"Billions" is back! The hit series from CBS's Showtime network is back with season 5 debuting on May 3, 2020, and the intrigue is intoxicating.1 The show, which debuted in 2016 as the brainchild of veteran TV writers Bryan Koppelman and David Levien, takes us deep into the opulent and cutthroat world of hedge funds, white collar criminals, and prosecutors willing to cross the line to catch a whale.2
The series follows billionaire hedge fund king Bobby Axelrod (Damian Lewis from the hit "Homeland"3 ), the show’s main protagonist, and founder of Axe Capital, on is endless pursuit of an edge to tilt the capital markets in his favor. For the first three seasons, Axe, as he is called, is relentlessly pursued by U.S. Attorney Chuck Rhoades (Paul Giamatti, of "Sideways and "John Adams" fame4 ). Rhoades' wife, Dr. Wendy Rhoades (Maggie Siff5 ) just happens to be Axe Capital's in-house psychologist, which, to say the least, complicates matters.
- "Billions" is a series about a billionaire hedge fund king who's constantly trying to tilt the capital markets in his favor.
- The show exposes viewers to the genius and dirty tricks of hedge fund managers, as well as the relentless pursuit of these managers by U.S. attorneys.
- It offers a look into the way financial markets work at the extremes, and how the system is played by its richest participants.
- The series is laden with investing and financial terminology.
Season 3 Synopsis
In Season 3, Axe is forced to step away from his firm as part of an agreement with the government after being charged with insider trading and market manipulation. Axe finds it impossible to stay out of the game despite putting his firm in the hands of trading savant Taylor Mason (Asia Kate Dillon6). Meanwhile, Chuck Rhoades—whose wife, Wendy, is still working as the in-house psychologist to both Axe and his firm—remains intent on prosecuting the billionaire, albeit from a distance, after handing the case over to the Eastern District of New York and his hand-picked U.S. Attorney, Oliver Dake (Christopher Denham7).
By the end of season 3, Axe and Rhoades, who have both been crossed by their former lieutenants, are about to join forces to enact revenge. If the past three seasons have taught us anything, there will be treachery, deceit, avarice, suspense, and billions. Lots of them.
What We Learn from "Billions"
"Billions" exposes viewers to the genius and, as some would have it, dirty tricks, of hedge fund managers who weave their portfolio trading strategies around financial regulators, insider trading, corporate actions, and more. It also tracks the relentless pursuit of these hedge fund titans by U.S. attorneys, who sometimes bend the law themselves in order to gain an edge and win their cases.
The show is laden with investing and financial terminology, which makes it irresistible for us. It offers a fascinating look into the way financial markets work at the extremes, and how the system is played by its richest participants. We don't want you to miss any of the nuances of the plot, so here is a glossary to keep you up to speed:
- Activist investor: An individual or a group of individuals who purchase large quantities of a company’s stock in an attempt to gain control of a sizable number of the company’s voting seats. By so doing, the activist investor can replace management or put pressure on them to significantly change its operational strategies with a view to driving the share price up. For example, Bobby Axelrod buys a 4.9% ownership stake in YumTime Bakeries in order to force management to fire the incompetent CEO and to eliminate corporate inefficiencies which were costing shareholders for the past eight years, all while executive compensations had soared 300% over the same time period.
- Alpha: The excess return that a hedge fund earns relative to the performance of a benchmark index or risk-free investment. Alpha is used to measure how well a fund manager performs. In simple terms, if a portfolio has an alpha of +5, it means that it outperformed the S&P index by 5%. A negative alpha signifies underperformance. In episode three of season 4, Axe gets his hands on Taylor's holdings and stock positions. Wendy convinces him to start bidding up those stocks to in order to generate more buying momentum in them, and then sell to 'capture the alpha'.
- Bedrocks: These are stocks poised to increase in value in the long term. Bedrock stocks are characterized by large market capitalizations and cash flow. Their growth spurt eventually slows down after years of growth, at which point they become income investments. Mundia-Tel was considered a bedrock until it filed for bankruptcy, causing a downward spiral in the telecommunications sector. Axe received information from a Mundia-Tel insider, Constantine, about the impending disaster before the bankruptcy was made public.
