term so as to profit
most directly from their inside knowledge.

In this new more permissive regime, I'm sure some executives would attempt
some straight-up shareholder robbery. But the speed required to succeed at
such schemes would make their actions obvious to the investing public, to
prosecutors interested in charging more prosaic crimes like fraud, and to tort
lawyers interested in breach of contract. After a time we'd have at least some
executives who had been incentivized toward honesty enough to actually become
generally honest.

~~~
yuhong
I have been thinking of anti-discrimination laws. Not all kinds of
discrimination leave evidence. I have a feeling that they should be restricted
to certain job categories. Similarly, sexual harassment leave evidence more
often, but this don't mean they are worth the costs. I have been thinking of
this Ask HN for example:
[https://news.ycombinator.com/item?id=11666857](https://news.ycombinator.com/item?id=11666857)

------
ppod
Here's the idea with sounding important: short sentences. It makes you sound
urgent. Even knowledgeable. Don't believe me? Throw in a question. And then
answer it. Exactly.

But the big gun, to hold in reserve?

New.

Paragraph.

------
jerryhuang100
Showtime "Billions" is probably the smartest show so far this year (maybe
before Mr.Robot S2).

Fun background info: even though the author denies it, the show is loosely
based on Steve Cohen of SAC Capital (now family office Point72, after insider
trading charges from US Attorney), who the author had a short encounter with.
And the "career coach" psychiatrist in the show played by gorgeous Maggie Siff
bears resemblance of the famous psychiatrist Ari Kiev floating on the SAC
floor.

[1]
[http://www.bloomberg.com/news/articles/2016-01-14/showtime-s...](http://www.bloomberg.com/news/articles/2016-01-14/showtime-
s-billions-greed-is-gripping)

[2] [http://nypost.com/2015/08/14/embattled-hedgie-inspires-
showt...](http://nypost.com/2015/08/14/embattled-hedgie-inspires-showtime-
series/)

~~~
albertwang
Except Bobby Axelrod doesn't have a "Billionaire Pig" which gets to live in
it's own room and retire on a vegan farm:
[http://www.businessinsider.com/steve-cohen-did-have-a-
pig-20...](http://www.businessinsider.com/steve-cohen-did-have-a-pig-2015-6)

~~~
jerryhuang100
maybe that's what Lara's vegan farm (for her farm-fresh restaurant) is based
on??

------
nezumi
I'd love to make a small change to the English language. When speaking of
speculation and rent-seeking activities, don't say "make money", say "obtain
money". Reserve the term "making money" for activities which create value.

Just try it: how successful and glamorous does your rich banker friend seem
when you describe him as an obtainer, rather than as a creator of wealth?

~~~
breischl
Speculation actually does deliver value. Whoever sold to the speculator gained
value - they got rid of some risk, and gained enough cash to make it
worthwhile. The speculator might also deliver value to whoever they sell to,
particularly if the speculator lost money on the deal. Plus they provided
liquidity, which sounds like BS until you need that liquidity (eg, try selling
a house in a slow market)

Banks deliver value too, unless you prefer to do all your transactions in cash
that you pull from under your bed and you never need a loan for anything.

Rent-seeking is indefensible pretty much by definition, although I think
people tend to perceive many things to be rent-seeking that actually aren't.

------
notliketherest
How hard is insider trading to catch, really? I'd assume a high level
conversation between two executives over golf and bourbon is pretty damn hard
to audit.

~~~
kleer001
Yup. Cigars, Masons, Yacht clubs, Golf clubs, vacations to Ibiza. There's an
endless list of rich only completely private locals. If people can just keep
their damn mouths shut then it's all good.

And I would suppose that there's an acceleration with wealth, right? Like a
cosmological constant of wealth gap, reset in some places every once in a very
rare.

~~~
ethbro
Isn't the extreme upper end of a progressive tax code essentially an
understanding that "look, if you're making this many multiples of everyone
else's income, you're probably doing something illegal. So help fund the
military / social welfare and we won't prosecute you"?

 _Edit_ : I realized I didn't use the most accurate language. "... you're
probably doing something _unfair_ " would be a better characterization.

~~~
madelinecameron
It doesn't even have to do with making a lot of money. Everyone breaks laws
every single day. It isn't a question of 'if', it is a question of 'when'.

Did Bill Gates 'break the law' by essentially creating a monopoly? Technically
yeah, but is that really a law anyone actually cares about?

~~~
seizethecheese
Creating a monopoly is not illegal, it's illegal to use monopoly power to
damage opponents.

~~~
TheCoelacanth
> Creating a monopoly is not illegal

No, read section 2 of the Sherman Act.

> Every person who shall monopolize, or attempt to monopolize, or combine or
> conspire with any other person or persons, to monopolize any part of the
> trade or commerce among the several States, or with foreign nations, shall
> be deemed guilty of a felony

The only legal form of monopoly is one that comes into existence without
anyone intentionally creating it.

------
gesman
Being hedge fund psychologist seems to be much safer bet than being a trader.

Regardless of market direction - you always win (a stressed clientele with
reasonably deep pockets).

~~~
rjeli
A form of selling pickaxes.

------
pgrote
5 years ago Altucher advocated not buying stock as lead into buying his
system:

[http://www.jamesaltucher.com/2011/04/10-reasons-you-
should-n...](http://www.jamesaltucher.com/2011/04/10-reasons-you-should-never-
own-stocks-again/)

Last year he started selling a system for buying stocks:

[http://www.timothysykes.com/2015/09/the-best-new-stock-
marke...](http://www.timothysykes.com/2015/09/the-best-new-stock-market-tool-
with-6-month-money-back-guarantee/)

[http://www.thealtucherreport.com/one-
percent.html](http://www.thealtucherreport.com/one-percent.html)

~~~
toephu2
is James Altucher just another charlatan?

