An under-the-radar financial blog is at war with one of the most polarising companies in finance: Hedgeye Risk Management.
Stay-at-home dad Carmine Pirone runs the blog, named Cramer’s Shirt. It’s a shout-out to “Mad Money” star Jim Cramer, who memorably duked it out with Hedgeye’s CEO, Keith McCullough, on Twitter in 2012.
In March of this year, Pirone assessed Hedgeye’s business actions, and specifically McCullough’s, labelling them as fraudulent on his blog. Pirone claims McCullough passes himself off as a trader, especially through his language on Twitter. On top of that, Pirone says, McCullough doesn’t accurately report his “trades” — he picks and chooses what wins to tell his followers.
But Hedgeye’s terms of service and McCullough have addressed that. McCullough doesn’t trade. No one at Hedgeye does. The company is an “actionable investment research” agency, aka a tip sheet, not a fund with a portfolio. And it claims to hold transparency in high esteem.
Pirone republished his allegations again on April 7. Four days later, a law firm representing Hedgeye slapped him with a lawsuit. The complaint seeks a jury trial on Hedgeye’s defamation claims against Pirone for his accusations of fraud. In late April, he was served with an amended complaint, that time with a summons to appear in court attached.
Hedgeye Risk Management
McCullough is a former hedge-funder — as you can read in his book “Diary of a Hedge Fund Manager” — but Hedgeye doesn’t run any money. The employees there spend their time analysing and researching markets, not buying and selling. Instead, Hedgeye sells research to clients, likely both institutional investors and mum-and-pop day traders, the latter for a subscription fee of $US29.95 a month. Institutions pay a much heftier sum, anywhere from $US40,000 all the way up to half a million, according to McCullough. He’s said that institutional investors account for 90% of Hedgeye’s subscriber base.
What’s helped give McCullough’s research firm a recognisable name in the finance world is his self-assured, combative Twitter presence. McCullough does not hesitate to insult or attack people, and often gleefully ridicules the brokerage firms and analysts he describes as “Old Wall Street.” Add CNBC’s Steve Liesman (and, more generally, CNBC, from whose air McCullough has been banished), Doug Kass, anonymous finance blogger ZeroHedge, and the Fed to the list of people and institutions that McCullough has battled.
McCullough also uses Twitter to tease a Hedgeye subscription service, #RealTimeAlerts, which provides clients with buy, sell, short, and other signals on a variety of different securities. Potentially addressing the recent controversy, McCullough has even tweeted screenshots of exactly what subscribers see.
As any businessperson would, McCullough uses his presence on social media to market himself and his company. But his tactics have attracted considerable criticism, most notably from the man his company is suing.
The Prospective Hedgeye Client
Pirone, who became interested in finance at about age 12, now has two daughters, a 3-year-old and a 6-month-old. He often scrolls through CNBC articles with one hand — while the other holds a baby bottle. Pirone openly discloses he hasn’t been employed since 2011, but he day trades (although not frequently).
“I think three times in my life I’ve sold in the same day because it was an option … maybe ‘swing trade’ is a better term for me. I usually hold stuff for years, sometimes, especially stocks,” Pirone told Business Insider.
Pirone became interested in Hedgeye and its real-time alerts. But before subscribing, he decided to follow the recommendations and see how they did.
“I was, like, ‘Well, this is crap.’ It doesn’t take very long to figure it out. Surely people are on to this, but I was watching and [McCullough] seems to be suckering these people in,” he said.
Hedgeye has declined to comment on the lawsuit.
How McCullough Presents Himself
In the simplest terms, Pirone thinks McCullough and his company don’t tell the whole truth about their recommendations. From McCullough’s feed, Pirone claims that a newbie to “finance Twitter” might even think that McCullough trades. Remember, he doesn’t.
Last time I had a bad day like this was the best day of the yr to sell
— Keith McCullough (@KeithMcCullough) February 11, 2014
“I mean, if you can merely give out paper trades and charge an admission price to see them, why take the actual risk of investing real money, right? In that sense he’s smarter than all of us,” Pirone wrote of McCullough in a post.
At some point — Business Insider hasn’t confirmed when — Hedgeye appeared to change the language explaining its real-time alerts (as CalibratedConfidence noted on ZeroHedge via screenshot). “Every day, you will receive email alerts in real-time whenever Hedgeye CEO Keith McCullough makes any trade,” the company’s previous explainer read.
