SPAC SPAC SPACA major challenge in asset management is naming things. If you are starting a new investment vehicle, you want to give it a name that is unique and memorable and that conveys something about your aspirations. For instance if you're starting a hedge fund you will probably name it after some figure of classical mythology (to convey "I have read books") or Elvish mythology (to convey "specifically, I have read the appendices to 'The Lord of the Rings'"), or after a posh town or neighborhood (to convey "I am posh"), or after a generic geographical feature (to convey "I am posh but discreet"), or after a nautical term (to convey "I would like to buy a yacht").[1] On the other hand, if you are starting a special purpose acquisition company—a sort of blind pool in which you raise money in a stock offering and then use it to go out and find a company to take public—what do you want to convey? I think that you mostly want to convey "hurry, it is a boom market for SPACs, let's get this SPAC out the door, no time to think about the name!" So we talked last month about Just Another Acquisition Corp., which really captured the zeitgeist. Or here is Do It Again Corp.: We are a newly organized, blank check company incorporated as a Delaware corporation for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. … Our management team, director nominees and industry advisors have decades of experience as senior executives, growing restaurant, retail brands and franchise concepts to scale, and expanding those concepts as large and successful public and private companies.
To be fair, the It that the Corp. is supposed to Do Again seems to be "run a restaurant/retail/franchise business successfully" rather than just, like, "do a SPAC." Successfully Build A Public Company Again Corp., rather than Tap The SPAC Market For A Bunch Of Money Again Corp. Still there is some ambiguity. They are planning to raise $125 million. I hope if they succeed they'll launch a new SPAC in like two weeks, before even finding a target for this one. Do Do It Again Corp. Again Corp. Now is the time! A lot has been written, by me and others, about the various cases for and advantages of SPACs; you can intellectualize them as a clever piece of financial engineering and a better, or at least different, way for at least some companies to go public. But it does often seem like, from the perspective of SPAC sponsors, the basic case for SPACs is "people are lining up to throw money at SPACs so I might as well grab some of it." Here for instance is a New York Times Sunday Styles feature on celebrity SPACs: Jay-Z is involved with one. Shaquille O'Neal has one. Ciara Wilson sits on the board of one, as does Serena Williams. Sports figures seem especially enthusiastic about them: Alex Rodriguez, Steph Curry and the activist and former NFL quarterback Colin Kaepernick — or should we say, "SPAC-ERNICK" — all have one. So does Billy Beane, the former Oakland A's general manager and subject of the book and film "Moneyball." … The celebrities aren't so much the financial decision makers but rather the promoters brought in to attract investors ("strategic advisers," in prospectus parlance). Like marketers of soft drinks or sneakers, SPAC managers are tapping into the power of celebrity to sell a product — in this case, a financial instrument The New York Times has likened to an "empty shell."
The celebrity promoter presumably works on both sides of the deal: It is easier for a SPAC to raise money if it has a celebrity attached to it (though, don't kid yourself, it is easy for a SPAC to raise money anyway, as the proliferation of Blah Blah Blah Here's A SPAC Corps. suggests), and it is easier for the SPAC to find a company to take public and negotiate a deal if it's got a celebrity in the room. "Ooh I want to meet Shaquille O'Neal," some number of entrepreneurs presumably think, and they are willing to give up a bit more ownership of their company in exchange for having Shaq on the board. One possibility is that this is inefficient, and every celebrity has a SPAC because the SPAC market is unbelievably frothy right now and there is too much money flying around. If you can snap your fingers and raise hundreds of millions of dollars for Any Old Acquisition Corp., and then take 20% of that money for yourself, that gives you a lot of money to spend on marketing. Why not spend 2% of investors' money slapping a celebrity on your SPAC, raise more money, and keep 18% for yourself?[2] In general there is a rough sense that financial products that are "sold, not bought" are worse for investors than the ones that are "bought, not sold," and nothing says "expensive sales effort" like paying millions of dollars to a celebrity promoter. Another possibility is that this is efficient, in a goofy way. It is probably true that, in the business of sourcing and negotiating deals with private companies, random celebrities do have certain advantages over experienced mergers-and-acquisitions bankers and semi-retired corporate operators.