Top Alpha Stories of 2015: Nerds Win Three, Lose Two

Top Alpha Stories of 2015: Nerds Win Three, Lose Two

We have made it a habit to present, at this time of year, a short list of the big news stories of the 12 months just past, insofar as they have affected alternative asset managers and their investors.

We’re happy to observe, as preface to this year’s version, that our list received some social media push-back last year. Tweets suggested that we had played matters too “safe” and ended up with a beta-hunters list rather than a truly alpha-oriented compendium. Well … we’re happy our critics are paying attention, though we have no idea whether they’ll be any happier with this list than they were with that one.

So we move forward. This year’s big stories read a bit as if Sheldon Cooper had decided to make a splash in the world of alternative investments. They are about statistics, algorithms, and some basic science. Though since the basic science involved in the first tem below is biology rather than physics, we should perhaps have invoked Amy Farrah-Fowler rather than Sheldon. But let us proceed.

Excitement in Biopharm

These are exciting times in the world of basic biological/medical research. They’ve been exciting at least since the completion of the map of the human genome in 2003, when attention turned to what can be done with that map.

At almost the same moment in those early years of a new millennium enterprising people and institutions invented the “gene chip,” a glass slide containing thousands of DNA sequences in an ordered array. The chip zeroes in on the sequences that do particular jobs, abstracting a particular geological class of mountain form the broader “map,” so to speak.

The take-off of science in this area has interacted with a lot of other developments, including a regulatory version of arterial sclerosis, and a build-up of the cost management pressures attending the world of Obamacare. All this has given us a hedge fund tug-of-war over Clovis Oncology, the meteoric career of Martin Shkreli, and much more.

Automation, Dapps, etc.

Though the theme this year is ascent of the nerds, we are compelled to mention two stories where the nerds seem to have fallen short. We reported back in March that block chains as a technology had gone far beyond bitcoins or other decentralized currencies, rendering possible robot-like corporations in the process, and we cited some speculation as to how the law may have to follow where this trend was headed.

Alas, though, anyone working on bringing those robot corporations into reality has had a slow year since.

Maidsafe, a “massive array of internet disks” designed to give greater privacy/security than users of the Google/Facebook dominated internet have come to expect, hosts a blog devoted to the innovative uses of block chains. But the recent blog entries there have indicated little forward momentum. They have been, instead, tedious discussions of terminology: what exactly is a “decentralized” network and how does it differ from a “distributed” network? That sort of thing.

Maybe there isn’t a lot of money to be made there. Just now, anyway. Let’s move along.

Dubious Claims about Black Swans

The year just passed also saw news that might confirm the theory that every revolution leaves much unchanged, that “the fundamental things apply as time goes by.”

On August 28 a story appeared in The Wall Street Journal asserting that Universa Investments LP had just made $1 billion on the bad news from China, which had spiked volatility and fattened the tails of black swans everywhere. That $1 billion seemed a very practical bottom-line confirmation of the long-anticipated fractal revolution in finance. King Gauss was dead, long live King Mandelbrot!

Here the real story is that the story was wrong. Further, much the same claim had been made, and had unraveled in much the same way, in 2009. Fool me once shame on you. Fool me twice….

Yes, there is a strong case to be made that the standard model has long understated risks, because the bell curve doesn’t describe the distribution of financial outcomes properly. The safest conclusion from efforts to replace that model with anew equally actionable alternative is that this is doable but it isn’t really scalable. So … black swan funds are here to stay, but talk of billion dollar overnight payoffs will remain just talk. Until of course, inflation proceeds to the point at which a “billion” means a good deal less than it does.

Big Dogs Make Big Bets on Big Data

After two items on dogs that didn’t bark, or that were wrongly thought to have barked, we get to return to actual canines making actual noise.

The year 2015 witnessed Silver Lake’s $1 billion purchase of convertible senior notes of Motorola Solutions (NYSE:MSI) payable in five years. The deal also involves the arrival of two Silver Lake managing partners as directors of MSI. Silver Lake is barking up a very specific tree within the forest of Big Data, the market for law-enforcement analytics.

The chart at the top of this entry shows MSI’s stock price through the year ending December 24, 2015. The big drop at the beginning of April indicates investor frustration when MSI gave up on its efforts to find a buyer and instead became a buyer, acquiring PublicEngines, a privately-held provider of prescriptive-policing data.

Though as you can see the market’s reaction to the deal was unenthusiastic, MSI continued its own acquisitive course, entering into a partnership with New Zealand’s Wynyard Group on June, thus acquiring software that will help Motorola’s own services connect the dots, as a press release put it, among “multiple databases and evidence libraries to help investigators quickly prevent and solve crime.”

In addition to this deal making and the new focus on crime-solving data, MSI in the summer had started showing growth momentum with the release of its second quarter results. Silver Lake’s investment was a natural response to this successful turn-around.

Of course there is much more to Big Bata than Big Policework. But the one can serve as a synecdoche of the other.

Consolidation of the Chemical Industry

Finally, we’ll mention the consolidation of the chemical industry. This has been a multi-year trend, but it drew our attention in mid-year when Platform Specialty bought Alent for $2.3 billion, and with the blessing of activist investor Cevian Cap.

Then our interest in that matter seemed almost quaint when the year went out with a real chem-industry bang, the proposed merger of Dow Chemical and DuPont, a deal which is in large part the consequence of pressure from alpha seeker Nelson Peltz.

Asia is driving deal volumes in chem industry M&A. That continent represents more than 42% of the merger activity in this market. This dominance derives in part from China’s need to reduce air pollution and in the process, to improve the efficiency of its industrial processes.

Looking at this market by segments: both specialty chemicals and the fertilizer & ag segment showed a lot of merger activity in 2015, Low commodity process could be driving the moves in the latter of those, and those same low prices are a factor in the Dow/DuPont announcement.



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