A US hedge fund has raised $100mn to make trades based on articles by its affiliated newsroom, launching a novel experiment in funding investigative reporting as the media industry suffers a fresh round of lay-offs.
The business is an effort to pair the sort of investigative journalism typically done by newsrooms with a long-short hedge fund. The fund, Hunterbrook Capital, places trades based on scoops uncovered by reporters at the newsroom, Hunterbrook Media, which is separated by a layer of compliance. Those scoops would only be based on publicly available information.
The companies, whose plans were first reported by the Financial Times last year, share a set of officers, including two co-founders — chief executive Nathaniel Horwitz and publisher Sam Koppelman — general counsel Fitzann Reid and head of operations Emily Pate.
“Journalism is seen widely as a difficult business, but people have been making billions of dollars off of reporting for years,” Koppelman told the FT. “Good reporting shouldn’t have to be a bad business.”
Hunterbrook Media launched on Tuesday with a report that alleged United Wholesale Mortgage had been unfairly incentivising independent mortgage brokers to funnel almost all of their business to the biggest US mortgage lender.
The story carried a disclosure that Hunterbrook Capital had placed a short position on UWM before publication, and a long position on Rocket Mortgage, UWM’s main rival. UWM’s stock ended the day down 8.5 per cent, but Rocket Mortgage also fell, closing almost 5 per cent lower.
Hunterbrook’s story also noted that its “non-profit affiliate” had partnered with law firm Boies Schiller Flexner to explore a class-action lawsuit against UWM on behalf of homebuyers. A proposed class action against UWM, its holding company and its chief executive Mat Ishbia was filed later on Tuesday.
The article was “an excellent example of the type of reporting that we set out to do,” Horwitz said. “It is at the intersection of [reporting] that affects a lot of people, that people should know about, and a business model that can fund more of that work.”
A UWM spokesperson said the report was “riddled with inaccuracies”, however, and called Hunterbrook’s use of journalists to help short a stock “unethical”.
“Hunterbrook is not a news organisation. It is a hedge fund sensationalising public information to manipulate the stock market to enrich themselves and their investors,” the UWM spokesperson said.
Hunterbrook Media will focus on investigative work and foreign reporting in under-covered regions, funding its journalism with fees from the hedge fund, rather than advertising or subscriptions.
“Nathaniel and I had this belief that the tools of reporting and the people who did it, journalists and [Open Source Intelligence] specialists, were radically undervalued,” Koppelman said.
Horwitz and Koppelman, who are in their late twenties and met at Harvard, have limited backgrounds in journalism or stock trading. Horwitz was a biotech investor and Koppelman is an author who worked at speech writing and communications firm Fenway Strategies. Both have family connections to the media business, however — Horwitz is the son of Pulitzer Prize- winning journalist Tony Horwitz and novelist Geraldine Brooks, also a Pulitzer winner, while Koppelman is the son of Billions co-creator Brian Koppelman and novelist Amy Koppelman.
The pair have enlisted several journalism industry veterans as advisers, including former Wall Street Journal editor Matt Murray, ProPublica founder Paul Steiger, and Bethany McLean, the investigative reporter who first published concerns about Enron’s accounting.
They have recruited three full-time reporters and a group of overseas freelancers who have written for mainstream news outlets, including the FT and Reuters, in places such as Brazil, Mongolia and Namibia. There is a single full-time trader on the hedge fund side, Courtney Dunlevie, previously of Commonstock and Morgan Stanley.
Running the newsroom this year will cost about $5mn, Koppelman and Horwitz said, and $10mn in seed funding raised last year would support operations through the end of next year. The hedge fund arm will charge investors a traditional 2 per cent management fee and 20 per cent performance fee and will in effect pay Hunterbrook Media for its research, funding the venture.
The plan is for Hunterbrook Media to be walled off from Hunterbrook Capital, differentiating it from other investment firms such as Hindenburg Research and Muddy Waters that also investigate and take financial positions in companies.
Hunterbrook Media also plans to publish articles on which it takes no financial position, but it is unclear whether it would run stories that could harm the fund’s active trading positions.
The venture launches in a grim period for the news business, following lay-offs at start-ups such as BuzzFeed, Business Insider and Vice, which were once touted as the future of news media, as well as legacy publications such as the Los Angeles Times and Sports Illustrated.
Hunterbrook’s strategy is fraught with compliance risks, and journalism experts have warned of potential conflicts of interest.
Trading on material non-public information, which journalists regularly uncover, could constitute securities fraud. To avoid that, the group has placed its general counsel, former US Securities and Exchange Commission lawyer Fitzann Reid, in charge of deciding whether an article from the news side of Hunterbrook can be shared with its hedge fund.
Horwitz did not disclose the identities of the limited partners who provided its $100mn funding, but he said the majority came from institutional investors, plus a few family offices and individuals.
The FT reported in October that seed investors in Hunterbrook included Laurene Powell Jobs’ Emerson Collective, General Catalyst co-founder David Fialkow, Avenue Capital co-founder Marc Lasry and Outside the Box Investments, where Murray is also an adviser.