Tag: ChatGPT

The Limits to the Artificial Intelligence Revolution

Posted on by phoffman@channelchek.com

What Will AI Never Be Good At?

Artificial intelligence (AI) is a true disruptive technology. As any informed content writer can tell you, the technology creates efficiencies by speeding up data gathering, research, and even graphics that specifically reflect the content. As an example, it is arguably quicker to use ChatGPT to provide a list of ticker symbols from company names, than it is to look them up one by one. With these small time savers, over the course of a week, far more can be produced as a result of AI tools saving a few minutes here and there.

This presents the question, what are the limits of AI – what can’t it do?

Worker Displacement

Technological revolutions have always benefitted humankind in the long run; in the short run, they have been disruptive, often displacing people who then have to retrain.

A new Goldman Sachs report says “significant disruption” could be on the horizon for the labor market. Goldman’s analysis of jobs in the U.S. and Europe shows that two-thirds of jobs could be automated at least to some degree. In the U.S., “of those occupations which are exposed, most have a significant — but partial — share of their workload (25-50%) that can be replaced,” Goldman Sachs’ analysts said in the paper.

Around the world, as many as 300 million jobs could be affected, the report says. Changes to labor markets are therefore likely – although historically, technological progress doesn’t just make jobs redundant, it also creates new ones. And the added productivity allows the masses to live wealthier lives. This clearly was the end result of the  industrial revolution, and years after the computer revolution, we are at a high rate of employment and have at our fingertips much which we never even dreamed.

The Goldman report says the use of AI technology could boost labor productivity growth and boost global GDP by as much as 7% over time.

There are few reasons to expect that the AI revolution won’t also provide more goods and services per person for a richer existence. But, what about the disruption in the interim? I was curious to know what artificial intelligence is not expected to be able to do. There isn’t much information out there, so I went to an AI source and fed it a bunch of pointed questions about its nature. Part of that nature is to not intentionally lie, I found the responses worth sharing as we will all soon be impacted by what the technology can and cannot do.

Limitations of AI that Will Persist

Artificial intelligence has come a long way in recent years and the speed of progression and adoption is accelerating. As a result, applications have become increasingly sophisticated. But, there are still many things that AI cannot do now and may never be able to do.

One thing that AI cannot do now and may never be able to do is to truly understand human emotions and intentions. While AI algorithms can detect patterns in data and recognize certain emotional expressions, they do not have the ability to experience emotions themselves. This means that AI cannot truly understand the nuances of human communication, which can lead to misinterpretation and miscommunication.

Another limitation of AI is that it cannot replicate the creativity and intuition of humans. While AI can generate new ideas based on existing data, it lacks the ability to come up with truly original and innovative ideas. This is because creativity and intuition are often based on a combination of experience, emotion, and imagination, which are difficult to replicate in a machine.

AI also struggles with tasks that require common sense reasoning or context awareness. For example, AI may be able to identify a picture of a cat, but it may struggle to understand that a cat is an animal that can be petted or that it can climb trees. This is because AI lacks the contextual understanding that humans have built up through years of experience and interaction with the world around us.

In the realm of stocks and economics, AI has shown promise in analyzing data and making predictions, but there are still limitations to its abilities. For example, AI can analyze large datasets and identify patterns in market trends, but it cannot account for unexpected events or human behavior that may affect the market. This means that while AI can provide valuable insights, it cannot guarantee accurate predictions or prevent market volatility.

Another limitation of AI in economics is its inability to understand the complexities of social and political systems. Economic decisions are often influenced by social and political factors, such as government policies and public opinion. While AI can analyze economic data and identify correlations, it lacks the ability to understand the underlying social and political context that drives economic decisions.

A concern some have about artificial intelligence is that it may perpetuate biases that exist in the data it analyzes. This is the “garbage in, garbage out” data problem on steroids. For example, if historical data on stock prices is biased towards a certain demographic or industry, AI algorithms may replicate these biases in their predictions. This can lead to an amplified bias that proves faulty and not useful for economic decision making.

Take Away

AI has shown remarkable progress in recent years, but, as with everything that came before, there are still things that it cannot do now and may never be able to do. AI lacks the emotional intelligence, creativity, and intuition of humans, as well as common sense reasoning and social and political systems. In economics and stock market analysis, AI can provide valuable insights, but it cannot assure accurate predictions or prevent market volatility. So while companies are investing in ways to make our lives more productive with artificial intelligence and machine learning, it remains important to invest in our own human intelligence, growth and expertise.

