The Exchanges

Q Which two people have had the biggest impact on your professional life?

A I'm gonna give you three people. My father, who I've already said, gave me the IQ in terms of how to think about risk-reward, which I think is just ingrained in me in thinking of distributions. My mother gave me the EQ side. She is not only an incredibly nice person, but following up from my grandmother, she just, if it wasn't for her, she balanced out my father's strengths, and so my EQ is there. The third person is my oldest daughter, and the reason I say that is I had my oldest daughter When I was 22, so I was very young, had not finished college yet. So she became a motivating factor for my AQ, because I didn't want to let her down. And so that inspiration, and the reason I bring it up that way, people always have like mentors, always have stuff, but my IQ helped me when I finally did start to focus at school and when I got the job at Morgan Stanley. My EQ definitely helped me with the politics at Morgan Stanley, but also the managing people and mentoring people and helping people grow. But if it wasn't for the AQ and the get back up and the whole thing with Rocky Balboa and for Piney, it's not how hard to get hit, it's how fast you can get back up. And I believe that those three people had a huge influence on just my ability to do things.

AI assessment note: “I'm gonna give you three people. My father... My mother... The third person is my oldest daughter”

Q So what was your path there? You started a controller. Reading some options books on the side, like most controllers do.

A Yeah. I'm going back. First of all, it was an interesting group. So when you get into a controllers area, there's a lot of people that wanted to be controllers for life. They had accounting degrees. I didn't like accounting. So I quickly decided that I was going to use those analytics and start building out a risk system because options at that point, this was in 1992. So options were still kind of a new thing and growing for Wall Street. And especially coming out of the crash in 1987, that's really when the option market started to take off and people started to, to really want to have puts, and we started having skew, and we started going through. So I got the ability of doing a lot of analysis. I started coding to some degree. That was my first risk analytics build out that I did to analyze the P&L and to do the exotic options. And a couple people on the trading floor took a liking to me, and like most people that I think have moved up the ladder at those organizations, The politics is a big part, so if you kind of get a mentor that takes a hold of you, and I remember that there was a person specifically, Dave Newbert, who was doing emerging markets, had been brought into the firm. He had spent a lot of time with me trying to understand how I did the analysis on the P&L form, and he just said, you should be up here trading, and he eventually brought me up, and so in 1994, on…

AI assessment note: “I was now leaving controllers, joining him in terms of running an emerging market book”

Q So what lit the spark coming out of school then?

A I got an offer to go to Morgan Stanley to start in their controller and risk management area. And I'd say when I got there, I was lucky. And sometimes you just get lucky. I ended up being a controller in the derivative area. So you're good with math. You graduate from Manhattan college. You kind of end up at this level where what you're really doing is doing the P and L analysis for option traders. And they were all extremely good at math and they knew something I didn't know a lot of. So the spark came from a, I'm a competitive person, played a lot of sports and wanted to be as good as them and decided that I would learn how to be an option trader by reading Books. And at this stage, I think I could count on my hand how many books I had read. I really did not finish books. I couldn't keep the attention span for it, but I did read a lot of books on option trading, and it led to some good things at Morgan Stanley.

AI assessment note: “the spark came from a, I'm a competitive person, played a lot of sports”

Q So when you see important macro inflection points that you think even today other investors may not have interpreted the same way that you did, does that filter into what you're doing in the portfolios when the individual PMs or have these risk-constrained portfolios, and how does it if it does?

A My job on the macro stuff, I think, is to help with the Bayesian side. So I'm trying to be like at a poker table, walking around the poker table and helping the individual players, not by telling them what's in everyone's hands, but by highlighting, you know, you've got this on there, they just bet this way over there. You sure this is a good risk reward at this point? So I'm not telling him what to do, but just to give you an idea, last year, size was a volatile factor. So initially, We saw small cap outperform large cap right around April when the tariffs started to go into place. Made sense. Okay, tariffs are going into place. Multinational companies, large cap companies will be more affected. Domestic companies will be okay. The US economy is fine. Global economy is bad. Then all of a sudden, we started worrying about growth. And around June, July, you started to see the large cap. Oh, we got to go buy large cap because the balance sheets are better. I'm worried about GE. I'm worried about all this stuff. Whether I'm right or wrong, I'm generally, like I mentioned at the beginning with my father, I've been trained to To try and find things that are high reward, low risk scenarios. So if I think those things, what I end up doing is we have a meeting every morning for 15 minutes, so I follow the 15 minutes is a good amount of time to keep people's attention. And we sit down a…

AI assessment note: “what I end up doing is we have a meeting every morning for 15 minutes”

Q Well, it's been a little while. I'd love to start with just an update on the firm. I think the last time we did this, you were shy of two billion, a bunch of ideas of how you were going to build out. So what's happened?

