Dominique Mielle on Luck and Resilience in Finance

is really a fascinating read. I know I when I have a guest on with a book, I usually say nice things about the book, and I don't do that if I don't mean it. But I really had fun reading this. It's very witty and charming and revealing about an industry in a way that most books on hedge funds simply are not. I found it to be a very pleasant read, and I think you will also. And I found this to be a fascinating conversation, which I expect you will as well. With no further ado, my

interview with Dominic meel, author of Damsel and Distressed. First of all, before we get started, I very much enjoyed the book. You have a very wicked sense of humor which comes through in the pages, starting with the title Damsel in Distressed. What made you decide to write a memoir about your decades in the hedge fund industry. Well, it started with an article that I wrote as a hobby about my experience as a woman at Lehman Brothers. And it was picked up by Business Insider, and I

realized a couple of things. One was that I really enjoy writing, and two was that I had never really taken time to think about the lack of women in the business and that there really wasn't a voice to tell the story of female investors. And so that's when I thought, you know, there might be a hole in the market, huh, identifying an inefficiency so to speak. So to speak, except that there's really no money in writing

a book. Well, it's best described as a branding exercise and a way to sort of get things off your chest. But but let's roll back a little bit. You get an MBA at Stanford, how do you end up in finance? Was that where you plan to go? Because a lot of the Stanford MBA graduates tend to find the way

into technology, not finance. Right. Well, by the time I got to Stanford, I pretty much knew I wanted to be in finance, but where I started was at Lehman Brothers in New York before Stanford, and that was completely that was serendipity. Really. I wanted a job that would take me away from Paris. I wanted to see the world, and whether it was investment banking or basket weaving really

had absolutely no bearing on my decision. So I ended up as an investment banker, which you know, like every analyst, I hated after a few years. And so the NBA was sort of a way out of that job, branching into hopefully what I thought were better, better pastures. But still in finance. Would you do with Lehman Brothers that you grew to hate? Were you just a spreadsheet jockey? And of course I was, and I was. It was particularly ruthless because I was in a group called FIG

Financial Financial Institutions Group. At the time, there were still a lot of savings and loan institution thrifts, lots of mergers. So what I did basically was model the mergers of any combination you could think of. I mean, I remember it got so bad that there was a spreadsheet with all the different institutions vertically and horizontally, and I had to model them in each queer, and I thought, what happened? What happens to the diagonal? Do they merge with themselves?

You want me to model that too, But that was kind of the sort of, you know, almost mindless brute force job that I was doing. So so you you do win a couple of accolades at Stanford when you're getting your MBA. What brought you to the attention of Canyon Partners? How did you find your way there? Well, first I sort of zoomed in on the fact that I wanted to work for a hedge fund that I worked.

I wanted to go to the buy side. That was first, and that was sort of really brought to me through a couple of classes that were incredibly illuminating, one taught by Bill Sharp and one by Darryl Duffy, both exceptional minds. So I sort of narrowed down finance to buy side by side, to hedge funds, hedge funds, to something that had to do with junk bonds. Because I was a great admirer of Michael Milkin, had read books about him, and so I thought that seems a very interesting mix

of finance, but also strategy. You describe what we now called junk bonds we used to call high yield, what we now call distressed investing, we used to call vulture investing, And you write the only difference between stressed and distress bonds was the immediacy of the bankruptcy. Tell us a little bit about what it was like to wade into the world of distress investing for our bonds. Well, I mean,

it was a fairly new asset class. I think, you know, it's not until probably fair Lawn came into existence that it became a real asset class in itself that stressed and distressed was um, you know, a category that was thought as investable, but it was very tiny. I mean, I think there were you know, probably fifteen billion in assets in total of hedge funds investing in distressed at

the time in the in the mid nineties. And so if you compare that to today, if you remember, Oak three raised fifteen billion dollar fund in twenty twenty on its own, so the magnitude is not even comparable. So it was a it was a starting industry, very much a sort of a venture but all type of business. New asset class for this type of investing as well. Right, So I like this quote of yours, which is stock owners own a call option on the value of a company.

Bond holders have sold a put option. One is long volatility, the other is short, and consequently are at odds in times of changing volatility. Explain why bond holders have sold a put option, because if if the value of the business of the company falls below the part amount of the bond, then the bond holders are going to repossess the company. It's as simple as that. The equity guys give you the keys and it's yours to run, and anything above the part value of the total debt on

the capital structure belongs to the equity guys. And so there are a lot of cases where it's really interesting how this sort of game of strategy, this game of risk, starts with a sudden change in volatility. It can be a bankruptcy, but it also can be an MNA event, it can be an LBO, it can be even a change in regulation or in market, or suddenly volatility picks up and the interest of bondholders and shareholders are at odds. And that's really what made the job absolutely thrilling. I'm

less of a business lover. I invest less because I'm interested in what widgets a company does, and more in the capital structure and how to position yourself, what the other guy is going to do at the bond level or senior secured level, and how to position yourself to make money. That's the thrill. So you're looking at the various paper that's available. Here's the downside, risk and equity, and for it to work out, the company has to