[3] There is undoubtedly a set of company founders who would be really excited to take a meeting with noted former Citigroup banker Michael Klein, but there is another set of founders who would be much more excited to take a meeting with noted current Warriors guard Steph Curry. The latter group is probably larger, and it is not obvious that it would be worse for investors.[4] One obvious way to monetize this would be for investment banks and private-equity firms to hire celebrities into part-time jobs, paid mostly on commission, to help source and pitch mergers and acquisitions and initial public offerings. Someone else researches the industry and runs the numbers and does the due diligence; the celebrity shows up to the pitch meeting to shake hands and charm everyone. And in fact there is plenty of this sort of thing, loosely speaking; lots of politicians leave office and go into banking or private equity, not because they are good at discounted cash flow analysis but because they are good at schmoozing.[5] Still there are cultural and regulatory limits. Investment bankers are generally expected to have securities licenses; of course you want your senior bankers to be good schmoozers, but they also have to know their way around a financial model. Part-time work also seems to be frowned upon; it is hard to be a successful investment banker at the same time that you're an NBA All-Star. SPACs arbitrage these limits: They allow celebrities to play a critical role in a sort of M&A-slash-IPO process, doing what they do best, for a pile of money, on an incentive basis, while keeping their day jobs. They can efficiently apply their star power to the financial industry, and they can ruthlessly monetize it. Investor relationsThe basic idea of investor relations is that it is good for a company to befriend the people who own their stock, or who might buy it. For one thing, this keeps up the price of the stock: If the people who own your stock like you and feel well-treated, they won't sell it, and might buy more, which is good for your stock options and so forth. For another thing, one day you might need money, and if you need to raise money by selling stock, it is good to have good relationships with the people who might buy it. "People" here, traditionally, means "institutional investors." If you need money, what you want to be able to do is call up Fidelity and say "hey we need money" and have Fidelity say, "well, we have a lot of money, and we like you, so here's some money." "People" does not, traditionally, mean thousands of retail investors. It is not easy to call them up and ask for money, and they are fickle, and each of them only has so much money so if you need a lot of money quickly they are not much help. This traditional analysis might be totally wrong? At least for some companies? The last few months have made it pretty clear that if you are a certain sort of company and want to raise a lot of money quickly, you would be a fool to call up institutional investors and ask them to buy big blocks of stock, and you'd be much better off doing an at-the-market offering and selling stock on the exchange to retail investors. Similarly if you just want your stock price to be high, institutions are a boring and inefficient audience, and what you really want is for thousands of retail investors on Reddit to get excited about your stock and make memes about it. The aggregation of individual investor preferences has gotten more efficient, in some sense, and certainly more intense; what you want is for all those individual investors to prefer your company, and then to take advantage of it. I do not exactly know what this means for the investor-relations function at big companies, or for that matter at smaller companies that are more likely to become meme stocks. "We are going to ignore institutions because they are boring, and focus on pumping our stock on Reddit": No, wrong, this is a very bad lesson to draw from January's meme-stock excitement. Still, something. If you work in IR at a meme-y company you have to at least read Reddit, even if posting is probably still a bad idea. Anyway here is a fun Wall Street Journal article about companies trying to figure this stuff out: The retail mania is prompting companies to get a better understanding of their shareholders and how they can connect with them. They are reaching out to individual investors through special events, podcasts, social-media channels and charts, while also keeping the lines of communication open for institutional investors. … "We are building influencer strategies, working selectively with some of these influencers to inform and educate the growing pool of capital represented by retail investors," said Rachel Carroll, president and managing partner at Edison Group, an investor relations company.
