Three Longs & Three Shorts

Published on: 7th April, 2019

This week’s reads focus on what makes DE Shaw one of the most successful hedge funds, how the Chinese are dominating the Indian mobile apps space, how the world’s cheapest hospital needs to get cheaper, the concept of site-specific theatre, how mindfulness has fallen prey to capitalism and why meat eating in Japan was banned for centuries.

1.       Long read: DE Shaw: inside Manhattan’s ‘Silicon Valley’ hedge fund

Author: Robin Wigglesworth
Source: Financial Times (https://www.ft.com/content/0364850c-3ebf-11e9-9bee-efab61506f44)

In 1988, David Shaw, a computer science professor in Columbia University created a small company above a bookshop – Revolution Books – in New York City. That startup is today one of the largest hedge funds in the world – DE Shaw has US$50bn of assets under management. It is the fourth highest grossing hedge fund of all time having generated nearly US$29bn for its clients since inception.
This article on the secretive hedge fund – based on a series of interviews with its senior management – is the closest most of us will get to understanding one of the first and most successful quant funds: “…DE Shaw has evolved dramatically from the algorithmic, computer-driven “quantitative” trading it helped pioneer in the 1980s. It is now a leader in combining quantitative investing with traditional “fundamental” strategies driven by humans, such as stockpicking. This symbiosis has been dubbed “quantamental” by asset managers now attempting to do the same. Many in the industry believe this is the future…The combination of DE Shaw’s performance and the secrecy around exactly what it does both vexes and fascinates rivals and counterparties. “They’re like a calibrated machine that can respond to nearly every market,” says the head of an investment bank’s hedge fund trading desk.”
DE Shaw’s performance numbers are already the stuff of legend: “Last year its flagship $14bn Composite Fund — which has been closed to new investors since 2013 — returned over 11 per cent to investors net of fees, despite the turmoil in financial markets. That was its seventh double-digit gain of the past decade, over which period it has not suffered a losing year. Its $7.6bn “macro” fund, Oculus, returned 5.9 per cent in 2018, and the $7bn stocks-focused Valence made 8 per cent.”

The 1300 people (including 80 PhDs) who work at DE Shaw use a mixture of quantitative and discretionary approaches to make money. It would appear that in all of these approaches, quantitative techniques provide the main framework with discretion being applied at the margin. However, “DE Shaw runs some quant strategies so complex or quick that they are in practice almost beyond human understanding — something that many quantitative analysts are reluctant to concede. The goal is to find patterns on the fuzzy edge of observability in financial markets, so faint that they haven’t already been exploited by other quants. They then hoard as many of these signals as possible and systematically mine them until they run dry — and repeat the process. These can range from tiny, fleeting arbitrage opportunities between closely-linked stocks that only machines can detect, to using new alternative data sets such as satellite imagery and mobile phone data to get a better understanding of a company’s results.”

However, the biggest opportunities, the firm believes are in good old fashioned long-only equity investing: “DE Shaw still sees plenty of opportunities in the quantitative investing side, especially its “long-only”, non-hedge fund investing business, DE Shaw Investment Management. DESIM has quintupled in size since 2011 and now manages $24bn. To grow this further, the company is expanding into something dubbed “risk premia”, systematically exploiting theoretically timeless drivers of returns, such as the tendency for smaller or cheaper stocks to outperform the overall market over time.”

2. Long read: The World’s Cheapest Hospital Has to Get Even Cheaper 

Author: Ari Altstedter
Source: Bloomberg (https://www.bloomberg.com/news/features/2019-03-26/the-world-s-cheapest-hospital-has-to-get-even-cheaper)

The article begins with a description of Dr Devi Shetty, the founder & promoter of Narayana Hrudayalaya – a chain of heart centres and multi-specialty hospitals – performing a complicated heart surgery. “…pulmonary thromboendarterectomy, the surgery Shetty performed, can tie up an operating room for most of a day. In the U.S., the procedure can cost more than $200,000. Shetty did it for about $10,000 and turned a profit. A cardiac surgeon by training, Shetty is the founder and chairman of Narayana Health, a chain of 23 hospitals across India that may be the cheapest full-service health-care provider in the world….Narayana has made Shetty one of India’s best-known doctors and the proprietor of a lucrative business, with about $8 million in profit in 2017.”

