[tribune]

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 investments and the advice the firm sells to clients,” says the Times, and I suppose there are some shady elements: When McKinsey advises on a bankruptcy, for instance, and its hedge fund owns one or another slice of the capital structure, then there’s a clear potential for conflicts of interest.

Mostly, though, it’s hard to get too worked up about this. For one thing, most of the fund’s money seems to be run by outside advisers, and even the stuff run by McKinsey employees seems to be mostly walled off from the consulting business. For another thing, the incentives are mostly good: McKinsey’s consultants are trying to make the company better, and its hedge fund is invested in the company and wants the company to get better, so there is no problem here. “The firm’s partners stood to profit from their own advice,” says the Times about McKinsey’s indirect investments in Valeant Pharmaceuticals, but why would that be bad? If they do stuff to make the stock go up, then they make money, but that is also what the company wants. (In the event, Valeant’s stock went down, which was bad for both Valeant and McKinsey.) Really companies ought to demand that their consultants buy some of their stock, so they have some skin in the game with their advice.

Of course, what would really be scandalous is if McKinsey’s hedge fund shorted companies that the firm advised, and then the consultants tried to give those companies ruinous advice. You couldn’t advertise that strategy, but much of the Times story is about how secretive MIO is, and if you can be secretive enough then maybe you could pull off this trade.

[crazygringo]

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?

[tomp]

Why do you think that would be more likely in a structure like McKinsey's than in other structures? E.g. many banks have such structures (e.g. trading and M&A have a "firewall" between them so that no information crosses), and obviously insider trading/market manipulation happens between companies with no (or very little) legal connections (e.g. LIBOR scandal, or most other insider trading).

[Nicholas_C]

In the short time I worked for a bank during an internship it was very apparent that there is training one goes through regarding this sort of thing and a very formalized processes with strong rules about how you can even contact the other side of the house. I doubt McKinsey has this structure.

This is a pretty softball take by Matt Levine.

[nebolo]

Of course McKinsey has this structure. Indeed Puerto Rico recently investigated this structure and found it up to the task: https://www.mckinsey.com/~/media/mckinsey/about%20us/media%2...

[the_watcher]

Why would you assume that McKinsey doesn't also have a Chinese wall with training that MIO employees have to go through?

[Nicholas_C]

I would assume that since McKinsey is a consulting firm primarily they don’t have to comply with the same regulations that a bank does.

[akozak]

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.

[casefields]

The biggest risk if they were doing it is if anyone whistle blows on them that person can get a fat reward: https://www.sec.gov/whistleblower

[lordnacho]

Well then McKinsey should just say which firms they have positions in, and everyone can be satisfied that there's no problem?

[solveit]

McKinsey should do nothing because responding to a non-story is terrible PR.

[diminoten]

Because they're signing a bunch of document saying they're not going to do exactly this, so if they are doing exactly this, well... with their own petards they shall be hoistened, and that's a given.

[rhizome]

>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 investments and the advice the firm sells to clients,”

That's a lot of words to say "sketchy-ass shit."

[onetimemanytime]

Still, there shouldn't be any hints of conflicts of interests. And there should be no chance on giving bad advice + shorting. Or it's not ethical /legal if company A hires them to see if buying company B is good or not and they trad on it.

You are an adviser? Good. Here's your consulting fee and that should do it.

[mlthoughts2018]

Wouldn’t the main worry be insider trading? If you advised a bunch of people to adopt AWS this quarter, and the revenue bump to Amazon is going to happen a few months later, then you could unfairly use non-public knowledge to invest in Amazon ahead of time.

I don’t see how McKinsey would not be an “access person” held to the same insider restrictions as their client company’s executives.

Either way this snippet from Bloomberg seems to completely miss the point.