SkyBridge CEO on Investment Themes, Manager Screens and Regulatory Regimes (Part II)

Jun 3 2016 | 6:11pm ET

SkyBridge CEO on Investment Themes, Manager Screens and Regulatory Regimes (Part II)
By Steven Lord, FINalternatives

SkyBridge Capital’s Anthony Scaramucci is not your typical hedge fund executive. While most successful managers approach interaction with the media with a cautious mix of reserve and reticence, Scaramucci is the opposite; engaged and ebullient, he is a rarity in the upper echelons of institutional finance — very good at what he does, and very willing to talk about it.

In Part II of our wide-ranging interview (read Part I here), the well-known hedge fund executive discusses the current state of U.S. politics, the populist targeting of the alternative investment industry, his surprisingly nuanced view of Wall Street regulation, and his hearty skepticism about the investment merits of liquid alternatives.

A Cabal Against Hedge Funds 

No candid conversation with Scaramucci is complete without discussing politics. Characteristically outspoken and very active in Republican fundraising circles, he backed Mitt Romney in 2012, served as Scott Walker’s finance manager during his abortive run for the 2016 nomination and supported Jeb Bush when Walker bowed out. In January, he wrote a Fox Business editorial in which he lamented a primary season so riven with “unbridled demagoguery” that the GOP faces either devastating defeat in the general election this fall or a seismic shift towards a currently unrecognizable new identity. “Call it a moral debt restructuring,” he wrote, “caused by the reckless behavior of a man who knows a thing or two about bankruptcy.”

With virtually all of the leading candidates for the U.S. presidency unified in their targeting of alternative asset managers in general and the tax treatment of some of their investment gains in particular, we asked Scaramucci about his position on the carried interest debate. “I am resigned to the fact that a cabal exists against hedge funds from politicians,” he replied. “There is such negative media associated with this industry, often from people who haven’t done the homework necessary to understand it. Carried interest, for instance, is much more of a private equity issue, but it still carries over to hedge funds because everyone is painted with the same brush. There is a lot of guilt by association that goes on, and in the case of some of the candidates, it comes with tremendous irony.”  

His political leanings notwithstanding, Scaramucci has a fairly nuanced view of regulation. In fact, when asked to pick the most influential change on Wall Street between the first airing of Wall Street Week and his resurrection of the show last year, he chose regulation. “These days, not many people are aware of how Wall Street operated when Louis Rukeyeser started Wall Street Week,” he says. “Coming after the Depression and the recovery after World War II, it was a closed circle dominated by inertia, a clubby brokerage industry and fixed brokerage commissions. May Day 1975 changed all that, and Wall Street has never been the same.”

On May 1, 1975, the U.S. government deregulated the commission markets and allowed competition to dictate the cost of trading. Almost immediately, discount brokerage companies like Charles Schwab and Waterhouse appeared, revolutionizing Wall Street with lower trading prices and increased service, which led to a three-decade embrace of Wall Street by retail investors that directly led to massive increases in liquidity, online trading and even the creation of innovative low-cost products like exchange-traded funds. 

“Capital markets are the circulatory system of the capitalist organism,” Scaramucci says. “Whatever makes that blood flow most freely is quickly embraced, and Wall Street allocates capital in a very propitious way. But heavy regulation restricts those arteries, and thus the efficient flow of that capital. No regulation is clearly a bad idea, but as the pendulum swings, history tends to repeat. Think of all the regulations put in place in the aftermath of the financial crisis: Dodd-Frank, Basel III, AIFMD, MiFID, etc. It’s easy to wonder whether it’s become excessive again, and whether all these rules will ultimately help prevent another wipeout.”

Ice Cream and Vinegar Don’t Mix

In the same vein, Scaramucci says he does not believe in a no-holds-barred approach to financial products. Liquid alternatives, for instance, are accidents waiting to happen, he says. “I hate liquid alts. I’ve begged people to stay away from them. They sound great, but they don’t work.” 

Liquid alternatives have grown quickly in the past several years as regular investors have sought greater access to the complicated alternative asset management strategies normally accessible only to wealthy investors through expensive and illiquid hedge funds and private equity companies. While proponents celebrate the risk management, diversification and directional benefits of such strategies, detractors wonder about the potential pitfalls of placing relatively illiquid, complex alternative investments into the hands of generally unsophisticated investors through what appear to be liquid, publicly traded wrappers.

“The core issue with liquid alts is that you can’t always marry liquidity with alpha generation,” Scaramucci says. “Dislocations in markets take time to reset, and liquid alts do not give you the time to capture that alpha. People will sell at the wrong times and for the wrong reasons.” When asked whether this was an area in which regulation could play a role in keeping people safe from themselves, he unequivocally agreed, echoing the old saying that just because you can do something, doesn’t mean you should.

“I love vanilla ice cream and I love red wine vinegar,” Scaramucci continued. “But that doesn’t mean they should go together. It’s the same with liquid alternatives — hedge fund strategies are great and liquid investment options are great. But they don’t always mix.”

Ultimately, Scaramucci says Wall Street’s simplistic definition as an efficient marketplace belies a much more complicated story. “Rational people will do irrational things if it is in their best interest,” he explains. “If you were an institutional fixed income manager in the fourth quarter of 2008, you were selling all the subprime exposure you could because you didn’t want to carry it. You didn’t want to lose your job. Ultimately, a lot of very smart people made very irrational decisions, at least from a securities perspective, because a lot of good paper was sold off to technically wild levels. It’s been a lesson to us ever since — dislocations can cause sane people to do insane things, and it’s our job to step into markets when those opportunities present themselves.”

Both parts of this article originally appeared in the June issue of Modern Trader

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