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CRTPi-VGA v3.0V - Find that VGA Monitor Yet?!

CRTPi Project Presents:

CRTPi-VGA v3.0V

A CRTPi image for running 240p on VGA CRT monitors
Other Releases:
Changelog: v3.0V for VGA-666 05/12/2020
Changelog: v2.5V for VGA-666 05/05/2020
Changelog: v2.0VX for VGA-666 03/21/2020
Required Hardware:
What is this?
Since I've been relegated to working from home for the next forever, I needed something to pass the time. Lots of users have asked for, and worked with me to create a solution for what we'll call the "Poor Man's BVM." A $5 Gert VGA666 adapter, cheap/free 31khz VGA Monitor, and a Pi packed with roms. What could be a better way to pass the quarantine?
For a long time, there were several stumbling blocks:
I finally stumbled upon some old threads with people listing out some 640x480 hdmi_timings, and that cracked the whole case wide open. I finally had the missing piece that could be slotted into my existing images. The end result is Emulationstation and other non-libretro emulators launching in 640x480p @ 65hz (great for PSP, DOSbox, ScummVM, and Kodi!) and all Retroarch emulators launching in 2048x240p or 1920x240p @ 120hz.
I opted to steer away from Black Frame Insertion and instead change the VSync Swap interval to 2 (running the framerate at half of 120hz). This solves the intermittent flicker and also the reduced gamma from BFI. Overall, it's a much more pleasing experience IMO. You can always change VSync Interval back to 1, and enable BFI in Retroarch if you the other way is better.
What Does That Look Like?
Here's a bunch of pics I took, some better than others!
What is Different?
See the current changelog and the v3.0 thread for a complete list.
What is Run-Ahead?
The Run Ahead feature calculates the frames as fast as possible in the background to "rollback" the action as close as possible to the input command requested.
I've enabled run-ahead on most of the 8 & 16-bit consoles and handhelds. A single frame (and using the second instance) is saved here, which dramatically improves input lag without affecting performance on a Pi3B+. More frames would require more hardware power, and may be achievable via overclocking.
lr-snes9x2010 consistent 60.0-60.2 FPS @ 60.098801hz lr-fceumm consistent 60.0-60.2 FPS @ 60.098801hz lr-beetle-pce-fast consistent 60.1-60.2 @ 60.000000hz lr-genesis-gx-plus consistent 59.9-60.2 FPS @ 59.922741hz (both genesis and sega cd) lr-picodrive consistent 59.9-60.2 FPS @ 59.922741hz (master system, game gear, and 32X) lr-gambatte consistent 60.0-60.2 FPS @ 60.098801hz (SGB2 framerate) lr-mgba consistent 59.8-60.4 FPS @ 60.002220hz (Gamecube framerate) 
To disable runahead for a game (or emulator):
Quick Menu > Latency > Run-Ahead to Reduce Latency > OFF 
What is Snap-Shader?
It's a Retroarch GSL shader that ensures games on CRT will look as good as on original hardware. It Makes games crisp vertically, and not shimmer horizontally. It correctly aligns the games for you regardless of console. Virtually eliminates the need for separate configurations per core (console).
https://github.com/ektgit/snap-shader-240p
Snap Shader (especially the snap-basic) is super useful on consoles where you may have a mix of horizontal resolutions within the core that you don't necessarily want to set individual game configs for. This is especially useful in PSX, FDS, PCE/PCE-CD, 32X, and MAME.
So far, the image is only set up for Snap-Basic (Pass: 1, Filter: Nearest, Scale: Don't Care) on lr-PCSX-ReARMed. If you care to, I would definitely try it out on other emulators. Here's the enable process:
  • Quick Menu > Shaders
  • Video Shaders > On
  • Shader Passes > 1
  • Shader #0 > snap-basic.glsl
  • Shader #0 Filter > Nearest
  • Shader #0 Scale > Don't Care
  • Save > Save Core Preset
What Does This NOT Have?
This doesn't have any ROMs (other than freeware test suites), BIOS files, music, screenshots, metadata, or videos concerning copy-written games. Other than the configurations and overlays, it has nothing that can't be downloaded through the repository or freeware.
Where Can I Get It?
You can download a premade image from Google Drive:
NOTE: Please expand your file system via Raspi-Config after your first boot, and reboot!
CRTPi-VGA v3.0V: For Pi3B/B+ with VGA666
MD5: 828cf4e5b67f67e8b5bd1e4fb8477332 
Default Retroarch Keyboard Hotkeys
*SPACE: Enable Hotkey* F1 Menu F2 FF Toggle F3 Reset F4 Cheat Toggle F5 Save State F6 Load State F7 Change State - F8 Change State + F9 Screenshot F10 Mute ENTER: Exit 
I have X Issue! Help?
I only have like 500mb of free space on my XXgb SD card!
You need to expand your file system via Raspi-Config. Follow these steps.
GBA, PSX, Neo-Geo, Sega-CD, PCE-CD, etc. games don't work!
I haven't included any bios's that didn't come with the retropie stock image, so you'll need to install the appropriate files in the BIOS folder. For Neo-Geo, I highly recommend the UniBios (renamed to neogeo.zip).
Samba Share won't work after I set up Wi-Fi!
Samba share service starts on boot, pending that a network is available. Configure your Wi-Fi then reboot first, and if that doesn't fix it then go into Retropie Setup > Configuration/Tools > Samba > Install Samba. Once it's complete, reboot and it should be golden.
USB-Romservice and/or Retropie-Mount don't work!
Follow this guide, but follow these steps before plugging in your thumb drive:
  • Go to Retropie-Setup
  • Update retropie install script
  • Go to Manage Packages -> Optional Packages
  • Scroll all the way down to usbromservice
  • Uninstall usbromservice
  • Install it again from Binary
  • Once finished, choose Configuration, then Enable USB Romservice
  • Reboot, and wait for it to fully boot in to ES
  • Plug in USB stick (has to be FAT32) and WAIT A LONG TIME (if your stick has a light, wait for it to stop flashing)
Timings for Boot and Runcommand
640 x 480p @ 65hz Timings: Emulationstation, DOSBox, ScummVM, etc.
640 1 56 56 80 480 0 1 3 25 0 0 0 65 0 36000000 1 #640x480 VGA666 
1280 x 720p @ 60hz Timings: Kodi
1280 1 80 72 216 720 1 5 3 22 0 0 0 60 0 74239049 1 #1280x720p 
Integer Scale Super-Resolution 240p @ 120hz Timings: All Retroarch Emulators
2048 1 180 202 300 240 1 3 5 14 0 0 0 120 0 85909090 1 #256x240/224p 1920 1 167 247 265 240 1 3 7 12 0 0 0 120 0 81720000‬ 1 #320x240/224p 1600 1 95 157 182 240 1 4 3 15 0 0 0 120 0 64000000‬ 1 #320x240/224p Alternate 
Integer Scale Super-Resolution 480p @ 60hz Timings: Dreamcast and PSP Retroarch Emulators
2048 1 180 202 300 480 1 6 10 28 0 0 0 60 0 85909090 1 #320/256x480/448p 
submitted by ErantyInt to u/ErantyInt [link] [comments]

CRTPi-VGA v3.0V - Find that VGA Monitor Yet?!

