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A pair of Millennium portfolio managers and their teams lost about $900 million on index-rebalancing trades

About $900 million in losses spread across two teams at hedge fund Millennium Management contributed to the firm’s worst monthly performance in over six years in February.

Millennium lost 1.3% last month, people familiar with the matter said. The losses, while modest in absolute terms and relative to other hedge funds, stand out in light of Millennium’s long record of consistently positive returns and sharp risk management. The firm has only had one down year since Chief Executive Israel “Izzy” Englander founded it in 1989 and hadn’t lost more than 1% in a given month since late 2018.

February was a choppy time in markets. Concerns over slowing economic growth and the impact of President Trump’s tariff and other policies added to volatility and helped erase prior gains.

A broad hedge-fund index compiled by research firm HFR declined 0.47% in February. Only about half of hedge funds that HFR tracks made money in the month, down from nearly 80% in January.

With about $75 billion in assets under management, Millennium divides money across more than 340 semiautonomous teams of investment professionals to produce returns that aren’t correlated with broader markets. Each team has its own specialty, from trading tech stocks to betting on the convergence of bond prices.

The firm imposes strict limits on risk-taking. Teams’ buying power can be cut in half once their losses reach 5%, The Wall Street Journal previously reported. When losses reach 7.5%, a portfolio manager likely is out of a job, though Millennium sometimes can make exceptions.

Millennium’s trouble in February included some wrong-way bets on which stocks get added to and subtracted from market indexes. Portfolio managers Glen Scheinberg and Pratik Madhvani and their respective teams each lost hundreds of millions of dollars last month on these so-called index-rebalancing trades, people familiar with the matter said.

Scheinberg and Madhvani have ranked among Millennium’s biggest moneymakers in the past. Index rebalancing has accounted for billions of dollars of the firm’s investment gains over the years, people familiar with the matter said.

Artificial intelligence and defense were the key buzz words of the week in the venture world. Three startups in those sectors raised massive rounds, however, there were big rounds elsewhere too — including biotech, healthcare and robotics.

1. Anthropic, $3.5B, artificial intelligence: Anthropic, a ChatGPT rival with its AI assistant Claude, raised a $3.5 billion funding round led by Lightspeed Venture Partners, valuing it at $61.5 billion. Anthropic was last valued at $18.5 billion in February 2024. The round values Anthropic at more than Elon Musk’s xAI, which was valued at $50 million in November after its $6 billion Series C. However, the new round values Anthropic well behind OpenAI, which is closing in on its own new $40 billion funding from SoftBank that will value it at a mind-blowing $260 billion.

2. Epirus, $250M, defense: Startup Epirus raised a $250 million Series D led by 8VC and Washington Harbour Partners in the latest example of a defense tech raising big. The Los Angeles-based company has developed a high-energy, high-power microwave technology to counter drones, drone swarms and other electronics. The new round included a strategic investment from General Dynamics Land Systems. Epirus — founded in 2018 — did not release a valuation after the new round but has raised more than $550 million, per the company. Epirus plans to use the new funds to expand into international and commercial markets, and grow its workforce.

3. Shield AI, $240M, defense: The direct hits just keep coming for the defense tech sector as defense and aerospace startup Shield AI locked up a $240 million F-1 strategic funding round at a $5.3 billion valuation. The new valuation is nearly double the company’s previous $2.7 billion valuation after it raised a $200 million Series F in October 2023 (it later added another $300 million in debt and equity to the round). San Diego-based Shield AI creates an array of intelligent, autonomous systems for the defense sector. Its software, for instance — Hivemind Mind — enables aircraft to operate autonomously in high-threat environments. The new funding received what the company called “major participation from strategic investors” Hanwha Aerospace and L3 Harris Technologies, as well as participation from existing investors including Andreessen Horowitz, US Innovative Technology Fund and Washington Harbour Partners. Founded in 2015, Shield AI has raised $1.3 billion, per Crunchbase.

4. Peregrine Technologies, $190M, law enforcement: Law enforcement startup Peregrine Technologies locked up a $190 million funding round led by Sequoia Capital, minting the San Francisco-based firm as a new unicorn at a $2.5 billion valuation. The 7-year-old startup develops data analytics software that allows state and local law enforcement agencies to put together unstructured and disconnected data in order to help understand it better and make decisions. The company’s platform was used last month in New Orleans at Super Bowl LIX by safety officials. While defense tech funding has exploded among VCs, law enforcement tech specifically has inched along slightly slower — with investors likely drawn to the big federal contract potential of startups developing military tech moreso than selling to police departments. Peregrine’s raise is the largest by a law enforcement/public safety startup since Dataminr, an artificial intelligence platform designed for real-time event and risk detection, raised a $475 million Series F in 2021, per Crunchbase data. Founded in 2018, the company has raised $250 million, per Crunchbase.

5. Callio Therapeutics, $187M, biotech: Cancer therapy drug developer Callio Therapeutics raised a massive $187 million Series A led by Frazier Life Sciences. The biotech company — based in Seattle and Singapore — is creating multipayload ADC’s, or antibody-drug conjugates, that deliver multiple agents to tumor cells. The newly formed company intends to use the proceeds to achieve clinical proof of concept for its first ADC and a second undisclosed ADC program.

6. 4C Medical Technologies, $175M, healthcare: Minneapolis-based 4C Medical Technologies, a medical device company developing minimally invasive therapies for structural heart disease, closed a $175 million Series D led by Boston Scientific. Founded in 2015, the company has raised $258 million, per Crunchbase.

