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Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moven News.
Find the Bloomberg Markets Podcast called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot Com slash podcast catch funds. You know them, you love them? How is performance in twenty twenty three? What to look for in twenty twenty four? Elana Weinstein Joints and she's the founder and CEO of the IDW Group and Bloomberg. Shanali Basset, who covers all of Wall Street, joins, is how cool is that Shanale that talks in hedge funds.
I've been waiting to have this conversation all week because what a weird year, Paul in hedge funds, and Alana is so plugged into this universe. Let's talk about performance first, though, because what's stunning is you've seen this massive melt up in markets, and the hedge funds, by and large across
the industry really have not kept up. Bloomberg's All Hedge Index is only up about four point eight percent through the year so far, and the multi strategies are supposed to be the kings of the castle here are only up less than three percent on the year. Alana, what's going on?
Okay, So let me unpack those numbers. First off, the hedge fund index, I think, is a blend of everything, So we need to kind of go strategy by strategy to really pull out what the themes are. Long short equities, which had a really tough twenty one and twenty two. Finally, Shanali had performance. I am please to sit here and say something positive, which I have not been able to do.
For the last couple of years, those funds, which are a big percentage of the hedge fund universe, the directional concentrated Tiger cubs and similar are up as much as twenty percent, thirty percent, even forty percent. The issue there, which is really important is even though they're up that much, they still have for the most part, an enormous high watermark to have to get out of. And let's just
say it's a fund that's up thirty five percent this year. Okay, you may think, and they were down about fifty percent between twenty one and twenty two. You may think, okay, ye'ar one this year, up thirty five they can get out of that remaining fifteen or twenty next year and
then it's smooth sailing. But the reality is their AUM maybe was thirteen billion at the beginning of twenty one, it's six and a half billion now, So that thirty five percent is on a much smaller base of capital, and it's actually as a result, so there may very much fewer dollars made than it would have been had they made that money back up before they had the losses, And as a result, there's really another sixty five percent to go, So that's a huge headwind for that strategy.
How much more excitement is there around the industry, especially because many of them have not met the market performance still, and so even if they're up, they have two issues here to your point the high water mark and the issue is you could just invest in the S and B or the Nasdaq or even the socks up sixty five percent this year, how does that set them up into appetite investor appetite for new hedge fund allocations next year.
Let me also touch on the multi managers which you cited. It is true that blended it's not a great result, but unpacking that, there's a lot of dispersion in that result. If you look at the more established multi managers that have been around a while and have built a mouse
trap that is very difficult to compete with. Fun like Citadel leading the pack up fifteen percent, which is a very different number than what you cited, or Millennium point seventy two up double digits, and then the rest are struggling, and that has a lot to do. So when we to answer your question LP appetite, you know, the reality is the reason the other multi managers grew so quickly is because the more established players were either closed or
very deliberate about how they grew. And if you can't allocate to the more established guys, or at least not at the level you'd like, then you end up pouring money into all these other funds that grew in the last two years hand over fist. And when I say quickly, I mean between three and eight x. Think about that over a twenty four to thirty six month period. It is very difficult to deploy that kind of capital growth and hire a winning team. In order to do that,
talent is really fugual to hire and attract. No one knows that better than myself and my team, and so you can't get from one billion to eight billion, hire one hundred and fifty pms and expect a great result. There's a lot more that goes into this.
Okay, well, let's talk about talent, because I feel like it was, you know, pandemic era where all we were talking about was the competition to talent and compensation wars who can offer the best starting salaries and the biggest bonuses. We know that it has been a more difficult year in terms of actually people getting paid, and we're probably finding that out here at the tail end of the year. So what is your view here on compensation and how these firms are making themselves attractive.
