How watching US drama "Billions" can boost our understanding of financial terminology
You don’t have to work in the investment management industry to be sucked into the drama of Billions, but it might feel like you need to be an industry insider to keep up with the jargon.
Whether you are watching it on a weekly basis or waiting to binge-watch the latest season in one go, we’ve pulled together a jargon-buster guide to help you navigate the show’s more technical financial industry terms.
What is Billions about?
Billions is a US drama following hedge fund manager Bobby “Axe” Axelrod as he attempts to beat the market and make “billions”. His approach is not always completely legal or ethical and his biggest challenge is getting past US Attorney General Chuck Rhoades, who has yet to lose an insider trading case. To complicate matters further, the in-house psychologist in whom Axe confides is Wendy Rhoades, Chuck’s wife. The show’s mix of politics and the ruthless pursuit of wealth, underlines the lengths to which white-collar criminals will go to make their fortunes and the perseverance of the lawyers who seek to catch them (sometimes by employing dubious methods themselves).
Hedge funds are alternative investment funds, which due to their high-risk level are mostly used by professional investors. Like any investment fund, institutions or individuals with significant assets pool their money which is then invested by a fund manager. In a hedge fund, the investors are known as limited partners while the hedge fund manager is often called the general partner.
The general partner can invest in almost anything – such as land, property, currencies, stocks and complex products called derivatives – in line with the fund's agreed strategy. They tend to use hedging strategies to reduce risk (such as buying certain positions when they anticipate a market rise or short selling when they expect a decline. See the definition of short selling below). Hedge funds often borrow the money they invest in the hope of magnifying their returns. This is another reason that they are considered to be high risk.
Axe is a portfolio manager. He decides where and when to invest on behalf of his clients, based on research which is generally provided by analysts.
Analysts provide the research on potential investments, allowing the portfolio manager to make informed investment decisions. They do this by looking at a variety of financial information relating to possible investments. For example, an analyst may speak to company management, examine a company’s financial statements, evaluate its competitive position in the industry in which it operates and consider how the economic environment may impact any investment.
Quants can refer to investment professionals or strategies where financial decisions are made based on complex mathematical algorithms and models. This is in contrast to analysts who use personal judgment rather than statistical models to arrive at an investment recommendation.
When you borrow a sum of money to invest, the borrowed amount is known as leverage. One reason Axe and his friends use leverage is so they can make large investments, but without having to use all their cash. This allows them to have available cash to allocate elsewhere as necessary.
Another reason is because leverage increases the return on an initial investment. It’s similar to what happens when you buy a house. For example, you buy a flat for £100,000 and you put down £20,000 as a deposit. Your leverage (the amount you have borrowed) is £80,000. The property rises in value by 50% to £150,000. But your return is not 50%, it's 62.5%. This is because your £80,000 investment has increased by £50,000.
However, if the market goes the other way, your losses will be amplified. For non-professional investors, the general advice is don't invest until you have cleared your debts.
Derivatives, such as futures, options and swaps derive their value from other underlying financial instruments. A future, for example, is an agreement to buy or sell an asset on a specific date in the future at a price agreed today. If the value of the asset rises, the purchaser stands to make a profit.
Investment banks specialise in facilitating the purchase and sale of stocks and bonds as well as helping companies list on stock markets. These listings are known as “initial public offerings”, which is where an investment bank will act as a broker between the company and the public to sell its shares for the first time.
Shorting (or short selling)
This refers to the selling of assets that you have borrowed from a third party and then bought back at a later date to return them to the lender. The seller hopes to profit from a decline in the price of the assets between the sale and repurchase.
For example, you borrow 100 shares of stock A from your broker and sell them at the prevailing market price of £1 each, receiving £100. Two days later, the share price of stock A falls to 90p. You buy 100 shares back at this price, paying £90 in total, and return the shares to the broker. You’ve made a £10 gain because the share price fell, as you expected it to. Conversely, if the share price rose to £110, you’d have to buy them back at this price to return them to the broker, making a net loss of £10.
Sovereign wealth funds (SWFs)
SWFs are government-owned investment funds used to fund and stabilize a country’s economy. These funds, which are typically very large and managed by sophisticated investors, can include hedge funds and other alternative investments.
Statistical arbitrage (Stat Arb)
An investment trading strategy that uses quantitative and computational analysis to identify mispriced opportunities from which an investor can profit. It usually involves buying certain assets while shorting relevant others (see definition of shorting above).
For example, a computational analysis of the peanut butter market concludes that the crunchy variety is going to be in greater demand than the smooth version. You would then buy stocks in crunchy peanut butter, while shorting smooth peanut butter. If the computational analysis is right, crunchy peanut butter will become more expensive because it’s in greater demand and you will gain from the rise in price. With fewer shoppers demanding smooth peanut butter, its falling share price will also benefit your short position.
BPS (basis points)
BPS is simply another way to talk about percentages. One basis point represents one hundredth of one percent. For example, if your strategy outperformed by 100 bps, that means it outperformed by 1%. If your fees are 25 bps, then that means you’re charging your clients 0.25% of the funds they have invested in.
Securities Exchange Commission (SEC)
The Securities Exchange Commission is responsible for the oversight and ethics of almost everything related to securities in the US. It monitors investment managers and anyone who is buying or selling stocks and bonds to ensure that their activities don’t pose a threat to the general public.
Insider trading is when someone makes an investment decision based on information that is not available to the public. For example, investing in a computer company because you were tipped off about a new and highly profitable software release before the information became public. Trading on this non-public insider information for financial gain is illegal.
Investors buy stocks in publicly-traded companies and in return become owners, along with other shareholders. Shareholders receive a portion of the company’s profits through a dividend.
Bonds (corporate and government)
Bonds give investors ownership of the company’s debt. Bonds are issued by companies and governments when they want to raise funds. Bonds provide a way for investors to loan money to the issuer for a defined period of time at a variable or fixed interest rate.
Asset-backed security (ABS)
An ABS is a security that is backed by, or has as its collateral, a pool of debt obligations, such as mortgages and credit card debt.
This is the measure of return Axe makes in his hedge fund compared to a benchmark, for example an index or market average. This is the additional return he generates for his investors compared to what they would have earned if they’d just put their money into an index-tracking fund without an investment manager making active investment decisions.