FT : Ex-LTCM trader on his unexpected conversion to passive investing

Ex-LTCM trader on his unexpected conversion to passive investing

Former hedge fund manager explains why he has abandoned active strategies

Not long after his 40th birthday, Victor Haghani, a man who had starred in not one but two of the era-defining financial stories of the 1990s, underwent the investment equivalent of a Damascene conversion.

He was once a leading member of an elite team of arbitrageurs, first at Salomon Brothers and then at Long Term Capital Management, the hedge fund company famed for its highly leveraged trading style and Nobel Prize-winning staff. LTCM came spectacularly undone at the end of the 1990s in one of the most famous Wall Street bailouts of all time.

Mr Haghani has since been on an intellectual journey that, in many ways, mirrors the evolution and central debates of the modern investment industry.

Barely into his 30s when LTCM launched, Mr Haghani is described in Roger Lowenstein’s When Genius Failed — an account of the rise and fall of the hedge fund — as “a natural trader” possessing “an intuitive feeling for markets, and a volatile, impulsive streak”.

Sitting in his co-working space in a WeWork building for start-ups in London’s Paddington, it is hard to imagine the calm and reflective Mr Haghani of today as the aggressive young arbitrageur egging his colleagues on to take outsized trading positions.

“I had been on the cutting edge of finance, having these brilliant colleagues including Nobel Prize winners in economics,” he says. “It was the cutting edge, but I guess we could say that I have a few scars from being at the cutting edge.”

He started his career at Salomon Brothers, the investment bank, as a young graduate from the London School of Economics, soon moving into the fixed-income arbitrage group run by John Meriwether, the financier immortalised in Michael Lewis’s Liar’s Poker, his semi-autobiographical account of Wall Street during the 1980s.

At Salomon the traders became famed across Wall Street for the staggering profits they generated for the bank, and their quirky obsession with calculating probabilities in as many parts of their lives as possible. To decide who paid the bill at dinner, Mr Meriwether’s team would play liar’s poker, a game based on betting on serial numbers on dollar bills that gave the title to Mr Lewis’s book.

Mr Meriwether left Salomon Brothers after a trading scandal and took his team, including Mr Haghani, with him to found Long Term Capital Management. Now joined by Myron Scholes and Robert Merton, the Nobel Prize-winning financial economists, LTCM was, for a period, one of the most successful funds ever. Then it became one of history’s most notorious financial blow-ups when its hugely leveraged bets on bonds went awry during the 1998 Asian financial crisis.

In spite of the demise of LTCM, Mr Haghani still looks back on this time fondly. “My time at Salomon and LTCM really was this golden era of academic and financial ideas starting to get traction in the market place. It was a magical time,” he says. “I re-read Michael Lewis’s book recently after a long time and thought, wow, he was actually very generous about what he said about our group.”

Following the collapse of LTCM, Mr Haghani, who along with other partners had significant amounts of his own wealth invested in the fund, was at a loose end. After spending every hour of his professional life engaged in the most arcane quantitative financial trading, he was now forced to think about what he was going to do with the money he had left.

“I had just turned 40 and I had decided to take a sabbatical and really, for the first time in my life, I addressed the question of how I should invest my and my family’s savings, whatever remained from LTCM.”

This most active of traders then started down a road that resulted in him embracing a very different investment strategy.

He realised that in spite of having run billions of dollars of capital alongside legendary Wall Street traders and Nobel Prize-winners, he did not know where to start.

“I don’t know if it is embarrassing or amazing, but I knew nothing about how to invest for my family. My first instinct was to continue to be quite active. But I realised that active investing made sense at a big bank like Salomon, not for individuals,” he says.

“As I started to try and answer those questions for myself by discussing it with friends and former colleagues, I realised a lot of people were in a similar position. People say investing is simple, and it is, but if you have been really close to the markets for a long time you have to unclutter your mind.”

This period of deep reflection resulted in Mr Haghani founding Elm Partners in 2011, a small investment company set up to manage his own money, but later those of friends and other clients.

Elm uses index-tracking funds to invest across the largest asset classes and tries to give its clients broad exposure to global economic growth at the lowest possible cost.

It charges investors 0.12 per cent in fees, much less than the 2 per cent annual fixed fee and 25 per cent of performance fees charged at LTCM. He takes no salary at the company.

So how did the epitome of the active fund manager come to embrace low-cost, index-based investment?

“I realised that investing involves solving two problems,” he says. “The first one is identifying attractive investment opportunities, and the second one is sizing them.

“Ninety per cent of the literature out there, academic and by practitioner, is all about how you can find the gems, whether they are strategies or actual investments. The second problem seems pretty pedestrian, but, actually, that is the critical one. The sizing of the trade is what resulted in the failure of LTCM.”

