Thomas Thornton (The past, present and future of Hedge Funds)

  • 00:00:30 Thomas’ experience at Wall Street (including running his own hedge fund and an insider trading investigation while working with Steve Cohen) and why he started his latest firm Hedge Fund Telemetry?
  • 00:18:40 How Thomas selects themes and timeframes for his daily newsletter?
  • 00:24:25 What Thomas thinks of the crypto bubble?
  • 00:35:44 Is deflation or inflation the bigger issue right now? Should low income jobs be made redundant?
  • 00:46:32 What it means to be a hedge fund manager? Should we aspire to become a Hedge Fund managers? How hedge funds prop up nascent ‘strategy managers’?
  • 01:05:02 Why and how should retail investors be exposed to as many financial instruments as possible?
  • 01:08:02 What fund managers does Thomas admire?
  • 01:14:02 What character types does the financial industry attract?
  • 01:29:38 Why are negative (or extremely low) yielding bonds of interest to investors?
  • 01:36:22 Thomas’ secret love for the Grand Tour/ Top Gear shows.

You may watch this episode on Youtube – #93 Thomas Thornton (The past, present and future of Hedge Funds).

Thomas Thornton is a former portfolio manager, senior trader, and technical analyst with Level Global Investors and Galileo Capital. Thomas is writing a daily investment newsletter at Hedge Fund Telemetry.

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Torsten Jacobi: So we’re really curious what you’re up to with your latest startup. We know you have a checkered history. You worked on Wall Street for quite some time. For what I know, your latest startup is called Hedge Fund Telemetry. Maybe you can tell us a little bit more about what you do now and what you experience in your career.

Thomas Thornton: Okay, well, let’s start. I worked on the sell side for Morgan Stanley in the 90s and I covered middle market hedge funds and I ended up in 2000 going to work for one of my clients to be the head trader for one of their, actually two of their hedge funds. It was mostly a long only firm, but they did have some hedge fund exposure and I was happy to join. It also happened to be the top of the tech market and they were a growth type long only firm and we had these hedge funds. So one of the things that was amazing is that I learned firsthand how hubris fell into an investment process and really almost ruined the firm. Actually, let’s just say I didn’t ruin it completely, but it really peaked. They had $15 billion under management and the hedge funds did very, very well because we were able to short, but they were still buying technology, healthcare, biotech, all at the peak and when they see Yahoo at $200 and it goes to $100 and they’re like, we got to buy more and in the hedge fund, we were just looking at it saying, this thing is going a lot lower. So as it turned out, the founder of the firm unfortunately got cancer and the firm sort of went through an implosion and that was around 2001. I launched my own hedge fund with another partner and this is the tech bubble had burst 9.11. It was a month after 9.11 and trying to raise money in Los Angeles where I lived at the time was just impossible and we ran the fund for a year. We had great 40% returns. However, my partner, his wife got pregnant again and he said, look, I’ve got to go back and make some real money and stable money. So he went to another mutual fund. So I was sort of left saying, okay, what am I going to do? And I was recruited to move to Greenwich, Connecticut and work for a startup hedge fund. Some guys that were very, very highly regarded coming from SAC, they were the top lieutenants for Steve Cohen. And so it was a very exciting time. I moved my wife and three daughters to Greenwich. It was quite a change in scenery but we really fit in and I worked for the fund until 2011 and we got caught up in the insider trading scandal that Steve Cohen was involved in with Diamondback and another one in Boston. Our firm was rated by the FBI in sort of a calculated move to bring publicity for Preet Bharara. And I remember the day vividly, it was a Monday and on Friday, the Wall Street Journal after the market had closed said, they had this report saying, these expert networks is insider trading ring and they’re circling some hedge funds. And our firm really didn’t use expert networks that much. And I thought, okay, I wonder who’s going to get hit. So as it turned out, Monday morning, I go into the office. I was running late. I commuted to New York City because our office was there and we had one in Greenwich as well. And I’m late and all of a sudden I get in the elevator and these two FBI agents with the FBI jackets and it was like right out of TV are in there and they said, you know, what floor? And I said 17 and they already had pushed it. And so I was like, okay, this is going to be interesting. So I get there. We have this glass conference room. I get there and everybody’s in the glass conference room. So I’m like, my heart’s racing. It’s just like, okay, this is going to change everything. So I’m not going to go into all the details, but at the end of the day, my one of my partners, senior partners was indicted over a year later. And he was convicted and then he was exonerated fully. And even the Supreme Court decided not to take up the challenge to retry him. And I’ll be very honest. We had an analyst that we had fired almost a year before all this that was communicating with another firm on their Yahoo account and getting ideas. So it was about eight people removed from that. So they were getting it from other people. And then he would put that info into our analysis. Now, the thing that was really crazy is that the idea that they didn’t have any specific thing on us. But what they did is they took all of our records and all of our emails and they found an idea back in July of 2008. And remember, that was right before the market was about to implode. And we had already seen a lot of problems happening in the tech sector. I mean, when you have a market in the financial sector where they’re laying off people, it wasn’t hard to spot that there was going to be technology weakness. So as it turned out, I was the person who came up with the idea to sell short Dell. It wasn’t that hard. We knew sales were going down. Intel had just announced bad earnings. So we started this short position in Dell. The fundamental analyst who covered hardware started to inject some of that info of what he had heard into it. And as it turned out, they indicted my partner on that particular trade and the trade worked. It wasn’t hard when everything was imploding, when Lehman Brothers blew up, that we covered our short. We made money. And it wasn’t a tremendous amount of money that we made considering we were $5 billion fund. But that day when the FBI showed up, everything changed. And I just knew that I’ve had a great reputation. I was one of the senior traders at the firm. I did a lot of market sentiment and technical work on every one of our positions, global markets. And as it turned out, it was very, very tough on me personally, financially. We really just got caught out with this unexpected news and the firm shut. You just can’t continue.

Torsten Jacobi: It sounds like the story straight out of billions, right? The TV show. There’s a constant battle between the FBI and the prosecution. And in billions, you feel like they do something dirty, but you never really know, is it actually illegal? So obviously the show doesn’t go into detail. It’s an entertaining show. And I think this similar issue, I think a lot of people have with what’s going on with insider trading laws. A lot of us, including me, believe that should never be a crime, shouldn’t be illegal in the first place. It’s ridiculous. But it’s the law. It’s the law. But it’s very tricky to find those definitions. And I think this has been going on for a long time. When is actually really, when we see clear cut case of insider trading, because as you said, there’s information that comes from many different sources. And when do you make that decision to put a trade on, right? That could be 50 different people who talk to you over the course of years. And then you suddenly say, okay, now I’m making this trade. But often, you don’t really not be even aware, especially as you say, it comes through many different layers. So even if it was an insider source, it gave you guys that information. It doesn’t mean that it would have any impact, right? You might have ignored it most of the time. And then this time, because it was layered into lots of other preceding information, it was actually more relevant. And I’m not really familiar with that case at the time. What happened with the expert network? Did that lead to many different indictments? What happened? You just tangentially mentioned that earlier.

Thomas Thornton: Well, as it turned out, the expert network was not a source for the information that we got with Dell. And again, it was like eight people removed and people we had no knowledge of. And we just heard through the grapevine of what we heard. And just remember, any analyst out there, whether it’s from a hedge fund, a mutual fund, from Citibank, Goldman Sachs, they’re all looking for some sort of edge or some sort of data point that will be part of their mosaic. And remember, I’m a technical person. And so the indicator that I was using was from Tom DeMark. And as it turned out, everybody was exonerated. I never had any phone calls, any conversations with anybody. Because if they did, they would say, oh, you’re looking at this little red number going down on a weekly chart for Dell. That’s all I knew. And that probably would have just blown their case. So they looked, they, it was a very political minded thing. I think SAC was more involved with expert networks back then than we were. So it just was, look, our guys used to work for Steve Cohen. They thought, oh, get these guys, they’ll flip for some reason and offer up Steve. And look, I have a lot of respect for Steve and his team. I think he’s built a great firm.

Torsten Jacobi: And it seems very political, right? It’s a Southern District in New York, right? The prosecution that seems extremely active in that area, very politically driven.