turn itself around and a miracle has to happen. The bonds aren't worthless, but they're definitely not trading it par but they've fallen so far that hey, it gives us a callable option on the company if they do go into bankruptcy. So let's get long. This debt which is trading at a fraction of what it was issued for. Is that more or less? That's correct, And it can

be a lot more complicated than that. Of course, it can be a simple capital structure like PGNE in bankruptcy, which had one layer of equity and one layer of bonds, and it can be very complicated like Puerto Rico that had nineteen different debt issues by different entities with different terms. So not only can you be long one bond, you can be long and short two bonds. You can be long different maturities. You can be long claim insurance in

insurance claims. That's the English right insurance claims, meaning meaning the insurance owns a claim against PGNE and that's they want to sell it and get the cash immediately, and they sell it to bound Post at a discount to what they're entitled to. That could be a trade. So, um, there are you know, infinite ways to position yourself in this sort of game of throne type, right, you said all the cursing and none of the sacks of Game of thrones, not that I've witnessed, but you know, lots

of cursing. So you were very actively involved in the restructuring of the airlines post nine to eleven. Um, what about what happened with a lot of banks during the financial crisis, I guess other than Lehman Brothers, most of them were either rescued or absorbed into another entity. So there really wasn't a whole lot of restructuring and distressed assets afterwards? Or was there? Tell us about that period after two thousand and eight or nine? Yeah, So financial

institutions were not my industry to cover. But of course Lehmann was a huge restructuring and bankruptcy liquidations still going on today, right, Yeah, that isn't crazy exactly. That kept my colleagues occupied and making a lot of money. By oh eight or nine, Look, there were bankruptcies everywhere in every industry, from retail to telecom. Um and there were the great bonanza of later eight and oh nine. Is that there were companies that were not stressed at all.

It's just the bonds were trading horribly just because liquidity was gone from the market. So it's it was a pretty different situation from two thousand and one, the whole dot com bust, but more importantly the telecom implosion. That's when all the wire cable uh some wireline companies went bankrupt. Names that maybe your listeners today wouldn't recognize, crossing fiber, you go down. We watched Nortel and Lusen, like, are those companies really going to go belly up? It was

sure that it was really fascinating. Yes, so all those don't even exist anymore. Um, and that these were real bankruptcies led by a supply demand imbalance too much, too much leverage and not enough demand for the products, and the demand demand was sort of tardy to come um, so those companies restructured or liquidity, but it was not

a liquidity issue. Oh eight was purely liquidity issue, so that the formidable trades were to buy companies that were actually very viable the way they were, and bonds were trading at huge gowns because there were no buyers anymore. Really interesting. So you retire in twenty eighteen, and two years later the pandemic strikes. A lot of companies crashed and recovered, but we've been still watching the fallout. Here

it is three years later. Do you ever look at that landscape and say, hey, if I was on the desk, we'd be buying this, that, and the other. Because this is just a temporary stress or. I wouldn't touch that that's going to hell in a handbasket. I do less of that and more thinking about the business of hedge funds in general. So in other words, I'm less interested in bond picking at this point and more interested in

what's going on. For example, you talk about the twenty twenty distressed cycle, and it's interesting to me that it was so short, so shallow, right, right, we had about five months Flinken, you miss it exactly, and that is of course due to the FED intervention. But if you think about it, que is a relatively novel tool. Not it wasn't invented it eight, but certainly before that it was. It hadn't been used so massively, so widely, so so systematically.

And so you know, since oh eight, the FED had has consistently used quee to rescue the bond market, and with bigger and bigger purchases in more asset classes. And so what that's done is a couple of things. One is the period of time where you have distressed bonds available has shortened, right, It's it was a few months in twenty twenty five months before that twenty sixteen, the energy crisis. Same before that, if you remember the tape per tenttrum in the summer of eleven, I think also

a few months. So short you've got to be positioned and ready and have the cash. And second, it's shallow in the sense that the biggest distress companies are very small Historically. If you think of the biggest bankruptcy in twenty twenty was Hurts. That's only twenty five billion in assets, right. Compare that to the Lehman brothers at six hundred billion. Compare that to the period of Old One where we had corporate malfeasans you'll remember Enron, Conseco, worldcome exactly. But

those were hundred billion cases. So they just was a ton of distressed and therefore returns were easier to come by. It's a lot harder when you've got, you know, a few twenty billion distress situations to pick from. And meanwhile the giant of the stress have raised funds that are alone fifteen billion, So fewer targets and a lot more funds doing the same thing. Correct. Really very very interesting. So let's talk a little bit about those early days

you mentioned in the book. Canyon Capital took a chance on you. First, why do you say that? And then second, how did you get a foot in the door? How did you start with them? Why do I say that? Because I'm I'm a foreigner and I'm a woman, and lots of foreigners and women out in Silicon Valley were at Stanford, so it wasn't and they're in La so it's not. Maybe it's it's rarer in Chicago and New York in Boston, but it's not completely foreign although this

was what year did you start a Canyon? Eight? All right, so a lot a little different world than than today, Different and similar at the same At the same time, if you're talking about female representation in hedge funds, it's very similar. There's been nano steps, but it's nowhere near what you would expect for an industry that's grown so much and that's become so institutionalized. And that's something we may want to talk about later. But they took a

