The Bridge's Market Recap - November
Viren Chainani
Hope everyone had a lovely Thanksgiving! Welcome back to The Bridge’s market recap. November brought its usual share of market-related drama, from reactions to the election, to the wild ride of SMCI, to more struggles for endowments with heavy bets in more opaque corners of the financial world. Let’s jump in:
Trump Trades and Prediction Markets
America’s vote is in, and the markets have had nearly a full month to rearrange themselves in response. The repercussions of Trump’s election have been largely what you would expect - hopes of deregulation have driven growth in stocks and crypto, 10-year treasury yields have remained elevated as inflationary pressures cloud the long-term macro outlook, and Mexico has overtaken China as the US’ leading source of imports.
But despite these reactions, many questions still remain around who the biggest winners in a Trump administration will be - Tesla CEO Elon Musk has loudly and publicly hitched his wagon to the president-elect, but details around Trump’s planned EV policy and the future of subsidies remain open questions. M&A activity might pick up with the all-but-assured ousting of Lina Khan, but will the presumably higher odds of mergers going through actually reduce returns from clever merger arbitrageurs? But as always, sometimes the biggest winners in the gold rush aren’t the miners but the ones selling the pickaxes, and new marketplaces that have stoked the flames of the investing/gambling debate anew might prove to be the best investment in and of themselves.
For the unsophisticated investor who wanted to test their convictions about the presidency but was dissuaded by trying to find answers to the complex questions above, 2024 saw the rise of a simpler alternative than stock picking or asset class reweighting. In a world where retail investors are accessing increasingly more abstract and complex strategies through options contracts or overengineered ETFs, it is almost refreshing to see the rise of prediction markets. “Just bet on the presidency” is an incredibly easy sell, particularly in an America that has become friendlier to gambling, and this year the CFTC permitted US-based prediction market Kalshi to offer citizens bets on the outcome of the election. But it isn’t just retail investors paying attention - smart money is now turning to markets such as Kalshi and Polymarket to provide alternative data to the polls - betting markets had favored Trump even as leading polls showed a dead heat. If the thesis that putting your money on the line leads to more honest results than opinion polling, prediction market data could upend many models and force traders and investors to recalibrate their views on political risk.
As the markets contemplate the incoming administration, Kalshi is ready to take advantage of the uncertainty. The platform offers simple, yes/no contracts on outcomes ranging from Fed decisions to cabinet picks. In a country increasingly eager to gamble, these markets may be another development that pushes the envelope. But for seasoned traders, they may provide insights that were previously difficult to capture.
SMCI
Over the past month, investors in Super Micro Computer Inc. have learned many lessons, likely the most important of which has been taking accounting concerns seriously. On a personal note, the most valuable takeaway has been to make sure I send out these articles after the month has actually concluded so no major, wildly interesting, completely article-overshadowing events happen right after I hit publish.
Super Micro rose to fame as a buzzy name in the tech space - their high-speed, high-power servers have become part of the infrastructure boom that has arisen to meet the demand for data centers and server management driven by the computation power-hungry LLMs of the AI boom. But accounting problems have long been a concern for investors - the company settled with the SEC in August 2020 over violations in accounting practices and agreed to pay $17.5 million in penalties. In 2018, the company was briefly delisted from Nasdaq after delaying its filing of financial reports by nearly two years. In 2024, short-seller Hindenburg Research alleged that the company had rehired executives involved in the original scandal and were engaging in accounting malpractice once again.
While the stock slowly pared gains over these concerns, October 30th was when hell truly broke loose. The stock collapsed over 30% as Ernst & Young resigned as the company’s auditor, citing integrity and ethics concerns. For a profession often characterized as boring, or as a glorified tickbox check, this was the rare moment where public accountants were able to stand up for the integrity of the markets, and with a good dash of drama too, with their resignation letter as close as corporate speak can get to a cold-shoulder rejection text.
Since then, the stock has been a playground for traders looking for volatility. Shares continued to fall through November as the company faced another delisting but popped once BDO was brought on as EY’s replacement, bringing returns to a positive 21% since November 1. With more delayed filings on the way as BDO scrambles to take over, the stock remains incredibly volatile, and the answer to “Is the worst behind the company?” is far from a resounding yes.
Ivy League Woes
Our last story is somewhat of a follow-up on two previous topics of interest, liquidity in private markets and the investment landscape in China, through an unusual starting point - Ivy League endowment funds. Endowments at elite colleges have long been a focus of critics for their immense size, and a point of envy for many investors for their returns - the “Yale model” popularized by David Swensen set forth a playbook for how colleges should approach investments, with staggering success. Part of this recipe for success was a willingness to take risks in alternative asset classes and geographies that other institutions may have shied away from. Both of these tenets have been put to the test, as endowment bets in private equity and China have soured, all while the public markets have delivered incredible returns.
Data from Cambridge Associates shows that 6 out of 8 of the Ivy League endowments underperformed the industry average return of 10.3% for the 12 months ended June. Yale and Princeton fared the worst, posting 5.7% and 3.9% respectively, deepening concerns on the heels of an even worse 2023 where full-year returns were 1.8% for Yale and a loss of 1.7% for Princeton. A large part of this underperformance may be attributable to the significant weighting on PE and VC, with data from Old Well Labs showing Princeton and Yale had allocated at least 40% of assets to these strategies. The volatility in distributions from these funds has been a pain point for large institutional investors broadly and has been magnified in endowments due to their overweighting. For a strategy that has attracted interest well beyond just the endowment space from sovereign wealth funds to pension funds, recent underperformance is a reminder of the volatility and illiquidity of alternatives.
The strategic reshuffle that may be coming to endowments will be a moment of reckoning for even its greatest proteges. Lei Zhang, and his fund, Hillhouse Investment, once the largest PE firm in Asia, have had to go back to the drawing board as institutional investors rethink their allocation to China. A former intern of Swensen’s, Zhang became famous for taking $20 million of seed money from Yale’s endowment and plowing it into Tencent, then a fledgling tech company worth roughly $2 billion. Now worth over $470 billion, Tencent was the play of a lifetime for Zhang, and started his career as one of China’s shrewdest investors, with an eye for startups that could adapt successful business models to the Chinese market. While his track record has been immaculate, Zhang and Hillhouse face headwinds - his newest buyout fund is focused on markets in Europe and Asia outside of China, but investors are doubtful that his edge will carry over. For Zhang, he remains confident that his ideas will continue to win out over the long term: “Walk alongside people with a broad horizon,” he says in his memoir The Value, “and make time your friend.”
As always, thank you for reading. As we head into a new year and new administration, the market is as interesting as ever, and I hope you will join me next month to cover more of the same.
Sources:
https://hindenburgresearch.com/smci/
https://en.wikipedia.org/wiki/Supermicro#Accounting_practices_and_short-seller_allegations
https://www.ft.com/content/3a6a1ce4-a5cc-4180-9f2f-2665a7e08b1f