I think compensation kind of falls into one of two buckets. It's either formulaic and for example, if you're at a multi manager with a pass through, you know exactly what you're getting paid. There's no mystery there. Or you're at a fund which is like a single manager, where if you're a senior person, you have points in the fund and then there's maybe a jump ball with respect to being able to reward you on top of that, but to the extent it's a fund that has a high
high water mark. No, there hasn't been a performance fee, for example, the long short equity managers in twenty one for the most part, there wasn't one in twenty two, and even though they put up this incredible performance in twenty three, they don't have a performance fee with which to pay those people. And so to answer your question, I think there's going to be a lot more frustration this year than there even has been the last couple
of years. Those people are going to get paid more because the manager is going the founder is going to feel he or she needs to reach more deeply into the management fee to pay them. But when you're someone who's put up hundreds of millions of dollars, even billions of dollars, the dispersion between what you're actually going to get paid this year and what you've produced is going to be very frustrating versus in previous Here is where
there wasn't performance for the fund. I didn't put up performance as an individual, So whatever I get paid, I'm kind of okay with because that's the ethos of this industry. It's paid for performance. Now I've put up tremendous performance, and my founder isn't really paying me something that feels in any way proportionate to what I should get paid.
And I want to also highlight as much as some of these funds lost a significant amount of AUM, we're still talking about falls from Grace of thirty billion to twenty billion, or in the case of Tiger Global, one hundred billion to fifty five billion. But think about the management fee. On fifty five billion, that's still a billion of fees, or on twenty billion, that's four hundred million of fees. So and these teams are relatively lean, particularly
at senior levels, and everyone knows that. So it's it's early, still a visa vcamp. But what we're hearing, even though the number is better, is an increased level of frustration, and I think there's going to be more vulnerability at these funds as a result.
When I left the street in the mid two thousands, I studied long and hard about whether to transition to the hedge fund business. And what I concluded then was that long short equity, no alpha left done game had been played out, so I can go Bloomberg.
So my question is how lucky we are?
And I was absolutely correct that the numbers bear that out. My question is if I'm a really good trader, I don't know, bonds, currency, something at Morgan, Stanle There, Goldman, Sachs. Back in the day, I could just leave and go raise a couple of billion dollars and then boom. That was my path. Does that still exist or does a lot of the new money coming into hedge funds go to the point seventy two's and the citadels.
Well.
As I said earlier, some of those established managers are closed or very carefully accepting new capital. I believe me, there's a line around the block to allocate to those. But two things. One the days of leaving the cell side to go start a hedge fund, I think you'd have to be completely nuts to try to attempt to do that. Good luck getting a job at a hedge fund period, because you've spent all this time on the cell side and back in the day. Sorry not to
age you, but we got there. You could take risks, sure right, you could take risk. You can't do that post the financial crisis. So if you're still sitting on the cell side, the reality is you're in more of a managerial role than you are a risk taking role. At a senior level, I think it's candidly become more
difficult to even launch coming from most hedge funds. Now, coming from a top flight hedge fund which has a great established track record and is doing well today, that's exciting to LPs, but that group of funds has become fewer and fewer. And yes, coming out of a fund like a Citadel or a point seventy two sets you up in good stead to be able to launch successfully, But think about coming out of some of the tiger cubs are related now that are still well below their
high water mark. That's not exactly an exciting value proposition to Lpece to say, oh, I'm going to be different, you know, and don't worry about the last twenty one and twenty two. You know, we're doing better now and my approach to risk management and managing volatility is better than what you've experienced.
Also em bettered in Paul's question here is there's a long short equation has been doing better, but macro has been such an exciting prospect. Currencies, fixed income, the interest rate environment so drastically changing. When you're looking at the types of managers. How much is the macro story part of twenty twenty four and what does that mean for the talent story.
That's a good question, Shanali, because every year I feel like it's a different story in macro. Twenty two is great, twenty three has not been so great, So we'll see what twenty four holds. It's a strategy which embodies as we've seen a lot of volatility, so I think it's TBD in terms of how they will perform. And you know, talent follows where there is an ecosystem which can navigate that volatility best.
We're now in an environment, an entry environment that haven't been in a long time where rates went up so much now they're going to be coming down. Is there a feeling within the hedge fund community that certain strategies are going to work better in twenty four than maybe the past couple of years.
Well, I think the reality is the uh, you know, the bar has gone up in terms of not just just the market environment, but also what LPs expect for what they're paying. And it's really the focus is of course on alpha and running in a way which neutralizes a lot of the market risk inherent right, that has
whip sawed a lot of the return for funds. Factor rotations really has obscured great fundamental stock picking and so being somewhere which can isolate what is value, growth, momentum, macro cross currents and hedge those things out so that great idiosyncratic alpha driven stock picking can shine through. That that's the most important thing, because then it doesn't matter what the market's doing.
