Get Paid, But Only For Beating Benchmarks: Peter Kraus

He was chairman and CEO of the big asset management firm from two thousand and eight through last year, and now he is starting his own firm. We are broadcasting live from Bloomberg Directive Broger Studios, and Peter Krause joins us right here. Peter, thank you so much for being here. Thanks you at least for having me. All right, So you are founding a new firm, and why good question.

It is a new firm, Uh what? The main reason that I think the new firm is exciting is that we're trying to align the revenue model of the firm with the clients objectives. And what I found in time in my experience in the industry is that although we all are here to serve clients. Almost all firms revenue models are fixed fees, so the client pays whether or not the manager performs. An aperture is distinctly different. In that sense, the client only pays more than the passive

fee if we perform. What is the hurdle rate? The hurdle rates are different for different products, so it would depend upon the investment services that we have. But let's just take an example in a simple equity fund. Let's say it's US large cap equities. The hurdle rate would be the standard and Poor's index, easily identifiable, recognizable by all. Okay, so let's say that this does gain steam. Would fees

be a lot larger once you hit that threshold? Well, actually, you have to earn the S and P return in order to be paid any fee at all. So in other words, let's just say the markets up ten percent, that's the SMP. If the managers performance is ten percent, they're paid exactly no performance fee and only their base fee. So here's what I'm wondering. When you talk about our performance, it depends what index you're looking at. It also depends what time frame you're looking at. So what is the

correct time frame to really judge this. So remember that almost all managers have benchmarks in the in the fixed fee space for sure, uh And so it's true that each manager has a different benchmark, and benchmarks can be complex. We're attempting to make those benchmarks simple, easy and recognizable. The time period over which you pay fees is one year. The reason why it's not longer is it's complicated for

people to understand fees over more than a year. We actually charge the fee every day, but at the end of the day, we only elect the fee if we actually create performance in the twelve month period in which the client is invested the new company aperture. Is it going to compete against more storied names like Goldman Sachs Or is this designed to go and try to peel away money from other let's say, hedge funds or specific

investment strategies. We actually think that we're attempting to disrupt all of those, not just Goldman Sacks, not just a hedge fund, not just tro Price, not just Fidelity, but all the above, because what we're trying to bring to the client is outstanding returns, returns over a benchmark at the end of the day, clients can buy beta or the market exposure for cheap prices. We know that, and we think that they should go and do that. What clients can't get is return in excess of the market.

We're actually trying to provide the Okay, so what do you think happens to all the big asset managers if they don't adopt a fee structure structures like this. I think this is a This is an industry that plays out over a long period of time. People don't move their money around, you know, haphazardly, but over long periods, you know, ten to fifteen years. I believe that the amount of money that will be followed by this performance

link structure will be very significant in the trillions. And you would look at me and say, well, how could that possibly be? But if you go back to when et F started, if I had said to you twenty plus years later, E t F are going to account for almost fifty of the marketplace, you would have thought it was crazy. I'm just struck by the infrastructure of an asset management, of an asset management for I mean,

this is not inexpensive. How do you maintain that with the structure when it's really hard to outperform unless you are investing in less liquid assets. I mean, if you're tied to broader markets, it's chance. Yeah, it's hard to outperform whether you're invested in liquid markets or illiquid or illiquid assets. Don't don't make don't make the mistake that ill liquid assets are easy to create performance from two. Look at the end of the day, we're running a

a asset management firm. It's disrupting on three different levels. It's disrupting on the revenue level, it's disrupting on the distribution level, and it's disrupting on the cost structure. We've built a cost structure that essentially outsources virtually all the things that most firms would do internally. Most firms do

them internally because it's their legacy. We have the benefit of building a firm today, and given the cloud structure in the world and the available technology, we can replicate what most firms do for millions and millions of dollars for far far less. So our cost structure is structurally competitive relative to anybody else. We actually have a structural benefit that others can't take advantage of. What are your thoughts about starting aperture investors at the time when if

