One thing that I think about a lot around here is that the big modern multimanager, multistrategy hedge funds — “pod shops” like Citadel, Millennium, Point72 and Balyasny — have gotten into many of the businesses that big investment banks were in 20 years ago. The investment banks used to be well capitalized, lightly regulated, adventurous, and willing and able to commit their own capital to make markets more liquid and efficient. Now they are more regulated and risk-averse, and the hedge funds have stepped into some of those roles.

In particular, the big hedge funds are now in the business of committing their own capital to provide liquidity to customers. Well, the banks would call them “customers.” The hedge funds mostly wouldn’t. But there are a lot of institutional investors who need help to do certain trades, who used to get that help by calling up their investment banks, and who now often get it, indirectly, from hedge funds. Trades like:

• The basis trade: Big asset managers often want exposure to long-term US Treasury rates, but they do not want to buy Treasury bonds directly; they want to buy Treasury futures. Somebody needs to manufacture those futures, by borrowing money, buying bonds, and selling offsetting futures. Manufacturing derivatives used to be a standard investment bank business, but now hedge funds do a lot of it. The asset managers don’t call hedge funds looking for futures; they buy the futures on electronic exchanges. But on the other side of the trade, there’s probably a hedge fund that is selling futures and buying bonds to hedge.
• The dispersion trade: Lots of investors want to buy stock index options to protect them against a broad crash in the stock market, and lots of other investors want to sell single-stock options to get income from their stock holdings. There is a natural net supply of single-stock options and a natural net demand for index options. These things sort of offset — the index is made up of single stocks — but not entirely, [1]  so some intermediary needs to take the other side of those trades and manufacture index options out of single-stock options. Again, manufacturing derivatives out of other derivatives is a standard traditional investment-bank business, but this is increasingly a hedge fund trade.
• The index rebalance trade: Index funds own the stocks in a big index, and sometimes the index changes, getting rid of one stock and replacing it with another. The index funds all need to buy the new stock and sell the old stock, at the same time, to continue tracking their index. That is very messy: If the index funds all sell a ton of the old stock and buy a ton of the new stock on the rebalancing date, you might expect the price of the new stock to spike up and the price of the old stock to collapse. Someone needs to be on the other side of the trade, selling a ton of new stock and buying a ton of old stock to provide liquidity to the index funds. Again, providing liquidity for block trades is a traditional investment bank business, but now this is a hedge fund trade.
• Merger arbitrage: Sometimes a company announces that it will be acquired by another company or a private equity firm. Big asset managers own the company’s stock for reasons of their own (they like its fundamental prospects, it’s in the index, etc.), but after the merger is announced the asset managers no longer want to own it: The stock stops being an equity-like bet on the company’s prospects and starts being a specialized fixed-income-like bet on whether the merger will close. If the company is selling itself for $50 a share, payable at some uncertain date six to 18 months in the future, a stock investor might prefer to get $46 per share now rather than wait around for closing. So hedge funds will provide liquidity by buying up the stock at $46.

Merger arbitrage quite famously used to be a trade done by investment banks; Goldman Sachs Group Inc.’s merger arb desk of the 1980s created many of the hedge fund managers of the 2000s. But it is not a trade that banks do as much these days, because it takes big lumpy asymmetric risks: If you buy a lot of stock at $46 to bet that the merger will close at $50, and then the merger collapses and the stock trades to $30, you will lose a lot of money. And the way to make a lot of money in merger arb is for things to go wrong: The really lucrative trades are the ones where there is bad news, the stock trades to $30, you buy more, and then the merger closes and you get your $50. (Volatility makes liquidity provision riskier but more lucrative.) That sort of doubling down on risk is not attractive for a bank in 2025.

On the other hand, the big multimanager multistrategy funds increasingly look like the banks did 20 years ago. They are not swashbuckling takers of concentrated risks with long-term locked-up capital; they are huge, systemically important, highly leveraged financial institutions that prioritize survival and steady returns. They lever up low-volatility trades; they don’t take wild risks. They quickly fire traders who lose too much money. It’s not clear that merger arb is a good fit for them either. Bloomberg’s Liza Tetley and Nishant Kumar report:

[Ed] Cooper is among a slew of portfolio managers opting to run their event-driven strategies outside of the giant firms, as some of the podshops balk at the inherent volatility of the long-time industry staple that wagers on corporate events, including success and failure of deals. …

“There are certain strategies that fit very well within the big podshops and there are others that are much more challenging,” Donald Pepper, co-chief executive officer and head of multi-strategy at Trium Capital, said in an interview. “Merger arbitrage is one — I don’t really think its natural home is in a podshop.” ...

Berry Street’s founder and Chief Investment Officer [Orkun] Kilic said it’s impossible to run the strategy effectively with 5% draw-down limits, especially in an environment where rates are high. “The only way to make money is by going big when other people get scared, and outside a podshop there is more flexibility to do that,” he added.

In fact, when a deal reaches the point when pods are forced to sell, that often presents a buying opportunity, Kilic said, adding he caps his deals universe to 20-25 situations that he is fully familiar with and waits for something to trigger pricing volatility.

Pentwater Capital Management, for example, stuck to its United States Steel Corp. bet throughout the 18-month saga of Nippon Steel Corp.’s controversial acquisition of the company that divided the US steel industry and became a flashpoint in American politics. The bet, worth more than $1 billion until recently, contributed to a 21% gain for the fund during the first half of the year.

Relative to modern banks, big multistrategy hedge funds are more nimble and more willing to commit capital and take big risks. But as they get bigger and more bank-like, there are limits to that. If you are in the business of taking concentrated volatile proprietary bets, the big hedge funds might not be the right fit for you.

I don’t really know what is left to say about the MicroStrategy Inc. Bitcoin treasury trade. I mean:

1. MicroStrategy (which now calls itself Strategy) sells securities to raise money to buy Bitcoin.
2. If it can sell common stock at a premium to net asset value to buy Bitcoin, this is a good trade. That has nothing to do with Bitcoin. It’s just, if selling $1 of common stock increases your market value by $2, you should do that, because it is good for existing shareholders. (It is less obviously good for the people buying the new stock at a premium to net asset value.)
3. If it can borrow money cheaply to buy Bitcoin, and if Bitcoin’s price goes up a lot, this is a good trade. If you can borrow money at 5% interest to buy Bitcoin, and Bitcoin goes up by 20% a year, then you make 15%. 
4. MicroStrategy does all of this, a lot. It sells stock to buy Bitcoin, and it borrows money to buy Bitcoin, though these days it borrows the money mostly in the form of weird preferred stock deals with names like Strife and Stretch. [2] The advantage of preferred stock is that MicroStrategy never needs to pay back the money it borrows (it’s a perpetual instrument); the disadvantage is that the interest rate is higher. (Stretch pays a 9% coupon and trades at about a 9.25% yield; Strife pays 10% and trades at about 9.1%.) 
5. If it can keep doing this forever — borrowing lots of money at single-digit interest rates while Bitcoin grows faster than that, and selling stock at a large premium to net asset value — then, you know, great trade, can’t fault it. A “perpetual motion machine,” I have called it.
6. But why would that work? Why would new investors be willing to buy stock at a premium to net asset value forever? Why would people be willing to lend MicroStrategy money at decent rates forever? Some people obviously believe in this strategy, and it turns out that MicroStrategy can raise tens of billions of dollars from them. But other people don’t believe in the strategy, so they won’t buy MicroStrategy’s stock or lend it money; MicroStrategy probably (?) can’t raise hundreds of billions of dollars. 
7. But the whole thing only really works if you keep doing it: People bought MicroStrategy stock at a premium to net asset value because they expected it to raise more money to increase its Bitcoin holdings per share. If it runs out of people to buy new stock, it can’t buy more Bitcoin, which means that buying MicroStrategy stock is no better (arguably worse!) than just buying Bitcoin directly, which means it shouldn’t trade at a premium.

I said in Point 6 — and also wrote yesterday — that MicroStrategy probably can’t raise hundreds of billions of dollars, but that’s just my gut intuition; maybe it can. If you think it can, then go buy the stock I guess: There’s plenty more room for this strategy to run, MicroStrategy will keep increasing its Bitcoin holdings, and it will earn its premium. If you think that the trade has reached saturation and there’s no room to raise any more money, then the stock is probably overpriced. (Not investing advice.)

Today Bloomberg’s Sidhartha Shukla and David Pan report that the trade is, uh, maybe reaching saturation:

Michael Saylor’s once-celebrated Bitcoin experiment is mired in a market backlash, raising questions about the sustainability of the corporate-treasury model he pioneered.

Shares of Strategy Inc., formerly MicroStrategy, have fallen 15% this month, erasing much of the premium the firm long enjoyed over its Bitcoin holdings. The company, long a bellwether for crypto sentiment, is now drawing fresh skepticism.

At the center of the concern is the firm’s financing tactics. Strategy’s new preferred stock — billed as its main vehicle for future Bitcoin purchases — has drawn tepid demand. A recent sale raised just $47 million, well short of Saylor’s ambition for blockbuster capital raising. To make up the shortfall, the company has returned to common-share issuance, despite earlier pledges to limit dilution. That reversal has rattled investors. …

In late July, the company pledged not to issue shares at a multiple below 2.5, with narrow exceptions. Two weeks later, the guidance was loosened, and on Aug. 25, the company sold nearly 900,000 new shares.

