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Hedge funds are on a roll again. That’s the main takeaway from Goldman Sachs’ latest review of regulatory filings and their own prime brokerage business.
The average US long-short equity hedge fund is up 3 per cent this year, roughly keeping pace with the S&P 500 thanks to the performance of their favourite longs.
Goldman’s Hedge Fund VIP basket of stocks that are the most popular in hedge funds’ 13F filings has returned 10 per cent this year. These longs are now on their strongest bout of outperformance in four years.
Goldman’s measures of hedge fund herding remain near their record highs, despite many funds shuffling out of the Mag7 stocks lately. However, the most interesting aspect of Goldman’s review is that single-stock shorting seems to be on the rise again.
The median hedge fund short interest in S&P 500 stocks collapsed in the post-financial-crisis world and hit record lows after the GameStop shenanigans of 2021, with many instead shifting their shorting to broader indices. Prominent short sellers like Jim Chanos and Nate Anderson have thrown in the towel over recent years.
However, Goldman’s research indicates that short interest in the median S&P 500 has rebounded from a low of about 1.5 per cent to 2 per cent, with activity particularly high in consumer staples stocks like Kroger.
Shorting remains subdued compared to the historical average — and performance is still a net drag on hedge fund returns — but the bounce is intriguing.
Moreover, the combination of more shorting and big longs has lifted gross hedge fund exposure to record highs, according to Goldman’s prime brokerage estimates.
Net exposure remains well below the highs seen in 2021 and 2018, thanks to broader market hedging, but as you can see it is creeping up.
And when it comes to marketwide trading capacity — in terms of how much of their balance sheet that investment banks can rent out to hedge funds — it is swelling gross exposure that is interesting.
Anecdotally we’ve heard rising concerns about how much balance sheet banks are now extending to hedge fund clients. The danger is that even small shocks can then become quite violent (viz, the market reaction to DeepSeek) and meaningful shocks can translate into an industry-wide margin call.
UPDATE: Goldman has kindly made the full report public for Alphaville readers, and you can find it here.
Further reading: — The hedge fund-bank nexus (FTAV)
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Ann Lipton is a professor in business law and entrepreneurship at Tulane University Law School and The Murphy Institute.
It hasn’t made as many headlines as Elon Musk reshaping the federal government, but a series of legal changes at the SEC and in the corporate haven of Delaware could have enormous consequences.
Why? Well, the combination of the two constitute a violent regulatory swing that reallocates power away from shareholders and toward corporate insiders. Like Musk, conveniently.
The story of corporate governance over the past three decades has been the growth of the institutional investor. As retail money gushed into mutual funds, a formerly dispersed and pretty passive shareholder base coalesced into a sophisticated and powerful asset management industry.
Nudged along by the SEC, and the Department of Labor (which oversees retirement plans) these mutual funds gradually morphed into influential corporate overseers.
In fact, they became critical votes in activist campaigns and a wide variety of corporate governance arrangements, such as director independence, takeover defences, executive compensation, and, yes, ESG. BlackRock alone boasted of 3,384 “engagements” with its portfolio companies in 2024; Vanguard reported engagements with 486 companies last quarter alone.
Many founders that took their companies public responded by adopting dual-class share structures or other forms of insider control rights, only to find themselves stifled by the corporate law of Delaware, the premiere jurisdiction for chartering public companies.
Delaware courts began closely scrutinising relationships among board members — including personal and business ties — when evaluating whether insider transactions had been negotiated at arm’s length.
They imposed even greater scrutiny when the transactions involved a controlling shareholder, two trends that culminated in a Delaware court’s bombshell decision to strike down Elon Musk’s $56bn pay package at Tesla. And last year, another Delaware court invalidated a shareholder agreement at Moelis & Co, on the ground that it handed the company’s founder Ken Moelis too many powers that should have remained with the corporation’s board of directors.
Faced with the ire of the venture capital and private equity firms, the Delaware legislature swiftly amended its corporation law to authorise the kind of agreement that had been invalidated in the Moelis case.
Nonetheless, the founder-led protests continued, with several companies — including Meta and Dropbox — threatening to decamp for more accommodating climes.