chance because look, hiring a woman was exceptional. It wasn't the typical profile. It still isn't. And on top of that, hiring a foreigner was an additional hurdle and a French person, which they probably didn't realize at the time, but you know, made me probably raging socialists compared to the average hedge fund political mind, even in California. Yes, sir, yeah, well you were in Orange County, so that I was let No, no,

we were in Beverly Hills, but the same exactly. Interestingly, it's it's interesting you're saying that because Kenyon has since moved two Dallas. There you go that that makes a lot of sense exactly. You cite in the book a study that says men overtrade so much that it reduces their risk adjusted returns by two point six percent. So, first, is this just cockiness excess self confidence by male traders

versus female traders? What accounts for the difference between the two and your experience working on on the trading desk? And how has this gap persisted for so many decades? So, first of all, it's not one study, There's now been four studies. It's mutual funds, it's hedge funds across the board. And the reason those studies exist is they're trying to answer the question or men better investors than women? Because if it were the case, then you wouldn't understand why

there's a preponderance of men in the investing jobs. And it turns out not to be the case, not because you can answer that men are smarter or not as smart as women, but strictly because the friction of trade overtrading costs a lot. And so why do they overtrade? The studies don't say, and I wouldn't venture a reason that you may have alluded to. What what does your instinct tell you? Is it because the different let me man explain quality. No, but in all seriousness, the broad

stereotype about men is, hey, we're idiots. We go anywhere when we shouldn't, and we do it with such bravado and such a surfeit of whether it's earned or unearned self confidence that it leads us into trouble Or Am I just engaging in pop psychology? No? I think that's right. The study your sighting is actually called Boys Will Be

Boys over Confidence in Trading. So there you go. But it's interesting that you really can pinpoint the difference in return because there's this sort of impatient or over zealousness in trading your portfolio, whereas standing still and second guessing yourself and really doing quiet studying and reading would produce better returns, which is what women in those studies generally tend to do. So look, my point is very far from saying women are better investors than men. That's sort

of a galization that I wouldn't make. But the study does suggest the studies behaviorally men have certain behavioral flaws correct that leads to a difference in outcome. At the very least, I would take those studies and say, look, having more women in your investment teams. In hedge funds is not a matter of fairness or equity. Who cares on the wall street whatever it is money, Yeah, it really is alpha. It's a matter of making better decisions

and being more profitable. So it's kind of interesting about the impact of overtrading. A couple of more bullet points from the book I found fascinating. Over the past fifteen years, nine percent of existing hedge funds close every year. Now the first question is is that due to a high watermark and they have to close and reopen in order to be able to get incentive fees or is something

else going on. It's a pretty unstable business, really, Oh it is, especially when you're small, meaning sub one billion. You have a category exactly. The survival rate of an emerging manager is low. There are a ton of expenses and they're getting higher with compliance and marketing and reporting and investor relationship, etc. And you typically have one anchor investor maybe two three if you're lucky. But you're really living month to months, and that's great fun when you start.

That was the great adventure of Canyon in ninety eight for me. But it's also a you know, every month is make a break. You have a terrible couple of months, your anchor investor pulls his or her money and you're done, or you you know, have a few star traders in analysts who quit very hard. So you mentioned John Merriweather, who was discussed as having bad luck for being in charge of long term capital management, with which spectacularly blew up the same year you began at Canyon. But I

didn't realize this. He subsequently opened and closed a couple of more hedge funds. I don't know if he was in three or four old told, all of which didn't succeed. So was this a lack of skill or was this just bad luck? Three times is kind of that's three strikes when you're out in the US kind of. I don't want to speak ill of the guy who I greatly admired, you know from the he's obviously in the

book of Michael Lewis, who you interviewed. But but that's the thing, even the guy you think of so highly, you know, after three hedge funds open and closed, you got to wonder if there's some risk management issue there. Yeah, you look at Liar's Poker and it describes him as this larger than life character. And then you read when Genius failed and not so great exactly, and again that is the thrill of this industry. Is that a hero today and a loser tomorrow. Amazing. So let's go to

your work as a trader. One of the things that struck me is very self aware and insightful, was you got very quote comfortable being uncomfortable. So let's talk a little bit about First what do you mean by being uncomfortable? And second how did you recognize, Hey, this is uncomfortable for most people, but I'm okay with it. Oh, from many different situations where you know, being French, I grew up with different ferent a different culture, different habits in

the US I was at the time. I like to think that I'm more, you know, after thirty years in this country, and I'm a little bit better acclimatized to to how the people live in this beautiful country. But I still do feel somewhat foreign in this country, and frankly, when I go back to France, I feel equally foreign

because I'm not really French either. But look, I think it is an important quality to to have to be an investor because ours is an industry or a business of conviction in the face of facts that are sometimes very damning, sometimes very contradictory, especially if you were thinking about investing in the stress you're going to buy a company that is not doing well, where all the signs are telling you this is not going in the right direction.

Either the left side of the balanche, the assets have something to to you have to fix something, or it's the right side with the capital structure. But something is the right in this situation, and to most people it would be a sign that you shouldn't touch it, and you have to feel comfortable being in the minority. That's probably true for probably every investor who's a bit of a contrarian. It's it's very uncomfortable to be to be in the minority. And with convictions, say I'm going to

buy this company. That's the right thing. There's something that I see that others don't. There's safety and numbers. When you're with the crowd, you're not going to get your you know, your head cut off. You may not outperform, but at least you could hide amongst the middle of the back. Correct. And now we've gone full circle, barry to what we were talking about just a second ago.