Thomas Thornton: Well, when you have the press already there when the FBI shows up, you know, guess what? Exactly. So it was, it was a tough time. As it turned out, and I’ll just, you know, go. It’s a good war story though. I love it. Let me tell you, you know, you sometimes experiences, you learn experience through very difficult times. And as it turned out, I ended up a year later going to work for one of the founder’s family office. And it was a small family office. I was the head trader, did a lot of analysis, wore a lot of hats, and it was really, really enjoyable. And at that time, I started to come up with an idea because I put out research among our old firm and within this family office that I got a lot of information from different sources from the sell side, from derivative traders every day. I looked at technical stuff in the market, sentiment, and I was putting that out. And I thought, what if I did this for more people out there, more funds? What if I set up a business where I sent it to some of the top hedge fund people out there, or mutual funds, or just even, you know, traders out there? And so, as it turned out, I didn’t do it right away. The family office trading aspect changed and the founder decided that he’d rather trade less, enjoy his life more. He was financially, you know, over the top successful. And so, I raised some money for some private equity funds. I raised $50 million for Alibaba, pre IPO, which was like $15 a share for Alibaba. That did really well. You bought them yourself. Well, just a little interest, not enough, but it worked out. So, then in 2017, I was asked to go to work for a friend at a small sell side boutique in New York City. And this was a broker dealer. And I was putting, they said, can you put out your research again to some of our clients? So, I started doing it. And I sent it to about 10 or 15 of my friends who were large hedge fund managers. And so, we had large pensions, you know, CalPERS and all CalSTRS and all these big pensions, black rock and big mutual funds that I was talking to all the time. But I made no money. And I really kind of hated it. So, what I did was I started sending it out because a trader, one of my old financials trader said, buddy, you’re not making any money there. Why don’t you put it out there on Twitter that you’d offer your research out and then set up a newsletter? So, I did. And I put it out there like anybody want this for free. And I had that day a thousand direct messages on Twitter. And so, I called my website friend and I said, I’ve got to get something going on immediately. So, I ran it for free for a while. I built up a nice following. I started going on Real Vision, Raoul Paul and Grant Williams are old friends. And so, I did these interviews. And I will be honest, the first couple of interviews I did, I swear, I was like, I have no idea what I’m doing here. But it actually worked out. I built this following. I offered it to people all over the world. And now, I have this business where I put out every day a couple of notes that look at market sentiment, charts with remark indicators, screens, the way a hedge fund manager would look at things. I have trade ideas. I have a lot of macro top down. I cover a lot. And of course, I’m in the US and I have a US equity market focus. But I like to look at how all the pieces evolve together. And hedge fund telemetry, the name telemetry, comes from my love of Formula One auto racing. And I’ve been a big fan for a long time. And in the early 90s, maybe late 80s, they started to, the cars, the teams would start putting sensors on every piece of the car, from the brakes to the fuel to the engines, everything in there. And they would go around the lap and they’d go by the pits and wirelessly, all that data would be transferred to their computers. They would crunch it all together. And then the next time around, they would say, hey, Alon or Ayrton, move your brake balance on a sign. And so that’s now today very common for hedge fund or excuse me, for Formula One teams. They have just bazillions amount of data that go through. It’s all transferred through wirelessly, back to factories and they analyze it. So I would analyze all this data and then take the most relevant info and put it out there to my firm so they could basically balance the portfolio, the way I see it or add it to their thesis or their mosaic of how they’re seeing things. So that’s what I do now with Hedge Fund Telemetry. I have so many people that read it and it’s not necessarily, hey, buy this, sell that at this exact time. But it’s like, hey, this is the overall theme that I’m seeing right now in the markets. And it’s sometimes, oftentimes, very contrarian.

Torsten Jacobi: So we can think of it maybe as an expert, curated Bloomberg version, right? So Bloomberg is a massive amount of financial data that you can acquire, including technical data. But it’s also, it’s very difficult to find your focus, what actually stands out, what’s important. And you can go to mainstream news media, but that’s a very difficult story. And then there’s like stock tweets and there’s a couple of specific places, forums on the web. But how long is it in use that you would send out every day? Is it like two pages? How curated is it? There’s literally two tweets.

Thomas Thornton: I wish it was two pages. It takes, it goes out midday. And I like sending out something midday because most sell side firms, the brokers, technical people would write it the day before. And then it goes out in the morning and they read it. And overnight, everything has sort of changed. The futures are up, down, whatever. And so I like to get a taste of what’s happening that day. And I find it most relevant for people to read midday so they can make adjustments towards the end of the day, because I think that’s where prices really matter.

Torsten Jacobi: How do you keep different time horizons in mind? And we know that hedge funds have a quarterly time horizon, right? And then there’s a daily horizon. We want to position ourselves for tomorrow or what might happen next week. Next week, the market was closed, for instance, on Monday. And then there’s also a long term horizon that we know from million investing that goes more into, well, I’ve seen this trend. I’m just waiting for this catalyst. I’ve already seen the catalyst. I went and did this trade. But I’m waiting to get out of this trade. So there’s a bunch of different time horizons. How do you choose which one to focus on? Because it seems like a lot of stuff that isn’t a daily news, it’s just noise, right? It doesn’t have any impact when you look at stuff six months ago. It’s like, whoa, crypto went up, went down, nothing really happened in the end, right?

Thomas Thornton: Right. The problem I find with business news such as, I mean, really from newspapers to CNBC, they’re talking about what’s working today. And they’re talking about, look at it from an apple tree. Here are all the apples on the tree right here. You’re not going to get rich with the apples that are ready to be picked or be sold, basically. You’re going to get rich when you’re planting something in the ground. And all of a sudden, you start to see the green shoots come up. That’s where you’re going to get. You’re going to really make money. So they’re really more of an after the fact. And so what I do is I like to say, hey, look, I’m seeing a trend that’s going to start to develop here. I was very early last fall with energy stocks from and energy stocks had a tremendous run over 100%. And so I’m more of a, let’s plant something in the ground around an idea. And then let’s see how it works over time. And sometimes that will work. I mean, it doesn’t, well, so let’s just say sometimes it doesn’t work. And we can see that early and pluck that. And then there’s times where we can hold something for an extended period. As far as time horizon, I look at various timeframes and I like to see when they get in sync. My go to trading timeframe is a 60 minute bar chart. So I look at that as, okay, these are just swing trades of a nice place to position if I’m adding a position or taking something off. Sometimes when we’re in sideways markets, they work beautifully. I look at daily and weekly. And when I see the daily and weekly time horizons get oversold or as they are now a bit overbought on various indicators, I mean, basics like RSI, some custom formatted MACD charts that I use, I get a better sense that what will come next. And one of my old partners at the hedge fund used to say, I would be two weeks early all the time on everything on bigger moves. And what was nice, because he was a fundamental analyst, he could start doing his fundamental work when I started to see those things to start to develop. And that’s really what I have tried to do with hedge fund telemetry. I try to give people a sense where they can integrate some of the work that I do into their own process. I’m not trying to say, hey, my process is perfect or the end all go to it’s I’m a guru, whatever. It’s more, this is what I’m seeing when market bullish sentiment gets up at these high levels. And then when it goes down, it’s where you want to buy it or sell it here, buy it here. It’s pretty simple. For example, a couple of weeks ago, all you could hear about where lumber prices were skyrocketing. My bullish sentiment on lumber was at 96% bulls. It’s 22% today. Last March, or excuse me, March of 2020, my S&P bullish sentiment was at 4% bulls. And it reached 90% recently. And now it’s starting to diverge a little lower. So I think that we’re seeing some topping action happen in the equity markets right now. So I use a lot of different timeframes. I sometimes when the dailies are just trending up, I’ll wait for the weekly signals to give me a better clue.

Torsten Jacobi: I want to pick your brain on the cryptos. The crypto so much happened. And I always said that I always thought of crypto as a failed experiment simply because it was supposedly the internet payment system. And it doesn’t work for that, right? It’s extremely slow. You wait hours for your transaction to go through. There’s very high fees involved. It’s just it’s failed. And that’s what I thought in 2013. But what I didn’t realize is that the store value storage idea actually took off and took off massively. And now we view full, you know, I feel like 90% into this mania and the whole market cap of crypto of BTC, Bitcoin is very high. And it’s a massive bubble from the way I look at it. Obviously, there’s an underlying revolution. And that’s good. But the store massive amounts, maybe trillions in value into these crypto assets, it seems kind of random because there’s so many other cryptos that you could actually generate other tokens. What do you think of the crypto space? Has it reached a limit? Where will this mania go in the next couple of years?