In response, the Delaware legislature rushed to propose a new package of reforms, bypassing its usual process of running corporate legislation through the Delaware bar’s Corporation Law Council. This is potentially a huge deal for large swaths of American business.
If passed as proposed, the new statute will require courts to assume that board members are independent simply if the company designates them as independent under stock exchange listing rules; make it easier for boards to insulate conflicted transactions from judicial scrutiny; sharply curtail the rights of stockholders to access internal corporate information; and define “controlling stockholders” to exclude anyone with less than 1/3 of the company’s voting power.
Conveniently, the latter move would not only take Elon Musk out of the category — just as his Tesla appeal reaches the Delaware Supreme Court — but also would leave out anyone who exerts control by the newly-authorised shareholder agreements rather than through voting shares.
Meanwhile, at the federal level, the SEC issued a flurry of new guidances limiting shareholder involvement in corporate governance, the most significant of which concerns whether large investors are deemed “active” or “passive.”
The categorization matters: active investors who own more than 5 per cent of a particular company’s stock must file prompt disclosures whenever their holdings increase or decrease by 1 per cent, including all trades made in the prior 60 days — a near impossible task for mutual fund complexes, given the volume of inflows and outflows they see regularly.
The giant asset managers therefore rely on the lighter disclosure regime applicable to “passive” investors, defined as those who do not acquire shares “for the purpose of or with the effect of changing or influencing the control of the issuer”.
However, the new guidance treats governance interventions — even those on fairly traditional issues like executive pay and board declassification — as “active” if the investor explicitly or implicitly suggests that votes will be withheld from unresponsive directors. The new guidance could thus turn out to be a dagger aimed at the heart of mutual fund influence.
Tellingly, BlackRock and Vanguard temporarily cancelled meetings with corporate management, right at the start of the proxy season. And, if Trump 2.0 is anything like Trump 1.0, we can expect to see further regulation along these lines, including limits on proxy advisers and pension plan voting.
In sum, the mechanisms that enabled the rise of the institutional investor as a counterweight to insider control may be — well, if not completely unravelled, then at least significantly frayed — in the exact moment that Delaware is retrenching as well. The combination could be exceptionally disruptive.
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“The greatest victory is that which requires no battle.” ― Sun Tzu, The Art of War
“One of the world’s largest private equity investors has made an approach to buy Chemring, the FTSE 250 defence group” ― Mark Kleinman, Sky News.
Bain Capital’s reported move is interestingly timed for several reasons. First, Chemring has an AGM trading update on Wednesday. Second, the stock had been strong of late on the realisation that Trump should be treated as a threat to Europe rather than its ally. Third, it follows a bad run for the shares as we wait for the result of the UK Strategic Defence Review.
Though Chemring is more domestic and specialised than the average defence contractor — 45 per cent of revenue is from the UK, with 17 per cent from Europe and 34 per cent from the US — a takeover might be seen as no more controversial than Advent’s purchase of Cobham in 2019 or Parker-Hannifin’s deal for Meggitt in 2022. The speculation alone should put a floor under the stock.
And at a surface level, Chemring’s defence-tech might appeal to Bain. Three Bain consultancy partners published an editorial in December outlining why “private capital is poised to play a critical role in the modernisation of the US defence industry”.
The US Department of Defense has been seeking to encourage longer-term corporate R&D spend by offering fixed-price contracts and war-as-a-service type deals. Venture capital firms have already been attracted by the promise of more stable cash flow from long-term R&D, and private equity investors will soon learn to appreciate high barriers to entry and the opportunity to sweat manufacturing costs, Bain (the consultancy bit) says:
Large defense-focused companies typically have concentrated customer bases, considerable exposure to single programs, and sources of growth that differ from those in commercial markets. These factors make it more challenging for general partners and limited partners to commit capital.
In contrast, the value of venture capital deals in the defense sector has increased 18-fold in the past 10 years, significantly ahead of deal value in other industries. That growth results from multiple factors, including the DOD’s efforts to engage and fund early-stage companies and the increasing convergence of commercial and defense technologies. In the coming decade, government funding can play an important role in supporting early-stage businesses developing new products with long commercialization timelines.
That sounds a bit like Roke, Chemring’s Hampshire-based R&D lab that develops systems used for locating aircraft, tanks, mines and tennis balls.