A Yeah, it was, I think it was early 19, and we were just south of two billion. We're now at four billion, and most of that growth actually happened during COVID, which has a lot to do, I think, with building the analytics out for the marketing side, but also, I think we spoke about this the last time, we were already using technology to show data visualization of what we do, And I think that helped with both the traditional hedge fund that we have, but also the fastest growing product that we have is our liquid all that has really been the biggest change since we last saw each other. We've done a lot of customized things for the insurance industry. We just launched the usage for international distribution on the strategy, and we already had it as a mutual fund for the RIA world. And that's been growing. And I think As I look back where we spoke about, my belief has always been that rates would be stuck at low levels. We're still at that space, and I continue to believe that they'll be not only lower for longer, but lower forever, and that's putting more pressure than ever on allocators, and I think one of the things we've had success with is this kind of story that, hey, if you need something that's both uncorrelated, but you also need something that has a sharp ratio that is where traditional Fixed income used to be. You need help with that. But then one other thing, and I will…

AI assessment note: “We're now at four billion, and most of that growth actually happened during COVID”

Q So if we looked at your baseball card, or in this case, it might be your, your track record on horse racing. How does the work you do sync up with outcomes?

A Well, here's the funny thing, and this gets back into the Evergrande thing. If you're a good handicapper at a horse race, remember there's usually six to 10 horses in a race. This is not a binary thing. So you can win theoretically only 25% of the time in terms of your picking the winners and make a lot of money as long as you're never betting on the favorites. And so I always start with the side of get rid of the favorites. So I think I've Pick the winner in three of the 11 or 12 that I've written on. One of them was disqualified. This was two years ago. So that was only two of the 12. So I'm, as a baseball player, I'm horrible. The two that I did pick ended up paying a lot of money. So it depends on how people bet it and go through it.

AI assessment note: “I think I've Pick the winner in three of the 11 or 12”

Q What was the first sort of adaptation that you found you had to make? So you started in You've got the crisis in oh eight. At what point in time did things shift and how did they shift?

A Well, getting back to the reason why George was interested in speaking to someone, George had gone through a long time period where not only had they been highly successful, I think the, the family office returns were above 50% a year. So when you compound at 50% a year, you're, you're really doing well and numbers grow big quickly. But also for him, the drawdowns were very limited. It was 2005 when we met and earlier on in that year, there was some issues that were going on with Delphi and General Motors and some downgrades and things along those lines that caused some disruptions in the credit market. The portfolio had a drawdown. So they had made a lot of money and then they had drawn down. So that's what led to him going, okay, I got to change some things. So the first adaptation was really bringing in a risk philosophy that had limits to the managers. And I would say we started the process of more transparency. We, Focused a lot as a risk committee before we launched. There were people that had been here, Rick Doucette, Apollo Wong, and some others that were very good on the risk side that had built out some systems that were fantastic. And we just added to them, and I think we expanded that as a group. And that led to the first part of just trying to make sure that you could navigate things when crisis would come. So if you go back to the Mexico days, one of the beliefs I…

AI assessment note: “the first adaptation was really bringing in a risk philosophy that had limits”

Q What long-term themes do you see coming out of this? You've mentioned technology. You mentioned briefly crypto. I know you're big on health and longevity. Let's start with crypto.

A I did write a paper at the end of last year, basically titled Bitcoin is finally an asset and it should be thought of as a part of allocators portfolios. I still believe that. And whether someone puts a half a percent in or one percent in, it has to be viewed in your belief of the blockchain. It has to, it's the fuel behind the money coming to it. Now, where I believe crypto, if you look Two things across disciplines, and you kind of think about it. The blockchain in all of the things that it does, it's about decentralization. Decentralization is going to be a major theme for the next 10 years, and I don't think people should underestimate it. Just by focusing on web three for a little while, you start to understand really very quickly the amount of people involved in a transaction like buying a home. Like how much Friction there is in completing transactions. And the reason I bring that up is we have a labor shortage. We need to find things that will help the labor shortage. And everyone goes towards robotics and artificial intelligence. I don't want to burst bubbles here, but I'm still am a skeptic on artificial intelligence and have focused on a human plus machine approach as opposed to a machines are better than human belief. I just don't have it. And I think the blockchain is an easier, more elegant solution that Is harder for the government to stop than say robotics are g…

AI assessment note: “Decentralization is going to be a major theme for the next 10 years”

Q So one of the things that's always baffled me about these multi-manager platforms is you control the risk, you have objectives for risk return, chart ratios, whatever the case may be, and it all makes sense from a risk perspective, but how does the individual PM make money?

