The Secret Broker: Livin’ on the hedge

After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.

Before the term ‘Hedge Fund’ ever existed, we would carry out trades that would have a protection leg built into them. That allowed us to minimise the downside risk, so we could all sleep safely at night knowing that if something did go against us, we had it covered off.

Originally, having one leg of a trade covering off the downside was coined as ‘taking out insurance’, and it was only later, in the 90s, that it became known as ‘hedging your position’.

If a cash bid was made for a company, we would stand in the market and pay a couple of pennies more than the cash bid price. This was in the knowledge that normally the first price cash bid was the market being teased, ahead of what cash price the bidding company was really prepared to stump up to win the support of key shareholders and lock in key management positions.

It would normally go: first bid price to sound out the market, then a slightly higher bid to show the market that they were serious, and then finally settling on a price at which everyone was happy to accept.

Ninety per cent of the time, most bids we got involved in played out to this ‘third strike and we’re out’ type of punt.

Our downside was covered off because we knew we could always accept the cash bid and maybe lose a couple of pennies, while our upside could be as high as 30 per cent or more as the final bid price was locked in.

If a company was being bid for in scrip, we would go long in the company that was being bid for and short the shares in the company that was making the offer, on a matching 1-for-1 ratio.

For example, if a company was offering one of their shares for four shares in another company that they wished to take over, we would buy four shares in the company being bid for and short one share in the company doing the bidding.

When it was finally over, we would accept the final offer with the shares we owned and we would then receive enough shares to exactly cover off our short position. (Even if the company raised the bid ratio, we would not make any changes to our position and what was left over after our short position was covered off became our profit, which we cashed in by selling them on market.)

In some cases, we would buy a blocking stake in a takeover situation.

Depending on the rules at the time, if a company needed say a 90 per cent acceptance rate from all shareholders before being allowed to compulsory acquire all outstanding shares and move to 100 per cent, we would buy 10.1 per cent. We would then hold out for a higher offer or sell (or threaten to sell) this blocking stake to a rival company and really throw the cat among the pigeons.

 

Not quite blackmail

This type of action became known as ‘greenmail’. The term was deemed to be a bit softer than full out blackmail, though behind the scenes that is what it really was, and while we were accumulating the position, we were known as the ‘green shoe brigade’.

‘Here come the green shoes’ they would cry out on the market floor, as we went around aggressively bidding up for stock, though I preferred to term it ‘the soft-shoe shuffle’ as this gave our actions a bit more of a softer tone.

We knew that by building up this blocking stake, we would create a few really pissed off people — no one more so than the chairman of the company doing the bidding and then their advisors, once they realised that a bunch of ‘city types in suits’ could now hold their bid to ransom.

Once set, we would sort of go off the radar a bit and go on a bit of a contact-free holiday, never answering the phone and always being in meetings and never directly contactable.

In our minds, we were playing the role of a beautiful woman playing hard to get to an Italian stallion. Over the months, as the stallion’s sexual frustration and testosterone filled tension levels banked up, we knew that when we eventually decided it was time to meet (or go on our first date with them) they were well and truly ready to blow their cork on almost any price tag that we suggested, and this was the only way they could get us into bed with them and let them consummate their deal.

It was only later in life, that the Americans arrived on the scene and started to do the same sort of market manoeuvres that we had mastered, but on a very much grander and a very much more global scale.

Their model was built on raising capital from punters, putting those funds into a capital gains tax friendly jurisdiction (BVI, Jersey, Bermuda etc) and taking an annual management fee of 2 per cent of FUM (funds under management), plus getting a bonus management fee of 20 per cent on any performance they achieved above an agreed and stated bench mark.

 

More wealthy than a Wall Street banker

This model became known as a ‘Hedge Fund’, and originally they all started out the same, but others began to realise that using this type of financial leverage made individuals extremely (and I really do mean extremely) wealthy and generated more wealth than any Wall Street bank-employed financial superstar bonus cheque could ever do.

Even a few Australians managed to get in on the action and personally leverage themselves to colossal wealth thanks to the huge fees that could be generated.

We have mentioned Greg Coffey before. He was the Australian hedge fund manager who walked away from a $US250m ($343.8m) bonus cheque, but the one who stands out for me the most is Michael Hintze, or Sir Michael Hintze, as he is now known.

He is now worth a cool $2.3bn and rubs shoulders with the likes of the Pope and British Prime Ministers. Though when I first met him, he was just known as ‘Hintzee’ and probably earning a couple of mil a year while working at Goldman Sachs.

I will never forget the day that I had to chase Hintzee down for an order and him discussing it with me and then him agreeing to go ahead with an order, all while sitting in a dentist chair and right in the middle of getting a filling replaced.

Unbeknown to me, when his assistant told me to try his mobile, he had arranged his dental appointment in such a way that the dentist’s assistant was answering calls for him.

The assistant strategically held his mobile while the dentist continued drilling away and she continued to vacuum suck up all his bits of tooth and spit, and allowing him to continue giving out orders via a tongue held down ‘stralian muffled nasal type of grunt.

That for me summed up the tenacity of the man, and after he left Goldman Sachs and set up his own hedge fund and I moved to Australia, we kind of lost touch as we both moved away to further our careers. I often wonder what would have happened if we had kept in touch.

Now, when I am given the quarterly task of going outside and trimming back the hedge, I do so through gritted teeth and as I angrily clip away and survey my couple of acres of land, I jealously wonder about who now trims the hedge that surrounds Hintzee’s 173,000 acres of backyard.

In fact, this mental torture made me cut the hedge so badly that even Mrs Broker sacked me from this task and she now employs Phil as our pool, grass and hedge man.

 

‘Green-eyed shuffle’

Even Phil could see the pain in my eyes as I watch him trimming the hedge and sweeping up the branches. After one session he thought that I needed a drink and suggested that if I wanted to, after he had gone home and freshened up a bit, he would come and pick me up and take me to his club.

Well blow me down, instead of arriving in his 30-year-old beaten up ute as expected, he arrives in a brand new Merc — worth more than all my cars added together — and whisks me off to his club, which turns out to be an exclusive ‘Members Only’ golf club.

I was expecting his ‘club’ to be the local RSL fishing club and had accordingly and daggily dressed down to that level of casual attire and not the exclusive golf club attire required for this much needed drink.

Phil promptly told me how he made his own personal wealth, through some savvy investments, and even though he didn’t need the money, he loved to get out of the house and tend to other people’s gardens, all while building up his collection of valuable artworks and property portfolio.

So now as I ponder back on what could have been, my ‘green shoe shuffle’ has turned into more of a ‘green-eyed shuffle’, and I’ve now reached the mental state of thinking of setting fire to the hedge and getting a nice fence to replace it.

God help my mental state if I discover the fence man is also wealthier than me. If this turns out to be the case, then this may be my last ever article. Though Mrs Broker will be OK either way, as she tells me that she has put a hedge policy in place.

Her policy? To take out a large insurance policy on my life, which she happily pays monthly.

Now that’s a real hedge!

The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at [email protected]

Feel free to contact him with your best stock tips and ideas.

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