Thomas Thornton: Boy, it’s a lot there. So I’m not I’ve never invested in crypto. I have what I do do every day is I analyze the price action in mostly Bitcoin, Ethereum. And I can say that in 2017, when it was going up, and it was a mania, and and everybody, you know, relatives were asking me, you know, should I get in? And it’s 16,000. And like, you know, no, it’s a little late here, maybe it’ll go higher. And also another thing, you saw so many outrageous price targets back then. And and so when you see these high, you know, oh, it’s going to 100,000, you know, by the end of the year, you know, there’s famous strategists that that we’re pointing out these, you know, crazy targets, I, you know, you just kind of get the sentiment when when that happens, you know, sometimes one really simple sentiment reading I always get is when you see price targets on anything goes sky high, well above something after it’s had a huge move, or let’s just say, when something’s going down, and they start making these much, much lower price targets, that’s a that’s a sign right there. My view on the fundamentals of crypto, I’ve always been a little skeptical because of my view is that this is a private asset, something that was created privately with zero regulation. And I’ve always thought that you would have more regulation come into the space. And in some places, you could just see it just get shut down. And, you know, obviously, that hasn’t happened. China’s doing a very, very big push right now through a lot of my sources. It’s coming from the highest levels of government, which you can imagine who that is, that they’re, you know, clamping down on not just crypto trading, but mining. And I think that’s also partly the environmental issues with crypto trading. So let’s just go back to 2017. When I was writing my note in December 18, 2017, I put out a chart of Bitcoin, and I said, look, we have a demarc cell countdown 13 here. If you’re involved in this, which I’m not, this is a cell signal. And it was basically the day after it peaked. Now, I also look at wave theory and Elliot wave theory. It usually the, you know, people are tuning out right now, but no, it’s actually very simple. And I don’t really subscribe to the old Fibonacci levels and all that from the very most strict sense. But what I do think is really important, and it’s easy for people to understand is if you go to Wikipedia and you look up Elliot wave, and they have the personalities of what each wave, what’s happening in each wave. Now, for example, in wave one, nobody really believes it. And then, you know, you have a pullback, so you got to sell it, you got to stay short. Then it goes up again, it surpasses wave one, that’s wave three, people are accepting it. And then it’s really gaining steam. And then you have a small pullback and you shake out some people. And then wave five is when, oops, hold on, ripping out my earbuds here, wave five is when you have total acceptance of everybody’s talking about it. It’s on CNBC all the time. Your relatives are asking about it. That’s the terminal wave. And I think right now we’ve seen a five wave move higher in Bitcoin. And I’ve seen, I’ll tell you, this last six months, actually more like nine months, I’ve seen several of my DMARC 13s on the daily timeframe trigger, and you see a 10 or 20% pullback. And for Bitcoin people, that’s a gift. And they laugh at the DMARC indicator saying, how could you be so stupid? This is a perfect thing, just hold on to it. But now we had a weekly one towards the highs, a little over 60,000. And we’ve seen a monstrous pullback. Now, the thing that really bothers me is that you have this environment over the last year of people, it’s just get rich. I want to get rich. I don’t want to turn one penny into a dollar. And so they’re buying up these meme crypto assets. The Elon Musk tweets about something and Dogecoin goes up. And it was a $90 billion market cap of Dogecoin, and I don’t know if I’m saying it right, but it went up and he was on Saturday Night Live. Everybody was expecting him to tout it. He kind of did. Then he called it a hustle, and the thing dropped. Now, it dropped so much that that’s a lot of money. If you think about it, that was $45 billion wiped out immediately. And the amount of leverage that these brokers and exchanges are allowing the retail customer to use is just egregious, and it’s wrong. And so I think that it’s a very difficult place when you see these meme type garbage crypto things going up, shit coins as they’re called. And that’s where people get hurt. And that’s where the regulation is going to come down, and they’re going to clamp down on it. And look, China’s clamping down because they don’t want competition for their own digital currency. I think the Fed’s going to have their own digital currency. China’s way ahead of them, and I think they’re going to try and catch up. And I don’t see the mania in Bitcoin going back to the same thing that what we’ve had. I mean, look, it could go higher. It certainly can. My view right now is it’s on the first wave down. Nobody believes it. People are still, you know, oh, you just got to hold it. And I’m thinking to myself, you just had a almost 50% pullback from the highs, and you’re just sitting there saying, oh, it’s fine. It’s Bitcoin. This is what it does. If I had a 50% pullback and I’m managing money for an institution or a fund, I’m out of a job. I’m going to be just murdered here. Oh, but it’s up so much for the year. It doesn’t matter. But the bottom line is right now that I think the buy and hold mentality for crypto trading is the wrong thing. People should be trading around their positions, taking profits at opportunities, not being too greedy to say, I’m going to put all my money in. I’m going to go on leverage. I’m going to buy garbage coins just because somebody on Twitter says it’s a good thing to do. Look, I kind of like the idea of an alternative asset like crypto. But I think it’s still, you know, there’s still a lot of risk out there. So that’s really my true view on crypto. And look, I’m thrilled for people that have made money. And it pains me to think of all the people that have held on or bought too high and have been wiped out here. It’s very difficult.

Torsten Jacobi: I think it’s a very thorough, very smart analysis of what’s going on with crypto. And I feel with all these manias, there’s obviously underlying factors that make a lot of sense. It’s great to have a currency. We all were very worried and many are still worried about inflation. It’s great to have a currency that’s independent of that, that has a good ceiling about how I think it’s about 2% of the potential added new tokens within the Bitcoin universe on the same chain. So I think there’s a lot of, like the internet, right? There’s a lot of good things about it that make a lot of sense. But it has gone into an extreme interest panel vision just like the internet bubble 20 years ago. And I think that’s a real problem as you just pointed out. But there’s something good that’s going to come out of it. And the idea that we get an easier way to store value, but also transact on the internet, that’s absolutely needed. And a democratic access to this worldwide without any restrictions is absolutely needed. It’s dramatic that this hasn’t happened in the last 25 years of the internet because it’s number one commercial marketplace where we don’t really have an unregulated or it could be regulated, but a global currency hasn’t taken off yet. I don’t think it will be Bitcoin, but lots of these ethereum 3.0, 3.0, or it might be maybe it’s Dogecoin, one of them will take off, right? Whatever that is, it might not be the one that we know right now, but there’s a lot of good in it. It’s just not the idea is not to buy one coin and hope that it all goes up. That’s ridiculous.

Thomas Thornton: I think the success of Bitcoin is not necessarily in the price going up. I think the success of Bitcoin is when there’s regulation and it becomes more accepted through other channels. Let’s just say, I don’t necessarily think it’s the greatest way of transacting business, but let’s just say when more brokerage firms, more regulation allow Bitcoin to be traded more actively, I think the price will more or less stabilize. Look, it’s a store of value that has a limited amount of coins. That’s why you have all these new coins that pop up and people say, oh, that’s the next big one. It’s going to go up and I want to get rich real fast.

Torsten Jacobi: The blockchain currency is highly inflationary. That’s the problem that people don’t see. We see this one sector, but there is millions of other coins out there that we’ve never heard of and they’re being created every day. All of us can do it. It takes five minutes and we can be able to create our own currency and that’s the ridiculous part. I think that’s just thinking in this truth. One thing that you touched on, I think this is really interesting, is that central banks and countries are coming up with their own digital currency. When we hear this, we see immediately, oh, wow, now the central bank is printing into money, but they’re printing it digitally. They don’t have to go through paper anymore. I think they only go through so much paper anyways, but they give it directly to consumers. It sounds a bit like, okay, UBI and massive inflation, we’re going to see this based on digital currency. That’s what is immediately the alarm bells going off, many investors hats. Do you think that’s going to happen or we go into more deflationary scenario? We see this all over the place now that technology and software is eating the world. Many, many, many things that we consider hardware and potentially inflationary, they just are not inflationary anymore. There’s a huge exception, healthcare and construction, but everything else we see in the world is eaten by software and just drops in price every 12, 18 months.