A Let's assume because we're running a neutral portfolio, let's just use market neutral. Let's assume everyone is dollar neutral each day. And they have 35 longs, 35 shorts, and every single name at the end of the year is up five percent. So the only way they could have made money is if there was a lot of dispersion in between the ending. So it's a combination of the dispersion on some type of time period and the volatility in the marketplace. And that's what we do. So going back to Georgia's roots, we have liquidity providers. So we're trying to find people who are comfortable providing liquidity. And the Arbitrage or the edge that we think exists is there's not a lot of liquidity providers right now. Dodd-Frank really neutered the sell side in a very big way. There's just not as many prop tests. They can't hold positions in these things overnight the way they used to, so their balance sheets are under constraint. There weren't a lot of liquidity providers to start out with. People were more momentum-based, but I think the liquidity providing mechanism has just been better. There's less liquidity, so you're getting more of these one-off Shocks. And so I think for us, one of the reasons that we have been able to be consistent the last three years in a challenging environment has been that there's been more dispersion opportunities. I think that all started in August of 15. Two th…

AI assessment note: “the only way they could have made money is if there was a lot of dispersion”

Q So much of this data is easily digestible and understandable in the equity markets, and it seems like as the equity markets have gotten more efficient, the ways of looking at factors and analytics have gotten more efficient. How do you think about applying it outside the equity markets?

A That's been a challenge, and we've spent a lot of time on it. So let's use the credit markets. We do use the analytics for the commodities markets and the FX markets, but it's very limited, and you're not dealing with a lot of different components at the end. Because the equity market has so many companies, and it's so global, you're dealing with thousands and thousands of opportunities for alpha and for measuring data. The problem with commodities and FX, you don't have it, and the problem with credit, which is the place that I thought we'd kind of go down this path, but those views have changed significantly with my belief on what's happening with Corporate credit. I just don't think it's ever going to get there because liquidity's dropped off. So the problem is, what does it matter from a factor basis if things aren't even trading? And we've entered this point in the credit markets and the debt markets in general, where it's people buy them and they just hold them. So there's not really a lot of trading going on. And I think now that the investment grade market in the US, and specifically the lowest grade of investment grade in terms of the triple B area, That is where going forward, the paper I just wrote talked about fallen angels, and I think that's gonna be a phrase that people are gonna learn more about, but I think the credit markets are gonna go through a big change. …

AI assessment note: “That's been a challenge, and we've spent a lot of time on it.”

Q Are those eight factors kind of traditional factors? You think of momentum size, sector?

A The fundamental factors I think for everybody are the same and value, momentum, quality, everything along those lines. We also use cross asset risk premia. We also spend time on macro factors. We also do customized factors. So we've gotten into a world that I think is more thematic. Just use the tax cuts. So there were companies that benefited from tax cuts that didn't. That doesn't show up as one of the factors until they're all working, and then it shows up in momentum. But in the interim, we want to know if that is a factor that's there. So that is a pattern recognition side, and it's one of the machine learning techniques that we try to use is, is matching up factors that we can create. So I will create a lot of factors that I think are important. So if I see this interesting thematic idea and Goldman Sachs sends it to me and it's been working, Then I will take that, put it in our system and overlay it with a bunch of our teams and see if they've ended up in the same thing. Most of the time, it's not even intentional. It's just ended up that way because they like the momentum is happening in the earning stuff, but now they're aware that, okay, I have this factor, so I should be aware of what could change it. And then the psychological side to me that I bring outside of the analytics is a belief that For human beings to be able to be more flexible and have behavioral alpha, …

AI assessment note: “The fundamental factors I think for everybody are the same and value, momentum, quality”

Q So is the card itself the visualization of some of the important metrics that describe how that portfolio manager behaves?

