Ramaswamy’s ‘Diversity Arbitrage’ is Really Paying Off
Who knew running for president could be so good for business?
One of the first things I learned as a trader was that you never tell a client, “I told you so.” Regardless of how accurate my advice may have been, rubbing my unheeded but correct call in a client’s face was just bad form. Hopefully, newsletters aren’t subject to the same maxim.
Because I told you this guy was trouble almost a year ago.
Another politician with a funny name
It isn’t easy to describe biotech mogul-turned-politician Vivek Ramaswamy. During the first Republican presidential debate, Chris Christie described him as sounding “like ChatGPT” while calling him out for lifting a line from a 2004 Obama speech. I wrote about him last year after a big-time hedge fund manager called him “a fast-talking bullshit artist.”
The latter comment, which was made on Twitter (I refuse to use that other name), reacted to a rather wacky interview he did with CNBC’s Andrew Ross Sorkin and Becky Quick. At the time, Ramaswamy’s ascent within the right-wing ecosystem was primarily due to his reputation as the author of Woke, Inc., Inside Corporate America’s Social Justice Scam. The book accuses corporations, especially those on Wall Street, of being under the spell of “social justice warriors” to the detriment of their shareholders.
His appearance on CNBC ostensibly promoted Strive Asset Management, his pushback to “woke capitalism.” Strive, which specializes in exchange-traded funds (ETFs), launched last year with significant investments from right-wing mega-donor Peter Theil and Republican Senator J.D. Vance.
Strive’s elevator pitch is that its funds don’t consider environmental, social, and corporate governance (ESG) strategies in its investments because they contend that it introduces politics into investing.
During the interview, the future presidential candidate argued against “identity politics” and “woke capitalism” instead of promoting his fund. It’s easy to see why.
Unlike hedge funds, ETF providers earn money from investor fees. Typically, ETF fees are relatively low. But in the anti-ESG universe, managers like Strive can charge a premium. BlackRock ETFs, for example, charge fees of about 0.03%, while Strive gets away with fees of as much as 0.41%.
Moreover, the year-to-date performance of Strive’s flagship fund has been less than stellar. The Strive U.S. Energy ETF, designed as a pushback against ESG investing, lags the S&P 500 ESG index by almost 20 percent.
The reality is that only 5% of all investment funds focus on ESG. Since fewer than 1.5% of all ETF assets under management are classified as ESG funds, and no ESG-only asset managers currently exist, Strive seems like a solution in search of a problem. That said, the anti-woke asset manager is tailor-made for the right’s attempt to build a “parallel economy:”
Debates around race, gender, and freedom of speech have splintered democracies, spread conspiracy theories, and sparked a series of culture wars. One byproduct of this is a rightwing movement in the tech and economic spaces, known as the “parallel economy”.
The parallel economy is a system of financial services, e-commerce websites, and social media targeting communities with rightwing political values, mainly in the US and Europe. Boasting taglines like “America’s first credit card for Conservatives” and “Save America, stop funding woke corporations”, these services aim to circumvent or compete with mainstream financial institutions and tech.
MAGA politics are perfect for business
Like Trump in 2016, Ramaswamy presents himself as the outsider on a mission to clean up Washington. And like the last Republican president, when the facts don’t fit his narrative, he has no problem making stuff up.
Take his contention that the woke mob is bending Wall Street to its will. According to data compiled earlier this year by Crunchbase, of the $330 billion in total available venture capital funding in 2021 and $216 billion available in 2022, Black founders received just 1.3% and 1%, respectively. That’s a long way from woke capitalism run amok.
When I wrote about him last October, I theorized that, like several other MAGA influencers of color, his emergence in right-wing politics was due to his exploitation of the Republican Party’s absence of racial minorities. I called the phenomenon of non-white influencers suddenly taking a hard right political turn “diversity arbitrage.”
The presence of a few high-profile Black and, in Ramaswamy’s case, brown folks in the GOP is just the counteragent Republicans need to prove, if only to themselves, that the accusations of racism and xenophobia leveled against their party are meritless.
