| I think a lot about what I sometimes call "abstract commodity space." Sometimes you want to buy nickel or aluminum or coffee or cocoa to make batteries or beer cans or cappuccino or chocolate bars, so you go to some supplier and negotiate a contract for the delivery of a useful amount of a particular grade of the commodity to your factory. Sometimes, though, you want to bet on the price of nickel or aluminum or coffee or cocoa, to hedge some risk to your business or just as a speculative bet. So you buy commodity futures, financial assets that reflect the price of a commodity but don't require you to store it or worry about it spoiling. The way these futures often work is that there are big warehouses full of the commodity, and people write futures contracts that essentially transfer the entitlements to the commodities in the warehouse, without ever having to take them out. Your futures represent a claim on some nickel or coffee in a warehouse in abstract commodity space, [1] and you don't have to think much about the physical properties of the actual thing. The warehouse system has put a layer of abstraction on the messy commodity business, and you can treat the commodity as just a number on your computer screen. We mostly talk about this when it breaks down, though. Sometimes the physical world tears through the layer of abstraction. The coffee or cocoa beans are stale, or someone discovers that the nickel in the warehouse is actually a bag of rocks. Or: Abstract commodity space is fairly global, and you can trade abstract commodities from a computer screen anywhere in the world. But the physical world is not so seamlessly globalized. Now, gold in a warehouse in New York is worth more than gold in a warehouse in London. Here's a Wall Street Journal article on "Why Dealers Are Flying Gold Bars by Plane From London to New York": Gold is, for the moment, worth substantially more in Manhattan than in the U.K. capital, sparking the biggest trans-Atlantic movement of physical bars in years. Traders at major banks are racing to yank gold from vaults deep below London's medieval streets and from Swiss gold refineries and ferry them across the ocean. … Banks run big offsetting positions, owning gold bars in London, lending them out to earn a return and hedging the risk that prices fall by selling futures in New York. JPMorgan and HSBC, which clear gold transactions and store bullion for other banks in London, are the biggest players in this trans-Atlantic market. The trade appears almost risk-free as long as prices on both sides of the Atlantic are close to each other. But when prices on the Comex surged above those in London late last year, baking in possible tariffs, contracts that the banks had sold in New York were suddenly underwater. ... Banks could close the trade by buying futures in New York, but such a move would mean crystallizing those losses. Another alternative: flying the physical gold they owned in London to New York and delivering it to the futures contracts' owners instead, said Robert Gottlieb, a retired gold-trading executive whose LinkedIn posts on the disarray have become required reading in the market. Once they covered their open positions, the banks had a chance to win big. How? Lock in higher prices in New York through futures and ship even more gold. JPMorgan alone said it planned to deliver $4 billion of gold this month, according to Comex filings. Gold no longer exists purely in abstract commodity space; there is New York gold and London gold, and New York gold is worth more. You can't move between them on your computer, but you can on an airplane. Though you also need to melt the gold: Comex contracts require a different size of bar, so traders need to send gold to Swiss refiners to recast it before flying on to the U.S. Sometimes, they cut out the first European leg by handing the refiner gold in London in exchange for the right size of bar, or flying bullion in from Australia instead.
Even in abstract commodity space, the size of the bar matters. The traditional model is that chief executive officers of public companies care less about social, environmental and charitable concerns than, for instance, nuns. Nuns tend to think things like "give generously to the poor," while CEOs tend to think things like "maximize profits for shareholders." There is a ton of overlap: Nuns don't want companies to commit murder, because it is a sin, and CEOs don't want their companies to commit murder, because the regulatory and public-relations problems from murder would be bad for long-term risk-adjusted profitability. And more broadly being nice and treating employees and customers well is probably good for the long-term bottom line, so many CEOS will be interested in doing that. But, at the margin, would you expect the CEOs to be more ruthless than the nuns? I think so. And the way that US corporate and securities law works is that small shareholders with a social perspective — often nuns, often climate groups, often just interested individuals — can buy some shares of public companies and then submit shareholder proposals asking the companies to do stuff. There are important limitations: The proposals are not binding (they can't force the companies to do anything), and they can't involve "a matter relating to the company's ordinary business operations," so a proposal like "pay your workers more" or "pollute less" probably wouldn't work. But these activists can submit proposals like "we would like the company to write a report describing what it is doing about climate change," and then the company will probably have to put the proposal in its proxy statement for shareholders to vote on. If it gets a majority of the votes, the company doesn't have to write the report — certainly it doesn't have to do anything about climate change — but it will feel some pressure to do so. Even if it gets a substantial minority of the