The Exchanges

Q Let's go through the story a little bit, because I remember the company. So the concept The concept was just local delivery of, was it retail?

A The concept was one hour delivery. And so it was basically Amazon one hour. And in fact, if you look at the old snapshots, which I'm sure are floating on the web somewhere of kind of the, the, the page had a striking similarity to Amazon. And the difference was you click and it got delivered to you within an hour. And, and so that was the business that people knew, like the retail business. B to C business. What people, most people didn't know, unless you were kind of in the company or one of our investors was, was the B to B model, which was third party logistics. We actually ran third party logistics for online delivery for some big companies that wanted to have a fulfillment agent into same day delivery service. And again, like it's all about keeping in business long enough. I mean, you know, I think our family has. 10 boxes from Amazon every day hit our doorstep, you know, from a, uh, something like a toothpaste, unfortunately to, to something more substantial. So that, the concept is really, but, but for us, it was, it was really, the retail business was about getting enough traction and awareness to really blow out third party logistics. Cause that's where we thought the real opportunity was. And that was a fascinating duality in terms of the B to B and B to C business. But most people knew us as the online delivery company, urban fetch hats, you know, deliver ice cream w…

AI assessment note: “The concept was one hour delivery. And so it was basically Amazon one hour.”

Q So let's grab Japan as an example. What does that deep dive look like? You know, where'd you start and where'd you get to?

A So it looks like the bags enter my eyes. Cause I just flew back from Japan last week and we're here in September and it's been my fifth trip this year to Japan. So we feel like there's really no substitute for, for being on the ground. We travel a lot. Our research team does. There's been two other folks on our research team that have spent as much time with me on separate trips to Japan. But kind of going back in time, I first started doing my, my trips to Japan when we started Chalkstream. And that was the beginning of the U.S. wave of activists that were coming in Japan. We looked at it and said, interesting stuff. And our gut originally was, we can run a screen on all these net cash companies. Why don't we just buy all three 50? Going back to my value days. These are, these are true value names, like net cash companies and hold them. And over time, pride is okay. During tough periods, it probably is okay as well. You probably lose some money, but you know, probably not as much as, as the markets. That was the theory at least that proved out in 2008. And so that was our working model. So we're flexible and agnostic to whether we do things direct or indirect. And, and as we started studying it more, and when we started meeting some of the, at the time, friendly activists, we changed our tune. And we thought that, wow, on a concentrated portfolio, not all three 50, but on a su…

AI assessment note: “as we started studying it more, and when we started meeting some of the, at the time, friendly activists, we changed our tune”

Q Do you think of that as one strategy where you've got the activists and then you've got the CDS as a hedge?

A We do. And this is an important point, so I'm glad you brought that up. We started the equities and it wasn't like we said, hey, let's find a hedge for Japan, but we often do that. But in this case, we thought that the Margin of safety on the equities was such that we're willing to take beta, and you know, we usually don't take beta. So for us to take a beta bet somewhere has to be something pretty extreme, like net cash companies. That being said, we saw this, and this really came about from a different angle, which was thinking about a tail hedge on China. And it was like, okay, not that we have much China exposure, but if China really hard lands, like, it probably means some, some bad things for the markets. And by association, going back to my experience in long-term capital, it probably means there could be some potential knock-on effects in other markets, and maybe that affects some of the stuff we own. So it started off as an innocent discussion on what are some good tail hedges on China. And we did some in Australian receiver swaptions, but that played out, and we're kind of looking for other things. And one of our credit managers that we seated said, you know, have you thought about Japanese CDS as a hedge of China? We're like, no. So they started describing this thesis about these massively levered companies that were in things like steel and shipping and basic commod…

AI assessment note: “We do. And this is an important point, so I'm glad you brought that up.”

Q That's great. What information do you read that you get a lot out of that other people might not know about?

A You know, there's a standard issue stuff. Like I think the economist is amazing, but one thing that I really enjoy doing is reading newspapers from different countries. It all started cause I, you know, I'll be traveling and I'll be In this airport or that airport, and you're like, instead of picking up the New York Times or the FT that's there, which I love, you know, and I read them every day, but then you pick up the China Daily, or you pick up the Nikkei, or you pick up the India Times. There's always a half-life when, and since I'm in Asia so much these days, it stays with me, that in the mornings, I'll just load up their, their local newspapers, and it's a different perspective. It really is. You, you, you have the same event happening. Moon's meeting to talk about North Korea. Right. And then you hear kind of how the pundits here talk about it and you kind of get a perspective on, on how they think about it there. And so it's, it's kind of eyeopening. And I think it just broadens out the perspective that our perspective here is important, obviously, and we live here, but, but there's a different perspective. And so I think that's, that's been helpful.