You know.
Interestingly, I want to comment on something you had talked about a little earlier. We were talking about the success of sit it out in multi strat but it's also worth talking about the undertone of the other side of that story. You had mentioned that some firms grew so fast, so quickly, and the poster child of that this year was really Sean Feld. This idea that a lot of money was pulled, billions of dollars was pulled from the firm. You know, they really had to look to raise capital to really
fill that whole. They even considered merging with another large multi strategy firm. Is Seanfeld alone? Is there other struggles that we're seeing in firms like Schonfeld and how does that play out into next year?
Totally?
You know, all these funds that grew so quickly, whether I mean, I'm just not to just to talk about who's grown hand over fist. These funds are multiples aum wise where they were even two years ago. Lmr Hudson Bay sinctive Schoenfeld, as you mentioned, fruition, and you can't
do that. You have to be far more deliberate with respect to thinking about what is the end state, how many pms do I want so that I can maximize idea generation and minimize crowding risk and then execute against that and only grow as you've been able to attract talent, and I don't mean bodies, I mean talent, and talent
always has options, right if you're that good. The reality is, as one of those multimanagers that grew very quickly, you're up against the Citadels, the point seventy two's, the Ballyasns of this world, the millenniums competing for those people. So what are you offering that's really a differentiated value proposition?
And when I hear of a fund and this is an actual fund that grew eight x in that period and hired and is now has one hundred and fifty pms with no real team underneath any of those pms and the pms they attracted or really science experiments. Most of them have not been pms before, don't know how to run risk in a market neutral model, and there's no real resources at the firm to make them better.
That's a recipe for disaster. And what we've learned is being a successful multi manager is not as simple as capital, a pass through and PMS. It is far more nuanced than that.
All right, really great to have you join us today, Alana and Shanali Basik as well. Thank you so much. We really appreciated. Alana Einstein there from IWDIDW group. It's the holiday week, guys, We're almost through it. We're like almost at the end of the year. Thank you very much.
You're listening to the Team Can't Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business app non demand wherever you get your podcasts.
I want to pivot to Cam Harvey. He's professor finance at the Fuqua School of Business at Duke University, my alma mater. I took a couple classes from Professor Harvey. I survived. I'm proud to say I can't claim any more success than survival, but some good stuff there. Hey, Cam, I look at the ten year treasury. I mean, I'm not a bond guy, but I mean, just a couple of coffee ago, the ten year treasury was at five percent. Now we're at three point eighty two percent. What's going on out there?
Yeah, So it overall is very good news that that rate has gone down, and I think that that investors and consumers have revised their expectations of inflation and this is good news. So it means that the Fed has stopped and is now talking about decreasing rates, and that pressure on the long term rates seems to abate it.
So I mean the market's pricing in multiple rate cuts for twenty twenty forty. I think the market's maybe a little over at skis here or is that something that the Fed should be considering?
Well?
Last time, Ozon I was making the case that the cuts should have begun in twenty twenty three. So the Fed overshot by pushing the short rates up so high. And the sooner that they take down some of these cuts, the better, because it does cause a lot of stress in our economy, and that stress is unnecessary given that inflation, according to my calculations, is running well below two percent.
And professor, let's dig into those calculations because they're fascinating. I love reading your work, whether it's across LinkedIn or more broadly, and for you, it's housing, right, This is where the misinterpretation is coming in.
Exactly.
So housing is operating with the lag, so it's not like current rents or current housing prices. We change the way that inflation is calculated back in nineteen eighty two, so before eighty two, it was real time inflation and housing, but now it operates with the LAG. So the housing inflation that's reported in the CPI is inflation that happened a year ago, and that component of inflation is thirty
five percent of the overall inflation. And the reason inflation has been high is that the shelter component has been running at seven percent. That's what goes into the CPI, but we know that's not the case. If you look in real time rental inflation or house price inflation is near zero or one percent, And if you recalculate the CPI with real time shelter costs, then what you see
is a real time inflation rate below two percent. And this has been very frustrating because this shelter component caused the FED to make a mistake early on in declaring that housing was no big deal and inflation was transitory, and it caused them not to move to keep rates so low for so long, and then the same mistake was made in twenty twenty three. It was obvious that the only reason inflation was high was because of the
shelter inflation that had happened in the past. Policy needs to be executed based upon real time data, not on data that happened like a year ago.