Now Mr Haghani passionately espouses the value of long-term, low-turnover investment at the lowest possible cost. “I don’t know what is going to happen next year or the year after,” he says. “But now, knowing how I want to invest over a very long horizon is actually the easier part.”

His mission is supported by compelling research and experiments he and his team at Elm publish to illustrate the common ways in which investors damage their own interests by being too active.

“The desire to be active manifests itself in a number of big problems. Repeated studies show that investor returns are worse than fund returns, because people chase returns and try and time the market. This means they end up doing worse than they would have with a simple static allocation to the market,” he says.

Besides “return chasing”, Mr Haghani also feels investors are still not aware of other problems caused by too much activity. “Active management means you have to pay higher fees, which is a drag on performance. Another drag is tax inefficiency. Very active strategies don’t realise that we tend to pay taxes when we realise gains. That means deferring gains is a good thing.”

Having personal experience of what happens when active management goes wrong, Mr Haghani says he wants to make sure other investors do not make the same mistakes.

“That is the problem we are trying to solve at Elm,” he says. “To stop investors hurting themselves by following their irresistible urge to be active with their investing.”

>>> Berkshire : Warren Buffett: insurance underwriting was the swing factor in Q

Warren Buffett: insurance underwriting was the swing factor in Q1 earnings; has been a wonderful period for Geico as competitors cut back on new business - investor day comments 
- Berkshire is an investor in four airlines and is betting on the industry; price competition is a risk
- Thought IBM would have done better over the last 6 years
- Google business of selling clicks to advertisers with little cost is a good business
- Hard to know how much price competition will come into a business like cloud services; Bezos has delivered a remarkable business achievement with Amazon

Reuters - French candidate Macron claims massive hack as emails leaked

Leading French presidential candidate Emmanuel Macron's campaign said on Friday it had been the target of a "massive" computer hack that dumped its campaign emails online 1-1/2 days before voters choose between the centrist and his far-right rival, Marine Le Pen.

Macron, who is seen as the frontrunner in an election billed as the most important in France in decades, extended his lead over Le Pen in polls on Friday.

As much as 9 gigabytes of data were posted on a profile called EMLEAKS to Pastebin, a site that allows anonymous document sharing. It was not immediately clear who was responsible for posting the data or if any of it was genuine.

In a statement, Macron's political movement En Marche! (Onwards!) confirmed that it had been hacked.

"The En Marche! Movement has been the victim of a massive and co-ordinated hack this evening which has given rise to the diffusion on social media of various internal information," the statement said.

An interior ministry official declined to comment, citing French rules that forbid any commentary liable to influence an election, which took effect at midnight on Friday (2200 GMT).

The presidential election commission said in statement that it would hold a meeting later on Saturday after Macron's campaign informed it about the hack and publishing of the data.

It urged the media to be cautious about publishing details of the emails given that campaigning had ended, and publication could lead to criminal charges.

Comments about the email dump began to appear on Friday evening just hours before the official ban on campaigning began. The ban is due to stay in place until the last polling stations close Sunday at 8 p.m. (1800 GMT).

Opinion polls show independent centrist Macron is set to beat National Front candidate Le Pen in Sunday's second round of voting, in what is seen to be France's most important election in decades. The latest surveys show him winning with about 62 percent of the vote.

RUSSIAN HAND SEEN

Former economy minister Macron's campaign has previously complained about attempts to hack its emails, blaming Russian interests in part for the cyber attacks.

On April 26, the team said it had been the target of a attempts to steal email credentials dating back to January, but that the perpetrators had failed to compromise any campaign data.

The Kremlin has denied it was behind any such attacks, even though Macron's camp renewed complaints against Russian media and a hackers' group operating in Ukraine.

Vitali Kremez, director of research with New York-based cyber intelligence firm Flashpoint, told Reuters his review indicates that APT 28, a group tied to the GRU, the Russian military intelligence directorate, was behind the leak. He cited similarities with U.S. election hacks that have been previously attributed to that group.

APT28 last month registered decoy internet addresses to mimic the name of En Marche, which it likely used send tainted emails to hack into the campaign’s computers, Kremez said. Those domains include onedrive-en-marche.fr and mail-en-marche.fr.

"If indeed driven by Moscow, this leak appears to be a significant escalation over the previous Russian operations aimed at the U.S. presidential election, expanding the approach and scope of effort from simple espionage efforts towards more direct attempts to sway the outcome," Kremez said.

France is the latest nation to see a major election overshadowed by accusations of manipulation through cyber hacking.