votes, the company will be a little embarrassed. Companies tend not to like these proposals. In the traditional model, these proposals tend to be, broadly speaking, "left-wing." The people submitting these proposals tend to be to the political left of the CEOs rolling their eyes at them. The nuns "demanding that large corporations give their workers health insurance or adopt climate-friendly policies" sound more progressive than the companies saying no. But in 2025 that is not quite a given. Now there is a lot of social activism from the right, with conservative shareholder activists complaining that CEOs are too "woke" and demanding that they cut back on environmental and diversity initiatives. Now, the US Securities and Exchange Commission has a lot of power over these proposals. The way it works is that the activists submit proposals to the company for inclusion in the proxy statement, and the company rolls its eyes and says "oh come on," and it writes to the SEC to say "we don't really have to include this, do we," and the SEC thinks about it and either (1) lets the company ignore the proposal or (2) makes it include the proposal in its proxy statement. The SEC has some rules — Rule 14a-8 — about what sorts of proposals can and can't be excluded, and then its staff interprets the rules to give the companies answers. (The answers are public; you can find them here.) And broadly speaking you would expect a left-wing SEC to say "you gotta include everything" and a right-wing SEC to say "you can exclude everything," because traditionally these proposals have a left-wing slant. Traditionally corporate managers are the conservative-coded group, and social activists are the liberal-coded group. But have things changed? Are corporate managers now woke liberals, while the shareholder activists are conservatives? And if so, will the new right-wing SEC be more friendly to shareholder proposals? No? Maybe? The Wall Street Journal reports: The commission has put out new guidance that will make it harder for activists to demand shareholder votes on proposals that touch on charged social issues. The move, a reversal of Biden-era policy, comes as activist groups on the left and right turn to the corporate sphere to fight culture-war battles on topics such as climate, guns and abortion. In the past year, for example, shareholders wanted bank JPMorgan Chase to audit the impacts of its climate policy, and questioned whether food-and-beverage maker PepsiCo had discriminated against white employees. Oil-and-gas company Exxon sued after shareholders used what it called a "Trojan horse" strategy to deliberately hurt its business with an allegedly bad faith proposal to slash carbon emissions. The SEC operates as a gatekeeper of which proposals can go forward. Under the guidance released Wednesday, corporations will now be able to block more proposals on some socially and ethically charged issues from being included in proxy statements, effectively stopping them from being put to a general shareholder vote. "Proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract," the SEC said. Here is the guidance. I suppose what will actually matter is how the staff interprets it, and you could imagine the anti-woke proposals getting through while the climate change ones don't, but the message here seems to be "leave CEOs alone to run their businesses." I'm actually a little disappointed that the core of OpenAI's schtick didn't work. It feels like it should have. The core of OpenAI's schtick was that it raised billions of dollars from equity investors at eleven-digit valuations while telling them things like "we are a nonprofit organization" and "our product could bring about the end of human civilization" and "returns for our first round of investors are capped at 100x their investment" and "it would be wise to view any investment in OpenAI Global, LLC in the spirit of a donation" and "it may be difficult to know what role money will play in a post-[artificial general intelligence] world." It conveys a certain confidence, to go around asking people for money while simultaneously saying "our duty is to humanity, not you" and "our product is too important for us to prioritize the interests of our investors" and "our product might make money, or for that matter humans, obsolete." It's a good pitch! "Business negging," I once called it. The simplest investment heuristic is probably "if someone is desperate for my money, I shouldn't give it to them," and nobody has ever seemed less desperate for investor money than OpenAI. The only problem is that OpenAI is desperate for investor money: It turns out that it costs a ton of money to build large-scale artificial intelligence models, so OpenAI has to keep raising huge piles of money. And at some point the investors want, not weird capped-profit interests in a complex waterfall of cash flows from a for-profit subsidiary of a nonprofit organization, but just normal equity stakes in a normal company that has normal obligations to them to maximize their profits. I kind of don't know why? My mental model of SoftBank, in particular, is that if you go to Masayoshi Son and say "I am going to wipe out humanity and render money obsolete, give me $40 billion and maybe you'll get something out of it, no promises," he will be like "finally I have found my soulmate" and give you all of his money. But, no, apparently even at SoftBank, they don't like to view their investments in the spirit of a donation. And so last year OpenAI decided to convert to a more normal for-profit company, saying: The hundreds of billions of dollars that major companies are now investing into AI development show what it will really take for OpenAI to continue pursuing the mission. We once again need to raise more capital than we'd imagined. Investors want to back us but, at this scale of capital, need conventional equity and less structural bespokeness.
