A10| Monday, October 28, 2019 THE WALL STREET JOURNAL.
China’s
Bubble in
Sneakers
FROM PAGE ONE
Speculators in China are treating sneakers much like financial derivatives. Guan Tian, 25, at his high-end Beijing sneaker store last week.RAFFAELE HUANG/THE WALL STREET JOURNALstrengthen. So-called quant
funds use computer models
and predictive algorithms to
sift vast reams of data and de-
cide what to buy and sell.
At hedge funds where hu-
man stock pickers are in
charge, managers dig into cor-
porate filings, meet with com-
panies’ managements and sup-
pliers, parse data for insights
on customer behavior, or bet
on events such as mergers.
Their trades are either long,
wagering on a security to rise,
or short, a bet it will fall.
Stock hedge funds out-
gunned the S&P 500’s total re-
turn, meaning with dividends
included, by an average of
more than 5 percentage points
a year from 1990 through
2009, according to an analysis
of HFR data that tracks equity
funds using both fundamental
and quantitative strategies.
From 2010, early in a record
bull run, through this Septem-
ber, clients have been paying
those funds to trail the S&P by
nearly 9 points a year, on aver-
age.
Frustrated clients
“Investors are frustrated,”
said Greg Dowling of Fund
Evaluation Group, a consulting
firm that provides advice on
where to invest. “Clients ex-
pect them to underperform in
a raging bull market, but not
by a huge degree, for years on
end.”
In the golden age of stock
picking, hedge-fund pioneers
such as Julian Robertson and
Michael Steinhardt notched
more than 20% gains in 1990, a
year when the S&P 500 lost
3.1%. Among early hedge-fund
managers was Jeffrey Vinik, a
former mutual-fund star at Fi-
delity Investments.
Mr. Vinik closed his hedge
fund in 2013 but said in Janu-
ary 2019 he would relaunch it
and hoped to raise $3 billion in
two months. He raised $
million.
On Wednesday, Mr. Vinik
called it quits.
“What I learned after proba-
bly 75 meetings is the hedge-
fund industry of 2019 is very
different than the hedge-fund
industry when I started in
1996, and it’s even very differ-
ent from the hedge-fund indus-
try when I closed in 2013,” Mr.
Vinik said.
What changed? For one, vol-
ume. There were just 530
hedge funds in 1990, managing
a total of $39 billion. Today
there are more than 8,200, all
trying to find winning bets for
what is now a vast trove of
$3.2 trillion of investor money.
For another, managers say
the rise of quantitative and
ContinuedfromPageOne
rate trading teams.
“There’s times I remind my-
self, these guys didn’t forget
how to make money all of a
sudden,” said Scott Warner of
Paamco Prisma, a firm that ad-
vises on or invests $23 billion
of client assets in hedge funds.
“But holding your breath and
hoping for change is not a
strategy. The question is, ‘How
are you adapting to the new
reality?’ ”
One answer is to buy stakes
in businesses that haven’t yet
gone public. Fat returns flowed
in recent years to Tiger Global
Management and Coatue Man-
agement—firms that invested
early in then-private compa-
nies such as Facebook Inc. and
JD.com, in addition to public
companies. D1 Capital Partners,
a high-profile fund that started
last year using this hybrid ap-
proach, recently gauged inter-
est in a vehicle that would in-
vest only in private companies,
said people familiar with the
fund.Frayed relationship
The struggle to find the best
path in challenging times has
frayed the relationship be-
tween the founders of Senator
Investment Group, which had a
strong debut a decade ago.
Launched in July 2008, Sena-
tor was flat in that financial-
crisis year when many suf-
fered, and soared 60% in 2009.
Investors piled in.
More recently, it has had
several weak years. In 2018,
when the S&P 500 lost 4.39%
on a total-return basis, Senator
lost 10%, investors said.
Co-founders Alexander
Klabin and Douglas Silvermanhave been locked in a running
debate about the right strategy
for the firm, which managed
$7.5 billion at the end of Sep-
tember, down from $9.5 billion
in early 2018. Mr. Silverman
has argued for sticking to its
core strategy of stock picking
and trading around events.