In the world I cover more which is AI we say a lot garbage in, garbage out. So how are you having conversations as a professor of course over there? Do you trying to get this message across to use hearing that it's falling on death is or more is that are willing to listen to some of the data that should be taken into account when it comes to in flrastory pressures.
So this has been a more than a year long campaign for me, and again I'm very pleased that the FED has changed the conversation. And the sooner they move the better. There is still a lot of risk out there. So like I know, people are patting the FED on the back, congratulations, mission accomplished. No, it's way way too early. My inverted Yell curved indicator which is eight out of eight in predicting recessions, that's the nineteen sixties. We are
at the average lead time to a recession. So if you look at the last four recessions, the Yell curve inverted on average thirteen months before a recession, and we are at month thirteen breakdown. We're at the average, So again it's too early. There are significant headwinds. The FED can help things by reducing the FED funds rate as soon as possible.
Hey, Kim, I know you also do a lot of work on blockchain, crypto fintech. You teach a course down there at DO Innovation and Crypto Ventures. What's the theme that you think we should be on the lookout for for twenty twenty four in this space.
So it's interesting that we've got the two simultaneous disruptions happening. So one is then decentralized finance to change our payment system and to allow for functionality that we've never had before, and we've got AI going on at the same time. So I look at this in kind of the big picture, and the big picture the thing that worries me a
lot is just the size of the US debt. So the service on that debt is about seven hundred billion dollars a year, and that service will increase in twenty twenty four to be the second largest spending category for the government. So the way to get out of this problem is, well, there's three different ways. One way is to increase taxes, and that just kills growth and nobody wants increased taxes. The second way is to print money
and to inflate our way out. So you print the money to pay off the debt, and that is just like a tax also, so nobody really wants that. Nobody wants to go back to that inflation. The third way is with growth. So if we increase our growth rate, then it naturally increases the tax revenue and allows us
to pay down some of that debt. So we are at a cusp of a pivot point, in my opinion, in the economy with these two disruptions going on, and they potentially allow us to get on a different growth path. And it's really important that we do not fumble these opportunities by overregulating either decentralized finance or AI. We need to embrace these disruptions and to look at the benefits, not just the costs. And I'm not saying this is without risk. There is risk, but the key thing is
to get on a higher growth path. I don't think it's unreasonable, all.
Right, Kim, that's great stuff. As always, Campbell Harvey, Professor of Finance at the Fuqual School of Business at Duke University, Great great Place, highly recommend it.
You're listening to the tape. Can's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa Play Bloomberg eleven thirty.
We dig into the geopolitical news of the week of the month. Of course, the narrative continues to build about the Red Sea, and of course Suthi Rebel has been seen to me attacking certain vessels and it basically redirecting. We understand now half of all containership fleets now currently no longer going through the Red Sea. They're avoiding the route. This is according to new industry data that overall is one that we can probably cooperate with. Our next guest,
we're please to welcome to the show. Anton Post, who CEO Mercury Resources, and you're all about negotiating skills. You're about professionals from an industry basis helping you plot out your dry cargo issues. When you are looking at such a difficult supply chain management conundrum, What do you advise at this moment Anton.
Yeah, thanks Carolyn. So at this point it's a lot of wait and see in what's happening with the international coalition. We are partners at have Court Gallbery's Melory Alexander. On the container side, it's right now a lot of handholding with our client base on the commodities sector to guide them through what's happening in the markets at this point.
So we're seeing of course increased freight, increased insurance, a lot of uncertainty and mixed signals from ship owners, container lines and from governments on what's happening to basically mitigate the risk and the threats that are out there from these many art groups.
I mean, yeah, talk to us about some of the mitigation of the risks of how the US Navy is leading this military partnership. You are out there talking to the brocus the ship is the government support authorities. Do they take this as some sort of easing of concern or are they still wanting to hold back.
Yeah, we're seeing some easing of concern.
Chip operators on the container side, like Marrisk CGM are starting to signal a return to going into the Red Sea and the Suez Canal. Some ship operators on the container side like HAPAG Lloyd are still holding back and not even announcing any kind of return to that to that market on the dry bulk side, which is a huge part of a huge part of our.
Business dry commodities ship owners.
Right now, it's naturally a time of year where it's where things have slowed down. Uh, So we're seeing ship owners of the dry bulk side diverting ships that are already en route and ship raiding new cargos.
For January February.
Timing is more of a let's see what happens after New Year's and what's happening on the h on the side to U, you know, on the on the news to mitigate what's happening there with the with with the military response. So of course we've seen the Navy move the usswy D Eisenhower into the Gulf of Baden and off them Andy Coast.
Uh.
This twenty nation coalition that the United States it's announced is seemingly coming together, but there's been some hesitancy from a couple of you know, some of the US allies and some nations have been reluctant to even put their name attached to it. Yet so definitely some still some concerns and not a lot of comfort.
Anton. Who ultimately decides whether ship does transit the Red Sea and the Suez Is it the insurance company, the ship owner, maybe the captain himself or herself. I mean, who really at theen today makes that decision?
Yes, yes, and yes, right, it's a it's a very much a combined situation. Ultimately, the master of the ship, the capture of the ship has the as the ultimate say, right, but they're taking instructions from the ship owner. But in this situation, really in all situations regarding commercial and merchant shipping, you have many layers on top, right, you have the ultimate ship owner, the company that owns the ship. You have the master that has ultimate responsibility for the ship.
And then you have the ship operator, the company that's often time chartering the vessel and has some say over it. So it's very much a combined decision. So even if a ship owner wants to order that ship to transit through the through the Suez Canal and the Red Sea, if the master is not comfortable, right, the master can basically say we're not taking We're not taking her through.
You know, I just kind of learned today through some other discussions that while yes, the having a aircraft strike carrier group in the area is certainly intimidating, certainly represents a tremendous show of force, at the end of the day, what can it really do against a bunch of terrorists? You know, what's the what's the belief in the industry about what it can really achieve?
Yeah, I mean right now, without having the international will to do something, and the geopolitics going on over over being seen to align you know, for some of our NATO allies in this case, right to see themselves to align with the United States on the mission to deal with it's been it's been walking a tight tightrope, right, So we're not even seeing strong rhetoric from.
Some nations on the issue, let.
Alone, let alone deploying actual military assets, enable assets to the situation. You know, some of what's been written about this, about the about the coalition that's coming together, as some NATO allies have instead of deploying a destroyer of frigate let alone, you know, any kind of hardcore military assets, they're deploying one staff officer to the team, right, So what signal is that sending to ye many armed groups here.
Operas I mean.
To that end, I mean what's fascinating is just how global and interconnected the shipping world is. I think in some of your notes you were talking about one vessel which is Liberia flagged, Dutch operated, Japanese owned. To that end, how does do politics in and of itself affect the business of shipping? Are people having to decide whether or not they work alongside certain alliances that they've always usually done, So how is that playing out in the world in which you work?
Yeah, absolutely, Caroline, And what we're seeing is situations in hardcore examples now of ship owners and dry cargo market.
One example that comes to mind, right, a dry cargo ship operator that's working on a voyage of a dry cargo a dry commodity is actually asking a large international trading firm that's their counterparty on that if there's any Israeli involvement in the trade, let alone, put aside the ownership of the vessel, the operations of the vessel, where the ship is going to, put that all aside, just whether or not there's any involvement by Israeli companies in
the actual trade of the commodity in that particular sense. So this is really really reach far reaching, right, something else that does always researching and getting ready for today. Interestingly enough, we're seeing ships now transiting through the Red Sea that are using their AIS system that's usually used to transmit data on the ship's position and load port
and discharge port and ETA. They're using that instead of showing a discharge port of let's say Peaeus Grease, they've replaced that with information that says armed security aboard or no Israeli involvement in the ship in the in the slot where you would put the discharge port or the destination port, so that it transmits through to the MNY armed groups, right, that they could see that information as
they're tracking the ship. In addition to what's allegedly an Iranian spy vessel you know, that's been lingering there too, and.
Touch about thirty seconds left. I mean, is there any realistics solution here other than I guess the cessation of hostilities in the region.
Yeah, I think the others.
The other solution is potentially in very unsavory, right, a military solution to dealing with what's going on on the ground in Yemen, and of course, I'm no expert in military matters in terms of how to deal with that, so I wouldn't even I wouldn't even vent venture that.
