MoneyFitt

25 January 2023

Happy Wednesday! 🐪

This time next week, it will be February.

US large-cap S&P 500 closed 0.07% DOWN 🔻 Tech-heavy Nasdaq Composite closed 0.27% DOWN 🔻 Pan European STOXX Europe 600 closed 0.17% DOWN 🔻 HK’s Hang Seng Index closed till ThursdayJapan’s Nikkei 225 closed 1.46% UP ▲

📊 In the Markets

Sued by Trustbusters… Is Google Feeling Lucky? War is profitable. Introducing “The Primes.”

📝 Focus

Hedge funds lost US$208 billion for clients in 2022

📖   MoneyFitt Explains

🎓 Hedge Funds 

📊 In the Markets

Sued by Trustbusters… Is Google Feeling Lucky?

The US Department of Justice is suing Google for abusing its dominance of the digital advertising market by “engaging in a systematic campaign to seize control of the wide swath of high-tech tools used by publishers, advertisers, and brokers, to facilitate digital advertising” and using “anti-competitive, exclusionary, and unlawful means to eliminate or severely diminish any threat to its dominance over digital advertising technologies.” The DoJ is seeking damages and forcing Google parent Alphabet to divest its Google Ad Manager suite.

They estimate that Google takes over 30% of all digital advertising dollars flowing through its various products and because of its control over almost all stages of the digital ad market, including the biggest ad auction exchange and the tech used by website publishers to sell ad space, the DoJ is accusing Google of having “pervasive conflicts of interest.”

The company is also facing antitrust actions in many other places like South Korea (fined for abusing its Android OS dominance) Europe (over US$8 billion in fine after fine after fine over the years) and India (where it recently lost a case, thereby allowing Android users to delete Google apps like YouTube.)

Antitrust, monopolies and competition – a mini-explainer

Competition or antitrust laws exist to protect consumers from unlawful monopolies or unfair business practices which would harm them through higher prices and less competition while benefiting certain powerful companies.Preventing mergers and acquisitions from resulting in monopolies is perhaps the easiest part of the job, but firms that have become monopolies or overly concentrated market power can also be broken up.Collusion between several companies in formal or informal cartels with practices such as price fixing is also forbidden, though proving it in court can be a lot harder.In the US, both the Federal Trade Commission and the entirely separate Department of Justice Antitrust Division enforce federal antitrust laws, agreeing to take cases based on expertise in particular industries or markets.

War is profitable. Introducing “The Primes.”

Almost everyone would agree that war is horrible, maybe even the staff and possibly the shareholders of the defence industry “Primes” in the US that make the tanks, ships, missiles and planes needed. But it does happen, and it is very profitable.

The two largest, Raytheon Technologies (RTX, with a market capitalisation of US$150 billion) and Lockheed Martin (LMT, US$120bn) reported results on Tuesday slightly above what Wall Street’s highly-paid analysts were expecting and their shares traded up in a flat market in response.

According to the Stockholm International Peace Research Institute, the five biggest defence companies in the world based on arms sales are all American. The above two are joined in the top 3 by, surprisingly to some, passenger jet plane maker Boeing, which in 2020, got 55% of its revenues from arms (vs 65% from RTX and 89% from LMT.) Smaller by both arms sales and market capitalisation are Northrop Grumman and General Dynamics (followed by BAE systems of the UK.)

Lockheed Martin is the largest pure-play defence contractor in the US and specialises in helicopters, missiles, electronics, space and warplanes like the F22 Raptor and this one:

Raytheon is the product of a mega-merger with United Technologies in 2020, and is one of the 100 largest companies in the world. RTX reported that in the fourth quarter it bought back US$408 million of its own shares, making it a total of US$2.8 billion for the year.