I feel like a lot of companies are a very long way away from using "influencer strategies" in their investor-relations function, but perhaps that will eventually be the norm. Hedge fund diversityWe talked a few years ago about a paper finding that hedge fund managers who drive fast cars are bad at managing hedge funds, because they "take on more investment risk but do not deliver higher returns" and "trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks." We have talked about other results finding that testosterone (as measured by facial width-to-height ratio) is bad for hedge fund managing. Also that money managers who grow up rich underperform those who grow up poor. One way to read these results is that these traits—testosterone, fast driving, wealthy childhood—are bad for managing money. Perhaps they correlate with taking foolish risks, which is bad for clients. "If you like torque you'll love volatility," as I put it in a headline. Another way to read this is sort of at a meta level, that anything that screams "stereotypical hedge fund manager" is a bad sign for a hedge fund manager, not because it is actually bad for managing hedge funds but because it is too easy to read as good. The problem with testosterone is not that it makes you more risk-prone, it's that it gives you the firm handshake and masculine facial structure that your clients associate with "good hedge fund manager," so they will give you money even if you are not in fact any good at managing it. If you grow up rich you can schmooze easily with rich clients, so they will give you too much moey. If you drive up to the investor meeting in a fast car, the investors say "look at that car, what a good hedge fund manager he must be," though you aren't. If you drive up in a minivan the investors say "hmm we must be at the wrong meeting." But then if you overcome their doubts it is because you are actually a good hedge fund manager! I have previously quoted Nassim Nicholas Taleb's argument that "Surgeons Should Not Look Like Surgeons": "The one who doesn't look the part, conditional of having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception." One way to put this is that there might be excessive pattern-matching in investment management, and people who don't fit the obvious pattern will have had to be better than people who do. In somewhat different news, here is "Diverse Hedge Funds," by Yan Lu, Narayan Naik and Melvyn Teo. (Lu and Teo were also authors on the sports-car and face-width papers.) We explore the value of diversity for hedge funds. We show that fund management teams with heterogeneous education backgrounds, experiences, and nationalities, outperform homogeneous teams by 3.59% to 6.23% per annum after adjusting for risk. Difference-in-differences estimates from an event study analysis of diversity-enhancing manager team transitions help establish causality. Diverse teams outpace homogeneous teams by exploiting a wider range of long-horizon investment opportunities and avoiding behavioral biases. Moreover, diverse teams eschew downside risk, survive longer, and report fewer regulatory problems. Diversity also allows hedge funds to circumvent capacity constraints. Consequently, performance persists more for diverse teams.
In a sense it is obvious why diversity would be good: If you are in the business of coming up with ideas and deciding if they are good, a team with more different ways of thinking will generate more ideas and test them more rigorously. The authors write (citations omitted): Diverse teams could exploit a wider array of investment opportunities by harnessing the heterogeneous experiences and skill sets of their team members. This should translate into superior investment returns that are less susceptible to fund-level capacity constraints. Moreover, by working alongside other managers from different backgrounds, fund managers could become more aware of their own biases and entrenched ways of thinking. Therefore, diverse teams could avoid some of the costly behavioral biases that afflict other teams. Similarly, members of a heterogeneous team could more effectively serve as checks and balances for each other, which should engender prudent risk management and lower operational risk.
And in fact they find evidence for all of that: Consistent with this view, relative to homogeneous teams, diverse teams arbitrage more of the prominent stock anomalies identified by Stambaugh, Yu, and Yuan (2015). … Consistent with the notion that working alongside other managers from different backgrounds helps fund managers become more aware of their own biases and entrenched ways of thinking (Rock and Grant, 2016), diverse teams are less susceptible to behavioral biases. … Consonant with the view that team members with heterogeneous experiences and backgrounds could more effectively serve as checks and balances for each other, we find that hedge funds operated by diverse teams are more prudent when managing risk.
At the same time, it is possible that excessive pattern-matching means that hedge funds don't efficiently pursue these advantages: Since hedge funds tend to be managed by small teams and small teams are more prone to homophily (Klocke, 2007), much of the economic benefits from diversity could be untapped. Indeed, anecdotal evidence suggests that hedge fund industry suffers from a diversity and inclusion problem. To the extent that diversity adds value, this presents a significant opportunity for hedge fund managers.
"Managers who worked at the same investment bank likely attended the same training program for incoming junior analysts and traders, and adopted the same workplace norms," note the authors, and you can see how hedge fund managers might want to hire people who were in the same analyst program as them. "She knows how to do finance," you might think, if you learned how to do finance the same way. But in fact you want people who do finance different ways. Anyway the paper also has a useful checklist of where to work and go to college if you want to work at a hedge fund: The top ten universities attended by hedge fund managers include Harvard University, University of Pennsylvania, Columbia University, New York University, University of Chicago, Yale University, Cornell University, University of Virginia, Massachusetts Institute of Technology, and Stanford University. The top ten former employers of hedge fund managers include Goldman Sachs, Morgan Stanley, Merrill Lynch, JP Morgan, UBS, Credit Suisse, Deutsche Bank, Lehman Brothers, Bear Stearns, and Citigroup.