7. Turing, $111M, artificial intelligence: Palo Alto, California-based Turing, which contributes code to AI projects, secured an $111 million Series E financing at a valuation of $2.2 billion led by Khazanah Nasional. Founded in 2018, Turing says it has raised $225 million.

8. Odeko, $96M, business development: New York-based Odeko, a software platform for local coffee shops, cafes and other food and beverage businesses, raised a $126 million Series E — comprised of $96 million in equity led by B Capital and a $30 million credit facility. Founded in 2019, Odeko has raised more than $280 million in equity, per the company.

9. Aescape, $83M, robotics: Aescape, an AI robotics startup for massages, raised $83 million in a round led by Valor Equity Partners. Founded in 2017, New York-based Aescape has raised $128 million, per the company.

1o. PetScreening, $80M, pets: Mooresville, North Carolina-based PetScreening, a pet policy management software developer, took in an $80 million Series B led by Guidepost Growth Equity and Volition Capital. Founded in 2017, the company has raised nearly $85 million, per Crunchbase.

Sweden saw the largest deal of the week outside the U.S.

Scale is useful, but the freedom to sprawl is not limitless

Like the exquisite yarn of the Andean vicuña, the conglomerate is becoming an exotic rarity. The corporate need for nimbleness means such beasts seem increasingly headed towards extinction. There is an exception, though: the world of luxury goods.

While consumer groups Reckitt and Unilever moult divisions, and industrials Honeywell and BP bow to pressure from activist fund manager Elliott Management, companies that cater to the style-conscious elites have resisted the deconstructionary trend.

Luxury multi-brand portfolios share features with industrial conglomerates. There are often few synergies to be had in sourcing materials or distributing products. Unlike multi-brands in home and personal care, luxury maisons tend to have specialised suppliers and dedicated shops.

Yet there is barely a monobrand left on the rack. Bernard Arnault’s LVMH showcases Louis Vuitton, Dior, Céline, Bulgari and Tiffany, among others. Francois Pinault’s Kering holds Gucci, Saint Laurent, Bottega Veneta and much more besides. Moncler recently bought Stone Island. And reports that Italy’s Prada is running its slide rule over Versace have sparked talk of the birth of an Italian luxury conglomerate.

What, then, explains the enduring appeal of the luxury behemoth? Scale is still useful, albeit in less obvious ways. When LVMH negotiates store space in a new luxury mall, for instance, it can use its big brands to get a better deal for the smaller ones. Ditto advertising rates. Hotshot designers joining a conglomerate know that, if they shine at a maison, they will be moved up the pecking order. See, for instance, ongoing speculation that Jonathan Anderson may move from Loewe to Dior.

Being big is also helpful given luxury groups appear to be involved in a giant game of Monopoly, buying expensive real estate in prime locations. Smaller groups like Prada are playing this game, but it is surely easier for the likes of LVMH — with a market capitalisation of almost €320bn — to buy up Bond Street. 

The freedom to sprawl is not limitless. While LVMH’s stable of fashion and leather goods brands may well belong together — and, indeed, provide a model for the other would-be luxury conglomerates to follow — it is not entirely clear that its drinks and retail divisions do. 

Wines and spirits accounts for 7 per cent of LVMH’s group operating profit in 2024 which, as Bernstein analysts point out, is down from about 40 per cent in the late 1990s. And their continued existence may turn off some investors — particularly in the Middle East — from investing in LVMH. Meanwhile, retailers Sephora and DFS have lower margins than luxury goods. It’s not clear they belong in the clutch. 

Sloughing such divisions off might not unlock big share price increases. But simplicity, speed and management time are precious resources. Fashionistas can make an ensemble out of unlikely items, but sometimes a clash is just a clash.

Postcard from Switzerland: the lure of the ghost resort

Super St-Bernard closed in 2010 — so why are skiers still flocking there?

The restaurant door was unlocked, so I pulled it open and went inside. Once this was the busy hub of the Super St-Bernard ski resort — next to the car park, the start of the cable car, and with a wide terrace for alfresco lunches and après-ski drinks. Now, it was a scene of desolation. My ski boots crunched on broken glass; old brochures, magazines and lift passes littered the floor; there was graffiti on the walls and the charred remains of a fire in the kitchen. The wind rattled the few shards of double-glazing left in the window frames.

Super St-Bernard, about 22km south of Verbier, opened in 1963 and became renowned for its high, long slopes, including one that dropped over the border into Italy. But by the turn of the century it was struggling financially, limping from one season to the next, and in 2010 the lifts finally ground to a halt. Abandoned ever since — the buildings slowly decaying, the lift towers rusting in the blizzards — it has become one of a growing number of so-called “ghost resorts”. Some are the victims of climate change, others of simple economics, usually unable to afford to replace lifts that have reached the end of their natural lifespans.

No accurate global figures exist, but in Switzerland alone 20 resorts have closed in the last 25 years, according to ski industry consultant Laurent Vanat. In Japan, at least 200 resorts have closed since the country’s ski boom of the 1980s. Most of the infrastructure has been dismantled or repurposed, but a few of the resorts have been left as if the staff simply walked out.

At Super St-Bernard, the strange thing, given the wreckage around me and a wind that was gusting up to 60km/h, was that I wasn’t alone. Beyond the smashed windows, I could see more brightly clad people emerging from their cars and getting ready to go skiing. A surge in the popularity of ski-touring — using skins attached to skis, so users can walk uphill rather than relying on lifts — is raising the prospect of some kind of afterlife for these abandoned resorts.