The version currently reads: “Receive email alerts every day in real-time whenever our proprietary model flashes a Buy or Sell signal.”
Moreover, the day after Pirone’s post was published, Hedgeye posted this video, making its intentions with real-time alerts clear. “This is what I would do in this security, right here, right now, timestamped. That’s it. It’s not a portfolio. I don’t run a portfolio,” McCullough noted.
Hedgeye’s SEC public disclosure says the same: Neither McCullough nor anyone else at the company trades. An SEC technical-assistance associate says the file or revision date isn’t available to the public on these documents.
McCullough also argues that, regardless of his tweets, he can’t hide from Hedgeye’s subscribers.
“I’ve shown over 2,700 signals since 2008. If you’re a subscriber, you can actually see all of those signals … Every single timestamp we’ve ever had is open for anyone to look at,” McCullough explained on Yahoo Finance’s Breakout.
Hedgeye’s real-time alerts also omit details — dividends, trading commissions, capital-gains taxes — from financial advice, Pirone points out. In fairness, though,
the firm’s terms of service, last updated in September 2012, specifically say that the company doesn’t account for those factors.
A Question Of Performance
Pirone analysed Hedgeye’s real-time alerts record from 2013. “The weighted average return of all trades last year from Jan 1, 2013 — Dec. 11, 2013 was .3382%, that’s not 33% that’s a fraction of ONE PER CENT,” he wrote in his post.
Soon after, McCullough tweeted his “reality,” which didn’t address his 2013 real return. His scorecard showed information from 2014 without percentage gains.
“Perhaps my favourite was when after he had gotten his face torn off shorting TWTR [Twitter] this past December, he shorted again near the all time high. When it fell back down to the low 60’s soon after he of course let everyone know that he shorted it at 73, but he conveniently left out he covered $US1 lower just north of 72, not in the low 60’s,” Pirone wrote.
A Fund Once Powered By Hedgeye
While Pirone’s blog analysed McCullough’s hypothetical success, Griffin Asset Management had taken it a step further. In 2012, the company offered a fund based on McCullough’s real-time alerts. The aim was to create a low-volatility fund with exposure to numerous asset classes from around the world, Doug Famigletti, president and CIO of Griffin, told Business Insider.
“We attempted to take the trades and create a portfolio,” he said. “And obviously whenever you take any trade recommendation you need to take a lot of things into consideration” — including the various types of assets and the ratio between longs and shorts.
The trading didn’t go well. Griffin used a back-tested model to scale real-time alerts into workable trading. But the project lasted only a little over a year.
“With any sort of investment management product, you have to have a product big enough to be sustainable to make the costs not very high, especially on a fund format,” Famigletti said. “You’re trading quite a bit, to move exposures around, which works much better in a fund format, than in a single account format.”
Famigletti said that Griffin may not have seen the success it had hoped for because of size limitations, even though he and his associates control about $US400 million for both institutions and individuals.
“I went into that partnership thinking we could build something very successful. And I think the reason we weren’t as successful as we wanted to be was because we’re not that large of a firm. I, personally, think that there are a lot of big firms right now that are running mutual funds that look a lot like Real-Time Alerts,” Famigletti said.
Full disclosure, as Famigletti wanted: He has more than a passing professional relationship with Hedgeye and McCullough. He roomed with Daryl Jones, Hedgeye’s current director of research, back in the day in New York City, and the three of them played hockey together. Famigletti’s endorsement even appears on the back of McCullough’s book.
The High Cost Of Dividends And Taxes
As previously mentioned, Hedgeye doesn’t spend much time addressing dividends or taxes. But both can, of course, affect returns.
“If over the next year, you have more longs than shorts, you’re going to have a net positive from dividends, as long as the yield is comparable,” Famigletti noted. “It really depends on which securities are held.”
On the other hand, if you short often, as McCullough seems to encourage, paying dividends can gouge profits.
“Taxes are an incredibly important piece of that because it’s all short-term gains. If you make 10% and it’s all short-term gains, you’re paying it all out in marginal-income tax rate. So that’s important,” Famigletti said.
But he also doesn’t feel Hedgeye has a responsibility to account for these factors in its real-time alerts’ profits. Wall Street brokerage firms, for example, do not. Nor do many mutual funds, hedge funds, or other investment companies that tout their returns.
“I mean, Goldman Sachs publishes a conviction buy list. They move that around quite a bit. When they say they gained 20% in a stock, they don’t say [whether] you took gains based on taxes,” Famigletti said.
