Money Stuff: Fine, Trade Labubu Futures

Farmers grow wheat and sell it to millers who use it to make flour. Sometimes a farmer wants to lock in a price for her wheat before the harvest, so she will sell wheat futures on a commodity futures exchange. Wheat futures are derivative contracts on wheat, and you don’t have to be a farmer to trade them. Anyone who wants to bet on the future price of wheat can trade wheat futures. If the futures trade at $5.50 per bushel, you can buy wheat at $5.50 today, and later you can sell it back at whatever the price turns out to be. If the price of wheat goes up to $5.75, you will make $0.25 per bushel; if it falls to $5, you’ll lose $0.50 per bushel.

This technology is so useful that it has been widely generalized, and now commodities exchanges offer futures contracts on all sorts of things. Commodities, sure — agricultural products, oil and gas, metals, etc. — but also bonds and interest rates and stock indexes and volatility. If you want to bet on those things, or hedge your risks, you can trade futures on a commodities exchange.

And we have talked a lot recently about prediction markets, which in the US are regulated as commodities futures exchanges. (Kalshi is the big prediction market that is regulated by the US Commodity Futures Trading Commission as a futures exchange; Polymarket will be in the same boat imminently.) A prediction market is generally a way to make yes/no binary bets on all sorts of propositions — who will win an election, what policymakers will do, etc. — though in modern US usage prediction markets are increasingly ways to make bets on sports. I have written a few times about how odd it is that, you know, “Josh Allen will throw for three touchdowns this weekend,” or “Eric Adams will win the New York City mayoral election,” is a commodity regulated by the CFTC, but somehow that’s where we’ve ended up. Through an odd regulatory path dependency, now yes/no bets on sports and elections are treated as commodity futures contracts.

Now here’s this:

Prediction market Kalshi Inc. and sneaker marketplace StockX are offering a new way to bet on the resale prices of in-demand sneakers and collectibles such as Labubus and Pokémon cards.

In a partnership set to be announced Wednesday, Kalshi will use StockX data to create so-called event contracts tied to sneakers, trading cards and figurines. Users will be able to trade on outcomes such as whether an item will surpass a price threshold after release day, or predict the best-selling brands during a major shopping event like Black Friday.

Products that will be listed include highly-anticipated drops of Jordan sneakers, Supreme hoodies and blind boxes that contain random Labubus.

“This is really a natural evolution of a platform made from stock market mechanics,” Greg Schwartz, chief executive officer of StockX, said in an interview.

Stop it. Why … why is this an event contract? Surely this should just be a regular futures contract? Like the natural way to bet on the price of a sneaker is to buy a futures contract on the sneaker. You buy a contract for future delivery of the sneaker today, and at maturity you get the sneaker or you settle up in cash. You pay $200 for the sneaker futures today, and if the sneaker ultimately trades at $175 or $250 you lose $25 or make $50.

I think there are probably good reasons of regulatory path dependency not to do it that way, and to instead offer Kalshi’s binary yes/no contracts on whether the sneaker “will surpass a price threshold after release day.” (Or its market on “Average Sales Price of the Pop Mart Labubu The Monsters Big Into Energy Series (6 Blind Box) on StockX this month,” which is actually a collection of yes/no bets on whether it will exceed various price thresholds.) It’s just unsatisfying.

There are also good reasons of credit to structure these as event contracts, though. The nice thing about event contracts is that they are easy to collateralize: Prediction market contracts generally pay out $1 per contract, so if you sell a contract like “the Bills will win the football game” or “this Labubu box will be worth more than $120,” you’ll never have to pay more than $1 if you lose. Kalshi and Polymarket bets are essentially fully collateralized. A contract like “I will deliver you wheat, or Labubus, in a month” could create a much more unconstrained liability; what if the Labubus go to $1 million? And so actual commodities markets have serious margining systems, to make sure that people who sell futures are good for their obligations, which are less necessary in events markets.

Commodities markets also tend to have warehousing systems, to make the commodities futures contracts interchangeable with the underlying commodities: If you sell wheat futures, you can actually deliver wheat to settle them. (“ Abstract commodity space,” I sometimes call this system of warehouses holding commodities to support derivatives trades.) We talked just yesterday about an investment fund that trades Hermès bags, and a reader who wrote in: “Can I just say how giddy it makes me that we’re one step closer to trading designer goods via warehouse receipts? And inevitably finding out one day that a bin supposedly full of luxury handbags is in fact full of handbag-painted rocks.”

That was before this stuff about trading sneaker futures on Kalshi! Again, they are not quite sneaker futures, and there is no reason for Kalshi to set up bonded warehouses to hold sneakers and Labubus for derivatives trading. You don’t settle the “Average Sales Price of the Pop Mart Labubu The Monsters Big Into Energy Series (6 Blind Box) on StockX this month” contract by delivering a box of Labubus, or a warehouse receipt referencing a box of Labubus on a shelf. Yet! But perhaps that is the future.

People sometimes worry about liquidity: They have put their money into an investment, and they worry that they might not be able to get it out. These worries can take two different forms:

1. Sometimes, you have $100 of stuff, and you can’t sell it at all. Nobody answers the phone when you call to sell, and you are stuck just owning it. This creates two problems. A big obvious one is that if you want cash, you can’t get it: Your money is tied up in the illiquid stuff. But there is also an accounting problem: If you think the stuff is worth $100, but you can’t sell it, is it really worth $100? It’s hard to know. If, last time you checked, it was worth $100, and now you can’t sell it at all, I guess you can still say that it’s worth $100.
2. Sometimes, you have $100 of stuff, but you can only sell it for $80. The market is panicking, it does not recognize the real value of your stuff, etc. This creates two problems. A big obvious one is that you can only get $80 of cash for your stuff, which is less than you want. But there is also an accounting problem: You thought the stuff was worth $100, but now it’s trading at $80, so even if you don’t sell it you have a mark-to-market loss.

Many assets fall into one or another of these regimes. Publicly traded stocks, for instance, trade continuously, and you can usually sell your stocks whenever you want. But they can go down, which is a bummer for you. Private company stocks, on the other hand, traditionally don’t trade much, so if you need to sell your private stocks it can be hard or even impossible. But because they never trade, they never go down, which is pleasing for your accounting and your ability to sleep at night. 

“Private credit,” as a general category, seems to fall mostly in the first bucket. You invest in a private credit fund, the private credit fund makes long-term loans, your money is locked up in the fund, the fund’s money is locked up in the loans, it’s all quite intentionally illiquid. Does this mean that, when the credit cycle turns, private credit loans will still be marked at 100 cents on the dollar even as quite similar publicly traded bonds trade down to 90? Who can say.

But in fact there is a lot of publicly traded private credit: Many big private credit firms manage publicly traded “business development companies,” or BDCs, a strange regulatory phrase meaning “private credit funds.” You invest in a publicly traded BDC by buying shares on the stock market, the BDC makes long-term loans (often alongside other funds managed by the same private credit manager), you can’t withdraw money from the BDC but you can sell your shares in the market any time you want. The shares are entirely liquid. But they trade at the market price: If the BDC says that it has $100 per share of loans, the market price of its stock might be $100 per share, but it might be $90 or $110 or any other number set by supply and demand. [1]  Why might the market price be $90? One important answer might be that the market does not believe that the loans are worth $100, though there are other possibilities. [2]

Anyway Blue Owl Capital runs a bunch of private credit funds, including:

• a publicly traded BDC, Blue Owl Capital Corp. (OBDC), with a net asset value of about $14.89 per share and a stock that closed at $11.75 per share yesterday, about a 21% discount to NAV; and
• a private BDC, Blue Owl Capital Corp. II (OBDC II), which does not trade, but which periodically offers to buy back some of its shares at net asset value.

OBDC II offers the first kind of illiquidity: Sometimes, you can’t sell your shares at all. OBDC offers the second kind of illiquidity: You can always sell all the shares you want, but you might not like the price.

Two weeks ago, Blue Owl announced that it would merge OBDC and OBDC II into a single publicly traded BDC, with everyone getting shares at net asset value. [3]  The advantage of this is that it would let OBDC II holders get their money back: “Redemption requests in the non-traded fund surged last month, exceeding Blue Owl’s pre-set limit,” and “the firm chose to honor about $60 million in redemptions, or 6% of the vehicle,” so there are OBDC II holders who couldn’t take out all the money they wanted to. As OBDC holders, they will be able to sell all of their shares freely. The downside is that they won’t sell at NAV; they’ll sell at the market price, which is about a 20% discount to NAV.

Nobody liked this and today Blue Owl called off the merger:

Blue Owl Capital Inc. is calling off a merger of two of its private-credit funds, after scrutiny over potential investor losses from the move sent its shares tumbling.

The firm terminated the deal between Blue Owl Capital Corp., publicly traded under ticker OBDC, and Blue Owl Capital Corp. II, a non-traded fund, according to a statement Wednesday. The initial terms of the agreement barred investors in the private vehicle from redeeming their capital until the merger closed.

“While we continue to believe that combining OBDC and OBDC II could create meaningful long-term value for shareholders, we are no longer pursuing the merger at this point given current market conditions,” Craig Packer, chief executive officer of OBDC and OBDC II, said in the statement. The company said it would re-evaluate its alternatives.

Right, the ideal time to redeem out of your private fund into a public fund is not when the public market is down 20%. 

At a high level, alternative asset managers like KKR and Apollo and Blackstone are in the business of buying, pooling and tranching companies for investors. There are some companies — big public companies, small private pest control companies, whatever — with fairly stable cash flows. The alts manager comes along and says: “These companies would be worth more if we bought a bunch of them, put them in a pot, and split the cash flows from the pot into two tranches. We’ll make a senior tranche, which gets paid back first; investors who want to invest their money somewhere reasonably safe but with a nice return will want to buy that tranche. And we’ll make a junior, equity tranche, which gets whatever is left over after paying back the senior tranche; investors willing to take more risk for higher returns will want to buy that tranche. By combining a bunch of companies and tranching their cash flows, we will create additional demand for them, so they will be worth more, and we’ll be able to take a cut of that additional value.” 

The tranching is called a “leveraged buyout” or LBO, the senior tranche is called a “private credit fund,” and the junior tranche is called a “private equity fund.” I am a little bit kidding about all of this, and no alternative asset manager would describe things quite this way. But it is broadly the case that, in 2025, the biggest alts managers tend to invest across the capital structures of LBO companies: They run private equity funds that own the equity and private credit funds that own the debt. If you want a diversified pool of senior claims on a big mishmash of private companies, you invest in a private credit fund; if you want a diversified pool of equity claims on a similar mismash, you invest in a private credit fund.

This is oversimplified in a few important respects. One is that it’s not generally the same manager whose funds own both the debt and the equity of the same companies. If KKR is “doing” a leveraged buyout (that is, if its private equity fund is buying the equity), then perhaps Blackstone will “lend to” that buyout (that is, its private credit fund will buy the debt); if the same manager does both the debt and equity then that can create awkward conflicts of interest. [4]  So one manager’s funds might own the equity of Companies A, B and C and the debt of Companies X, Y and Z, and another manager’s funds will own the equity of W, X and Q and the debt of A, B and P, etc.

Also, if you sum across all of the big alts managers, you will sort of get the entire capital structure of all of the LBOs, but not quite: Many LBOs get their debt funding from the “public” debt markets (high-yield bonds and broadly syndicated loans), so their senior tranches are held by other investors), not by alts managers. Similarly, private credit funds these days do a lot of lending that is not to LBO companies; they finance consumer loans and data centers and other stuff. “The big alts managers buy and tranche the LBO companies” is a useful intuition but not entirely correct in practice.

But at a high level the purpose of the alts managers is to slice the economy — or at least the large chunk of the economy owned by alternative asset managers — into safer (private credit) and riskier (private equity) cash flows, and sell each of those cash flows to the people who want them. Who wants them? Well, there is actually some overlap: Lots of institutional investors want to own some equity (including private equity) and some debt (including private credit), so they re-combine these cash flows. But historically private equity is for somewhat risk-loving long-term investors, endowments and rich individuals and stuff, and private credit is for life insurance companies. Life insurance companies are heavily regulated and like to own safe rated debt, but they have very long-term liabilities (life insurance and annuities) so they don’t mind locking their money up in illiquid investments. Private credit is perfect for them. [5]

This is the broad theme, but you can look at it from many angles. Today Bloomberg’s Laura Benitez and Scott Carpenter write about life insurance companies making NAV loans:

The insurance and annuity arms of Wall Street powerhouses including Apollo Global Management Inc., Ares Management Corp. and the Carlyle Group Inc. rank among the most active providers of an esoteric type of financing once dominated by banks and specialist lenders, according to market veterans handling the private deals.

Apollo’s Athene insurance unit alone has pumped roughly $18 billion this year into funding the debts known as NAV loans, in which fund managers post their investments — or net asset value — as collateral.

Buyout funds can use the money to shore up portfolio companies, redeploy it into new deals or seed new funds. Some loans enable payouts to investors who’ve been waiting for years to recoup stakes in hard-to-sell assets. …

Proponents of NAV lending emphasize that borrowers typically post collateral worth several times the value of the loans, and that the assets are diverse, lowering the risk their value might drop en masse. Even the worst-performing private equity funds barely ever lose more than 10%. Those features help NAV loans win investment-grade credit ratings. …

But if NAV loans do falter, they may expose buyers to some of the stickiest wagers collected by buyout funds over the past decade.

