Machines Are Replacing Wall Street's Bonus Culture

will be replaced by technology. Uh lenan newon financi reporter for Bloomberg News, joins us on our Bloomberg in our Actor Broker studio and she has this story. So, Lennon, we've heard these big financial services come you talk about the huge investments they're making into technology. That's really changing the culture of the financial services industry, isn't That's right, Paul. It's a big wamp wamp on Wall streets this morning.

Bonus culture is starting to disappear because the individual humans are not responsible for those kind of big blockbuster trades that used to see. Maybe we're when you were on the streets. So we're talking about al goes and automated trading strategies that are really making the money here, which means that the individual humans don't get as much. So does this just shift things to more of a salary

type of model. And have we seen that kind of adaptation at this point, yes, so we've seen bonuses decline, first of all, and we've also seen more salary models at the same time as seeing the bonus kind of being considered as a group effort or team sport, as one of our sources says in the story boy Back, And I mean just it was, you know, my total compensation was the bonus and you started just kind of obsessing on it the day you come back from summer

vacation in September, all the way through to year end, jocking for the number. But now it's I know it's changed now again, bigger percentage of total conversations in um in the salary. Are they finding that they're able to attract the same quality of people. This is an interesting question too, because the tech companies obviously want this kind of high quality quant talent as well, and so one of the things that used to be the same in

Grace on Wall Street. Was the bonus, right, which is that the banking industry could attract high talent because of the higher pay. But it seems like that's declining now, So that's a that's another question is whether they'll be able to attract the talent if the bonuses don't come up. So, just can you give us a sense of how widespread this is, because typically the areas where the bonus has been one of the biggest components is in say the trading side of things or the banking side of things.

We're actually getting deals done and trading short there can be some uh, some automation there, although not in every asset class, and on the banking side same, I mean, you still have to complete the deal. So where are we seeing the most disappearance of this culture. That's right, Lisa, And it's lumpy, it doesn't you know, it's not uniform. But I think in trading the markets that are most electronics.

So we're talking about equities, we're talking about foreign exchange, maybe slower as a bond market to kind of get up to speed in this, but the bond market eventually is going to go electronic as well. And so we're seeing more of this happen in the highly electronic automated markets, and it's across the buy side and the cell side as well. It's just a good thing from a profitability perspective for the financial services firm if they can cut

out some of these you know, high cost talent. Uh. Definitely. That's one of the major catalysts behind this move is the cutting of costs, right, the ability to reduce headcount, reduce the number of people on the desk, reduced the

bonuses that you pay in order to cut costs. Although you have to think on the flip side, there's got to be some people saying that this could potentially hamper profitability and that it doesn't incentivize people to go out there uh and obsess when they come in after summer break and lose hair over the question of how much

money they're gonna make for the company. That's right. If you eat what you kill, then you're pretty hungry, right, so you get out there and you try and found the pavement, whereas um in this model, maybe people are just collecting their salary. Have there ever been studies that show how much that hunger adds to profitability? Versus detract when it comes to risks that go awry. I'm not sure. No,

I don't think so. I'm not aware of anything because I think after the financial crisis, one of the when you look back to the financial crisis, a lot of regulars said it was the bonus culture that contributed to some of the behavior that we saw from the financial services firm grinding out bad deals just to grind out deals to get paid. Yeah, but it was the bonus culture of who everybody in the firm, including the very

top and the executive managers and the risk managers. I mean, at a certain point, if you have risk managers, they try to put a stop to that. But there has to be a yin and a yang, right, I mean, I guess that I'm trying to figure out, you know, where this balance is, and I'm trying to figure out

how important that conversation is exactly. It's really important. How do you motivate people and how to keep them hungry and aggressive and wanting to win, while at the same time not allowing them to do things that are over the line. And it's really really important question. Lenan Newin, thank you so much for joining us. It's a really interesting read and I'm sure prompting a lot of angst

across Wall Street, uh and beyond it. But this is something, Frankly, it's not just Wall Street, it's it's a lot of industry. Is the concept of how does automation play with humans? How do people use its third advantage? Yeah? Not surprisingly. I guess what the top red story is on the bloomber terminal right now, Lennan story. Yeah, all the algo is really eagerly reading about their bonuses. Lennui, and thank you so much for being with US finance reporter for

