A famous financial anomaly is that the stock market mostly goes up when it’s closed: “Over at least the past three decades, investors have earned 100% or more of the return on a wide range of risky assets when the markets are closed, and, as sure as day follows night, have earned zero or negative returns for bearing the risk of owning those assets during the daytime, when markets are open,” as Victor Haghani, Vladimir Ragulin and Richard Dewey have put it. That is, stocks tend broadly to open higher than they closed the previous day, and then to go down a bit during the trading day. 

Nobody quite knows why. Bruce Knuteson has a famous theory, laid out in papers with titles like “Strikingly Suspicious Overnight and Intraday Returns,” “They Chose to Not Tell You,” “Nothing to See Here” and “They Still Haven’t Told You,” that quantitative trading firms conspire to inflate prices every morning and deflate them every evening. My own crude intuitive assumption is that, because US public companies try not to release information during market hours, most of the fundamental information that causes stocks to rise over the long run is in fact released and assimilated at night. But that is not very rigorous, and nobody else seems to believe it.

The other famous fact about this anomaly is that, even if you know about it, you can’t make any money trading on it: The transaction costs of buying all the stocks every morning and selling them every afternoon would eat up all the profits. In 2022, two exchange-traded funds (“NightShares 500” and “NightShares 2000”) were launched to profit from the anomaly, but they lost money and closed after a year. Everyone talks about the overnight anomaly, but nobody does anything about it.

But if your explanation for the anomaly has a form like “actually most global economic growth occurs when the US is sleeping,” then perhaps this is a temporary setback. Perhaps you can find some instrument that (1) reflects economic growth, (2) mostly goes up overnight and (3) has better liquidity and lower transaction costs than, you know, S&P 500 index futures. Anything’s possible. Bloomberg’s Isabelle Lee reports:

The Nicholas Bitcoin and Treasuries AfterDark ETF, filed with the US Securities and Exchange Commission in December under the ticker NGHT, made its debut on Wednesday.

The product is designed around a striking disconnect in Bitcoin’s return profile. Since BlackRock Inc.’s iShares Bitcoin Trust ETF (ticker IBIT) launched in January 2024, overnight price gaps — measured from the market close to the following day’s open — have generated a roughly 200% gain, according to Bespoke Investment Group, a figure that outpaces a buy-and-hold strategy that rose more than 40%. In contrast, the tactic that involves buying at the open and selling at the close a loss of more than 50%.

The fund, managed by boutique wealth manager Nicholas Wealth, will take long Bitcoin exposure via swaps at 4 p.m. Eastern time and exit by 9:30 a.m. the following morning. During US trading hours, capital rotates into short-term Treasuries. It does not hold Bitcoin directly.

I suppose the Bitcoin overnight anomaly doesn’t have to have the same explanation as the one for stocks:

In Bitcoin’s case, analysts have pointed to several explanations for the effect: global crypto-native capital trading during Asian and European hours; thinner overnight liquidity amplifying moves; and US-session selling pressure tied to ETF hedging, rebalancing and derivatives positioning. According to calculations by Bloomberg Intelligence’s Athanasios Psarofagis, the average daily opening gap for IBIT clocks in at around 2%.

It would be funny if all risk assets go up overnight, but for unrelated reasons.

The way US … regulation? law? society? life? … works is that if something bad happens, plaintiffs’ lawyers find people who are harmed by the bad thing and recruit them to bring a class-action lawsuit against the company or person that did the bad thing. If the lawsuit succeeds, (1) the people who were harmed get something (maybe money, or maybe just, like, less harm going forward) and (2) the lawyers who recruited them get a lot of money. That is, the salient features of this system are:

1. Regulation is done not by government regulators writing forward-looking rules, but by entrepreneurial plaintiffs’ lawyers suing companies for damages and thus setting precedents for what is not allowed; and
2. The lawsuits are not brought by the victims, and the lawyers do not work for the victims in the traditional sense. The lawsuits are dreamed up by the lawyers, and the victims are more or less hired by the lawyers.

