Trump ≠ Gordon Gekko

You have to love him. Donald Trump might be exactly what this world needed. His outrageous tweets have sent electric shocks through the stock markets and made CEOs shiver at a push of a button. He has given a new meaning to the U.S. foreign relations and promised changes, which he will never be able put into practice (U.S. tax reform). Trump is inexperienced at best and careless at worst.

The world is slowly adapting to the new U.S. president, though. His electrifying tweets are now largely being ignored by the stock market (Ivanka Trump-Nordstrom conflict), but the fact that his 140 character-long messages could wipe out millions of market value in the first weeks and months after the elections made many people ask whether the president elect’s tweet craze could in fact be financially motivated. Adding to the many of his negative labels, one had to wonder if indeed Trump could be so unbelievably ruthless to misuse his power to time the markets? There is a legislation that would prevent it, of course.

The STOCK Act, adopted in 2012, was designed to restrict insider trading by members of the Congress and their staff. It bars President from: using nonpublic information for private profit; engaging in insider trading; participating in an initial public offering; intentionally influencing an employment decision or practice of a private entity solely on the basis of partisan political affiliation; and participating in a particular matter directly and predictably affecting the financial interests of any person with whom he has, or is negotiating for, an agreement of future employment or compensation.

But were it not for the law, the stock market’s increasing ignorance of Trump’s tweet tactics are unlikely to cause him a headache, because he was never interested in the short-term monetary gain based on some insider information. Each of his high-profile sackings, beginning with the removal of judges that opposed his almighty will and ending with the most recent firing of Mr. Comey, the(ex-)head of FBI show how much Trump is an ego maniac.

Maniacs are by definition not in control of themselves. They do not control events in order to achieve something, but rather they tend to act on impulses. Ten years after the great recession, maybe this is precisely what the world needs — a maniac. Things have become too stiff. Economic growth stayed sub-par and markets barely moved. The investors and bankers bonuses have fallen as there wasn’t any news to trade on really. But with Trump, markets have began to dance like crazy and millenials are finally moving out of their parent’s homes. Sometimes, the bad is good.

The Gordon Gekkos of this world, for one, may have a reason to celebrate. Bar the insider trading and the illegality of his conduct, in principle Gekko has sought to do what a typical hedge fund would — seek & trade on market gaps and inefficiencies. All hedge fund strategies, whether that be long/short position, or the many different arbitrage strategies (relative value or merger arbitrage), share a common trait in that they are trying to outperform market by exploiting market failures — buying parts of the market which are undervalued and selling short those that are too expensive.

But the hedge funds had a number of bad years now. Financial markets remained silent and apart from a few large ups- and downs, they have moved in tandem, which made it impossible for fund managers to make superior profits. Star fund managers like Bill Ackman have seen their fame falling and some hedge funds have began to return their money to investors, as they struggled to justify the 2/20 fee (2% standing management fee + 20% of all excess return). At the same time, passive investing have become extremely popular represented by the Exchange Traded Funds (ETFs), which although (only) passively tracking an asset, or a selection of assets by choice have delivered higher returns than hedge funds at a fraction of cost.

But their popularity might be turning financial markets toward numb masses of pools of money betting against each other. That combined with the Trump jumps makes a case for the return of hedge funds, because the old-new factor of surprise that Trump brings makes it possible to trade on market imperfections. Trump is certainly not Gordon Gekko, but they would get along just fine.

In past, investing in hedge funds has been a domain of super-rich and large institutional investors, both due to regulation and also as the minimum investment size was set too high. Now, it seems, most of us will be able to buy ticket to ride on the next hedge fund wave thanks to the already mentioned ETFs. Because they can be put together, so that they passively track & follow any investment strategy, ETFs have become a way to replicate what hedge funds do. Although the methods differ, they tend to observe a pattern in how hedge funds invest and project it into future to make their asset allocation. Beachhead Capital Management, for example, track the 40 largest long/short hedge funds and use historical information to predict how they will respond to market changes. Based on this, they then use ETFs to choreograph similar moves. Is there going to be a party on Wall Street again? Well, this time it seems we all can try it on our own skin.

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George Salapa

Founder finstora. Thoughts on money & culture. Some poetry. Mostly recycled literature. Wrote for Forbes and Venturebeat before.