Bloomberg News. Well, in the world of global trade, Wednesday will be a big day. That is the day when the US and China are set to sign the Phase one trade deal, and we'll get a sense of what that means for retailers coming up with Rick Heffelbin. He's a former chairman and president CEO of the American Apparel and Footwear Association. So Rick, thanks so much for joining

us here in our Bloomberg Interactive Broker studio. So if we get this trade deal with again schedule to be signed U this Wednesday, what does it mean for apparel makers, footwear makers? This country. Well, clearly, Paul, we're you know, we're excited they're meeting. We're exciting. They're signing a piece of paper. Course it's eighty six pages and nobody's seen it yet, which is a little bit disturbing from everything that we've heard from you know, our insiders. Uh, we're

not particularly bowled over by this deal. A matter of fact, we don't think it's going to help us at all, which is uh a big concern for a whole host of reasons are really simple to understand. Um, they eliminated the December fifteen tariff, which we never had, so eliminating something we never had is not of great value to us.

The percent that we've had for a couple of months now on hats, handbags and gloves, that's sticks, that's still there, And the fifteen percent that they hit us with on September one gets cut to seven and a half percent, which, in our humble opinion, is seven and a half percent too much. So we don't see an new winds for our industry at this point in time. We are justifiably upset for a whole host of reasons, Like, you know, is there going to be a Phase two are you know,

will talks go on. What's the roadmap for getting rid of this? Well, remember when you spoke with us over recent months when you said that it would be an absolute disaster, death knell if the tariffs are planned for December had gone into effect. So on on a certain level, that's good, right, they didn't go into effect. Well they did, and they didn't. Remember as an industry, we are war. Prior to the trade war, six percent of all imports coming into the United States, but we already paid fifty

one percent of all duties collected. So we are a highly tariffed industry in America. The average terrorists before the trade war one point two percent. Our average terrorists were about twelve percent. Okay, Well, just what I'm trying to understand is going forward, at least we have certainty, right because Phase two isn't gonna necessarily involve all retail and tariffs. Again, let's say it doesn't. Is that good enough? No, it's not.

It's gotten. It's not good enough because you're you're essentially taxing us out of our prime sources supply. And that's what hurts because a huge percent forty one of all apparel coming into the United States comes from China. Sixty percent of all footwear comes from China, percent of all accessories. So what signing that deal does. It signs a mandate for us to get out of China. Okay, so we'll listen to the administration, we'll listen to present, We'll get

out of China. Where are we gonna go? Where we gonna go? So in this first round, with all the agitation, people decided to stay there. We got through the holiday season by renegotiating. But all bets are off going into so prices have to go up. When prices go up, sales go down, and retail will end up in a funk. You know, we lost seventies seven thousand jobs in retail list year, and retailers everybody knows is essentially two thirds of the economy. Ten percent or twelve percent of all

jobs are in retail. So we look at this signing as a concrete step to tell us, okay, you better make other plans. And you know how long it takes to make other plans, three to five years. So we're in trouble. We're hurting. So, Rick, what did your members, the apparel and footwear retailers, what did they do. How did they deal with the higher tariffs to day try to pass along those price increases. Did it eat into

their margin? What did you find so? Well? Remember I left a f A at the end of the year, so I can tell you what my former members did, and what they all did unilaterally was went over to China and said, look, we make our money in the fourth quarter of the year. Help us out. Work with us because we will have to absorb tariffs on inbound merchant that I have. So pretty much China worked with everybody, but they say, you know, one time deal, we'll get

you through holiday. So you're on your own. I'm looking today five below, which is a retailer the prices most of its goods at five dollars or less. It felt the most since it went public in twelve. It had downgraded some of its forecasts. And it makes me think, particularly with respect to margins, these sort of lower income are the sort of uh discount goods stores potentially have the most to lose. Is that right? Yeah, the independent retailers and low price stores are the most at risk.

There's more buying power the higher you go up the food chain, so you know, certain retailers will do okay, they'll get around it, and certain retailers will suffer. Can you give us a sense of the sort of scale here? I mean, in other words, how does that affect department stores the Macy's is of the world, or the it affects them because of the huge quantity of merchandise that they bring in. They were reliant on their suppliers, and their suppliers don't have an other place to go. So

the big guys will get hurt. The question of what degree of how much hurt there will be in the in the plan, you will see it. You're gonna see earnings coming up. You know, everybody goes holiday was great. You know we did three point forward to four percent increase. Maybe we did about seven hundred thirty billion dollars during the holiday season. Awesome. What about earnings? You know everybody gets so excited about sales. What about earnings? Earnings reports

are coming out the next three weeks. You're gonna see how we did. And yeah, well, the next time, my ten year old comes to me and says, I saw this watch and it was discounted by eight percent. We gotta buy it. I'm gonna look at him and I'm gonna say what about the earnings? See what about the earnings? And he'll he'll look at me and he'll say, oh my god, why are you my mother? Rick Halvin by,

and thank you so much for being with us. Rick Calvin Bien, former chair at president and chief executive officer of the American Apparel and Footwear Association, joining us here in our interactive broker studio is a really timely discussion. Well en was the everything rally markets across the world performing quite well, asset classes performing very well, and not just US equities of questions, what do you do for

an encore? Uh in. Christina Hooper, chief Global market strategist for Investco, joined us here in our Bloomberg in Actor Broker studio to share her thoughts. So, Christina, again, you've just taken a look at the SNPI about in bonds rallied as you go into how do you think about an encore? Well, I think we should expect modest returns for U S docks. They had a really strong run up in and I do believe there is certainly a bias to the upside, just given very a common midative

monetary policy, especially from the Fed. But I think leadership will rotate. Uh, it will shift to the emerging market space for a few key reasons. First and foremost, we saw balance sheet normalization and back in September, and interestingly, that's when e M took off. E M outperformed the US in the fourth quarter, and in fact, China was a standout within the emerging market space. And I think a lot of that had to do with balance sheet

normalization ending. Okay, balance sheet normalization is one thing. Balance sheet re expansion is another. And that's really what we saw, right. This isn't just normalization ending. This is uh, you know, I don't know if you want to call it qui again because I'll get absolutely pasted on Twitter. But some sort of easing through the expansion of the balance well, that certainly has helped as well. But I think we can overlook how much balance sheet normalization impacted emerging markets.

It was creating a liquidity suck, so much so that the former Reserve Bank of India governor or Chip Patel had an op ed piece in the Financial Times in June of two eighteen, essentially an open letter of the FEDS saying, hey, please slow down bouncy normalization. You're creating a liquidity suck that is impacting negatively emerging markets. So, Christina, as we think about the US equity markets, mostly a

story of multiple expansion, not much earnings growth. That really puts the pressure on this market to deliver earnings growth. What do you think the outlook should be for investors for earnings growth? Well, I think earnings growth will be

rather modest. But I do believe because of how extraordinary the FEDS accommodative stances, because the bar is so high on any kind of rate hike after three insurance cuts, I do believe it's an environment where risk assets benefit, and so there is some upside potential even if you do have lackluster earnings. So let's talk about the main cause for a twenty It sounds like emerging markets will continue to get a lift from this dynamic. Is that right? Yes?

But I would say we need to be selective within the emerging market space, so favor Asia e M in particular Chinese equities certainly benefiting from what all of em is benefiting from in terms of the end of balance sheet normalization, more liquidity UM, but in particular Chinese equity should benefit from a phase one US China trade deal. Why aren't we seeing more of a lift in the small and MidCap shares the Russell's two thousand, especially in

light of the rally that we're seeing in junk bonds. Well, because growth remains quite modest, and so this is an environment where investors are drawn to larger cap names and are drawn to secular growth. Uh that that doesn't mean that secular growth is going to outperform for the full year. That doesn't mean that large caps are going to outperform

for the full year. I think we'll get short periods of time, sort of bursts in which um smaller cap names, more cyclical name perform well in But I do think when we look back on the year in full that secular growth tends to outperform and larger cap tends to outperform because growth is rather modest. All right, let's say that I'm concerned about evaluation. One of the sectors that screams out as cheap as energy. Is there any reason

to get my toe in the energy space. Well, you always want to be well diversified, and that includes some exposure to energy. And she just said, now it's like forget it, and if one word to assume that the US Iran conflict does not end today and in fact has some sort of legs. UM. That's another rationale for having exposure to to some energy stocks. UM. But I do believe in the grand scheme of things, UH, energy is not going to perform as well as other sectors

like technology. I was reading an article this morning about how a dollar, which is kind of a key component when we talk about everything from commodities to emerging markets, UH, that the dollar has not served as the haven that it once has, and that during bouts of geopolitical turmoil or other issues like what you mentioned with Iran in the US, the dollar hasn't necessarily rallied to the degree

that you would expect. Do you buy the argument? I mean, this sort of feeds into the whole dollar weakening UH kind of concept in the US losing its cloud and the international community, at least with respect of the currency is Do you buy that? I think there's some truth to that argument. We certainly have seen gold as a safe haven asset class of choice as well as the Japanese yen. So I think that is true, and I

think there are a variety of reasons why. But certainly one of them is a desire on the part of some countries to move away from the US dollar as the reserve currency of choice. Wednesday is a fairly big day for those global trade folks. We're gonna get that Phase one deal signed. We don't know what the deal is. I guess we haven't seen any but is that all the market needs is just to see this thing kind of taken off the table. I think the market certainly

will benefit from this issue being taken off the table. Now, we have to recognize that this does not end risks when it comes to trade, because if a Phase one deal is signed between the US and China, it could mean that the US then turns its sites on Europe and embarks on more in the way of trade wars with the EU, which could be quite problematic. Who suffers most, Germany? Yes,

I think Europe suffers. Germany in particular suffers in an environment like that, especially if we were to see tariffs applied to European autos, which I think would be the eight hundred pound guerrilla in the room. That's that's what I was thinking. I mean, we hear about the wine tariffs, and I know a lot of people, uh, Tom Keane quitted, whine and cheese. It's it's very upsetting the idea that that the cost of wine might go up. And it really is all about cars, right, it is it is.

That's that's the big danger and that's the giant hammer that the US wheels with the EU. Christina Hooper, thank you so much for being here. Thanks for having me. Christina Hooper as chief market strategist at Investco. Talking about the market outlook, the headlines surrounding hedge funds tend to be somewhat conflicted. On one hand, you have underperformance when it comes to total returns when compared versus the s

MP five hundred. On the other, assets continue to climb to all time high records even though you have withdrawals. Reading us down to break it out down and get a sense of what to expect in the year, head is Don Steinberger. He's managing partner at Agecroft Partners based in Richmond, Virginia. Don, thank you so much for being with us. Can we just start there in terms of

what you're expecting this year with flows for hedge funds. Yeah, so last year there were net redemptions of about three percent to the industry, but the average hedge fund was up about nine, so industry assets were up six. I think, you know, industry assets have gone up ten at the last eleven years. I think you're going to go up again, uh in two thousand and twenty. I think the amount of redemptions is going to be less this year than