This is exaggerated and not the only way that either regulation or lawsuits happen, but it’s an important and underrated part of how US law works. We often talk about it in the context of securities fraud lawsuits, because “everything is securities fraud” and bringing a securities-fraud lawsuit is a good way for a plaintiffs’ lawyer to punish bad actions and also make a lot of money. But there are other sorts of class-action lawsuits with a similar essential structure.

So an important piece of US regulation/law/society is the market that matches entrepreneurial plaintiffs’ lawyers (who have a lawsuit idea) with victims of harm (who have standing to bring the lawsuit that the lawyers want to bring). I am not an expert on how this market works. I see a lot of law-firm press releases on Bloomberg (“Firm XYZ is investigating possible securities fraud by Company ABC, call us”) and I assume they work fine; being a securities-fraud plaintiff is actually an institutional business so presumably the repeat-player lawyers have repeat-player clients on speed dial.

But if you are a lawyer suing social media companies for umpteen bajillion dollars for intentionally getting kids addicted to social media, where should you find clients? Well, you want clients who have been harmed by social media addiction. I suppose you could go look for clients at, like, silent meditation retreats and phone-addiction-rehab clinics. But pretty obviously the best place to find them is … Instagram? The Wall Street Journal reports:

Law firms looking for potential clients to sue on Instagram can no longer find them using Instagram.

In the wake of recent trial losses, Meta Platforms on Thursday began removing hundreds of advertisements from Facebook and Instagram that trial lawyers and marketing companies have been placing to recruit new clients. The ads seek to reach eligible plaintiffs to join mounting lawsuits against the social-media platform.

“We’re actively defending ourselves against these lawsuits and are removing ads that attempt to recruit plaintiffs for them,” the company said. “We will not allow trial lawyers to profit from our platforms while simultaneously claiming they are harmful.”

I mean, on the one hand, sure, fair play, I respect it. On the other hand that last sentence superficially sounds like a good argument — “you are profiting from our platform while saying it is harmful” — but obviously isn’t one. Of course the place to find the people who are most harmed by Instagram is on Instagram! Where else would they be? They’re addicted!

Okay here’s an insider trading hypothetical. You’re a senior executive at a US public company that is publicly negotiating to acquire another US public company. You don’t like the chief executive officer of the other company, and you are not shy about telling people that. You are talking to a guy, and you tell the guy that:

1. The CEO of the target company is “incompetent and also … a ‘suck-up,’” and you plan to fire him when the deal closes;
2. Your company is probably going to raise its bid for the other company to get the deal done; but
3. You think you are overpaying, and “if we could just wait another year, we could get it a whole lot cheaper.”

All of this information — your plans for executive succession, your plans to raise your bid, your view that the deal is misguided — is not public yet. Let us assume that it is also all material: If everyone did know this, stock prices would move. [1]

Here’s the question: Are you allowed to do this? Is this all legal? Nothing here is legal advice, but I think the answer is “it depends.” If the guy you are venting to is your therapist, or your priest, or your company’s banker or lawyer, or probably your spouse, or maybe even your golf buddy, then you are allowed to tell him. [2] Those people all owe some duty of trust and confidence to you, and you can reasonably expect them to keep your venting secret. 

If the guy you are venting to is a hedge fund manager who owns your company’s stock, and if the conversation began with him saying “hey I am trying to decide what stock trades to make, what can you tell me about the state of your acquisition negotiations,” then that seems bad. In particular, a US rule — Regulation FD — prohibits a company from “disclos[ing] any material nonpublic information” to “a holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer's securities on the basis of the information.” If you tell this hedge fund manager material nonpublic information, that seems like a Regulation FD violation.

(If he trades stock, is it also insider trading? That is a more complicated question; basically if you got some “personal benefit” from his trading then it looks like insider trading. If you are telling him all this because he promises you a cut of his trading profits, that’s insider trading. If you’re telling him all this because you think it is in the best interests of your company and you get no personal benefit out of it, it probably isn’t. But it’s still a Regulation FD violation, so still don’t do it.)

If the guy you are venting to is just some guy on the street, though … what? You don’t know if he’s a shareholder, you have no reason to think he will trade, and if he does you don’t expect any personal benefit. You’re not telling him for any reason relating to stock ownership, or stock trading, or the stock or the company at all. You are telling him because you like to vent. 