- Bellwether stock: A trendsetting stock that is representative of its sector. A bellwether leads its respective sector in that if its price rises, its sector follows suit, and if it falls in price, the sector declines as well. When telecom giant Mundia-Tel filed for bankruptcy, a domino effect ensued, which saw the stocks of the entire telecommunications sector crashing.
- Bips: This term is short for basis points (BPS). Bonds are usually quoted in bips. One basis point equals 0.0001 or 0.01%. A bond yield that goes down from 1.07% to 1.02% is said to have moved down by 5 bips.
- Blue chip: These are well-known companies that are stable and reliable, even in market downturns. Many of the products and services these companies sell are high-quality and in high demand. Blue chip companies are those that have been around for a long time and are often multinational corporations like Coca-Cola, Walmart, IBM, and General Electric.
- Block trade: A private, large buy or sell order submitted for 10,000 shares of a security, or a block of shares with a market value of at least $200,000.
- Breakout trade: A technical trading strategy that involves buying or shorting a stock after its price moves outside its defined support or resistance level, usually followed by heavy trading volume and an increased amount of volatility.
- Bucket shop: In the financial industry, a bucket shop is a pejorative term for an investment firm that deals mainly in speculation, gambling, and making bets on stocks and commodities. Axelrod referred to Krakow Capital as a bucket shop.
- Bull and bear: A bull market is characterized by a trend of rising prices in the capital market. Its name comes from the way a bull attacks its target by lowering its head and horns and upon contact with its victim, swinging its head up, so as to throw its victim in the air. A bear market is one that is in decline. It is likened to a bear, which attacks its prey by making a swift downward swipe of the paw.
- Burn rate: The rate at which a company or company division—research and developement (R&D), for example—spends or loses money.
- Buyout: An investment move that occurs when a company purchases a controlling percentage of shares in a target company, in essence buying out the target company.
- Churning: An illegal trading practice that involves a trader executing excessive trades in clients’ accounts in order to generate commissions.
- Cooking the books: A fraudulent accounting act that involves tweaking the numbers on a company’s financial statement to make the company look more profitable than it actually is to investors or to avoid paying higher taxes.
- Currency devaluation: A purposeful lowering of the value of a country’s currency relative to another currency within a fixed exchange rate system. When Axe met with Everett Wright with the intention of poaching him from Richards Capital, Wright mentioned that the Nigerian government was going to devalue its currency (the naira) against the U.S. Dollar due to its weaker than reported oil industry results. Wright also suggested that taking a large short position in the naira—betting against the naira—could devalue the currency much sooner than it would happen if they waited for the Nigerian government to do it.
- Cut bait: A financial term that implies walking away from an investment. Sometimes, investors get too attached to a security. Even when it's losing money, they keep hoping for a price reversal. Cutting bait—selling the losing position and bailing out—could mitigate the investor’s losses and clear funds to be used for a new investment.
- Dead cat bounce: A brief recovery in the price of a declining stock or bear market, followed by a resumed downtrend.
- Distressed debt: The debt of companies or municipalities that have filed for bankruptcy or have a high chance of filing for bankruptcy in the near future. Marco, Bruno’s cousin, pitched an investment in distressed bonds to Axe. The distressed entity issuing the bond was a small town called Sandicot, which was selling the bond for pennies on the dollar. There were talks to start developing the town—specifically, building a casino—which was sure to bring in more traffic and investment. The casino license ended up not coming through and the distressed investment became worthless. Though very risky ventures, if distressed entities turn around, the returns could be large.
- Event-driven strategy: A hedge fund strategy that takes advantage of securities that become mispriced for a short period of time after a corporate action such as an earnings announcement, dividend declaration, merger, or bankruptcy notification. Likewise, an event-driven macro play is a strategy whereby a trader exploits short-term movements in securities that are sensitive to macroeconomic movements such as interest rates, commodity prices, or foreign-exchange fluctuations.
- Expense account: A corporate account from which funds are withdrawn to reimburse employees for expenses they incurred while conducting business.
