Financial Journalists, Hedge Fund Managers, Corporate Jets & The Information Game

One of the most regular e-mails I seem to get from readers of this blog goes something like, "I really enjoy reading your blog, and you write really well. Out of interest, what do you do?"

The praise is flattering, but most of all hearing from your readers is one of the principle reasons I enjoy writing this blog; from software developers to consultants to CEO's to journalists, every one has a unique story to tell and a unique perspective to share regardless of whether they agree with what you have to say or not. Debate is what stimulates the ever-elusive search for the hard truth of economic and political reality, and it's one of the main reasons I write, so I'm flattered to hear from so many who are so curious about what I have to say here.

In order to set the record straight then, I'm a financial journalist; that is, I write about markets, business, the global economy and economic shenanigans the world over. Unlike many in financial journalism, however, I didn't come to the task from a journalistic background, but from a financial one; prior to writing professionally, I worked in corporate finance. "Why on earth," many ask (perhaps fairly) "would you leave finance to join an industry seemingly in perpetual decline, monopolized by lay-offs and low-pay?" Answer one: I love it, and writing/researching is what I've always loved doing. At the end of my tenure in corporate finance, I spent most of my time gravitating towards this end of occupational activity than towards raising capital, which is what I was actually employed to do. Answer two: I'm a born contrarian, and I love risk.

It's in thinking about my own career transformation that I realize a fundamental aspect to the general understanding about the industries I have worked in/work in now is continually misunderstood and misconstrued.

Suffice it to say that the premise of this post then centers around a key idea: that the transferable skill sets and goal sets between financial journalism and money management are large. The argument, in my view, has important consequences - and answers - for the debate which has been rearing it's head over the Maria Bartiromo-Citi-corporate-jet-affair; namely, the ethics of financial journalism.

Managing Information

Perhaps due to the monstrous gap in the lifestyle standards between hedge fund managers and financial journalists, it's not often you hear the parallel between the two professions made, but there are in fact more similarities between the job and goal functions than most realize. Specifically, the two jobs focus on one key theme: managing information. As a hedge fund manager, before you begin to manage any money, you have to get your head around the information that's going to make you any money. Central to that process is the ability to be able to see patters and consequences as a result of those patters where others cannot see them. The same is true of financial journalism: if you want to sell popular and meaningful stories, you have to be able to see patterns and consequences before anyone else sees them. This primary ability is central to distinguishing a hedge fund manager from an analyst at a fund, or a financial journalist from a desk researcher. It requires being as truthful to the information at hand as one can possibly and reasonably be, at the same time as being able to judge that the information is consistent with the thesis you set out to research.

Here's a rather simplistic example, but it illustrates the point I'm making well. Let's say you're a hedge fund manager and you have a feeling that there's going to be a major wave of M&A activity in the oil and gas industry over the next year. As a result, you want to lay some large call (buy) contracts on the smaller oil and gas companies, which you think will benefit from the M&A activity, and some equally big put (sell) contracts on the larger oil and gas firms, which you think will be doing the buying and hence punished by the market (when there's a merger or an acquisition, the company that shells out more than the other is usually punished and the one that gets the shells of cash usually rises; although this is slightly different in the recent case of private equity deals, it stands good for this example where most oil and gas companies are publicly traded).

But before you do that, you have to check out whether your thesis is valid, or you could end up losing a pile of money. So first of all, you look at the chart for crude. You look at everyone else's opinion, and talk to all the experts you can find on the subject. Then you look at the oil companies themselves. What are they doing? Are they merging? What are their earnings like for the past year? For the past five years? What does the market think of oil companies right now (that will mostly be reflected in the P/E and P/B ratios, but also in the volumes of traded equities)? Are there any disparities in the valuations of smaller and the larger oil and gas companies? And how about oil exporters? Are they nationalizing oil? Are they reducing or increasing output? What effect does this have on smaller/larger oil and gas companies? Are they the same effects or different effects? What kind of liquidity do these companies have right now?

