The Exchanges

Q So you mentioned a couple of different things that could encapsulate into what one of your trades might look like. What is it that is kind of like an emblematic trade for you?

A I'll give you the best trade I ever saw that expresses the view that we have, but it was also a function of how screwed up the market was at the time, so I, I just want to warn you that we'd be so lucky to find a trade that looks like this again, but we were always a believer that Europe would not collapse, and we certainly were a strong believer of that during the first round of the sovereign debt crisis, and we really felt that it was hugely overpriced and all these other things, and A lot of people wanted to buy Italian and Spanish bonds during that period of time to express that view. We weren't the only ones who had that view. I'd say we were in the minority for sure, and obviously a lot of real money around the world was actually shorting Spanish and Italian bonds to hedge their overall portfolio, which is good. I mean, you want that to happen, especially if you have the opposing views. You have a structural bid against you that ultimately will dissipate if you're right. But what was really interesting was, is you could buy the forwards, Which is a fancy way of saying a seven-year, seven-year bond in Italy, which is buying a fifteen-year bond and shorting an eight-year bond. And you're literally synthetically creating a forward. People buy forwards, obviously, in the rate markets all the time. Three-year, one-year, your IBOR, three-year, one-year, US dollar swaps, and the…

AI assessment note: “I'll give you the best trade I ever saw that expresses the view that we have”

Q So then post law school, how did you work your way back to it?

A I was absolutely convinced with every core part of my body that I wanted to be, and I wanted to be a principal. I wanted to allocate capital. Like some people are lucky in life. 10 or 11 years old, that's what I wanted to do, and I've never changed my view on that, and that's, I don't know if that's healthy, unhealthy, but it was my reality, and so, you know, I was maniacally focused on trying to get a job that would allow me to do that, and I got a JD MBA at Columbia, and, but I had this sort of weird background in that a lot of the firms kind of looked at me with curiosity, Smart guy. Okay. But no experience, you know, that type of thing. And so no buys. I mean, I tried to knock my way into buy side firms. You know, I sent letters to, I don't know, I'm sure everyone, KKR, Apollo, this guy, that guy, no one really took me up in the offer because to be fair, all of us look at this now that I'm in this seat is yeah, let them go work at like one of these bolts bracket firms. Let them train these people for us. And then we'll take them, right? Like, we don't want to train any of these people. Like, that's a waste of our time. We're not good at it. I'm sure that's kind of how I was viewed, and I got really lucky because I was interviewing at Lazard, and one of the most senior principals there was offered a job to build a brand new private equity firm, and out of his non-compete, he…

AI assessment note: “I got really lucky because I was interviewing at Lazard, and one of the most senior”

Q So what, what did you learn in those first couple of years in your kind of formative education and principal investing?

A I'd have to say that those first few years before I became an entrepreneur, I learned in the sense that, okay, here's a spreadsheet. Here's how cash flows and finance works and so on and so forth. But I sort of evaluate my learning process based on the things that I continue to carry with me. You know what I mean? Like, did they imprint my life in any way? Was it a searing imprint into who I was? And the answer was no. Those few years on Wall Street, don't get me wrong, like learning how to model and learning how to put presentations together and things like that. And, you know, investment memos, that stuff's important. But I viewed law school as unbelievably important for me, even today more than ever. I've used those three or four years as, but not really powerful. And then post that, you know, when I started my firm, things kind of really picked back up for my learning curve. So the bad news was, I sort of think that those few years were A bit bereft of deep learning, but that's okay. I mean, you know, that's part of life.

AI assessment note: “learning how to model and learning how to put presentations together”

Q And that opportunity said, so what were the real estate buckets and then where did you dive in?

A Largely speaking, real estate, As everyone knows is in some ways, like a long duration tip on some levels. And so you're trying to, in essence, buy bonds is kind of what they are. That's sort of how it intersects with my macro, which I like fixed income. I like rates. I mean, there's like this big intersection and there's a lot of different business models that people pursue. There's the, I'm just going to buy as many bonds as I possibly can and build this giant asset management firm. And I'm going to charge fees for literally just managing gallons and gallons of bonds. If you look at the fixed income markets, generally like the non real estate, those are like your big PIMCO style funds, right? And then on the complete opposite side is probably like the distressed guys trying to bend the future to create value. So one group is not really trying to bend the future at all and effectuate much change. They make most of their money by making good Timing and geographical and asset class decisions. The other piece is guys who are trying to add real big value, developers, people who rezone, those types of things. So to me, I didn't think I could add much in the first bucket because frankly, I actually, even to this day, I think the world has more than enough of those people. But it was the second bucket that interests me. And so that's where we went.

AI assessment note: “it was the second bucket that interests me. And so that's where we went.”

Q So you had early on, you're kind of trading and screwing up on your own, and then you have principal experience in real estate, and then, you know, you start trading. How did you approach, let's just call it the macro hedge fund in terms of How you thought about investing?

A Well, it's evolved a lot. I mean, I would say that when I first approached it, obviously it was more akin to how one trades their personal portfolio. I didn't really have a lot of appreciation for a lot of the risk parameter issues that now dominate hedge funds. And we can come back to that because the pendulum's probably swung too far in the other direction, but I had no real appreciation for a lot of that. My view was look at screen, try to make money, find a security that you're going to make money off of. Like it was pretty unit dimensional, not really, I wouldn't say bad portfolio construction. I was aware of what my risk was, but not very highly evolved portfolio construction. And also remember Ted, that period of time, the risk premium was so high for a lot of the ideas that we had that There was a lot of margin for error anyways, in the sense that you were capturing huge amounts of risk premia. Now things have changed. You have to be more exacting. It's not as much risk premia. You can't really, I'm not saying get away with it, but you have to measure things closer to the millimeter than to the inch or, you know, some version there or foot even. So I would say that our early process on the thinking part is still very similar to what it was then. And very good. And I would say the things that have changed a lot is on the risk management piece. And again, I think it's sti…

AI assessment note: “when I first approached it, obviously it was more akin to how one trades their personal portfolio.”

Q In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. And then how about stylistically on the kind of return generation side, what is it that you're looking for in your trades?

A I'm definitely more of a mean reversion trader, and I think mean reversion, you and I had a brief conversation about this. I think mean reversion is really, really hard, especially in liquid markets. Being a distressed trader in illiquid markets, you know, you don't have a mark. You know, you buy a piece of real estate and it goes down, but five years later you were right. Nobody really knows that it went down for three months. Mean reversion in trading is very, very hard. It also is hard because when you're doing trend trading or you're doing breakout trading, it's clear where the break is. If it goes back below the break, just stop out and you're done. It's emotionally pretty easy. Mean reversion is like, Well, it's really bad now. I don't think it could get worse, but maybe it's going to get worse. And, you know, I have to leave bullets in my pocket in case it gets worse. And so that's literally like the story of my life. The story of my trading life is I don't think it could get worse. So that's our style. That's definitely our style.

AI assessment note: “I'm definitely more of a mean reversion trader”

Q I'm kind of curious of how you have these two activities side by side, this sort of private real estate investing and the macro trading hedge fund. Where do you see informational synergies across the two?

A I literally think that like being a real estate investor is so powerful for being a macro thinker. First of all, I think real estate's like the ultimate macro asset class. When you invest in private equity, you're literally investing on a company, like a company. I buy an apartment building in Austin. I got 500 companies in that apartment building, right? The employees probably work for 500 different companies. Now, of course, I'm investing on a, based on a street corner, and, but at the end of the day, I'm making an interest rate call, I'm making probably a geography call, and then I gotta make the entry price call. But generally speaking, that's what I'm doing. The other thing worth noting is that the real estate market, it's the biggest asset class in the end. I mean, if you really look at it globally, It is the big consumer of capital. When you think about, like, Fed policy, ECB policy, and so on, of course, their policies about creating liquidity and easing financial conditions, of course, touches stocks and corporate bonds, but the volume of real estate globally Dwarfs by factors, the total volume of bonds and shares. By way of example, two years ago when interest rates were going up, I went to all of my real estate friends and I said, look, if you had to refinance your portfolio at X, please tell me what X is that equals zero equity. So said differently, where are you ba…

AI assessment note: “being a real estate investor is so powerful for being a macro thinker”

Q Why don't we dive in and just start with your kind of early education and how you got involved in the investing world in the first place?

A Yeah, I'd say my initial exposure to it was through my father, who was a lawyer and then a private investor. And I don't even think he knew it in the sense that I don't think he identified himself as such, but he was a Early private equity investor starting in kind of late sixties. I was born in 1972. And by the time I had sort of consciousness, if that makes sense, he was sort of well on his way. And so frankly, my first exposure was through him. And I suppose there's lots of different ways people view their parents or their fathers as sons. You know, some of them emulate and want to be like them. Some rebel, you know, there's lots of different ways to go, I guess. My path was somewhat, some level of emulation, or at least, you know, interest in what he was doing. And then, I don't know, you know, I know I've heard this from other people in my industry, in that, you know, I was Jewish. And had some bar mitzvah money that was gifts that were given to me. And I don't know exactly how it happened, but some version of going to him and saying, Hey, I can manage this, you know, certainly no lack of confidence. And so that was kind of my first foray. And by the time I got to college, it was really like a big endeavor. And I was really aggressive. And maybe it's sort of almost the antithesis of the way I trade now, but I ran it up to a lot of money and I was like very obsessed with it…

AI assessment note: “my initial exposure to it was through my father, who was a lawyer and then a private investor”

Q And so how did you initially get started?

A The nice thing about real estate, which is different than the hedge funds, I mean, we'll go through the same conversation. How did you initially get started at hedge funds? It was a lot harder in the hedge fund business, particularly given my lack of perceived or real history in the, in the space. But in real estate, it's a bit easier because once you decide what your thesis is and what you're driving after, and then you go tie up a piece of real estate, That fits within that thesis, which is at least the way I invest in real estate to this day. To some degree, the person is betting on the asset, probably the way most people look at it, myself included, because I've been on the other side of these conversations as an investor, not as a sponsor, is you're betting maybe 80% on the asset and 20% on the person. So that's an easier lift. You go tie something up, you run around, you talk to a bunch of people with money, and you sort of convince them More about the asset than your own skills. And so that was sort of the way we started. And we had a thesis. I mean, we, and we are thematic real estate investors. We were then from literally the first day until today in 20 years, it has not changed. We basically create themes and we invest against those themes. And so my theme then was that rezoning In Southern California had huge amounts of excess returns attached to it. Buying something…

AI assessment note: “my theme then was that rezoning In Southern California had huge amounts of excess returns”

Q Why don't we finish this off and talk about the projects that you are working on now and those themes?

A So I was investing all through the cycle from, we'll call it oh nine to 2000 and 1516. And I went to Soros in 2017, and they asked me to sort of build a real estate platform. And I had to, again, sort of ask rainwater style questions, start with a white sheet paper. What do you do? Those types of questions. And so on behalf of them, and then subsequently now back on behalf of just ourselves, unfortunately, we were asking those questions at a point in time where we were clearly late cycle. I personally have been a beneficiary of that as an investor for years, but just the very fact that I even now only have one asset left out of all the assets that I accumulated during that period tells you what my view was as to where we were in the cycle. So the question really was, what do we invest in? And the answer was, is okay, I'm only willing to invest in secular trends that I feel like will be persistent to plow through the cycle. Otherwise I'm basically not willing to invest. And so The one we chose was investing in data centers and we continue to invest in that. And then the other one, which we've most more recently kind of tripped into is sound stages for content production. And so those two share in many ways, a lot of similarities and there's some non-similarities to them, but those are our two big platforms that we're working on and we're excited about both of them. I mean, now T…

AI assessment note: “The one we chose was investing in data centers and sound stages for content production”

Q So what changed so that you started trading in hedge fund format?

A Well, one, I had all these other people that wanted to trade with me. So one day I woke up and I'm like, well, I am a hedge fund manager. Like I'm managing other people's money and this is insane. And you know, I understood the regulatory risks of not doing it within a normal construct. That was like the base utility problem, right? Which is if you're going to do something, you got to do it so that it's not violating any regulatory issues. And then the second thing honestly was, is that The hits just kept coming. These big macro questions just kept coming, and I was like, well, how do I get off of this thing? This was like a bicycle for the mind. Wait, wait a second, I get to sit in an office all day and debate amongst the most important macro issues of the day? Like, this was like a dream to me. You know, I'm like, wait a second, I get paid to do this, and I can immediately bet on this, and No, no, no. That was, and if you recall, like, it was years of this. Like, it went all the way at least into and through the European sovereign debt crisis. So, we're talking about four or five years of just massive, big macro questions. Now, admittingly, eventually, a lot of those questions calmed down until more recently, of course. And then, you know, it's a competitive thing, and then, you know, you start raising money, and you have large outside investors, and Alan Howard becomes my pa…

AI assessment note: “I had all these other people that wanted to trade with me.”

Q You don't really come across too many people that are investing in private real estate and then trading macro. So, you know, why don't you take me through, you know, you're doing these thematic real estate investments and okay, there's a theme overlap, but how did you decide to get back into trading?

A Well, the world was in trouble in oh five, oh six. That was very obvious. The nice thing about real estate, this is a funny story. Everyone, and it's not to belittle people are in real estate cause I'm in it. So just, I'm belittling myself when I say this is that It's like one of the few asset classes where they have like, it's called Argus, a piece of software that helps everyone model the real estate. Almost all other private equity style investments, they build their own models and they don't have a standard model. But, you know, real estate lends itself to a standard model. One of the things about that model is the big assumption is your, what's called your kegger, your compounded annual growth rate on the big assumption, right? Rent growth or something like that. And then obviously leverage. Those are the two big things in real estate. And so what dawned on me in the mid 2000 was, is you had to make these crazy heroic assumptions about the forward, the kegger and your leverage to get to what I even thought, not a, not a great return, just an acceptable return. And then of course we were in residential real estate. I mean, at the end we were selling condominiums. And so if you were selling for sale, residential real estate, I mean, you really had to be blind. You know, you had to like shut your eyes to what was going on. And as a final point, I had moved to Hong Kong becaus…

AI assessment note: “Well, the world was in trouble in oh five, oh six. That was very obvious.”

Q How does the underwriting differ for real estate, like thematic real estate deals than what you just might expect from buying commercial property or something like that?

A Well, it shouldn't in the sense that in the end, the fundamentals of how many dollars do I put in and how many dollars do I get out and how quickly do they come out? I mean, that's all the same. I think where, Ted, it really differs is, I always used to joke that, and everyone knows this in the finance world, which is, you know, it's crap in crap out. You can make any model tell you what, whatever the hell you want it to tell you. And I think that the way I look at investing, including in trading, I don't think there's actually any difference on this specific point, which is you have to be Socratic in your process and you have to challenge your assumptions constantly. And the way I look at investing, like my core principle as an investor is the harder it is, To invert your argument, the more powerful your argument is. And so what I would say about thematic investing is it doesn't really change the numbers. You know what I mean? Meaning like, it's not like you're shooting for a lower IRR or a lower anything. It's just that it's harder to invert the arguments surrounding your assumptions. Whereas in non thematic real estate investing, I think it's easier.

AI assessment note: “it's just that it's harder to invert the arguments surrounding your assumptions.”

Q The sort of macro world, how do you go about preparing yourself on a day-to-day basis to be in the right mindset to make it work?

A Well, I have like these crazy, and by the way, my investors, my Natalie, like, it's a bit embarrassing. Like, she put this whole manual together of like all these things that I do, and I have real, like, I don't know, misgiving's the right thing. It feels like it's, you know, a bit contrived, but if you can convince me that it'll help me, I will try anything to be better at the things I just described. So, I'll try anything, in essence, to remove my biases, to be better at making decisions, because that's what people are paying me to do. So, I do think that as a human being, you know, because we're not machines, we obviously live in a body, and, you know, we have emotion, and, and I think all the Physiological elements of ourselves. We are not wired to be dispassionate about evaluating facts and topics. We're not wired that way. That's the tribalism you see right now in the political environment. And so I do think you have to work very hard at making sure you can push back against that diet, exercise, meditation, all these things. I think they all Integrate together. Some people, to be fair, don't need those things. I mean, you know, I know I need those things. I need a lot of routine. I need a lot of, of those things in my life to be as effective. Sleep. I mean, I could go hours on sleep. The least appreciated medicine in the world is sleep. I mean, it's just ridiculous how pe…

AI assessment note: “I need a lot of routine... diet, exercise, meditation, all these things.”

Q So how did you transition over when you went to start your own firm into real estate?

A One of the firms I worked for was affiliated loosely with Richard Rainwater. I bumped into Richard where he lived at Canyon Ranch in Tucson. He gave me great advice. Now, Richard is widely accepted to be, like, almost like a career whisperer. You know, you have all these people who, like, literally will tell you that Richard had this massive impact on them. Now, most of those people actually worked for Richard, ok? But Richard only had, like, maybe a half-hour conversation with me, but the best thing he said Which, you know, it was like hand of God type thing. He was like, you don't get it. You don't know anything. And I was like, okay, well, thanks for that compliment. He's like, no, no, no, like, that's your superpower. You're not shackled to anything. One of the problems that happens with people is they look at their life like a career. They don't really look at it like, okay, where does money want to go? Where does money need to go?

AI assessment note: “He gave me great advice... look at it like, okay, where does money want to go?”

Q So in the core part of the macro hedge fund from which you're spawning the sidecars, what does the portfolio look like in terms of either the number of positions or trades?

A It's gotten a lot more concentrated. That's good and bad in the sense that they look a lot more like, oh, this guy is just trading a sidecar with a couple extra trades on it. Because the risk parameters of the main fund is typically tighter on some levels than these sidecars, it can put a lot of pressure on you because it means that, well, okay, so you have fewer ideas. Your batting average has to be really, really high because you're not swinging as many times. And oh, by the way, you're not taking as much risk as you are in the sidecar. So even more, your batting average has to be well to give a, a proper rate of return, call it, you know, seven to 10% return. If you just run the Sharpe ratio of the VAR and all these other things. So that sort of coquates to like a .75 sharp, which is probably as good as one can hope and macro. I mean, everyone wants to do a one, but nobody will get there. So I think it puts a lot of pressure on your main fund, but if you can convince your clients that one, obviously you're good at what I'm describing and two, that a predominant number of them will at least participate in some of your sidecars, then you can make it pretty far. With really good returns. And, you know, if you look at over allocation, if you will, to each trade every time we said over allocate. And I think that's what we're trying to push people into. You know, we're trying to p…

AI assessment note: “It's gotten a lot more concentrated. That's good and bad”