U.S. intelligence agencies said in January that Russian President Vladimir Putin had ordered hacking of parties tied to Democratic presidential candidate Hillary Clinton to influence the election on behalf of Republican rival Donald Trump.

Oil is forming a “hammer” setup on daily candlesticks, if confirmed is evidence of a bullish reversal and suggests the current downtrend has run out of steam, may indicate there is more upside to come.
Oil printed at a trend low of $43.76 earlier, lowest intraday level since Nov. 15, before bouncing back, and is now up on day
See chart here
Oil had fallen as much as 11.3% this week following EIA data that showed a continued expansion of U.S. crude production
U.S. output rose for an 11th week through April 28 for longest run of gains since 2012, EIA data showed Wednesday
While OPEC is likely to prolong curbs for further 6 months, U.S. shale supply remains a concern, Nigeria’s oil minister said
Stoxx 600 oil and gas index is down 4.5% ytd
The biggest SXEP decliners ytd are: Saipem -26.5%, Tullow Oil -25.7%, Wood Group -15.4%

9to5.com : Could Apple buy Netflix or Tesla? Citigroup thinks so

Could Apple buy Netflix or Tesla? Citigroup thinks so
Analysts often dream about spending Apple’s growing cash pile by listing which company’s Apple could acquire, and this week Apple’s cash reserves climbed past a quarter trillion dollars at $256.8 billion. In response, Citigroup analyst Jim Suva has listed both Netflix and Tesla as takeover targets for Apple…

Reuters reports that Suva included seven companies as potential M&A targets for Apple: Netflix, Disney, Tesla, Activision Blizzard, Electronic Arts, Take Two Interactive Software, and Hulu.
The idea in part, as Citi has highlighted before, is that Apple may be more likely to do something with its cash pile which is mostly overseas if the Trump administration offers corporations a tax holiday as expected.
Apple CEO Tim Cook has talked about the need for corporate tax reform (and a lower tax rate) as recently as this week, although he has been cool on large company acquisitions:
In terms of large acquisitions… we have looked at large companies. In each case, it didn’t pass our test for various reasons. We will look again, I’m sure we will. I think we have the management talent and depth to do it. We don’t feel pressure to acquire revenue…we want to make great products. Cash is not burning a hole in our pocket.
One exception is Beats Electronics which Apple acquired for $3 billion as the foundation for Apple Music and the expansion of its audio business.
However unlikely a major acquisition by Apple of any of the companies listed by Citi may be, the firm certainly isn’t alone in predicting Apple could use its cash for a big company takeover. Last month RBC similarly floated the idea of Apple buying Disney to create ‘unique opportunities’ although the firm only described the likelihood as ‘greater than 0%.’
Reuters doesn’t give Citi’s analyst much credit either:
The analyst is rated three out of five stars for his recommendations on Apple, according to Thomson Reuters StarMine.

>>> Weekly Update

Weekly Market Update: Despite commodity softness stocks hold at lofty levels heading into the French election

The week opened on a sleepy note, with many markets outside the US closed for the Mayday holiday. Washington DC stayed on the front lines, as White House administration officials continued to push the President's agenda. Congress came together and reached a tentative deal on a $1.1T omnibus spending bill to fund the govt through Sept 30th. By Thursday, House Republicans finally pushed through its bill repealing and replacing the Affordable Care Act as had been promised repeatedly during the election. European politics also may have aided sentiment after the final French presidential debate ahead of Sunday's runoff appeared to solidify the prospects for an Emmanual Macron victory.

The US economic data generally came in a bit softer than expected and lagged that of what we saw of out of Europe and Asia. The Euro moved up to a 5-month high, while the Dollar gained ground against the Yen, reaching a 1-month high. Wednesday's FOMC statement and Friday's jobs report largely affirmed the notion the Fed can and will stay on a path of gradually raising interest rates. Futures markets have continued to price in two more hikes this year, most likely starting in June. A chorus of Fed officials vocalized that same belief in speeches on Friday, as well. Assuming the French election goes as planned, ECB officials also hinted that they could steer the market towards their plans to withdraw stimulus in the near future. Treasury yields drifted higher following Wednesday's FOMC statement.

Commodities saw a wave of selling throughout much of the week that temporarily spooked equity markets. WTI crude prices dropped below the Nov low of $45.90 Wednesday to trade at levels not seen since last summer. The selling was exacerbated by technical levels but largely attributed to lingering concerns about steadily increasing NA supply and lackluster demand growth. Cooper, iron ore, and aluminum also declined, hurt by reports that the Chinese continue to crack down on a host of financing vehicles. Prices appeared to have stabilized late in the week, potentially helped by readthroughs from Q1 earnings season. A third of the S&P reported this week and executives from across an array of sectors talked confidently about growth they were seeing across both business lines and geographies. Many even talked about their belief that they can raise prices to offset input costs and painted an even more encouraging picture than the economic data has shown. For the week the Dow added 0.3%, S&P gained 0.6% and the NASDAQ rose 0.9%.