AI assessment note: “one thing that I really enjoy doing is reading newspapers from different countries.”

Q And when you would see those types of trades, like negative basis trade, free option is massive convergence in currencies. Could you tell who was on the other side of it to get conviction that this thing that doesn't make mathematical sense is worth the trade?

A You had a sense, right? Because being, being on the street, you had a sense of what institutional flows are doing. So you had a sense, my question was always like, how does it get here? And he's like, well, you know, this central bank's moving, you know, kind of big into this part of the curve for this reason. You start understanding from the salespeople what their objectives are, their client's objectives are. So you start kind of putting together a rough, And I say rough because you don't really know. Rough framework on kind of what's going on, and it kind of gives you some comfort that, okay, you know, there's a reason that happened, and, and perhaps there's a reason that will revert at some point.

AI assessment note: “You had a sense, right? Because being, being on the street, you had a sense”

Q And what does concentration mean? Like how many themes or positions or however you think about it?

A There's probably only a handful of tactical themes in our portfolio today. Things like Japan, there's things like Korea. There's things like electricity, power trading. There are kind of big themes in our portfolio. And the balance is a concentrated portfolio of low net, low beta strategies that we think still have some alpha. And usually to your point about capacity constraints, a lot of them can't take a lot of money, right? So that side of our business is not one that can, can scale infinitely for sure, because we're in small cap regional banks, right? And that's a limited strategy. So that's kind of when we think about concentrating and in our Themes. There may only be a couple of themes at any given time that are meaningful in our portfolio. But if you look at Japan, Korea, and increasingly power as a percentage of our risk in our portfolio, that's probably 40% of our risk. You know, and there's a lot of positions underneath them, but, but those are, those are pretty big thematic bets in our portfolio.

AI assessment note: “There's probably only a handful of tactical themes in our portfolio today.”

Q Great. Well, let's, let's pull on one more. What's your, either the thing you've most recently dove into or the, the longest lasting one?

A I'll focus on, on one of the more recent ones, which has been electricity trading and power trading. And this is a space that we think fits a lot of our criteria. We look at everything from, we have this kind of laminate card philosophy, which is like, This sense of, can you put your investment philosophy on a laminate card? And we heard it from one of our offsite coaches on this entrepreneur who had this laminate card on values on, on companies that he liked. So for us, it's a pretty simple process and it's basically space, team and alignment. So the first thing is space. Like, what do we like on spaces? And for us, we like spaces that are either capacity constrained because it keeps away the big boys, complicated, heavily retail focused. Like regional banks or MLPs, which when they dominate those markets, they tend to exacerbate things and you can, you know, kind of be on the other side of that, so to speak. So space is important to us. And that's why Korea, Japan, like all these things come from a big picture perspective important. And then kind of the next thing is the team. And is the team a local player? Is it us doing CDS? Is it some combination thereof? Then the final thing is the alignment. How do we structure something that is truly In the spirit of doing this for, for multiple years. So pulling it back to the electricity question and comment on, on where are we putti…

AI assessment note: “I'll focus on, on one of the more recent ones, which has been electricity trading”

Q Fantastic. All right. What's your biggest investment pet peeve?

A One of the pet peeves is deriving confirmation from others or association. And we've made that mistake before. We said, oh, wow, like, you know, all these smart people are investing in this, like, you know, must be good. And maybe on the margin, you kind of relax your standards a little bit. And, you know, if I go back and think about all of our greatest hits, you know, I don't think there was one that was a consensus, like, yeah, that feels good around the board kind of investment. It was always like, there was always some twists, some difficulty, like even short subprime, like, you remember, like everyone was talking about the government buying every single mortgage in America, right? So therefore maybe it doesn't work. So you go through some late night sweats on, on all those things, but the ones where you kind of feel like, oh, you know, it's fine. Like, you know, yeah, they did it. I mean, it must be great. That's one of my pet peeves.

AI assessment note: “One of the pet peeves is deriving confirmation from others or association.”

Q How did you go from the hedge fund to local delivery?

A It was really simple. We had a team full of PhDs that we really liked and respected, and we were shutting down our hedge fund. And it was a lesson in how do we keep the band together? Like, what do we do? Like, this is a good team, right? And we believe in the strategy. We just thought that at the time it was going to be hard to kind of raise money for, for quant. But we thought that how do we keep this team together? And at the time there was so much going on in technology and we're all living in New York city, all dealing with the lack of convenience and lack of delivery. And to us, it actually was just a fascinating optimization question, right? So the geeks and us came out and it's, it was basically, okay, if you've got X number of warehouses, Y number of orders and Z number of delivery people, how do you do that? So it's actually a fascinating question, right? Logistics and in operation management. And it was kind of, it wasn't that much of a segue from the team we had. And so we started building up that team and we built up this business. We raised a bunch of money from venture capitalists.