you look at the SMP five hundred were four. We've got a record for the DAO at three. You're looking at performance that's pretty good, and a lot of people are starting to think maybe this is the time to lighten up on stocks some sixty six. I started thinking about investing, believe it or not, when I was maybe twelve or thirteen years old. Over that time period, doesn't take anybody, you know, smart to realize that equies are going up over time. People are investing for their lives,

they're investing for their savings. Market timing is interesting to talk about, but not interesting as an investment thesis. So Aperture is here for the long run. We expect to be in business for many, many years, tens of years, and our job is to produce alpha, whether the market is going down or the market's going up. Is it hard for you to recruit potential investment managers with a fee structure like this, especially since their compensation is so

closely tied to our performance. It's a great question. It's really the key question. Actually, So I've interviewed over almost a hundred people. Can't keep counting. Somewhere over seventy five, and I think it's up to a hundred UM. And I think the people fall into two categories. There are those portfolio managers who grew up in a fixed fee world who look at this and go, well, why would I go to a performance based world when I get

paid whether or not I perform? And my view of that is I don't even want to want to hire them, because that's just not the person I want. The person I want is somebody that believes they can perform, has a history of performing, understands how to take risk, and is willing to be paid on the basis of that performance. Because there are two important things to that. One is their risk takers and at the end of the day, you want to invest with the risk here. You can't

make money if the person doesn't take risk. And two is they're willing to cap their capacity because capacity is the main issue in the camp in the industry. Any names you can share who have joined the team, no, I mean it'll be public over time. But I think we're a team. I'm sorry rhymes like like Magan, but we're a team and we're going to be a team, all right. We're gonna leave with there Thanks very much for coming in. Peter Krauss is the founder and financial

partner for Aperture Investors. They're looking to reshape the fee structure for money managers. Thanks very much for coming in and sharing your thoughts with us. Joining us now as Lenan Union. She's an FX reporter for Bloomberg News Land. Thank you so much for being with us. You know, I have to think it is strange that the dollar is weakening at a time when treasury yields are grinding higher. Doesn't this go against the trend that we've seen recently.

It certainly does, Lisa, And that's the really interesting thing we've seen. Positioning in the FX market is max bullish right now. People are piling into long positions. It's the third most crowded trade according to Bank of America's Fund Manager Survey. And yet I'm hearing a lot of people talking about the dollar being a cell um. You know. We we talked to Ben P. Perry Boat Asset Management. They think the dollar could plunge ten percent in the next six to nine months. So what we're looking at

is the market saying Feds over We're over it. We know what's happening there. The U S economy is doing well. What's next. We'll just taking a look at the performance of the dollar today one thirty two eighty against the pounds sterling. Perhaps that's in response to the comments from Donald Tusk of the European Union about ongoing negotiations, and also taking a look at the dollar versus the Canadian

looney one twenty eight the dollar is weakening. Yeah, And I think with those two stories, particularly with Canada and the pound, we have a lot of videosyncratic political risk and trade risk when it comes to NAFTA. So the dollar has definitely gotten a bid in the last few weeks months because of trade problems. But I think a lot of the being people that I'm looking at on the by side, who are longer term thinkers, think Okay, the trade stuff is just noise. It will eventually be resolved.

And what's really important is the fundamental drivers, which is US central bank is already moving, which next, Which central banks are next, and who is going to catch up to the US in terms of that monetary policy convergence. So Dave come on in here. If BNP PRIVA analysts are correct and others that the greenback could decline could appreciate about ten percent in the upcoming year. What does that mean for US equities? And that's kind of almost

a tailwind. Now, yeah, I mean you've sort of seeing the dollar pop up and a lot of companies results as something to be concerned about. I mean, let's face it, you know, if you've got a higher dollar than all those overseas earnings just don't count so much when you bring them back home, if only for the sake of the financial statements. And you know, to the extent that the companies are trying to sell overseas, I mean, it becomes an issue as well, so it has the potential

to be that. I mean, then again, I'm looking at the Bloomberg Dollar Index and it's sort of sitting in the range. It's been the last few months at the bottom of the range, but it's not like we've had the kind of really substantial move lower that would suggest that, at least for the moment, that things are changing in

