Morning Coffee: Hedge fund Millennium's -$900m loss explained by witty quant. How junior bankers are using AI to save time

Hedge fund Millennium does not like it when its portfolio managers lose money. As the Wall Street Journal reported last September, Millennium "hates" risk and imposes unusually tight risk limits on its portfolio managers: lose 5% and your capital is cut in half, lose another 2.5% and you'll be fired. 

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It's not surprising, therefore, that at least one Millennium portfolio manager - Hong Kong-based Jeremy Ma - seems to have left the fund after it lost $900m on trades undertaken by two teams focused on index rebalancing.

The Wall Street Journal first reported the loss on Friday. Bloomberg followed up on Saturday. And then Giuseppe "Gappy" Paleologo, the head of quantitative research at Balyasny, who's known for his sense of humour, took to X to explain why index rebalancing is a precarious art. 

Index rebalancing was born in the 1980s and goes right back to sellside investment banks, said Paleologo.  It's fundamentally a liquidity play, and it revolves around the rebalancing trades required to ensure that an index continues to reflect the weightings it's supposed to reflect. The action is focused on the "announcement" date when the securities involved in the rebalancing are announced, and an "effective" date when the rebalancing occurs. 

Here is a short description, straight to the point, from the 2021 Handbook. Plus several pages of details on methodology changes to index reconstitutions. 
9/ pic.twitter.com/eypTHTaqB3

— Gappy (Giuseppe Paleologo) (@__paleologo) March 8, 2025

When it comes to index rebalancing, "there is not a single way to trade," says Paleologo. If you want to trade index rebalancing, "you gotta predict these pesky adds and deletes. Not easy." You also have to predict flows, the demand for and supply of liquidity, and you have to hedge, or not. Trading ahead of announcement day is risky, but is where you make the big money. On the effective day, you sell your positions at the closing auction. Then you make money over the coming weeks as the impact of the rebalancing disappears. 

It's all very risky, says Paleologo, who says most descriptions of index rebalancing (including, probably, our summary of his description above) are akin to describing Marilyn Monroe as a bipedal mammal. "So many things can go wrong, so much risk tolerance is needed, so much craft goes into this conceptually simple trade, that very few teams can do it well."

Millennium's teams did seem to do it well until recently. The Wall Street Journal says the fund's index rebalancing teams, led by Glen Scheinberg and Pratik Madhvani have made "billions of dollars" for Millennium in the past. Last month, they both lost "hundreds of millions". A few more portfolio managers there may disappear yet. 

Separately, as banks rush to deploy AI in an effort to cut costs, the manner of its implementation in junior banking jobs is becoming clearer. 

Bloomberg reports that Citi's analysts and associates are using AI to summarize 8-Ks, 10-Qs, press releases and public-credit agreements. Junior bankers at Morgan Stanley are using AI to "generate first drafts." Bank of America is using AI to 'quickly produce Public Information Books.' PJT is using AI to 'help distil filings such as merger proxies and disclosure statements.'

Companies selling AI to do the work of junior bankers inform Bloomberg it's revolutionary and that 'two weeks of analysis can be done in 20 minutes.' Juniors themselves seem suspicious: even if AI leaves them with no work to do, they'll still need to be working in the office to satisfy senior bankers' desire for the conspicuous grind. 

Meanwhile...

Ten-year German bond yields registered their largest one-day rise in decades on Wednesday. “We’re now watching to see if there are any casualties. That can then force a derisking in the system that triggers price action that has a bigger impact on liquidity. When these moves happen there tends to be winners and losers." (IFRE) 

RBC cut people in technology and operations, personal banking and commercial banking teams. (Reuters) 

Coinbase wants to hire 1,000 people. (Reuters)

Interview Coder, markets itself as a service that helps software developers cheat during job interviews. (CNBC)  

London-based hedge fund QRT now manages about $28bn, which is $5bn more than last year. (Bloomberg) 

The Bank of England is paying Korn Ferry £600k “to provide services to support the Bank to identify efficiencies and reduce costs in Bank operations.” (Financial News)  

Hedge fund manager and media mogul Paul Marshall frequents the Holy Trinity Church in Brompton, London. So many other senior finance figures. (London Review of Books)

Jes Staley is dyslexic. (Bloomberg) 

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