Interesting things we read last week: About hedge funds, employee engagement, and many more

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At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.

Here are the ten most interesting pieces that we read this week, ended March 17, 2017.

1) Hedge funds run by women outperform [Source: Financial Times]
Hedge funds run by women have outperformed a broader benchmark of alternative investment managers over the past five years, raising fresh questions as to why there are so few female portfolio managers. The HFRI Women index has returned 4.4% over the past five years, compared with a 4.2% return for the HFRI Fund Weighted Composite index, a broader gauge of hedge funds across all strategies and genders. Nonetheless, the number of women in the industry remains small, with fewer than one in 20 hedge funds employing a female portfolio manager. By contrast, one in five mutual funds employ a female portfolio manager, according to Morningstar, the data provider. Jane Buchan, chief executive of Paamco, a $24bn fund of hedge funds, said the lack of female hedge fund managers stems from the problems women face when trying to raise money from investors.

2) Why the millions we spend on employee engagement buys us so little [Source: HBR]
Even as organisations are spending hundreds of millions of dollars on employee engagement programmes, their scores on engagement surveys remain abysmally low. This is because most initiatives amount to an adrenaline shot. A perk is introduced to boost scores, but over time the effect wears off and scores go back down. However, when organisations do make real gains, it’s because they’re thinking longer-term. They’re going beyond what engagement scores are telling them to do in the moment and redesigning employee experience, creating a place where people want, not just need, to work each day. Interviews of executives across industries, psychologists, economists, and business leaders led the author to identify three environments that matter most to employees: cultural, technological, physical. Then a survey was designed to ascertain how organisations are faring in each area. After analysing more than 250 diverse organisations, drawing on the Fortune 100 and various “best workplaces” lists, the results showed that over half the companies were rated poorly by their employees in at least one of the three areas, and 20% got very low scores across the board. Although 23% were making strides in all three areas, just 6% were investing heavily in all three — and those “experiential organisations” (Adobe, Accenture, Facebook, Microsoft, and others) saw performance gains.

3) India’s court system offers little hope of justice  [Source: Financial Times]
Using the example of Delhi’s Uphaar cinema fiasco that led to 59 people, including children, dying of asphyxiation. This article highlights the divergence in New Delhi’s claim that the rule of law is a factor that distinguishes India from its richer neighbour China, and ostensibly makes it an attractive investment destination vs. actual facts. The Uphaar cinema case is a powerful reminder of how the rule of law is collapsing in India under a backlog of 33 million criminal and civil cases, which one judge estimated would take 320 years to clear. India has just 18 judges for every 1 million people. Many fast growing economies have 35-40 judges per million people; in the USA, it is more than 100. This has implications for investors in India. Companies can sometimes obtain relatively quick judicial relief, as Nestle managed to do when a court overturned a two-month-old ban on its popular Maggi noodles in 2015. But when disputes arise, most investors in India turn to international arbitration for a quick resolution. However, easy recourse to international arbitration is something PM Modi’s nationalist government now wants to stop. Last year, New Delhi notified 57 of its trading partners that it wants to renegotiate its existing bilateral investment treaties. Among New Delhi’s demands is a new requirement that investors in India must exhaust all domestic legal remedies to resolve disputes before moving to international arbitration.

4) Wall Street’s next ‘Big Short’ [Source: Bloomberg]
The Wall Street speculators are zeroing in on the next US credit crisis: the mall. While it’s no secret that many mall complexes have been struggling for years as Americans do more of their shopping online, now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, in the way many homeowners did nearly a decade ago. Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities (CMBS) are growing. By one measure, short positions on two of the riskiest slices of CMBS surged to $5.3 billion last month, a 50% jump from a year ago.

5) Scientists make step towards humans guiding robots by telepathy [Source: Financial Times]
The US researchers have taken a step toward telepathic communication from people to robots, by developing a mind-reading device that allows humans to correct a machine instantly with nothing more than brainwaves. The prototype brain-computer interface developed by MIT enables a human observer to transmit an immediate error message to a robot, telling it to fix a mistake when it does something wrong. Technology that allows humans to interact with robots intuitively through their thoughts could have a range of industrial and medical applications, from robotic limbs to self-driving vehicles.

6) First, we need to ask ‘why’ [Source: Livemint]
Charles Assisi, the co-founder of Founding Fuel Publishing, shares how his recent conversation with the CEO of a North American firm Praxis, made him realize the importance of having and sticking to your own set of personal beliefs. In the CEO, Issac Moorehouse’s case these beliefs led him to pass on a business opportunity raising Charles’ curiosity about this entire concept and interrelation between personal beliefs and mental clarity. In Issac’s case the clarity helped him unambiguously state his thoughts on the business opportunity and why it wasn’t a right fit. Some perspective to his questions emerged on the back of a short talk he had listened to a long time ago around an intriguing idea: why comfort will destroy your life. The speaker, Bill Eckstrom urges us to imagine four rings lined up vertically, chaos, complexity, order, comfort. He suggests we imagine the ring at the bottom as one where comfort exists. And at the top, one where chaos prevails. Eckstrom argues that if a person is in the comfort zone—either internally as an individual or externally in the world she operates in, lethargy is inevitable. In much the same way, at the other extreme, when in the middle of chaos, it is practically impossible to think right. In theory, it follows then that the ideal place an individual ought to be is where order exists. But, Eckstrom argues, in the overall scheme of things, when things are in order, comfort is tempting and stagnation is inevitable. The real world, though, is a complex place. This is because most events in our life happen at the intersection of chaos and order. To grow, we have to figure how to navigate complexity. But most people have no clue where to begin.

7) Artificial intelligence runs wild while humans dither  [Source: Financial Times]
In the current world algos sometimes interact with each other in unintended and unpredictable ways. The need to understand such interactions is becoming ever more urgent as algorithms become so central in areas as varied as social media, financial markets, cyber security, autonomous weapons systems and networks of self-driving cars. Specifically, malevolent bots, often working in collaborative botnets, can run wild possibly leading to the scenario where such bots mimic humans on social media to “spread political propaganda or influence public discourse”. Such is the threat of digital manipulation that a group of European experts has even questioned whether democracy can survive the era of Big Data and Artificial Intelligence. It may not be too much of an exaggeration to say we are reaching a critical juncture. The scale, speed and efficiency of some of these algorithmic interactions are reaching a level of complexity beyond human comprehension. Susan Blackmore, a psychologist has argued that, by creating such computer algorithms we may have inadvertently unleashed a “third replicator” called tremes. The first replicators were genes that determined our biological evolution. The second were human memes, such as language, writing and money that accelerated cultural evolution. But now, she believes, our memes are being superseded by non-human tremes, which fit her definition of a replicator as being “information that can be copied with variation and selection”. “We humans are being transformed by new technologies,” she said in a recent lecture. “We have let loose the most phenomenal power.”

8) The facts are true, the news is fake [Source: medium.com]
Nassim Nicholas Taleb is this piece describes the agency problem inherent in journalism today. There is no difference between a journalist and the restaurant owner in Milan, who, when you ask for a taxi, calls his cousin who does a tour of the city to inflate the meter before showing up. Or the doctor who wilfully misdiagnoses you to sell you a drug in which he has a vested interest. Unlike the earlier days when dissemination of information took place informally between groups of people as a part of social life, the reliance on one-sided accounts, such as television and newspapers, which can be controlled by the mandarins is a more recent phenomenon that has lasted from the middle of the twentieth century until the US elections of 2016. In that sense, social networks, allowing a two-way flow of information, is an improvement on traditional media. He believes that such an agency problem as that of the current press is systemic, as its interests will keep diverging from that of its own public, until there’s an eventual blow-up. The divergence in actual facts versus the reported “news” is evident in that journos worry considerably more about the opinion of other journalists than that of the general public. Economic insecurity worsens the condition: journalists are currently in the most insecure profession you can find: the majority lives hand to mouth and ostracism by their friends would be terminal. Thus, they become easily prone to manipulation by lobbyists. You say something unpopular in the profession about Brexit, GMOs, Putin, and you become history. This is the opposite of business where me-tooism is penalised.

9) What if jobs are not the solution but the problem [Source: aeon.co]
For centuries Americans have believed that work builds character (punctuality, initiative, honesty, self-discipline, and so forth). They’ve also believed that the market in labour has been relatively efficient in allocating opportunities and incomes and that, even if it sucks, a job gives meaning, purpose and structure to our everyday lives. This essay presents a counterpoint to this position and argues that these beliefs are no longer plausible. In fact, they’ve become ridiculous, because there’s not enough work to go around, and what there is of it won’t pay the bills. The author adds that the official unemployment rate in the United States is already below 6%, which is pretty close to what economists used to call ‘full employment’, but income inequality hasn’t changed a bit. The numbers say that a fourth of the adults actually employed in the USA are paid wages lower than would lift them above the official poverty line – and so a fifth of American children live in poverty. Almost half of employed adults in this country are eligible for food stamps (most of those who are eligible don’t apply). The market in labour has broken down, along with most others. He goes on to suggest that current situation is an intellectual opportunity: it forces us to imagine a world in which the job no longer builds our character, determines our incomes or dominates our daily lives. It makes us question what would society and civilisation be like if we didn’t have to ‘earn’ a living – if leisure was not our choice but our lot? These are practical questions because there aren’t enough jobs. So it’s time we asked even more practical questions.

10) Assessing markets’ shift to a ‘presidential put’ [Source: Livemint]
Stock-market investors in the USA are in the midst of a gradual transition in their operating regime. Their environment is moving away from comfortable reliance on central banks that are able and willing to support asset prices and towards a White House that appears less constrained by Congress in pursuing pro-growth policies, given the Republican majorities in both houses of Congress. For much of the period since the 2008 global financial crisis, markets have been able to rely on central banks to repress financial volatility and boost asset prices—not as an end in itself for policymakers, but as a conduit to higher growth and faster balance-sheet repair. Over the last few weeks, however, the Federal Reserve —using the public reasoning of higher global growth and inflation—seems set to resume gradually, lifting its foot off the accelerator. This change has not been of major concern to markets because of what is being referred to as the “presidential put”—that is, the markets’ willingness to embrace prospects for pro-growth policies under the new Trump administration. This is due to two factors: repeated comments by President Donald Trump signalling his intention to pursue the trifecta of pro-growth measures involving deregulation, infrastructure and tax reform; and the reduced threat of paralysing political gridlock on Capitol Hill. In sum, the major question facing stock markets is less about the nature of the regime shift and more about its timing and effectiveness.

- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.