Now you're a financial journalist who sees the potential for a story on the same subject: wave of M&A activity sweeping the oil and gas industry. The above questions and processes are exactly the same for the research process of your story. You have a thesis, you have a pile of ( mostly disconnected) information and opinion, and you have to whittle it down into something comprehensible and as true as possible that either directly supports or directly challenges your thesis. It's called managing information, and it's what financial journalists and hedge fund managers alike do all day long.

Conflicts of Interest

When you're selling something, doing favors for people gets you a long way. This is not true when it comes to being right and first, and being right and first are the essential characteristics that define good money management and good financial journalism.

Chris Roush, in a post titled "Bartiromo's Plane Ride Raises Questions", seems to sum up pretty well the recent sentiment over CNBC "money honey" Maria Bartiromo's acceptance of trips of Citi's corporate jets at first-class-commuter prices. "Business journalism," he claims "is getting a bad rap after it was disclosed that CNBC anchor Maria Bartiromo took a plane ride on a Citigroup jet from China back to the United States." He goes on:

Bartiromo, according to a CNBC spokesman, took the flight for "source development" reasons, not for any specific story. But based on her long-standing friendship with the now-fired executive, it's clear that she could have had access to him anytime she wanted.

... What bothers me the most is that CNBC and Bartiromo -- who has also raised ethical questions by disclosing on the air that she owns Citi stock -- act is if nothing was wrong with the plane trip.

The problems should be obvious to them. Yes, business journalists are supposed to interview executives and push to talk to them as much as possible.

But the appearance of accepting something -- whether it's a plane trip halfway around the world or a lunch -- calls into question our integrity and motives with consumers of business news. And we're not supposed to be "friends" with the people we write about.

Somewhere along the line, Bartiromo and CNBC seem to have forgotten these basics.

The point that the general criticism, and Roush's post miss is that a financial journalist, just like a hedge fund manager, who is affected by their "friendship" with a Chief Executive to the point where that friendship influences their professional conduct will not be in a job for very long. If there was a major piece of negative news which came out of Citi, but a hedge fund manager who held a large portion of Citi stock chose to stick with his or her trade, knowing full well the stock may come down 5% plus, that hedge find manager would be called to question by lots of angry investors. If the same thing happened twice, the fund manager would find it hard to get a job again managing anyone's but his or her own - and maybe family's - capital.

The same point is true of Maria Bartiromo in the same situation: if her judgment as a result of her "friendships" with Citi execs were unduly affected in a crisis situation to the point where she was influenced enough to try and 'spin' the story, or worse, not to break the story at all, you can bet that it would most likely cost her her career. Even if she consistently tried to spin positive news for Citi, she, like any market participant, would get found out. It's the old law of "reversion to the mean". In other words, conflicts of interest are difficult not to reconcile in professions where being "right" is the key factor to your success.

Conflicts of interest are not the same in nature for financial journalists and money managers as they are, for, say, CEO's. In the latter situation, where a CEO tries to "front run" the market (make money on expected good or bad news buy buying or selling the stock ahead of time) on a pending news announcement, the action, if not prosecuted, would not necessarily affect the career of the CEO: it would merely make or save him/her a few million dollars. The CEO could potentially continue managing the company without repercussions.

It's perhaps a tough concept to grasp for those used to seeing every conflict of interest as inherently black, but in the case of Maria Bartiromo, the conflict of interest may in fact benefit the public, if only because she becomes more privy to the goings-on of Citi than your average punter, which is at the end of the day, what a financial journalist should be and must be in order to be effective. The same is true of a money manager - the more information they are legally privy to, generally the better for the investors in the fund.

The chastisement of Bartiromo is unfortunately motivated by the same emotion which motivates money managers to denounce the trading practices of successful peers: envy. It's with no uncertain peril we put successful and honest people out of their professions and amateurs in their place because of  overly-simplistic reasoning. Because in that instance, we all end up worse off, less-informed, and ultimately, more susceptible to the exact malpractice we were so afraid of in the first place.

UPDATE: Welcome (back) Instapundit readers! Thanks for dropping in. This is a blog principally about the economy, and you'll find that quite a lot of it is about global as well as U.S. markets. Please feel free to take a look around, comment, and of course, come back any time you like.