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As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

nytimes.com

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Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#71

Post by crazygringo »

tribune wrote: post #47

From Matt Levine of Bloomberg: Here is a New York Times story about the “McKinsey Investment Office, or MIO Partners,” the in-house hedge fund of consulting firm McKinsey & Co., which invests employee money, including in companies that McKinsey advises. “That web of relationships underscores the unusual nature of McKinsey’s hedge fund, and the potential for undisclosed conflicts of interest between the fund’s investm…

The idea that there is no problem because both McKinsey and the company want to make money seems... ludicrous to me, and completely misunderstands insider trading.

The problems would be:

1) McKinsey learns about non-public good things on the inside, and so buys even more stock than they otherwise would (pretty much the definition of insider trading) and/or sells competitors' stock

2) McKinsey learns about non-public bad things on the inside, and so sells stock they otherwise would have held and/or buys competitors' stock

I don't see how Matt Levine can possibly just brush that aside?

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#72

Post by akozak »

crazygringo wrote: post #71
tribune wrote: post #47

From Matt Levine of Bloomberg: Here is a New York Times story about the “McKinsey Investment Office, or MIO Partners,” the in-house hedge fund of consulting firm McKinsey & Co., which invests employee money, including in companies that McKinsey advises. “That web of relationships underscores the unusual nature of McKinsey’s hedge fund, and the potential for undisclosed conflicts of interest between the fund’s investm…

The idea that there is no problem because both McKinsey and the company want to make money seems... ludicrous to me, and completely misunderstands insider trading. The problems would be: 1) McKinsey learns about non-public good things on the inside, and so buys even more stock than they otherwise would (pretty much the definition of insider trading) and/or sells competitors' stock 2) McKinsey learns about non-public…

Insider trading would be bad and illegal. But absent evidence that it's happening, I think his point is that merely having a stake by holding securities isn't inherently problematic.

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#73

Post by pradn »

brootstrap wrote: post #45
adam wrote: post #4

Earlier quoted context omitted.

Hiring these firms is a major "cover your ass" move. If you're a CEO and you hire McKinsey, your board is going to likely approve as they are from the same East Coast/West Coast Ivy League fraternity as McKinsey consultants. And because they only hire people from those schools or recruit former executives from their clients, there is a strong signaling mechanism that you're hiring "the best and the brightest." Then i…

100% of my experience with McKinsey has been trash. Just started working with new company and they wanted us to talk with these guys. We are reviewing some database systems and this guy is a literal joker. His suggestion to speeding up our database "well we can use REDIS, REDIS is fast because it's in-memory". So we want to put how many TB of data into REDIS? We are talking about tons of historic data that never chan…

Somewhat related: as I've been interviewing candidates for SWE jobs, I've found that many will talk about their recent machine learning projects. And the way they can talk about that problem has no bearing on how well they do on a simple programming question I give them later. You've gotta view big data/ML/AI expertise with extreme scrutiny given how hot that stuff is. Best to just ignore the candidate's assertions.

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#74

Post by thegranderson »

stupandaus wrote: post #64
kokokokoko wrote: post #60

Earlier quoted context omitted.

I feel that you may underestimate the amount of insider trading that goes on in private equity. Remember also, the line between insider knowledge being legal or not is somewhat gray. I doubt there is an on record scheme with company memos and other communication discussing inside info. It's probably much closer to work friendships and casual partnerships that pass much of this information along. As long as you can bu…

This comment fundamentally misunderstands what insider trading is. There is no such thing as "insider trading" in private equity - insider trading by necessity is gaining an unfair advantage via non-public information. Private equity and venture capital investors both get access to substantial non-public information and are allowed to buy and sell equity in the private markets with as much or as little non-public inf…

While I would agree that the comment you're responding to is probably using the term incorrectly, there is definitely such a thing as insider trading in private equity.

Knowing that a public company is about to be taken private by a friend's PE firm is material non-public information (MNPI). Knowing that a PE-backed company is about to be bought by a public strategic acquiror is MNPI. Knowing that sales of a private company's products to a public company are changing rapidly is MNPI (think of knowing the order pipeline for an electronics manufacturer who sells to Apple).

Trading on any of this MNPI would absolutely count as insider trading, and is watched closely by PE/VC firms, who are all regulated by the SEC and FINRA (in the US, at least)

This MOI story seems to come up every few years, but McKinsey has kept everything so private that typically all the articles can say is "MIO seems suspicious, and may be conflicted"

A few past articles: https://www.wsj.com/articles/mckinsey-investments-werent-dis... https://www.ft.com/content/7c6700bc-2976-11e6-8b18-91555f2f4...

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#75

Post by kokokokoko »

stupandaus wrote: post #64
kokokokoko wrote: post #60

Earlier quoted context omitted.

I feel that you may underestimate the amount of insider trading that goes on in private equity. Remember also, the line between insider knowledge being legal or not is somewhat gray. I doubt there is an on record scheme with company memos and other communication discussing inside info. It's probably much closer to work friendships and casual partnerships that pass much of this information along. As long as you can bu…

This comment fundamentally misunderstands what insider trading is. There is no such thing as "insider trading" in private equity - insider trading by necessity is gaining an unfair advantage via non-public information. Private equity and venture capital investors both get access to substantial non-public information and are allowed to buy and sell equity in the private markets with as much or as little non-public inf…

Apologies, I tend to use private equity for all private fund investments, which isn't technically accurate. Thanks for the clarification.