I was here to take part in a public event organised by the French ski brand Black Crows, joining about 25 others for a day’s touring led by mountain guides and some of its sponsored skiers, including the pioneering French alpinist Liv Sansoz. We gathered for a briefing in the shattered restaurant, (“watch for frostbite in this wind,” warned Sansoz), fixed our skins beneath the cable car machinery, then set off slowly climbing the hill.

Super St-Bernard sits at 1,900 metres, close to the top of the Entremont Valley and the Col du Grand-St-Bernard, a key pass into Italy. It had three lifts — the longest running right up to 2,770 metres on the ridge separating the two countries — but no hotels. The previous night we’d stayed 6km down the road at the Bivouac Napoléon, a hotel in the village of Bourg-St-Pierre. Before a fondue, we’d watched a short film produced by Black Crows about Super St-Bernard, the latest in a series it has made about ghost resorts around the world.  

Quite why a young, vibrant brand would want to link itself to stories of ski history, of decaying infrastructure and financial ruin, isn’t immediately clear. Partly the idea is simply to reach people who wouldn’t watch conventional ski action movies. “But also for us skiing is not just about practising a sport, it’s a culture,” says Camille Jaccoux, the brand’s co-founder. “And a big part of that culture is the boom of skiing in the 1960s, 1970s and 1980s.”

With snow becoming more unreliable in lower resorts, and higher resorts getting more crowded and costly, a sense of wistfulness, of yearning for a more optimistic past, increasingly seems to hang about the sport. After the film, one attendee became emotional as he talked about his memories of growing up skiing Super St-Bernard, “a playground” that typically gets 14 metres of snow every winter.

Later the hotel owner, Claude Lattion, showed me an old black-and-white photograph of the smugglers who used to take cigarettes over the pass from Switzerland to Italy, and for whom the opening of the lift was a boon. He pointed to a young dark-haired woman resting on the snow beside boxes of cigarettes in hessian bags: “My mother-in-law.”

In 2002, the village, which by then owned and ran the resort, decided it should be shut down. At a council meeting Lattion argued against the closure. “The mayor said, ‘well, the only solution is if we sell it to you for a franc’. I had 30 seconds to make the decision — I must be mad.”

Lattion laboured on for another eight years. “I found partners, put in money from my pocket, a huge amount of time. It was a great, experience, very enriching from a human point of view . . . financially, not at all.” By 2010, a SFr25mn investment was needed to update the lifts, a sum Lattion was unable to raise.

Back on the mountain the wind kept blasting our group and fog swirled around the valley. The topography of the surrounding peaks funnels storms towards these slopes, guaranteeing good snow until late in the spring, but also raising the likelihood of high winds and lift closures (“it was our number one enemy,” Lattion had told me).

The snarling wind, and the exertion, made conversation difficult — instead I mused about the pull of Super St-Bernard and others like it. If modern skiing means standing in line at a resort owned by a vast corporation, or queueing to enter a couloir while those ahead adjust their selfie-sticks, then a trip to a ghost resort might offer a joyous alternative, perhaps even a sort of rebellion.

We pressed on, making it to the top of one of the lifts and seeking shelter in the lee of a large boulder, where the guides finally made the call to retreat. Then we blasted back down in an unlikely swath of colour, enjoying wild snow and a whiff of nostalgia.

Heathrow looks at building shorter third runway in bid to cut costs

London’s hub airport is preparing a detailed expansion plan after winning government backing

Heathrow airport is exploring ways to cut the cost of its multibillion pound expansion plan, including whether to build a shorter third runway than originally planned.

The airport is preparing a detailed proposal for a third runway to present to the government by the summer, after chancellor Rachel Reeves threw the government’s weight behind airport expansion in a bid to boost economic growth.

As part of the process, Heathrow’s management is reviewing whether it should make changes to its previous expansion blueprint to cut costs, people familiar with the matter said.

The previous master plan was costed at £14bn in 2014 prices, but was shelved in 2020 when the pandemic struck. A hugely ambitious project, it involved diverting the nearby M25 motorway into a tunnel, demolishing 750 homes, a primary school and an energy plant.

Heathrow’s management have said they would like to stick with this “north-west runway” plan, which has been through years of scrutiny and preparation.

But the airport is considering all options before making a final decision, one of the people said. One option would be to still expand to the north west, but to build a shorter third runway to avoid the need to divert the M25 motorway through a tunnel.

The airport is exploring whether this option is feasible, the person said. One problem is that it could give the airport less operational flexibility, as some aircraft might not be able to use it, depending on its length.

The north-west runway was the preferred choice of the government’s 2018 Airports National Policy Statement, and making material changes to it could add years to the project if the ANPS has to be rewritten.

Since the plan was shelved in 2020, Heathrow has hired a new chief executive and undergone a significant change in ownership, and it is natural that the new leadership would want to fully understand its options before undertaking a hugely expensive project, one of the people said.

Last month Heathrow set out proposals for a “phased expansion programme”, which will start with improvements to its current site but ultimately “lay the groundwork for a third runway”.

The airport has said it will only proceed if the government also agrees to reform planning rules, airspace and the airport’s financial regulation.

“The government has been clear, expanding Heathrow will bring huge economic benefits to the whole country. We are looking at our plans for how to deliver this privately funded project and will present them to the government this summer,” Heathrow said in a statement.