a meaningful way for US companies. And just to your point at Lisa, I mean, a company like Coca Cola, which derives more than half of its revenue from outside the United States, they would be affected by any of those big moves in US dollar, right, yes, exactly, and so maybe this becomes, you know, a boon if the dollar does start to weaken. We saw that when the FED was tightening rates that um, you know, everyone was

really worried about this tightening and financial conditions. The dollar was doing a lot of the tightening for the FED. So maybe we're going in re versus un confused because with treasure yields now at ten year yields climbing above three percent, you're getting real return on everything from three months t bills out through the thirty year treasury. I'm just trying to understand why are we not seeing more foreign investor flood back into the US giving more of

a bid to the dollar. I mean, I understand about the FED, but what about the actual yields. I think it's again we're we're looking at the two thousand seventeen story again, which is that people just uh, in the FX market don't see the US as that appealing anymore because we've maxed out, and I think the two markets are definitely dislocated for sure, um and in for an exchange, people say this is as good as it gets in

the US. What's next as good as it gets. That seems to be not resonating at all with stock traders today as we hit a new highs, so people seem to think that there's a lot more good head in equities, although currencies can sometimes sometimes have a little bit more of a finger on the pulse, a different pulse perhaps. Davilson, Blomberg Sox editor, columnist and blogger, and m live go on the Bloomberg and Lennian who covers FX for us here at Bloomberg News, and I gotta say, I'm having

trouble reconciling higher yields with a weaker dollar. It's something that is not logical you're trying to make sense of. Well, no, it's just it goes against some recent trends that we've seen, and it just it's an interesting dynamic. It'll be interesting to see whether it holds. Right now. We want to

shove the focus to China overnight. There are reports that China is considering cutting tariffs on incoming goods as seeming I don't know, olive branch to the rest of the world saying that we're going to lower our high tariff rates a little bit in order to be a leader in trade joining US now Tom or like chief economist for Bloomberg Economics coming to US from Washington, D C. Tom. This seems to go against what we had been seeing.

It does seem to break the vibe between the US and China where it was sort of an escalating tariff off. How big of a deal is this? I think we need to wait for the details. UM. If it's a very significant cut in tariff um, then clearly this is going to be big news. UM. If we're just talking about a fraction of a percent or a couple of percents of tariff I think is not going to really move the dial um. It seems to be an indication

that China wants to d escalate this situation UM. The US, when with two hundred tariffs on two billion dollars in goods, China responded with tariffs on just sixty billion. The US set tariffs at ten percent and said they were going to China came in at a lower level. And now this move to offer a general concession on tariff's um worldwide UM seems to me an indication that China is trying to de escalate. What about the import tax that China might impose more generally, what would that do to

the Chinese economy. So the way that China will present this is part of a longer term reform and opening strategy. Of course, Donald Trump has his prestige in China, Chi Jinping has his prestige. The last thing that China's government wants to do is to be perceived as making concessions

um to the US. So this will be presented as part of a longer term reform and opening strate to Gum, and it will have, to your question, pim Um that positive impact in terms of raising consumption, in terms of dealing with some of China's economic imbalances, and so the hope in Beijing will be at the same time as taking some of the heat out of the trade trade dispute,

it's also a longer term positive for China's development. So, Tom, this was my big question when I read the news this morning, I was wondering it will China lower tariffs on US goods alongside others that they import, especially considering the fact that they've got no plans to dial back their retaliatory tariffs that they said are going to go into effect on September twenty in tandem with the additional US tariffs and Chinese goods. Right. Um, that's an important question.

I don't think we have perfect clarity on it yet. We don't have the details from the Chinese side. UM. My initial take though, is that this reduction in tariffs will be worldwide. It will fly to the U S, it will apply to Europe, it will apply to everybody. UM. So the Chinese are making their domestic market more attractive

to foreign firms. At the same time, those punitive tariffs on U S firms um, which the Chinese have said they will impose in retaliation for US tariffs on Chinese firms, will be in place, So the whole market will look more attractive to foreign firms but Chinese, but US terms