~~~
beat
And he'd be the first to tell you that.

------
leroy_masochist
I'm calling bullshit on this guy being who he says he is (a former hedge fund
manager) based on the following two passages:

"I would estimate 90% of hedge funds commit crimes along the way."

No way. It's a material number, but it's not 90%. Even if the author is using
"hedge funds" here to refer to "long-short equity hedge funds"; the latter are
often quite sketchy and operate close to the line in terms of hiring
consultants who basically traffic in insider information. But the 90% estimate
is asinine hyperbole.

"The 20% is the percentage of profits that the hedge fund manager takes. So if
a one billion dollar hedge funds returns 10% (about the same as most mutual
funds on a good year), then the profits are $100 million and the hedge fund
manager makes an extra $20 million for himself (20% of $100 million)."

NOOOOOOO NONONONONONO.

The 2/20 fee structure gives GPs 20% of the carry _above a specified hurdle
rate_ that is usually in the mid-high single digits. So, in this example, if
the hurdle rate were a relatively industry-standard 8%, the GPs would have
earned $4mm. Not $20mm.

~~~
matco11
There are several things that give away that he is unlikely to have been a
real hedge fund manager (oh well, maybe he managed $5mm of friends and family
money, but that does not make him a pro!), but what he says on the fee
structure is not one of them: several hedge funds would have the standing to
claim 2/20 (or even more) without hurdle rates.

A tiny fraction of hedge fund managers would be infringing any laws, if at
all. Excluding the over-the-counter markets(!), the better you are as a hedge
fund manager, the more you know what can make you money, what can lose you
money and which of your decisions were wrong and which were right: there is no
room to blame it on other people doing insider trading.

~~~
leroy_masochist
Interesting, I'm not familiar with any funds that have no hurdle rate
whatsoever. I've heard of some that have what people in the industry describe
as arrogantly low hurdle rates (like in the 3-4% range), but have never heard
of a situation where there is none at all.

I agree with you that there might be a few funds that are considered so hot
that their GPs could get away with not having a hurdle rate; do you know of
any by name?

FWIW, my understanding is that if you're a super-in-demand fund, the power
move is keeping the same hurdle rate in place (maybe even raising it as a
demonstration of confidence in your skills as a money manager) and also
raising the carry rate.

In other words, going from a 2/20 structure with an 8% hurdle rate to
something like a 2/33 structure with a 10% hurdle rate. I believe a few of the
Tiger baby funds have done this.

------
partycoder
Well, one of the secrets is this:
[https://en.wikipedia.org/wiki/Greenspan_put](https://en.wikipedia.org/wiki/Greenspan_put)

Which is a form of subsidizing speculative bubbles.

------
digitgopher
These colorful exposés by jaded ex-financial insiders are all the rage, and
I'm not saying Wall Street rules/ethics aren't important to talk about, but
it's easy to ignore more fundamental processes. The Fed, with the touch of a
keyboard, writes money into existence out of thin air, purchasing securities
with it. It amazes me that so few discuss the ethics of where the money comes
from in the first place.

~~~
thrwawy20160421
I have noticed that any comment on HN that mentions the Fed's money printing
gets downvoted to hell quickly

~~~
beat
Funny, I've noticed that most comments about "the Fed's money printing" are
ignorant, paranoid nonsense.

------
thomnific
Maybe I'm jaded, but reading this I came away a little disappointed at not
learning anything much. A lot of the behaviour seems strange, and yes, a
little crooked. But "evil"?

I think a better explanation is hidden in this phrase. The authour writes:

>> Trading is very stressful. I hate it. I would make a bad trade and I would
feel my blood pumping all over my body all day long. And then if the trade was
a loss I would cry at night. I was so scared all the time. I hated it.

On one hand it makes me feel a little better that this happens to even
successful people. But on the other hand, you cannot be a trader with this
kind of attitude.

Suffice to say that not everyone has the same problem. Sounds to me like he's
justifying his own actions in retrospect, at least a little. Does recounting a
grab-bag of fun anecdotes say anything about the real problems in finance? I
like James Altucher a lot, but I expected more here!

------
Cyph0n
Excellent article. Loved the informal style!

If you haven't already watched "Billions" [1], it is an absolutely thrilling
show. I was uncertain about it after the pilot, but I continued because of my
experience with Showtime's "The Affair" [2].

I did not regret that decision. It is in my opinion the second best show of
last season, after "Fargo" [3] of course.

[1]:
[http://www.imdb.com/title/tt4270492/](http://www.imdb.com/title/tt4270492/)

[2]:
[http://www.imdb.com/title/tt2699110/](http://www.imdb.com/title/tt2699110/)

[3]:
[http://www.imdb.com/title/tt2802850/](http://www.imdb.com/title/tt2802850/)

------
markbnj
>> And if you can’t make it there, as the song sort of goes, you can’t make it
anywhere.

The song sort of goes the complete opposite of that :).

If I can make it there, I'll make it anywhere. It's up to you, New York, New
York.

------
bo1024
The section "Hedge Fund Compensation" was very simple and clear, yet a really
effective explanation of the problem with current incentive structures.

------
turar
The US Attorney is widely believed to be loosely based on Preet Bharara. This
is a good recent profile: [http://www.newyorker.com/magazine/2016/05/09/the-
man-who-ter...](http://www.newyorker.com/magazine/2016/05/09/the-man-who-
terrifies-wall-street)

------
marcusgarvey
Some investors like Calpers, biggest pension fund in the U.S., are falling out
of love with hedge funds. [http://wolfstreet.com/2016/04/21/whats-hammering-
hedge-funds...](http://wolfstreet.com/2016/04/21/whats-hammering-hedge-funds/)