Paul Hoffman

Managing Editor, Channelchek

Sources

OpenAI. (2021). ChatGPT [Computer software]. Retrieved from https://openai.com

https://www.cnbc.com/2023/05/16/how-generative-ai-chatgpt-will-change-jobs-at-all-work-levels.html

The U.S. Debt Limit and the False Sense of Security in Money Market Funds

Posted on by phoffman@channelchek.com
Image Credit: Images Money (Flickr)

Even a Short-Lived Default Would Hurt Money Market Fund Investors

While the U.S. Treasury is now at the mercy of politicians negotiating, positioning, and stonewalling as they work to raise the debt ceiling to avoid an economic catastrophe, money kept on the sidelines may be at risk. Generally, when investors reduce their involvement in stocks and other “risk-on” trades, they will park assets in money market funds. These investment products are now paying the highest interest rates in 15 years, which has made the decision to “take money off the table” even easier for those involved in the markets.

But, are investors experiencing a false sense of security?

Background

Money Market Funds (MMF) are mutual funds that invest in top credit-tier (low-risk) debt securities with fewer than 397 days to maturity. The SEC requires at least 10% to be maturing daily and 30% to be liquid within seven days. The acceptable securities in a general MMF include Treasury bills, commercial paper, and even bank CDs. The sole purpose of a money market fund is to provide investors with a stable value investment option with a low level of risk.

Unlike other mutual funds, money market funds are initially set and trade at a $1 price per share (NAV). As interest accrues, rather than the value of each share rising, investors are granted more shares (or fractional shares) at $1. However, the funds are marketed-to-market each day. Typically market prices don’t impact short-term debt securities at a rate above the daily interest accrual. But “typically” doesn’t mean always. Occasionally, asset values have dropped faster than the daily interest accrual. When this happens, the fund is worth less than $1 per share. It’s called “breaking the buck.”

When a money market fund “breaks the buck,” it means that the net asset value (NAV) per share of the fund falls below $1. In addition to quick valuation changes, it can also happen when the fund’s expense ratio exceeds its income. You may have gotten a notice during the extremely low interest period that your money market fund provider was absorbing expenses. This was to prevent it from breaking the buck.

Nothing is Risk Free

Just under $600 billion has moved into money-market funds in the past ten weeks. This is more than flowed into MM accounts after Lehman Brothers went belly up which set off panic and flights to safety. Currently, $5.3 trillion is invested in these funds; this is approaching an all-time record.

The Federal Reserve has been lifting interest rates at a record pace, the level they have the most control over is the bank overnight lending rate, or Fed Funds. This impacts short-term rates the most. Along with more attractive rates, stock market investors have become nervous. This is another reason asset levels in MMFs are so high – a high-yielding money-market fund that is viewed as risk-free looks attractive compared to the fear of getting caught in a stock market sell-off.  

As discussed before, there are risks in money-market funds. And right now, the risks may be peaking. This is because government spending has exceeded the ability for the U.S. to borrow and pay for it under the current debt ceiling limit. The limit was actually reached last January when it was addressed by kicking the problem further down the road. Well, the road now ends sometime in June. In fact, U.S. Treasury Secretary Janet Yellen said the U.S. government may run out of cash by June 1 if Congress doesn’t act, and that economic chaos would ensue if the government couldn’t pay its obligations. Not paying obligations would include not paying interest on maturing U.S. Treasuries.

It isn’t a stretch to say the foundation of all other securities pricing is in relationship with the “risk-free” rate of U.S. debt. That is to say, price discovery has as its benchmark that which can be earned in U.S. debt which has been presumed to be without risk of non-payment.

What Happens to Money Market Funds in a Default?

In a default, the U.S. Treasury wouldn’t pay the full principle it owes on liabilities such as maturing  Treasury debt – short term term government debt with extremely short average maturities is a staple of market funds. That is why the price of one-month Treasury debt has dropped recently, sending its yield up to above 5% from a 2023 low of about 3.3%. It has driven expected returns of MMFs up as well, but there is a risk that these short maturities may not get fully paid on time. Many fund providers’ money market funds would then break the $1 share price.

Breaking the buck can have significant consequences for investors, particularly those who rely on money market funds for their cash reserves. Because money market funds are considered a low-risk investment, investors may not expect to lose money on their investment. If a money market fund breaks the buck, it would diminish investor confidence in the stability of these funds, leading to a potential run on the fund and broader implications for the financial system.

Likelihood of Breaking the Buck

Money market funds breaking the buck is a relatively rare occurrence. According to the Securities and Exchange Commission (SEC), there have been only a few instances where MMFs have broken the buck in the history of the industry. The most significant of these occurred in 2008 during the financial crisis when one of the oldest money market funds, Reserve Primary Fund, dropped below $1 due to losses on its holdings of Lehman Brothers debt securities. This event led to a run on many money market funds creating significant instability in the financial system.

Since the Reserve Primary Fund incident, regulatory changes have been implemented to strengthen the money market fund industry and reduce the risk of funds breaking the buck. These changes include requirements for funds to maintain a minimum level of liquidity, hold more diversified portfolios, and limit their exposure to certain types of securities.

Take Away

Nothing is risk-free. Banks such as Silicon Valley Bank found that out when their investment portfolio, largely low credit risk, normally stable securities, wasn’t valued at what they needed it to be worth to fund large withdrawals.

