12 February 2018

Morning Coffee: Hedge fund made millions on a long lunch break. Brian Moynihan gets a raise

Traders at a little-known $350m Denver-based hedge fund placed a $200k bet that made them a laughingstock, but when many of their critics got crushed when the market collapsed, it was their turn to laugh all the way to the bank.

The investment team bet that an exchange-traded fund linked to a calm stock market would go to zero in the event of suddenly volatile trading – in fact, the ETF ended up losing 96% of its value. They foresaw the coming volatility spike and scored a $17.5m payday on that $200k bet. Many of the employees at the 20-person firm, which has a view of the Rocky Mountains outside the its windows, were out of the office when the market went bonkers, making them millions of dollars.

“People were laughing at us, saying this could never happen; this should never happen,” Justin Borus, the 41-year-old founder and manager at Ibex Investors, told Bloomberg. “We saw people pricing this as a one-in-five-thousand event, but it was more like a one-in-five-year event.”

When Borus, the firm’s director Ari Rubin and chief data scientist Cooper Stainbrook went shopping for the right derivatives to place their bet on a volatility spike, brokers responded with ridicule, telling them that options speculating the inverse VIX would go to zero would never pay off.

“Cooper and I go to New York a lot,” Rubin said. “In one instance, someone actually laughed in our faces at the type of options we were looking at.”

They always believed in the wager, but even they were caught by surprise when they hit the jackpot.

Rubin and Stainbrook were taking a long walk around Colorado’s capital city when the market started to go haywire on Feb. 5. As they walked, the two of them were on the phone with a client and happened to mention black-swan events. The client told them to check out the VIX Index – one was happening as they spoke.

“We came back to our screen and we’re watching the VIX and it’s moving with extreme velocity,” said Rubin, a former Israeli Defense Force soldier and ski bum turned money manager. “We’re laughing at every tick up until we realized what was going on. Cooper just looks at me and goes, ‘Oh man. The Vol-pocolypse just happened.’”

The fact that they were away from their desks for so long during the biggest U.S. equities dip in more than six years shows a huge change away from the “lunch is for wimps” culture perpetuated by the first Wall Street film in 1987. To further highlight how they do things differently out west, Ibex’s senior executives celebrated by going skiing the next day.

Separately, Bank of America CEO Brian Moynihan got a 15% raise, up from $20m for 2016 to $23m for 2017, including $21.5m in stock and an unchanged base salary of $1.5m, his largest pay package since becoming CEO of the Charlotte-based bank in 2010, according to the Charlotte Observer. Half of Moynihan’s stock awards are performance-based shares that will be paid only if Bank of America meets certain financial goals.

In addition, Bank of America Merrill Lynch hired Matt Cannon, Morgan Stanley’s co-head of EMEA financial institutions, as the co-head its newly-merged corporate and investment bank for the U.K. and Ireland, along with Richard King.

Bank of America achieved net income of $18.2bn last year, up $410m from the prior year, and total capital returned to common shareholders was nearly $17bn, more than double 2016’s amount.

BofA’s share price rose approximately 34% last year compared to the 16% increase in the KBW Bank Index, which tracks 24 of the biggest U.S. banks’ share prices.

Last month, J.P. Morgan awarded chairman/CEO Jamie Dimon $29.5m for 2017, up 5.4% from 2016, including a base salary of $1.5m, $23m in stock and a $5m cash bonus.

On the other hand, Wells Fargo has not yet announced 2017 compensation for CEO Tim Sloan but is unlikely to give him a raise, as the San Francisco-based bank continues to make missteps.

Meanwhile:

Citigroup is initially hiring 60 technologists to set up an innovation center in London in one of the first strategic investments by a big U.S. bank in the British capital since the Brexit vote. (FT)

The mafia allegedly defrauded a Wall Street trader and several NFL stars who invested a futuristic product that turned out to be pure fiction. (New York Daily News)

Steve Bannon thinks Goldman Sachs’s shareholders should have been wiped out in 2008, and that its president, Gary Cohn, should have lost his job, but Bannon was ousted and Cohn is still Trump’s economic adviser. (Bloomberg)

With extensive ties to the financial industry, officials within the Trump administration are dismantling many of the safeguards put in place after the 2008 banking crisis – and bankers are loving it. (Bloomberg)

A court ruled that collateralized loan obligation managers don’t have to follow the risk-retention regulations that apply to issuers of asset-backed securities. (Bloomberg)

Last year, banks had common equity capital, which regulators use to assess their balance sheet’s strength, that was equivalent to 12.5% of their assets – more than double the 5.5% they had at the start of 2009. (New York Times)

Some of the “seesawing, whiplashing” https://www.wsj.com/articles/volatile-birds-peopleand-stock-markets-1518192997 market movement was due to efforts by traders and portfolio managers to protect themselves from volatility in stocks rather than a broader fear of market turmoil. (New York Times)

There’s a big reason why Wall Street is currently more anxious than Main Street. (New York Times)

The sheer speed of the stock selloff has challenged the buy-the-dip advice offered by firms from J.P. Morgan to Goldman Sachs, and this correction may have further to go. (Bloomberg)

The world’s biggest hedge fund hates Europe. (Bloomberg)

Equities and fixed-income traders are hoping for different market outcomes. (Bloomberg)

Companies and stock exchanges want to make investors disclose short positions, but some argue that short-sellers do good, valuable work. (Bloomberg)

Ex-Credit Suisse “star” executive Patrice Lescaudron was sentenced to five years in prison for abusing the trust of clients, orchestrating a “clever” fraudulent scheme that brought him tens of millions of francs. (Reuters)

Credit Suisse faces a U.S. class-action lawsuit over $1bn in write-downs it took in 2015 and 2016 linked to its trading division. (Reuters)

ECM bankers are courting PE firms Bain Capital and Golden Gate Capital as they prepare a business software company for an IPO. (Reuters)

A $2bn exchange-traded fund manager is making its investors bankroll its hefty litigation costs. (Bloomberg)

Hedge funds and other investment managers for the wealthy often share the money with the brokers who pitch their products. (Bloomberg)

There’s a raging argument between those who believe that automation will reduce human jobs and those who believe that technology advances will produce as many jobs as they displace. (WSJ)