Mr. Klabin has pushed for
significant change, said people
familiar with the fund, at vari-
ous times arguing for longer-
term, concentrated bets; for
more focus on private invest-
ments; and for a move into
shareholder activism at target
companies. Mr. Klabin also has
been building up an internal
team the New York firm has
described as a think tank fo-
cused partly on thematic bets
such as the future of work.
In February, Mr. Klabin
moved up a floor at Senator’s
Madison Avenue building, to
the 29th. A recent hire, activistinvestor Quentin Koffey, keeps
desks on both floors to work
with each founder, said people
familiar with the firm.
The co-founders worked
with their longtime perfor-
mance coach last year on im-
proving their relationship, said
people familiar with Senator.
The rupture has continued
this year even though Senator
has done better. It was up
15.5% for the year through Sep-
tember, against 20.6% for the
S&P 500 total return and 8.1%
for all stock hedge funds, ac-
cording to HFR.
A person close to Senator
said the firm is on steady foot-
ing, in part because more than
half of the money it manages is
locked up for at least two
years and also because Messrs.
Klabin and Silverman are com-
mitted to the firm.
Mr. Jacobson and co-
founder Richard Grubman
launched their hedge fund,
Highfields, in Boston in 1998
and focused on value investing,
searching for less-expensive
stocks and bonds they believed
would appreciate over time.
Harvard’s endowment was the
first investor, writing a check
for half a billion dollars.
The fund regularly beat the
overall stock market by about
10 percentage points early on,
said former employees and in-
vestors. The returns built loy-
alty among clients, whom the
managers met with just once a
year. Mr. Grubman retired in
2010.
Highfields notched some of
the early gains with contrarian
bets. After Sept. 11, 2001, High-
fields bought shares of gam-
bling companies that had de-
clined after a drop in air travel.tives, including buying and
selling shoe fractions.
It’s all getting a bit much for
the People’s Bank of China,
whose Shanghai branch re-
cently warned financial agen-
cies in the city of sneaker-
frenzy risk, including “mass
disturbances,” according to
state media reports and a docu-
ment seen by The Wall Street
Journal.
Chinese investors are on a
perpetual search for the next
big thing and tend to pile into
anything hot, such as bitcoin or
garlic, which saw fortyfold
price rises in some parts of the
country in 2009.
Such feeding frenzies rarely
end well. The past month ex-
posed another one—certificates
purportedly exchangeable for
crabs, a popular food during
China’s weeklong October holi-
day. An avalanche of what were
essentially crab futures ended
up leaving many buyers with
neither crabs nor money.
Sneaker trading platforms
were set up partly to help buy-
ers verify shoes’ condition and
weed out fakes, much like simi-
lar platforms in the U.S.
In China, however, specula-
tors exploited a 30-minute time
lag in which both buyers and
sellers can opt out of a trade
without penalty, using multiple
accounts to cancel trades and
ContinuedfromPageOne
make new bids in a rapid-fire
sequence that creates an illu-
sion of hot demand, sometimes
tripling the price of a shoe in
half an hour.
Some use a “warehouse” op-
tion to buy and sell shoes with-
out ever taking delivery of the
actual item. Others trade on
fractions of shoes, represented
by a token, through cryptocur-
rency exchanges such as
55.com.
Trading platforms are plug-
ging some of the loopholes by
forcing buyers of already-in-
spected sneakers to take deliv-
ery of them before they can sell
them again. It isn’t clear that ishelping much.
On trading platform Nice, a
pair of Travis Scott Nike Air
Force 1s is set to go on sale on
Nov. 4 for around $170. Two
buyers have already bought
rights, similar to a call option,
to buy the shoes for $1,553 and
$2,667, respectively, and more
than 2,000 users have said they
are generally interested. More
than 800 buyers are offering
between $295 and $700 for a
pair of Air Jordans set for re-
lease on Nov. 5 at $183.
Nice and Poizon didn’t re-
spond to requests for comment.