will face this additional punitive tariff. UM. I think the the logic of that for Beijing is that they hope to turn US corporates into lobbyists on their behalf, because the US corporates will see, oh, the Europeans, the Canadians, the Japanese, they're all going into the Chinese market on these new favorable terms. We can't get in because we're faced with these punitive additional tariffs. Let's go to d C. Let's encourage the Trump administration to call a truce, maybe

walk back some of the some of the terrists they've introduced. Tom, just quickly here, if this is all going to happen, what happens to the Chinese currency? I mean it hasn't it been falling in value? And doesn't that make them Chinese products, you know, more competitive? So China has allowed the UNSW to de appreciate somewhat over the course of two thousand and eighteen. There certainly hasn't been an extreme drop in the currency. The fear for China if we saw a big drop would be we'd be back to

the world of capital light flows and concerns about financial stability. Um. I think if we see this cut in tarrits and that reduces the tensions in the trade war, then that's going to reduce the need for you and depreciation as a kind of competitiveness offset. I do you want to just remind you we are awaiting law enforcement comments on multiple victims having been shot in Maryland. We will bring

you those when we get them. Tom. You know you're talking about how China wants to turn US corporations into lobbyists to get the Trump administration to back away from this trade escalation. But so far they have been lobbyists and they have failed. What makes China confident that perhaps the Trump administration would listen to corporate pushback when it really hasn't worked so far. Yeah, I think that's a

that's a key point. And my expectation at the start of the year was that we were going to have much more vigorous corporate pushback from the US business lobby and that was going to be a more significant factor in changing the changing the view on the Trump administration. Clearly, that hasn't happened so far. We'll see what the extent of the tariff cut that China is offering is um.

But clearly, if it's a very significant tariff cut, if it's significantly increases the appeal um of doing business in China, and then you would expect those business lobby voices in the US to get that little bit louder um. And of course they don't have a crystal ball into Beijing. I don't know what the government's internal thinking is, um, but the hope I think would be the alloweder voice from the US business lobby would make it more difficult

for the Trump administration to proceed with aggressive tariffs. Does this also have an impact on other countries in Asia that maybe have assumed some of the manufacturing work that has been too expensive to do in China, Right, So I think countries like Vietnam, countries like the Philippines, countries like Bangladesh, And we were already seeing a lot of export business, low value added export business moving from China

to those countries because they are cheaper now. Um, And this US China trade war, I mean, it could only accelerate that process. Right. If China is getting more expensive in terms of labor, in terms of exchange rate, in terms of all the cost of production, and then you have tariffs on top of that, then all the corporations are going to think, Okay, my next factory is going

to be in Southeast Asia. Now. If China reduces his tariffs and dials playing the tension in the trade war, um, clearly that the pressure for that exodus of manufacturing activity will be that bit less. So one thing that I'm struck by is we were speaking with Leland Miller of China beige Book International earlier in the week, and he was saying that on the ground, it seems like manufacturing is slowing in China despite some of the data that

we're getting from official sources there. And I'm just I'm wondering, if you do sort of reduce the barrier to imports in China at a time when you're already seeing a slowdown and manufacturing, how much could this actually hurt China's economy. I mean, that's an interesting question. UM. Clearly, if you import more manufactured good things, you have less need to imput the actually less need to produce manufactured goods at home at the same time. UM, Tariffs and not the

only factor determining where manufacturing activity takes place. UM, the supply chains are in China. The emphas structure is in China. These things do not move quickly or move overnight. UM. I think the idea that the Chinese government has is probably not so much. Oh, we're going to get more important manufacturing goods, and that's going to be bad for our factories at home. But rather we've got lots of consumers.

They've got a demand for goods that have produced globally. UM, we're going to ramp up consumption by reducing import barriers and opening the door to more US cars, more Japanese cars, more of those kind of high end goods that Chinese consumers now want but are not being produced at home. Want to thank you very much for spending time with us.