Thomas Thornton: Well, point out one thing first before I get into the inflationary, deflationary thought. One of the problems, if you do have a digital currency run by the government, and let’s just say they’re able to see basically what everybody has, what their assets are, how much they have in the bank, so to speak. Bitcoin was part of a movement to hide assets from exactly the governments. There’s a change in narrative with that. I think that there are problems with a government digital currency as far as privacy. Maybe gold will come back to be something that will be a bigger asset. I’m not a gold bug. I’m long a little gold right now, but I’m not agnostic and is gold. I buy it, I sell it, it goes up, it goes down. I try to find the right direction. But you’re right. Software is a deflationary tool. And if you think about the iPhone here, a lot of messages here. How many businesses, how many segments in technology has the iPhone taken away and created? Because the iPhone is, in my opinion, the greatest technology advancement over the last 20 years. The Internet, and then you had this iPhone that came and you were able to look on the Internet. Because you could on a BlackBerry, so to speak, the browsers were terrible, but you could. But this changed it all. It was like having a computer right here. You don’t have fax machines anymore, camera. You don’t need a camera. You don’t need a video camera. You’ve got it right there. You don’t even need a computer. You have a phone built in. You just look and think about what they’ve created. Facebook was just a business on a desktop. And then they got it together and they figured out how to do it through the phones, through mobile. That’s what took their business up. I mean, Instagram, they paid $1 billion for its worth more than Facebook standalone company today. You have YouTube on here now, so people can do videos and put it on there. You have Uber. Uber wouldn’t have existed. Lift. Nope. Door dash. No, but none of these would really exist without this technology. So you’ve really eliminated a lot of core businesses and you’ve created a lot of core businesses. Now, if you want to talk about inflation right now and deflation, you have two sides right now. The Fed is saying it’s transitory. There are some people saying it’s structural. I fall into the middle of this. I think there are transitory aspects that we’re seeing right now. Look, we’ve never been in a pandemic, so it’s very difficult to say with any economist out there saying, well, this is what we’re seeing prices go up in commodities and it’s never going to end. I think that that’s not necessarily true. But I also think that it’s funny that the Fed and the government are paying people to stay home. They’re paying people, they’re paying people, stimulus. The unemployment benefits are extended and extended. And you’re seeing a labor shortage. You’re seeing a labor shortage with the unemployment rate at 6%. It was just at 4%. There’s a lot of people out there that are saying, you know what, I’m cool staying at home or better yet, I’ll go back to work but pay me under the table. I’ve seen that happen. And it was on the news recently, a lot of restaurants, oh yeah, I still want to get my government stimulus, but I don’t want to come back and be a waiter or do whatever or cook unless you pay me under the table. So you’re seeing this dynamic here that the government, what if, since wages haven’t gone up in 10 years, we’ve seen no wage growth through this whole period of exceptional growth in the world, in the markets. That’s the one thing in the economy that hasn’t really gone back. What if the government is paying people to force competition with employers to have to force wages higher to incentivize people to come back? Now, I think that’s not transitory. That is structural inflation in wages.

Torsten Jacobi: But it’s more complicated than this, right? So when you say wages haven’t risen, that’s true. But it’s also this good portion of employees that make a ton of money. You know, I live in Silicon Valley, people easily make 200, 250,000 with three, four years of experience. And that’s not winning the lottery. That’s a regular, slightly advanced salary, right? There’s some options inside, but mostly it’s cash. So that’s a ton of money. And those have risen spectacular, you know, the last 10, 20 years. And I think what’s really strange is that we have these low end jobs, so to speak. They’re not crazy dangerous jobs, but they are menial jobs. And they haven’t moved at all. There’s a lot, there’s a layer above that, there’s few layers above that haven’t moved in a long time. And maybe it’s time to automate that way. A lot of people make that argument about slavery, right? They always say, well, as long as we afforded slavery, you know, it was cheap enough, right? So we didn’t have to invest into machines. The industrial revolution was held back. And once we realized we grew conscience, or maybe it was just cheap enough to grow conscience, whatever that point was in time, we abolished slavery. And then, well, we had to automate. So we started the industrial revolution. That argument to say, if it’s true, I’m actually not sure. But I feel like there is this argument that you need experience and you need to become an efficient worker through a job. And that’s correct, right? But if your job is basically, it’s the only opportunity to rise from that menial job is to have slightly less menial job. Maybe we are at the point where we say, well, we make it so expensive through what we’ve done, right? And so that’s kind of what’s going on in my heart, is we make it so expensive that we either double the salary in these menial, low paying jobs, or we just automate them away and have people sitting at home. That’s kind of what happens to most of us, I think, when we go through the next 20 years of AI growth.

Thomas Thornton: Well, automation is all around us. We see it, you go to McDonald’s today, and they don’t have as many people working there anymore. You go and you push buttons on their thing of their menu. And you see people working at McDonald’s. Does literally nobody there anymore? Yeah. And look, there’s benefits to that because the people that created the kiosks for you to order, they’re employed, they’re making money in their business. So everything changes in some ways for the better. In our area, there are toll booths or there used to be toll booths. Now it’s all automated. Now it’s just you drive through, you have your easy pass and you’re charged right like that. It eliminates a ton of traffic and time, and that’s what technology does. It eliminates time. It’s easier to get something if you walk into a room and your lights turn on for you rather than you have to go and find a switch. That’s the way, I mean, that’s the most basic thing of how it works. And look, I think that the government, I mean, if they really were forward thinking would really make education, not necessarily college education, but education for these types of skills in the future to be more easily accessed and free. Let’s teach people how to create businesses, how to rise up.