If you have ten white guys from Harvard, what are the odds that one of them will be completely outside the sort of think tank that is, you know this team. If you again want to be uncomfortable, if you want to be outside the box, you probably need people who look different, who think different, who were raised differently. And I'm not just talking about women, I'm talking about minorities.

So you talk about a couple of really interesting things in the book relative to that, one of which is, it's really more implied than anything what's changed in the US since the eighties regarding economic mobility? That there used to be a huge ability to move up or at least in a better situation than your parents were, and the data implies that from the nineteen eighties forward that kind of stopped. Tell us about how you saw this

lack of diversity and the lack of economic mobility. What is your perspective as a someone who grew up in France come to the United States and seeing, Hey, I thought there was a lot more mobility here, or at least there used to be. Yeah, it's a look, I'm not saying that France is much better, but over the last thirty or forty years, probably forty years since the

Reggan years. If you look at the wealth and the income distribution in this country, it really has sort of gelled at the top right, very much so, not just the one percent, but the point one and the point on one percent. Correct, you know, the one percent probably controls eighty percent of the wealth in this country. And that's something that most Americans are not aware of. If you ask them to describe their country, they'll describe a

country of which wealth structure resembles Norway. Right, We're not in Norway Rum. But there was a lot more movement upward movement. You know, back in the sixties and in the seventies, there were marriages between the boss and the secretary. They were jobs that allowed people to move up. Strangely, you know, finance is still one of those jobs that could take people from a very modest background. If you think about George Soros, this is a guy who had

nothing when he was an emigrat from Hungary. Came here more or less. And so I do recognize that finance, in particularly investing in hedge funds, has this immense potential for social mobility. But generally speaking, our society is pretty frozen in that really disparate classes of people. There's a quote in the book, the idea we're all equal and the harder working and smarter people naturally come out ahead is simply the childish statement of a person, most likely

an upper middle class Caucasian mail right. That's really very telling. But one of the things I've learned doing this and speaking to a lot of wildly successful people, men and women, is how often the concept of luck comes up, Like very successful people with a little bit of self awareness seemed to recognize, Hey, you know, this could have just gone a little differently, and we're not having a conversation

because I'm not, you know, running a successful business. How important is the role of luck in people's success, be it whether they're born in this country or elsewhere, whether they're born male or female, or just in their day to day life. How significant is law? Huge? Huge? Really? I think so. And it's all a matter of how

whide your definition of luck is. If you're thinking very specifically, did I win the lottery, did I meet somebody who offered me a job at Canyon or you know, another successful then you could say, well, no, I'm not lucky. I worked really hard. But if you look at luck in the much broader context of I was born in a free, wealthy country, France, to parents who were both educated and value education. Not particularly wealthy, but middle class,

upper upper middle class. Right. I was born white, yes, a woman, which you know has came with some difficulties in the field that I chose, But I would say incredible luck. Right. And then the biggest luck of it all is I joined Kenyon in the nineties and there was a tsunami that literally lifted all waves of hedge funds from ninety to two thousand and eight and even beyond.

You know, no offense to Canyon, but there you know, their growth is very much a beta phenomenon that happened to fair Long, to Citadel, to Omega, to I mean new name exactly. It's funny because I was discussing luck earlier today with someone who said, you know, if you started as a bond trader, you were lucky to begin your career in the early part of a thirty year bull market in bonds, to which I said, well, at the time, you didn't know it was going to last

thirty years. You had to be able to conceptualize that, and the takeaway is luck is great to have, but it's not a durable edge. It won't persist even if you happen to be in the midst of the greatest bond bull market. You have to be long. You can't be on the other side of it. That's true. So luck is the starting point, and then resilience is what makes it. You gotta stick with it. There's a quote you have at the end of one of the chapters on endurance and resilience, and I'm going to throw the

quote at you and let you comment on it. The woman the Canyon Partners hired was not a good girl who chose to get along with people as her seminal virtue. I was a girl who was good at seeing what she wanted and convinced deep down she could get it. Tell us a little bit about that. These are my qualities, you know, I'm resilient. I'm I'm you know, in between a dog and a donkey, you know, persistent. You know, I get the bone and I and I just keep it. That's you know. And by the way, Barry, I do

think these are huge qualities for investors. Resilience, the ability to lose money on a daily basis and get back into it and make up for it. That's an amazing lesson in life, right to take failure and losses as business as usual. It's just a flip side of a winning trade. And you know, because you've interviewed so many of those amazingly successful investors that the image of them never having a losing trade is a fallacy. It's all about what you do with failure that determines whether or not.

And it's also the average. Do you win on average more than you lose, but you are going to lose. I don't know a single investor who doesn't lose money regularly. Someone once said, it's not how often you lose, but it's how big your losses are, which is really interesting. Correct, it's I know, I'm stealing that quote from somebody, somebody very smart. Sure, it's it's the probability and the severity of your loss. But sticking with it is you know

what it what it takes, endurance and resilience. Let's talk a little bit about the peak we've seen in hedge funds. For a lot of funds, the early two thousands saw a lot of opportunity in the distressed market and in other spaces. Why was the first half Why was the pre financial crisis decade so lucrative for funds? I don't think it's any different from any industry starting out right.