Stock market investors that were drawn in invest in to rising bond yields also found that when yields keep rising, the values of their portfolios can drop just as quickly as if they were invested in stocks during a sell-off. While no one truly expects the current tug-of-war over debt levels in Washington to lead to a U.S. default, one can’t be sure at a time when there have been many firsts that we thought could never happen in America.

Paul Hoffman

Managing Editor, Channelchek

Can You Prepare for Hyperinflation?

Posted on by phoffman@channelchek.com

Hyperinflation, Can Investors Protect Themselves?

Inflation in Argentina so far in 2023 is running at 126.4%. Meanwhile, its GDP has declined by 3.1%. This certainly meets the definition of hyperinflation. Can this situation occur in the U.S. economy? Hyperinflation is when prices of goods and services in the economy run up rapidly; at the same time, it causes the value of the nation’s currency to fall rapidly. It’s a devastating phenomenon that has serious consequences for businesses, investors, and households. Below we explore the causes of hyperinflation, its effects on the economy, and some ways to protect investable assets against it.

Causes of Hyperinflation

Hyperinflation can be caused by a variety of factors, but one ingredient that is most common is excessive money printing by the country’s central bank. When a central bank allows excessive cash in circulation, especially if it is during a period of low or negative growth, natural economic forces that occur when there is an abundance of currency chasing the same or fewer goods, serves to drive up prices and down currency values. This inflation can quickly spiral out of control, leading to hyperinflation. Other causes could include shortages of goods or services driving prices up as demand outstrips available supply.

Effects on the Economy

Excessive inflation is not good for anyone that holds the impacted currency. Businesses can command higher prices, but they will also be paying higher prices to run their business and receiving payment with notes with far less purchasing power. This is because hyperinflation increases costs for labor and raw materials, weighing down profit margins. Less obvious, but certainly adding to the hardship, is that businesses may have trouble securing financing and loans during hyperinflation; this can limit their ability to function or grow.

For households and individuals, hyperinflation also rapidly decreases purchasing power, as prices for goods and services jump up. This lowers living standards in the country as people are forced to pay more for the same goods and services. Additionally, hyperinflation can lead to a loss of confidence in the currency. Behavior including the belief that items should be purchased now because they will be more expensive tomorrow leads to hoarding and other actions that create shortages and drives up prices even further.

How Some Prepare for Hyperinflation

Hyperinflation is rare, yet, once the wheels start turning, such as they did in Venezuela in 2016, or Germany in 1923, it is important for businesses and individuals to take steps to prepare for the possibility. Here are ways that people have prepared for excessive inflation in their native currency.

Diversify Your Investments: While some believe it is always prudent to stay widely diversified, it may offer even more protection when the economy goes through the turmoil of excessive inflation. Preparing in this way means spreading your investments across a variety of asset classes, such as stocks, bonds, real estate, and commodities. This will help by avoiding any one particular asset class that gets hit hard. Keep in mind, stocks are often a good hedge against moderate inflation, and precious metals have historically been looked to for protection in times of extreme inflation. Earnings of companies that export are not expected to suffer as much as importers.

Hold Some Assets Denominated in Other Currencies: This can include established digital currencies, foreign stocks, bonds, that are not denominated in your own home currency. By holding assets denominated in other currencies, you can protect yourself from its devaluation versus others.

Invest in Hard Assets: Hard assets, such as gold and silver, land, and even tools can be a good way to protect yourself or your business from hyperinflation. These assets have intrinsic value and can retain their value even if the currency they are denominated in loses value. Remember that if inflation remains, it is likely to cost more in the coming months for the same piece of office equipment that helps your business run more efficiently.

Cryptocurrencies: Keeping within the guidelines of diversification, more established tokens such as bitcoin and ether are considered by some to help protect from hyperinflation. A word of caution, cryptocurrencies have little history against currency devaluation and inflation. The theory however is these digital currencies are decentralized and not subject to the same inflationary pressures as fiat currencies.

Take Away

In 2018 inflation in Venezuela exceeded 1,000,000%, proving, when the recipe for higher prices is in place, the unimaginable can happen.  

While there is no consumer or investor that can proactively impact a rising price freight train, if hyperinflation is expected, there are steps one can take to reduce the negative impacts. These financial steps can be as simple as buying things today that you expect to need later, and more substantially diversifying your portfolio toward hard assets, companies that export to countries not experiencing inflation, and even bonds with either short maturities or an inflation factor as part of the return.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.nasdaq.com/articles/argentina-inflation-seen-at-126.4-in-2023-central-bank-poll-shows

https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html#:~:text=In%201923%2C%20at%20the%20most,surprise%20by%20the%20financial%20tornado.

https://www.theatlantic.com/business/archive/2012/03/the-hyperinflation-hype-why-the-us-can-never-be-weimar/254715/

Understanding Stock Options: A Comprehensive Guide for Investors

Posted on by phoffman@channelchek.com

Stock Options Trading Explained

Stock options, sometimes referred to as derivatives, are a tool for managing risk when combined with a related equity holding, or as a means to amplify return on moves made by a stock or index. There are also related income strategies investors should know about. Newer investors often learn they could have benefited from options after it’s too late. Below we talk about stock options, what they are and how they are used to fill some investor knowledge gaps they may not even be aware they have. This discussion includes understanding what options are, why they are used, the different types of options available, and how you can use them to hedge against the market moving in the wrong direction. You’ll also discover how options can be used to amplify portfolio results.