Under the current regulatory model, Heathrow is allowed to recoup spending on airport improvements through the landing fees it charges airlines, which are typically passed on to customers through ticket prices.

Airlines led by British Airways owner IAG and Virgin Atlantic have launched a campaign to persuade the Civil Aviation Authority to review how Heathrow is funded, amid fears over the final costs of a third runway.

The head of Emirates airline has also warned that Heathrow’s plans for a third runway could face a legal challenge if airlines were forced to pay significantly higher landing fees in order to finance it.

France and Germany clash over ‘buy EU’ weapons

Berlin says new €150bn funding for defence industry should be open to non-EU partners, but Paris disagrees

A proposed €150bn injection into the EU’s defence industry has become a new flashpoint in a long-standing battle between France and Germany over the continent’s rearmament drive and whether it should include countries outside the bloc.

Spooked by US President Donald Trump’s threats to end generations of American protection, Europe has pledged to increase defence spending dramatically and scale up their domestic capabilities that have withered since the cold war.

Last week the European Commission proposed to raise €150bn that would be lent to capitals to boost their military production. While the broad idea has received unanimous political backing, the details are still being fleshed out, with heavy lobbying over whether the cash could be spent on arms made outside the bloc.

During an EU summit on Thursday, several leaders including German Chancellor Olaf Scholz said the initiative should be open to like-minded non-EU partners. “It is very important to us that the projects that can be supported with this are open to . . . countries that are not part of the European Union but work closely together, such as Great Britain, Norway, Switzerland or Turkey,” Scholz said.

However French President Emmanuel Macron, who has long supported increasing European autonomy and boosting domestic industrial production, said that “spending should not be for new off-the-shelf kit that is once again non-European”.

For the gaps in Europe’s critical capabilities — including air defence, long-range strikes, intelligence, reconnaissance and targeting — “the method is to identify the best businessmen and businesses we have”, he added.

He also said each EU member state would be asked to “re-examine orders to see if European orders could be prioritised”.

Brussels diplomats are concerned that the €150bn initiative will get derailed by the same argument that has delayed agreement for more than a year on the European Defence Industry Programme, a €1.5bn fund disbursing grants for defence. Efforts to implement it ground to a halt this winter after Paris demanded a cap on what proportion could be spent on extra-EU components and a ban on products with IP protection from third countries.

Senior commission officials tasked with drafting the detailed proposal in the next 10 days have been urged to liaise closely with Paris, Berlin and other capitals to make sure it is not blocked when put forward for approval by member states. 

“There’s a lot of work that needs to be done on this. It didn’t exist a week ago and needs to be ready in less than two weeks,” said an EU official. “There will be compromises made.”

Commission president Ursula von der Leyen said the loans, which will target seven key capabilities including air and missile defence, artillery and drones, will “help member states to pool demand and to buy together,” and also to provide “immediate military equipment for Ukraine”.

The Polish government, which currently holds the rotating presidency of the EU and is tasked with chairing the bloc’s ministerial meetings, will be under pressure to work out a rapid agreement. The initiative can be approved by a majority of the EU’s 27 states, but French buy-in is seen as essential even if the country can be outvoted — as the EDIF precedent shows.

“We’re at a stage where this just needs to be sorted in the name of speed, not perfection,” said an EU diplomat involved in the negotiations. “But if there was reluctance to ram €1.5bn past French objections, how are we expected to do €150bn?”

The commission declined to comment.

Can Germany spend its way out of industrial decline?

Chancellor-to-be Friedrich Merz wants to expand investment in defence and infrastructure. The race to re-arm could be a much-needed boost for manufacturing

It took just a few hours for Friedrich Merz to conduct one of the sharpest U-turns in recent political history.

At lunchtime last Friday, Germany’s chancellor-to-be received a sobering briefing on the state of the economy from finance minister Jörg Kukies.

Kukies explained that after two years of stagnation and with more clouds gathering over Europe’s largest economy, Berlin faced a €130bn budget shortfall over four years and dwindling growth potential, according to people with knowledge of the presentation.

Shortly afterwards, Donald Trump had a public shouting match in the Oval Office with Volodymyr Zelenskyy, accusing the Ukrainian leader of not wanting peace with Russia, Kyiv’s aggressor, and not being grateful for Washington’s support. For Washington’s allies in Europe, the extraordinary scenes were further evidence that the Trump administration had turned hostile.

Watching all this unfold, Merz decided “there was no time to lose”, says a person close to his thinking.

Within days, the centre-right leader of the Christian Democratic Union (CDU) struck a deal with the Social Democratic party (SPD), his likely coalition partner in the next government, which would transform the way Germany manages its economy.

The two parties agreed to loosen the country’s constitutional debt brake and inject hundreds of billions into Germany’s military and ageing infrastructure — a breakthrough upending more than two decades of conservative fiscal dogma.

Under the agreement, which still has to be approved by parliament with a two-thirds majority, Berlin would be able to raise as much debt as needed to equip the Bundeswehr. In return for its support on defence, the SPD secured the creation of a €500bn, 10-year infrastructure fund to modernise the country’s roads, bridges, energy and communications networks — one of the party’s flagship campaign pledges.

It was time to adopt a “whatever it takes” approach to defence in light of the “threats to freedom and peace” in Europe, Merz said on Tuesday when he announced the deal alongside the leaders of his Bavarian sister party CSU and the SPD.

Not only does the agreement represent a stark departure from the brand of economic orthodoxy that has been dominant in Germany, it also accelerates a move away from decades of military restraint after the second world war.

“It is a huge shift away from this stance of ‘You make do with the money you’ve got, rather than borrow’ that has been the pillar of the modern German economy, and has been something Germans have really prided themselves in,” says historian Katja Hoyer.

“It signals that Germany is going to play a bigger role on the world stage, but also that Germany will look more after its own interests.”

The prospect of huge investments into the defence sector has also fuelled hopes Germany could halt its industrial and technological decline by helping manufacturers and engineers find a new purpose and new markets — with positive effects rippling through the Eurozone.

This is “one of the most important shifts in German economic policy” since the second world war, says Vikram Aggarwal, investment manager at Jupiter Fund Management, as Germany adapts to a “multipolar word” where countries and regions “will have to increasingly provide for their own defence”.

According to Joe Kaeser, former chief of German engineering giant Siemens, now chair of Siemens Energy and Daimler Truck: “It means we are going to be back, Germany — we don’t know exactly how, but this is what we are going to achieve.”

With potentially more than €1tn in additional debt over the next decade, economists have compared the fiscal stimulus to the country’s reunification in 1990, when the government led by CDU chancellor Helmut Kohl poured billions into the former eastern communist states.

The effects on Germany’s industry should be significant, economists, policymakers and business executives believe, as defence contractors help replace part of the shrinking automotive base and infrastructure projects jolt the construction sector back into life.

“One should not underestimate what confidence does on decision-making for investment and employment,” says Kaeser. “This [deal] is a priceless effort to set out a mission — to say this is what we’re going to do: this landing on the moon.”

BNP says that the announcement can deliver “a positive confidence shock”, galvanising consumers and companies. The German economy — stuck in a rut for the past two years — could expand 0.7 per cent as soon as 2025, compared to 0.2 per cent growth in a previous scenario, the bank estimates.

Economists predict the debt-to-GDP ratio, currently at 63 per cent, will still be far lower than that of France or Italy. While German stocks soared, the country’s borrowing costs, traditionally the lowest in the Eurozone, jumped by the most since the 1990s, as investors adjusted to Berlin’s newfound boldness.

The new package would accelerate industrial shifts already under way since outgoing chancellor Olaf Scholz set up a special €100bn military fund in 2022, in the wake of Russia’s full-scale invasion of Ukraine. At the time, he described the move as Zeitenwende — historic turning point — in his nation’s approach to defence and security. Germany is the second largest supplier of arms to Ukraine behind the US.

The race to re-arm could be a much-needed boost for German manufacturing, which has been hit by the crisis in carmaking, looming trade wars, and growing competition from cheap Chinese steel and car imports.

German weapons maker Rheinmetall, whose stock has nearly doubled this year, is converting some of its own domestic car-part plants to produce military equipment. Last month Franco-German tank maker KNDS agreed to take over and convert a train-making factory from Alstom in the eastern town of Görlitz to produce parts for battle tanks and other military vehicles.

Hensoldt, a state-owned maker of sensors and radars, is in talks to hire teams of software engineers from Continental and Bosch, two of Germany’s largest automotive suppliers, which together have announced over 10,000 job cuts in the past year.

Excitement spread among Deutsche Bahn staff this week, at the thought that the state-owned railway known for its delayed trains and signalling failures would receive the money to implement a €53bn renovation plan stuck in limbo since the collapse of Scholz’s coalition in November.

Boris Pistorius, SPD defence minister, has been one of the most vocal advocates for debt brake reform. German’s most popular politician, who hopes to remain in his post under a Merz-led coalition, described this week’s announcement as “a truly far-reaching, historic decision”, saying: “We are taking responsibility for our security not only as Germany, but also for our Nato partners.”

That Merz, of all German politicians, would orchestrate such a dramatic policy shift, has startled many in Germany. A staunch Atlanticist in the tradition of postwar chancellor Konrad Adenauer, the 69-year-old former BlackRock senior adviser has built a reputation as a supply-side conservative sceptical of state intervention.

During the campaign, he vowed to cut taxes, regulation and welfare benefits. While he did not rule out a reform of the borrowing limits, he insisted that budget priorities first be set and cuts decided.

“It’s a typical ‘Nixon-goes-to-China’ moment,” says a person close to the negotiations.

“You don’t choose the historic moments in which you live,” says Sophia Besch, senior fellow in the Europe Program at the Washington-based Carnegie Endowment for International Peace. “Merz, as a transatlantacist, would not have chosen to be the chancellor overseeing the divorce with the US.”

Merz has no choice but to act quickly, his allies argue. His only chance of securing a supermajority to pass the constitutional amendments is to use the outgoing parliament, which can be reconvened until March 25.

Beyond that date, the far-right Alternative for Germany and far-left Die Linke, which oppose reforming the debt brake to fund more defence spending, will enjoy a blocking minority. Merz still needs to win over the Greens to pass the bills.

“Merz is totally convinced that we need money for defence. We don’t know how much, but we know that after March 25, a minority of Putin-friendly parties can stop any kind of additional defence money for the foreseeable future,” says Roland Koch, a veteran CDU politician and close ally of Merz. “Only the Social Democrats and the Greens can be allies, and you have to pay a price — the €500bn fund for infrastructure is the price.”