We talk about an S curve for most industries, and there's a very rapid expansion when you start with a good idea and few people going after a very large pot, especially for distressed When you think of the two thousand and one two thousand and two periods, I think, if I recall correctly, there were some six hundred bankrupt companies in one year, some lots of work, lots of work, lots of gold to mine, and the industry was very small, so it was a lot easier to make good returns,

and we indeed do who did produce amazing double digit twenty percent return on the regular basis. Right, So you have the dot com implosion, you have the telecom sector going belly up, you have the airline industry in total distress post nine to eleven. What else was going on? I mean that seems like that's a lot just those three areas, and in between corporate malfeasans was rampants. We talked about how does how does that affect distress fund investing?

Do people just dump they have certain requirements? Well, though, those companies went bankrupt, so that was more and Ron Concco, Tycho, huge companies that produced um, you know, bad financials and as a consequence, accounting malfeasans earnings freud. You go down the list. It was. That was before we got to the analyst scandal and the IPO spinning, and there was a ton of stuff that basically made Main Street look at Wall Street and saying, why am I even giving

you any money? You guys, can't you know, stay out of jail. That was before socks, that was shortly after reg FD. It's it's hard to believe, but there was a time when companies disclosed different facts to different cotively, right, very selective. I mean, I think any investor today would gasp at the idea that a company could tell you and me about their earnings next month and not to them.

It's amazing. And there have been other hedge fund managers who've written tell all books from the nineties and you go through these books and you're like, none of the stuff could happen today. All of their alpha is illegal today, exactly it's a lot of the whole concept of whisper numbers, which we still use the phrase, but it doesn't really exist anymore. It doesn't. And so a lot of the competitive advantages that hedge funds really capitalized only on have

been regulated away or competed away. So let me let me share a quote with you from Jim Chanos, who runs Mechano's Partners, and he said when he started in the late eighties or early nineties, there were a couple hundred hedge funds and they all generated alpha, and it was, you know, a few billion dollars. It wasn't a lot of money. Today it's three trillion dollars, eleven thousand hedge funds,

but it's still the same five hundred generating alpha. Is that an exaggeration or is there more than a little truth to that. I actually don't know that they're the same funds generating alpha. The numbers are correct. When I started, there were two thousand hedge funds managing maybe three hundred billion or eleven thousand or so, and now it's one

hundred as correct. What I do know is that there's a handful or actually a bit more than a handful that um are still in business today and that have become the market right from Apollo to Citadel to oak Tree. These are the mammoth of hedge funds. So um is he talking about that there's a handful of guys who started early and have become huge and are still added um and still racking funds from investors. That's true, but they're not producing alpha. If you look at their returns,

you know it's it's not particularly uh. They're not outperforming the market at least not not systematically, and that was really the promise of hedge funds. Well, well, you mentioned in the book size is the enemy of performance. That was at an issue before the financial crisis, or so much money flowed into the space that it's become self defeating, and all these formally high performers are now just so big they're very happy collecting the management fee in the

performance fee managers less. By the way, you show the math in the book very very easily and understandable for those who may not be as Mathie, which is basically a giant fund collecting two percent is much better than a smaller fund that's killing it. But they're not starting out with a lot of assets no, that's totally true. That that is exactly what's happening. Size is the enemy of outperformance. And if you think about it in very simple terms, those funds have become the market. How could

they outperform the market. They are so big that they are that they are the market. So that's one thing. The second is that, yes, they're very happy collecting fees because that is the business they're in. The business they're in now is not to outperform the market, it's to collect funds and so and there are studies that showed that the incentive is about what they call hoarding funds, so you know they're hoard funds, not hedge funds. I

have that question two and twenty. Hoard funds is not about performance, it's about more assets under management, which raises the question why should investors pay such large fees for beta? Shouldn't the incentive fee be on alpha alone? In other words, I go buy an SMP five hundred funds for three BIPs? Why do I need to give you in two and twenty tell you what I'll give you twenty on anything you beat the SPX with And that seems reasonable. I'm

surprised that hasn't really caught on yet amongst endowments and foundations. Well, to be fair, there is pressure on fees, so I think at this point there are very few hedge funds able to charge still two percent and twenty that it's one in fifteen, one in fifteen, but it's it's really coming down. So there is the awareness from institutional investors that fees are too high. But I can think of a couple of reasons of why that's going on, and the main one is that it used to be that

hedge funds were populated with risk tolerant investors. It's not the case anymore. It's mostly institutional investors who are advised by third party lookers or consultants, and those consultants are not paid to take risks. Nobody's going to get fired by recommending that you put money with oak Tree, right right,

That's the safe thing to record. They've put up some pretty good numbers lately, they have, But that is the recommendation you'll get from every consultant to every family office or you know, because that is the safe thing to because those middlemen are paid for safety. So we've come to this kind of surprising outcome where people put their money really with the biggest funds and paying for safety rather than outperformance. I'm not saying against paying for safety.