What are Options?

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price and date(s). The underlying asset can be anything from stocks, bonds, commodities, or even currencies, for the purpose of this article, we focus on stocks and stock indices.  

There are two types of stock options: call options and put options. A call option gives the buyer the right, but not the obligation, to buy the underlying stock at a specified price and date. A put option gives the buyer the right, but not the obligation, to sell the underlying stock at a specified price and date.

When an investor buys an option, they are said to be “long” the option. When they sell an option, they are said to be “short” the option. Being long a call option is similar to being long the stock, as the investor profits if the stock rises. Being long a put option is similar to being short the stock, as the investor profits if the stock price falls.

Why Are Options Used?

Options are used for various reasons, such as speculation, hedging, and income generation. Speculators implement strategies to bet on the direction of the options underlying stock. For example, an investor that expects a stock price may rise will buy a call option. It they believe it will fall, they could get short exposure by going long a put option.

Options can also serve investors to hedge (protect) their holdings and offset potential losses in the underlying position. For example, if an investor owns XYZ Stock, they can buy a put option to protect against a potential drop in XYZ Stock. If the stock price falls, the put option will increase in value; depending on the shares controlled by the option, it can offset the decline in the stock.

Income generation using stock options is growing in usage. The scenario where this works is when an investor sells a call option against a stock they own, as part of the sale, they collect a premium for the option. If the stock price remains below the strike price of the call option, the investor keeps the premium and the stock. If the stock price rises above the strike price, the investor must sell the stock at the strike price, but still keeps the premium. This works best in a flat or declining market.

Using Options as a Hedge Against Losses

Options can be used as a hedge against the market moving against a stock position. For example, if an investor owns 100 shares of ABC Stock, currently trading at $50 per share. And the investor is concerned that the stock price may fall, but does not want to sell the stock and miss out on potential gains if the stock price rises, or in some cases, create a tax situation.

To hedge against a potential drop in ABC’s stock price, the investor may decide to buy a put option with a strike price of $45, expiring in three months, for a premium (cost) of $2 per share. If the stock price falls below $45, the put option will increase in value, offsetting the losses in the stock. If the stock price remains above $45, the put option will expire worthless, and the investor keeps the stock and the premium.

Time Decay, Intrinsic Value, and Extrinsic Value

So far, the use of options described here have been fairly straightforward. But there are considerations that might help keep this portfolio tool in the toolbox until it is most needed. The considerations are time decay, intrinsic value, and extrinsic value. Here is what is important to understand about these realities.  

Time Decay:

Time decay, also known as theta, refers to the decrease in the value of an option as it approaches its expiration date. Options have a limited lifespan, and as time passes, the likelihood of the option ending up in the money decreases. Therefore, the time value of an option decreases as it approaches its expiration date, resulting in a decrease in the option premium.

Intrinsic Value:

Intrinsic value is the amount by which an option is in the money. In other words, it is the difference between the current market price of the stock and the strike price of the option. For example, if a call option has a strike price of $50 and the underlying stock is currently trading at $60, the intrinsic value of the option is $10 ($60 – $50).

Intrinsic value only applies to in-the-money options, as options that are out-of-the-money or at-the-money have no intrinsic value. The intrinsic value of an option is important because it represents the profit that an option holder would realize if they exercised the option immediately.

Extrinsic Value:

Extrinsic value, also known as time value, is the portion of an option’s premium that is not attributed to its intrinsic value. Extrinsic value is the amount that investors are willing to pay for the time left until expiration and the possibility of the underlying asset moving in their favor.

Extrinsic value is affected by several factors, including the time left until expiration, and the volatility of the underlying stock. As the expiration date approaches, the extrinsic value of an option decreases, and the option premium decreases as well.

Options Premium:

The options premium is the price that the buyer pays to purchase an option. The options premium is determined by various factors, including the current market price of the underlying asset, the strike price, the expiration date, and the level of volatility in the stocks price.

The options premium is made up of intrinsic value and extrinsic value. The intrinsic value represents the portion of the premium that is directly attributable to the difference between the current market price of the underlying asset and the strike price of the option. The extrinsic value represents the portion of the premium that is not attributable to the intrinsic value and is based on the time left until expiration, the level of volatility in the market, and other factors.

