Hedge funds are dusting off an old strategy to help reverse a fundraising slump, but it comes with a risk

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Hello there! If you're indulging in Thirsty Thursday today, this bartender's list of red flags to look out for is a good read before picking a spot.

In today's big story, hedge funds are dusting off an old strategy that's a unique twist on passive investing.

What's on deck:

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• Tech: Meta's going to spend like crazy on AI in the next year. Investors don't hate it.
• Business: Some signs work is taking over your life.

But first, what's old is new again.

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The big story

Hedge funds' new pitch

When investing, how would you like to have your cake and eat it too?

That's the idea of an old-turned-new strategy catching fire among hedge funds looking to mirror the market with a touch of their investing magic.

Business Insider's Alex Morrell has a breakdown on "portable alpha," a combination of passive investing based on a benchmark, like the S&P 500, coupled with an actively managed strategy.

The approach allows investors the baseline protection of mirroring the broad market (the passive investing portion) while getting exposure to the secret sauce hedge funds are known for (the actively managed portion).

It's not just a win for investors. The passive portion of portable alpha means hedge funds may be eligible to get money from investors' long-only investment mandates. That's usually a much larger pool of cash than what institutions earmark for hedge funds.

And with the fundraising environment for hedge funds looking bleak, they'll take any help they can get.

Portable alpha isn't foolproof. The strategy has been around for decades and was quite popular in the mid-aughts. But then the financial crisis happened, sending both parts of the strategy crashing. The fact that the passive portion of the strategy involves leveraged bets didn't help matters.

Portable alpha reminds me of an old rule in Hollywood about not working with kids and animals. (Stay with me.)

The rationale is that actors working with kids and animals risk getting upstaged and outshined. Under that premise, the same could be said of hedge funds partnering with a strategy they've long looked down upon.

Any hedge funder worth their Patek Philippe will tell you how they can beat the market. The reality in recent years is most don't, but that hasn't stopped firms from touting themselves as different from the rest.

But with portable alpha, hedge funds are tying themselves to something they've pledged they are better than. There is a rationale to that shift in philosophy — the broader market has been booming — but teaming up with a perceived rival poses a risk.

What happens if the hedge fund's portion of the portable alpha strategy is what pulls returns down? It's one thing if you can't beat the market. It's another when you pair your strategy with the market and end up being the one that can't pull its own weight.

Although, it's not like hedge funds have much choice. Institutional investors are getting much more particular with where they park their money. With competition from venture capital and private equity, hedge funds can't afford to turn their nose up at anything.

But will the short-term benefits outweigh the long-term risks?

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3 things in markets

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2. No interest rate cuts… yet. The Fed didn't lower rates, but Chair Jerome Powell hinted relief could come as soon as the next meeting in September. As for how that would impact November's election, Powell said the Fed will "never use our tools to support or oppose a political party, a politician, or any political outcome."
3. London (is not) calling hedge funders. With the UK set to increase taxes on wealthy asset management executives, the city could see an exodus of financiers. That could be a boon for tax-friendly cities like Milan and Dubai. BI spoke to people who have made the move.

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3 things in tech

1. The (AI) doctor is ready to see you. According to an internal document, Amazon's One Medical team has discussed building a new large language model called "DoctorAI" to automate routine healthcare tasks. That could include generating clinical notes and processing prescriptions, among other things.
2. Nvidia is winning Big Tech's latest earnings season. The chipmaker continues to benefit from tech companies' massive AI investments. As its peers were grilled on their spending in this week's earnings calls, Nvidia shares rose more than 12% on Wednesday.
3. Meta's gearing up for an AI spending spree. Despite announcing it expects to spend at least $35 billion on infrastructure costs — like AI — this year, Meta apparently wooed investors during its second-quarter earnings call. Even after saying it'll spend more, Meta's stock jumped nearly 7% in after-hours trade.

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3 things in business

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What's happening today

• Apple, Amazon, Barclays, Shell, and other companies are reporting.
• Democratic National Committee holds a roll call to formally nominate Kamala Harris for president.
• Higher US tariffs on Chinese goods take effect. These include hikes on imports such as electric vehicles and semiconductor chips.

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The Insider Today team: Dan DeFrancesco, deputy editor and anchor, in New York. Jordan Parker Erb, editor, in New York. Hallam Bullock, senior editor, in London. Annie Smith, associate producer, in London. Amanda Yen, fellow, in New York.