Enrique Abeyta on 'The COVID Disconnect And The Coming 'Melt Up' In Markets'; Behind Bill Ackman's $4 Billion Day; SPACs Aren't Cheaper Than IPOs Yet; Boaz Weinstein Piles Up 90% Gain in Hamptons; A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks; Hedge Fund Fees in Free Fall; Goldman CEO Opens for Chainsmokers at Hamptons Concert

By Whitney Tilson

Wednesday, July 29, 2020

1) I loved the 55-minute interview my colleague Enrique Abeyta did with the Contrarian Investor Podcast, “The COVID Disconnect And The Coming ‘Melt Up’ In Markets,” which you can listen to here (I listened to it at high speed on Castbox here).

Enrique – who’s knocking the cover off the ball with his weekly Empire Elite Trader and monthly Empire Elite Growth newsletters – argues that, contrary to the current headlines, we’re in the 7th or 8th inning of defeating the coronavirus. He expects cases, hospitalizations, and deaths in the U.S. to plunge in the next six weeks, which, when combined with unprecedented fiscal and monetary stimulus, could lead to a 1999-style “melt up” in the markets going into the end of the year.

You can learn more about Empire Elite Trader right here, and Empire Elite Growth by clicking here.

2) My old friend Bill Ackman turned away $8 billion – and still raised $4 billion for Pershing Square Tontine Holdings (PSTH) last week.

This made it the largest special purpose acquisition company (“SPAC”) in history (and the 14th-largest IPO ever of a U.S.-domiciled company). Michelle Celarier of Institutional Investor has the most insightful article I’ve read about it: Behind Bill Ackman’s $4 Billion Day. Excerpt:

While SPACs have become the rage among hedge funds, Tontine’s huge popularity is also a reflection on Ackman’s rising stature this year, which added to investors’ willingness to give him so much money to play with.

“He’s a courageous investor, is willing to be bold, and he finds a way to win,” says Chamath Palihapitiya, whose Social Capital has also launched three SPACs, including one that bought Richard Branson’s Virgin Galactica and is now up about 150% since its launch in March of 2019.

“I admire [Ackman] and hope he crushes it,” Palihapitiya said…

Pershing Square eschewed the hefty benefits sponsors of such vehicles typically take.

“It’s the first SPAC in history without compensation to the sponsor,” a person familiar with the deal noted. “In every other SPAC the sponsor gets 20% of the company if they do a deal.”

Instead, Pershing Square has purchased warrants for $65 million, which give it the right to buy up to 5.9% of the company for $24 a share – but only three years after Tontine closes on a deal.

Other terms, like investor warrants, incentivize investors not to redeem, thereby encouraging those with a long-term investment horizon.

3) Speaking of SPACs, one of my favorite columnists, Bloomberg’s Matt Levine, has been writing some insightful stuff about them recently: SPACs Aren’t Cheaper Than IPOs Yet. Excerpt:

The SPAC sponsor will be a venture capitalist or an experienced operating executive or a savvy player in the capital markets; perhaps she can help the company she takes public perform better than it would on its own. [Alex] Danco:

The business and the sponsor, who used to be on opposite sides of the table negotiating against each other, are now on the same team. The sponsor might even become the chairperson of the newly merged public business, like Chamath did with Virgin Galactic. This is very different than the dynamic with banks: it’s M&A, rather than consulting. Your negotiation is more brutal, but then once it’s done, you merge.

Unlike the bank, who never really worked for you anyway; the SPAC sponsor doesn’t just work for you; they ARE you.

As I said last week, I suspect a lot of private companies aren’t looking for that; they already know who they are, and don’t really want to combine their identities with Bill Ackman or Chamath Palihapitiya or Michael Klein. A SPAC is not a neutral tool to take a company public, but a partnership with a sponsor, which may or may not be what you want. But it’s what the sponsors want, so maybe they’ll pay up for it. One thing that you are selling, when you do a SPAC merger instead of an IPO, is a bit more control, and perhaps the market will pay you for that.

I don’t expect SPACs to replace IPOs. I like direct listings well enough because they cut out a lot of the apparatus and structure of traditional IPOs, while SPACs mostly add a lot more apparatus and structure. (And expense.) They feel to me like an interesting tool for weird times, not the future of going public. Merging with one person’s company and paying her a huge fee to do so does not feel like a good general substitute for selling shares to the market at the clearing price. But maybe that’s wrong; maybe if SPACs are going to be the future of going public, people will start doing them with less structure and less expense.