Merz succeeded in sealing a defence pact with the SPD before a meeting of EU leaders in Brussels on Thursday. As chancellor-in-waiting he could not officially attend the gathering, which was designed to co-ordinate the bloc’s response to Trump’s efforts to negotiate a settlement with Russian President Vladimir Putin over Ukraine — Scholz is still Germany’s caretaker chancellor.

But Merz managed to steal the show, flying to the Belgian capital the day before to meet Nato chief Mark Rutte, EU diplomatic head Kaja Kallas and European Commission president Ursula von der Leyen.

On Thursday in Brussels, when asked about his government talks with the SPD on the sidelines of a meeting of Europe’s centre-right leaders, he quipped: “We are on good speaking terms . . . when it comes to spending money!”

Back home however, Merz is facing two weeks of tricky legislative hurdles and institutional obstacles.

“A lot of people are very sceptical,” says a senior Bundeswehr commander, who warned of sluggish procurement and vast manpower deficiencies. Addressing those problems, he said, was “not going to take months, it’s going to take years”.

Merz’s package includes a plan to overhaul defence procurement. But Christian Mölling, Europe director at the Bertelsmann Foundation, a think-tank, says that trying to enact structural reforms while also spending much larger sums of money would be like performing open heart surgery. “While it is pumping you’re also trying to change something — and that’s an enormous stress.”

The same logic applies to infrastructure projects, says Jens Südekum, a professor of economics at Düsseldorf’s Heinrich Heine University. Not only must policymakers allocate the money wisely to maximise impact on growth, they also needed to speed up implementation.

There could be more immediate political snags. The Greens, furious at Merz’s sudden conversion after years of opposing their calls for debt brake reform, have decided to make him sweat, heralding hard bargaining until the old Bundestag is reconvened next week.

But most analysts expect the Greens to support the package in return for assurances that part of the money will go towards the green transition.

Another difficulty for the CDU/CSU and the SPD will be to re-mobilise all their outgoing MPs, who may have little incentive to abide by party discipline when it comes to attendance or voting.

Hoyer believes that the increasing pressure — external from Trump, internal with a resurgent far right and far left — is likely to unite Germany’s mainstream parties.

“This grand coalition that isn’t so grand any more is keen to prove that this is a new start,” she says. “Domestically, they’re quite aware that they’ve only got four years. And if they don’t do anything, then the AfD and Die Linke will probably increase [their support] further.”

The huge bets on what is known as the cash-futures basis trade could amplify market shocks

It is hard to underestimate the enduring resonance of the 1980s comedy Trading Places in the finance world. The story of the Duke brothers seeking to profit in orange juice futures from ill-gotten inside information was even referenced in a recent speech by Beth Hammack, president of the Cleveland Federal Reserve

She was warning about an issue that is increasingly worrying global policymakers — the amount being borrowed by hedge funds to inflate their trading positions relative to their assets, or leverage. In Trading Places, the Duke brothers came unstuck and went out of business, partly because they were too leveraged in what they thought was a riskless trade and could not meet calls to pay more margin, or collateral, when it turned sour.

In the Dukes’ case, there was not a lot of obvious systemic fallout. But the real world, of course, is messier. Policymakers around the world such as Hammack are increasingly worried about growth in an arcane corner of finance called the cash-futures basis trade.

This arises from a disconnect between prices for contracts to buy bonds in the future and the value of bonds eligible for their delivery. It is nearly free money that is available for those with the wherewithal to take it.

The basis trade makes money, but not very much per dollar deployed. To eke out decent returns you need leverage. Before the global financial crisis investment banks took this money. But following systemwide financial meltdown and subsequent bailout, post-crisis regulation was brought in to limit bank leverage, forcing banks to exit some activities. While this might be great for taxpayers, it has been less great for the hyper-efficiency of fixed income markets.

Hedge funds have since stepped into the void, and with gusto. Instead of making calls about the future of monetary policy or geopolitics, fast money has been buying Treasury bonds and selling futures — the Wall Street equivalent of hoovering up nickels on the sidewalk.

It’s hard to put a precise number on it, but the IMF estimates hedge funds now account for around 11 per cent of the US Treasury market, and that basis trades constitute around $1tn of this position. In Europe the footprint is much more modest, measured in the mere tens of billions, though ECB analysis suggests it has grown quickly. As central banks unwind their Covid-era bond purchases and governments continue to run substantial deficits, should we be thankful that hedge funds are there to absorb the supply? As always, there’s a catch.

The popularity of the basis trade has fuelled the growth in hedge fund leverage to new highs. According to the US Office of Financial Research, hedge fund borrowing in so-called repo markets has increased by $1.5tn since the end of 2022, almost a trillion of which is accounted for by solely the largest 10 funds.

And the risk is that leverage creates vulnerabilities in market-based finance which amplify shocks. This risk is not just theoretical. During the turmoil in US overnight money markets in September 2019 and the generalised mayhem of March 2020, the basis trade unwound, contributing to Treasury market problems that forced the Fed to step in.

Market-based finance is supposedly less prone to herding because risk is spread across a diffuse set of buyers. But as the UK pension fund crisis in 2022 demonstrated, if market participants operate with a common operating model and motivation, they can act as one and throw bond markets into chaos. With such a large basis trade, it’s easy to see how market tremors are increasingly putting officials on edge.

Paradoxically, obvious remedies — mandating greater collateral on overnight borrowings and futures contracts, and a shift to central clearing of trades — are the sort of thing that might trigger rather than defuse a market crisis. Leverage is dangerous at a system-level precisely because it introduces the risk of rapid synchronised deleveraging. As the saying goes, “it’s not the speed that kills, it’s the sudden stop”. Mandating higher margin requirements could catalyse this threat.