The question is how much do you pay for that? That's five BIPs, is my answer exactly. The other thing I can think of is that there'll always be room for hedge funds in a portfolio allocation for diversification, and that's a perfectly valid reason to invest in hedge funds. I get that, But again, how much do you pay for diversification and how good is it? Because lately diversification has not been good from hedge funds. So every year institutional investor puts out their rich list. Just came out

this week, and it's exactly what you're talking about. It's all the giant funds, all the usual names that we usually see at the top of the list. Ken Griffin, Stephen Cone, Dave Tepper, Ray Dalio, Dsho, Jim Simons, that whole list are all making a billion plus a year. More or less. Ken Griffin had a good year, he had a four billion dollar year. Is it now winner take oil and hedge funds. Is that that same fat headlong tail distribution of wealth even amongst the hedge fund community.

Oh yeah, I think it's definitely the case that the biggest hedge funds are attracting the most money and the smallest emerging managers are having a very tough time fundraising. And this is you blame this on the consultants, that they're the parties who or am I overstating that? I

think they're very much. I don't blame them because people will act the way they're incentivized, and they're incentivized to advise you to put your money with the safest all in one shopping you know, very well staffed, compliance wise, investor relation wise companies. Those are the big ones, right, That's what they're incentivized to do. It's sort of like any think of a mature industry like fashion. You know you're not gonna buy Why do you buy Gucci sunglasses?

It's not because you see better, It's because the brand says something that nobody's gonna make fun of you for wearing Gucci glasses. It has a certain cachet of quality. It's probably gonna last, and that's why people But that's all marketing, right, That's the old expression used to be nobody gets fired from buying IBM. If you bought an IBM product, it was considered safe. But I don't really

think of investing along those same lines. But then again, I don't have a family office with a billion dollars in it, so maybe I might think differently. Who knows, and it's not only the family office. The family offices might be the ones willing to take a bit more risk. But think of the pension plans, think about the school endowments.

They really need some safety. And you know, the thought that they could be invested in a lot of emerging managers that go belly up, you know, the year after is not is not going to fit with their risk profile. Huh really quite interesting. Let's talk a little bit about what seems to be a bit of a reckoning for hedge funds Following the financial crisis in O eight o nine, hedge fund performance seemed to change markedly. What happened? Was it simply size or is there more going on there?

What happened is in a way that was shocking, is hedge funds that were supposedly hedge We're down thirty forty so where was the hedge in that? And redemptions started flowing, which led to you know a huge number of hedge funds closing or putting up their gates, and I think the realization then became, Okay, if we want to survive and have a solid business going forward and also really build equity value for fund we need to be large.

We need to offer multiple products. We need to think about structure and think less about evergreen funds where people can go in and out without friction, and start thinking about locked up funds. So essentially, investment managers became captains of industry, became people who thought about their fund not just as shuffling money, but as a business with the marketing team, with a strategic team, with different geographic offices, a real business that could offer sort of that one

stop shopping to investors. That's a fundamental rethink of the previous business of hedge funds, isn't it. So that raises the question that seems like they're professionalizing and institutionalizing hedge funds, but the pre financial crisis our performance didn't really seem to follow. Why do we think that? Is? Is it the FED? Is it technology? What change markets? Structure? What is it that changed that led so many funds to no longer perform the way they were well, size is

certainly one and I think probably the biggest one. But also if you think about all those competitive advantages that we had in the beginning, they were taken away from us or competed away. So the information advantage before reg FD, that was gone. And not only that reg FD I think was implemented in two thousand. But what happened that was that with technology, the information became cheap and available to all of US retail and institutional investors. It wasn't

the case before. You couldn't just turn on your computer and have your ten k's and ten q's on any company and earnings release you know, webcast on Bloomberg at your fingertip. So it was really an equalization of the information that took away a competitive advantage. There's the fact that there were so many more hedge funds, so not only are they a bigger but also it's a very competitive, mature industry. So that was you know, the story of

performance that was very subdued. Really. Some people have blamed dilution of talent that when there's a few thousand hedge funds, hey you could grab a great analyst, a great trade or a great PM, but at eleven thousand, you're sort of tapping into the ranks of the B players. Correct. There there was a study on that that is called I Think Hedge Fund How big is too Big? But

essentially they claim that there are two issues. One is, if your out performance is related to an asset class that's a liquid when you're too big, you're going to run out of assets to invest in long term capital management is correct. And if you're trading an asset class that is very liquid with sort of unlimited supply like the stock market, you're going to run out of talent. And it's exactly as you said. When we started with five hundred million in assets, you need ten excellent ideas.

When you have twenty five billion in assets, you need two hundred excellent ideas. Well, let me tell you, maybe the first ten are pretty good. The next one hundred and fifty have the potential to really dilute the excellency of your top ten investing ideas. Huh, that's really interesting. Let's talk a little bit about in Vitro wealth creation.

You tell a story in the book that the Stanford Alumni Organization asked you for a donation, which you promptly make At the same time, Stanford works out in arrangement with the fun you're working, and they put some money into Canyon. Canyon collects big fees from Stanford, which they then essentially bank for your bonus next year. And then rinse, lather, repeat, just do the same thing over and over again. How real is that sort of thing across the whole industry?