CRTPi Project Presents:

CRTPi-VGA v3.0V

A CRTPi image for running 240p on VGA CRT monitors
Other Releases:
Changelog: v3.0V for VGA-666 05/12/2020
Changelog: v2.5V for VGA-666 05/05/2020
Changelog: v2.0VX for VGA-666 03/21/2020
Required Hardware:
What is this?
Since I've been relegated to working from home for the next forever, I needed something to pass the time. Lots of users have asked for, and worked with me to create a solution for what we'll call the "Poor Man's BVM." A $5 Gert VGA666 adapter, cheap/free 31khz VGA Monitor, and a Pi packed with roms. What could be a better way to pass the quarantine?
For a long time, there were several stumbling blocks:
I finally stumbled upon some old threads with people listing out some 640x480 hdmi_timings, and that cracked the whole case wide open. I finally had the missing piece that could be slotted into my existing images. The end result is Emulationstation and other non-libretro emulators launching in 640x480p @ 65hz (great for PSP, DOSbox, ScummVM, and Kodi!) and all Retroarch emulators launching in 2048x240p or 1920x240p @ 120hz.
I opted to steer away from Black Frame Insertion and instead change the VSync Swap interval to 2 (running the framerate at half of 120hz). This solves the intermittent flicker and also the reduced gamma from BFI. Overall, it's a much more pleasing experience IMO. You can always change VSync Interval back to 1, and enable BFI in Retroarch if you the other way is better.
What Does That Look Like?
Here's a bunch of pics I took, some better than others!
What is Different?
See the current changelog and the v3.0 thread for a complete list.
What is Run-Ahead?
The Run Ahead feature calculates the frames as fast as possible in the background to "rollback" the action as close as possible to the input command requested.
I've enabled run-ahead on most of the 8 & 16-bit consoles and handhelds. A single frame (and using the second instance) is saved here, which dramatically improves input lag without affecting performance on a Pi3B+. More frames would require more hardware power, and may be achievable via overclocking.
lr-snes9x2010 consistent 60.0-60.2 FPS @ 60.098801hz lr-fceumm consistent 60.0-60.2 FPS @ 60.098801hz lr-beetle-pce-fast consistent 60.1-60.2 @ 60.000000hz lr-genesis-gx-plus consistent 59.9-60.2 FPS @ 59.922741hz (both genesis and sega cd) lr-picodrive consistent 59.9-60.2 FPS @ 59.922741hz (master system, game gear, and 32X) lr-gambatte consistent 60.0-60.2 FPS @ 60.098801hz (SGB2 framerate) lr-mgba consistent 59.8-60.4 FPS @ 60.002220hz (Gamecube framerate) 
To disable runahead for a game (or emulator):
Quick Menu > Latency > Run-Ahead to Reduce Latency > OFF 
What is Snap-Shader?
It's a Retroarch GSL shader that ensures games on CRT will look as good as on original hardware. It Makes games crisp vertically, and not shimmer horizontally. It correctly aligns the games for you regardless of console. Virtually eliminates the need for separate configurations per core (console).
https://github.com/ektgit/snap-shader-240p
Snap Shader (especially the snap-basic) is super useful on consoles where you may have a mix of horizontal resolutions within the core that you don't necessarily want to set individual game configs for. This is especially useful in PSX, FDS, PCE/PCE-CD, 32X, and MAME.
So far, the image is only set up for Snap-Basic (Pass: 1, Filter: Nearest, Scale: Don't Care) on lr-PCSX-ReARMed. If you care to, I would definitely try it out on other emulators. Here's the enable process:
  • Quick Menu > Shaders
  • Video Shaders > On
  • Shader Passes > 1
  • Shader #0 > snap-basic.glsl
  • Shader #0 Filter > Nearest
  • Shader #0 Scale > Don't Care
  • Save > Save Core Preset
What Does This NOT Have?
This doesn't have any ROMs (other than freeware test suites), BIOS files, music, screenshots, metadata, or videos concerning copy-written games. Other than the configurations and overlays, it has nothing that can't be downloaded through the repository or freeware.
Where Can I Get It?
You can download a premade image from Google Drive:
NOTE: Please expand your file system via Raspi-Config after your first boot, and reboot!
CRTPi-VGA v3.0V: For Pi3B/B+ with VGA666
MD5: 828cf4e5b67f67e8b5bd1e4fb8477332 
Default Retroarch Keyboard Hotkeys
*SPACE: Enable Hotkey* F1 Menu F2 FF Toggle F3 Reset F4 Cheat Toggle F5 Save State F6 Load State F7 Change State - F8 Change State + F9 Screenshot F10 Mute ENTER: Exit 
I have X Issue! Help?
I only have like 500mb of free space on my XXgb SD card!
You need to expand your file system via Raspi-Config. Follow these steps.
GBA, PSX, Neo-Geo, Sega-CD, PCE-CD, etc. games don't work!
I haven't included any bios's that didn't come with the retropie stock image, so you'll need to install the appropriate files in the BIOS folder. For Neo-Geo, I highly recommend the UniBios (renamed to neogeo.zip).
Samba Share won't work after I set up Wi-Fi!
Samba share service starts on boot, pending that a network is available. Configure your Wi-Fi then reboot first, and if that doesn't fix it then go into Retropie Setup > Configuration/Tools > Samba > Install Samba. Once it's complete, reboot and it should be golden.
USB-Romservice and/or Retropie-Mount don't work!
Follow this guide, but follow these steps before plugging in your thumb drive:
  • Go to Retropie-Setup
  • Update retropie install script
  • Go to Manage Packages -> Optional Packages
  • Scroll all the way down to usbromservice
  • Uninstall usbromservice
  • Install it again from Binary
  • Once finished, choose Configuration, then Enable USB Romservice
  • Reboot, and wait for it to fully boot in to ES
  • Plug in USB stick (has to be FAT32) and WAIT A LONG TIME (if your stick has a light, wait for it to stop flashing)
Timings for Boot and Runcommand
640 x 480p @ 65hz Timings: Emulationstation, DOSBox, ScummVM, etc.
640 1 56 56 80 480 0 1 3 25 0 0 0 65 0 36000000 1 #640x480 VGA666 
1280 x 720p @ 60hz Timings: Kodi
1280 1 80 72 216 720 1 5 3 22 0 0 0 60 0 74239049 1 #1280x720p 
Integer Scale Super-Resolution 240p @ 120hz Timings: All Retroarch Emulators
2048 1 180 202 300 240 1 3 5 14 0 0 0 120 0 85909090 1 #256x240/224p 1920 1 167 247 265 240 1 3 7 12 0 0 0 120 0 81720000‬ 1 #320x240/224p 1600 1 95 157 182 240 1 4 3 15 0 0 0 120 0 64000000‬ 1 #320x240/224p Alternate 
Integer Scale Super-Resolution 480p @ 60hz Timings: Dreamcast and PSP Retroarch Emulators
2048 1 180 202 300 480 1 6 10 28 0 0 0 60 0 85909090 1 #320/256x480/448p 
submitted by ErantyInt to crtgaming [link] [comments]

Trying to emulate the first ever 3D Java game (Munkiki's Castles)

This post is largely based upon the LostMediaWiki article
I would like to introduce you to a rather interesting case which likely could be solved with the help of the Reddit community. I will try to keep this post short and sharp
Remember the monochrome Nokia phones? It turns out the latter of them, still black-and-white, supported Java!
Not only that, there is a game for one of these phones that is first ever to feature 3D graphics and also one of the first ever mobile games released for the Java ME platform. I am talking about Munkiki Castles for Nokia 3410. This game was considered long lost, until in the middle of 2017 Qwerty36078 managed to get and publish it.
The problem is, no one could emulate it so far. Considering it has been written for an old, monochrome Nokia 3410. The game uses aplenty of memory hacks and tricks to be able to run on approx. 5 FPS. But the biggest problem is that because at the time there was no J2ME 3D library, the game uses its own proprietary class (which, again, is likely full of hacks and hard-to-read code), which is lost. So far it seems like Munkiki Castles is the only game to use this class. Nevertheless the class itself appears to have influenced the OpenGL development (or vice versa). This class has been nicknamed M3D(O) and normally is to be found at "com/nokia/mid/m3d/M3D" . It is unknown if the Nokia 3410s come with this class embedded or not.
Anyway, here is what we have trying to emulate the game:
Now, here is what was tried:
Can anyone help me, and other people from LMW community, to manage to get this game running? It seems like we are "almost there" all the time. Pretty much all the help could be useful, starting from browsing through the binary files via HEX editor and ending with writing MAME code to emulate Nokia 3410 or buying Nokia 3410 phones off ebay and trying to dump the class, if it is there. Long story short, all the help is appreciated
Kind regards
submitted by dark_timur to emulation [link] [comments]

The Least Bad Option

As a DAO token holder, when I first heard that the DAO had been hacked I thought all the money was permanently gone. That was a bad feeling I felt not just for myself, but for the entire Ethereum community and the hope and promise of The DAO.
When I heard there was a time lock, and soft and hard fork options to fix the problem, the pendulum swung the other way and I once again became overly confident in the tech, and falsely concluded there would be a painless 'fix.' However, thanks to the good work of Emin Gun Sirer, I realized just how many unexplored issues there actually were – technical, legal, social, governanace related, etc. I have posted his thoughts from his NY Meetup PPT below, and would encourage everyone to take a quick look them.
We were talking about this in our Portland Ethereum meetup, and let's face it, mistakes were made by Slock.it, AND Solidity was not tested enough and ready for roll out, and we all made a mistake rushing ahead. We are all responsible for this mess. We all need to realize there are no good options here. But, if we can work together to find a distributed solution where we all share some of the pain, and come to an agreement collectively, that would be the least bad option.
I first was attracted to the soft fork, but the more I learned about it, I realized it was temporary, would take extraordinary measures and cooperation from miners, which is not their original agreement and not what they signed up to do, and then it would only lock up the tokens, not recover them. Then the hacker joined the white hat draining of the DAO, which suddenly seemed like an endless loop, until we would further have to select white hats who would be allowed to transfer the tokens but nobody else would. It seemed to be a rabbit hole that became more temporary, and more convoluted, requiring an increasing number of actions that violated our core principles the further we pursued it. All of this is bad for the Ethereum Foundation and the future of the Ethereum. The idea of the soft fork quickly appeared a good temporary but bad intermediate and horrible long run option.
I then felt that a hard fork was the only solution, but honestly that was strongly influenced by the idea that a hacker stealing $50m is bad short run, and it's bad long run, so the worst option.
I have been involved with Ethereum for about a year, and must admit I did not come from the Bitcoin community, but from the currency mechanics and payments community, and was originally intrigued only by what might be possible using smart contracts, so that’s what I want to protect, and the real long run value for me. When I spoke with my technical friends who had come from the Bitcoin community, they really, really did not like the hard fork, and felt it would be better to let the hacker walk. I listened to them carefully, and changed my mind.
I also realized that for most people in our community, either hard forking or letting the hacker walk was the worst option, with the other being the second worst option, and soft fork being the third worst option.
From game theory and life, I have learned the longer this goes on, and the closer it gets to the time lock expiring, the higher probability for additional unexpected bad outcomes, unforeseen forks in the road, which I am sure the hacker is working furiously on. The quicker this is resolved, the better for everyone, maybe even the hacker. The soft fork should not lull us into complacency, but be a temporary measure of days and weeks, not longer.
Ultimately, I realized the least bad option is to setup a binary outcome, where we agree to either pay a bounty to the hacker by a specific date, or if he is unreasonable, then go ahead and implement a hard fork. If it doesn't work, at least we tried, and I think the effort will count for something in the long run.
As long as this decision happens before the time lock expires, the hacker knows a hard fork has been agreed to and is definitely coming, and the decision date is firm, the hacker's best outcome is to accept the bounty in exchange for releasing the rest of the ETH. Maybe the hacker would prefer to force the community into a hard fork due to antisocial or anti-Ethereum motives, but money is a powerful motivator. I know, people will not like negotiating or appeasing a hacker, but if we take responsibility collectively for this problem, our problem, that we all created, then this is the least bad solution, for the following reasons:
  1. It avoids the worst (or second worst) option of a hard fork.
  2. It avoids the second worst (or worst) option of the hacker walking away with $50m ETH.
  3. It makes everyone pay a price, so avoids in some measure the moral dilemma problem.
  4. It's the only negotiated solution, which can’t be understated how valuable and important that could be for our leaderless community.
  5. It protects the Ethereum foundation and the miners from having to violate core principles to save slock.it's bad coding, or from being tempted to collude with the hacker.
  6. Paying for bounties is part of the software ecosystem, and although the number is big in real terms, it's still just a number.
  7. It solves the problem quickly, and as cleanly as possible. Again, there are no good options.
The key to negotiating is not focusing on what the hacker gets, which in this case will just make you frustrated and angry, but rather focus on what the community gets, the least bad option that maybe prevents the community from splitting into two camps. That alone is maybe the most important thing to me personally, and to others I know. Ethereum is still young, and as a community we have important challenges ahead; let’s put this behind us with minimal damage ASAP. That’s what taking responsibility collectively in practice really means.
If you agree, then we simply need to set a price. I think I read someone else had proposed 5%, which is a relatively painless learning lesson for each of us individually, but a sizable and potentially life changing bounty for the hacker(s). Remember, it won't work unless the incentive to play nice is substantial.
We have all had time to think about this and mull over the options, but now we need to find the will to come together and create a solution, the least bad solution. I say pay the bounty in exchange for returning the DAO tokens, kill the DAO 1.0, and be done with it.
What say you?
Gaming the DAO Emin Gün Sirer Department of Computer Science Cornell University Posted with permission. Thx Emin!
DACs • Decentralized Autonomous Corporations/Orgs are incredibly powerful and promising • A computer program, with its own code and state, that can programmatically manage money flows • The entire behavior of the program is pre-ordained • Brand new era, with brand new functionality
DAO Promise • Automate and eliminate the middlemen • Achieve far higher efficiencies o A hedge fund with 0% overhead? • Self-policing and/or self-arbitrating o Can’t eliminate the legal system, but can handle simple cases • Bring complete transparency to the operation of a company or trust o Insurance o Finance • Killer apps are yet to come...
DAO Unknowns Is it actually possible to build secure, functional smart-contracts? • What about the fine print you see on regular contracts? • What’s in the fine print? • How to form the contract covenant The spirit of the agreement How to resolve disputes • How to modify the contract • How to terminate The DAO, as we will see, messed up almost all of these
Enter The DAO • Usurped the phrase “The DAO” for a specific investment fund • Part kickstarter, part Andreesen-Horowitz o Built by Slock.It, a company originally intended to kickstart an IoT bike lock, but built a kickstarter instead • How it is supposed to work o We all buy into The DAO with ether o The DAO amasses a fund o Contractors come before The DAO with proposals o We all vote on the proposals o If we achieve a quorum, and there is support, proposals get funded o Proposals then return rewards, distributed back out
The DAO Complications • Buying in • Voting • Exiting • Modifying the Contract • Payouts
The DAO Buy-In • 27-day creation phase • Buy in with ether o 1.00 ether for 100 DAO Tokens for 14 days o +0.05 ether every day for 10 days o 1.50 ether for the last 3 days • Additional gains accumulate in “extraBalance” • Why is there a rising scale? • Do “viral features” have any place in sound investments?
The DAO Proposals • Anyone can submit a proposal • Curators pick proposals o Requires a 5 out of 11 signature o 11 members of the Ethereum community, unrelated to SlockIt • The curators’ job description is unclear o Is it to just check identity? o Is it to “protect the DAO”? o The curators are not paid, but they are under substantial legal risk The Voting • Any DAO token holder can vote on a proposal • A proposal is funded if o There is a quorum (sufficient votes) o The majority of the quorum is in favor (voted YES) • Required quorum sizes vary by size of contract o Largest required quorum is 53% • Votes are weighted by a voter’s holdings • But a voter commits The DAO funds (i.e other people’s money) to proposals • Someone who voted cannot exit The DAO
The Exit • Cannot just take money out of The DAO o Why? Because of viral/social reasons • To exit, you need to follow a 62-step process: o Initiate a proposal to make yourself a curator o Anyone can vote YES or NO on this proposal o It will likely fail o You can call splitDAO on a failed proposal o A new child-DAO will be created where you are the curator o You can now propose to withdraw funds, approve it as curator, vote on it, and then take the ether back out • Takes 27+7 days • Takes 27 + 7 days
Upgrades and Rewards • There is no provision to modify The DAO in place o o No kill switch o No security upgrades o Cannot preserve the full state and change code • The extraBalances can only be spent after The DAO has spent an equivalent amount on proposals • Unclear about the intended behavior with regard to • rewards o Inherited into childDAO’s, but not into grandchildren
The DAO Token Markets • DAO tokens can be bought and sold on open markets • Their price will reflect the expected value of future ether flows • Until The DAO funds a proposal, 1 token = 0.01 eth • But in USD terms, the price will fluctuate • The price difference will reflect the uncertainty in the • value of 1 eth, 34 days from now o o E.g. 1 eth = $15 o But 1 dao = $13 • This is a normal consequence of decisions in DAO design
Taking Stock • Why was The DAO designed the way it was? o To avoid legal meddling? o To help fund illegal operations? o To create Ponzis? o “Sunny-day thinking” • Aspirational system design • Does The DAO idea even make sense?
The Questions • Are the crowds even able to pick winning strategies? o Do fund managers really bring 0 value to the world? • Will we ever reach the quorums required? o Most token holders are passive o The risks of “going with the crowd” without voting • Are the mechanisms in The DAO suited for the tasks that need to be carried out?
The Questions • Are the crowds even able to pick winning strategies? o Do fund managers really bring 0 value to the world? • Will we ever reach the quorums required? o Most token holders are passive o The risks of “going with the crowd” without voting • Are the mechanisms in The DAO suited for the tasks that need to be carried out? NO!
The Call for a Moratorium • My colleagues and I were alarmed that The DAO managed to collect 11M eth, $220M USD • The internal mechanisms were broken • We rushed a manuscript that detailed the failures, called for a moratorium • The DAO community was convinced and wanted to upgrade The DAO
The Hack • While we were in a holding pattern, someone emptied out a substantial fraction of The DAO • The hacker took $50+M worth of ether into a child-DAO called the Dark-DAO • Hacker took advantage of multiple attack vectors o A reentrancy bug in the DAO code o Additional tricks to avoid getting his balance reset o He also voted YES on every other split proposal, to reserve the right to pursue everyone who wanted to split • Hide your kids, hide your pets, there is no safe place
The Hack Technicalities
What If The DAO Had Not Been Hacked • It still would have been hacked • It was and is deeply broken • The design of voting mechanisms that capture the will of the crowds is a difficult nuanced task • Everybody on the Internet is an expert at three things: o Economics o Game theory o Distributed Systems • The DAO team, and others like it, full of hubris and the Dunning-Kruger effect, are easy targets
Guiding Principle • DAO-1.0 is irredeemably broken, but let’s examine how one might build DAO-2.0 in light of what we have learned • The DAO voting mechanisms have to be truthful and strategy-proof o Truthful: token holders vote their true opinion o Strategy-proof: token holders fare best by voting their true opinion • The current mechanisms are broken in multiple ways
Affirmative Bias • Every voter has a unique valuation for every proposal o o “Prop #37 will bring in 3% yearly over 3 years” o “Prop #37 will be a net loss, that team can’t pull it off” o “Prop #37 will take us to the moon!” • Ideally, you want everyone to vote their conscience o Positive Expected Value: +EV o Negative Expected Value: -EV • +EV folks are incentivized to vote early • Not so for -EV!!! o Negative votes lock people in • Early votes will be positive, feedback loops work against -EV folks
Stalking • A stalker can vote YES on a split proposal and follow a splitter into the child-DAO • Stalker is not going to be the curator, but he can be the dominant (53%) shareholder in the child • Stalker can keep the splitter from taking out his funds • Stalker can then blackmail the splitter • If the splitter splits again, he loses his rewards from the original DAO • SlockIt claimed that the splitter could counterattack, but do you want to play corewars?
Ambush • A -EV voter has a disincentive to vote, especially if his vote is not needed • So a big bloc of YES votes can come in at the last possible minute to pass a proposal that initially looked unpassable • This commits other people’s funds to a proposal, even though large fraction is against that proposal • Possible remedy: add time to the clock when the vote outcome changes
Token Raid • An attacker can move the price of DAO tokens by o Incentivize people not to split but to sell their tokens o Keep the public from snapping up tokens • She can do this by o Creating social media panic, via stalker attack o Passing a -EV proposal, via ambush attack • The price of tokens will drop, she can short on the way down, and snap up when the attack is over • This is a legitimate manipulation strategy, often seen with penny stocks, except the mechanisms make it easy
extraBalance Raid • Attacker forces people to split from The DAO, which leaves behind the extraBalance amount • Currently at 275,000 ether • DAO tokens should trade at 1.02 • If the attacker scares away 95% of investors, DAO will trade at 2.00
Majority Takeover • SlockIt identified and worried about a majority takeover • A voting bloc of 53+% can fund 100% to a 1 proposal • Curators are expected to guard against this o This scenario is specifically cited • But a voting bloc of 53+% can fund 10 proposals of 10% • No principled way to even define the attack, let alone defend against it o DAO defenseless against Soros-style attacks
Reward Dilution • The DAO issues reward tokens as proposals pay back into the DAO • Akin to dividends • But the reward token math does not follow any accounting principle • In particular, reward tokens can be diluted even after someone has split off from the DAO
Risk-Free Voting • One of the many “race conditions” • Investor votes YES on a proposal, committing funds • Then invokes “unblockMe” before the proposal is executed, and splits off • This allows her to commit the DAO to a proposal without committing her own funds • An attack amplification vector
Concurrent Proposal Trap • Voting on any proposal commits the voter until the end of the voting period • Attacker poses a proposal o We have seen “do you believe in God?” for 0 ether • Everyone who votes is banned from splitting until the end of the voting period • Attack amplification vector: push an incendiary proposal with a long voting period, then launch short-fuse attack
Independence Assumption • All of the discussion until now assumes that all proposals are independent • Yet in real life, proposals are linked o Funding a cluster of proposals might yield much higher returns than funding them individually • Not an attack, but undesirable • This can yield strategic behavior (i.e. people voting down worthy proposals) even when everyone means well
What Have We Learned • The DAO is a fantastic experiment • The experiment has been a huge success • Enormous demand for smart contracts • The Ethereum core has some (well-contained) issues that need to be fixed o The design of a secure smart-contract language is very different from the design of a web-programming language • The DAO is a hot mess
Methodological Issues • Why was The DAO designed the way it was? o To avoid legal meddling? o To help fund illegal operations? o To create Ponzis? • Carefully thought-out viral features • Common behaviors were purposefully made difficult • “Sunny-day thinking,” aspirational ideas about best case behaviors • Irresponsible design, no safety mechanisms • Flawed methodology
Takeaways • Can we build a $1.2B ecosystem, while spending $0 on basic research and science of smart contracts? • How do we build and vet trustworthy smart contracts?
IC3, Initiative on Cryptocurrencies and Smart Contracts http://initc3.org
submitted by wunderwood11 to ethereum [link] [comments]

Perpetual Option: Och-Ziff Capital Management Group (OZM)

In his book, You Can Be a Stock Market Genius, Greenblatt talks about using LEAPs to make leveraged bets. The book included his trade in Wells Fargo (WFC, another topic for a future post, I suppose).
But sometimes, stocks get down so cheap that they become priced like options. In the Genius book, the WFC LEAPs were priced at $14 while the stock was at around $77.
Here, we have a hedge fund manager trading less than $3.00/share, which is a typical price for regular options, not even LEAPs. Of course, all stocks are options on the residual value of businesses. But sometimes things are priced for either a large gain or zero, just like an option.
I call this a perpetual option, but that reminds me of those lifetime warranties. Like, who's lifetime? The manufacturer's? The store's? Yours? Nothing is forever, so I guess there really is no such thing as a perpetual option. But anyway...
Och-Ziff IPO'ed in 2007 at $32/share and traded in the mid $20's right before the crisis, then down to below $5.00 during the crisis and back up to the mid-teens. I've been watching this since the IPO and looked at it again when it was trading around $10/share. It's down quite a bit since then. I didn't own it back then but I did take a small bite down at $5.00/share.
I have mentioned other private equity and hedge fund managers here in the past but haven't owned most of them because of the amount of money that seemed to be going into alternatives. I was just worried that the AUM's of all of these alternative managers were going up so quickly that I couldn't imagine them earning the high returns that made everyone rush to them in the first place. Look at the presentation of any of these alternative managers and their AUM growth is just staggering.
Extremely Contrarian We investors walk around and think about all sorts of things; look at store traffic, taste new foods/restaurant concepts, count how many Apple watches people are wearing (I recently biked around the city with my kid (Brooklyn to Central Park, around the park (around the big loop) and all the way downtown back to Brooklyn (30+ miles) and I think I counted two Apple watches that I saw compared to countless iPhones. And this was in the summer so no coats or long sleeves to hide wrists).
And a couple of the things that we tend to think about are, What does everybody absolutely love, and what are they 100% sure of (other than that Hillary will win the election and that the market will crash if Trump wins), and What do people absolutely, 100% hate and don't even want to talk about? In the investing world right now, it seems like the one thing that everybody seems to agree with is that active investing is dead (OK, not completely true because we active investors never really lose faith in it). The data points to it (active managers underperforming for many years, legendary stock pickers too not performing all too well, star hedge funds not doing well etc...). The money flows point to it (cash flowing out of active managers and into passive funds, boom in index funds / ETFs; this reminds me of the 1990's when there were more mutual funds than listed companies. There are probably more ETFs now than listed companies). Sentiment points to it (stars and heroes now are ETF managers, quants etc.).
By the Way Oh, and by the way, in case people say that it is no longer possible due to this or that reason for humans to outperform indices or robots, I would just say that we have seen this before. Things in finance are cyclical and we've seen this movie before.
From the 1985 Berkshire Hathaway Letter, Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value -- and even thought, itself -- were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest -- whether it be bridge, chess or stock selection than to have opponents who have been taught that thinking is a waste of energy?)
What Do People Hate? So, back to what people absolutely hate. People hate active managers. It's not even stocks that they are not interested in. They hate active managers. Nobody outperforms and their fees are not worth it. What else do they hate? They hate hedge funds. I don't need to write a list here, but you just keep reading one institution after another reducing their exposure to hedge funds. There is a massive shakeout going on now with money leaving hedge funds. Others like Blackstone argues that this is not true; assets are just moving out of mediocre hedge funds and moving into theirs.
This is a theme I will be going back to in later posts, but for now I am just going to look at OZM.
OZM OZM is a well-known hedge fund firm so I won't go into much detail here. To me, it's sort of a conventional equity-oriented hedge fund that runs strategies very typical of pre-Volcker rule Wall Street investment banks; equity long/short, merger arb, convertible arb etc. They have been expanding into credit and real estate with decent results. But a lot of their AUM is still in the conventional equity strategies.
What makes OZM interesting now is that chart from the Pzena Investment report (see here). These charts make it obvious why active managers have had such a hard time. The value spread has just continued to widen since 2004/2005 through now. Cheap stocks get cheaper and expensive stocks get more so. You can see how this sort of environment could be the worst for long/short strategies (and value-oriented long strategies, and even naked short strategies for that matter). Things have just been going the wrong way with no mean reversion.
But if you look at where those charts are now, you can see that it is probably exactly the wrong time to give up on value strategies or value-based long/short strategies; in fact it looks like the best time ever to be looking at these strategies.
Seeing that, does it surprise me that many pension funds are running the other way? Not at all. Many large institutions chase performance and not future potential.
Conceptually speaking, they would rather buy a stock at 80x P/E that has gone up 30%/year in the past five years that is about to tank rather than buy an 8x P/E stock that has gone nowhere in the past five years but is about to take off; they are driven by historic (or recent historic) performance.
OZM Performance Anyway, let's look at the long term performance of OZM. This excludes their credit and real estate funds which are doing much better and are growing AUM.
This is their performance since 1994 through the end of 2015:
OZM fund S&P500 1994 28.50% 5.30% 1995 23.50% 27.40% 1996 27.40% 23.00% 1997 26.70% 33.40% 1998 11.10% 28.60% 1999 18.80% 21.00% 2000 20.60% -9.10% 2001 6.30% -11.90% 2002 -1.60% -22.10% 2003 24.00% 28.70% 2004 11.10% 10.90% 2005 8.80% 4.90% 2006 14.80% 15.80% 2007 11.50% 5.50% 2008 -15.90% -37.00% 2009 23.10% 26.50% 2010 8.50% 15.10% 2011 -0.50% 2.10% 2012 11.60% 16.00% 2013 13.90% 32.40% 2014 5.50% 13.70% 2015 -0.40% 1.40% 5 year avg 5.85% 12.57% 10 year avg 6.69% 7.32% Since 1994 12.05% 8.87% Since 2000 7.59% 5.01% Since 2007 5.14% 6.53%
So they have not been doing too well, but it's really only the last couple of years that don't look too good. Their ten-year return through 2013 was +8.2%/year versus +7.4%/year for the S&P 500 index. It's pretty obvious that their alpha has been declining over time.
For those who want more up-to-date figures, I redid the above table to include figures through September-end 2016. And instead of 5 year and 10 year returns, I use 4.75-year and 9.75-year returns; I thought that would be more comparable than saying 5.75-year and 10.75-year, and I didn't want to dig into quarterly figures to get actual 5 and 10s.
OZM fund S&P500 1994 28.50% 5.30% 1995 23.50% 27.40% 1996 27.40% 23.00% 1997 26.70% 33.40% 1998 11.10% 28.60% 1999 18.80% 21.00% 2000 20.60% -9.10% 2001 6.30% -11.90% 2002 -1.60% -22.10% 2003 24.00% 28.70% 2004 11.10% 10.90% 2005 8.80% 4.90% 2006 14.80% 15.80% 2007 11.50% 5.50% 2008 -15.90% -37.00% 2009 23.10% 26.50% 2010 8.50% 15.10% 2011 -0.50% 2.10% 2012 11.60% 16.00% 2013 13.90% 32.40% 2014 5.50% 13.70% 2015 -0.40% 1.40% 2016* 1.10% 7.80% 4.75 year 6.53% 14.58% 9.75 year 5.48% 6.72% Since 1994 11.68% 8.92% Since 2000 7.29% 5.27% Since 2007 4.82% 6.86%
So over time, they have good outperformance, but much of that is from the early years. As they get bigger, it's not hard to see why their spread would shrink.
They are seriously underperforming in the 4.75 year, but that's because the S&P 500 index was coming off of a big bear market low and OZM didn't lose that much money, so I think that is irrelevant, especially for a long/short fund.
More relevant would be figures from recent market peaks which sort of shows a through-the-cycle performance. Since the market peak in 2000, OZM has outperformed with a gain of +7.3%/year versus +5.3%/year for the S&P, but they have underperformed since the 2007 peak. A lot of this probably has to do with the previous charts about how value spreads have widened throughout this period.
I would actually want to be increasing exposure to this area that hasn't worked well since 2007. Some of this, of course, is due to lower interest rates. Merger arb, for example, is highly dependent on interest rates as are other arbitrage type trades. (The less risk there is, the closer to the short term interest rate the return is going to be.)
One thing that makes me scratch my head, though, in the 3Q 2016 10-Q is the following: OZ Master Fund’s merger arbitrage, convertible and derivative arbitrage, corporate credit and structured credit strategies have each generated strong year-to-date gains through September 30, 2016. In merger arbitrage, certain transactions in which OZ Master Fund participated closed during the third quarter, contributing to the strategy’s year-to-date gross return of +1.3%. Convertible and derivative arbitrage generated a gross return of +0.5% during the third quarter, driven by gains in convertible arbitrage positions, commodity-related volatility, commodity spreads and index volatility spread trades. Year-to-date, convertible and derivative arbitrage has generated a gross return of +1.3%. In OZ Master Fund’s credit-related strategies, widening credit spreads and certain event-driven situations added +0.4% to the gross return within corporate credit during the third quarter, while in structured credit, a +0.9% gross return during the quarter was attributable to the realization of recoveries in certain of our idiosyncratic situations. Year-to-date, the corporate credit and structured credit strategies are each up +1.2% on a gross basis. Gross returns of less than 2% are described as "strong". Hmm... I may be missing something here. Maybe it is 'strong' versus comparable strategies. I don't know. Anyway, moving on...
Greenblatt Genius Strategies Oh yeah, and by the way, OZM is one of the funds that are heavily into the yellow book strategies. Here's a description of their equity long/short strategy: Long/short equity special situations, which consists of fundamental long/short and event-driven investing. Fundamental long/short investing involves analyzing companies and assets to profit where we believe mispricing or undervaluation exists. Event-driven investing attempts to realize gain from corporate events such as spin-offs, recapitalizations and other corporate restructurings, whether company specific or due to industry or economic conditions.
This is still a large part of their book, which is a good thing if you believe that the valuation spreads will mean revert and that Greenblatt's yellow book strategies are still valid.
One thing that may temper returns over time, though, is the AUM level. What you can do with $1 billion in AUM is not the same as when you have $10 billion or $30 billion. I don't think Greenblatt would have had such high returns if he let AUM grow too much.
This seems to be an issue with a lot of hedge funds. Many of the old stars who were able to make insane returns with AUM under $1 billion seem to have much lower returns above that level.
Here is OZM's AUM trend in the past ten years. Some of the lower return may correlate to the higher AUM, not to mention higher AUM at other hedge funds too reducing spreads (and potential profits).
Just to refresh my memory, I grabbed the AUM chart from the OZM prospectus in 2007. Their AUM was under $6 billion until the end of 2003 and then really grew to over $30 billion by 2007.
Their 10-year return through 2003 was 18%/year vs. 10.6%/year for the S&P 500 index.
From the end of 2003 through the end of 2015, OZM's funds returned +7.2%/year versus +7.4%/year for the S&P 500 index. So their alpha basically went from 7.4%/year outperformance to flat.
This is actually not so bad as these types of funds often offered 'equity-like' returns with lower volatility and drawdowns. The long/short nature of OZM funds means that investors achieved the same returns as the S&P 500 index without the full downside exposure. This is exactly what many institutions want, actually.
But still, did their growth in AUM dampen returns? I think there is no doubt about that. These charts showing tremendous AUM growth is the reason why I never owned much of these alternative managers in the past few years I've been watching them.
The question is how much of the lower returns are due to the higher AUM. Of course, some of this AUM growth is in other strategies so not all new AUM is squeezed into the same strategies.
Will OZM ever go back to the returns of the 1990's? I doubt that. First of all, that was a tremendous bull market. Plus, OZM's AUM was much smaller so they had more opportunities to take advantage of yellow book ideas and other strategies.
Boom/Bubble Doesn't Mean It's a Bad Idea By the way, another sort of tangent. Just because there is a big boom or bubble in something doesn't necessarily make that 'something' a bad idea. We had a stock market bubble in the late 1920's that ended badly, but owning parts of businesses never suddenly became a bad idea or anything. It's just that you didn't want to overpay, or buy stocks for the wrong reasons.
We had a boom in the late 1990's in stocks that focused on picking stocks and owning them for the long term as exemplified by the Beardstown Ladies. Of course, the Beardstown Ladies didn't end well (basically a fraud), but owning good stocks for the long haul, I don't think, ever became a bad idea necessarily.
We had a tremendous housing bubble and various real estate bubbles in recent years. But again, owning good, solid assets at reasonable prices for the long haul never became a bad idea despite the occasional bubbles and collapses.
Similarly, hedge funds and alternative assets go through cycles too. I know many value investors are not with me here and will always hate hedge funds (like Buffett), but that's OK.
We've had alternative cycles in the past. Usually the pattern is that there is a bull market in stocks and people rush into stocks. The bull market inevitably ends and people lose money. Institutions not wanting to lose money rush into 'alternative' assets. Eventually, the market turns and they rush back into equities.
I think something similar is happening now, but the cycle seems a bit elongated and, and the low interest rates is having an effect as alternatives are now attracting capital formerly allocated to fixed income. In the past, alternatives seemed more like an equity substitution, risk asset.
Valuation OK, so what is OZM worth?
Well, a simple way of looking at it is that OZM has paid an average of $1.10/year in dividends in the last five years. During the past five years, the funds returned around 6%/year, so it's not an upside outlier in terms of fund performance.
Put a 10x multiple on it and the stock is worth $11/share.
Another way to look at it is that the market is telling you that it is unlikely that OZM will enjoy the success even of the past five years over the next few years. Assuming a scenario of failure (stock price = 0) or back to sort of past five years performance ($11), a $3.00 stock price reflects the odds of failure at 73% and only a 27% chance that OZM gets back to it's past five year average-like performance. Of course, OZM can just sort of keep doing what it's doing and stay at $3.00 for a long time too.
There is a problem with this, though, as the dividends don't reflect equity-based compensation expense; OZM gives out a bunch of RSU's every year.
To adjust for this, let's look at the economic earnings of the past five years including the costs of equity-based compensation.
Equity-based compensation expense not included in economic income is listed below ($000):
2008 102,025 2009 122,461 2010 128,737 2011 128,916 2012 86,006 2013 120,125 2014 104,344 2015 106,565
It's odd that this doesn't seem to correlate to revenues, income or AUM; it's just basically flat all the way through.
If we include this, economic income at OZM averaged around $520 million/year. With fully diluted 520 million shares outstanding, that's around $1.00/share in economic earnings per share that OZM earned on average over the past five years. So that's not too far off from the $1.10/share dividends we used above.
One of the interesting things about investing is when you find alternative ways to value something instead of just the usual price-to-book values, P/E ratios etc.
So how would you value this?
What about adjusting the implied odds from the above. What if we said there's a 50/50 chance of recovery or failure. Let's say recovery is getting back to what it has done over the past five years on average, and failure is a zero on the stock.
50% x $0.00 + 50% x $10.00 = $5.00/share
In that case, OZM is worth $5.00/share, or 70% higher than the current price. You are looking at a 60 cent dollar in that case.
Let's say there is a 70% chance of recovery.
70% x $10.00 + 30% x $0.00 = $7.00/share.
That's 130% higher, or a 40 cent dollar.
By the way, the AUM averaged around $37 billion over the past five years, and remember, their return was around 5.9%/year so these figures aren't based on huge, abnormal returns or anything.
As of the end of September 2016, AUM was $39.3 billion, and this went down to $37 billion as of November 1, 2016. OZM expects continued redemptions towards year-end both due to their Justice Department/SEC settlement and overall industry redemption trends.
The above ignored balance sheet items, but you can deduct $0.60/share, maybe, of negative equity, or more if you think they need more cash on the balance sheet to run their business.
Preferred Shares As for the $400 million settlement amount and preferred shares, the settlement amount is already on the balance sheet as a liability (which was paid out after the September quarter-end). The preferred shares were sold after the quarter ended. They have zero interest for three years so I don't think it impacts the above analysis. You would just add cash on the balance sheet and the preferreds on the liability side.
If you want to deduct the full amount of the settlement of $400 million, you can knock off $0.77/share off the above valuation instead of the $0.60/share.
Earnings Model The problem with these companies is that it's impossible, really, to predict what their AUM is going to be in the future or their performance. Of course, we can guess that if they do well, AUM will increase and vice-versa.
But still, as a sanity check, we should see how things look with various assumptions in terms of valuation.
First of all, let's look at 2015. In the full year to 2015, a year that the OZM funds were down (master fund), they paid a dividend of $0.87. Adjusted economic income was $240 million (economic income reported by OZM less equity-based comp expense) and using the current fully diluted shares outstanding of 520 million, that comes to $0.46/share. OK, it's funny to use current shares outstanding against last year's economic income, but I am trying to use last years' earnings as sort of a 'normalized' figure.
Using these figures from a bad year, OZM is current trading at a 29% dividend yield (using $3.00/share price) and 6.5x adjusted economic income. This would be 8.3x if you added the $0.77/share from the settlement above.
OK, so average AUM was $44 billion in 2015, so even in a bad year, they made tons in management fees. Fine. We'll get to that in a second. AUM is $37 billion as of November 2016, and is probably headed down towards year-end.
2016 Year-to-Date So let's look at how they are doing this year so far. Fund performance-wise, it hasn't been too good, but they do remain profitable. These fund businesses are designed so that their fixed expenses are covered by their management fees. Big bonuses are paid out only when the funds make money.
Anyway, let's look at 2016 so far in terms of economic income.
In the 3Q of 2016, economic income was $57.4 million. Equity-based compensation expense was $18.3 million so adjusted economic income was $39.1 million. Annualize that and you get $156 million. Using 520 million fully diluted shares (share amount used to calculate distributable earnings in the earnings press release), that comes to $0.30/share adjusted economic income. So at $3.00/share, OZM is trading at 10x arguably depressed earnings. (This excludes the FCPA settlement amount). If you include $400 million of the FCPA preferreds (total to be offered eventually), then the P/E would actually be closer to 12.6x.
For the year to date, economic income was $195 million, and equity-based comp expense was $56 million so adjusted economic income was $139 million. Again using 520 million shares, that comes to $0.25/share in adjusted economic earnings per share. Annualize that and you get $0.33/share. So at $3.00/share, OZM is trading at 9x depressed earnings, or 11x including the FCPA preferred.
OK, so maybe this is not really 'depressed'. With still a lot of AUM, it is possible that AUM keeps going down.
AUM was $37 billion in November, but let's say it goes down to $30 billion. That's actually a big dip. But let's say AUM goes down there. And then let's assume 1% management fees, 20% incentive fees, and economic income margin of 50% (averaged 56% in past five years) and the OZM master fund return of 5%.
In this case, economic income would be $300 million. Equity-based comp costs seems steady at around $100 million, so we deduct that to get adjusted economic income. This comes to $200 million.
That comes to around $0.40/share. At $3.00/share, that's 7.5x adjusted economic earnings, or a 13% yield, or 9.4x and 10.6% yield including the FCPA preferreds.
So that's not bad. We are assuming AUM dips to $30 billion and OZM funds only earn 5%/year, and with that assumption the stock is trading at this cheap level.
Things, of course, can get much worse. If performance doesn't improve, AUM will keep going down. You can't really stress test these things as you can just say their returns will never recover and that's that.
On the other hand, any improvement can get you considerable upside.
If assets return to $40 billion and returns average 6% over time, economic income margin goes to 56% (average of past five years), adjust economic income per share is $0.76/share and the stock could be worth $7.60/share for more than a double.
Here's a matrix of possibilities. Skeptics will say, where are the returns below 5% and AUM below $30 billion?!
Well, OK. If returns persist at lower than 5%, it's safe to assume that AUM will go down and this may well end up a zero. That is certainly a possibility. It wouldn't shock many for another hedge fund to shut down.
On the other hand, if things do stabilize, normalize and OZM recovers and does well, there is a lot of upside here. What is interesting to me is that the market is discounting a lot of bad and not pricing in much good. This is when opportunities occur, right?
5% 6% 7% 8% 9% 10% 30,000 $0.45 $0.52 $0.58 $0.65 $0.71 $0.78 35,000 $0.56 $0.64 $0.71 $0.79 $0.86 $0.94 40,000 $0.67 $0.76 $0.84 $0.93 $1.01 $1.10 45,000 $0.78 $0.87 $0.97 $1.07 $1.16 $1.26 50,000 $0.88 $0.99 $1.10 $1.21 $1.32 $1.42 55,000 $0.99 $1.11 $1.23 $1.35 $1.47 $1.58 60,000 $1.10 $1.23 $1.36 $1.49 $1.62 $1.75
The row above is the assumed return of the OZM funds. The left column is the AUM. Assumptions are 1% management fee, 20% incentive fee, 56% economic income margin (excluding equity-based comp expense) and $100 million/year in equity-based comp expense.
It shows you that it doesn't take much for adjusted economic income per share to get back up to closer to $1.00, and can maintain $0.45/share even in a $30 billion AUM and 5% return scenario making the current stock price cheap even under that scenario.
Conclusion Having said all that, there is still a lot of risk here. Low returns and low bonuses can easily make it hard for OZM to keep their best people. But if their best people perform, I assume they do get paid directly for their performance so that shouldn't be too much of an issue.
A lot of the lower returns in recent years is no doubt due to their higher AUM. But it is also probably due to crowding of the hedge fund world and low interest rates leading to an overall lower return environment for all.
If you think these things are highly cyclical, then you can expect interest rates to normalize at some point. Money flowing out of hedge funds should also be good for future returns in these strategies. The part of lower returns at OZM due to higher AUM may not reverse itself, though, if OZM succeeds in maintaining and increasing AUM over time.
But even without the blowout, high returns of the 1990's, OZM can make decent returns over time as seen in the above table.
In any case, unlike a few years ago, the stock prices of many alternative managers are cheap (and I demonstrated how cheap OZM might be here) and institutional money seems to be flowing out of these strategies.
So: OZM is cheap and is in a seemingly universally hated industry Money is flowing out of these strategies, particularly performance chasing institutions (that you would often want to fade) there is a bear market in active managers and bubble in indexing (which may actually increase opportunities for active managers) value spreads are wide and has been widening for years making mean reversion overdue etc. These things make OZM a compelling play on these various themes.
I would treat this more like an option, though. Buy it like you would buy an option, not like you would invest in, say, a Berkshire Hathaway.
There are a lot of paths here to make good money, but there are also plenty of ways to lose. If you look at this like a binary option, it can be pretty interesting!
Posted by kk at 8:11 PM No comments: Links to this post Email This BlogThis! Share to Twitter Share to Facebook Share to Pinterest
Labels: OZM
Saturday, October 29, 2016 Gotham's New Fund Joel Greenblatt was in Barron's recently. He is one of my favorite investors so maybe it's a good time for another post.
Anyway, this new fund is kind of interesting as I am sort of a tinkerer; this is like the product of some financial tinkering. I don't know if it's the right product for many, but we'll take a look.
But first, let's see what he has to say about the stock market in general.
The Market Greenblatt says that the market is "expensive". The market is in the 21st percentile of expensive in the past 25 years. Either a typo or he misspoke, he is quoted as saying that the market has been more expensive 79% of the time in the past 25 years. Of course, he means the market has been cheaper 79% of the time.
The year forward expected return from this price level is between 2% to 7%, so he figures it averages out to 4% to 6% per year. In the past 25 years, the market has returned 9% to 10%/year so he figures the market is 12% to 13% more expensive than it used to be.
He says: Well, one scenario could be that it drops 12% to 13% tomorrow and future returns would go back to 9% to 10%. Or you could underearn for three years at 4% to 6%. We're still expecting positive returns, just more muted. The intelligent strategy is to buy the cheapest things you can find and short the most expensive.
But... Immediately, bears will say that this 25 year history is based during a period when interest rates went down. The 10 year bond rate was around 8% back in 1991, and is now 1.8%. In terms of valuation, this would have pushed up asset values by 6.2%/year ($1.00 discounted at 8%/year then and $1.00 discounted by 1.8% now).
Declining rates were certainly a factor in stock returns over the past 25 years. Of course, the stock market didn't keep going up as rates kept going down. The P/E ratio of the S&P 500 index at the end of 1990 was around 15x, and now it's 25x according to Shiller's database (raw P/E, not CAPE). So the valuation gain over the 25 years accounted for around 2%/year of the 9-10% return Greenblatt states.
Here are the EPS estimates for the S&P 500 index according to Goldman Sachs:
 EPS P/E 
2016 $105 20.4x 2017 $116 18.5x 2018 $122 17.6x
Earnings estimates are not all that reliable (estimates have been coming down consistently in the past year or so). But since most of 2016 is done, I suppose the $105 figure should be OK to use.
I don't know if it's apples to apples (reported versus operating etc.), but if we assume the 'current' P/E of the market is 20x, then the valuation tailwind accounted for 1.2%/year of the 9-10%. But then of course, even if this was a fair comparison, there is still the aspect of lower interest rates boosting the economy by borrowing future demand (and therefore overstating historical earnings).
In any case, one of the main bearish arguments is that this interest rate tailwind in the past will become a headwind going forward. Just about everyone agrees with that.
But as I have mentioned before, calling turns in interest rates is very hard, Japan being a great example. If you look at interest rates over the past 100 years or more, you see that major turns in trend don't happen all that often; it's been a single trend of declining rates since the 1980/81 peak, basically. What are the chances that you are going to call the next big turn correctly? I would bet against anyone trying. OK, that didn't come out right. I wouldn't necessarily be long the bond market either.
Gotham Index Plus So, back to the topic of Gotham's new fund. It is a fascinating idea. The fund will go long the S&P 500 index, 100% long, and then overlay a 90%/90% long/short portfolio of the S&P 500 stocks based on their valuations.
The built-in leverage alone makes this sort of interesting. Many institutions may have an allocation to the S&P 500 index, and then some allocation to long/short equity hedge funds. The return of the Gotham Index plus would be much higher (when things go well).
I think this sort of thing was popular at some point in the pension world; index plus alpha etc. Except I think a lot of those were institutions replacing their S&P 500 index portfolios with futures positions, and then using the cash raised to buy mortgage securities. Of course, when things turned bad, oops; they took big hits in S&P 500 futures, tried to post cash for the margin call and realized that their mortgage funds weren't liquid (and was worth a lot less than they thought).
Or something like that.
There is risk here too, of course. You are overlaying two risk positions on top of each other. When things turn bad, things can certainly get ugly.
I think Greenblatt's calculation is that when things turn bad, the long/short usually does well. I haven't seen any backtests or anything, so I don't know what the odds of a blowup are.
Expensive stocks tend to be high-beta stocks and cheaper stocks may be lower beta, so in a market correction, the high-beta, expensive names may go down a lot harder.
To some extent, lower valuations may reflect more cyclicality, lower credit risk / lower balance sheet quality too so you have to be a little careful. In a financial crisis-like situation, lower valuation (lower credit quality) can tank and some higher valuation names may hold up (like the FANG-like stocks).
But Greenblatt's screen is not just raw P/E or P/B, but is tied to return on capital, so maybe this is not as much of an issue compared to a pure P/B model.
The argument for this structure is that people can't stay with a strategy if it can't keep up with the market. Here, the market return is built in from the beginning and you just hope for the "Plus" part to kick in. In a long/short portfolio, the beta is netted out to a large extent so can lower potential returns. This fixes that. But there is a cost to that.
In any case, I do think it's a really interesting product, but keep in mind that it is a little riskier than Gotham's other offerings.
Oh, and go read the article on why this new fund is a good idea. Greenblatt is always a great read.
Chipotle (CMG) Well, Chipotle earnings came out and it was predictably horrible. The stock is not cheap so it hasn't been recommendable in a while, but I really like the company. There was a really long article on them recently which was a great read. It didn't really change my view of them all that much. I think they will get a lot of business back, eventually.
The earnings call was OK, but what was depressing about it was that they decided to ditch Shophouse. I don't think any analysts asked about it so it was a given, I guess. I had it a couple of times in DC and liked it and was looking forward to it in NY, but I guess that's not going to happen. As an investor, that was not baked into the cake, I don't think, even though there was probably some hope that the CMG brand can be extended into other categories.
This puts a lot of doubt into that idea. Someone said that brand extensions in restaurants/retail never work, and that has proven to be the case here. I wouldn't get too excited about pizza and burgers either. Burgers are really crowded now and will only get more so.
If CMG has to look to Europe for growth, that is not so great either as the record of U.S. companies expanding into Europe is not good. I would not count on Europe growth.
Anyway, this doesn't mean it's all over for CMG. I think they will come back, but there are some serious headwinds now other than their food poisoning problem; more competition etc. They were the only game in town for a while, but now everyone seemingly wants to become the next Chipotle, so there are a lot of options out there now.
As for Ackman's interest in CMG, I have no idea what his plan is. There is no real estate here as CMG rents all their restaurants, and their restaurants had high 20's operating margins at their peak. I don't know if they will ever get back up there, but it's not like these guys don't know how to run an efficient operation. Maybe Ackman sees SGA opportunities, but pre-crisis, SGA was less than 7%, so there wouldn't be that much of a boost from cutting SGA. Or maybe he thinks it's time for CMG to do what everyone else is doing and go for the franchise model. Who knows? I look forward to seeing what his thoughts are; hopefully some 500 page presentation pops up somewhere...
McDonalds I don't want to turn this into a food blog, but I can't resist mentioning this. I have been a lifelong MCD customer; I have no problem with it. OK, it may not be my first choice of a meal in most cases, but it's fine. And when you have a kid, you tend to go more often that you'd like. But still, it's OK. It is what it is, right?
I like the remodelling that they are doing, and the fact that they have free wifi is great too. But here's a big clustermuck they had with their recent custom burger and kiosk idea. I walked into a MCD without knowing anything about any of this recently. A lady said I can order at the kiosk and I said, no, I'll just go to the counter, thank you.
And I waited 10 minutes or so in line, looking up at the tasty looking special hamburgers on the HD, LCD menu board. It was finally my turn at the cash register and I said I want that tasty looking hamburger up there on the screen. And the lady said, oh, you can only order that at the kiosk. I was like, huh? That was really annoying. So I wait all this time and I can't get what I want; I have to walk all the way back and get in another line again? Come on! At that point, I didn't want any other burger so I just ordered a salad (and the usual for my kid).
OK, so it's my fault, probably. User error. But as a service company, as far as I'm concerned, that was a massive fail on the part of MCD.
OK, Now That I started... And by the way, since I got myself started, let me get these two out too. Yes, I spend too much time at fast food joints. Guilty. But still, here are my two peeves related to two of my favorite fast casual places:
Shake Shack: Being dragged there all the time, I have learned to love the Shack-cago hot dog. Chicken Shack is awesome too, in case you don't want to eat hamburgers all the time. But I can't tell you how often they get take-out and stay wrong. I had a long run where they didn't get it right at all and had to ask for things to be packed to go. It is really annoying and wastes everyone's time.
Chipotle: This hasn't happened to me the last couple of times, but this is the usual conversation that happens to me just about every time I go to Chipotle.
CMG: "Hi, what can we get you today?" (or some such) Me: "Um, I'll have a burrito..." CMG: putting the tortilla in the tortilla warmecooker, "and would you like white rice or brown rice? Me: "White rice is fine" CMG: with tortilla still in the cooker, "and black beans or pinto beans?" Me: "black beans". CMG: laying a sheet of aluminum foil on the counter and placing the tortilla on it, moving over to the rice area, "Was that white rice or brown rice?" Me: "white rice" CMG: sliding over to the beans, "and black beans or pinto beans?". Me: "black".
I can't tell you how many times this exact thing happened to me. If you can't remember what I say, don't ask beforehand! Just ask when we get to whatever you are going to ask me about! This is not rocket science, lol... Incredibly annoying.
Anyway, I still love CMG and will keep eating there.
Oh, and to make things interesting, I decided to post a contact email address in the "about" section of the blog. I will try to respond to every email, but keep in mind I may not look in that email box all the time.
I will try to post more, though.
http://brooklyninvestor.blogspot.com/2016/11/perpetual-option-och-ziff-capital.html (read original with tables)
submitted by BobFine to stocks [link] [comments]