Understanding time decay, intrinsic value, and extrinsic value is crucial when it comes to trading stock options. Time decay affects the value of an option as it approaches its expiration date, while intrinsic value and extrinsic value make up the options premium. By understanding these concepts, investors can better understand their costs and make more enlightened decisions.

Take Away

Stock investors transact in stock options for various reasons. These include portfolio protection, income generation for an existing portfolio, and speculating on the direction of an asset. There are considerations associated with holding options beyond any commission or bid/offer spread. These are intrinsic premium costs for in-the-money trades, extrinsic as they relate to value and decay on the position as it approaches its expiration date.

Adding risk management using options to your investment tools to call upon when appropriate can reduce stress; speculating with the help of derivatives can be very rewarding but may have the impact of increasing portfolio swings in value along the way.

Paul Hoffman

Managing Editor, Channelchek

Are You an Accredited Investor? Here’s What You Need to Know

Posted on by phoffman@channelchek.com

Demystifying What it Means to be an Accredited Investor

Have you looked into determing if you qualify as an accredited investor? Individuals and entities that are deemed “accredited” may be permitted to participate in certain types of investment offerings that would not otherwise be available to those that don’t meet the criteria. It allows access to a broader range of offerings, many of which are considered to allow for greater potential returns in exchange for higher potential downside.

What is an Accredited Investor?

An accredited investor includes those that meet certain financial criteria set by the Securities and Exchange Commission (SEC) in order to participate in certain types of private securities offerings. Accredited investors are deemed to have the financial sophistication and ability to bear the risks associated with these investments.

The SEC defines an accredited investor as someone who has a net worth of at least $1 million (excluding the value of their primary residence) or who has earned at least $200,000 in annual income ($300,000 for married couples) for the last two years and has a reasonable expectation of earning the same income in the current year. Entities such as trusts, partnerships, corporations, and certain types of retirement accounts can also be accredited investors if they meet certain financial criteria.

Why Learn if You’re Accredited

So why is it worth knowing if you qualify as an accredited investor? For one, it opens up a wider range of investment opportunities to allocate your capital to. This can include private securities offerings, private equity funds, venture capital funds, and direct investment in hedge funds. These types of investments are considered riskier than publicly offered registered securities but may offer higher potential returns.

Another benefit of being an accredited investor is that it allows you to invest in crowdfunding opportunities that are only available to accredited investors. Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet. While crowdfunding is open to anyone, there are certain types of crowdfunding that are only available to accredited investors. These offerings, called Regulation D (Reg D) offerings, allow companies to raise capital without having to register with the SEC.

Reg D offerings can take several forms, including Rule 506(b) and Rule 506(c) offerings. Rule 506(b) offerings allow up to 35 non-accredited investors to participate in the offering, while Rule 506(c) offerings are only available to accredited investors. Companies raising capital through a Rule 506(c) offering are required to verify the accredited investor status of participants through documentation such as tax returns or financial statements.

Important to Think About

It seems obvious, but worth noting that just because you are an accredited investor does not necessarily mean that investment opportunities that become available to you will work out well. It’s crucial to do your due diligence and thoroughly research any investment opportunity before committing funds. While those that meet the definition of accredited and may have attained a higher degree of financial sophistication increase their opportunities, investing always involves a varying degree of risk.

Is it worth becoming an accredited investor to open the door to exploring private securities offerings? While this decision ultimately depends on your individual financial goals and circumstances, it’s worth considering the potential downsides of becoming an accredited investor solely for this reason.

For one, becoming an accredited investor often requires a significant amount of wealth, which may not be feasible for everyone. Additionally, investing in private securities offerings often requires a higher degree of financial sophistication and access to professional investment advice. It’s important to consider whether or not you have the resources to properly evaluate investment opportunities and make informed decisions.

Furthermore, private securities offerings are often less liquid or illiquid, meaning that it can be challenging to sell your investment if you need to access your funds quickly. This lack of liquidity can be a significant disadvantage for investors who may need to access their funds in the short term.

Take Away

Being an accredited investor allows individuals and entities to participate in certain types of private securities offerings that are typically not available to non-accredited investors. This can provide access to higher potential returns but also comes with a higher degree of risk. It’s important to thoroughly research any investment opportunity before committing your funds and to consider the potential downsides of becoming an accredited investor solely for the purpose of investing in private securities offerings.

Did you Know?

From time to time, Noble Capital Markets, Inc. may post Investment opportunities (“Offerings”) on its site that may only be purchased by accredited investors, as defined by Rule 501 of Regulation D under the Securities Act of 1933 (“Regulation D”). To learn more about your qualifications and potentially these offerings, click here to explore further.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor

https://www.finra.org/rules-guidance/guidance/faqs/private-placement-frequently-asked-questions-faq

https://www.channelchek.com/terms/accredited-investors

Hedge Funds 101: What They Are and How They Work in Investing

Posted on by phoffman@channelchek.com

Developing a Deeper Understanding of Hedge Fund Investments

Hedge funds have become a buzzword in the world of investing, it’s one of those investment instruments that people think they can explain until they’re asked to – not everyone understands what they are or how they work. In simple terms, a hedge fund is a private investment vehicle that is managed by a professional investment manager or team. The primary goal of the fund is to generate above market returns for its investors by using various investment strategies that are often more complex and riskier than traditional investment vehicles like managed mutual funds or index funds. The following should help fill many of the gaps in investors understanding of these funds, including their legal structure, investment strategies, and how they differ from other types of investment vehicles.

