Will Stock Pickers Survive this Brave New World?

Several events, which occurred just this month, should have stock pickers quaking in their Salvatore Ferragamo’s.

According to the July 11, 2018, edition of the Financial Times, Facebook faces its first ever fine, which is a result of the Cambridge Analytica data scandal. Regulators in the United Kingdom’s Information Commissioner’s Office (ICO) accused Zuckerberg’s company of  breaking the law by failing to safeguard user data, coupled with its lack of transparency regarding third party sharing policies. Under UK law, the maximum fine allowed is 500,000 Pounds, roughly equivalent to 656,000 US dollars and the ICO is seeking the maximum penalty. Facebook has 28 days to appeal the ruling.

While this sounds like a steep penalty, it is around one thousandth of one percent of Facebook’s market cap…in short, much less than a slap on the wrist.

Ethical Investment Strategies

On the rise are funds with so-called ethical investment strategies. A recent example is Norway’s $1 trillion oil fund which dumped the bonds of PacifiCorp, a U.S. utility, and placed parent company, Berkshire Hathaway Energy on a watch list that has the potential of excluding them from the portfolio.

Warren Buffet’s companies are not alone. This fund is on its fourth iteration of exclusions for companies that earn more than 50 percent of their income from coal. Another U.S. (and Buffet) casualty is Tri-State Generation and Transmission, an electricity seller.

Coal is not the single criterion for exclusion. The world’s largest meat packer, Brazil’s JBS, was also dumped by the fund due to extensive corruption allegations. Norway’s oil fund is not unique in following an ethical investment strategy, and its approach is followed closely by many other investors.

Another Stock Pickers Nightmare

The European Union, citing antitrust violations, fined Google’s parent company, Alphabet, 4.34 billion Euros, or just north of $5 billion. That is roughly 40 percent of 2017 earnings. The EU has given Google 90 days to comply with its ruling. Failure to comply will result in fines that equate to around 5 percent of Alphabet’s daily turnover.

Of course there will be an appeal, but the handwriting is on the wall. Globalization has consequences, and they can be extremely costly.

What about Hedge Fund Jobs?

The events outlined above should make it clear that hedge fund jobs will become more diverse than ever before. Expertise in international law will be in great demand, as will expertise in the political and social sciences. While the events discussed here are unlikely to have a consequential impact on the value of these companies’ stock, the potential of this occurring in future cases is clear.

Laws promulgated by the EU, ethical investing strategies such as those practiced by the Norwegian oil fund, and punitive actions such as the one taken by the UK’s ICO are the tip of the spear. Another excellent example of foreign legislation with the potential to impact U.S. firms can be found here.

The important take away is that the hedge fund industry will increasingly require the services of the best and brightest from a variety of disciplines, which enhances opportunities for a variety of people to work in a hedge fund. The stock pickers will be relying on that expertise.

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