All these endowments and by the way, anybody could go on a certain website and look up every non for profit endowment and who their investors are. Yeah. I mean that's the kind of thinking that made me widely unpopular with the marketing team at Canyon and sort of, you know, them deploring what a sort of socialist French citizen that was even twenty years into being in this country is

that socialism? I live five minutes from Friends Academy, which is a private school that has like a surprisingly big endowment, and you go through what the endowment is invested in, and there are a few sites that do this because it's because they have to do tax filings, so it's all available. And what a coincidence. A lot of the funds they invest in, or parents of kids who go there, and it's this really incestuous relations is it is. So it's not this isn't like a one off example. There's

a ton of this. I mean, if you think about it, you know, the people who work in the hedge funds and make a lot of money, or typically Harvard, Stanford,

the Colombia, people on the list exactly. You go down the list exactly, and those schools have huge endowments that they have to invest and since you know, David Swinson at Yale was so instrumental in making allocation to private equity and hedge fund a real pillar of the portfolio of those endowments, it's been systematically, okay, systematically the case that those school endowments invest in hedge funds where they are students are going and getting paid. And so as

you said, look, I'm not saying it's wrong. Obviously everything is very transparent and legal. But there's something that strikes me as not quite right when you know this money is sort of recycled. It's a little icky. It's a little icky, right, it just seems like, oh so that okay, it's a little you know, it just feels like it's not arms length what I would imagine is Hey, if you're investing on behalf of the public, you have to have an arms length relationship. It can't be that sort

of old boys network. But apparently it's not illegal. It's just not pretty. It's just that's exactly what it is. I'm not saying that there's any other way. I don't have a genius idea to say, you know, those endowments should invest with mutuo funds at five bibs a fee. I just feel like the way you describe it, there's something that is surprising in the way the world is working. So there's a quote in the book that I really

really liked. My conviction is that the job of investing is a highly creative enterprise, and that the qualities it requires our imagination, ingenuity and guts tell us a little bit about imagination, ingenuity and guts. Well, I think the stereotype of a good investor is somebody who's incredibly quick at numbers, or you know, a very ruthless deal maker.

And my experience is that at least when you trade an invest in in distress, but probably in every other category, there are other qualities that people don't talk about enough. And imagination and creativity and being a good listener or some of them. If you think about what it takes to restructure a company, a lot of negotiations, thinking up a new capital structure, explaining it, explaining it to other stakeholders,

having a vote on that. But it takes a lot of you know, thinking outside the box and ingenuity to see the potential of a different cap structure or different type of assets. Selling a business that's no longer profitable, or closing some stores, or expanding in an area where the company hasn't done before. That's all stuff that is just thinking up ideas and scenario that has very little to do with numbers. I'm not saying it doesn't help to have some ease with numbers, but it's certainly not

the foundation for success in my mind. When you're talking about these highly creative qualities, you also note that men and women possess these qualities in equal measure for sure, for sure, And that was very much in response to the idea of the concept that men are better at taking risks or they're more aggressive, And that may be so, but I don't think risk for the sake of risk is the quality required in being a good investor. You know, there's a famous joke by fran Leboiz who say, Hey,

I'm a smoker. I'm great at taking risk, and you know, we'd have all smokers in trading rooms if that was the case. You need to have a return for risk, and return is the ability to think up a solution. Look the hedge fund business, we're in the business of ideas, and ideas are equally distributed between men and women. All Right, I got a couple of curveball questions for you, starting with it's not so much a glass ceiling as a

quicksand floor. Explain what you mean by that. I think when I got stuck, or I saw other women stuck, it's not so much that they were hitting their head against some invisible ceiling, is that they were sort of pulled down. They just had to and I had to fight so much for what seemed to be much easy, easier to get to for men. Now, of course, it's

just my impression. I was not a man, I was a woman, and you could tell me, well, you had the wrong impression, but it was sort of systematic and enough for me to think it's very hard to get up because I have to be so aggressive and fight so much for you name it the capital behind my ideas, the business line I want to lead, the extra analyst I need. So it's twenty five years later since you

started at Canyon. In finance, generally we see women running all sorts of companies and divisions in the world of finance, but as you mentioned, we really haven't seen the changes take place at the hedge fund sector. Why do you think that is? Yeah, I mean hedge funds really do remain a bastion of white men. It is changing some, but slowly, I mean nano steps, and again certainly not where you would expect them to be for the size and the influence the industry has. I think it takes

two things. One is outside push from investors, and we're definitely seeing that LPs really do want diversity and they insist and ask questions about it. But the piece that's still not completely bought in, I think is internally. I still don't think hedge fund managers have bought the idea that they'll make more money with a more diverse investing fun and a ton of research supporting that. There is really interesting and my something that just cracked me up

in the book. I'm gonna read you a quote and you're gonna have to explain this to me. You walk into the kitchen at Canyon and an imposing, handsome man with a killer smile was pouring himself a cup of coffee in the common kitchen. I said hello. One of the other analysts, visibly excited, asked me, did you see him? Yes, I think it's fabulous. We're bringing diversity onto the team. And the other analyst says, to you, what are you talking about? That was Magic Johnson. He's heading the Canyon

Johnson real Estate joined venture. You're from France. Still you don't recognize Magic Johnson. New idea. I saw this LA Lakers. You're in LA famous one of the most famous basketball players ever up there with Michael Jordan. Didn't mean anything to you. Yes, and when you you know, when you're talking about being comfortable being uncomfortable right there? That was that was an awkward pause. But no, I didn't recognize him. I saw this really handsome black men with killer smile, right.