AI assessment note: “we were shutting down our hedge fund. And it was a lesson in how do we keep the band together”

Q So let's walk through some of those. You mentioned long tails, a lot of traditional thinking of asset allocation, owning assets. In some sense, people can get short the tails pretty easily. So what was the construct that you said, okay, we now have a pool of capital. What are the objectives and how are you going to achieve them?

A So we really wanted at the beginning, and I think this DNA has stayed with us the whole time. We really wanted to build something that was focused on long-term compounding. And that's obviously what a lot of people focus on. But we wanted to do it in a way that was focused on areas that were less competitive, that were niche, and where we could concentrate our bets. And so we actually took the opposite of an asset allocation framework. And, and we had the view at the time, and it turned out that it was even more extreme than we expected, that too much money would flood into space. That historical correlations would be useful, but dangerous to rely on too much. And if you think about asset allocation, right, you're relying on your forecast of volatility, expected returns and correlations. And if you believe that there are some distortions to that because of capital flows, or in the case of where we are today, potentially with kind of liquidity and QE, does the fact that these asset classes are correlated to this way in this environment means that they'll be correlated that way going forward? Right. So our plan and our philosophy, and it's still a core part of what we do is, well, how do we focus on things that have an inherent lack of correlation to a lot of those things? And how do we focus on things that could have long tails? And that could be the result of a dislocation. Tha…

AI assessment note: “We really wanted to build something that was focused on long-term compounding.”

Q time when people dive in to try to find a low beta alpha driven opportunity, they might marry it with low cost beta. So you start talking about Buffett and people, which is true, but there's also a, hey, own US equities and long term compound and be patient in that way. So how do you think about the low cost beta piece and are you foregoing that on purpose?

A We're forgoing on a purpose. I think it's actually fantastic, and people should do that. We don't think we add value for providing that to people. And I think people know when they come to us, everyone's got plenty of beta in their portfolio, either directly or indirectly. If you work in finance in New York City, and you have zero equities, you're long equities, right? Right? If you're in the hedge fund industry, private equity industry, you have beta, DS&P. And one of the charts I have on my desk is A graph of, of tenure yields going back 40 years. And the reason I keep it there is that it looks like a ski slope, right? It goes from 14% down to where it is today. And there's been some gyrations, but it's, it's basically, I say this to all my contemporaries, like none of us are as good as we think we are. We've been the beneficiaries of, you know, so if you think about hedge funds, equities, real estate, private equity, directly, you know, if that chart didn't look like that, Yeah, and sure, some people have done better than others in capturing benefits from that, but what if it doesn't look like that going forward? And so for us, we don't really feel like we can add much value by providing beta to investors, and we think that they have it already, and what we want to do is provide them with something different and more tactical.

AI assessment note: “We're forgoing on a purpose. I think it's actually fantastic”

Q And what were some of those key lessons?

A I was surprised. Finance guy, it's transactional. This is expensive to that. This dog looks cheap to that dog, you know, and, and how do you arbitrage that? And, and these guys are like, um, okay, well, this is a good investment, but how can we actually affect change? How do we make a difference? And like, I remember those guys early on, and they'd done it amazingly, brought in kind of incredibly high level politicians, business people. So like, if they're, you know, getting a company to expand into China, like, we'll make a call. We're, we're actually going to add value as an investor. You know, if you're going to do this strategy in Southeast Asia, we've got these kinds of connections, you know, really, really thoughtful adding value. And that, that was like, wow, you know, you can actually kind of move the spread in your favor. Yeah. That's kind of cool. So that was interesting, and that company ultimately got sold to Verisign, who was the big player in that space, and that was the first time I took a pause in life, and, and really thought about what I wanted to do next.

AI assessment note: “We're, we're actually going to add value as an investor.”

Q So if you take a step back, you've got a Japan opportunity set of electricity trading. You mentioned Korea. You said something about China rolling over. How do you think about portfolio construction?

A I think we start first with how do we create a low beta core portfolio that allows us to be patient? So if you think about in some ways how we think about ourself, we're trying to combine The best attributes of a multi-strategy hedge fund, a fund of funds, and a private equity fund. And they all have all got their pluses and minuses, right? So we want to have the direct trading capabilities and infrastructure to, to go quickly. We want to have the access to information and experts that you get from, from a fund of funds kind of flow. And it's, it's fascinating. So we can, we can go anywhere and people want to talk to us and they really want to tell us their best idea. And that's fun. And then we have the ability to take really long-term bets. And so even if we're seeding people, We can provide working capital, which is a little different. We can provide LP capital. We can say, we can start with a question, Mrs. Manager, what do you want? Not like here's a prepackaged program on how we seed people. So getting back to your, your question, we want to start with building a portfolio that gives us the time to be patient with our research and with our tactical bets and some of our longer term bets. And, and that in of itself is not easy. And so we've really gravitated more and more towards Things that have limited capacity, things like I mentioned that may be kind of in the small cap…

AI assessment note: “we start first with how do we create a low beta core portfolio”

Q Yeah. With your background and Pete's background, understanding deeply what's happening in spreads and quantitative investing, what's your perspective on active equity investing? Whether it's long only or long short hedge funds, this general perspective, given what you know about what's happening in the quantitative world.

A You know, it's a good question, and I know you've thought deeply about this topic, and there's a big shift going on. There's the quantification of almost everything. There's the big data of almost everything. Passive has really trounced a lot of active for, for many, many years, and just taking the hedge fund space and going back to our origins, you know, we have this view there's gonna be a lot of money flooding in. It, it dwarfed what we expected by a factor of five. And so, it's really hard to create a lot of active alpha when there's that much money in the space, and when a lot of the similar approaches, we're now almost on third generation, meaning, like, some of the early hedge fund folks have spun off, and then there's been spinoffs of those folks, and maybe in fourth generation, just saying it out loud. So, the techniques are there, the process is, is there, and there will always be people that are good at active management, and I think that You know, um, we're a believer. We're a little bit more skeptical in places where there's a lot of capital. That's where in places like Korea, where it's a huge equity market and you can count the number of good hedge funds on one hand. So we think it's a secular play. That's why we built a business there, a hedge fund business there, and we expect to be there indefinitely. And in some of the other spaces, it's getting harder and ha…

AI assessment note: “it's really hard to create a lot of active alpha when there's that much money”

Q And what did it look like trading on a fixed income desk back then?

A So different. So different. You had, stepping back, you walk on the trading floor, it's different than today, but back then it was hard not to be in awe. You could feel the momentum. You could feel the energy, right? This is before electronification. This is when there were big personalities. You know, you were in the transition period between The lacrosse team players who are these aggressive old school traders, right? And then kind of the beginning of the quants. And my first boss at Lehman was, was kind of one of the, the wave of, of kind of early quants to come in to say, hey, let's use some computing power and let's really study these relationships between cash and swaps and Ted spreads and basis trading. And, and, and again, going back to my SysKyna days, it wasn't about like, hey, is the bond going up or down? Like, who knows? You know, in, in, in 94, by the way, When the Fed, the, the surprise rate hike and kind of vast, it was all kinds of mayhem imprinted on me that there's some things out there that are bigger than any kind of given, given view of the markets. So I kind of confirmed my Susquehanna view on kind of relative value, but it, but it looked to your question. It looked really different. There was a tremendous amount of energy. It was this exciting shift where technology was just coming in larger than life characters, right? I mean, those liars poker was writ…

AI assessment note: “You could feel the energy, right? This is before electronification.”

Q So if you look back, AQR started at around the same time and similarly had a pretty rough start for the same reasons. What was it at that time that had you decide, you know, we should wind this down and they sort of clearly kept going and ascended from there?

A Yeah. And it's a great question. And I, such tremendous respect for AQR and what they've built. And if you think about the different paths, right, they start and they go right into the 98 drawdown, right? So the same draw to me a minute went into, and it was, it was, it was an ugly time. And they were, like all of us, assets were, were flowing the other way. It was going to be very hard to raise capital, new capital in the space, and they did an amazing job of, of holding on to enough assets. And it was still, you know, that long value short growth was also, remember, 99 wasn't really, that wasn't really fun, right? Because that was when every tech stock was kind of flying through the roof, and that took out some, some other big kind of fundamental value managers. But then when the market's corrected, all of a sudden long value, short growth looked really, really good for, for many years. And so that experience and kind of how AQR was able to stabilize is, is maybe my one bullet point for being in the asset management business, which is stay in business. If you believe in your strategy, if you believe in your team, what is the X factor you need? You need duration of capital because you need to be around those times. And every decade, there's maybe one or two opportunities where there actually is Lower hanging fruit and it is easier to make returns, but you gotta be there. Yeah.…

AI assessment note: “such tremendous respect for AQR and what they've built. And if you think about”