Across the country, many firms are struggling to get attractive prices for the investments they acquired when financing was cheap and easy in the era of near-zero interest rates.

Yes: Private equity funds take the junior claims on a bunch of companies, and when the market turns they lose money. Private credit loans— including direct buyout loans (backed by individual LBO companies) but also NAV loans (backed by whole portfolios of LBO companies) — take the senior claims on those companies and are safer.

Strategy Inc. (formerly MicroStrategy) is the original crypto treasury company: It sells stock and debt to raise money to buy Bitcoin. This trade worked very well for a while, for two reasons:

1. Strategy’s stock traded at a large premium to net asset value, so it could sell stock to buy more Bitcoin in a way that was accretive: Strategy’s Bitcoins per share kept increasing, because it was selling stock at a premium to buy more Bitcoins.
2. Strategy could borrow money (mostly in the form of perpetual preferred stock) at rates that were not low in an absolute sense, but that were kind of low for crypto. If you could issue preferred stock at a 10% coupon and buy Bitcoin with the proceeds, that was also accretive to shareholders as long as Bitcoin was going up 20% per year.

Now, though, uh. “Strategy’s mNAV — a key valuation metric comparing the firm’s market capitalization to the value of its Bitcoin holdings — has collapsed from above 2.5 to just 1.2.” Selling stock at 1.2x net asset value to buy Bitcoin is still accretive, but it’s no longer the magic trade that it was at 2.5x, and it is fragile: If you keep selling more stock to buy more Bitcoin, you will tend to drive down the price of the stock and make the premium — and the whole thesis of the company! — disappear.

Meanwhile borrowing at 10% to buy Bitcoin is a fine trade when Bitcoin goes up, but not so much when it goes down. “Strategy Inc. sold €775 million ($898 million) preferred shares at 80 cents on the euro earlier this month,” reports Bloomberg, with a coupon of 10% (and thus a yield of 12.5%). Bitcoin “has tumbled 12% since Strategy’s euro preferred sale,” though. Paying 12.5% to buy an asset that then falls by 12% is very much not accretive. Ah well. 

Elsewhere in crypto markets selling off, this is an extremely pleasing series of paragraphs in the Financial Times:

“What we are seeing now is not a collapse in crypto markets. It is the extended aftershock of October’s liquidation event,” said David Namdar, chief executive of CEA Industries, a vaping company that earlier this year began buying vast quantities of a token issued by Binance, the world’s largest crypto exchange.

“The scale [of the sell-off] is different this time because positions are larger, leverage ran deeper and the unwind takes longer,” Namdar added. “The fundamentals have not changed.”

Beyond bitcoin, six of the 20 biggest cryptocurrencies by market value have tumbled more than 40 per cent this year, with Shiba Inu, Sui and Avalanche each down about 60 per cent.

“The fundamentals have not changed,” says the CEO of a vaping company turned crypto treasury company about a market crash in tokens like Shiba Inu. Is that good?

I wrote yesterday about a public company chief executive officer who announced a plan to buy 690,420 shares of his company’s stock. “Those are the meme finance numbers,” I wrote, “and they have magic powers. If you do stuff in units of 69 and 420 then your stock will go up.” I got several emails from readers saying that I am old and out of touch and now the meme numbers are 6 7. Is that true? As a father of elementary school aged children, I personally encounter the 6 7 meme far more often than 69 or 420, thank God, but presumably the schoolchildren aren’t buying the meme stocks? Elon Musk is 54 years old; his memes are 69 and 420. Still I suppose if you’re a forward-looking meme stock CEO maybe you do have to start doing stuff in units of 6 and 7.

Trump’s Warships Trigger Rally in Venezuela’s Defaulted Bonds. Meta Dodges Breakup as Judge Highlights Market Share Declines. UK seeks to revive dwindling stock market with single source of data. Elon Musk’s xAI Is in Advanced Talks to Raise $15 Billion, Lifting Valuation. Nokia splits AI business into separate unit after $1bn Nvidia investment. Brookfield Targets $10 Billion for AI Fund in Nvidia Pact. The New Requirement for MBAs Seeking Consulting Jobs: AI Proficiency. “More than half of white-collar employees currently don’t have assigned desks, up from one-third before the pandemic.” “High-quality branded merchandise is ‘a point of differentiation’ in a hot labour market.” “A generation of ‘Dazed and Confused’ fans is mourning the potential loss of a landmark.” Billionaire Tom Steyer to Run for California Governor Decrying Rich.

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