The Exchanges

Q So what was it about Stan's ability to find and determine who he wanted to have on the team?

A I call it the enough rope principle. So there's this famous sculpture by a French sculpture named Man Ray, and it's kind of a hangman's noose. And the title is enough rope. And Stan just was willing to give people more and more rope. Sometimes it worked. Sometimes it didn't. And you knew very quickly. I started out as a stock picker in Europe, and then was helpful on the British pound devaluation. My contribution was just an observation that the British housing market, that mortgages there, floated with the base rate, which is their overnight rate. And if the Bank of England raised rates on Wednesday, mortgages went up on Friday. If they were trying to protect the pound, strengthen it by raising rates, The higher they took rates, they would be bankrupting the voting public. So I had some success with that, and I think I maybe came back to Stan two or three months later and said, like, I'm in charge of this portfolio. It'd be a lot easier if I could hedge with futures. Do you mind if I hedge with, yeah, go ahead, hedge with futures. Then it came back a couple months later, and this is before the euro. I said, you know, there are 19 currencies, and a lot of these little markets, Move up and down with currencies, so could I trade currencies too? And he thought for a minute, then he looked at me and said, yeah, do you want to trade bonds and commodities? I said, yeah, I'll do that.…

AI assessment note: “I call it the enough rope principle... Stan just was willing to give people more and more rope.”

Q What's the research process to connect all these dots to get to the point where you can have that kind of conviction in a macro trade?

A Just like with a stock trade, we set up the fundamental picture. So this is what could happen to the current account. This is how cheap the currency is. If it just got back to The historical level. So you actually have a framework and reference points for where it could go, and then there are technicals involved, which, you know, can be very different than stocks. You know, what would happen if the yen started weakening? Could there be a cascade effect because exporters have a certain position? When you get one of these Big major changes. A lot of times there's been a lot of position buildup over time. I think it was Nassim Taleb who says that lack of volatility leads to volatility. So you're also trying to figure out, okay, where's the market? And not unlike with the subprime trade, We had started putting on a short yen position. One of the brokers had seen us doing it and called and said, oh, well, we have this vol fund that will sell you all the yen puts you want. Great. And I think this vol fund thought they were picking us off because the end had been very stable, so vol was low. Maybe the vol on the screen was four, and they thought, well, if these guys would pay six, we'll sell them as much as they want. So I think they thought we were crazy to buy these things at a six fall. Like with the stock, the yen was bouncing around between 78 and 82. I thought maybe it could go …

AI assessment note: “we set up the fundamental picture. So this is what could happen”

Q So as you came out of school, where'd you take that?

A 1984, investment banking had just taken off. I didn't really want to do one of the two-year analyst programs because by this time I was hooked on the stock market. There was a service called Value Line that used to mail out these gigantic books on earnings. You get a trial subscription for 25 dollars, so over the years I had a trial subscription. One of my roommates had a trial subscription. Having known nothing about stocks and markets and currencies, I was hooked on markets. And I really wanted to do investment management. 1984, really only two firms, Brown Brothers Harriman and Fred Alger would let you do investment management right out of the school. So I went to Brown Brothers.

AI assessment note: “So I went to Brown Brothers.”

Q What was it that led you to leave?

A The mid to late-ish eighties, there was kind of this tradition of management breakfast that Goldman Sachs, Morgan Stanley would host a management breakfast for a company, and over those years, I'd gotten to be friendly with Jim Chanos, noted short seller also. He and I, I don't believe ever overlapped at Yale, but like with Jim Rogers, we had the Yale connection, and I just found that we were very simpatico in our questions. I would say the difference is that Jim is a pessimist. I am a cautious optimist. It was kind of back to the Jim Rogers mold of just deep dive research and does the story work? I concluded that I thought short selling could become an asset management category, and I thought Jim could be The white shoe brand in it, because a lot of the short sellers were these shadowy figures and planning stories and just generally had a bad name, and I thought that Jim could become an institutional brand, and I was the first analyst, the third employee.

AI assessment note: “I thought Jim could be The white shoe brand in it... and I was”

Q 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. In this cards backgammon analogy, when you're investing, now you're taking on the full macro strategy. From everything you've been through, everything you've learned, how did you set out of what you were trying to do at KeySquare?