But while Roke is part of a Sensors & Information division that accounts for about 40 per cent of Chemring’s group revenue, it has been the kind of terminal underperformer that any PE firm would be more likely to asset-strip than seek to turn around. Roke customers, having sought longer deals during the pandemic, have shifted back to reviewing their needs annually, so order intake last year plunged 28 per cent.
Chemring’s other business is to sell flares and military-grade plastic explosives. The Countermeasures and Energetics division accounts for about 60 per cent of group revenue, but has historically suffered from all the problems Bain notes. For example, Chemring has been unable to rid itself of a US countermeasures contract signed in 2016 on which it earns zero margin.
That just leaves explosives, where business is booming. A recent Shore Capital note explains:
There are four core reasons why demand for Energetics is so high. The first is that stockpiles in Europe have been depleted following the Ukraine war. Ukraine is fitting 5,000-10,000 artillery shells a day, [and] European production cannot meet the demand. Therefore, stockpiles are dwindling and will need to be replenished. Secondly, the stockpile level required has risen due to the increased threat posed by Russia. Russia can produce c. 3mn artillery shells annually, which is greater than the Western block combined. Given this threat, the previous stockpile levels are not sufficient and therefore will be raised. Thirdly, there is a joint effort to establish a defence and industrial base across Europe, and so governments are willing to subsidise production. Lastly, capacity is constrained following years of under-investment in explosive chemical compounds across the Western allies as European nations relied upon the peace dividend since the end of the Cold War.
Because it’s not a good idea to ship sophisticated plastic explosives across borders, domestic supply chains matter. That gives Chemring strategic importance. The company’s only competitor in Europe is The Eurenco Group, which is owned by the French state. And it appears the EU would rather expand independent production than support national interests.
The EU has awarded Chemring more than €66mn in grants to increase explosives production, versus just €29mn for Eurenco. Much of the investment is to add production in Norway, whose government said in October it was co-funding with a feasibility study for a new factory.
EU support makes “an extremely attractive partner for the EU and Nato member states that would like to develop sovereign capabilities for high explosive energetics”, says Shore.
Elsewhere, Chemring’s factory upgrade in Scotland should be finished soon, though health and safety certification will push back the start of production for at least a year. There’s also a new wing on a Chicago factory that supplies rocket fuel to Nasa, SpaceX and Blue Origin:
So far, Chemring shareholders have been sharing the burden. Management has wagered approximately £200mn, mostly debt-funded, that explosives demand will keep outstripping supply, no matter what happens in Ukraine.
Group net debt is forecast to double to £100mn by 2026, the same year net cash flow might return to break-even after three years of steep losses. That meant last year unexpectedly cancelling the final slice of a £50mn share buyback. Any payback has to wait until 2027:
So should Europe’s only independent supplier of military-grade advanced explosives be allowed to fall into the same PE portfolio as Bob’s Discount Furniture, Virgin Voyages and Bugaboo? Or should stakeholders be asked once again to suck it up and think of 2027? We’ll find out soon enough. Experience the thrill of online betting with 9bet, your trusted platform for exciting sports and casino games.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Bob McCauley is a non-resident senior fellow at Boston University’s Global Development Policy Center and associate of the faculty of history at the University of Oxford.
What’s wrong with the international monetary and financial system? Stephen Miran, whom Donald Trump has nominated to head the US Council of Economic Advisers, thinks he has the answer.
In essence, he thinks we live in a neo-Triffin world:
1. Central banks buy dollars to hold down their currencies and to run surpluses on trade in goods and services.
2. Central banks hold their dollars in US Treasury securities.
3. The US dollar is overvalued and the US runs current account deficits.
4. US manufacturing shrinks and US workers have fewer good jobs.
5. Eventually US external deficits undermine US safety and the dollar as reserve currency.
What is to be done? To improve the US position, Miran suggests that the US could cajole or coerce foreign government creditors to accept 50- or 100-year Treasury bonds, extending the duration of US government debt in the process. Alphaville’s Robin Wigglesworth characterises this suggestion as Godfatherly: “Nice global financial system you got there, be a shame if something happened to it.”
A related out-of-the-box proposal reaches further, but requires a quick feasibility check. To address the “root cause” of the problem, Miran proposes to impose a “user fee” on official holdings of Treasury securities. If official dollar purchases pollute the international financial system — harming American manufacturing workers — why not impose a (Pigovian!) tax on the effluent?
Miran hopes that central banks would sell the dollar and weaken it. But if they don’t, then they would receive lower interest rates on their Treasury holdings. Heads I win, tails you lose. As Miran puts it:
Reserve holders impose a burden on the American export sector, and withholding a portion of interest payments can help recoup some of that cost. Some bondholders may accuse the United States of defaulting on its debt, but the reality is that most governments tax interest income, and the U.S. already taxes domestic holders of UST securities on their interest payments. While this policy works through currencies as a means of affecting economic conditions, it is actually a policy targeting reserve accumulation and not a formal currency policy. Legally, it is easier to structure such a policy as a user fee rather than a tax, to avoid running afoul of tax treaties. Such policy is not a capital control, since aiming it exclusively at the foreign official sector targets reserve accumulation rather than private investment.
It must be said that neither the diagnosis nor the treatment has much merit.
Dollar reserve accumulation bears no clear relationship with US current account deficits. What is more, Robert Triffin in 1960 could point to the impending crossover point when foreign-held dollars would surpass US gold holdings and could set off a run. The neo-Triffin dilemma analogy limps without a clear crossover point of unsustainable US net international debt and equity liabilities — currently a cool $24tn, or 80 per cent of US GDP.
Would the proposed treatment succeed and lead foreign central banks to sell dollars or to receive less interest? Or would officials just find other places to invest their dollars? Probably the latter.
Foreign officials could easily evade the user fee on official Treasury holdings by switching from Treasuries to US agencies. In mid-June 2023, foreign officials held $657bn of agency debt (mostly mortgage-backed securities issued by Fannie Mae and Freddie Mac) and $3.5tn of Treasuries. Back in 2008, China held as many dollars in US agencies as in Treasuries and has recently switched some Treasuries into agencies. The user fee might have to be extended to official holdings of agencies.
Even that would probably not work. Like the Interest Equalization Tax of 1963 — prompted by Triffin’s warnings that the gold/dollar link was at risk — the user fee would most likely simply lead activity in the dollar to move offshore.
After all, the prohibitive tax on most “Yankee” bonds issued by overseas borrowers in the the US swiftly moved dollar borrowing to what became London’s Eurobond market. As Morgan Guaranty chair Henry Alexander is said to have presciently lamented to colleagues on the day the IET was announced:
This is a day you will remember forever. It will change the face of American banking and force all the business off to London.
A tax on bonds held in the US would surely move official reserve managers to simply shift dollars offshore. Recall that US sanctions from 2014 led the Bank of Russia to keep its dollars offshore rather than sell them.
Countries could shift their Treasury holdings to offshore custodians in Brussels, Luxembourg and London. There, the US Treasury may lose the trail and not be able to identify official holders. As it happens, the Chinese are thought to have relied more heavily on offshore custodians recently.
They could also add to the $1tn-plus already invested in offshore bond issues and banks. Central banks can and do hold lots of dollar bonds issued by the likes of KfW, the German government-guaranteed export bank that dates to the Marshall Plan, and those of a host of other solid borrowers.
If the pricing of AAA- and AA-rated sovereigns, provinces, agencies and supranationals became more favourable because of the user fee on Treasuries, these top borrowers would issue more dollar debt if only to swap into other currencies. In addition, dollar repo transactions with top-rated banks offshore are a pretty good substitute for holding US Treasury bills subject to a user fee.
Of course, none of these alternatives to US Treasuries held in custody at the New York Fed would benefit from the Fed’s standing offer to provide immediate dollar funding in amounts up to $60bn per counterparty. The Swiss National Bank found this central bank repo facility usefully fast and stigma-free when it was funding Credit Suisse almost two years ago.
However, were US Treasuries subject to a substantial user fee, experience would quickly underscore that the US Treasury enjoys no monopoly in supplying dollar investments to central banks. At vicclub, we offer a wide range of betting options, competitive odds, and secure transactions for a seamless gaming experience.