But you could.
You can imagine if we're dealing with a situation where we're United States NATO allies are not even willing to send more than a staff officer to a joint naval task force, what's gonna you know, where's the will to deal with this on the situation on the ground where the attacks are originating from.
Well, you as an officer in the US Naval Reserve, so you know a bit more than we do here in the radio studio. But we really appreciate your time. Anton, absolutely fascinated to get and on the ground feel of all the negotiations you're currently having. Anton Posners, of course, the CEO of Mercury Resources.
You're listening to the tape Kent Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
We want to get some expertise in this area where the risks are also where the opportunities are to be investing in this sort of technology. We'll please to welcome Jake Sapo's general partner at Emergence Capital, and Jake, you know, the retort coming from the likes of open ai and the other foundational models has been fair use, and ultimately also the fact that they've been trying to get ahead of this in some way by striking deals with the
actual springer. I think the key publicists over in Germany where they've sort of licensed some of their particular use of publications and writings. What will the New York Times case mean do you think for the training of these models when you put the genie back in, can you in any way take out New York Times's own articles from the training of open AI's model.
Yeah, it's a great question.
It's great to be here. What I'd say is this is going to create a lot of movement towards exploring open source models. So open ai is the champion of the kind of closed source model ecosystem, which means that the data that they're training on and the code that they actually generate from it is not publicly available, and so there's lots of questions now around transparency, what data are they using? What can we use as a business
if we're going to use their opena models. What is happening now is an increased interest by people that consume models to explore open source models, where the data that is used to train those models is clearer and you, as the user of the model, have the ability to manipulate the model themselves. So we think that twenty twenty four, and certainly the advent of this lawsuit is going to push businesses who are using this technology to consider open source models more seriously.
So I think I'm getting comfortable with what AI is, and that's a big leap for me because it took me in most of the year. Here now my question.
The last time we talked about it.
Yeah, I just need some help on what do you think in twenty twenty four, Jakes might be some of the use cases that maybe will help the general public get a better feel for what generative AI is and what it can mean.
Yeah.
Well, I think the good news is in twenty twenty four, we're going to move from kind of prototyping land into production. A lot of these applications are going to actually get launched and are going to have real impacts for consumers, you know. As you know, we focus on B to B software investing in emergence, and we think there's going to be a bunch of exciting applications of AI in
twenty twenty four. Give you one example, we work with a company called Docimity, which is shorthand is LinkedIn for doctors, and they provide a whole suite of tools for doctors in addition to just a social networking application, but they help doctors serve their patients. One of the things that they're using AI to do is to help doctors draft letters to insurance companies to get approval for treatments.
Right.
That has massive implications for not just the doctors, but also obviously consumers and getting you know, much more efficient. That type of thing wasn't possible a year ago and is increasingly possible today. So you're going to see those types of things.
Come to fruition.
We have worked with a company called Ironclade that's in the legal contracting space and they help they help companies draft contracts using AI more effectively, which allows people to process contracts more quickly and ensure they're correct. So you're going to see them kind of seep into all sorts of applications across the business ecosystem.
A new phrase for me, and there's a lot of new phrases I'm learning as it relates to AI co pilots that ensure humans stay engaged. Here explain what that concept is and of what are some interesting companies that maybe have seen with that tech.
Yeah, so imagine that you are on your computer and you're searching for some piece of information. The idea is historically you would go, you know, to Google and look externally, or you would kind of scour all your documents internally, a copilot will actually pop up and give you not just a link to something, but actually an answer. We work with a company called Guru that does this exact thing.
So the idea is, instead of searching across all of your applications, the information has actually serviced to you directly. So the concept of a copilot, to boil it down, is, as you're doing your job, you have an assistant that is kind of next to you that helps coach you on the right direction to go. Now, critically, there's a
difference between a copilot and an autopilot. Autopilot is dangerous, right, because that's when the human shuts off their brain and the plane flies itself, and that could be bad, or you know, it could be good. As you're building these co pilots, As you're building these coaches, you need to ensure that the human stays engaged and is actually in putting their new their thoughts and creativity and double checking into the software. Because, as we all know, AI is
not perfect. There are errors that are committed all the time. That's okay in consumer applications. You know, if you're chatting with a dead celebrity using AI, it's okay if it's wrong, right, But if I'm drafting a important legal contract or if I'm communicating with an insurance company, I need to be ensured that it's a bulletproof. And a core way to do that today is to ensure that the human is engaged with the copilot and not just clicking accept, accept, accept on whatever it suggests.
When you're looking at the valuations of the companies that you're ruying in the B to B space, or more broadly, when we're talking of the latest one hundred billion dollar valuation of open AI. When we're thinking of Vanthropic reaching a run rate revenue run rate of eight hundred and fifty million and potentially being valued more than eighteen billion.
Are those valuations realistic if open source is going to become more of the valued foundational model direction of choice or do you think, really still these valuations are going to be the right source of.
Amount for them. It's a really great question. There are lots of great closed source companies like the ones you named. As open source becomes more and more viable in twenty four and twenty twenty four and beyond, work with a company called together that helps you know companies actually use
closed source model open source models more effectively. There is going to be pressure put on these open source models, and so the key thing to check as you're evaluating an investment in a close source or really any a opportunity is retention.
You want.
These things are getting incredible adoption right initial adoption. People are playing with this stuff, experimenting with their prototyping, et cetera. But the core thing that will matter in twenty twenty four and AI is retention. Are people that start using the product continuing to use the product, and the key questions you alluded to is in these foundational models, it's easiest to start with the closed source model because it's all packaged for you and you can just kind of
get it up and running quickly. But if open source models become more preferred, either because they're more easily manipulable or because of the New York Times, you know, driven concerns around where's your data coming from, there is going to be some downward pressure on these close source models, which could put pressure on retention, which could ultimately pu pressure on some of those valuations.
And Jake, how are you trying to add analyze the regulatory outlook for twenty to twenty four as you make these investment decisions? How you trying to preempt It feels sort of like crypto all over again. Everyone's trying to get ahead of where the SEC or indeed, more broadly, you know, we've had an executive order here in the US, but this is going to come down to global regulation. We've seen the EU with its AI Act. How do you front run that?
Yeah, well, I think transparency is really important, Like understanding where you get your data from is really important. You don't want to be using copyrighted data to train your models, right, that's like it's obvious, But I think people are going to be paying much more attention to where that data comes from. I think similarly, trust is going to become much more important, not just in terms of where your
data comes from, but is that data actually believable? You know, bad data going into a good model is going to create a bad output. I work with the CEO of Guru, Rick Nucci, calls this truth washing, which is where, Okay, I'm using data that comes in and the model spits out an answer that sounds really confident.
What's wrong.
I think going forward there's going to be a much greater impetus put on how do you validate the data that went into training the model is not only legally for you, legal for you to use, but also accurate so that the input or the output that comes out of the model can be trusted. So as we think about evaluating investment opportunities, we're thinking about it from a first principle's perspective, which is a belief that regulators are going to move in the direction. Thank you Apple for
the use of the thumbs up there. This technology is going to move in a direction where regulators are concerned about. Okay, is the data? Are you allowed to use the data that you are using? And is the output that's coming out of these models trustworthy such that good things can come from it?
Thirty seconds Jake, if I bring a cool AI idea to Sandhill Road, can I raise money?
Well?
As we talked about last time, Paul, Standhill Road is that's the past. The future is San Francisco, the Embarcadero. That's where the question nice.
I like that.
But to answer your question, can you raise money? Well, first, I would look at your background, and I think your an incredible interviewer. I don't know how oh technically savvy, you.
Are, right, but good.
I mean the reality is there is going to be more media and companies twenty four yeah, exactly, covering your the media company, I'll writ a check all day long. There is going to be more scrutiny of AI investments going forward, and I think the key thing people are
going to be looking for is that retention point. In twenty twenty three, so many AI applications, we're getting so much tire kicking, and lots of people were using the product for a week, two weeks, three weeks and then they would get bored or try the next hot thing,
et cetera. What investors are going to be increasingly looking for in twenty twenty four is Okay, yeah, you've got a lot of people to start using your thing, but are people continuing to use the thing indefinitely and continue to get value out of it?
Right?
All right, Jake, once again, thanks so much for joining us. Really appreciate getting your insight there. Jake Sayper, general partner at Emergency Capital, Thanks.
For listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio