May 25, 2020 · 1h 16m · capital-allocators
Brett Jefferson – Inefficiencies in Structured Credit at Hildene Capital Management (First Meeting, EP.19)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Ted Seides interviews Brett Jefferson, founder and Co-CIO of Hildene Capital Management, exploring his journey from collegiate athletics to pioneering structured credit strategies in Bank TruPS and CLOs. Jefferson details Hildene's asset-structure-option valuation framework, the critical importance of enforcing indenture rights, and the capacity discipline and risk management principles guiding the firm.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 13.4% of the talking time here. How this is scored →
Ted as informed peer 2.5 Guest teaching 3.6 Guest disagreement 0.6 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 1:07:10 Condemning leveraged retail ETFs as predatory
Brett forcefully attacks Wall Street creators of leveraged retail ETFs following the oil crash, calling out the mismatch between institutional pros and retail muppets.
Hardest push from Ted ▶ 41:30 Ted probing on the trade-offs of open-sourcing IPTed presses Brett on whether releasing Hildene's proprietary data via TruPS Info undermined their pricing power and pricing efficiency.
Biggest teaching moment ▶ 32:20 Deconstructing unlisted TruPS CDO portfoliosBrett details how he reverse-engineered 91 unlisted Bank TruPS securitizations using FDIC call report filings to build an unbeatable information edge.
Ted holds their own ▶ 13:51 Ted synthesizing role models and mentor dynamicsTed sharply connects disparate threads of Brett's early life, framing how specific male mentors and coaches shaped his appetite for risk and perseverance.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Early Life, Lacrosse, and Syracuse Championship | 1 | 1 | 0 | 0 | Ted opens with an open-ended biographical prompt about Brett's background. Brett delivers an uninterrupted monologue detailing his childhood, rebellion against early testing, boarding school, and lacrosse career at Syracuse. | |
| Chicago Trading Floors, History Master's, and Kellogg MBA | 1 | 1 | 0 | 0 | Brett continues his narrative explaining his time on the CBOE floor in Chicago, trading failure, master's degree at DePaul, and admission to Kellogg. Ted listens passively without interjecting. | |
| Mentorship, Role Models, and Overcoming Failure | 3 | 2 | 0 | 0 | Ted synthesizes recurring themes from Brett's story around mentorship and the internal drive to overcome failure. Brett confirms and elaborates on learning risk-taking from Coach Simmons. | |
| Structuring CBOs and Joining Marathon Asset Management | 2 | 3 | 0 | 0 | Ted prompts Brett on his post-MBA career trajectory. Brett recounts structuring early CBOs at Smith Barney, navigating Wall Street territorialism, and bluffing confidence to land a job running secondary CBO strategies at Marathon. | |
| Valuation Triad and Secondary Sourcing Framework | 3 | 6 | 1 | 0 | Ted asks how Brett identified opportunity in secondary structured credit. Brett delivers a masterclass explaining why NAV calculations failed in high-yield CBOs and introduces his framework combining asset value, structure, and option value. | |
| Deconstructing Structure, Asset Values, and Option Control | 3 | 5 | 0 | 0 | Ted asks Brett to unpack the triad of asset, structure, and option value. Brett explains how voting thresholds in indentures give out-of-the-money junior tranches blocking leverage, before detailing his exit from Marathon and founding Hildene. | |
| Pioneering the Bank TruPS CDO Strategy | 3 | 7 | 1 | 0 | Ted inquires about Hildene's initial 2008 strategy. Brett explains how unearthing bank names from obscure regulatory call reports allowed Hildene to exploit massive mispricings in Bank TruPS CDOs. | |
| Sponsor Message: Ridgeline Investment Management Tech | 3 | 5 | 1 | 0 | Ted asks how Brett managed relationships and information advantage with brokers and dealers. Brett describes open-sourcing their database via TruPS Info to create market liquidity while debunking the efficient market hypothesis. | |
| Underwriting Margin of Safety and Asymmetric Upside | 3 | 5 | 2 | 0 | Ted asks about the balance between credit underwriting and legal structuring. Brett describes high-profile legal battles in Delaware and Trenton bankruptcy courts to protect indenture rights against rogue managers and aggressive hedge funds. | |
| Scaling Down, TARP Auctions, and Big Data in CLOs | 3 | 4 | 0 | 0 | Ted asks when Hildene expanded beyond TruPS. Brett details participating in government TARP auctions, returning $1 billion to LPs to manage capacity, and hiring big-data programmers to analyze complex CLOs. | |
| Hildene's Core Principles: Risk, Innovation, and Alignment | 3 | 3 | 0 | 0 | Ted prompts Brett on his core business principles. Brett highlights disciplined capacity management, single-firm P&L structure, backloaded incentive fee structures, and avoiding overnight leverage during market panics. | |
| CLO Dislocations, Private Equity, and COVID-19 | 3 | 4 | 0 | 0 | Ted asks about the COVID-era distressed credit landscape in April 2020. Brett explains the impact of PE sponsors, Fed intervention, rating agency downgrade dynamics, and analyzing company survival rather than earnings. | |
| Market Risks and Leveraged Retail ETF Pitfalls | 2 | 4 | 3 | 0 | Ted asks about broader systemic market risks. Brett passionately criticizes retail leveraged ETFs and commodity products like negative oil ETNs, characterizing them as predatory products sold to retail investors. | |
| Premier Lacrosse League Investment and Chaos LC | 2 | 1 | 0 | 0 | Ted steers into Brett's investment in the Premier Lacrosse League and concluding personal questions. Brett shares stories about founding team Chaos LC, learning golf mechanics, and life lessons from his parents. |
Statements from this episode (19)
Jefferson: Roughly 40% of CBOs and CLOs held telecom bonds
“There was also this problem in the high yield market and the telecom sector, and about 40% of all CBOs or CLOs had telecom bonds, and that was just the largest issuer there.”
Hildene evaluates structured credit via asset, structure, and option value
“So I came up with this methodology, which we still use today, and it was basically the value of the assets, the value of the structure, the value of the option.”
Jefferson: Structured credit requires a bazaar mindset instead of a mall mindset
“If you're dealing in equities, you're dealing in high yield bonds where you can just go and buy a bond. I call it like shopping at the mall. You go to the mall, you know what you're going to buy. What we do is like going to the Turkish Bazaar and you show up w…”
Jefferson: Strong option protections let distressed credit survive zero-price drops
“And one of the interesting things about if you have a deal and the value of the option is very, very strong, you can have assets that trade down to zero, trade back up. As long as that option can't be exercised, then you're okay.”
Jefferson: Shorting CDO assets only works if the whole market collapses
“I also looked at the value of the option in a CDO, and I said, if I short this, whatever it might be, mortgage bond, ABS bond, into this structure, And the structure never liquidates. I can't get out. And I kind of came to this conclusion that the only way thi…”
Bank TruPS allowed five-year interest deferrals without triggering contractual default
“The one caveat which the regulators made them put into these securitizations was that you had to be allowed to defer for up to five years before you went into default.”
Bank TruPS was a $35B niche versus the $1T+ non-agency market
“It wasn't a big market, it was a thirty-five billion dollar market, so it didn't make sense for a lot of folks to get into it. Like, let's just say the non-agency market, which was Over a trillion dollars.”
Jefferson: Never haggle with brokers on deeply distressed structured credit
“If you're buying a bond at six, pay a guy a half a point. You're not buying at six because it's going to seven. You're buying at six because it's going somewhere a lot higher. And I made sure I was the first call from all those guys.”
Every active TruPS dealer sourced market information directly from Hildene
“Look, I can say with full confidence that every dealer that's in the space right now, and there's a lot more than just two Got their information from us. A lot of our competitors got their information from us.”
Jefferson: Extreme distressed credit payouts completely disprove efficient market theory
“No, I'm not a big believer in the efficient market theory. When you buy a bond three times for a buck and a half and it ends up paying you a 140 points, that's not efficient markets.”
Hildene occasionally misidentified underlying banks in early TruPS portfolios
“There was a time for a while where we did not have a hundred percent of the actual banks. And I'm going to tell you that there's a lot of first national banks in this country. There's a lot of first Cherokees. There's a lot of bank ones. I mean, there's 8000 b…”
Jefferson bought a $27M CDO tranche for less than a nice dinner
“I convinced him to sell me all twenty seven million dollars of that tranche. I paid less than what I probably pay for a nice bottle of wine when I go to a nice dinner.”
Jefferson returned $1B to investors, deliberately shrinking Hildene's AUM by 40%
“I sold a billion dollars and I gave back. I went from a 2.4 billion dollar firm to a 1.4 billion dollar firm.”
The $750B CLO market requires big data analytics over manual spreadsheets
“This is a seven hundred and fifty billion dollar market where there's 125 different managers where there's about a thousand deals with 3000 different underlines. So this has gone from something that you can do yourself to big data.”
Jefferson: Quantifying credit risk statistically has never worked and never will
“Trying to quantify credit is something which has never worked and I don't think ever will, because you're basically saying, okay, these guys at the rating agencies, they did it right, or I'm missing the motivations of the underlying leverage.”
Hildene defers half of its incentive fee until LP capital is returned
“We align our interest through a fee structure, which is unique. And we take half of our incentive fee when we give the money back.”
Hildene runs on a single firm-wide P&L rather than individual trader books
“I think the other thing that we do, which is really, really different, is we have one P&L for the firm.”
Jefferson: Private equity funds will inject capital to save struggling CLO credits
“And the one thing I can guarantee you is, is that people who raise money will never give it back. They're just not going to give it back and say, I couldn't find anything. So they're going to find something to invest in. I think that's going to come to helping…”