Who’s Signing Up For Real-Time Alerts?
While Hedgeye hasn’t revealed the precise demographic composition of its clients, McCullough has said 90% of them are institutional investors. And the company’s ADV Form, a public disclosure filed with the SEC, reveals even more.
Eric Chaffee, a law professor with expertise in securities regulation at the University of Toledo, helped Business Insider interpret the document. “It is fair to say that the company is reporting no individual clients …. [and] appears not to focus on serving individuals,” Chaffee told Business Insider in an email after reviewing the document.
The screenshot below outlines the rest of Hedgeye’s clients, as the company reported them.
But then there’s Will Hassell, a 17-year-old subscriber to Hedgeye’s Morning Newsletter, from Huntsville, Alabama. He signed up a little under three months ago but has followed McCullough and Hedgeye on Twitter for about nine months.
“I kind of almost use [McCullough] as contrast to some of the other analysts and ideas out there … a more macro view rather than stock specific,” Hassell told Business Insider.
Hassell considered subscribing to real-time alerts. The low cost attracted him. But on second thought, he realised the tool wouldn’t really help him.
“Especially with real-time alerts, [McCullough’s] doing a lot of shorting. With me, I’m more cautious of shorts … I’m not really a big day trader, so for me, it’s not that useful,” Hassell said.
So far, though, Hassell feels good about his subscription to Hedgeye’s newsletters. They have benefitted him on a larger scale.
“For what I use it for, I think it has given me more of a clarity. I have gone and done stuff that he’s recommended, like being long on the euro. That’s been paying off a lot,” he explained. “It’s not really stocks. It’s generally more macro level.”
Considering Hassell’s subscription, the company’s SEC reportings may not be accurate, according to Chaffee. “Which is especially troubling considering the warning at the top of the form,” he said. That warning reads: “You must keep this form updated by filing periodic amendments.”
A technical-assistance associate at the SEC told Business Insider that the search function would return the most recent information on Hedgeye that the SEC possesses. The site, updated nightly, would also show any amendments. Hedgeye, however, did submit its brochure with the SEC on March 14, 2014. That document states that the company “welcomes individual investors to subscribe” but doesn’t report any currently. It also reports “no material changes as of October 2013.”
Further, individual, potentially less-experienced traders such as Hassell — to whom the $US29.95 subscription fee might appeal — won’t have resources nearly as large as institutions like Griffin. And even this firm struggled to apply real-time alerts to a real portfolio.
Famigletti, however, thinks the benefit depends on how subscribers apply real-time alerts to their trades. In his mind, most people interested in subscribing would understand the complexities of the market.
“I caution anybody that thinks they can subscribe to something for $US29.95 a month and think it’s going to make them rich,” he said. “
I’ve been in this business for 17 years, and a lot of people who read blogs, subscribe to newsletters, they’re not totally naive.”
Hedgeye Goes After Pirone
Hedgeye’s lawsuit, brought by Raipher D. Pellegrino & Associates, alleges that Pirone falsified the accusations of fraud and intended to harm McCullough’s and Hedgeye’s reputations. And as a result, the company has lost subscribers and money.
In defamation cases, the burden of proof lies with the plaintiff, First Amendment lawyer Bob Corn-Revere, a partner at Davis Wright Tremaine LLP, told Business Insider. “The basics don’t change … But whether you’re dealing with a public figure or private figure matters a lot,” he said.
To prove that damage, Hedgeye would likely have to release company information, such as subscription numbers and profits, in court. As a private company, Hedgeye’s apparent success has created conjecture in the finance and media worlds about both.
“Generally, if someone is claiming they have been injured, they have to document that injury,” Corn-Revere said, although he didn’t want to speculate on the case.
Based on employees’ recent tweets, however, the opposite seems true, another point that CalibratedConfidence brought to light.
If this case goes to court, which seems unlikely, those tweets could come back to haunt Hedgeye. “Whenever you’re collecting evidence about whether or not a company has been harmed, you’re going to look to occurrences, online or not, to bring up in depositions,” Corn-Revere said.
Below is a copy of Hedgeye’s original complaint against Pirone. On Page 2, Section B, there’s a typo — that the plaintiff will pay damages to the plaintiff. The second suit had the same mistake, according to Pirone.
“I’m not concerned about this case at all. I don’t see how it could possibly go to trial. On page two, it looks like they’re suing themselves … The most annoying part is that I have to spend time addressing this,” Pirone said.
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