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#76

Post by takinola »

I am a beneficiary of this hedge fund so I may be biased, but I feel pretty confident that there is not much conflict of interest going on. As has been attested to by multiple people on this, and other, threads, there is very little proprietary information sharing between teams at McKinsey. In fact, once you work for certain clients, you are automatically barred from working for others. I was once privy to a situation where a consultant working with a different client, unknowingly, shared some proprietary information with the team I was working on. I saw the extent to which the partners freaked out and tried to correct the situation. Of course, there are examples of people violating this trust (people will be people) but there have not been any examples of structural violations (ie the firm designed processes that encouraged or tolerated unethical practices)

It does McKinsey, as a firm, very little good if their clients' business goes down in flames. They, obviously, cannot bet against their clients (it would be catastrophic to their core business if this was ever publicly disclosed) and so they can only bet with their clients, even if they (unethically and possibly illegally) used their clients proprietary information to trade.

It feels to me that there are some corporations that newspapers can just bash confident that most of their readers will nod along without applying much critical thinking. I understand the skepticism. I used to share it before I got to see the inner workings of organizations like this. There is much to criticize about organizations like McKinsey but violating clients' trust is not one of them.

One last argument against the insider trading inference, the results I have seen, while good, are not indicative of what is possible if smart people were truly trying to take advantage of their knowledge of the inner workings of the largest corporations in the world.

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#77

Post by randogogogo »

b_tterc_p wrote: post #30

Seems highly unlikely that there’s any actual secretive insider trading happening here. It would be a HUGE risk for practically no gain, distributed across many individuals, committed by primarily people who wouldn’t stand to benefit. The firm should probably switch to vanguard or whatever... but the existence of this hedge fund does not mean the firm is using its insider knowledge maliciously. Most consultants won’t…

The perception alone matters to clients, that's enough to take action let alone potential insider trading type ethical issues. I work at a firm doing a lot of M&A work and Chinese walls are a big deal to alot of our clients in that space. Also we're a smaller firm and able to manage confidential projects, I'd think McKinsey of all people could figure out how to do this.

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#78

Post by mruts »

jonahb wrote: post #41
mruts wrote: post #32

I highly doubt that there’s any impropriety going on besides the lack of disclosure. Investment banks have been dealing with conflicts like this for a long time and the market has never cared.

I wonder if you read the article. Banks keep research and banking separate. At McKinsey, the heads of several practice areas are on the hedge fund's board. Not to mention that if your standard for impropriety is the investment bank, you're lost already.

I mean, do you think it's really that likely that the portfolio manager of the hedge fund is in collusion with the board? That would be highly unusual, and I seriously doubt McKinsey would risk such collusion.

I know people here don't think highly of the financial services industry, but let's talk about self interest. The fines from the SEC if there were collusion would be massive, this would be one of the biggest cases of insider trading in the past decade.

I know people from McKinsey, and while I don't know about top management, I believe that they are a reputable firm and wouldn't touch anything like this with a ten-foot pole.

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#79

Post by raincom »

brootstrap wrote: post #45
adam wrote: post #4

Earlier quoted context omitted.

Hiring these firms is a major "cover your ass" move. If you're a CEO and you hire McKinsey, your board is going to likely approve as they are from the same East Coast/West Coast Ivy League fraternity as McKinsey consultants. And because they only hire people from those schools or recruit former executives from their clients, there is a strong signaling mechanism that you're hiring "the best and the brightest." Then i…

100% of my experience with McKinsey has been trash. Just started working with new company and they wanted us to talk with these guys. We are reviewing some database systems and this guy is a literal joker. His suggestion to speeding up our database "well we can use REDIS, REDIS is fast because it's in-memory". So we want to put how many TB of data into REDIS? We are talking about tons of historic data that never chan…

So, McKinsey is becoming another Deloitte!!

Re: As McKinsey Sells Advice, Its Hedge Fund May Have a Stake in the Outcome

#80

Post by mruts »

bob_theslob646 wrote: post #65
mruts wrote: post #32

I highly doubt that there’s any impropriety going on besides the lack of disclosure. Investment banks have been dealing with conflicts like this for a long time and the market has never cared.

There is something known as a "Chinese wall" that prevents that in banking. I am not sure if there is one in consulting. > A Chinese wall is an ethical barrier that prevents communication between members of an organization that might lead to conflicts of interest. For example, a Chinese wall could exist between departments where the exchange of information could unfairly influence trades. The "wall" is figuratively e…

That's a good point. And you're right, I don't believe there is anything like a Chinese Wall in consulting. But I still don't think that they would risk their reputation on very risky collusion.

If there were evidence that there was insider trading on behalf of the hedge fund, it would probably result in one of the largest SEC fine in recent years. It would be a massive blow to their reputation. I tend to believe (maybe naively) that firms act in their own best interest and that McKinsey wouldn't dare do something as egregious as collude with their hedge fund.

I know I probably have more faith in the financial services industry than most of HN, but McKinsey is a reputable firm with good people and I don't believe that in a million years (will that might be an overstatement) they would do anything like what the NYT is suggesting.

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