Yeah, I like how you use the word. It’s a very, very socialist idea. They’re rising up of the masses, but the information is out there, right? So YouTube is free and then you can basically learn any skill you want off YouTube. You can become a hedge fund manager just off YouTube, I feel like. But you need experience, right? But the skill is the basics. If you go around and sign up for all the news sliders, if you go around and take three years to do nothing else but learn about the financial industry, I think it will be pretty smart if you take it seriously. Well, there’s a, I mean, think of it this way. There are plumbers out there that will do, they’ll have their own YouTube page and they will have had to unclog a drain or how to fix your dishwasher. I’ve actually looked up things all the time of how to, you know, fix something. I had a dishwasher. Well, you can’t do that, but I looking at, I mean, look, I think that YouTube is amazing and you’re right. I mean, my daughter is in college and she looks up YouTube all the time for some of the stuff that she’s studying and how to interpret different things. I mean, and there’s YouTube, YouTube stars out there that are making millions of dollars. They’re creative. I mean, I, I’m a car fan and I look at car bloggers on, on YouTube and they’re seeing a million hits on each of their videos. And that’s actually real money that, that YouTube and Google are paying them. And that, that’s a business right there. And, and look, for me, I have a business. It’s on the internet. I’m very active on Twitter. I have a lot of a decent following. And I wouldn’t have that if it was without, you know, the internet and finding people out there all over the world. Yeah, you had a recent tweet where you kind of put out guidelines, how to become a hedge fund manager. And if this is even something we should aspire to, I’m curious about what you thought about doing that tweet storm. Okay. It’s not easy to be a hedge fund manager. And it was a lot easier in the 90s, or even in the early 2000s, that there were really no barriers to entry. Two guys in a Bloomberg could, could launch one. I did. And the problem today is that these have become institutionalized. And the assets available for hedge funds has been, is more institutionalized. And the cost of starting and running a hedge fund is really prohibitive to the majority. And look, I launched back in 2001 with a shoestring budget. We found investors that gave us money. But it’s really hard to scale. And the other thing that’s happening, you want to talk about wages, wages at hedge funds are going down. And they’ve been going down because the fees are going down. It used to be two and 20. And there are some managers still out there that they get, you know, 2% and 40% and 40% or even more. Those are exceptions. It’s now less than 1% management fee or no management fee and 10% or less for your incentive of what you make on top of it. Now, it’s really hard to raise money because if you’re a startup and you have, okay, let’s just, let’s point out the ones that do well. These are managers that have managed money before. They have a track record. They’re coming out of a big fund or they’re coming from a Goldman Sachs or Morgan Stanley or Credit Suisse or whoever. And they have money behind them. Most likely, the managers that are starting this fund have millions of dollars that they are putting into their own fund. They’re not only just putting money into their own fund, but they’re putting money into the infrastructure. That infrastructure is having an office, having the legal counsel, having the accountants, hiring analysts before you’re even generating income. And they’re not making money the first couple of years. Now, here’s the other thing. They know that if they do well, which is a gamble, because you could come into a year, started a year where nothing really works with your strategy, and then it becomes rather difficult for them. So there’s a gamble there. And allocators, okay, let’s just talk about allocators. What’s the better bet for them? Because an allocator, these are institutions that give money to hedge funds. Now, they have their startup hedge fund list and then they have their go to big hedge fund institution that they give money to. Giving money to a startup hedge fund, you better have all your list checked off of why you’re giving it to them. Because you’re taking or those allocators are taking a risk with their business, their reputation, their jobs. And that’s the best case scenario. The worst case scenario is that you have people that think, oh, I want to be a hedge fund manager. Okay. What’s your qualification? Well, I’ve studied the markets. I’ve got a great track record. I made 150% over the last year trading my own account. How big is your account? Well, it’s, you know, half million dollars. Well, sorry, that doesn’t necessarily work. Again, it takes a lot of money to start a hedge fund, a successful hedge fund, because the hedge funds have to generate income. And not only the performance, but you have to run a business. And that is what I think trips up a lot of people. And I’m reminded of a meeting I had with Blackstone in 2001, when I was launching my phone, I came to New York and I met with a bunch of allocators. And they said, look, we want to see at least a one year track record. We can’t be more than 10% of your total assets. And we want to see the business acumen of what, of how you run your business. We don’t care about, I’m not talking about your performance, because a good performance can be great one year and down the next year. And that down the next year is game over. So I’ve seen really successful hedge fund managers that I’ve seen carve out their own businesses after fail. And it’s very, very tough. So the barriers to entry are tougher now. It’s not impossible. And, you know, I know some smaller ones that have come through, but they also have had money behind them. They’ve got family money, they’ve got the assets to live off of while they’re trying to scrape and make this business work. It’s tough. It’s very, very tough. And again, these are lower, not incentivizing people to go out and start a new hedge fund. And it’s really hard performance wise because the performance, okay, fine, the markets are up great this year. They’re not always up great this every year. And the other thing is, if you look at the last 10 years, or from the lows in March of 2009, it’s been five stocks in the S&P that have led the market higher by 50%. You took out Apple, Amazon, Google, Facebook, those are, those are the ones that have exceeded all expectations. Now, is that going to happen over the next 10 years? And can you just put your money in those five stocks and say, okay, I’m going to knock it out? I don’t think so. I think it’s going to be a tougher road 10 years away. And oh, the other thing is, why would you put your money in a hedge fund when hedge funds are underperforming the S&P 500 or the NASDAQ 100? So you have allocators that are thinking, where can I go? What strategies work in all markets? And that’s a difficult question. I think it’s a very spot on analysis. I looked into becoming a hedge fund manager, starting a hedge fund myself a couple of years ago. And I saw exactly what you just said. It’s very difficult to get this initial capital. You have to use your own money. You use your own money. It’s not decisive. It’s not considered as scalable. Just because you trade a few million doesn’t mean you can trade a few hundred million. And obviously, because there is only a limited amount of supply of investors who are eager to go into these alternative assets, and it’s not seen as new and interesting anymore, it’s something that has to have the benchmarks. And it’s extremely bureaucratic. There’s a lot of red tape. So I stayed away from it as far as I could. What I found interesting do is, and I’m not sure if that’s still the case, but for a time, and that was a couple of years ago, if you automated trading strategies that are literally completely automated, that trade with a few million doesn’t have to be huge. And there’s a ton of hedge funds who incubate these strategies. And if you don’t have to give them the strategy, you literally just get money to trade on their accounts. So the money never goes to you. You’re not a fiduciary. You basically just trade on that account by inputting the trade. So that’s all you do. That seems, and they have full control. They can pull it out within the second, within five seconds. That seemed to be something that was relatively easy to get into. If you have a bit of track record of a winning strategy that’s mostly automated or not, it doesn’t really matter where, why you trade. I thought that was pretty easy to get, well, a few million in allocation. But that is you’re not a hedge fund. You’re literally just someone who trades other people’s money as a technology provider. So you change the name of the concept. It’s kind of the same thing you do in the end. But that seemed really easy. I mean, there was tons of people who were ready to say, well, we’re going to put a million into that portfolio. It stays on their account, but you can play with it. I actually like that model. And there are a lot of big hedge funds, I mean, SAC, Millennium, others that they bring those portfolio managers in and analysts and they give them capital to run and they get a payout on that. Now, that’s getting into one of those big funds and that’s ideal. They’re very strict on risk management and they can cut your allocation or cut you out pretty quickly. I’ve seen that happen way too many times. Prop funds are out there as well. If you have a good strategy, you have something that makes money, they’ll give you some money to trade. A lot of times there’s quant funds out there. I mean, look, quant funds, I’ll give you a story. Strategies come and go. Long short was great in the early 2000s. And then people found out that people weren’t really short. We were very short in financial crisis and we actually came out of 2008 flat on the air, which was a huge win. But quant funds were the rage several years ago and we have a few here in Greenwich and I always like to see these trends come and go. One summer afternoon, we would just see all these guys wearing the AQR. There was a big quant fund of fleeces and hats and they’re all at the bar and I was meeting a friend and they had, it was a private party. So we were like, oh, we’ll go somewhere else. So we went to another bar right up the street and there were AQR people there having their own private party. And then across the street, there was another bastion of AQR people. Now, AQR basically was peaking at that time and they’ve lost tons of assets. A lot of those quant funds had the same models. It’s like, oh, we want to be long bonds, long stocks and chop around here and we’ll make money. But it didn’t work. The problem is that when you do these quant models, you have to figure out what kind of lookback are you choosing. So are you looking back 20 years? If you have that one trade out, you’re looking back one year, six months, but rarely enough with the shortest lookback period, those are the models that make the most money on a daily basis. You’re like, well, made money for the last couple of months. So it’s a really great model and you keep allocating more capital. But those are also the ones that are most fragile. So they probably work for right now, but it doesn’t mean they will work in two years from now. And you feel like, oh, I can retreat. I picked the money out before something that happens. I look at all the risk factors, but you don’t. You think you’ll get the unknown unknown and Donald Rumsfeld’s words. You don’t know when you should pull out because everyone else obviously trades on similar models as well and it builds up to see its fragility and these things just drop 30, 40% in a day. Well, you can’t get out at all because it’s not liquid enough. Well, I just picked up on one word you mentioned there a couple of times, fragile and investment firms, they’re fragile. They’re a living human or human intervention organism that can make mistakes, can get caught on the wrong side. And it’s not really well known, but there are times and we’ve seen not like the big giant pullback we saw in March of 2020, but other periods of bond market volatility that is just, it comes out of nowhere and you’re thinking, oh my God, what just happened here? Well, it’s a quant fund having a really bad day. And I have a few quant of fund managers that I can tell you that I’ve seen them where it was basically a normal market week, but the bond market had like some big hiccup and they all got caught up and they look like white as a ghost when you see them and it’s like things are fragile and it’s hard. Strategies come and go and it’s the multi strat type of funds that I think are the most durable. So I’ve seen, look at SAC, SAC does exceptionally well. It’s an institution now. They have the traditional long short, they’ve got some quant, they’ve got private equity, they’ve got crypto, they’ve got all these, you name it, they have it. And that’s why their returns are fairly steady and that’s what an allocator or an investor really wants. I always feel very suspicious if it’s too, you know, it’s like the Bernie Madoff model, it’s too close to 5% every year. I get very suspicious because something seems, maybe it’s the accounting, or maybe everything is fine, but I get really suspicious when I see this really nice flattened out returns that are slightly above the average every year. Yeah, well, the Bernie Madoff model, I can tell you that I remember right before our firm shut down, that was right when Bernie Madoff had blown up. Maybe it was a year before when he blew up, but I think that Bernie Madoff was trying to get one of our founders to invest into his fund. And my guy was just like, yeah, well, we’ll see, you know, and they sent this sheet of returns. And I think the founder framed it and put it in his office, just like this perfect return. And yeah, when it’s too good, you know, sometimes too good a performance is concerning. I once had an allocator when we were sitting down, when he was doing his due diligence, he said, look, I need to get 11% return. This is the return I want to see from you guys. And our returns were generally in double digits. Again, you know, 2008 we’re flat, which I was thrilled. But then we went out to after work, we, you know, he wanted to meet us and hang out. And so we went out and had drinks. And he said, look, all I really need is 7%. Because if it’s above 7%, I don’t lose my job. And that was kind of like the truth be told, you know, hey, I want this 11%. But a 7%, I’m cool, you know, just staying steady. But, you know, there’s pressure on all walks of out there. And the other thing is leverage. You know, we talked about people leveraging with crypto. You know, this Arkegos blew up with this obscene amount of leverage out there. And I still think there’s a lot of leverage still out there in the markets. And that is maybe the biggest concern I have over the near term. I also think that sell side firms, the Goldman’s, the Morgan Stanley’s, Credit Swiss, obviously, numerous are taking down the amount of leverage that they’re giving their accounts. And we weren’t a really heavily levered firm. I mean, I think we were double levered at times. But I mean, the amount of money that some firms have extended and it’s opaque as well. Nobody really knows how much leverage is out there, especially if you’re using multiple prime brokers. And oh, you know, it’s like taking a second mortgage at five different banks on your house and putting it into. Think about Robinhood, you know, which you felt like they used the retail margin model. And I think it’s a 3x or 4x, but it’s been used by every single retail bank for a long time. And it blew up in the effects, right? I think they had to raise 5 billion over a weekend just because everyone traded on a very few stocks. And these stocks, there was no pricing anymore, right? So they jumped like 100% in a matter of minutes. And they didn’t even know how to close these trades anymore. I don’t think that’s the whole general issue, right? They’re back off of this year. Well, you know, Robinhood deserved every painful thing that happened to them because basically, this has been a year of the new investor. You’ve had so much new money coming into the market. And with the mentality, I’m going to get rich. I’m going to buy GameStop. And, you know, it’s going to double for me overnight. And Robinhood would, you know, send the confetti, you know, you just bought GME. And here, do you want to, you can double up the amount that you can, you can trade with leverage, you know, its margin. Nobody really knows the risks of margin until you know the risks of margin. Yeah, but it’s an SEC model. They didn’t make up the margin models, right? It’s supposedly safe and hasn’t been around for 40 years. I don’t know when it was, when the defined tuning was done, but they didn’t give people more leverage than they should. Right? So it was all within the federal mandated. You’re right. You’re right. They didn’t give more than they should as far as the legal aspect, but they were giving leverage to investors who were unsophisticated. And they, and look, they, let’s say, you want to trade options? We fill that options too. Yes, that’s how it works. Yeah. What happens? I think everyone should have access to this. I never understood why we make, why we exclude people from the investment options. And I was talking to Jesse, and I think it was Jesse, we were talking about all these options that you can only use if you have, I think it’s an IDA account, I forgot what the specific term is, but there’s a lot of things, the startup investment that you couldn’t do, and now there’s cards, but there’s a lot of like, if you want to buy CDS, where do you go? I called my bank and I actually called Chase and said, where can I buy CDS’s? And they looked at me like I’m crazy. Like there’s so many cool things that I’ve known that have very nice convexity. And you can’t get access to them on a retail basis. So I think what Robinhood initially set out to do is very laudable. We shouldn’t blot with them because I think it’s great. Obviously it became a business and it’s not the same thing anymore. But if we should expose retail investors as much as we can to any kind of financial instrument, now obviously we’ll blow up in their faces, but they can learn from those, right? Why shouldn’t they? Why shouldn’t they? It’s better than planning it. You know, okay, besides the margin issue, which I think it was an issue for them. Everything was concentrated in GameStop that period. So when you have so many people invested in one stock that is moving just parabolically and then dropping massively in the same day and even worse after hours. And I mean, when it would go up 40 or 50% or more after hours or dropped, you know, that’s when the models broke because you couldn’t have people naturally getting out of a position. The market was closed for a lot of people and you couldn’t, you know, what are you going to do? But when it opens up down 100% or not 100% but down 50%, which it did, that’s when I think things broke because then it was like immediate people are out. And look, it’s because with those gaps, it wasn’t just a clean, you know, up and down and you have a margin call. No, these were gaps and they were on the hook because those small investors that put 10,000 up, they borrowed 20,000 and they were now down a lot more than the initial 10,000. That was on them and that’s why they needed to raise money. And look, I hope they learn and I’m happy people are more people are investing. My kids are investing, they’re doing things, they’re learning about markets and it’s a great thing. The problem is it came very late in the cycle and a lot of people have made money and a lot of people have made money too easily and that’s the get rich quick type of thing that I think is prevalent right now. It’s always when the valuations are high, the most investors are around kind of by definition, right? And that really raises are really interesting that nobody wants to buy it or otherwise they wouldn’t even have gotten there. When you think about fund managers and you touched on a couple of them, who are people you feel like they have figured out their own way so they don’t just go from quarter to quarter and they’re doing not just great performance, but they really add their personality to their fund management. Who do you admire in that business? Well, I think the, I mean, a lot of managers have great people underneath them and great analysts and build great teams and I think that’s really the core of what makes a fund manager great. It’s not just one guy on top that calls all the shots. Stan Druckenmiller, if you look at his record over the long term and how he invests and how he can be very, very aggressive and take big positions in something that he feels a lot of conviction. And I know people that know Stan and work for Stan and Stan gets very excited when he has an idea that he likes. A friend of mine turned him on to farming and buying farms in the mid 2000s. He was so excited. He bought farms and he did all this stuff and they did exceptionally well. He’s very passionate about his views on the economy, inflation, what the Fed’s doing and I think that if people haven’t seen some of the some of the talks that Stan has done recently, he did one for USC Business School. It’s really revealing of what his views on inflation and what the Fed is doing right now. So I have a lot of respect for him. I also have a lot of respect for Paul Teeter Jones. I’ve been fortunate to know Paul and I think that one of the things that’s most impressive about Paul besides having just a great long term track record is that he’s a very honest guy. He is super balanced in his life. And he’s got a great family. I see him taking walks in the neighborhood. He’s always clear headed. He does yoga. He’s very measured and he assembles smart people around him as well. Now he’s a little less, well maybe he’s a little more involved but because I think that he’s moved to Florida. He’s changed his fund around and I think that he’s still outperforming the markets. He’s invested in crypto a while back and he sees the benefits of it and I think he’s a great model for people. He’s the most generous person on Wall Street. He’s raised more money with Robinhood, the foundation, more than any other foundation I know in the world. He genuinely cares about society and he’s created models of looking at companies which he calls just capital which are companies that not only are good solid companies but they have an ESG element. They’re good to their employees. They’re good for the environment. A lot of things that the model finds. He’s also with Robinhood, a lot of foundations bring in all this money. They have overhead. Paul and a few others underwrite Robinhood’s foundation expenses. 