Advice on life anyone?

So here's the deal.
Around February of this year, in my last semester of Undergrad, I decided, "Fuck it, Imma do what I want." I'm a biological male, 6'6" and with a very masculine form, but I decided to start openly wearing makeup, nail polish and whatever clothes I wanted to. For a solid three months I had a terrific experience expanding my own horizons and getting comfortable in my own skin and in my own ambiguous gender identity. I learned in those months that there are such things as comfort, acceptance and love for people like us. There is peace and community and normalcy, in some contexts, when you just decide to do it and let yourself be yourself.
It culminated in going to my spring formal in a dress and patterned stockings. All of my friends were supportive, and it was perhaps the best night I've ever had. They were all supportive, a few girls complimented me on my style choices, and on the whole the night was glorious. A week later I wore makeup and nail polish at graduation, and later when I went out to dinner I kept the makeup and nail polish and wore capris with the same patterned stockings I wore to formal. It felt great. Here I was, out in public, looking genuinely good in a gender-ambiguous way, comfortable with myself.
(by the way, Roberts Wesleyan College in Rochester, NY, where I attended, was a loving, accepting community. Somewhat surprising for its conservative theological base, but worth stating and commending here)
Anyway, I didn't get into grad school so I had to move down to Mississippi to live with my Mom and Step-Dad. I don't have a job yet, and I can't seem to get one yet, so I can't move out onto my own yet.
I've tried even wearing makeup around them, but it seems like every time I do I'm met with disapproval, criticism and outright scorn. I love my Mom more than anyone else in the world, but it seems like I can't do anything outside of accepted gender binary without her reminding me that my gender-ambiguous behavior is harmful to my employment prospects and my lifelong success potential. I want to say that she's wrong, but living in Mississippi she's probably right.
I feel like I've gone from living life in an open field to living in a small room. I already have the shock that I'm not in college anymore (I'm working on getting into "normal" grad school to become a teacher now) and on top of that I have to find a way to deal with the fact that I can't dress myself and present myself how I want to if I'm to expect any measure of normal employment and fulfillment, I have to keep myself confined to the binary.
I know how to "just do it", I know how to get over societal conceptions and hold my head high in stockings and a denim skirt. That's not the issue.
I don't know how to stare down the person who loves me the most and tell her that she's wrong when I know she isn't.
I don't know how to stare down the harsh realities of employment in the deep south and still manage to be myself.
Staying in the closet, pretending, isn't an option after what I learned back in college, but at the same time I feel like the expression I crave is similarly no longer a viable option for pursuing the path of life that I want.
Can any of y'all give me advice on how to proceed or what to do?
submitted by jrsadpanda to genderqueer [link] [comments]

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