Shetty now wants to reduce the price of his firm’s services further to meet the rates set by the Ayushman Bharat healthcare program: “…Narayana needs to find ways to cut costs further—and then keep cutting. Shetty thinks he can do it and, in the process, create a model for ultralow-cost health care that can be applied anywhere. “We are trying to produce a pilot for the rest of the world to follow,” he said over a lunch of curries and fried fish after scrubbing out from the heart operation. He was still wearing his surgical cap. “In 10 years, India will become the first country in the world to dissociate health from affluence. India will prove that the wealth of the nation has nothing to do with the quality of health care its citizens can enjoy”… For a surgery like the one he’d just performed, Modicare would provide only $1,300.”

Central to Shetty’s success is upskilling or task-shifting: “In the mid-1990s, Shetty began experimenting with a business school concept alternately called upskilling or task-shifting. The idea is for everyone involved in a complex process to work only at the top of his qualification, leaving simpler tasks to lower-paid workers. In a hospital, this might mean that the costliest staff—experienced surgeons—enter the operating theater only to complete the most difficult part of a procedure, leaving everything else to junior doctors or well-trained nurses. Then they move to the next theater to perform the same task again.”
In 2000, with seed funding from his father-in-law, Shetty put his assembly line method of surgery into place …”to create the first Narayana hospital, which would put assembly line surgery into action. (Narayana was the benefactor’s middle name.) Initially focused solely on cardiac procedures, Shetty gradually expanded Narayana’s remit to include most major operations and set up regional hospitals that could feed patients with complex conditions into its two largest facilities: the Bangalore flagship and another in Kolkata. Within a decade the company had a national network and, in 2014, even opened in the Cayman Islands, in part to attract medical tourists from the U.S. Two years later, Narayana Health went public in Mumbai; it’s been continuously profitable since.”
Another colleague of Devi Shetty explains how the Narayana system works to sustain profitability: “Everyone does as much as they can,” Ashwinikumar Kudari, a senior gastrointestinal surgeon, says toward the end of a busy day at the Bangalore hospital. He’s just removed two malignant tumors the size of golf balls from a middle-aged woman’s intestines—the seventh surgery he’s performed or supervised since morning. A compact man with a trim mustache and a wry smile, Kudari is soon on the move again, checking in briefly on a gallstone removal next door before dashing up a spiral staircase to another operating theater. There, he takes over from a colleague who’s struggling to locate a particularly tricky fistula. “Our margins are low on one surgery, but because we do so many in a day, we can make enough,” he remarks after the elusive fistula—the longest he’s ever seen—is found, running from the man’s anus to above his groin. By working at this pace, the average Narayana surgeon performs as many as six times more procedures annually than an American counterpart.”

That’s not all. Devi Shetty has squeezed savings out of many other parts of his hospitals’ operations: “The surgical gowns are procured from a local company for about a third of the cost of international suppliers. The tubes that carry blood to heart-and-lung machines are sterilized and reused after each surgery; in the West, they’re thrown away. The machines themselves, along with devices such as CT and MRI scanners, are used well past their warranties, kept running by a team of in-house mechanics. The operating rooms, pieces of real estate so expensive that many hospitals bill for their use by the minute, are also part of the assembly line. Whereas preparing a U.S. surgical theater for the next patient can take 30 minutes or more, Narayana has gotten the process down to less than 15, in part by keeping turnaround teams with fresh instruments, drapes, and other supplies on immediate standby, ready to roll the moment a room is available. Even patients’ families are part of the upskilling model. Narayana trains them to bathe patients and change bandages in the hospital, as they’ll do when they get home. This allows paid staff to focus on more challenging work. Through all these methods and more, Narayana has been able to get the retail cost of a heart bypass, its most common operation, down to $2,000, about 98 percent less than the U.S. average.”