Share Buybacks – a mini-explainer

When a company uses extra cash (that is not used to grow the business through investing in itself or paying its staff) to buy shares in itself in the marketThe end result is fewer shares in issue, which means that remaining shareholders will own a bigger share of the company — without buying more sharesThis increases the value of each share, which should in theory then be reflected in the market price of each share, though prices often react to the announcement even before the actual buybacks happen

Since the day before the Russian invasion of Ukraine on 24-Feb, RTX is up 6.5% and LMT is up 16.2% vs a 10% loss in the S&P500. (The UK’s BAE Systems, with 97% of sales from arms, is up 43.8% in GBP terms.)

At this stage, the Russia-Ukraine war is known and factored into most investors’ considerations, as are heightened geopolitical superpower tensions, but with the US debt ceiling again in question, defence spending may be the next near-term focus. The US in 2021 made up US$801 billion of the total global defence spend of US$2.1 trillion, more than double the spending of the next two, China and India, combined.

📝 Focus

Hedge funds lost US$208 billion for clients in 2022

Breathless fanboy business writers are gushing with praise for Ken Griffin’s Citadel hedge fund 🎓, having made US$16 billion for its investors in 2022. This is the biggest dollar gain by a hedge fund in history, pipping John Paulson’s $15.6bn from his bet against subprime mortgages in 2007… when Citadel lost $8bn. It now manages US$62 billion, having made a 38% return in its main fund last year.

Since it started in 1990, it’s made US$65.9 billion for investors, displacing Ray Dalio’s Bridgewater ($58.4bn since inception) as the most awesome hedge fund ever. Fellow multi-strategy multi-manager hedge funds DE Shaw and Millennium also did well in 2022, and along with Citadel, made US$32.0 billion for investors. The FT calculates from its total gross trading profit of US$28 billion last year that Citadel charged investors about $12bn in expenses and performance fees.

In fund-of-fund LCH’s data, 2022’s 20 best-performing hedge fund managers earned $22.4 billion for investors, which sounds like a lot of money (it is!) though also the lowest figure since 2016. But the reporting is a bit bizarre as it is focused backwards on the best 20 in the period, so obviously, the gains would be, in dollar terms, huge and positive. 

Tucked away in the same data, hedge funds overall lost US$208 billion for clients, the most by the hedge fund industry in a single year since 2008, when they lost US$565 billion when the S&P500 index closed the year down 38.5%. In 2022, the same index was down 19.4%. (According to eVestment data, hedge funds in total managed US$3.3 trillion at the end of 2022.)

Hedge funds as a whole (not cherry-picking the ones that have done well in a backwards-looking exercise) can lose as well as make billions.

Among the 2022 losers were Chase Coleman’s Tiger Global, the most famous of the so-called “Tiger cub” funds (spawned by the legendary Julian Robertson’s Tiger Management), which lost a record $18 bn (or 56%), Steve Mandel’s fellow cub Lone Pine at $10.9 bn and Sir Christopher Hohn’s TCI with an $8.1 bn net loss.

📖 MoneyFitt Explains

🎓 Hedge Funds 

A hedge fund is a type of investment fund that pools capital from multiple investors, like mutual funds, but because they use various complex strategies to generate returns are not regulated like traditional investment vehicles and are typically only available to accredited investors (i.e. rich folks).Many of them lock up investor money for relatively long periods of time and charge high fees, such as “2-and-20”, meaning an annual management fee of 2% of assets plus a 20% share of all gains made in the portfolio. This rewards, on purpose, either long-term thinking or a high-risk / high-return investing mindset.Hedge funds are often run by highly experienced investment managers who use sophisticated investment strategies, such as short selling and derivatives, to generate returns. One element of that is the use of leverage, borrowing money to increase the size of their investments, which can amplify returns but also increases risk if the trades go wrong.One of the benefits of hedge funds is that they have the potential to generate high returns, which can be especially attractive to investors looking for ways to either turbocharge or diversify their portfolios (or both.) On the downside, hedge funds can be highly risky, partly due to the leverage taken.