Welcome to Sunday Snacks, folks. We’re out here memorizing lines from Billions so we can parrot them as our own views. To help you. Duh.

Starboard, an activist investor, just took a 5%-ish stake in Fortrea, and it gives us an opportunity to link this incredibly wild powerpoint presentation they made about Olive Garden’s holding company circa 2014.

Ahmed and Peter still talking about it to this day. 285 slides of pure gold.

But we’re not gonna talk about that. We’re just gonna dip our toe into hedge funds.

It’s a quick read. Alright, let’s go

Hedge Funds: Scabs or Saviors? In 3 points

1. What are hedge funds exactly?

• It’s basically a fancy investment club. Unlike you common-sense index funds, hedge funds can take an array of positions in stocks and other complicated financial stuff to potentially get huge returns.
  

• Who uses them? Endowments, pension funds, high net worth individuals. The most high profile hedge funds are typically centered around one genius asshole (Bill Ackman, Bobby Axelrod, etc.).
  

• An example you say? Michael Burry of ‘The Big Short’ fame ran a hedge fund and made investments in some of those ‘complicated financial instruments’. He shorted the entire housing market with his investors’ money. He made a ~500% ROI for his clients.

2. What are ‘Activists’?

A lot of Hedge Funds are “passive” in the sense that they research investments, markets, and deploy capital at the right time and sell at a premium.

But there’s another type too…

• Activists are typically the ‘genius assholes’ we mentioned above. They typically take a stake in a company (around 5% typically to avoid immediate disclosures) that’s not performing well, or could be performing a lot better
  

• They (usually) use their platform to call management out, fight for seats on the board, install their own senior team, and (mostly) focus on one thing: increasing that stock price at all costs.
  

• It also leads to Hedge Fund guys saying some wild shit (Starboard leader Jeffrey Smith actually said, “I love Olive Garden unlimited breadsticks”.

2a. Example: Starboard takes over Olive Garden

1. Around 2014, Starboard decided to make a push at Darden Restaurant Group, one of the largest in the country.
   

2. Why? Mainly 3 things:

   • out of control costs;

   • bad operating model;

   • company structure
     

3. Result? Starboard eventually got what it wanted: the board. It re-structured the company, got rid of unnecessary processes in the kitchen, and cut costs overall.

We also got this gem of a PowerPoint slide. I wonder which 2nd year analyst go the ‘pls fix’ email to this slide when they were putting this together:

3. Alright, whatever, does this shit work?

Yes, all the time. Hedge Funds perfected capitalism.

3. No, be serious

• Well, it did for Darden. Take a look at the picture below. Barring the pandemic fluctuation, the stock has performed like Belichick and Brady.

AND AND AND…

• No. not always. HEC wrote a great article on this, so we’ll let them explain… (hint: it works and then it doesn’t).

• Given that information, it’s fair game to say that the S&P 500 outperforms hedge funds over the long run, although there may be a comparison issue (we’re looking into this narrative and whether it’s false common knowledge).

Again, none of this is investment advice.

What AI made this week

Tasteful or still tasteless. We can’t decide.

Have a great week!

Ahmed and Peter