If I had Sam Altman as my salesperson I would try doubling down on structural bespokeness, but I guess I am wrong. Anyway we discussed the odd fallout of this the other day. You can't really take the assets of a nonprofit and give them to a for-profit company, so OpenAI will essentially have to sell its assets to itself: The nonprofit will have to give up its control over (and residual profit interest in) the for-profit subsidiary to satisfy investors, but to satisfy charity law, it will have to get paid the fair value of what it is giving up. The natural way to do that would be for the nonprofit to get back shares — conventional equity — in the newly independent for-profit company. How many shares? Well, intuitively, the nonprofit currently controls the business, so you might think it should get back a controlling stake in the for-profit business. (Like, 51% or more.) On the other hand, the majority of the business's profits for the foreseeable future have been promised to outside investors (in the form of a structurally bespoke profit waterfall), and OpenAI is looking to raise many billions more dollars before it becomes profitable, which suggests that the nonprofit should get a minority stake. (The number 25% has been thrown around.) In any case, there is some plan for a separation, and some negotiation over how much the nonprofit will get. [2] But this plan arguably puts OpenAI in play: If the nonprofit is looking to sell its stake in the for-profit business (to the for-profit business, for stock), then arguably it should entertain higher offers, for instance from Elon Musk. Who lobbed in a $97.4 billion cash bid this week. "In play" is a term from public-company mergers and acquisitions. There is a notion in M&A that a company is never obligated to sell itself — it can always reject an acquisition offer and decide to stay independent — but, if it does decide to sell itself, it has an obligation to shareholders to take the highest bid. [3] I don't think that's quite true for a nonprofit like OpenAI, but you can see Musk's point: If the nonprofit is planning to sell its valuable asset, it shouldn't take less than fair value, and fair value is set by the market. But if OpenAI is not in play, never mind: Elon Musk said he would withdraw his $97.4 billion bid for the nonprofit that controls OpenAI if the board stopped its conversion to a for-profit company. "If [the] OpenAI board is prepared to preserve the charity's mission and stipulate to take the 'for sale' sign off its assets by halting its conversion, Musk will withdraw the bid," lawyers for Musk said in a court filing Wednesday. Sure! In general you can't just lob in a hostile bid to buy a nonprofit's assets [4] ; if OpenAI just stayed as a nonprofit, Musk would not have much leverage to buy it. (Though he could — and did — sue it for not being nonprofit enough.) You can see the fairly obvious point here. Musk runs an artificial intelligence company, xAI. It started later and is smaller than OpenAI, but Musk has big ambitions. He has raised a lot of money for it. OpenAI is bigger and wants to raise more money, and investors want to give it that money, but only for "conventional equity and less structural bespokeness." xAI can offer conventional equity; OpenAI can't, yet, until it converts. If OpenAI fends off Musk by staying a nonprofit, that will cripple its ability to raise money and scale, and will put xAI in a better competitive position. I mean, that's clearly how OpenAI sees the problem. I kind of want them to be wrong. Give it a try, you know? Tell Musk "sure, we'll stay a nonprofit," and then go back to SoftBank to be like "we still want your $40 billion at a $300 billion valuation but, small hitch, to fend off Elon Musk, you will have to view it in the spirit of a donation." New Jane Street dropped: Led by former Credit Suisse colleagues Pierre-Yves Morlat, or Pym to his friends, and Laurent Laizet, London-based [Qube Research & Technologies] has grown quietly into a $23 billion trading powerhouse, all from modest origins as an $800 million spinoff from the Swiss bank just seven years ago. The aim is for $30 billion of assets. A firm whose name can still be met with blank looks when you mention it to finance veterans, it's now arguably a part of this industry's aristocracy. ... It has no staff in New York where most of the hedge fund big guns reside. It shuns star culture and the trigger-happy hiring and firing of employees, sharing out rewards instead. Only one in 10 of its 1,400 workforce is a traditional portfolio manager. Most would fit in just as easily at Google or Meta, and teamwork is prized in the hunt to solve complex market problems. … [It is] a firm where secrecy reins. Morlat, 58, and Laizet, 53, avoid the media and have resisted hiring even a PR agency. When QRT marketers talk to potential clients, they show a printed presentation that's diligently taken away afterward. I wrote last year that "I read a dozen articles a week about Jane Street Group, and they all mention how secretive and press-shy it is," and I am looking forward to QRT's turn in the media-shy limelight. There are other similarities. Like Jane Street, QRT is pretty techy: As with many hedge funds of note, it leans heavily on "quants," the math prodigies who try to divine market moves. What's different is the number of techie whiz kids on the payroll. It's spending hundreds of millions of dollars on technology and data, 10 times more than when it spun out from Credit Suisse. Last year it recruited 232 IT staff, 157 researchers and just 48 traders.