The Financial Services Board, a body set up by the G20 to co-ordinate national financial authorities, recommends central banks step up their monitoring, development of strategies to address vulnerabilities, as well as more information sharing across borders. In her speech, Hammack raised the prospect of relaxing a cap on the amount of leverage a bank can take relative to its capital, giving dealers room to help hedge funds unwind their trades in times of stress. The Bank of England meanwhile is working on a facility to allow non-bank markets participants to borrow cash against gilts in such periods Both look like good practical ideas.

It’s not hard to imagine the US Treasury market being tested with shocks over the next four years. While the cash-futures basis trade is, in theory, riskless, regulators are right to look to it as a potential catalyst for instability. And as the fictional Duke brothers will attest, financial calamities can most usually be traced to a seemingly safe trade being leveraged up.

How a random chess variant won over the world’s best players

In a barn by the Baltic Sea, Magnus Carlsen makes his move

The majestic Weissenhaus estate has been owned by nobles, survived a devastating fire and hosted world leaders. Its striking castle, white facade illuminated by the glow from the windows, sits on the banks of the Baltic, in northern Germany. A golden frieze stands out against the dark, pitched roof.

In a big barn opposite the castle, a crowd has gathered. On stage is a towering man, the owner of Weissenhaus. Jan Henric Buettner, lit by red lights against a dark curtain, grips the back of a large, transparent table. He tips hundreds of numbered lottery balls down a slide, where they cascade into an orb-like bowl.

At the invitation of the host, I dip into the cluster and pluck out a sphere. Number 328. This ball, in its own small way, will determine the outcome of the inaugural Freestyle Chess Grand Slam Tour.

Freestyle Chess is a new name for an old idea, a variant in which the pieces on the back row — king, queen, rooks, bishops and knights — start in a randomised position. The pieces on the other side mirror this arrangement. It’s also known as Fischer Random, after Bobby Fischer, the American chess legend, or as Chess960, after the number of possible starting positions. Fischer had grown sick of how theory stifled creativity in the regular game. “I’m not anti-chess, I’m pro-chess,” he explained. “I’m trying to keep it alive.”

Technological advances have compounded Fischer’s complaints. Since Garry Kasparov lost to IBM’s Deep Blue supercomputer in 1997, chess engines have consolidated their power. Smartphones can crush grandmasters. Elite players memorise the machine’s lessons and mimic them over the board. It can all feel a little rote. “Imagine if we were playing soccer and it was all about penalty shots,” the Armenian grandmaster Levon Aronian says on a cold walk on the coastline. “Let’s say I have amazing speed and dribbling, [but] all I have to do is shoot the ball into the net. That’s what classical chess feels like quite often for us.” (Later Aronian, in response to my “challenge”, beats me in 22 moves, despite advancing his queen earlier than is wise.) 

Magnus Carlsen, 34, the world’s top-ranked player, is also sick of penalty kicks. He dropped out of the world championship in 2022 after growing tired of the gruelling, weeks-long format and months of preparation required. Carlsen’s successors — China’s Ding Liren and India’s Gukesh Dommaraju — won the title without the involvement of the world’s best player.

About a year later, Carlsen was approached by a wealthy German businessman. Together, they developed a vision for invigorating the ancient game, loosening the machines’ grip and reintroducing the human element. 

Buettner is a Hamburg-born entrepreneur with a background in telecoms. As an executive, he foresaw the internet’s rise in the 1990s, but had to fight for his share of the proceeds when Bertelsmann AG sold its AOL Europe stake for $6.75bn in 2000. He and another Bertelsmann executive settled for $194mn between them. Flush with cash, Buettner bought the rundown Weissenhaus estate and spent nearly two decades developing it into a luxury retreat with a spa and two Michelin stars.

Like millions of people, Buettner fell in love with chess following the Covid-19 pandemic. He improved his game with the hired help of a German grandmaster. Eventually, he envisioned a chess competition with the spectacle of Formula 1 and the personality of its hit docuseries, Drive to Survive. Players would wear brightly coloured jackets, track their heart rates and enter “confession booths” for mid-game interviews. And thanks to the lottery balls, the games would be unpredictable. In July 2024, Buettner raised €10mn from New York-based venture capitalists Left Lane Capital.

At Weissenhaus, Carlsen stays in the GOAT Villa (so named for this event), one of the property’s luxurious accommodations. His star power is crucial to Buettner’s plans for a tour that elevates chess players to celebrities, earns fees from sponsors and hosts, and capitalises on the game’s growing online fan base.

But Freestyle has clashed with Fide, the game’s international governing body, over its plan to crown a world champion, which Fide believes only it has the authority to award. Fide threatened legal action and warned players they would be expected to sign a contract that would bar them from the next two world championships for participating in an unauthorised “world championship”, a chilling prospect for grandmasters not named Magnus Carlsen.

Buettner complained about Fide’s “coercive tactics” and questioned how any organisation could claim a monopoly on the word “world”, but ultimately removed the clashing references. The winner will be crowned Freestyle Chess Champion. The move will be revisited in a postseason review.

This isn’t Carlsen’s first spat with Fide. Late last year, he was fined $200 for wearing jeans at the World Rapid Championship. He withdrew, but returned when Fide relaxed the dress code. Fide remains hopeful that the parties can reconcile. “It requires building more trust, it requires building a more respectful environment, but it is possible,” Arkady Dvorkovich, its president, said in an interview.