Structure of a Hedge Fund

Hedge funds are formed as limited partnerships. This makes investors in the fund limited partners. The investment manager is the general partner of the fund and is responsible for making investment decisions on behalf of the limited partners. The general partner is also responsible for raising capital for the fund, safekeeping, and negotiating fees with investors.

Hedge funds are typically only available to accredited investors, which requires that they meet SEC wealth, income, or financial sophistication thresholds. This is because hedge funds are considered to be high-risk investments and are not subject to the same regulations as other types of investment vehicles. Accredited investors are assumed to have the financial sophistication and resources to handle the risks associated with hedge fund investments.

Investment Strategies

Hedge funds use a wide variety of investment strategies to generate returns for their investors. These strategies can range from relatively simple, such as long/short equity, to highly complex, such as quantitative trading or event-driven investing. Some of the most common investment strategies used by hedge funds include:

Long/Short Equity – This strategy involves buying stocks that are expected to increase in value (long) and shorting stocks that are expected to decrease in value (short).

Event-Driven – This strategy involves investing in stocks that are likely to be impacted by specific events, such as mergers, acquisitions, or bankruptcies.

Quantitative Trading – This strategy involves using mathematical models to identify trading opportunities based on patterns in historical data.

Distressed Investing – This strategy involves investing in companies that are in financial distress or undergoing restructuring.

Global Macro – This strategy involves investing in currencies, commodities, and other assets based on macroeconomic trends.

Valuing a Stock

One of the key skills required to be a successful hedge fund manager is the ability to value a stock or other opportunity. This involves analyzing a company’s financial statements, industry trends, and other relevant factors to determine the intrinsic value of the company’s worth. If the stock is undervalued, the hedge fund may decide to invest in it in the hopes that its value will increase over time. Conversely, if the stock is overvalued, the hedge fund may decide to create a short position in it in the hopes that its value will decrease.

Compared to Other Investment Vehicles

Hedge funds differ from other types of investment vehicles in several ways. First, hedge funds are not subject to the same regulations as other types of investment vehicles, which means that they have more flexibility to use complex investment strategies and take on higher levels of risk. Second, as mentioned above, hedge funds are typically only available to accredited investors, whereas more traditional types of investments like mutual funds or index funds are available to the general public.  Finally, hedge funds typically charge higher fees than other types of investment vehicles, which can include both management fees and performance fees.

Take Away

Hedge funds are complex investment vehicles that can use a variety of riskier methods in an attempt to generate high returns for their investors by using a wide variety of investment strategies. These strategies can range from relatively simple to highly complex and are often more risky than other types of investments. Hedge funds are structured as limited partnerships and are typically only available to accredited investors. They differ from other types of investment vehicles in their lack of regulatory oversight, and known to charge higher fees.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor

Bed Bath and Beyond, Why Companies Delist, and Investor Impact  

Posted on by phoffman@channelchek.com

Do Investors Take a Bath When Stocks Delist?

One popular meme stock, Bed Bath & Beyond (BBBY) is being delisted from the Nasdaq exchange, according to a company announcement. There are a number of reasons a public company can delist from an exchange. In BBBY’s case it is related to their recent bankruptcy filing, according to management. Below are examples of the many reasons a company would delist, what happened in BBBY’s case, and what delisting means for investors.

Many Reasons to Delist

Delisting from the stock exchange refers to the removal of a company’s shares from public trading on a particular exchange. It occurs by management choice or at the exchange’s request. The process can happen for various reasons, such as regulatory violations, bankruptcy, or a company’s decision to go private. Delisting can have significant consequences for the corporation and its investors, including decreased liquidity and visibility in the market.

A common reason for delisting is regulatory violations. For example, if a company fails to comply with the reporting requirements of the Securities and Exchange Commission (SEC), it may face delisting from the stock exchange. This was the case with Chinese tech giant Alibaba, which was delisted from the Hong Kong Stock Exchange in 2020 because of regulatory violations.

Sometimes, companies have a reason to take themselves private and delist as part of that process. Going private means that a corporation’s shares are no longer traded on public stock exchanges. In 2013, computer maker Dell was taken private in a deal worth $24.9 billion. The company’s delisted its shares from the NASDAQ exchange. Twitter was recently purchased and taken private.

As is the case with Bed Bath and Beyond, bankruptcy often causes shares not to meet the exchange’s criteria, forcing a delisting. Another retailing example is Toys R Us in 2018. It filed for bankruptcy and was subsequently delisted from the New York Stock Exchange (NYSE).

Delisting can have significant implications for a company and its shareholders. One of the main consequences is a decrease in liquidity. When a company is delisted, its shares are no longer traded on public stock exchanges, which means that investors may have a harder time finding buyers or sellers for their shares.

Additionally, delisting can impact a company’s visibility in the market. Without a public listing, a company may find it more difficult to attract investors and raise capital. This can be particularly challenging for small and mid-sized companies that rely on the stock market to raise funds.

Bed Bath and Beyond’s Delisting

Trading in BBBY common stock will cease at the opening of the trading day on May 3 – according to a filing with the Securities and Exchange Commission (SEC).

In its bankruptcy announcement, the company said trading of shares would halt on the Nasdaq exchange. Nasdaq and the NYSE have standards companies need to meet for their stocks to be listed and stay listed. This includes minimum levels of liquidity, market value, or price level.

Back in January, Nasdaq warned the company its shares would be delisted after it failed to report quarterly results in a timely manner. The company eventually filed the report and returned to compliance. This time Bed Bath and Beyond said it doesn’t intend to appeal.

Shareholders will still own the stock and fractional shares of the company after May 3. However, without the help of a major exchange, trading between stockholders and speculators is usually much more difficult. Some bankrupt companies’ stocks continues to trade in over-the-counter markets (OTC). They typically have the letter “Q” at the end of their stock symbol. It isn’t yet clear if BBBY will trade as BBBYQ.

After a company files for Chapter 11, unsecured creditors—including suppliers and leaseholders—line up in an attempt to get repaid. How much creditors get paid back depends on how much money Bed Bath and Beyond can raise from the sale of either parts of its business or the chain itself.

Take Away

Delisting from major stock exchanges can happen for various reasons and can have significant consequences for investors. While regulatory violations and bankruptcy can lead to forced delisting, companies may choose to delist voluntarily to go private or for other strategic reasons. Regardless of the reason, delisting can impact a company’s liquidity and visibility in the market, making it important for investors to carefully consider the implications before investing in delisted companies or those facing delisting.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/edgar/browse/?CIK=0000886158

https://www.investopedia.com/ask/answers/10/stock-holder-lose-equity-chapter-11.asp

https://bedbathandbeyond.gcs-web.com/news-releases/news-release-details/bed-bath-beyond-inc-receives-nasdaq-delisting-notice

https://bedbathandbeyond.gcs-web.com/news-releases/news-release-details/bed-bath-beyond-inc-files-voluntary-chapter-11-petitions

Blockchain Decentralized Organizations are Quietly Growing Behind the Scenes

Posted on by phoffman@channelchek.com
Image Credit: BYBIT (Flickr)

The Evolution of Blockchain Includes the Less Heralded DAO

Less talked about creations that can only exist with blockchain technology are Decentralized Autonomous Organizations (DAO).  This is an organization that operates autonomously on a blockchain network, using smart contracts to execute its functions. While a famous Ether hack gave DAO’s a figurative black-eye a few years back, the defi organizations exists and new purposes, and with that new challenges as well.

What is a DAO?

A Decentralized Autonomous Organization (DAO) is a type of organization that is run by smart contracts on a blockchain network rather than a centralized authority. In a DAO, the rules and regulations are encoded in computer code, which is executed automatically by the blockchain network. This means that decisions are made through a decentralized voting process rather than being controlled by a central authority.

DAOs are not controlled by any single entity or individual but rather by a distributed network of users. The DAO will self-execute on rules and directives encoded in the blockchain. All of these decisions and transactions made within a DAO are recorded on a public blockchain, this is designed to make them transparent and auditable.

DAOs can be used for a wide range of applications, including governance, finance, and decentralized applications (DApps). They offer a way for communities to come together and govern themselves in a decentralized and transparent way, without the need for a centralized authority.

The Purpose of a DAO

The purpose of a DAO is to provide a trusted method of organizing and managing a group of people, without the need for a centralized authority. DAOs are designed to be self-governing, transparent, and autonomous. They enable members to collaborate on a common goal, make decisions through a democratic process, and manage resources in a decentralized way. DAOs are often used for fundraising, investing, and community-driven projects.

Examples of DAOs

One of the most well-known examples of a DAO is The DAO, which was launched in 2016. The DAO was a decentralized investment fund that raised $150 million in Ether (the cryptocurrency of the Ethereum network). Unfortunately, The DAO was hacked shortly after its launch, leading to the loss of millions of dollars. This event highlighted the potential risks associated with DAOs and the need for proper security measures.

A more successful example of a DAO is MakerDAO, which is a decentralized lending platform that uses a stablecoin called DAI. MakerDAO enables users to borrow and lend cryptocurrency without the need for a centralized authority. It operates autonomously through a set of smart contracts that are stored on the Ethereum blockchain network.

Who Uses DAOs?