4) And speaking of hedge-fund friends who are crushing it, Bloomberg had a nice profile yesterday of Boaz Weinstein of Saba Capital, who’s having an epic year: Boaz Weinstein Piles Up 90% Gain in Hamptons, Bets on More Chaos. Excerpt:

When New York shut down, he left his office in the Chrysler Building and decamped to Long Island, like others from high-caste Manhattan. Unlike much of that crowd, however, Weinstein has settled here to make money – lots of it.

He’s added to his profits every month this year, trading credit and derivatives of companies including Wirecard AG, retailers Staples Inc. and Macy’s Inc. and loading up on cheap closed-end mutual funds. That’s helped him outperform all of his hedge fund peers, generating an eye-popping 90% gain in his main fund after years of uneven returns. He’s attracting new money, pulling in $1 billion to his now $3 billion Saba Capital Management. And he sees room to profit, even as stocks and bonds rebound.

“Markets are at an unstable place right now. I look out at the next five months, and there are lots of known unknowns,” he said in a phone interview, pointing to everything from the course of the pandemic to the U.S. election and relations with China. “There are dislocations today that are as large as they were three months ago.” He predicts there will be more moves to make as default rates mount.

5) Not all hedge funds are doing so well, of course, as this New York Times article highlights: A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks. Excerpt:

As the coronavirus began shuttering the global economy in March, critical parts of U.S. financial markets edged toward collapse. The shock was huge and unexpected, but the vulnerabilities were well known, the legacy of risk-taking outside regulatory reach.

To head off a devastating downward spiral, the Federal Reserve came to Wall Street’s rescue for the second time in a dozen years. As investors sold a vast array of holdings and rushed to the comparative safety of cash, the Fed pledged to become a buyer of last resort to restore calm to critical markets.

That backstop bailed out many people and investment firms, including a class of hedge funds that had been caught on the wrong side of a trade with ample risks. The story of that trade – how it went wrong and how it was salvaged – offers a cautionary tale about important issues Congress did not address in the 2010 Dodd-Frank financial law and the Trump administration’s hands-off approach to regulation.

A decade after Dodd-Frank, America’s sweeping post-2008 crisis fix, was signed into law, commercial banks like JPMorgan Chase and Bank of America are better regulated and safer, but they may be less willing to help smooth over markets in times of stress. Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street – areas that Dodd-Frank left largely untouched.

In addition, the powers that policymakers have to deal with persistent vulnerabilities have been undermined by Trump administration officials who entered office seeking to weaken financial rules. Treasury Secretary Steven Mnuchin, who leads a panel created by Dodd-Frank to identify financial risks, has moved to release big financial firms from oversight and abandoned an Obama-era working group that was examining hedge fund risks.

The result is a still-brittle system, one in which financial players rake in profits in good times but the government is forced to save them or leave the economy to suffer when things go awry.

6) Here’s more about the tough times in the hedge-fund industry: Hedge Fund Fees in Free Fall Is the New Reality For a Humbled Industry. Excerpt:

Hedge-fund fees had already been shrinking before the pandemic ripped through global markets. Now, they’re in terminal decline…

Long notorious for charging high fees, the $3 trillion industry runs portfolios that are generally open only to institutions and affluent individuals. It’s going to extraordinary lengths to attract new money as the coronavirus pandemic triggers losses and accelerates an investor exodus that has plagued the industry for years. Many of the world’s most prominent managers have come to the stark realization that they need to upend the “two-and-twenty” fee model that’s been a fixture for decades if they want to expand. For some smaller firms, the goal isn’t growth. It’s survival…

Standout returns in the 1990s – fueled by celebrity managers such as George Soros and Seth Klarman – helped hedge funds command exorbitant prices. A 2% annual management fee and a 20% cut of profits (variously known as the performance or incentive fee) became the norm for most firms, even for startup managers with little pedigree. One selling point was that hedge funds had the flexibility to pursue strategies other money managers couldn’t. They might make big bets on assets declining in value as well as rising or even make money on the market’s volatility.

But mediocre performance since the 2008 financial crisis has sparked an investor mutiny. Now even the best-known managers are coming around to the notion that they need to make some concessions to stay competitive: industry titans such as Alan Howard, David Harding and Paul Tudor Jones have all cut their fees in recent years.

7) Here’s a great tweet about this awesome story – LOL! Goldman CEO Opens for Chainsmokers at Hamptons Concert

Best regards,


Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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