A On the investment side, we just wanted to have a couple of big positions, manage them well, and pick out the big things, try to keep the noise out. We had a small, tight-knit team, and then we had 30 consultants around that, Those are people, some I'd worked with since the mid eighties. We probably had three new ones, three out every year. And the idea would be, okay, we don't need a Latin American specialist in the office. We have a great consultant in Latin America. We don't need a Tokyo office. We have a great Tokyo specialist. The other thing having been on the allocator side was to be an asset to the partners. So a lot of times we would have a major endowment come to us and say, we're going in on this private equity deal in Brazil. What do you think we should do with the currency?

AI assessment note: “we just wanted to have a couple of big positions, manage them well”

Q Are there anywhere else in the world that you're keeping close eye on?

A Japan. I believe that this could be a secular bull market. One of the few in the world. Abe had great policies, but he also had great stability. And then he was assassinated. Unfortunately, he was out of office when he was assassinated. I believe he would have come back. So now the Japanese are maybe back into this game of musical chairs with prime ministers. And then I think Europe is a big question mark in terms of policy and deindustrialization, and especially politics. I would predict that in the next 18 or 24 months, Marine Le Pen The bête noire of European politics is going to be president of France, and she's going to be president of France because the alternative on the left is worse than she is. So these populist politics that are a backlash to trade and immigration, and also it's just some very bad choices that have been made by the Europeans. German industrial policy, we're going to sell into China, We're going to use Russian energy to fuel us. We're going to keep a cheap currency because the Southern European states, which are now doing much better than Germany, we're going to turn off our nukes and make ourselves more reliance on German energy. I'm very interested to see what the German mighty industrial export machine does over the coming years.

AI assessment note: “Japan. I believe that this could be a secular bull market.”

Q How did you spend your time when you had so much more capital, so many different teams, George hovering as he was known to do?

A I arrived September, 2011, and the bond market in general just melted down. European bond market, especially the Italian bonds were still in melt mode. The idea was for me to reacquaint myself with the firm. It was 320 People to manage, a 120 investment professionals, and many of them not happy to see me there. So I was supposed to have 90 days to get in the seat, get to know people, the firm. I ended up doing I think five days in, the biggest trade I'd ever done was John Corzine's firm got liquidated out of their Italian bond position, and it was a three and a half billion dollar trade. I still had the index card that I worked it out on. JP Morgan called us, and I was able to say, we'll take the whole trade with the repo right now.

AI assessment note: “So I was supposed to have 90 days to get in the seat”

Q So alongside all of this trading and search for asymmetric activity, Soros back then was also known as one of the most successful backers of early talent of investment managers. What did that look like under the Soros umbrella?

A That was great because it's really affected my strategy in terms of The kind of organizations that I like. We were able to have a small, tight-knit, high-performance team, but we could leverage our knowledge by giving money out to other managers. So it could be someone who's fantastic at growth stocks. It could be a media person. It could be someone in Japan. It could be someone in Asia. And when I eventually took over at Soros, my philosophy was that A very good manager is someone you're proud to be invested with. They have good returns and you never have to worry about the phone call that things have gone pear-shaped. So that's a very good manager for an outside manager. A great manager would be someone who one, two, three times a year, maybe only every other year would come to this is a big trade idea. You should have it in your center book, or let me do an SPV for you.

AI assessment note: “we could leverage our knowledge by giving money out to other managers”

Q Soros was always known as this great macro manager. How do you define what that means?

A We back up for a minute, kind of the Soros, Stan Druckenmore slash Duquesne tradition. Everybody started out as a stock picker. George was a stock picker. He was at Arnold Bly Schroeder, and he had a list of 10 stocks. His research process was talking to his clients about his stocks. Somebody convinced him that something was a bad idea, take it off and add something else. And then he expanded into macro. Same thing with Stan. Stan was Very young, but he was the head of the research department at PNC Bank in Pittsburgh, and decided, kind of like my Brown Brothers asset allocation, he just threw away the asset allocation matrix and put 40% in oil stocks or something in the seventies. He was also a stock picker. I think macro permeates everything, and my style, still the Duquesne style, is that the micro drives the macro. We can get a huge amount of information from what companies are telling us. We can't predict the PCE deflator better than anybody. We can't have a better model for LEI, but if trucking companies are telling you the business is taking off, then that's very interesting. If Home Depot is telling you that they're having trouble keeping products, very interesting. If you are hearing from bank CEOs that credit cards are getting sour. You can make a lot of good macro judgments with that.

AI assessment note: “my style, still the Duquesne style, is that the micro drives the macro.”

Q When you're in a seat like that, that's as big as it gets in the financial world, How do you decide when it's time to move on?