3. Long read: The Chinese takeover of Indian app ecosystem

Author: Shadma Shaikh
Source: Factor Daily (https://factordaily.com/the-chinese-takeover-of-indian-app-ecosystem/)

Chinese mobile handset manufacturers dominating the Indian mobile devices market was not surprising given their dominance in manufacturing but Chinese apps taking over the Indian app ecosystem is a big surprise for many. Five out of the top 10 mobile apps in India are Chinese.

Few reasons for the spectacular success of Chinese: deep pockets for marketing expense, focus on vernacular Indian users, an addictive user interface, racy content, quick iterations and execution cycles, and cheap offerings. Chinese companies are fast learning the nuances of doing business in India. They opt for local talent and local content to make inroads in the Indian market. Companies are not focussing on the top 100 million urban crowd which is well served. Their target is the next 200 million to 600 million consumers, who do not have a go-to entertainment, payment or ecommerce platform yet. Shadma rings the alarm bell for Indian players and says “If Indian app entrepreneurs can make good learnings from the Chinese invading their fief, it may stem the hollowing out of the Indian app ecosystem.”

“….TikTok is a Youtube killer.” “Helo is giving ShareChat a tough time and has a higher chance of winning India market.” “TikTok is like Instagram for India.” “Bigo Live is a platform for companionship.”

For those trying to make sense of the Chinese dominance of the Indian app ecosystem, these are familiar statements. Yet, until about a year or a little more ago, these platforms and their Chinese parents were not heard of. Now, they are not just a rage but have inspired several dozens of other platforms to launch and experiment in the internet booming India market. 2018 is likely to be remembered as the year when the Chinese took over Indian smartphones. In December 2017, the top 10 mobile apps on Google Playstore looked a lot different than what they look from a year later. The Playstore rankings for India in 2018 have China written all over it. Five out of the top 10 mobile apps in India are Chinese — versus two at the end of 2017. That’s not all. As of December 2017, there were 18 Chinese apps among the top 100 across various categories on Google Playstore. These included popular ones such as UCBrowser, SHAREit, and NewsDog. Fast forward to the end of 2018. The number of Chinese apps in the top 100 Playstore apps has reached 44. Beyond the top 100, there are others like Rozbuzz, a social entertainment content platform, and YouStar, a video chat room platform, that enjoy a more than one million downloads in India – a threshold that evokes grudging respect in this app community……..There are many things that are common between Chinese apps launching in India: deep pockets for marketing expense, focus on vernacular India users, an addictive user interface, racy content, quick iterations and execution cycles, and cheap offerings to name a few. Also, there’s a huge emphasis to shed the “Chinese” tag. This could be an effort to address the general mistrust among Indians of Chinese products or a precautionary PR exercise.

In 2012, when Tencent’s relatively popular messenger WeChat launched in India it spared no expense in marketing and branding of the product. From product launches in malls to roping in popular Bollywood actors as brand ambassadors, WeChat launched and acquired users with commendable speed. But as the platform started getting more mainstream in China, its growth in India tanked. By 2015, Tencent wound up its WeChat team in India. “A lot of it had to do with failing to localise the platform for India,” says Himanshu Gupta, former associate director of marketing and strategy, WeChat India. Nevertheless, WeChat’s failure presents learnings for the Chinese ambitions of making India their next big market. Not only are Chinese entrepreneurs aware of it, but they also understand the nuances of the India market. This is evident from the strategy adopted by popular Chinese players in the India vernacular content market. For example, Helo by ByteDance has a local team entirely based in New Delhi…….