A It's broken up into about four parts. The first one is their performance measures, which is very traditional morning start type stuff. So there's some things that I think are more creative, but that stuff I always say is the most boring part of kind of going through it. The second part is the factor part. So that really gets into the time series regressions and the holdings based work, the two of them to show the manager, A, what their factor risk is today. But most importantly, and I think the thing that separates what we do from most vendor based Systems I've seen, but also as PMs have come in, this is what they've appreciated the most, is seeing how static their factor risk is. So how does it change over time? So we can mouse across over the last year and see, well, you have momentum on now, but you were short momentum, you know, six months ago. And that means they don't have a complete bias towards momentum. We have other people here that have ridden anti-momentum the whole time. And normally those types of teams wouldn't be here, but the one I'm thinking of, they've been up all six years, they've managed money. They run anti-momentum all the time. To give you an idea, their portfolio right now, if they had it on the last 12 months, would be down probably about 20, 25%. So they're in losers versus winners. Value hasn't been working, yet they've made money six years in a row…

AI assessment note: “It's broken up into about four parts. The first one is their performance measures”

Q Yeah, yeah. Before we move on, any other things that pop into your head as important lessons you learned in your years at Morgan Stanley?

A I've given you kind of the pros. One of the most important things, and the reason that I left, was a negative. At some point when I came back from Brazil, where I think at the beginning of the office there were 10 of us there. So it was a little tiny thing. I think the last number I heard down there was over 200. So the office grew from that point into a big office. But when I came back to New York and they said, okay, here's your book, and these are the people you're managing, and it was a very different experience. And I think when I left or made the decision to leave in 2002, the major reason was that I realized that whether it was because my father and his entrepreneurial side, whether it was my introvert and just Liking things kind of quiet and going through it, or whether it was growing up in a divorce household and really wanting this team atmosphere that I had in my sports teams where I really liked the camaraderie. It was very, very different at a big organization where politics were dominating, and I just reached a level where I realized that my job as I went higher and higher up was to fire people, and that was really what it was, and I didn't see the ability for the company Of that size to adapt. And I started to get into technology. I think the most important paper I read in the early 2000 was by, I believe his name was Jim O'Neill at Goldman Sachs and it was on br…

AI assessment note: “One of the most important things, and the reason that I left, was a negative.”

Q All right. So a little cautious on the credit markets. What are you most excited about in the markets?

A Well, I think the technology stuff dominated. So we had more excitement in terms of advancements in technology. And even though that'll continue, I think that was pretty much when the iPhone came in, we've, we've had a good run with technology. I think the next 10 years is going to be about longevity and advances in healthcare, and I think that's going to be the most exciting thing. Obviously, the biotech industry raised a lot of money. It's interesting that if you go look at the biotech industry relative or any of the small cap biotech industries relative to the NASDAQ or relative to the S&P, they've underperformed the NASDAQ, so they've underperformed tech the last four or five years. They've Basically been a market performer with the S and P the last five years. So they raised a lot of capital, didn't get a lot there. We should be getting through when industries take a lot of capital in and you merge in technology, which really helped with the cloud, which honestly, you know, you're talking 14, 15 where Amazon web services really took off. The healthcare industry has really been slow to this stuff. I think we're going to start seeing a lot of the benefits, but when you combine it with artificial intelligence, we will be solving a lot of problems. And I can't think of a more exciting period than figuring out how to solve Cancer and Alzheimer's in a way that gets bigger has hu…

AI assessment note: “the next 10 years is going to be about longevity and advances in healthcare”

Q What's your favorite thing to read regularly, or what reading do you almost never miss?

A Six years ago, I met a general who was a brigadier general in the Air Force younger than me, and we developed a relationship over our kind of knowledge of China. And he was the first person to suggest to me that I really should start reading on the singularity. And that has lived with me since that day. I believe everybody who's in the business of investing Should spend a lot of time reading stuff on the future and what it's going to look like. I say to people regularly, I don't think there'll be bonds and everything will be free in 30 years. I say it not as a fact or as a guess, but it's something I do believe is coming because of my belief in the impact that nano and three D printing and artificial intelligence and robotic synthetic biology and all these things are going to have and that there's a math behind it. That people will recognize when five G becomes more of a normal thing and just how the internet of things are growing. So I'm going to say the singularity, but I'm going to add one more because I've written a lot. And two years before I met the general, I also started taking some training in meditation and just an understanding of Buddhism. And, you know, my father is and was an atheist. And so I didn't have a lot of beliefs and I'm not a religious person, but I do believe in the concept of Of karma, and I do believe in the concept of doing good and going through it,…

AI assessment note: “So I'm going to say the singularity, but I'm going to add one more”

Q your investment management tech, request a demo at ridgeline.ai. And now, back to the show. That notion of changing your mind in the right way behaviorally almost implies that there's information that you're responding to appropriately. The more you make these decisions, the less fundamental information there may be. So what is it that you're measuring to say, oh, behaviorally, that was a good decision, that was a bad decision?