In corporate news this week, Apple shares were hit after disclosing some iPhone sales softness in its quarterly results, but the tech giant pared its losses as the market digested CEO Cook’s defense that it is likely just a pause in purchases while customers gear up to buy the new phone launching this fall. Tesla reported its revenue doubled y/y on record deliveries, but posted a larger loss than anticipated, and the automaker expressed some worry that the cheaper Model 3 model may be eating into sales of the pricier Model S. Facebook beat on the top and bottom line as its ad revenue jumped 51% y/y, and the social media behemoth told investors it will use GAAP figures instead of non-GAAP from now on so that it can include stock-based compensation in its calculations.

SUNDAY 4/30
04/30 (US) Congress negotiators from both parties said to have reached a tentative deal on $1.1T omnibus spending bill to fund the govt through Sept 30th - financial press

MONDAY 5/1
(HK) Macau Apr Gaming Rev MOP20.2B v MOP21.23B prior; +16.3% y/y v 14.0%e
05/01 *(US) MAR PCE DEFLATOR M/M: -0.2% V -0.2%E; Y/Y: 1.8% V 1.9%E
(US) MAR PERSONAL INCOME: 0.2% V 0.3%E; PERSONAL SPENDING: 0.0% V 0.2%E
*(US) MAR PCE CORE M/M: -0.1% V -0.1%E; Y/Y: 1.6% V 1.6%E
(US) APR FINAL MARKIT MANUFACTURING PMI: 52.8 V 52.8E (lowest since Sept)
*(US) APR ISM MANUFACTURING: 54.8 V 56.5E; PRICES PAID: 68.5 V 67.5E
(US) Atlanta Fed forecasts initial Q2 GDP growth at 4.3%
*(CN) CHINA APR CAIXIN PMI MANUFACTURING: 50.3 V 51.3E; 7-month low; 10th straight month of expansion

TUESDAY 5/2
(AU) RESERVE BANK OF AUSTRALIA (RBA) LEAVES CASH RATE TARGET UNCHANGED AT 1.50% (AS EXPECTED)
BP.UK Reports Q1 adj Net $1.45B v $1.21Be, Underlying replacement cost profit $1.51B v $0.5B y/y, Total Rev $56.4B v $53.5Be
*(DE) GERMANY APR FINAL MANUFACTURING PMI: 58.2 V 58.2E (confirms its 29th month of expansion)
*(UK) APR PMI MANUFACTURING: 57.3 V 54.0E (9th month of expansion and highest since Apr 2014)
(EU) EURO ZONE MAR UNEMPLOYMENT RATE: 9.5% V 9.4%E (matches lowest level since 2009)
MRK Reports Q1 $0.88 v $0.83e, R$9.43B v $9.29Be
(CZ) Czech PM Sobotka: To submit government resignation to President and possible prepare for early election
(US) Pres Trump tweets: "Our country needs a good 'shutdown' in September to fix mess!"
AAPL Reports Q2 $2.10 v $2.02e, R$52.9B v $52.6Be; raises dividend 10.5% to $0.63 from $0.57 (indicated yield 1.71%); increases buyback program by $35B (4.4% of market cap) to $210B

WEDNESDAY 5/3
BNP.FR Reports Q1 Net €1.89B v €1.81B y/y, Rev €11.3B v €10.8B y/y
(UK) EU said to have raised Brexit bill to an upfront payment between €91-113B over 10 years would net to ~€55bn-€75B as Britain received share of EU spending and repaid loans - financial press
(DE) GERMANY APR UNEMPLOYMENT CHANGE: -15K V -11KE; UNEMPLOYMENT RATE: 5.8% V 5.8%E
(EU) EURO ZONE Q1 ADVANCE GDP Q/Q: 0.5% V 0.5%E; Y/Y: 1.7% V 1.7%E
(US) APR ADP EMPLOYMENT CHANGE: +177K V +175KE (lowest since Oct)
NYT Reports Q1 $0.11 v $0.06e, R$398.8M v $385Me; Digital subscribers surge
(US) APR FINAL MARKIT SERVICES PMI: 53.1 V 52.5E
(US) Puerto Rico Gov announces restructuring of $70B debt; to advance plan for bankruptcy-like case - press
(IR) Iran reportedly attempts missile launch from a mini submarine, 14 days prior to Sanctions trigger
(US) FOMC HOLDS TARGET RATE RANGE AT 0.75-1.00%, AS EXPECTED; GROWTH SLOWDOWN IN Q1 IS LIKELY TO BE TRANSITORY; EXPECTS ECONOMY TO WARRANT GRADUAL RATE HIKES
(US) Association of American Railroads weekly rail traffic report for week ending April 29th: 527.8K carloads and intermodal units, +5.1% y/y (16th straight week of gains)
TSLA Reports Q1 -$1.33 v -$0.55e, R$2.70B v $2.56Be
FB Reports Q1 $1.04 v $1.10e, R$8.03B v $7.85Be
(AU) AUSTRALIA MAR TRADE BALANCE (A$): +3.1B V +3.3BE (5th consecutive surplus)
(CN) CHINA APR CAIXIN PMI SERVICES: 51.5 V 52.2 PRIOR; 4th month of sequential decline and weakest level since May 2016