4. Short read: In Kolkata, home is where the drama is

Author: Sohini Chattopadhyay
Source: The Hindu (https://www.bloomberg.com/news/features/2019-03-26/the-world-s-cheapest-hospital-has-to-get-even-cheaper)
Kolkata is witnessing a new type of theatre. Called site-specific theatre, these are plays which are staged in the city’s grand old homes. “Site-specific theatre, a term that The Guardian says has been gaining traction since the 1980s, refers to productions that are not in the traditional theatre space but grow out of the sites where they are performed.”

This article begins with a play called 32 Ashwini Dutta Road (performed in a house with that address): “When we, the audience, knocked at 32 Ashwini Dutta Road, a handsome, 80-year-old South Kolkata residence, a young girl opened the door and welcomed us in absent-mindedly. She led the way to the baithak khana (living room), a high-ceilinged room belonging to a different Kolkata, the Calcutta of yore, which had grand houses with window sills wide enough for two to sit comfortably. The girl settled us in before getting into a heated chat with her friend and neighbour about the family pressure she was facing to get married. What we were witnessing was the play, 32 Ashwini Dutta Road, arguably the first site-specific production in Bengali…The play is conceptualised by the interdisciplinary artist Sujoy Prosad Chatterjee, who first saw such a performance in a heritage house in Toronto, which was once home to a former mayor.”

So, why bother with staging plays in old houses? “Kolkata was once packed with these family seats, described by Amartya Sen as “eccentric” and “beautiful” in his letter of support to novelist Amit Chaudhuri’s campaign for conserving these properties. The city’s centre was the business district, made up of British neo-classical buildings and Armenian and Jewish mansions. A large number of these family houses have been replaced with unlovely apartments today. The houses that remain have emptied out, many of the rooms are locked up, their residents now in distant cities.

Chatterjee’s project, running till March, wants to make use of such houses again. Not only in the older, more historic neighbourhoods of Bhawanipore and Ballygunge, but also in relatively new suburbs like Salt Lake, where too many houses are now thinly inhabited. At the end of the performance, Chatterjee invites the audience to start performances like this in their localities. Aside from reimagining these spaces, he hopes that projects like his will rekindle a sense of community in these hollowed-out neighbourhoods. When you visit someone’s home and walk through their rooms and sit on their beds, it’s hard not to start a conversation.”

5. Short read: Why Eating Meat Was Banned in Japan for Centuries

Author: Kristi Allen
Source: Atlas Obscura (https://www.atlasobscura.com/articles/japan-meat-ban )

Whilst India goes through its own debate over beef, it is intriguing to know that for over 12 centuries, meat eating was considered taboo in Japan. This may come across as a surprise to some people who have found Japan to be the haven for quality beef or have seen other unconventional meat on menus of Japanese restaurants. Whilst the advent of Buddhism was a factor, there were practical reasons around the terrain not being conducive for rearing animals for meat and the simple scarcity of animals, which would rather be used in farms.
“For both religious and practical reasons, the Japanese mostly avoided eating meat for more than 12 centuries. Beef was especially taboo, with certain shrines demanding more than 100 days of fasting as penance for consuming it. The story of Japan’s shift away from meat began with the arrival of Buddhism from Korea in the 6th century. At that time, the Japanese were meat eaters. Venison and wild boar (which was sometimes called yama kujira, or “mountain whale”) were particularly popular. Aristocrats enjoyed hunting and feasting on deer entrails and wild fowl.

….But the meat ban also had secular roots. Even before Buddhism, meat wasn’t an essential part of the Japanese diet. As a nation of islands, Japan has always relied on fish and seafood as staples. … Raising animals is resource-intensive, so Japanese farmers working with limited space in their mountainous island nation largely avoided it. It was also in the best interest of the country to discourage the eating of useful farm animals, since there were relatively few of them in Japan.

…. One government decree stated that anyone who’d eaten wild goat, wolf, rabbit, or raccoon dog (tanuki) was required to repent for five days before visiting a shrine. Those who’d eaten pork or venison, however, were required to repent for 60 days. For eaters of beef and horse meat, it was 150 days. On the rare occasions that they did eat meat, Japanese people cooked it on fires outside the home and avoided looking directly at their altars afterwards so as not to contaminate them.