And pretty levered: Multistrats are notorious for leaning on vast amounts of borrowed money to juice their bets. QRT takes it to a whole new level. As a firm, Millennium's total amount of regulatory assets, which includes leverage, was 7.5 times its investor cash at the end of 2023; Citadel's was roughly 7.2 times. At Morlat and Laizet's outfit, it's been at least twice that.
And has some market-making DNA: It runs a "market-making" unit where it matches buyers and sellers in shares, using algorithms to shave off hundreds of millions of dollars of profit from microscopic price differences. It also trades physical commodities just like billionaire Ken Griffin's Citadel, and it invests in early-stage tech companies like a venture-capital firm.
More generally, I think sometimes that there has been a convergence between a class of firms that are usually called "multistrategy hedge funds" and the ones that are called "proprietary trading firms." In the olden days you could distinguish between two sorts of firms: - A hedge fund run by a charismatic genius boss, with nice offices in Greenwich or Mayfair, which made relatively long-term fundamental bets on asset prices using money from outside investors (as well as the boss's own money).
- A proprietary trading partnership run by a group of pit traders, with a spot on the trading floor of an exchange, which collected the spread on relatively short-term market-making-type trades using the partners' own money.
But those models have moved toward each other. The exchange floors closed, and the market makers got their own nice offices, got bigger, and became more willing to take on longer-term, less liquid and more complicated risks. The hedge funds also got bigger, hired more managers, and became more obsessive about controlling risk, leading them to trade more quickly and earn more profits from trades that look a lot like liquidity provision. And so it is natural for trading teams to move between the Jane Streets of the world and the Millenniums of the world, because those firms do broadly similar things and serve broadly similar functions. Well, they serve broadly similar functions in financial markets. (Doing big levered arbitrage-ish or liquidity-provision-ish trades.) There is one important function that multistrategy hedge fund firms serve that prop firms don't: Hedge fund firms run hedge funds, and you can invest in them. (Well, probably not you, but endowments, pensions, etc. can invest.) The prop firms run their own money, and mostly don't have an offering for outside investors. But this sort of exposure — tech-enabled, quantitative, risk-controlled bets on stocks and bonds — is attractive enough that multistrategy hedge funds can charge huge fees to outside investors. Actually it's attractive enough that many of them have stopped taking outside investor money, which is another service QRT provides: Its fat returns and distinct approach let it charge eye-popping fees of 25% to 30% plus add ons, well above the norm for other "multistrategy" hedge funds, the leviathans who stake teams running lots of different trades. ... Its rise has come as investors have withdrawn funds from smaller firms and piled into multistrats. Unable to keep up with demand, the biggest have been mostly closed to new money, forcing backers to go elsewhere. QRT has been a major beneficiary. [Two of its funds,] Torus and Qube have also had to stop taking client cash. There's a lot of demand for multistrategy funds, so it's a good trade to supply one. Uh: For all of artificial intelligence's advantages, it still has a long way to go, according to Bank of America Corp. Chief Executive Officer Brian Moynihan. "I was trying to get a mortgage-amortization schedule. I pounded in it three times, got stuff you couldn't read. Finally I just got a picture of a house," Moynihan said Wednesday at the BofA Securities Financial Services Conference. "That's not right or wrong. It's just still learning how to do this stuff. And I'm learning how to do the stuff with it." Okay? I mean … what? How did he … what prompt did he type in? For fun I asked ChatGPT to give me an amortization schedule for a 30-year fixed-rate mortgage with an initial amount of $800,000, and it gave me a table that (1) ties to what I got in Excel but (2) was expressed with 12 digits after the decimal point. If your human financial analyst gave you that answer, you would make fun of her, absolutely, but not like you would if she drew you a picture of a house. "The monthly payment is $4,925.737603411156" is a correct-ish but contextually inappropriate response; "it's just still learning how to do this stuff." A picture of a house is a real Dada non sequitur, I love it, but I don't quite believe it. Wall Street nears sale of $3bn of debt tied to Elon Musk's Twitter buyout. Trump Advisers Eye Bank Regulator Consolidation After Targeting CFPB. UK Mulls Merging Financial Regulators to Ease Barriers to Growth. Trump Deregulation to Speed Bank Consolidation, Bob Diamond Says. Long-term investors split with asset managers over climate risk. America's Most Exclusive Suburbs Are Finally Building More Housing. SharkNinja CEO Says There's No Supply Chain for US-Made Blenders. "He was doing stuff like, 'OK Steve, would you be totally opposed to trying this out?' and 'Steve, I'm hearing from you it sounds like you're worried.'" NYSE Plans Texas Exchange as Financial Firms Flock to State. Donald Trump Jr invests in 'steroid Olympics.' If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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