Can't argue with that. So I said hello, and I was I was very excited to, you know, have some diversity in the team. That's hilarious. That really is funny. Um, let me move on to my favorite questions that I ask all of my guests, starting with what is keeping you entertained these days? What are you watching or listening to? Netflix, Amazon podcast whatever? Uh? Well, I do watch quite a

few French shows. There's one on Netflix that's called Standing Up about stand up comedians standing up in France or in France, in France in French translated, of course, that's quite funny. I recently benched on Silicon Valley, so that I had seen before, but it's such a classic, and you'll notice the first time around I didn't pay much attention to how the private equity guys are depicted. It's priceless. Really,

I have to go back. It's really spot on. So that that's Those are the two things that I've been watching. So I got a couple of questions to ask you about that. First, we loved to call my agent. I don't know if you watch that. That's excellent, so good, And in fact we ended up watching Emily in Paris, not because it was good, just because the scenery was just so amazing, like you could watch it on mute and the architect yeah, no, it looked great. Just ignore

the plot line. And then if you like Silicon Valley and this is just a touch more out there. Um, there's a show on Apple TV called Mythic Quest, which is about a game company, and it's the same sort of crazy, quirky characters, and I hear it's only slightly exaggerated. I got the same sense from Silicon Valley. This seems exaggerated. And the response was not as much as you would guess. No, Bill Gates was an advisor to this show. It's amazing noted.

We were in Andres and Horowitz, um for for a podcast. Actually, and that weekend I'm watching Silicon Valley and I'm laughing. Oh, there is the outside with the waterfall around it. I was like, we were just there. They literally go into these VC shops and film in it around it like all the b roles were. They were really amazing. Yeah. Anyway, if you like Silicon Valley, see if you like Mythic Quest. It's a little weird, it's a little quirky. It's very fun.

Tell us about your early mentors who helped shape your career. I don't know that I've had mentors. It's it's a relatively new concept. Did you have mentors. There were people who I put an outside value on their influence. Some of them knew me, some of them we never spoke, but I could create a list of Hey, these ten people had an outside impact on how my career developed, some without even their knowledge, right exactly, So, I think it's when I think of mentor, my definition is somebody

who takes a special interest in developing your career. And certainly that didn't really exist when I started. Did people have an influence on my career. Obviously my ex co partners Mitch Julius and Josh Friedman. I mean I grew up with them. They ran the business. I learned most of what I know from them, and they were interested in my making money for the fund where they interested in me Dominique having a wonderful career for the sake

of my career. No, not particularly. They had a fun to run and money to make, and you know they made sure that I performed. Let's talk a little bit about books. You mentioned when Genius failed in Black Edge in the book. What are some of your favorite books? What are you reading right now? So my favorite books are not financed books. I'm a huge reader. I read in English in French. I read poetry, play. My favorite books or have nothing to do with business, The Little

Prince by Santi Exipani and Kim by Rudier Kipling. I am reading now a book called When We Were Orphans by Ishiguro. I'm in a Japanese phase and so I'm meeting Japanese contemporary authors. That's a good list. I get emails from people all the time that tell me. Most of what they read they find in recommendations from people like you on the show. So a list of ideas from other people, you know, I have a long list

of books. What sort of advice would you give to a recent college grad, male or female who was interested in a career in either hedge funds or distressed assets. I'm not very good at giving sort of open ended advice, but I'll try it, and that would be to make sure they go into the field because they love it,

meaning it sounds don't just chase the bucks. That's what I meant, and I think they were quite a few people that I've interviewed in the later years where obviously the money was the main incentive, and it's not clear to me that you're going to be resilient enough if that's your motivation, and as we spoke, I really think that's an important quality if you If you can't stick with it, it's going to be hard to be successful,

and sticking with it is what is required. You're not going to get rich in a just a few years. And our final question, what do you know about the world of investing today? You wish you knew twenty five or so years ago when you were first getting started. I think it's mostly that people who speak with authority and great, you know, the great assertive tone, don't always know what they're talking about other than that nothing because

it was a great adventure. It's sort of a thrill to discover a field, right, That is really what makes a job so fascinating. Well, Dominique, thank you for being so generous with your time. I really enjoyed the book and heartily recommend it. Damsel and Distressed My Life in the Golden Age of Hedge Funds by Dominic Mielle. If you enjoy this conversation, well check out any of our previous four hundred and eighty seven such discussions we've had.

You can find those at YouTube, iTunes, Spotify, wherever you find your favorite podcasts. Sign up for our daily reading list at Riholtz dot com. Follow me on Twitter at Ridholts. Follow all of the Bloomberg podcasts on Twitter at podcast I would be remiss if I did not thank the crack team that helps put these conversations together each week. Justin Milner is my audio engineer. Atika Valbron is our project manager. Paris Wold is my producer. Sean Russo is

my head of research. I'm Barry Results. You've been listening to Masters in Business on Bloomberg Radio