When Portuguese missionaries arrived in Japan in the early 16th century, they had been counseled that the locals considered drinking milk to be like drinking blood and that eating beef was unthinkable. Even the warlord Toyotomi Hideyoshi supposedly questioned Portuguese missionaries on their practice of eating beef, as cows were so useful as farm animals. Nevertheless, the Portuguese were able to spread some of their cuisine to the locals, including sweets, tempura, and beef, which Kyotoites called waka, from the Portuguese vaca.

Dietary customs began to change faster in the late 19th century. After Emperor Meiji assumed power in 1868, the Japanese government moved to end their two centuries of isolation and adopt Western practices and technology as quickly as possible. Plus, many believed “that one reason why the Japanese had poor physiques compared to Westerners was that they did not eat meat or dairy products,” writes Ishige.

.. One prefectural decree from 1872 reads “Although beef is a wonderfully nutritious food, there are still a great number of people barring our attempt at westernization by clinging to conventional customs,” adding, “Such action is contrary to the wishes of the Emperor.”

In the end, the wishes of the Emperor prevailed. As Japan opened up to the world, it began to absorb meat-based dishes from Korea, China, and the West. Soon, expensive Western-style restaurants serving meat popped up in cities, followed by affordable Japanese restaurants serving a medicinal beef stew, which would evolve into the dish sukiyaki. Today, the Japanese eat almost as much meat as they do seafood. While it took a few decades, meat is now as much a part of Japanese cuisine as sushi.

6. Short read: Mindfulness meditation in America has a capitalism problem

Author: Sean Illing/David Forbes
Source: Vox (https://www.vox.com/science-and-health/2019/3/29/18264703/mindfulness-meditation-buddhism-david-forbes )

As scores of people across the world take to meditation as a tool to enhance mental health, this interview with David Forbes, a professor at Brooklyn college, brings out how even this could be falling prey to capitalism. Calm, a popular mobile app used for meditation is already a unicorn (valued at over a billion dollars).

“The number of Americans who’ve tried meditation has tripled since 2012. And many are doing a specific practice with Buddhist roots called mindfulness, which involves directing your attention to your experience in the present moment with kindness and without judgment. The practice is increasingly being offered in schools, health care facilities, and prisons to improve well-being. So how is this a bad thing?…

…. The mindfulness you see in Buddhist communities is not the same mindfulness being promoted in corporations and schools across the country…. At the same time, mindfulness is also becoming an industry, and lots of companies are cashing in on it. … there are money-making studios popping up all over the place. And mindfulness is being marketed [by them] as very much an individualistic practice, which is not healthy and even further contributes to stress and ill-health.

Buddhists seek to let go of attachment to the myth of the private, solid, unchanging self, and to promote universal compassion and end universal suffering.

But capitalist culture enforces the myth of the privatized, self-centered self. So unless mindfulness is employed in the service of making the world a better place — then practicing can and does end up serving to maintain the very self-centered, greedy, individualistic institutions and relationships that contribute to the lack of connected presence, kindness, and compassion that contribute to our unhappiness.

Buddhism has ethical values and practices such as non-violence. Its deeper moral stance is that we are interconnected with all beings, to all our social relationships and institutions, and with the earth itself.

People will argue that you become kinder and more compassionate just by practicing mindfulness. But I believe people need a moral framework in addition to mindfulness, some social vision to guide them. I think [in many US contexts it has] been severed from this moral tradition. Without that, meditation can become just another tool of self-absorption.

… problem is that it ultimately doesn’t go far enough because it reinforces the sources of our unhappiness. As long as mindfulness is focused on the individual and not on our social situation, it will not help us change the conditions that are making us unhappy, namely a hyper-competitive, ultra-individualistic culture that separates and alienates us…”

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Note: the above material is neither investment research, nor financial advice. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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