100% of all the money that’s raised and we’re talking events that raised $50 million on a night. There’s one coming up in June and that all goes to kids schools. The New York City school system homeless. He is a good, well rounded person. That’s what I think is misjudged about the perception of people on Wall Street. There are a lot of people that are exceptionally generous, exceptionally motivated to help society with their wealth and put in time and effort and money. Those are the ones that I really find the best. They build great businesses around them. They bring in the best talent and they just continue to knock it out every year. You don’t necessarily hear about their performance from quarter to quarter or anything like that. They just tend to keep moving in the right direction. There are definitely some up and coming people out there in the world. We’ll see how they perform as good citizens as they do well. They join likes of Robinhood and build that foundation more for society. I’m really impressed by those two. I think if anybody wants to be a hedge fund manager or trader or portfolio manager, any place or just a money manager, those are people that have done wealth or others with their experience. They’re always giving back. The financial industry is not necessarily known for producing wealth around a person. That’s put at this point. At least in a popular concept. There’s a lot of them out there that I’ve met some that are totally off the rails. It seems to attract that character. We know certain characteristics that help you be a better actor. It would be an exceptional actor. You’ve been leaning certainly towards social path angle. It doesn’t have to be. It doesn’t mean you are one, but it seems to find the national industry. It attracts very intense characters. I’m thinking of Michael Morke, who supposedly basically slept three years most of the nights. He started calling people at 4 a.m. and doing heels at 7 a.m. and doing this all night. I feel this is certain. You’ve got to out compete. You’ve got to really have to prove something to the world. You’ve got to really go through the labor also. There’s a lot of fleshiness that usually helps in spending, but also personality. I feel really attractive to the financial industry. I will say all the people I’m talking about, and I just spoke to, they do have that trait of they want to kill it. I know others that have that same mentality. I’ve worked for them that when they walk in the office in the morning, you better have everything that you need to give them so that they can have the day they want. They can have mood swings that are absolutely terrifying. I tend to be one that keeps a very even keel. I have a low heart rate. I do my job and know what I need to do, but there are those people out there that are so, so intense. If you want to be a hedge fund manager, learn to be completely intense and crazy and take huge risk and not flinch. I would have trading on our desk, PM say, sell 500 cubes, and this is like five minutes after the market closed, after big tech earnings or something. Sell 500,000 QQs. I’d have to call Goldman Sachs and say, you’ve got to stop me within five cents of the last print. That’s intensity from him to me to go to Goldman and they do it. They use their capital and we get it done. There is a certain amount of intensity and you’ve got to be a little bit ruthless, but I had to work the street pretty hard working our orders, but I would always day or two later make it up and give them some trades and say, thanks, I appreciate it. There was a give and take that I think from the buy side and sell side that should exist, but you’re right, the typical hedge fund manager, intense. Look, they’ve got a lot at stake. Absolutely. That’s a bit of a short term optimization. We know there is a lot of randomness involved in the financial industry and you have to, you’re being measured and benchmarked all the time, which doesn’t necessarily happen in other industries as much. Do you think that it’s just a short term optimization to hit it out of the park for like three years and then basically retire is seemingly the better strategy than doing this, which is the Warren Buffett strategy, right? Finally, something that will compound it 11% for the rest of your life because that will make so much money that you’re the richest person on earth, even if you buy, I don’t know, a cigarette manufacturer. I don’t even know, it was a mill, right? Berkshire Hathaway was a terrible company. No, Berkshire Hathaway was, they made dress shirts. They made dress shirts. Oh, yeah. Yeah. And it failed. So, I mean, but yes, I mean, a lot of the company, that was the whole idea, whether it was his stake to buy these cigarette parts, right, in the beginning. But he always optimized and he only really got started in his 30s, right? But he optimized on the long term. That’s why he got rich when he was really old. But I think for most hedge fund managers, a bit like sort of entrepreneurs, they have similar view on this. They get two years of runway or a year of runway and they better hit it big because otherwise, well, they didn’t even try. That’s how they feel. Yeah, I agree. There’s a lot of pressure when a fund launches and the pressure is also benchmarked against what the market does. So, right now, it would be pretty tough in an environment like this in the last, if you’ve launched in the last year to be outperforming the S&P 500 or the NASDAQ, it’d be tough. It’d be really tough. But that makes people work harder, concentrate positions a little more to optimize their performance. And I don’t think that there’s those types of managers that make it big in three years and then say, you know, I’m going to the Hamptons. Now, I think that after three years, if you’re doing it and you’re successful, you’re scaling, you’re going to scale, you’re going to get more allocators that see that you did well over that past three years and they’re going to say, I want to be a part of this. So, after three years, that’s actually two, but probably three is better. They’re going to be more than happy to give you money. So, it takes three years of grinding it out and then stick with what you know. Don’t change strategies. Just keep going. Sounds like a starter, right? So, three years and then you want to look at the idea, if you can, if you have that option. When you look at hedge funds right now, what do you feel or A, maybe your asset class has been nobody looks into? You just mentioned farms a couple of years back. We looked at farms and data development capacity. What is something a lot of people think about that, about alternative data? So, they basically look at data that doesn’t, it’s not typically financial data. It’s data that’s sourced from somewhere completely different and then you use this to trade on your fine patterns. That’s a quant thing, but it really expands this whole idea of what a quant can do because this data could be farming data. It could be how many cows you draw from satellite pictures, how many cows are out there. That’s your trading strategy. I make this up, but there is a lot of stuff being done in satellite imagery. What do you feel is really cool right now that a lot of people attach a lot of hope to have outsized returns from? Well, I think that a lot of money is going towards the crypto space right now. And I think that the ones that are going to survive are going to be the ones that can manage the volatility. And that’s tough because you’re going to have to be short some crypto that you know is not going up. And that’s very, very tough. I think that there are several places right now that I think the market may come back to. And the reason I said is because this period of time reminds me of 2000, 2001, where we had this sensational boom and then we had this bust. And my view right now is that the long, short equity hedge funds, that model is actually has been out of favor because I’m going to buy the S&P and no problem. That model of a two way portfolio long and short is going to come back. And I think there’s a lot of assets out there, a lot of stocks that are just, they make no sense, no sense at all for the prices where they’re at. And if you have smart, fundamental, and let’s say timing wise, technical people that are on your team, you’re going to be able to find those ideas. And again, we’ve had a 10 year run of five stocks leading the market higher. And the attribution for those top five stocks is over 50% of the total of the total gain. So what happens if an Apple, which is not necessarily priced at the low end of its valuation range, it starts to top out? You just start, I mean, look, they print money. It’s the best company in the world. Let’s just say they top out and they just lose a little favor as far as the investor. Or what about Amazon? Everybody loves these companies. I love them. They’re great companies. I use them all the time. But what if these companies, these stocks, just start to go sideways? What if we start to lose some of that freedom that they’ve had? What if there’s more antitrust around the world that looks at these companies and say, hey, you’re a $2 trillion company. Your power is too much. Now, they’re not necessarily a monopoly in the true sense. But if they start raising prices or they start shutting off certain places, I mean, the Apple’s in a lawsuit right now with Epic Games, that’s going to be interesting to see how that happens, what happens there with their App Store. But I think that these main stocks could come into difficulty. And if that happens, I think the market will sputter. Now, I think there’s great places in the market that are undervalued. I think energy. I think there’s financials out there that are undervalued. And energy is picking up a lot of investors this year. They’ve done well. Actually, I think energy has done the best of all sectors. There’s some small cap areas. But I think the long short portfolios are going to be the place to be. And I think there’s going to be a lot of companies out there that are going to be uncovered as just complete frauds or overvalued. And just like basically like 2000 when you had the tech bubble burst, I think that could easily happen again. Yeah, I think that’s spot on. I think there’s a lot of potential volatility that’s put it this way. I’m really curious when we look at, a lot of people play with volatility strategies. This kind of became a trend the last couple of years because we had these pops in volatility. The mix, the measurement for volatility seems extremely low. I saw it and might have risen a lot since then and moved down to the teens, right? It was 12, 13. I’m like, holy smokes. Really, we think of these extreme valuations that can easily reverse. And the implied volatility is so low. And you can play with this really nicely. You can just bet on next six months, the next 12 months, we see at least some higher volatility. For me, that seems like free money. And I don’t know where it is now. Maybe it has risen already. But it cannot stay that low for long. Right. The VIX has been pretty, actually, when I think in the pre COVID, it was in the low teens, maybe like 12 or something. And it went skyrocketing up. And it’s been fairly steady around 20. And maybe that’s a little, the new regime, that’s more elevated. Maybe there’s still some fear out there in the market. You have this dynamic of fear and greed. And I think that there are people now starting to show some hedges in the market. You had this extreme call buying last year people that, I’m going to buy calls. And that’s like buying stock for some people until they learned when things, the bottom fell out and their calls didn’t work. But I think there’s going to be more volatility when, I don’t know, I think that we could see something, it’s calm right now. It’s very calm. The bond market’s fairly steady. The rates have gone up and they’ve backed off. And they really haven’t backed off that much. And so they’re kind of elevated. And if we do have inflation and we do have some inflation issues, and look, we’re going to have more bondage, the bond issuance over the next six months or even longer, it’s going to be huge. We’ve got to pay for all this stuff. And how are you going to entice investors to invest in bonds? You’ve got to have higher rates and a better risk reward right now. And you had rate down. There’s going to be a ton of investors. I’m always amazed. There’s a ton of investors who are really going for 0.3, 0.5, 0.6% interest rates. Some of them over a long time. I’m like, holy sports, how is that possible? How is that economy? And so many investors, how are they happy about extremely low prospects? And they must have thought about inflation. They know inflation could spike up and their money goes down by 5% in value every year. How can they commit to such long term, low yielding trades? Do you think that’s a mindset issue or they do it only for short term investment? How is it even possible? It still boggles my mind. I know it’s been going on for a long time. It’s like we lost faith in ourselves. Look, the bottom line is people are buying bonds for the yield. That’s not the game. People are buying stocks for the yield. People are buying bonds for the capital appreciation because they believe rates will continue to go lower. That’s been the game. The risk parity strategies have done exceptionally well until rates lifted because they were long bonds, they were long stocks. When that turned around and rates started to rise, the price of their bonds, which the yield didn’t matter, started to move easily against them hard. There’s another thing. So it’s speculative maniac in bonds, so to speak, where you bet on a lowering of future interest rates. I don’t know if it’s