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Top Five Alpha Stories of 2012

January 1, 2013

This, 2012, has been an eventful year for seekers of alpha, their counterparties, and their service providers. JPMorgan Chase had to acknowledge the problems created by their “whale,” Bruno Iksil; UBS’ “Delta One” trader Kweku Adoboli learned his fate; and three different trustees have worked through the consequences for customers and counterparties of the failure of MF Global the previous fall.

But in our quite arbitrary and selective count, none of those three important stories made the list for the top five. The stories listed below are the ones that have left us spellbound.

Simon Lack: No Yachts for the Customers

In January, Wiley brought out The Hedge Fund Mirage, Simon Lack’s well-written and contentious look at the hedge fund industry.

Lack worked at JPMorgan for twenty-three years, much of that time in North American fixed income derivatives and forward FX trading. He also sat on an investment committee for that institution, allocating more than $1 billion to hedge funds. So he came by his knowledge of the field honestly. And his book claims that although “the hedge fund industry has created some fabulous wealth; most investors have shared in this to a surprisingly modest extent.” He said that he has attempted to think of anyone who has become wealthy simply by investing in hedge funds, without also being a manager, “and I couldn’t.”

The industry has taken umbrage at the suggestion that it is selling a mirage, and that along with many of Lack’s more specific claims have come under fire, at All About Alpha and elsewhere.  (If you follow that AAA link, we suggest you also scroll down to the comments section, where Lack replies.)

Aleynikov: Algorithms and Appeals

In February, the Second Circuit Court of Appeals overturned the conviction of a former computer programmer for Goldman Sachs, Sergey Aleynikov.  Aleynikov had been charged with unauthorized copying of Goldman’s computer code for high-frequency trading, with the intention of using that code for the benefit of his new employer.

It wasn’t until April that the appeals court that had reversed his conviction got around to explaining itself. It said that the code in question had not been in the interstate “stream of commerce,” thus the indictment had failed to state an offense under the pertinent statutes.

Nonetheless, the defendant is not out of penal jeopardy. He was arrested in August on New York State law charges arising out of the same underlying acts.

Aleynikov’s significance as a figure in the development of the federal case law will remain, however he fares before the New York bench. This is just one of a set of recent cases in which the federal courts have backed away from any central role enforcing the security of proprietary trading strategies, and this habit on the part of those courts will surely make life more complicated for certain managers in the new year.

Libor: Scandal and Significance

In July, bigwigs at Barclays resigned over the Libor-fixing scandal, which was even as they resigned widening to become a central banker’s scandal as well.  These questions continue to fascinate us: what did the Fed know? What did the Bank of England know? And when?

Professor Andrew Lo of the MIT Sloan School of Management, told us in November that in his view the scandal over the manipulation of Libor has affected the psychology of the markets.

“Financial markets depend on trust,” he reminded us, “and we had precious little trust as it was.”

Sovereign bonds: Language and Litigants

In October, we heard again from the U.S. Court of Appeals for the Second Circuit, this time in a finding against Argentina in a much-watched dispute over the all-too-common pari passu language.  It upheld (most of) an order by district court Judge Thomas Griesa to the effect that   Argentina can’t pay those of its bondholders it wants to pay (the co-operative folks who went along with the restructuring) unless it also pays the holdouts. Given the specific language of the contract when these bonds were issued, the Second Circuit has upheld that.

Maneuverings continue, and another showdown of high-priced lawyers is set for this February. How it all shakes out will have a lot to do with the future of the sovereign bond market, orderly or disorderly restructurings, and the viability of the so-called “vulture” strategy.

Bain Capital: the Political Mainstream and Private Equity

Finally, we reach what may have been the single most important alpha-related story of this busy year. In November, a former manager of Bain Capital, Mitt Romney, failed in his effort to become President of the United States.

Indeed, Mitt Romney was one of the three founders of private-equity fund Bain, in 1984. He continued in a central role at least until 1999 when he left to become president and CEO of the organizing committee of the Salt Lake City Olympic Games.

Romney’s role at Bain, and the role of institutions such as Bain in the U.S. economy, became critical campaign issues during the Republican primaries. Newt Gingrich, a former Speaker of the House, and the author of the “Contract with America” of 1994, described Bain’s business model as the execution of “clever legal ways to loot a company.”  Such a sentiment helped shape the general-election campaign in the fall as well.

It may well be that this campaign will prove to be for the PE world what the high-visibility meltdown of Long-Term Capital Management in 1998 was for the hedge fund world – the permanent entry of some once fairly obscure questions into the consciousness of mainstream political debate.