Jane Street’s AI bets go sour

One event to start: The FT Weekend Festival is this Saturday, September 5. Spend the last weekend of summer at Kenwood House in north London or online with the Financial Times. Hear from 200+ leading authors, actors, politicians, chefs, artists and FT journalists. I’ll be speaking in the Money tent so if you’re attending, come and say hello.

In today’s newsletter:

• Jane Street’s growing pains

• Woodford collapse still confounds investors

• Asset management M&A booms

Jane Street’s growing pains

Jane Street, the Wall Street quant trader, has had some fantastically successful years, generating billions of dollars of trading revenue. But last year set a new high as revenue nearly doubled to $40bn from 2024, itself a two-bagger on 2023. This year the situation looks a tad different.

Jane Street had invested heavily in Situational Awareness; a former employee at Jane Street works at the AI-focused fund; and it was exposed to many of the same AI-linked stocks that Leopold Aschenbrenner, the founder of Situational, had bought, including Sandisk, Nebius and Bloom Energy, write Jill R Shah and Joshua Franklin. 

But the bets soured, leading Jane Street to lose money over a month for the first time in a decade. The stake in Aschenbrenner’s fund and positions in AI stocks were the main factors behind a massive $15bn loss in trading revenues, after a bruising sell-off in the sector during July. 

The loss was a stunning reversal for a firm whose returns had become the envy of Wall Street. It also made clear just how far the secretive company has evolved from its roots as a nimble market maker and arbitrage trader, profiting from tiny differentials in asset prices over fractions of a second.

Today, it is one of the largest financial institutions in the US and it takes massive bets over longer horizons, increasing the risk to its balance sheet, lenders and regulators, who keep a close eye on outfits the size of Jane Street for the market dislocations they could cause.

The FT spoke to more than a dozen current and former employees, as well as analysts and other Wall Street firms familiar with Jane Street’s evolution. Jane Street itself declined to comment.

“When you start seeing the kind of revenue these guys are putting up, the only way that’s possible is when your holding period extends as well as the size,” says Larry Tabb, head of market structure research at Bloomberg Intelligence. “The problem with that is your clarity on the future declines.”

Its tilt into large and lengthy wagers and its headlong embrace of the AI trade, including the Aschenbrenner investment, comes as the firm has achieved fearsome scale, according to Paul Rowady, director of research for Alphacution.

“You’re trading slower. You have bigger positions, they absorb more capital,” he adds. “It’s a different animal.”

Woodford collapse still confounds investors

A decade ago, before any problems set in, Neil Woodford had near-deity status. The then much-feted fund manager only worked miracles, with investors clamouring to entrust their capital to a man once referred to as the UK’s answer to Warren Buffett.

Today, many of those same investors still seek answers as to how their money disappeared so quickly following the extraordinary collapse of Woodford’s flagship fund in 2019, writes Chris Newlands. 

“He is an arrogant, egotistical man who has never properly taken responsibility for his misbehaviour,” says Ian Duffield, who lost more than £100,000 after the closure of the Woodford Equity Income Fund, which once held a staggering £10bn of assets.

Blame has been apportioned, however. A year ago this month the financial regulator fined Woodford and his former investment company, Woodford Investment Management, a combined £46mn, concluding that he held a “defective and narrow understanding of his responsibilities”.

Many reasons have been cited for the fund’s failure, from a succession of badly performing stock choices, most significantly in online estate agency Purplebricks and construction company Kier, to the withdrawal of a £250mn investment mandate from Kent county council.

But perhaps the trigger for the downfall, as flagged by Duffield, was Woodford’s over-reliance on large, illiquid assets: investments that could not be sold when investors started demanding their money back.

Woodford, meanwhile, got rich. According to figures filed with Companies House, Woodford and his business partner Craig Newman took £111.5mn out of Woodford Investment Management as dividends in the five years to March 2019.

Gina Miller, a campaigner and investment manager, says: “Woodford was fined £5.9mn personally by the FCA and yet he and his business partner paid themselves £20mn in dividends in the 12 months to March 2019 alone, while the fund was heading for the rocks. The fine was far too lenient.” 

Woodford declined to comment for this article.

Asset management’s M&A booms

Two new deals from Vanguard and Victory Capital last week underscored the pace of consolidation reshaping the global asset management industry, as investment groups rush to expand, writes Harriet Clarfelt.

Index-tracking fund titan Vanguard, which has $12tn in assets under management, revealed it would acquire AI-wealth platform Altruist for an undisclosed sum, pointing to the benefits of technology in helping advisers serve more clients.

Separately, Victory Capital, the Texas-based investment house that lost out in the race to buy Janus Henderson earlier this year, said on Wednesday that it would scoop up asset manager First Eagle for $7bn.

Those transactions come as a wave of consolidation ripples across the global asset management industry, with fund firms seeking scale and breadth across geographies and asset classes. Global asset management deal volumes have already reached $53.8bn year to date, the highest figure on record since at least 1995, according to data from Dealogic.

In Vanguard’s announcement on Wednesday, chief executive Salim Ramji said that “far more people could benefit from access to financial advice than the industry can serve today,” and “technology can help close that gap by enabling advisers to serve more people and serve them better, while preserving the human judgment and relationships at the centre of good financial advice”.

Victory, meanwhile, said its acquisition of New York-based First Eagle — with $222bn of assets under management — would create a $571bn fund firm, “positioning Victory Capital as one of the largest publicly traded traditional asset managers in the US”.

Nelson Peltz’s Trian Fund Management, together with investors led by venture firm General Catalyst, ultimately won the bidding war for Janus Henderson this year, with an $8bn all-cash offer, after Victory unexpectedly swooped in earlier with a rival proposal.

Victory’s latest deal combines $4.4bn in cash and $2bn in newly issued shares, with Victory also taking on $575mn of First Eagle bonds expiring in 2032. That is well above the roughly $4bn that First Eagle’s private equity owners Genstar had paid. That deal had only closed about a year ago.

When it dropped out of the bidding war for Janus Henderson in late March, Victory said its “acquisition strategy has not changed”.

The Swiss Association of Wealth Managers is urging its government to halt the October launch of a vast new register of company owners after hackers stole similar data on thousands of people from neighbouring Liechtenstein in late July.

Institutional investors are putting money into Blackstone and KKR evergreen funds originally set up to woo wealthy individuals, a move that could ultimately upend the sector’s traditional 10-year fund model.

UK venture capital investment is heading for a record year after surging in the first half to £14.4bn, according to PitchBook data, bolstering the country’s reputation as the leading European hub for AI deals.

UBS has discussed overhauling the management of a $1bn sustainable finance fund that works with development agencies such as the World Bank amid concerns about its UK investment partner Record’s push into private markets.

JPMorgan Asset Management and its peers which have shipping portfolios, including vessels, have seen increased interest from pension funds and large institutional investors keen on exposure to hard assets.

And finally

Those who missed the National Portrait Gallery’s exhibition this spring have one last opportunity to catch Lucian Freud’s Drawing into Painting. The beautiful Louisiana Museum, bordering the Øresund Sound north of Copenhagen, will host the collection for most of September.

Until September 27