From Matt Levine of Bloomberg:<p><i>Here is a New York Times story about the “McKinsey Investment Office, or MIO Partners,” the in-house hedge fund of consulting firm McKinsey & Co., which invests employee money, including in companies that McKinsey advises. “That web of relationships underscores the unusual nature of McKinsey’s hedge fund, and the potential for undisclosed conflicts of interest between the fund’s investments and the advice the firm sells to clients,” says the Times, and I suppose there are some shady elements: When McKinsey advises on a bankruptcy, for instance, and its hedge fund owns one or another slice of the capital structure, then there’s a clear potential for conflicts of interest.<p>Mostly, though, it’s hard to get too worked up about this. For one thing, most of the fund’s money seems to be run by outside advisers, and even the stuff run by McKinsey employees seems to be mostly walled off from the consulting business. For another thing, the incentives are mostly good: McKinsey’s consultants are trying to make the company better, and its hedge fund is invested in the company and wants the company to get better, so there is no problem here. “The firm’s partners stood to profit from their own advice,” says the Times about McKinsey’s indirect investments in Valeant Pharmaceuticals, but why would that be bad? If they do stuff to make the stock go up, then they make money, but that is also what the company wants. (In the event, Valeant’s stock went down, which was bad for both Valeant and McKinsey.) Really companies ought to demand that their consultants buy some of their stock, so they have some skin in the game with their advice.<p>Of course, what would really be scandalous is if McKinsey’s hedge fund shorted companies that the firm advised, and then the consultants tried to give those companies ruinous advice. You couldn’t advertise that strategy, but much of the Times story is about how secretive MIO is, and if you can be secretive enough then maybe you could pull off this trade.</i>