A A couple of things. You have to think, what's the level of administration you're doing? Is that impacting your returns? My telos in my career has been, I want to do things I'm interested in. I want to keep learning, and I don't want to be bogged down. I don't want my day to be things that I don't like. Every day is not a good day. Every week's not a good week, but you want to have good months and years. So if you're on the wrong trajectory, there's that. Then I think that I had some differentiated views that maybe one other person at the firm didn't have. It's a real challenge as we get older to not become more negative all the time.

AI assessment note: “You have to think, what's the level of administration you're doing? Is that impacting”

Q How have you felt that being gay has influenced your life and career?

A It had a big influence. I had an appointment to the Naval Academy that I decided not to take in 1980, and we were broke, and so it was free, but Yale was very good to me. I worked three jobs in summers, and things worked out, and I think maybe subconsciously one of the reasons I was attracted to money management, the numbers are the numbers. It's not a sales job. You don't live next to clients in Greenwich, and they're going to give you commissions because you're at the country club together. I always thought your P&L protected you. And if I could add one more thing, I am probably the most quantitative person you'll ever meet, who's also very religious and very superstitious. I don't think they're mutually exclusive, but a lot of people do. I pray and have a rabbit's foot that my quant analysis is right.

AI assessment note: “I always thought your P&L protected you.”

Q How did that lead to your interest in investing?

A I don't know if it led to my interest in investing, but it led to my methodology in investing. Bruce Kovner has this great saying, I had the ability when you and I were together for the subprime trade to imagine that what had never happened before, a national recession in U.S. housing could happen. That this mortgage rot had permeated the system and that there was this new-ish form of instrument That could capture these asymmetric returns. That took imagination. We had a very distinguished mortgage manager come into the office. I think he'd actually written the Wiley book on mortgages and tell us what a great buy mortgages were halfway through the crisis, and I think his fund went down a hundred percent. He couldn't imagine that this could happen or that these tranches in the CDOs could be wiped out.

AI assessment note: “I don't know if it led to my interest in investing, but it led to my methodology”

Q Why don't you take me back to your early experience as a kid that led you to thinking about finance?

A Well, you know, in Little River, South Carolina, the only thing you knew about Wall Street was something bad happened in 1929. My dad had a lot of financial ups and downs. He was a real estate investor, a boom bust mentality, and he went bust twice. So that makes me think a lot about risk management, allocation, leverage. The other interesting thing about my dad was he had the largest science fiction collection in South Carolina. Probably not a high bar, but as a kid, I could point to Alpha Centauri on a map before I could point to Chicago, because he'd sit and read these books to me and would go outside and look at the stars, and one of our neighbors had an observatory, and it was all about imagination.

AI assessment note: “he went bust twice. So that makes me think a lot about risk management”

Q And how did Soros amass all this talent?

A He didn't stand it. It's a real management lesson. George really looks at the world in a different way and is a markets animal. I think the greatest investment he ever made was finding Stan, because in He turned over the portfolio, but was still kind of actively involved from the sidelines. Then the following year when the Berlin Wall came down, he was able to spend more of his time on philanthropy and rebuilding Eastern Europe. Stan really built the team. I got so spoiled working for him. I think The Duquesne employment contract is one page, and it's a, all compensation is at the discretion of Stanley Updruckenmower, and I only know one person in four years who's ever complained about being underpaid.

AI assessment note: “the greatest investment he ever made was finding Stan... Stan really built the team.”

Q How did you feel that that inhibited you from being able to express investing the way you'd learned?

A I think it was just the loss of asymmetry. If I had a bullish view on oil, ok, I'd probably be better off owning crude, because I remember at a point I did have a bullish view on oil, and the oil stocks didn't move, because they were looking more at the mid curve, or analysts were waiting for a price, whereas the oil price was going up. So what happened was I went back to the investors and said, look, we're gonna do macro. If you want, I'll take the lock off, and you can have your money back. We had a good run after that, but at that point, I'd been working since I was nine years old. I was 42. I had been financially successful, and I was just tired. There are two components to a hedge fund. There's managing the portfolio, Running the business. I thought I had an A team on the portfolio side. I didn't have an A team on the business side. So there's always this anxiety. So I thought I wanted to retire. I might've been a professor right out of Yale if I hadn't had a lot of student loans and I wanted to go back and teach. I remember having dinner with Stan and his wife and he said, F you, you'll be back in a year. You can't not do this. And he was right. That was my, to come and work with you, a protege. I thought I could be halfway back in with the fund of funds model, with the best ideas model, because for me, a lot of it, it's a competition of making money, but also what we do …

AI assessment note: “I think it was just the loss of asymmetry.”