My impression is that this would not be insider trading, or a Regulation FD violation. It’s not, like, great. It might violate your company’s policies, which probably say “don’t go around telling everyone secret information about our business.” But it doesn’t seem like a securities-law violation. Not legal advice!

My point here is mostly that US securities law about disclosure of nonpublic information is weird and unintuitive. People intuitively think “executives at public companies are not allowed to tell anyone material nonpublic information without disclosing it publicly,” but that’s not really right. 

Anyway:

Jeff Shell is stepping down as president of Paramount Skydance Corp. following a contentious lawsuit by a high-stakes gambler who accused him of leaking inside information. ...

Shell became the subject of a scandal in recent weeks after R.J. Cipriani sued him for $150 million over allegations that the executive failed to deliver on a promise to develop a TV show honoring his late mother in exchange for public-relations services.

The suit, filed in Los Angeles Superior Court, also claims that Shell provided him with material nonpublic information about Paramount’s business, including that it was overpaying for Warner Bros. and its negotiations for a $7.7 billion TV contract the company signed with Ultimate Fighting Championship in August.

Paramount said the board conducted “a complete and thorough review” of the allegations that Shell violated securities disclosure rules and said the facts demonstrated that they “do not establish a securities law violation.” 

Here is Cipriani’s complaint, which is mostly about Shell allegedly promising to make a TV show for him and not doing it, but also a little bit about disclosure:

During [a meeting with Cipriani], Shell also disclosed to Plaintiff his disdain for David Zaslav, the Chief Executive Officer of Warner Bros. Discovery, Inc., and stated that Paramount’s senior leadership would not be retaining Zaslav in any post-merger capacity because they considered him to be incompetent and also to be a “suck-up,” overly enamored of Hollywood celebrities. ...

Shell further disclosed at this meeting that Paramount intended to enhance and “sweeten” its pending hostile tender offer for Warner Bros. Discovery to $30 per share in cash, with additional financial commitments. This information was not publicly announced until February 10, 2026, eight days after Shell disclosed it to Plaintiff. ...

Perhaps most remarkably, Shell then stated words to the effect: “We’re paying way too much for Warner Bros. If we could just wait another year, we could get it a whole lot cheaper.” … This admission by Shell constitutes a disclosure of material non-public information — specifically, the internal valuation assessment of Paramount’s own President and Director — to a non-insider with no duty of confidentiality, in violation of SEC Regulation FD.

Yeah I’m with Paramount here, those claims are all a little embarrassing but “do not establish a securities law violation.”

One popular worry about indexing is that index funds tend to buy high. The most popular indexes, like the S&P 500, tend to consist of the biggest companies. Stocks get into the index by going up a lot. Once they are in the index, the index funds have to buy them. If a company’s stock goes up a lot for bad reasons — misplaced optimism, bubbles, fraud — then the index funds will buy near the peak. The index can be “the final dumping place” for pump-and-dumps, I wrote a few weeks ago.

Another popular worry about indexing is that the indexes are pretty concentrated. The big indexes contain the biggest companies, and these days the very biggest companies are proportionally bigger than they used to be. The S&P 500 has 500 companies, but just 10 of them represent about 40% of its value. If you buy the S&P 500 to get a diversified set of investments, you might not be getting the diversification you want.

In fact, US mutual funds are more or less required to have a certain amount of diversification; they cannot be too concentrated. (Specifically, for tax reasons, they prefer to put at least 50% of money in holdings that are each smaller than 5% of their portfolios.) With some indexes, this could actually be a problem: The Nasdaq 100, for instance, consists of 100 tech stocks, and several of the biggest of those companies represent more than 5% of the market cap of the index. To avoid the problem, the Nasdaq 100 (and some other big indexes, like S&P 500 sector indexes, though not the main S&P 500 itself) has its own concentration cap: “The aggregate weight of the companies whose weights exceed 4.5% may not exceed 48%,” and if it would, then some companies’ weights are capped at 4.4%. We have talked about this rule in the past, when Nasdaq announced a special rebalancing that seemed to have the effect of forcing index funds to sell a bunch of Tesla Inc. stock. 