last year. A lot of that is due to the fact that interest rates are so low, and I think you're gonna see some major institutions take some money out of their fixed income allocation shifted into either uncorrelated hedge fund strategies or potentially start buying hedge funds within their fixed income portfolio, like direct lending, specialty finance, structure, credit to stress debt. So don it's interesting, you know, I

look at the hedge fund business. My personal opinion is is the long short equity business kind of peaked in two thousand six, and if you look at performance, you know it's really been soppointing. How can the hedge fund industry, written large, continue to attract capital when it underperforms well, I agree with you that long shirt equity did peak a number of years ago. A lot of long shirt equity managers have had a difficult time. You've seen a lot of money come out of long shirt equity and

go into other hedge fund strategies. But I think the reason that hedge fund asseture and all time high is because most of the money going into the hedge fund industry is into other strategies that help diversify a portfolio.

You know, you have these very large pension endowments foundations that can't be a dent in equity, and they are loaded up in equity when you combine public equity, private equity, real estate equity, so they're you know that one of their main choices is invested in fixed income, and outside the US rates are close to zero. In the US,

the aggregates about two point two percent. So they're looking at diversifying away from fixed income into hedge fund strategies, and they're not looking at out the form the SMP. They're looking at generating kind of a mid to high single digit uncorrelated return across a diversified list of strategies. It's interesting to me that direct lending is among those that you mentioned, because how is that a hedge fund area.

Isn't that more of the sort of closed down fund kind of long term, hold the maturity, get involved with the company if you need to kind of strategy. Well, I would say that the lines so, hedge funds are a fund structure, you know, hedge funds are an open end fund that have different type of liquidity provisions. Private equity is more of a draw down structure where you hold assets and then you paid out over a number of years. And the difference between hedge funds and private

equity are are very gray. And there are a number of hedge fund organizations that are coming out with private equity structures or they're coming out with hedge fund structures that have very limited liquidity. So you know, again, I think depends what your definition a hedge fund is. A lot of hedge funds are broadening out their product lineup. When I was looking at the hedge fund business back in the day, it was about delivering absolute returns above

and beyond the market, uncorrelated. This whole argument about I'm going to give you mid single digit uncarrelated returns is totally a new pitch by the hedge fund industry in my opinion, don how about the days when a big trader from Goldman Saxom more in Stanley, you know, has a great ten year run and then decides to go out and raise a billion or two billion dollars. Is that still possible today? I think it's very, very difficult.

You have a couple of very high profile launches UH in the hedge fund industry, but the amount of launches has gone down significantly, and you have two different dynamics. I mean, one is that the costs of running a hedge fund have gone up significantly. You need a lot more infrastructure. In addition to that, you have a huge squeeze on fees, so the break gaping level from an

asset standpoint has gone up a lot. A lot of these new hedge fund launches are offering founders share for the first hundred millions of assets are about the normal fee, So the business are becoming much more competitive. I think you're gonna see less and less launches over time, and I think you're going to see a consolidation of the number of hedge funds in the industry over time. Where

are we in terms of hedge funds turning into family offices. Well, you know that there's been some very high profile stories about a few hedge funds that have closed down, decided to give their money back, and you know, the fact of the matter is there's an arms race for alpha. You know, you've got to come continually up your game, and a strategy that worked ten years ago doesn't necessarily

mean it's going to work today. So you do have some high profile managers that are closing down, but a lot of those are closing down because they haven't had good performance over the past five years. They're suffering redemptions. So you know, there are some very successful hedgha managers that made you know, a billion dollars by generating great returns a decade ago, no longer generating good returns and are deciding to convert to family offices. Hey, Don, thanks

so much for joining us. We always appreciate your thoughts on the hedge fund business. Don Steinbruger, Managing partner for A Partners based in the Capital of the Confederacy, Richmond, Virginia. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney I'm on Twitter at pt Sweeney. And Lisa bram Woyds I'm on

Twitter at Lisa bramwoyits one before the podcast. You can always catch us worldwide on Bloomberg Radio