Indeed, “going MAGA” can mean money and influence for minorities willing to play along. On the left side of the political spectrum, Vivek Ramaswamy would be another brick in the proverbial wall. But on the far-right, he’s just what the doctor ordered.
That’s why it was so obvious, to me at least, that Ramaswamy was going mega-MAGA because that’s where the money is. In the trading world, it’s called “taking the other side of the trade.”
Arbitrage is the strategy of exploiting price imbalances for the same asset in different markets. In its simplest form, a trader purchases an asset in a market where the price is lower and simultaneously sells it in a market where the price is higher.
For example, today’s version of Vivek Ramaswamy vehemently opposes affirmative action. But the 2011 version of Ramaswamy accepted a $90,000 fellowship from the Paul & Daisy Soros Fellowship for New Americans, founded by the older brother of George Soros. It’s not like Ramaswamy needed the assistance. At the time, he was CEO of a biotech company called Roivant (ROIV) and already a millionaire.
In 2020, while Ramaswamy was still Riovant’s CEO, the company launched Roivant Social Ventures, a Diversity, Equity, and Inclusion (DEI) initiative with a mission “to generate substantial social returns and reinvest financial returns to drive long-term impact.”
JP Morgan and BlackRock, along with several of the world’s most prominent ESG managers, were (and still are) among the largest holders of Roivant stock—strange bedfellows for the arch-enemy of woke capitalism.
Ramaswamy’s anti-woke schtick also diverts attention from his sketchy financial dealings. It keeps the Republican base from asking, “Why is Ramaswamy so damned rich?” The short answer: due to the initial public offering for Axovant, a failed Alzheimer’s drug, which may be one of the biggest pump-and-dump schemes ever:
…Ramaswamy first rode to prominence and fortune in 2015 by hyping a supposed drug for Alzheimer’s named Axovant, which ultimately failed.
An obsequious Forbes profile from 2015 captures the initial hype surrounding Ramaswamy’s Axovant IPO. “Vivek Ramaswamy…rang the bell of the NYSE to launch the biggest initial public offering in the history of the American biotechnology industry.
Ramaswamy’s Bermuda-based company, Axovant Sciences, had been formed only eight months earlier, but here it was raising $360 million to develop an Alzheimer’s drug that had been all but abandoned by GSK [Glaxo Smith Klein]. On the first day of trading the stock almost doubled, giving Axovant a market capitalization of nearly $3 billion….after Ramaswamy had persuaded GSK to part with the unproven remedy for a mere $5 million up front.”
Axovant, which was 78% owned by Ramaswamy’s corporate holding company Roivant, then proceeded to blow up after failing FDA tests, with its stock sinking from $200 to 40 cents. Many small investors who followed Ramaswamy lost their shirts. But for Ramaswamy, it was a good year. His holding company, Roivant, raised $500 million thanks in part to the Axovant hype, all while gradually reducing and diluting its Axovant stake from 78% to just 25%.
(For the less financially fluent, this TikTok video is a good rundown of Ramaswamy’s sketchy road to riches.)
Given Ramaswamy’s Roivant financial haul, one might think the company is a profit-generating dynamo. You’d be wrong. Since going public, the company has never turned a profit. In 2020, Roivant lost $433 million, $698 million in 2021, over a billion in 2022, and another billion in losses predicted for 2023.
Strive Asset Management hasn’t performed much better. Its Strive U.S. Energy ETF, designed as a foil to ESG investing, lags the S&P 500 ESG index by almost 20 percent.
Despite the poor performance of his businesses, things couldn’t be better for Vivek Ramaswamy. He still owns nearly 55 million shares of Roivant stock or 10% of the company—even after selling $32 million of company shares to finance his presidential run.
According to the Financial Times, the day after last month’s Republican debate, his company’s Strive 500 ETF added $1.4 million. In August alone, investors dumped $18 million into the ETF. Strive Asset Management announced it had amassed $1 billion under management a few days ago.
Fortunately for Ramaswamy, Republicans are so busy feasting on his anti-woke rhetoric they’ll never notice he’s just another fast-talking bullshit artist.
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