I ask Sverre Sundbø, a Norwegian television presenter, if he thinks his fellow countryman Carlsen will ever play Fide events again. Just then, the king of chess enters the room. “Magnus, what should I answer?” Sundbø asks, laughing. Carlsen’s response is withering. “Probably not,” he says and slips away.

There’s a shock in the barn. Vincent Keymer, 20, defeats Carlsen in the semi-finals. The GOAT can finish only as high as third. The young German awaits either Fabiano Caruana of the US or Javokhir Sindarov of Uzbekistan in the final, and their match rages on for almost eight hours as they play a baffling array of arrangements — including ball 328. Slow games fail to divide them. Rapid and blitz games follow. Finally, Caruana, currently the world number two, prevails. By nightfall, players and staff are shattered. Snow falls ahead of a two-day final that culminates on Valentine’s Day.

Freestyle’s success will rely on chess’s modern internet and media ecosystem. Platforms such as Chess.com, a partner to Freestyle, have boomed since The Queen’s Gambit, the hit Netflix series, was released during the pandemic. Word is that a production company has been filming here behind the scenes, in search of the next mainstream moment.

There’s a shock in the barn. Vincent Keymer, 20, defeats Magnus Carlsen in the semi-finals. The GOAT can finish only as high as third

The content creators Anna Cramling and the pseudonymous JulesGambit have just filmed for YouTube. I ask them what stands out at Weissenhaus. Game night, they say, where chess is swapped for the role-playing contest Avalon. “You’ve got bad guys and good guys, and we’ll all start accusing each other,” Jules says.

This game night, Caruana sits in front of a fireplace at his Weissenhaus residence, joined by Cramling, Jules and a dozen others, including the popular chess-streaming sisters Alexandra and Andrea Botez. Streamers and grandmasters become servants of King Arthur or minions of the villainous Mordred. Game night is in the centre of a Venn diagram of chess, gaming and internet  culture, a small taste of the evolutionary leaps  that are transforming tradition.

But with investors on site, Freestyle’s media strategy runs into trouble. Daniel Naroditsky, another influential commentator and grandmaster, has walked out and aired a series of grievances with Freestyle on Twitch. Naroditsky criticised Buettner for booking too many commentators and for “denigrating” chess notation. He also complained that Weissenhaus was too isolated for him to track down a decent doner kebab. But his concerns ran deeper: can Freestyle engage casual fans, or is it a niche event for the elite?

Buettner gives Naroditsky an earful over the phone. Following an intervention by Aronian, Buettner finds a way to bring Naroditsky back into the fold, albeit online rather than on site. Buettner regrets his initial reaction, but his concern is understandable; chess is an online phenomenon and talk travels fast.

Online chess will debut at the Saudi Arabia-backed Esports World Cup in Riyadh later this year. The event will offer a $1.5mn prize pool, double Weissenhaus’s. Chess will be played alongside popular video games such as League of Legends and Call of Duty. Carlsen and Caruana have signed for Team Liquid, one of the biggest brands in esports.

While Caruana welcomes these developments, he worries about “growing the game out of our  control”. “I’m a bit of a purist in terms of chess,” he says, “so I don’t want to see it completely lose its identity. Chess has a very long legacy and it completely precedes the internet age.”

As the final approaches, the chess-media machine kicks into action. From a string of studios alongside the barn, content creators, commentators and chess legends talk viewers through the action.

On the pro stream, Judit Polgár, the only woman ever to reach the top 10, and grandmaster Peter Leko, who doubles as Keymer’s coach, are joined by Aronian to deliver deep analysis to sophisticated viewers. On the community stream, James “Dash” Patterson plays the role of outsider; he is better known for commentating on League of Legends and other esports. Levy Rozman, aka GothamChess, explains the game in the plain terms that have earned him millions of subscribers and the moniker of the Internet’s Chess Teacher.

Freestyle’s major backers have flown in. Left Lane Capital chief Harley Miller wears all black, from his trenchcoat to his spiky sneakers.

Keymer’s golden jacket is draped on his chair. It’s a fitting colour, as he has the measure of the lottery positions once again. Keymer and Caruana draw the final game, ending the American’s chances of a comeback. With a slightly raised brow, Caruana extends his hand. Keymer takes a final glance at the pieces, and shakes to secure the $200,000 prize, the biggest of his young career. A glitzy ceremony follows and the party continues after dinner. Keymer plays poker in the cellar with a few of the guests. Staff and other revellers dance into the night.

The next morning, Buettner wakes characteristically early. In his office, he’s surrounded by mementos of the F1 hospitality he wants to emulate. The man who fought for his share of the AOL Europe proceeds and invested the cash into a village near his birthplace is now the CEO of a chess start-up. He plans to step back into the role of chair later this year. An investor tells me the next move is to turn Freestyle into a business. Lower cost, more revenue. Although Freestyle Chess is now funded by venture capitalists, Buettner can’t hide the emotion in his voice when he thinks of the players. “I would never leave them,” he says. “I would always fight for them.”

Carlsen plays a game of golf before flying off. The world’s greatest chess player is headed to Texas for an interview with Joe Rogan, the podcast host. The episode will eventually have more than four million views on YouTube. Then, last month, Carlsen put the jeans that offended Fide up for auction on eBay for the benefit of a youth charity. The winning bidder snagged them for $36,100.