Element Capital Management, a hedge fund run by Jeffrey Talpins, is yet another example of everything that is wrong on Wall Street today. The issue here is not that Element is doing anything illegal or even shady, but rather just another example of the “anything goes” attitude that pervades U.S. financial markets. Taking advantage of a flawed system is not “good business”. It does not create GDP or employment, it merely enriches Talpins and his investors and exacerbates the growing wealth inequality problem.
Apparently, Talpins is leveraging his $6 billion hedge fund to buy many times that amount of U.S. treasury notes and bonds at auctions, and then sell them back into the market again for a slight profit, often within just a few hours.
More on Element Capital’s massive U.S. treasury trades
According to sources who spoke to Carolyn Cui and Gregory Zuckerman of the Wall Street Journal, Element Capital has been the largest bidder in nearly all of the 62 Treasury note and bond auctions for the eight months between November and July, these people said. At most of the auctions, many of which saw $30 billion debt sold, Element purchased close 10% of the total issue.
Obviously, the Treasury Department wants to know the identity of large-scale bond buyers because it prefers long-term holders such as pension funds, insurance firms and central banks. Treasury officials rightfully worry that large trades made by hedge funds will result in sales that artificially jack up treasury market volatility and potentially increase borrowing costs.
“If you’re issuing debt, your preference is those ‘sticky investors,’” notes Scott Skyrm, a managing director at Wedbush Securities.
Analysts highlight that Element Capital is a “macro” fund that invests in bond, stock and currency markets based on global macroeconomic trends.
One of the WSJ sources said that Element had been shorting bonds in anticipation of higher interest rates, but has recently been unwinding that wager, requiring them to buy Treasurys.
Other sources close to the firm say there is another reason: Element Capital is one of the last hedge funds that that still makes trades trying to make profit from the effects of supply and demand in the Treasury market. It works because demand for bonds goes up and down on factors such as perceptions of growth and market risk, while supply is based on regular auctions of different-maturity securities by the Treasury. Rather obviously, new supply tends to slightly depress prices for short periods of time, sometimes just for an hour or two.
Talpins is a trader formerly at Citigroup and Goldman Sachs. He has a reputation for an intense, self-centered personality that can lead to clashes with rivals. He even tested the patience of ex-Federal Reserve Chairman Ben Bernanke by asking 10 consecutive questions in an important meeting with the chairman and a number of other hedge fund execs.