- Family office: A private, boutique, advisory company that manages the wealth and financial affairs of the fund manager, his or her family, and/or a number of the fund’s employees. Family offices don’t manage money for external or outside investors, and are exempt from regulations under the Dodd-Frank financial reforms. A hedge fund could voluntarily convert into a family office to avoid the onerous compliance costs and regulatory scrutiny that haunt hedge fund managers, or to avoid the pressure of meeting a certain benchmark for quarterly returns. A hedge fund could also be forced to wind down to a family office by regulators, as a penalty for unscrupulous trading practices. As part of his plea deal with the U.S. Attorney’s office—and to avoid a prison term—after he was found guilty of insider trading using Arcadia Railroad shares, Steven Birch agreed to convert his firm to a family office.
- FDA approval: In most cases, when a new drug is approved by the U.S. Food and Drug Administration (FDA), the stock price of the pharmaceutical or biotech company that won the approval soars, resulting in enormous gains for shareholders. Drugs newly approved by the FDA are called blockbusters—hedge funds are constantly on the lookout for such potential blockbusters. Donnie Caan, a trader at Axe Capital, fell under the U.S. Attorney’s radar when he made large-volume trades in a biochem company called Rubinex. Shortly after he purchased the stock, the FDA approved the company’s organic pesticide, leading to a surge in Rubinex's share price and millions of dollars in profits for Axe Capital.
- Hedge funds: A pool of funds raised from accredited and high-net-worth investors, used to create a portfolio managed using a range of alternative strategies. The difference between a hedge fund and a mutual fund lies primarily in the extent of the employable strategies. Axe Capital is a hedge fund run by Bobby Axelrod.
- Hedge fund managers: The name comes from the term hedging, and hedge fund managers like Bobby Axelrod are hired to reduce risk, regardless of how the market performs. Hedge fund managers use various investment techniques to provide the highest possible return for their investors, while at the same time reducing risk. The genius of a hedge fund manager lies in his or her ability to mix strategies to completely eliminate unsystematic or diversifiable risk from the portfolio(s) without taking away from returns. Investment strategies and vehicles used by hedge fund managers include—but are not limited to—stocks, currencies, fixed income securities, leverage, shorts, swaps, options, futures, and forwards.
- Hedge fund compensation: This is what hedge funds and their traders are paid. Hedge funds use a fee structure called 2 and 20 to determine their compensation for managing an investor’s funds. The two refers to a 2% annual management fee that is paid out of an investor’s assets under management (AUM). The 20 refers to the 20% performance fee that fund managers take. Different hedge funds have different fee structures. At Axe Capital, the fee structure is three and 30. This means that an investor who has $4 million dollars with Axe Capital will be charged $120,000 (3% of AUM) at year-end as compensation for the firm managing his or her funds. In addition, a $10 billion hedge fund like Axe Capital, with, say, 20% returns, will have booked $2 billion in profit for its investors at year-end, which means that $600 million (30% of profit) is the manager’s to keep.
- High-frequency trading (HFT): An automated trading technique that uses computers running complex algorithms to analyze the markets for price discrepancies, then executing a large number of orders at high speeds.
- Holding company: A company that provides no services or products, but holds the controlling interest in a number of other companies. The business of a holding company is to hold assets in other companies with active operations.
- Insider information: This is non-public information about a company that, if acted upon, could be financially advantageous to the investor or trader. People who work in a company or have close links to employees of a company may be privy to insider information, which by itself is not illegal, until the information is used to buy or short stock for profit.
- IPO: An initial public offering (IPO) refers to when a company goes public for the first time. Its shares are offered to the public to raise capital for the firm and to give all market participants an opportunity to purchase ownership stakes in the firm.
- Lock-up period: A time frame within which hedge fund investors cannot redeem or sell their shares. Lock-up periods can be three months or longer, depending on how liquid the shares making up the fund or portfolio are.
- Long: A buy position taken on a security, with the expectation that the price will increase in the future. A long position is the opposite of a short position.
- Margin call: This is a broker’s notification to an investor or trader to top up their margin account, thus bringing it up to the minimum required level. A