- Chengyu Bai and Shiwen Tian have a study showing that more attractive fund managers get promoted faster but have worse returns. A good model of asset management is that skilled managers gather assets until their fees roughly equal the alpha they generate. It's not a stable equilibrium for someone to be able to get rich by passively moving money out of an index fund and into an active manager's fund, and managers like having money. So, in general, skilled managers raise more money (or charge higher fees) until their after-fee returns approach what someone could get elsewhere. Unskilled or unlucky managers find a different line of work. But this model describes an asymptote, not the state at any point in time; even if it's true, there will be some emerging managers who are putting up good returns but not getting enough credit for it, and others who either have a good pitch or a lucky year or two and can over-raise accordingly. (And, of course, some managers are not purely money-motivated, and keep their firm at a size that's appropriate for whatever they like most, whether that's turning over lots of rocks in nanocap stocks—a rewarding activity at the moment!—or funding private companies that are barely past the idea stage.) If there's some factor that makes it easier to raise money (being good-looking can keep you out of jail for longer, so it makes sense that it would apply in other places), then those managers will raise more than they should. The good news for anyone who isn't strikingly attractive but does want to make money in investing is this: alpha only exists if there's someone worse than you on the other side of the trade, so beauty bias in fundraising means better returns for everyone else.
- Earlier this month, The Diff noted that one of the problems with Yahoo, and a reason to be skeptical of their turnaround, is that it's such a hard company to define. A Letter a Day has a transcript of an interview with David Sambur, co-head of private equity at Apollo, Yahoo's private equity owner. It validates the first half of that Yahoo thesis and completely invalidates the second: the Yahoo deal is working because the company has sold so many non-core assets, some of which were valuable enough to be worth a lot (Yahoo Japan), and some of which were a drag on profitability. PE funds love to do deals where they can immediately liquidate some assets, because that rapidly lowers the denominator in return calculations: buy a business for $1bn and sell it for $2bn in five years, and you've earned a respectable 15% return. Buy the same business, concurrently sell part of it for $500m, and sell the rest five years later for $1.5bn, and your annual return jumps to almost 25%.
- Frederik Gieschen has reflections on three years of writing online. Some of this is about the literal business of writing for money, a topic near and dear to me, but it's also about the question of how to choose what career you pursue given your skills and interests. There are much better ways to monetize skills, at least in year one, but it's hard to beat the flexibility and "surface area" of writing. And there are many other jobs that have a similar payoff, where the compensation is lower but the pace of evolution is faster.
- This Carol Loomis profile of merchant bank Allen & Company is almost two decades old, but thanks to the company's model it's mostly up-to-date; they're very quiet (aside from a splashy annual conference), very patient, and very good at connecting potential M&A partners in media. That's an approach that can take a very long time to pay off: the firm was founded in the 1920s, but their big break was selling Columbia Pictures to Coca-Cola and taking a seat on the board in 1982. Some people talk about "time arbitrage" in the sense that they care more about what happens in three years than what happens next quarter, and there is indeed less competition in this area. But there's even less competition in building a business that will quietly compound but not really kick into high gear for a generation or two.
- Anvar Sarygulov & Phoebe Arslanagic-Wakefield in Works in Progress writes about what caused the Baby Boom. This piece is especially valuable because it offers some data that contradicts easy stories about what happened: the boom started in the 1930s, not the 1940s, and it was a global phenomenon, not just localized to the US or even to the war's victors. Rising incomes are a good intuitive explanation, but they tend to be negatively correlated with birthrates. The piece makes a case that the real answer is technology: labor-saving products at home reduced the time cost of bearing children, better healthcare reduced maternal and infant mortality rates, and more homebuilding meant more affordable family formation. Some of those are one-time effects that are hard to replicate, but at least in housing there are policy solutions. (These solutions would reduce the net worth of homeowners—but the home-owning demographic is old enough that they're also implicitly dependent on a labor force big enough to take care of them when they're older.)
- This week in Capital Gains, our spinoff newsletter giving breakdowns of topics in finance, economics and corporate strategy, we covered why companies give earnings guidance, and why it matters. There are good intuitive reasons to keep this information quiet, both because it's hard for companies to know the future and because it's good to keep their success a secret from competitors. But there are better reasons for managers to tell their shareholders roughly what's coming next.
- A good exercise for understanding an industry is to read older materials targeting participants. There's a lot that we take for granted now that had to be painstakingly figured out in the past. So, Hedge Funds is a book about hedge funds published so long ago (1995) that you could just call the book "Hedge Funds" and know that it would immediately appeal to an audience starved for information about the vehicle. The book seems to mostly target 1) investors who are thinking of backing a fund, 2) lawyers, accountants, and brokers who are helping to set one up, and 3) finance types who have heard rumors about the availability of high performance fees and want to know what's going on. The book was definitely written at a time when markets were inefficient: the performance numbers they cite are high, and on the other end the book notes that Quantum Fund's performance fees were only 15%. The book has plenty of details that don't matter much any more, but it's striking how many things stay the same: there are cogent discussions of fund capacity, and of managers' and LPs' differing incentives around how fast funds should grow and what kinds of risk they should take.
- Drop in any links or comments of interest to Diff readers.
- What are your favorite early books on an industry? Sometimes part of the value of such a book is looking at the sections you can skip because the process has been streamlined—and also noticing which problems persist.
Companies in the Diff network are actively looking for talent. A sampling of current open roles:
- A well funded seed stage startup founded by former SpaceX engineers is building software tools for hardware engineering. They're looking for a full stack engineer interested in developing highly scalable mission-critical tools for satellites, rockets, and other complex machines. (Los Angeles)
- A company building the new pension of the 21st century and building universal basic capital is looking for a product manager with fintech experience. (NYC)
- A company building zero-knowledge proof-based tools to enable novel financial arrangements is looking for a senior engineer with a research bent. Ideal experience includes demonstrations of extraordinary coding and/or math ability. (NYC or San Diego preferred, remote also a possibility.)
- A company that helps clients use alternative data to make better decisions is looking for a data scientist/analyst with experience in the finance sector. (Remote)
- A startup building a new financial market within a multi-trillion dollar asset class is looking for generalists with banking and legal experience. (US, Remote)
Even if you don't see an exact match for your skills and interests right now, we're happy to talk early so we can let you know if a good opportunity comes up.
If you’re at a company that's looking for talent, we should talk! Diff Jobs works with companies across fintech, hard tech, consumer software, enterprise software, and other areas—any company where finding unusually effective people is a top priority.