A As we've built out skills and biases, and I'll, I'll try to use a baseball analogy, because when Moneyball was first out, I think the focus got into the part of finding advanced analytics, so different analytics than what people were looking at. So we'll follow WIP, we'll follow Not just hits and batting average, but we're going to look at walks. We're going to incorporate everything in. So the baseball analytics just changed, and we started getting more analytics. And I think this industry has gone through the same thing. The other part is, if you want to make someone better, you got to show them their biases. I'm sure everyone has seen when you watch the World Series or the playoff games, and they have this box, and when the batter comes up, it says, okay, he bats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Try to only swing at the ones below the waist. Does he have the ability of doing that? And that's behavioral alpha. The ability of not letting your brain go after that high pitch is the problem. So it makes you both smarter that if you can see it. I always joke that the majority of what we learn as humans happens when we're young, and [...]

AI assessment note: “if you want to make someone better, you got to show them their biases”

Q And why? What is it about turnover that allows you to create the risk exposures you want?

A I think, 2007, 2008 was a year that people still have not put enough care in thinking about why this Really disrupted the hedge fund industry. So if you look at hedge fund returns back to August of oh seven, which was when the quant unwind occurred, if you look at the overall returns of hedge funds, and you just look at any measure, um, there's barely any returns, if any. You've had periods where it's gone on, but from that point, it's been very difficult. And I'm not blaming oh eight, because I think oh eight was just a cycle. Uh, we've had plenty of little cycles, but the iPhone came into existence in June of oh seven. And then quantitative easing came into existence in the bottom in oh nine. Those two things had a huge impact, I think, on hedge funds. Number one, you had the competition from the quants, which really started to grow once the iPhone came in. We had advancements, obviously, in the cloud and everything afterwards that brought the barriers to entry down. So the quant space just started to compete. And the edge that managers had, to some degree, was not having that competition. So finding data that others couldn't find, and computers are really good at finding it, But the second thing was we had a change in the demographics and in passive investing. So I think the money being managed by retail before oh seven and obviously before 2000 created opportunities because…

AI assessment note: “2007, 2008 was a year that people still have not put enough care in thinking”

Q What types of questions do you ask to try to measure AQ in someone you're thinking of bringing in?

A Well, let's see. Since people will hear this, um, let's put it this way. I ask people to tell me a lot of stories rather than one word answers. Stories for me involve a lot of different ways that people integrate themselves in the world. It kind of tells me how their brain works for solving a problem. A lot of them will be on storytelling. A lot of them will be on relationships that they have, experiences they've gone through. They'll be Geared a lot away from, well, what'd you do with in class? And what was that job worth? What did you learn from? I'm really trying to find people that have already gone through the journey of life and have learned a lot about themselves. So self-awareness to me is one of the most important things for, for people to be, I think it's step one to being involved as a person. I do follow a framework of thinking about the way people view themselves in the entire world. It's important to me. George Weiss has built a, a firm that, which is known for its culture. And we want people when they come in to collaborate, to communicate, to get along well. It helps us not only grow the firm, but I think it makes the environment, the work-life balance better for people. And I think especially after your COVID where people had to stay at home for long periods of time, and now the work from home and the flexible work thing is on one side. On the other side, whene…

AI assessment note: “I ask people to tell me a lot of stories rather than one word answers.”

Q you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. So this concept of negative real rates being driven by this misallocation or effectively excess demand for the paper is different from the idea that you'd have negative real rates because they simply can't go up because governments can't afford the interest cost. Which one ends up carrying more weight over time?

A Well, for governments carrying the interest cost for years, I joked behind closed doors and occasionally on stage where it wasn't being videotaped that there'd be no bonds in 30 years. I still believe that. And I used to say, well, bonds will be replaced by three D printers and nanotechnology. And there's other forms of it where I still believe that that's the case. You don't need to borrow long-term money when you can solve problems instantaneously, which is really what advanced materials and three D printers that in my mind is the end of It's scarcity, and scarcity is what drives bonds, in my opinion. If you have everything when you need it, you have abundance, it gets into the whole exponential innovation. I do believe in it. It's just not a question of if, it's a question of when, and the governments will be trying to stop it. Now, on the government side, they're going to keep rates lower because they can't hurt the distribution of wealth problem, and this is the main thing, is whether it's Japan setting up a wealth distribution council, whether it's China talking about the common prosperity, whether it's the US with The progressives versus the moderates, whether it's in Europe, every single part of the world is on this redistribution of wealth or protecting it, and you can't have rates go up to a major degree. You have to focus on jobs in the economy. So printing is just e…

AI assessment note: “Now, on the government side, they're going to keep rates lower”