Nike declined to comment.
A government crackdownwould be bad news for Yang
Lei, 25. The telecom-company
employee started trading shoes
with a pair of “Bugs Bunny” Air
Jordans he sold for a more
than $100 profit on Nice.
With 24 pairs now in his
portfolio, he isn’t worried his
investment will depreciate.
“Everyone just thinks he won’t
be the last to pick up the hot
potato.” He figures if he sold all
his shoes now, his profit would
be around $3,500.
On that principle—that a ris-
ing price will keep rising—even
nonsneaker items are getting
swept up in rallies. On Nice in
September, a 70 cent IKEA key-chain saw its value soar to
more than $140, and a para-
trooper toy given away free in
a store-chain promotion sold
for as much as $282.
The frenzy is creating dis-
tance between true sneaker-
heads and sneaker speculators.
One of Liu Yuan’s most be-
loved pairs, Nike’s SB Dunk
High Pro Dog Walkers, feature
a colorful mix of faux dog fur.
He thinks they represent Af-
ghans, Golden Retrievers, Ger-
man shepherds and Dalmatians.
On the soles are a collage of
dog photos. When the shoes ar-
rived, the dark brown shoelaces
came folded like dog feces in aplastic bag.
Mr. Liu, 23, who works in
branding at a Shanghai sports
firm, bought the pair in July
for around $212 on the Nice
platform. They now trade for
$310, a near 50% premium.
That is not enough for Mr.
Liu to sell. “When I wear these
sneakers to work, my col-
leagues always say I look hip,”
he said.
Guan Tian, 25, runs a high-
end sneaker store in Beijing’s
upscale Sanlitun neighborhood
with friends and displays his
personal collections there. Sur-
rounded by shrink-wrapped
Nike sneakers behind plexi-
glass, he said the sneaker bub-
ble has driven up prices for the
true aficionados. A few years
ago, fans could line up outside
stores for new releases, while
now they are selected mostly
by online lotteries.
That has also made it harder
for traders to secure fresh sup-
ply at release prices. To in-
crease his chances in a lottery
on Nike’s official website, Mr.
Wang hired a company that
uses registration bots.
On a recent Saturday, he and
a few fellow traders staked out
two Nike stores in Shanghai for
18 hours, with just a break for
lunch. They circled buyers who
had just paid around $180 for a
pair of dark gray Air Jordan 6s,
a limited edition designed by
rapper Travis Scott, offering
them more than $1,000.
For those taking the offer,
Mr. Wang demanded to see the
store receipt to guard against
buying a fake pair. “Unlike
stocks, there are no regulators
in this market,” he said,
—Raffaele Huang contributed
to this article.passive investing has distorted
how stocks move and reduced
the chances to profit. Quants
can spot and eliminate certain
mispricings of securities that
once offered opportunities to
stock pickers. Further compli-
cating matters, stocks in recent
years have had an increasing
tendency to move in tandem,
whether on signs of a Federal
Reserve rate move, a presiden-
tial tweet on trade or other
events.
Low interest rates also
make life tougher, by reducing
interest payments short sellers
earn on cash they get when
they sell borrowed stock,
known as “short rebates.” In
addition, the emergence of in-
expensive financing means
companies the short sellers
target are less likely to go bust.
The portion of stocks traded
by humans—in the market
overall, not just at hedge
funds—has fallen by an esti-
mated two-thirds since the late
1990s to about 15%, according
to JPMorgan Chase & Co.
Hedge funds have typically
charged annual fees of 2% of
invested assets and 20% of in-
vestment profits. It’s a mea-
sure of their struggles that a
growing number now charge
less.
There’s been a parade of
hedge-fund shutdowns, includ-
ing some that investors once
clamored to get into, such as
SPO Partners & Co. and Blue
Ridge Capital. In each year
since 2015, more hedge funds
have closed down than have
launched, according to HFR.
Prominent managers such
as William Ackman and David
Einhorn, who could readily
move markets and becamehousehold names, now run a
fraction of the money they
used to. Mr. Einhorn’s Green-
light Capital started 2019 with
$2.5 billion in assets under
management, versus $12 billion
in 2014.