Tom Orlick is Chief economist for a Bloomberg Economics, talking about the effects of the drawn out US China trade war and what that means not only for consumers in the United States, but also for the Chinese economy. So Amazon wants to run our world in every which way, whether it's in our homes, whether it's in our stores, whether it's the music we listen to or the movies we watch. The latest they are planning to open three thousand ghost stores. By Shara over Day, Bloomberg Opinion calumnists

covering all things tech. What does an Amazon convenience store look like? Well, what they look like now. Amazon has a handful of these cashier less more or less convenience stores um that they started a couple of years ago in their hometown of Seattle, and they look like a conventional convenience store with prepared foods and a handful of select um packaged food items, except there are no cashiers. You kind of walk in with your smartphone that has

a special app on it. You pluck whatever you want off the shelves, and you walk out and your app is automatically figures out what you bought and charges you for it. Now, I don't know, you know, our colleague Spenser Sopa reported this story yesterday about the planned open as many as three thousand of these cashier less stores. In addition to the number which is quite stunning, the other surprising thing was maybe they won't be convenience stores.

Maybe they will be more like cashier less. Uh, you know these kind of sandwich joints that we see all over our neighborhood here in Manhattan, more like places where you go to pick up a sandwich or a salad or some other prepared food. So it feels almost like it's in competition with you know, Preda Mager or Chipotle, er these other kind of lunch joints that we see in lots of cities. Do we have any idea about the back the back end of all this, the kitchen preparation.

Who's going to do all that work? And is that coming from Whole Foods? For example? I mean, look, the irony of any cashier less store is that it requires an enormous amount of manpower behind the scenes. Right, So, in addition to the people who have to prepare the food, you have people who stuck the shelves. You have people who have to drive food from a centralized kitchen um or or warehouse to the store. Uh, you gotta restocked shelves,

you gotta have securities and people and are shoplifting things. Essentially, there are people required, even for something that is billed as cashierless. You know, Spencer's story yesterday reported quite an interesting figure that the original ghost store in Seattle required a million dollars just for the technology hardware, and that doesn't account for all the other costs to set up

and operate that store. So obviously a million dollars plus per store does not scale if you're talking about something on the order of three thousand stores. Jeff Bezos is no dope. What's his plan here, what's the what's the

big kitting? Okay, so the look, the big prize here is Americans and people around the world, they spend huge chunks of their household budget every month on groceries, on convenience stores, and on eating out and if Amazon can pluck you know, good share of each of those pools of household spending, that's an enormous market for Amazon, particularly in grocery, but not exclusively. So that is really the big prize here, is accessing a huge pool of consumer spending.

Do you know that Amazon offers something called Amazon Cloud Cam for the Alexa smart home. It's a security camera that has two way audio, night vision and HD resolution. Indeed, yes, it's one of many of their Alexa power devices. Yes, well, that was where I was going with this, because I believe you said to be an announcement having to do with devices, and I don't know whether it's going to be the Echo Look, the Echo Show, the Echo Spot, the Alexa, the Fire TV. My goodness, Yes, it's so.

As you said, in a couple of hours, Amazon is hosting this event in Seattle where they're going to apparently talk about the next wave of the devices they put out with this Alexa kind of smart brain baked in UM.

As you point out, they do have a pretty big range of these Alexa powered Amazon devices already, and I think although there are no hard sales figures, it feels like some of those Alexa powered devices have been successful, like the Echo Dots, which is the kind of small form version of the original Echo voice powered speaker, and some of the Alexa powered devices that Amazon is released, um haven't been a successful So I think it's fair to think that Amazon is kind of throwing spaghetti at

the wall to see what sticks when it comes to their device strategy. And maybe that's not a bad idea, right if you're a company of Amazon size, let's do essentially, you know, experiments in the real world instead of you know, in a laboratory. But there's no cashier when you buy that spaghetti before you throw it at the wall. Interesting, Well, um, I suppose yeah, you can buy those Amazon devices on Amazon, no people required. Also at whole food stores where there

are cashiers. It just gets better and better, doesn't it. I will say, I go to Whole Foods, I full disclosure on an Amazon Dot Prime customer, but I haven't signed on for the benefit Whole Foods because it just seems onerous and yet another password. I don't know. I just am not seeing the crossover so much. You get a discount, I know, yeah, it actually costs less, I know, but then it's time. Time is money anyway, sure over day of Bloomberg Opinion columnist. Thank you so much for

being with us. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio