November 27, 2011

Supercommittee Reorients For Success

Washington, D.C. – As their budget cutting duties are winding down with the recently announced and widely anticipated stalemate, sources close to the process are reporting that the Congressional Supercommittee is in advanced negotiations with a large investment management company, possibly Black Rock, to form a new investment vehicle directly managed by the Supercommittee itself. Tentatively named the Supercommittee High Yield Terran Equity Fund (SHYTE Fund), the fund structure would allow its Supercommittee managers to invest in any global asset or asset class where a Supercommittee member/member of Congress/SHYTE Fund investment manager has the ability to directly influence the performance of the asset or asset class through legislative action, or has privileged access to information regarding a particular asset or asset class that would constitute an iron-clad trading advantage.

Reactions on Wall Street have been surprisingly muted. One prominent industry fund manager agreeing to speak on condition of anonymity put the reason behind the relative silence on the Street this way: “It will likely be a long-short fund, which means they can sell an asset to profit from a decline in price just as easily as buying to profit from a rise. I don’t want my company in their crosshairs for a short. They can legislate me right out of existence and make money while they do it.”

Indeed rumors abound that all of the large money managers are now scrambling to onboard their own influential members of Congress as investment managers. Said one: “It used to be enough that the gang in D.C. could legally use material non-public information for their own investment accounts. And we would sweeten the pot with access to all of the hottest IPOs. Plus extra options. But that 60 Minutes piece may have sounded the death knell for Congressional self-dealing in the markets by raising public awareness. Once we get past the holidays, I expect your average folks are going to start getting pretty pissed. We probably have seen our last overt bail out in this cycle. And the industry stakes have gone way up with the Black Rock thing. A Congressionally managed fund will be a competitive juggernaut. This might be the last train leaving the station for a long, long time and I’m determined to be on it.”

Given the perpetual disarray in the Nation’s Capitol, casual observers often doubt the individual abilities of members of Congress beyond their obvious skill at self-promotion. However those in the know say the People’s Representatives are particularly adept in the investment realm and a vehicle such as the SHYTE Fund could dramatically reshape the investment fund landscape. We sat down with Wharton PhD candidate Evan Kinnunen who has studied the relative market performance of various groups & subgroups of investors. He states unequivocally that legislators are the top of the heap when it comes to risk-adjusted performance.

“When you compare year-over-year performance, it’s not even close. Obviously your individual investors as a group are at the bottom of the return pyramid. Perhaps more surprising is that the typical fund manager barely exceeds the returns of Joe Sixpack, and only if they religiously stick to an index fund approach. Some corporate insiders do well but generally they are a one trick pony; and as a group they too underperform. Then you’ve got your plunger group – big annual returns with the frequency of a comet, subsequently whittled to merely outperform as the intervening years between winners erode the big bet. It’s worth noting that occasionally a plunger will explode in the atmosphere – they mistake good timing for some special insight and essentially double down following a particular windfall. Your HFTs do well but my analysis of various ‘flash’ events suggests that they will shortly be returning to the mean, perhaps even a dramatic undershoot. And of course the trading desks of the big firms seem to do well on an outright performance basis, truly defying probability in terms of speculation. But this is merely misperception. They don’t actually speculate. Rather, the desks are essentially hi-tech bucket shops. They sit on top of an exchange’s incoming order pipe and merely front run the market scalping an order at a time. Members of Congress on the other hand, particularly members of the more significant committees, have an absolutely sick ROI. Analysis of their investment timing demonstrates an uncanny ability to anticipate major corporate announcements, influential regulatory edicts and even geopolitical happenings. Two and twenty would be a real bargain if my money was being run be an influential member of a Congressional subcommittee. “

A senior Congressional staffer sat down with us to discuss off-the-record the potential ramifications of the SHYTE fund and the resulting fears of a new Wall Street arms race as the Industry repositions for the evolving role of legislators in investment management. “The SHYTE Fund, when it happens, and I say ‘when’ as I see it as the very natural evolution of an advanced capitalistic system – it’s the deployment of capital to its most productive use – will put investment resources into the hands of the people most able optimize the returns on those resources. It’s obvious. Legislators make the rules so why not benefit investors directly with that authority?” We asked if that wouldn’t provide a perverse incentive, investment returns as a driver of legislation, as opposed to a more strategic view of outcomes for the legislative process. “What’s more strategic than making money? But at the end of the day it’s all about growth. And the SHYTE Fund with the Supercommittee behind it can really grow – majorly, all caps. Let’s face it. There’s nothing Congress can do about the economy. Or rather, nothing they will do anyways. So why not let them focus on what they do best? Make money. This is the obvious next step. And this will actually make the legislative process more transparent. At least until the SEC-managed fund I’ve been hearing about launches in the spring. THAT will truly be The Sh*t!” (expletive deleted)

In fact numerous off-shoots seem to be sprouting from the SHYTE Fund initiative. One such effort being discussed is the American Federal Reserve Advantaged Income Debt Fund (AFRAID Fund) reportedly to be offered by a certain west coast manager. “It’s a natural extension of our preexisting policy of hiring former Treasury and Fed officials. You don’t need a kashkari to recognize the obvious benefits” said an executive at the firm regarding the fund to be managed by the Federal Open Market Committee. Advertising executives have advised OTCB that preliminary marketing literature has already been presented to the fund managers for the AFRAID Fund. One tag line is reportedly “Be AFRAID. Be very AFRAID!”. We couldn’t agree more.

OTCB – We make it up so you don’t have to!

Editors Note: It’s been an incredible year here at the OTCB World Headquarters Shed. In fact, in anticipation of the Modern Economic Depression Outright Implosion, we have finally completed the migration of our reporting & editorial teams to the OTCB World Headquarters Underground Bunker. But leaving that aside for now, it is truly an amazing time to be a proponent of freedom & democracy in the world. Now just so we’re clear, your friends at the OTCB World Headquarters Bunker are not actually advocating freedom & democracy (lest we become the next victims of a Predator Drone attack). But we definitely ADMIRE those who are out there risking life and limb to advance the human condition.

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