THURSDAY 5/4
HSBA.UK Reports Q1 Pretax profit (adj) $5.94B v $5.3Be, Underlying Rev $12.8B v $12.5B y/y
CARLB.DK Reports Q1 (DKK) Rev 13.7B v 13.4Be
SIE.DE Reports Q1 Net profit €1.45B v €1.44Be, Industrial Business profit €2.49B v €2.12Be, Rev €20.2B v €19.7Be
GLE.FR Reports Q1 Net €747M* v €863.2Me, Op €1.20B v €1.37B y/y, Rev €6.47B v €6.18Be
ABI.BE Reports Q1 $0.74 v $1.00e, EBITDA $4.49B v $4.90Be, R$12.9B v $12.9Be
BMW.DE Reports Q1 Net €2.15B v €1.64B y/y, EBIT €2.65B v €2.65B prelim, Rev €23.45B v €23.4B prelim; affirms forecast
RDSA.NL Reports Q1 adj Profit $3.75B v $3.01Be, Basic CCS EPS $0.41 v $0.13 y/y, R$71.8B v $64.8B y/y
*(NO) NORWAY CENTRAL BANK (NORGES) LEAVES DEPOSIT RATES UNCHANGED AT 0.50%; AS EXPECTED
USCR Reports Q1 $0.42 v $0.17e, R$299.1M v $282Me
FAST Reports Apr Net Sales $343.8M, +3.7% y/y
(CZ) CZECH CENTRAL BANK (CNB) LEAVES REPURCHASE RATE UNCHANGED AT 0.05%; AS EXPECTED
*(US) Q1 PRELIMINARY NONFARM PRODUCTIVITY: -0.6% V -0.1%E; LABOR COSTS: +3.0% V 2.7%E
(BR) Brazil Apr PMI Services: 50.3 v 47.7 prior (1st expansion in 26 months)
*(US) MAR FINAL DURABLE GOODS ORDERS: 0.9% V 0.7%E; DURABLES EX TRANSPORTATION: 0.0% V -0.2% PRELIM
WTI Crude breaks Nov low below $46.00 (lowest level since April 2016)
(US) Atlanta Fed cuts Q2 GDP to 4.2% from 4.3% on 5/1
(US) House of Representatives passes ACHA Obamacare healthcare replacement bill
IBM Buffett said to have sold 33% of IBM stake in Q1 and Q2, but has stopped selling shares - CNBC
(HK) HONG KONG APR COMPOSITE PMI: 51.1 V 49.9 PRIOR; 1st expansion in 4 months, 3-year high
(NZ) NEW ZEALAND Q2 INFLATION EXPECTATION SURVEY: 2-YEAR INFLATION EXPECTATION 2.17% (highest since Q3 of 2014) V 1.92% PRIOR

FRIDAY 5/5
(CZ) Czech PM Sobotka changes mind and will NOT submit his resignation (withdraws offer); proposes to dismiss his finance minister
(US) APR UNEMPLOYMENT RATE: 4.4% V 4.6%E (lowest since May 2007)
(CA) CANADA APR NET CHANGE IN EMPLOYMENT: 3.2K V +10.0KE; UNEMPLOYMENT RATE: 6.5% V 6.7%E
(US) APR CHANGE IN NONFARM PAYROLLS: +211K V+190KE
(US) APR AVERAGE HOURLY EARNINGS M/M: 0.3% V 0.3%E; Y/Y: 2.5% V 2.7%E; AVERAGE WEEKLY HOURS: 34.4 V 34.4E
(US) New York Fed Nowcast: cuts Q2 GDP forecast to 1.8% from 2.3% from 4/28