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The Morning Brief: At SALT, Few Big Themes but Lots of Fear
As I headed home from the 8th annual SALT Conference at the Bellagio Hotel in Las Vegas, I had two over-riding thoughts: One — does “What happens in Vegas stays in Vegas” apply to calories consumed? Didn’t think so.
Two — or the rest of the year, the presidential campaign is going to be a lot more interesting than the financial markets.
The conference was punctuated by some testy moments, like when Milton Berg, founder and CEO of MB Advisors, and Don Brownstein, chief executive officer and chief investment officer of Structured Portfolio Management, debated the virtues of short-term trading; T. Boone Pickens supported Donald Trump’s temporary ban on Muslim visitors; Democratic strategists Donna Brazile and Republican strategist Karl Rove debated which party should take credit for giving women and blacks the right to vote. It was pretty intense for about a full minute. And transgender activist Caitlyn Jenner railed at the conservative cognoscenti over the bathroom gender issue, although she did stress she won’t vote for Hillary Clinton. Go figure.
The attendees also saw billionaire Mark Cuban hang with the crowd at the Thursday night concert performed by the Killers and heard comedian and FOX News suck-up Dennis Miller make numerous obscure references that few ever seem to get.
But otherwise, “There was no over-riding thing, idea, strategy that came out in a highlighted way,” said Ray Nolte, co-managing partner and chief investment officer of SkyBridge Capital, the host of the event, in an interview Friday morning after all of the hedge fund panels were completed. “No one was euphoric for a strategy.”
Last year, merger arbitrage, activism and event-driven strategies dominated the discussion amid excitement over their potential returns. But remember, last year’s conference took place before the market’s summer swoon and subsequent heightened volatility, which plunged half of all hedge funds into the red by year-end.
Otherwise, several major themes seemed to emerge from this year’s conference:
One: Hedge fund managers did not have their usual hedgie swagger. While we noted that at the recent Sohn Investment Conference the top-shelf managers presenting their ideas seemed mostly bearish, at SALT there were some bears but the rest were very cautious or defensive. You didn’t hear about some market or sector that was “way undervalued” or a “no brainer” or a “potential ten bagger.” You also barely heard about the next hot Internet stock. No one recommended Facebook, Netflix or the common stock of Valeant Pharmaceuticals. Yes, Passport Capital’s John Burbank talked up Tencent, the Chinese internet giant. But otherwise, we were more likely to hear about relatively staid companies such as Sherwin Williams, the paint company singled out by 33-year Wall Street veteran Richard Chilton Jr. of New York-based Chilton Investment Co. “They’re playing defense,” one allocator told me Friday day at the after-pool party. Maybe part of the reason was that a number of managers presenting ideas are currently in the red for the year, and several lost money last year.
Two: As has been widely reported by now, investors let it be known they are finally fed up with paying high fees for mediocre or lousy performance, and managers were finally willing to concede there is a problem. Roslyn Zhang of the enormous China Investment Corp. sovereign wealth fund basically said on a panel that she thinks most hedge funds’ performance stinks, and Omega Advisors’ Leon Cooperman conceded that fees need to come down. The 73 year-old billionaire has been humbled of late, posting a 10 percent loss last year and another 5.6 percent decline in the first quarter of this year despite a nearly 5 percent gain in March. He has also suffered several billion dollars in redemptions. At a separate press briefing, Kynikos Associates’ James Chanos, who has also seen a big erosion in assets in recent years, asserted that hedge funds should have a hurdle rate before they receive their performance fee, which he requires.
Three: Credit strategies seemed to enjoy a larger profile at the conference. Part of this was by design; Nolte confirms there were maybe one or two more credit panels than usual. Structured credit, collateralized loan obligations and other strategies were discussed by niche managers as well as macro managers. For example, Clayton DeGiacinto, founder and chief investment officer of Axonic Capital, said the asset class has become more appealing to hedge funds as more of the big investment banks have pulled out of the market. Christopher Pucillo, CEO and CIO of Solus Alternative Investment Management, said commercial mortgage-backed securities — known as CMBS — is his firm’s biggest allocation on the long side, while the firm has been shorting high-yield debt. David Rosenbloom, a partner at Prophet Capital Asset Management, talked up the virtues of collateralized loan obligations, or CLOs, which are packages of bank loans. “We love CLOs,” chimed in Andrew Rabinowitz, partner and chief operating officer at Marathon Asset Management. Even Cooperman, mostly known as a long-short specialist, said he has 20 percent of his assets in structured credit.
Four: China’s problems were an ever-present topic of discussion. It was mentioned many times, and mostly in terms of the degree of direness. For example, Austan Goolsbee, formerly chairman of President Obama’s Council of Economic Advisers, told the audience China is a lot worse off than what many thought it was. He said banks may need to be bailed out in China, while Hayman Capital Management’s Kyle Bass called its credit system one of the great macro imbalances. “It will come unglued,” predicted Graham Capital Management’s Kenneth Tropin, speaking on a panel. “The current regime wants to kick the can down the road. Speculation by investors in China is escalating at unprecedented levels. I think the government wants it (the day of reckoning) on someone else’s watch.”
Five: The vitriolic, super-charged presidential election campaign was also very apparent in the room. And not just because there was one panel of political pundits recreating their cable news battles. Or that former House Majority Leader John Boehner and former New York City mayor Michael Bloomberg were also highlighted in one-on-one interviews. Even the investment-oriented panelists were asked to weigh in on the upcoming election. T. Boone Pickens, Jr. was asked to defend his support for Donald Trump. James Chanos lamented that Joe Biden didn’t run for president. Blue Harbour Group’s Clifton Robbins was asked about being a big fund-raiser for Hillary Clinton, only to correct the questioner that it is his wife who is the one helping Clinton, a long-time friend. And Sam Zell told the audience “history won’t be kind to the last eight years,” blurting out “bullshit” when he was told that the unemployment rate halved during that period, even though it did. Anthony Scaramucci, the founder of SkyBridge, was formerly a harsh critic of Donald Trump’s but has since changed his tack in a big way, using the conference as an opportunity to try and raise money from hedge fund bigwigs and other captains of industry in support of the controversial candidate. Trump’s fundraiser, Steven Mnuchin, met with several attendees — though it’s hard to say how Trump will fare with a crowd he has lambasted in the past over carried interest and other issues. As for his abrupt about-face on Trump, Scaramucci told Alpha: “I’m going to use a Wall Street expression: I think there’s an arb spread between what he’s saying and what he’s actually going to do. I’ve spent a lot of time with him in the last couple of weeks, and I’m way more comfortable with him today than I was six months ago, and I’m looking forward to working with him.”
My final take: The contrarian in me is looking for a big rally in global stocks, including China, by year-end. Love that wall of worry.