So the two index worries have sort of opposite effects:

• When a company’s stock goes up and it becomes big enough, it will be added to the index, which will force funds to buy it for non-economic reasons, so it will go up more.
• When a company’s stock goes up even more, and it becomes really really big, its weight in the index will be capped, which will force funds to sell it for non-economic reasons, so it will go down.

The first worry is that index funds are forced to buy high, so if there’s some mean reversion, they will lose money. The second worry is that index funds are forced to sell high, so if there is persistent momentum, they will miss out: If an index becomes too concentrated because a handful of stocks are in fact really really good, the index funds will have to pare their positions in those stocks and miss out on some of their future really good gains.

The same effects apply to a lot of actively managed mutual funds. When a stock is added to the index, it becomes part of active funds’ benchmark, and they feel some pressure to buy it. (We talked last week about active funds feeling pressure to buy SpaceX for that reason.) When a stock becomes too big, active funds that hold it might be too concentrated, so they will feel some pressure to sell it.

Here (via Alpha in Academia) is an NBER working paper on “The Hidden Cost of Stock Market Concentration: When Funds Hit Regulatory Limits,” by Lubos Pastor, Taisiya Sikorskaya and Jinrui Wang:

As stock market concentration has risen, regulatory limits on fund portfolio concentration have become increasingly binding, especially for large-cap growth funds. When funds approach these limits, they trim their largest holdings and reduce equity exposure. Funds perform worse when constrained. A constraint-based ownership measure predicts stock returns, particularly among the largest firms. These findings suggest that high market concentration can distort stock prices by limiting the ability of optimistic investors to scale their positions. Just like short-sale constraints can produce overpricing by limiting pessimistic investors' views, constraints on long positions can generate underpricing by suppressing optimists' views.

I suppose the takeaway is that Nvidia Corp.’s stock price would be even higher but for the fact that diversified mutual funds can’t really put all their money on Nvidia. And they’re missing out; from the paper:

In regressions with fund fixed effects, large-cap growth funds perform worse when constrained. Over the full 2019-2024 sample, these funds earn significantly lower risk-adjusted returns in the five months following the constrained quarter. In the first three months alone, the average large-cap growth fund’s four-factor-adjusted return is 28 basis points (bps) lower.

Arguably if SpaceX, OpenAI and Anthropic go public this year, the stock market will get even more concentrated. You could have a thesis like “all future economic value will accrue to like 10 giant companies that control artificial intelligence, so I will just buy those stocks.” But diversified mutual funds can’t have that thesis.

Sure?

Bill Ackman is in talks to launch a strategy that would make big bets on complacency in financial markets, in a bid to mimic the success of doomsday trades the billionaire investor made during the pandemic.

Ackman’s Pershing Square would use the fund to make “asymmetric” trades aimed at profiting by wagering against the prevailing narrative in markets, according to people familiar with the matter.

The strategy would resemble bets during the coronavirus crisis, when Ackman paid $27mn for derivatives that appreciated when corporate debt sold off. The trade handed Pershing a $2.6bn windfall after economic ructions caused by the pandemic sent bond markets reeling. ...

Ackman’s plans for a possible new fund come as this year’s market volatility has wrongfooted Pershing. The firm’s flagship fund had lost more than 16 per cent of its value as of the end of March, according to filings.

Pershing’s new fund would keep much of its assets in short-term US debt before deploying the capital on large credit and macro bets mirroring those historically made by the main fund, said one of the people.

I love it? A couple of points here. First, sure, if you have a track record of making 10,000% returns on big bets in crises, or even of making a 10,000% return on a big bet in a crisis, you can probably fundraise on that track record. “I will park your money in Treasury bills until I find another 100-bagger, and then do that”? What is the cadence of the 100-baggers? Every … five years? Actually a fund with a return profile like “+4% a year most years, but occasionally +10,000%” would be a great pitch.

Of course the problem with that is that any normal person would have a powerful bias toward action. If you’ve got a billion dollars of client money parked in Treasury bills until you find a great asymmetric opportunity, wouldn’t you find a great asymmetric opportunity every couple of weeks? Wouldn’t many of them not, in fact, be great asymmetric opportunities? Wouldn’t you just fritter it away on some mediocre trades?

But here Ackman actually does have real advantages over any other hedge fund manager, in that:

• His main strategy is kind of “we buy a dozen stocks and hold them,” suggesting that, unlike most hedge fund managers, he has overcome his bias toward action and achieved a certain Zen stillness. (Just in his investing, I mean; not the tweeting.)
• This would apparently be a permanent capital vehicle, like most of his funds. Most hedge fund managers have a bias toward action in part because, if they are not actively making money for clients, the clients will take their money back. Permanent capital solves this problem. If the investors can’t take their money back, you really can park it in Treasury bills until you find a trade you really really like.

Obviously the counterargument is that “this year’s market volatility has wrongfooted Pershing” and the main fund has lost money. [3] If you’re pitching people on your ability to spot asymmetric trades that will make you big money in market downturns, you have to, you know, put the asymmetric trades on before you lose money in a market downturn. You can’t get complacent!

We talked yesterday about a claim by John Carreyrou in the New York Times that Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, is a guy named Adam Back. Back denies it, and there is plenty of skepticism. For instance, Bryce Elder at FT Alphaville has an entertaining critique. Here is one of his objections:

The regular ritual of outing potential Satoshis has a logical hurdle: what does it say about the hoard of approximately 1mn bitcoin whose ownership is attributed to Nakamoto, which is valued at nearly $70bn at current prices and hasn’t moved since 2010? Consistent with all previous speculative stories, the NYT report says nothing useful.

To believe Back is Satoshi, a person must believe that in the past year, Satoshi has fronted Cantor Fitzgerald’s launch of a politically advantaged crypto treasury vehicle and has financed at least two more, the Paris-listed The Blockchain Group and H100 Group of Sweden. They must believe that Satoshi’s company raised money from numerous investors including Bitfinex, Tether’s sister company, to build a platform for stealth bitcoin trading between institutions.

We talked about Back’s crypto treasury company yesterday; I agree that it’s a little philosophically inconsistent and infra dig for Satoshi, but my impression is that everyone who founds a digital asset treasury company (1) has plenty of money and (2) is slumming it a little, so whatever. But as Elder says, this problem is not unique to Carreyrou’s proposal. Satoshi, everyone assumes, controls a stash of Bitcoin worth $70 billion that he has not touched in 16 years. So any candidate to be Satoshi is either:

1. Dead,
2. Living an implausibly modest lifestyle for someone with $70 billion of ready cash,
3. Hustling for money in a way unbecoming of someone with $70 billion of ready cash, or
4. Elon Musk. [4]

If you think Satoshi is any living non-Musk candidate, you need an explanation for why he’s not living like a leisurely billionaire.

I want to propose an explanation that could apply equally to any anarcho-libertarian cryptography expert who could plausibly be Satoshi. Perhaps Satoshi, whoever he is, (1) invented Bitcoin and then (2) lost his password so he no longer has access to his Bitcoin. (And has to make a living by, like, launching DATs or whatever.) I do think that accidentally losing access to billions of dollars’ worth of Bitcoin is the very most Bitcoin thing a person could possibly do, and in particular the most 2010-era-Bitcoin thing a person could possibly do, so it stands to reason that Satoshi, the patron saint of Bitcoin, would have done it. What if James Howells is Satoshi?

Wall Street Poised for Record $18 Billion Equities Trading Haul. Wall Street Watchdogs Pull Back Amid Trump’s Deregulatory Push. Wells Fargo whistleblower award slashed by Wall Street watchdog. Paramount M&A Loan Cut to $49 Billion as Lending Group Swells. Investors sought to pull $20bn from private credit funds in first quarter. CoreWeave, Meta Strike Another $21 Billion Deal for AI Computing. Pimco Seeks to Sell Parts of $14 Billion Oracle Data Center Debt. OpenAI halts Stargate UK data centre project. BDO axes 31 partner roles as AI pressure grows and profits fall. Thomas Peterffy Says There Should Be No Bans on Insider Trading. A Prospectus for the ‘Tehran Toll Booth’ IPO. You can pay a few thousand dollars to gossip with a Bravo star.

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