The largest investor in
hedge funds, Blackstone Group,
has cut back on funds where
humans weigh company funda-
mentals. Blackstone made its
call in 2015, said people famil-
iar with the firm, in part be-
cause low interest rates were
hurting funds’ ability to make
money from their short bets.
Blackstone, which invests
about $81 billion in hedge
funds, shifted much of what it
used to invest in fundamental
stock-picking funds to quant
funds.
Other investors are favoring
stock-picking funds they think
have a particular advantage,
such as biotech-focused ones
that employ scores of Ph.D.s
and M.D.s, or so-called plat-
forms that deploy several sepa-It stuck with its bet against
Enron for more than two years
despite a chorus of naysayers
and a rise of more than 50% in
the energy company’s stock at
one point. The bet paid off
when Enron collapsed in an ac-
counting scandal around the
end of 2001.
The “E” from an Enron sign,
displayed at Highfields, was a
reminder for staffers to read
footnotes in company filings,
and to visiting management
teams that Highfields did its
homework.
In recent years, Highfields
struggled to match its early
success. In 2017, when the S&P
500 total return was 21.8%,
Highfields gained 0.6%.
Some inside the firm
blamed a yearslong market
trend favoring “momentum”
stocks over the value stocks
Highfields focused on. Some
said Trump administration an-
titrust moves had made bet-
ting on merger activity trickier.
Investors and friends say Mr.
Jacobson, a competitive person
accustomed to winning, was
frustrated by the market.
Mr. Jacobson, then 57,
started to wonder if there
might be something else he’d
enjoy doing more with the rest
of his life, said those who know
him. He asked several friends,
such as Och-Ziff founder Daniel
Och, about their experiences
after they gave up managing
other people’s money.‘Ready for a change’
Days before telling clients in
early October 2018 he was
shutting the fund, Mr. Jacob-
son informed some employees
so they could start liquidating
holdings. “After three-and-a-
half decades of sitting in front
of a screen, I realized I am
ready for a change,” he wrote
in a client letter.
Highfields averaged a 10%
annual return from its 1998 in-
ception through September
2018, vs. the S&P 500’s average
7.4% total return in that
stretch, according to a person
familiar with the firm.
A month after he told cli-
ents he was closing the fund,
Mr. Jacobson addressed Mor-
gan Stanley’s top trading cli-
ents at a dinner during an an-
nual conference it holds for
them. Mr. Einhorn was there,
as were others such as Daniel
Loeb of Third Point and John
Griffin of Blue Ridge.
Perched on a bar stool field-
ing questions, Mr. Jacobson
said he had been restless as
the 20th anniversary of his
firm approached. He said he
wasn’t enjoying investing any-
more, and had wondered how
much longer he could remain
committed as he contemplated
making several long-term
hires.
Then Mr. Jacobson asked
whether others in the room
were having fun.
The question, posed on the
heels of a violent stock pull-
back that had bruised many
stock pickers in the room, fell
flat.Both the number of hedge funds and their assets have surged.
Numberoffunds
$012trillion2000 2010Average 1990-
Funds outperform market by
5.2 pct.ptsLosingGround
Stock hedge funds’ annual average performance has lagged
behind the total return of the S&P 500 in recent years.01020 percentage points2000 2010Average 2010-Sept. 30, 2019
Funds underperform by
8.9 pct.ptsJune 2019
8,Assetsundermanagement1990 2000 ’$3.2 trillion
Note: HFR tracks equity hedge funds using both fundamental and quantitative strategies
Sources: WSJ analysis of HFR data (funds performance) and Dow Jones Market Data (index performance); HFR (funds, assets)Hedge Fund
Kings Face
Reckoning
Hedge-fundandindexreturnsSources: People familiar with Highfields (fund);
DJMD (index)Note: 2018 data are through September400102030%2010 2015Highfields S&P 500Hedge funds are no
longer especially
good at picking
stocks.