Some investors online viewed the move as a breach of trust. And issuing equity below mNAV now risks a negative flywheel: falling stock weakens the ability to buy Bitcoin, eroding confidence, further driving down the premium.

Right, yes, issuing stock at above net asset value to buy more stuff is accretive to shareholders, and Strategy’s essential pitch is “we can keep doing that.” Issuing stock at below net asset value to buy more stuff is of course dilutive. If you can’t sell stock at a premium then the whole thing stops working. Your ability to sell stock at a premium depends on your ability to sell stock at a premium. It is circular, and thus fragile.

I should say that the failure mode here is, you know, fine. For MicroStrategy’s premium to be justified, it needs to keep finding new investors to buy new stock at a premium; when it runs out of new investors the trade collapses. But when trade collapses, MicroStrategy will just be a giant pile of Bitcoins. Which are worth a lot. Like, assuming that the price of Bitcoin holds up, MicroStrategy would still be worth tens of billions of dollars even if it couldn’t sell more stock at a premium. [3]  For Saylor, at least, this is a very good trade even if it ends: He has, through hype and crypto and clever use of the capital markets, transformed a small software company into a giant investment company with tens of billions of dollars of permanent capital. 

A well-known problem in crypto is extrapolating a “market cap” from a trading price. You invent some crypto token, you issue 999 billion tokens to yourself for free, and you issue 1 billion tokens to other crypto traders for free. Then someone sells you 100 of their tokens for $1. Now each token is worth $0.01, so the token has a market capitalization of $10 billion and your stash of 999,000,000,100 tokens makes you a multibillionaire. This is correct as a matter of arithmetic but quite misleading as a matter of economics. Nobody has invested $10 billion of capital into your token, and if you tried to sell all your tokens you would not clear $9.99 billion, or probably $9.99 million for that matter. The trading price of a teeny tiny sliver of tokens does not necessarily reflect the economic value of the total supply of tokens.

This is not really a crypto thing, though; it’s true of every traded fungible thing, including stocks. The Bloomberg Billionaires Index tells me that Mark Zuckerberg’s net worth is $262.5 billion, consisting mostly of $257.5 billion of Meta Platforms Inc. stock. You get that number by multiplying his share holdings by Meta’s trading price. Meta’s stock trades about $9 billion per day; if Zuckerberg wanted to sell all his stock it would take months. Also people would notice, and they’d be like “wait Zuckerberg is selling out his Meta stock??” and the stock would go down. The conversion rate between Zuckerberg’s Meta stock and dollars is not exactly the rate implied by the market price; that’s just the best estimate you’re going to get.

People notice this more in crypto, because crypto tokens sometimes push it to extremes. You can, and people do, print as many tokens as you want and get very high market capitalizations without much trading. Meta’s stock does trade $9 billion a day, so its market cap is pretty reflective of real supply and demand. But that’s not true of every stock. Some companies have a lot of shares outstanding, but for whatever reason most of them are not available to trade, and the ones that do trade do not necessarily reflect the value of the whole company.

This sometimes happens for weird idiosyncratic reasons. For instance, we have discussed QXO Inc., Brad Jacobs’s building products rollup company, which for a while had $4.5 billion of investor capital in locked-up shares, and a tiny sliver of publicly traded shares that traded at a price implying a $110 billion market cap. That was a product of a weird reverse merger and retail investor enthusiasm and inattention; you don’t see that too much at big companies.

But there is one very common situation where the stock price might not reflect real supply and demand, which is: initial public offerings. When a company goes public, here is roughly what happens:

1. The company has, say, 100 million shares outstanding.
2. It sells 10 million of them in its IPO; the other 90 million are held by executives, employees and venture capitalists, and are locked up, meaning that they can’t be sold into the market for months after the IPO.
3. It tries to sell the 10 million shares mostly to good enthusiastic institutional shareholders who will be long-term holders of the stock and won’t flip it as soon as the stock opens for trading. Which means that, when the stock does open for trading the day after the IPO, most of the stock won’t trade, because it will be held by those long-term committed investors.
4. So only like 1 million shares — 10% of the stock sold in the IPO, but just 1% of the company’s total shares outstanding — will be available to trade on the first day.
5. Meanwhile lots of investors who didn’t get shares in the IPO want to buy that stock in the market.