DAOs are typically used by communities, organizations, and individuals such as Decentralized Finance (DeFi). The Defi projects use DAOs to govern the platform and make decisions about its future path and development.

Some gaming communities have used DAOs to manage in-game assets and govern the community. Social media outlets have chosen decentralization and implement a DAO  social media platforms use govern the platform and make decisions about content moderation and platform development.

Are DAOs Legal and Safe?

Regarding the safety and legality of DAOs, they can be safe and legal if designed and implemented correctly. However, like any technology, there are risks associated with DAOs, including the potential for hacking and exploitation of smart contracts.

The legality of DAOs depends on the jurisdiction and the specific nature of the DAO. In some countries, there may be regulatory frameworks that apply to DAOs, while in others they may not be explicitly recognized. In general, the local law applies to the DAO. Those that engage in illegal activities or violate securities laws can be subject to legal action. Regulations specifically applicable to this new technological format are subject to revision.

Take Away

Blockchain technology has grown and evolved since the creation of the first DAO, simply called, The DAO, in 2016. The development of new blockchain platforms and smart contract languages has made it easier to create and operate DAOs, and there are now many different types of DAOs being developed for various use cases. The security of blockchain technology has also improved and expanded adoption and adaptation to different groups will rely on the trust of the technology to shield itself from outside harm.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://blockworks.co/news/reevaluating-crypto-journalism-funding

https://www.investopedia.com/tech/what-dao/

https://www.bloomberg.com/news/articles/2020-09-16/a-trip-down-the-crypto-rabbit-hole-in-search-of-the-dao-hacker#xj4y7vzkg

AI a New Favorite Among Retail Investors

Posted on by phoffman@channelchek.com
Image Credit: Focal Foto (Flickr)

Recent Investment Trends Include Small-Cap Artificial Intelligence Stocks

C3 AI, sometimes written C3.ai, is an artificial intelligence platform that provides services for companies to build large-scale AI applications. Its stock had the fifth highest traded shares among Fidelity’s retail investors on Monday (February 6). This included a record-breaking $31.4 million worth of shares traded among the broker’s individual self-directed traders. According to Reuters, “Retail investors are piling up on small-cap firms that employ artificial intelligence amid intensifying competition between tech titans.”  The article points to Google and Microsoft as examples of companies that expect AI to be the next meaningful driver of growth.

Investors, for their part, are looking to get ahead of any acquisition spree that deep-pocketed companies may embark on, which could include buying the advanced technology by acquiring small-cap tech firms.

Focus Heightened by ChatGPT

The spotlight ChatGPT finds itself in, three months after its launch, is indicicative of the interest in this technology amongst investors and users. With applications as numerous than one can think up, the technology could outdate many services provided by tech companies like Alphabet (GOOGL), or Microsoft (MSFT) – big tech has catching up to do. This seems to have created a race by cash rich companies to not be disrupted and left behind.

Investor’s recent focus on small companies in this space prefer those that are concentrated in AI technology. One main reason is that small-cap or microcap firms in this space are likely to have AI as a more concentrated part of their business. The bet being that whether the small company continues to grow independently, or is acquired by a larger firm looking to instantly be par with current technology, doesn’t much matter, it is a win for the investor if either occurs.

And it is a win, C3 AI stock rallied 46% last week, and climbed another 6.5% on Monday. It is now up 146% year to date.

Other Companies Involved

SoundHound AI, provides a voice AI platform services, and Thailand-based security firm Guardforce AI have more than doubled so far this year, while analytics firm BigBear.AI has increased ninefold.

US-listed shares of Baidu Inc climbed after the Chinese search engine indicated it would complete an internal test of a ChatGPT-style project called “Ernie Bot” next month.

Shares of Microsoft, which supports ChatGPT parent OpenAI, had been ratcheting up over the past month. The company is expected to make an announcement on their AI gained 1.5% in premarket trading ahead of the AI plans this week. ​

Google-owner Alphabet Inc said this week it would launch Bard, a chatbot service for developers, alongside its search engine.

Take Away

Change in technology that leads to improvements in daily lives has always been a focus of investors betting on which companies will outlast the others with “the next big thing.” These companies start out as small growth companies as Apple (AAPL) did in 1976. Then, a number of paths lay ahead. They either grow on their own like the Jobs/Wozniak computer maker did, get acquired for an early payday for investors and other stakeholders, or they can be outcompeted leaving investors with a non-performing asset.

Channelchek is a platform that specializes in bringing data and research on small-cap companies, including many varieties of new technology, to the investors that insist on being informed before they place a trade. Discover more on the industries of tomorrow by signing up for notifications in your inbox from Channelchek by registering here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.reuters.com/markets/us/retail-investors-flock-small-cap-ai-firms-big-tech-battles-share-2023-02-07/

https://www.barrons.com/articles/c3-ai-stock-rally-bull-wall-street-51675441248?mod=Searchresults