necessarily speculative, but I did speak with an allocator, one of the big global allocators at Blackstone last couple of years. I sat down with him and I said, why are your European managers buying bonds, negative yielding rates? I see a risk here, and he said, it’s very simple. They are mandated to buy bonds. That’s number one. Number two, they think that bond prices will continue to rise, no matter even if they’re negative yielding. That was right there. They said, we’re buying bonds because we want capital appreciation and we think that’s going to happen going forward. It makes no sense. I think negative yielding bonds has been one of the worst experiments ever in the market. So I think that when that backs up, when you see the amount of negative yielding bonds, I think there’s about $13 trillion worth of negative yielding bonds in the world was 18. Are they already negative, right? Because the inflation was almost somewhere around 1.5, 2.5% in the last couple of years. So even if you get 1% yield, it would be negative, so to speak. Well, yeah, the real yield, of course, but the point is that we had at the peak, I believe, $18 trillion in negative yielding debt around the world, and a lot of it is in Asia, in Japan, in Europe. And as yields and rates have seen them rise around the world, that’s dropped down to about $13 trillion and we chart that all the time. So that’s a dynamic there that there’s a lot of trillions that have evaporated as far as the gains that these portfolio managers had. Now, the big risk, in my opinion, and this is the risk, I think, of that everybody’s watching is if rates start to move up fast in an unruly way, that will really put every single market at risk. Because if one market in particular, and they’re all in a chain, if one chain link breaks, you’re going to see selling across the board. Because you have multi strap managers, you have people that are in stocks and bonds, and if bonds are getting killed, they’re going to take down some risk in stocks as well. It’s not going to just rotate into stocks or some other place. And I think that’s the big risk. If it’s an unruly, fast, sharp move, if we see the US 10 year rate over 2%, 25 basis points in a day, I think that would scare some people. If it moves even more, I think it’s going to scare a lot of people. And the valuations, and especially on all these tech stocks and these bubble stocks, well, obviously, they’ll get hit. One thing also, the Fed may be saying, look, we’re cool with inflation. We’re not going to touch our strategy. We’re not going to do anything because they know that it’s actually put some strain on the tech. A lot of stuff that’s been bubbleicious. And so maybe they’re looking at it like, okay, we can just live with some higher rates if it takes down some of the bubble and it just deflates a little, not pops. We don’t want pops. They don’t want pops. What do you think? If rates rise relatively quickly to 3% or 4%, there’s a lot of leveraged positions that were betting on higher prices in those low yielding bonds. And they would have to unwind. And in order to do so, they sell their portfolio relatively broad. And we would see 30%, 40%, 50% in stock prices going down. That’s a potential portfolio if the rates go up so quickly because people have to leave these positions sooner or later. Yeah. I mean, look, there’s another, again, there’s leverage out there in the markets. And when leverage has to get unwound quickly, as we saw with Arkegos, and that was a very small piece of the market with very few stocks, everybody’s gross comes down, their exposures come down, and boom, we got to sell across the board. The prime brokers that are managing, or holding the levered bets, whether it’s any asset, they’re going to tell their clients, okay, you’ve got to cut your exposures ASAP right now, or we’re going to do it. And it just, that’s snowballs. And that’s essentially what happened in 2008. You had exposures way too high. People had to take down leverage, and they were forced to because the banks that were holding all those things were running out of cash, and they needed to tell people, delever, delever, delever. And forced delevering is, it’s game over for the market. So maybe they’re taking down leverage right now in a soft way after what’s happened. I’ve seen a few people I know that ran prime brokerages move on, move on, and they’re changing things right now at the big prime brokerages. Yeah. I have a non financial question for you. Okay. I know you like the Grand Tour in Tokyo, right, TV show. What’s your favorite episode until they do a lot of road trips, right? And well, I’m a big fan of TV show too. I think they really combine a couple of different themes very well. Well, what do you think is, what do you like about the show? What’s your favorite road trip that they took? I like the ones where, okay, there was one that they did with supercars on these Swiss roads. And I don’t know exactly the roads. And they went through the Italian Alps through these, I think it’s a Zocalon, it’s a switchback. And it just was fabulous. It was great. There was no cars on the road, helicopter views that were awesome. I also like when they get in trouble. I remember that when they go to certain countries and they get arrested or something, they do something just completely off the wall that’s so wrong in that particular country. But yeah, it’s a great show. There’s one also where, I forget who was driving it, but they were driving an electric supercar. But he went off the road and it caught on fire and it was just like a complete $2 million car poof that they just destroyed. But my favorite part of Top Gear is when they bring the celebrities or race drivers and they put them on the track to take the ordinary car around the track and they time them. I love that. I would love to do that. And you’ve seen Lewis Hamilton and Sebastian Vettel and all the big drivers go on the show and compete. And some of those guys have done so well when it’s raining. And that just tells you the type of driver compared to a typical actor that goes on it and tries to do well in the dry. So these drivers are a step ahead. And it’s very difficult. I think it’s a format that’s not easy to make successful. And they’ve been honing it in for a very long time. And I think a lot of travel photography, travel stories, things about cars, they’re neither funny nor interesting. They’re like a constant product placement. They were either by the country or by the automotive manufacturer. So they’ve combined a couple of different elements and actually created something entertaining that especially works when you see the three of them together. They have their own shows. I don’t consider them very entertaining when they’re by themselves. Yeah, like Jeremy Clarkson, he’s the most brash of them all. And another thing that makes the show so great is that they’ve also come out and said, this car is awful. They’ve said, they hate it. And when they do like a car, they just have such great emotion over it. I remember Jeremy’s driving this single seat car. No, it’s double seat car, but it’s open. It’s called an aerial atom. And it’s like a go cart. And it’s so fast. And it shows his face. And it’s just shaking with the wind hitting his face. And it’s amusing when you see that type of stuff. But again, I think all the different car bloggers on YouTube, oh, those guys, they were the first to do it. Now you can see so many different people on YouTube and you can follow them. They go around the world. They’re driving supercars. There’s so many people. And Instagram, again, is really leading the charge. You see people, there’s a guy named Tim Burton. He goes by Shime 150. And he’s my favorite. He’s a British guy. He’s nice. He’s proper. He’s created a great business for himself. And he goes around the world. He owns McLaren Senna’s. He owns all these fabulous cars that he goes to the factories. He drives them. He tells his honest opinion. He just bought a Porsche Taycan, the nicest one. And he just, you know, with an electric vehicle, it’s new for him. And he said he just had like total anxiety over range, ranging anxiety, which is a thing that happens with electric vehicle owners. And that’s something he’s gone around. You can’t get the charger to work. It’s been interesting. Yeah. Yeah, it’s, it’s something I feel the, we talked about really driven people in the financial industry, right? They really want to kill it. I feel like they, there is a reward they’re thinking of, right? It’s this, this, this appreciation from other people, obviously. But it’s also what do you do with all this money, right? Because you obviously don’t need it. But it’s, it’s, I think the grantor really exemplifies this. If you have all this money, this is what you could do, right? This is what your life could be. And you just said, and some people on YouTube have already, they, they, they shortcutted this, right? They didn’t go through the whole financial industry. They said, well, no, I’m just, I’m just going to start after this and try to pull it off on YouTube. Yeah. And they do. Right. So the millennials or the degeneration after them thinks of this slightly different, right? They want to reward sooner. They don’t go through a career of working as a hedge fund manager or in the financial industry. They just want to reward them next two years. And remember, you know, when you, when you want to become a hedge fund manager, you just can’t be one. You have to go through the steps. And I had a conversation with someone the other day that a young person and, you know, he wants to be a hedge fund manager or work for a hedge fund or, and I always have people email me, you know, how do I get started? What do I do? And I always, you know, how do I get started on a Wall Street? I’m like, go to law school, be a lawyer, because that’s the most steady gig on Wall Street. But to be a trader, there’s not many traders now, a lot of algorithms that business, that sort of technology has taken away a lot of trading jobs and most of the trading jobs, especially at the sell side firm. So this is just 10% of the desks are filled now with the traders at Goldman or Morgan Stanley or wherever. And becoming a portfolio manager, I think the best approach to that is to, okay, first of all, go to a good college, okay, business school is a great place to start. You learn about business, you meet contacts, and that’s important. CFA is great. I took level one, I passed level one, I didn’t go back for level two, because I got hired at a hedge fund, this is, you know, 1999. And I learned plenty. And I didn’t really feel like studying for a whole year and being away from my family. That was just no, no, thanks, I’m good. But, you know, having those credentials may or may not be needed. But it’s also going to be when someone’s reading your resume, they’re going to say, oh, he went here, he did this, that this, and maybe he worked at a sell side firm, investment banking, he understands how to model portfolios. That’s going to get you in the door. And in the other ways, if you know someone, or if you have money, it can get you in the door, you could start at the low, low end of it, and build your way up. But you got to be a success at that place, and move to the next stage. You know, you could be a trader, you can move up to a portfolio manager, do well as a portfolio manager, and then go out on your own. And that’s a, you know, that’s a very fine few amount of people that are able to do that, able to scale their business to make it profitable for them, and worthwhile. I mean, a lot of people would be just very happy working for Third Point, or SAC, or anywhere where it’s a very steady model, they’re getting paid great. You know, you don’t have to be the main guy, but it’s hard. It’s hard to stay there. There’s a whole debate about will these careers, will people still have careers in 20 years from now? Is that even something for the majority of the next generation that will still exist? But that’s a whole other debate. Thomas, I got to go. Okay. Thanks so much for taking the time. It was awesome. It was great. Thanks so much. Talk to you soon. All right, talk to you soon. Take it easy. Bye, Thomas.

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