These numbers are just illustrative and probably too low, but they’re in the right ballpark. [4] If a lot of people want to buy a company’s stock, but only 1% of the stock is available for sale, then that stock will probably trade at a high price. If you just multiply that price by the number of shares outstanding, you will get a very high market value for the company. But that value is not necessarily a fundamentally accurate valuation of the company. It also reflects the short supply of the company’s shares.

(In modern markets you see a similar situation with big private companies: They have even less stock available for ordinary people to buy, but not none; there are secondary markets and special-purpose vehicles that allow outsiders to buy stock in SpaceX or OpenAI or whatever. As we often discuss, those shares can trade at big premiums to the actual values of the companies in institutional fundraising markets, but again this is a matter of restricted supply rather than valuation. The other day I speculated that OpenAI might be a trillion-dollar company, judging by its retail trading price, but I am not sure that makes it “officially” a trillion-dollar company.)

This is a big part of the explanation of the “IPO pop.” A company goes public, it sets an IPO price for its stock that entices long-term institutional investors to buy 10% of its stock, and then it opens for trading and trades to the price that entices short-term retail investors to buy 1% of its stock. The demand curve slopes down; you can get a higher price per share for 1% of your stock than for 10%. So the IPO prices at the 10% price, and then the stock trades up to the 1% price. The people who bought in the IPO have an instant profit, though for most of them (the long-term holders) it is unrealized. 

And then people complain that the company left money on the table by not selling shares at the higher trading price. But it couldn’t have sold 10% of its stock at that price. That’s the price for 1% of its stock.

This is not the only explanation for the IPO pop (the pop also compensates investors for taking risk, etc.), but it’s an important one. Here’s a new paper by Joseph Henry and Terrence O’Brien titled “How much money is really left on the table? Reassessing the measurement of IPO underpricing”:

IPO issuers are thought to collectively leave billions of dollars "on the table" by underpricing shares relative to the initial trading price. However, this trading price corresponds to relatively small share volume. Because some investors are more optimistic about the shares' value than others, the trading price exaggerates the maximum feasible IPO price for the larger IPO quantity. We assess the extent of the mismeasurement by introducing a new measure of underpricing that incorporates both share prices and their associated quantities. Using data from 2,937 IPOs from 1993-2023, our evidence suggests that IPOs are underpriced by substantially less than is commonly believed, perhaps up to 40% less.

In particular, my schematic numbers above appear roughly plausible: In their sample of 2,937 IPOs, on average roughly 10% of the shares sold in the IPO become available for trading on the first day. [5] So it’s not surprising that the price goes up.

My basic view is that working in the financial industry is an essentially mercenary career: The money is pretty good, the job security is not so good, and you should be ready to be fired unsentimentally at any time. Still this is a bit rough:

ANZ has issued an apology and offered psychological counselling to more than 100 senior bankers after they received an email sent in error instructing them to return their computers, ahead of the news that they were going to be fired.

The Australian bank sent out the automated emails ahead of schedule on Wednesday. It held an online call with the staff later that day to confirm that those who had received them would be losing their jobs. …

ANZ had been planning to tell staff about the job cuts next week. An ANZ spokesman said the bank had “apologised unconditionally to our staff impacted”.

The Financial Sector Union, which represents employees in the finance industry, said it had been contacted by members over the emails, which had caused “panic and distress”.

“This is a disgusting way for workers to learn about job cuts — through a botched email instead of a respectful conversation,” said the union’s national president Wendy Streets.

Yeah, I guess, but the outcome is the same? Like ANZ “apologized unconditionally” for the email, but it didn’t hire them back.

One thing you could do, as a hedge fund manager, is conduct rigorous fundamental analysis of public companies and buy the stocks that you think are fundamentally undervalued. Another thing you could do, as a hedge fund manager in the 2020s, is try to predict which stocks will capture the attention of retail investors online and become meme stocks.

A third thing you could do, though, is buy stocks and try to make them meme stocks. We have talked a few times about meme-stock activism, in which professional(ish) investors buy shares of actual or potential meme stocks and then tweet moon emojis and stuff to try to make them meme-ier. In 2025, the determinant of stock prices is not always fundamental value; sometimes it is Reddit popularity. It is hard, as a hedge fund manager, to influence fundamental value; you can try to push management to make strategic changes, but that is expensive and they might not listen to you. It’s not easy exactly to be cool online, but it might look easier. It’s relatively easy to tweet moon emojis.

Anyway we have talked a little bit about Eric Jackson, who runs a firm called EMJ Capital and who has tweeted early and often about Opendoor Technologies Inc., which became a big meme stock last month in part because of his efforts. His latest schtick on X is apparently that he is …. standing outside of Drake’s house in Toronto “until he buys at least ONE share of $OPEN”? I’m sure that there is so