I guess you already knew that. Mutual fund attractivenessMeanwhile here's "Is Beauty Skin Deep?" by Gajanan Ganji, Arati Kale and Devendra Kale: In this paper, we investigate if the perceived attractiveness of mutual fund managers influences mutual fund flows. We hand collect professional photographs of mutual fund managers and use machine learning algorithms to develop two objective proxies of attractiveness. We find that, even after controlling for fund characteristics, performance measures and manager characteristics, mutual funds managed by 'attractive' managers receive higher fund flows. Our results are robust to matched sample analysis, Heckman two-stage selection, alternate model specifications as well as use of an alternate proxy. We also find that the attractiveness bias is predominantly witnessed within retail investors. We further find that manager attractiveness does not entail superior fund performance. Our results thereby suggest that mutual fund investors exhibit a bias for seemingly attractive mutual fund managers.
What a baffling result. If you told me that attractive hedge fund managers got lots of assets I'd say sure, why not, hedge fund managers market their funds in person and everyone likes attractive people. You pull up to the investor meeting in your sports car with your attractive facial-width-to-height ratio, you wow the clients, you speed away with more assets. But I do not know the names of anyone who manages my mutual funds, or what they look like, or how I would find out. When I do a Google Image search for "mutual fund manager" the first eight results include five cartoons, two stock images of men viewed from the back, and one picture of actual mutual fund managers:  I submit to you that no one has ever seen a mutual fund manager, and that it would be almost impossible to intentionally allocate money to attractive mutual fund managers. Maybe the attractive ones are also just lucky, and lucky mutual fund managers get more inflows than unlucky ones. Things happen Greensill Crisis of Confidence Worsens as GAM Winds Down Fund. Goldman Sachs Set to Jump Back Into Cryptocurrency Trading. Ant Tells Staff It Will Find Solution for Unsellable Shares. Democratic senators call for tougher capital requirements for US banks. Oil Trade Group Is Poised to Endorse Carbon Pricing. Dublin is Top Brexit Relocation Spot for Finance Firms, EY Finds. China's top bank regulator warns of 'bubble risks' in foreign markets. "There was a common line of critique last spring that united leftists and private equity fund managers alike that the government should have let all kinds of big businesses — cruise lines, airlines, hotels, etc. — go bankrupt, and that the Fed's low interest rates constituted a kind of mass bailout of big business that would leave the economy strangled by zombie businesses. That was completely, risibly wrong." "'One of the big concerns with everybody and their auntie getting into the gin business,' he said, is that 'somebody disappears in a ball of flames.'" If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] I once wrote: "Every imaginable figure from Greco-Roman mythology has already been pressed into service as a hedge fund name, so what are you going to call your fund? Just opening to a random page in Graves, or even Harrison, will no longer get you a unique name that conveys the seriousness, power and historical heft of your fund. Many other ancient traditions—Hindu, Egyptian, Norse, Babylonian, Akkadian and of course Elvish—have also been mined extensively for financial-company names." And here is a word cloud of buy-side fund names; popular categories include "directions," "virtues," "fish," "New England locations," "nautical" and "alcoholic drinks." "Please invest in my new fund, Swampscott Tequila Yacht Capital LP," I once wrote. [2] Last month Josh Barro argued that Colin Kaepernick is making a mistake by sponsoring a SPAC to do socially responsible investing, and that he should instead sponsor a mutual fund to do socially responsible investing. Leaving aside other possible objections about the relative impact of SPACs and mutual funds, I suggested that in fact Kaerpernick is doing a SPAC because mutual funds usually charge fees of less than 1% of assets under management, while SPAC sponsors routinely charge 20% of assets. [3] It is worth saying that a lot of the celebrities listed in the Times piece are also *otherwise* noted for their business dealings and acumen; it's not so much a list of random celebrities as it is a list of celebrities that skews toward the people who were making extensive private investments even before they got into SPACs. "I can't believe we haven't seen a Kim Kardashian SPAC yet," Barry Ritholtz told the Times, and he's right, not only because Kardashian is very famous but also because she is one of the savvier businesspeople of our era. And the business of our era is SPACs. [4] There is an argument that you might prefer to invest in a startup that *isn't* all that savvy about its fundraising options? Like a founder who doesn't know who Michael Klein is might give you a better deal than one who does? But everyone knows who Steph Curry is. [5] Also banks are pretty notorious for hiring the children of prominent clients or prospective clients, because those children are presumably good at schmoozing with their parents. | 
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