Is Apple really a hedge fund that makes phones?

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A pair of finance professors troll the Wall Street Journal’s readership.


From Thomas Gilbert and Christopher Hrdlicka’s Apple Is a Hedge Fund That Makes Phones in Friday’s Journal ($):

When you buy a share of Apple stock, you do not simply buy into a $1 trillion technology company. You also buy a share of one of the world’s largest investment companies: Braeburn Capital, a wholly owned subsidiary of Apple. Braeburn manages a $244 billion financial portfolio—70% of Apple’s total book assets. Apple acts like a hedge fund by supporting this portfolio with $115 billion of debt.

Like a hedge fund, Apple provides minimal disclosures on Braeburn Capital’s holdings. But unlike a hedge fund, Apple does not restrict itself to accepting funds from sophisticated investors. Apple invests the money of everyday investors, like a mutual fund—but without telling investors what they own, the most basic protection mutual funds offer.

Equity and debt holders beware. Similar shadow hedge funds abound within S&P 500 industrial companies. Most disclose less information than Apple about their activities. Our research, published in the Journal of Finance, shows that in 2012 these corporations managed a combined portfolio of $1.6 trillion of nonoperating financial assets. Of this amount, almost 40% is held in risky financial assets, such as corporate bonds, mortgage-backed securities, auction-rate securities and equities. Current accounting standards require companies only to report aggregate valuations on a quarterly basis.

My take: Would that other hedge funds contributed anything to society, never mind something as useful as an iPhone. Note also the broad brush in paragraph three—”similar shadow hedge funds”—with which the authors tar Apple’s investment portfolio. Messrs. Gilbert and Hrdlicka offer no evidence that Braeburn Capital has sunk Apple’s money into junk investments like mortgage-backed securities.

NOTE: Except that they share the name of an apple cultivar, Apple’s Braeburn Group has no connection with Robert Paul Leitao’s Braeburn Group of independent Apple analysts, long-time participants in my quarterly Apple Earnings Smackdowns. Confused yet?