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Hello and welcome to The Money Stuff Podcast, your weekly podcast. You've already talked about stuff really to money. I'm Matt Levine and I read the Money Stuff column for Bloomberg Opinions.
And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
What are you at today, Katie?
We're going to talk about M and A fees. Yep, We're going to talk about private asset ETFs and then we're going to do a mail bag mail bag.
All right, let's get to it MNA fees.
So how do investment bankers make money in a normal M and A environment?
Stereotypically, investment bankers get paid for closing M and A deals. Yeah, they spend most of their time prospecting for deals and occasionally a deal actually happens, and then they get a big check. You know, I wrote that they do most of their work for free, and then sometimes they're wildly over paid. Right, Like, you do a lot of pitching, you do a lot of advising clients, You do a
lot of working on deals that don't happen. Then you do a few deals that do happen and you get a twenty million dollar check.
And like you said, occasionally deals close. It feels like occasionally is turning into someone infrequently deals closed. In this m ANDA.
Environment, the norm is if you do a deal, you get paid, right, and doing a deal is like a little bit of a the concept they pitch a lot of deals that never happen or like you do some work stories. Yeah, but like if you sign a deal, you certainly expact that most of the deals that sign close two companies agreed to merge and then they merge. Right,
in the current environment, it is less common. I mean it's pretty common, but it's like a little bit less certain that a deal that signs will close, right because of anti trust regulatory scrutiny is like the sort of big headline thing, but other reasons.
To the golden age of anti trust.
The golden age of anti trust, and so like some big companies sign big deals and then they don't close. And if you're a banker whose fee is continued closing, then you don't get the fee and then you really sad.
So what do we do for these four investment bankers? Because you wrote about it this week, probably you wrote about it this week that it was a Reuter's article.
I hope I'm pronouncing that name right.
No, it was it Reuter's. I can say that again. Well, you wrote about this week a Reuter's article about these poor investment bankers who deals aren't closing as much as they were. What are they to do?
There's been some amount of structuring where you could get your fee in some set of installments, right where like you could paid a little bit when the deal signs and more when the deal closes, or you could get paid something for a busted deal. But now bankers are charging more of their money up front, like when a deal signs, so like when they deliver a fairness opinion, and like the deal is sort of formally announced, the
bank gets check. And they're also when deals get busted, banks will write in their engagement letter, if you sign a deal and then the deal doesn't close for like red uterors, and often the company will get a breakup fee closing for regulatory reasons. And banks will say, if you get a breakup fee, we want a chunk of it. And like both of those things, getting a chunk of the breakup fee and getting paid on announcement are like more common now and they make up a greater percentage
now than they used to. So it's like now banks are getting like an aggregate twenty or twenty five percent of their fees on signing as opposed to like five ish percent a few years ago, and they are asking for like a quarter of the breakup fee instead of like ten or fifteen percent.
And you know, this world intimately much more than I do. But I mean to me, that sounds totally reasonable.
Oh yeah, it's totally reasonable. It's just like it was a norm that they didn't get paid that way. And it's funny. You know, I was an M and A lawyer and then I was an investment banker. Lawyers traditionally get paid by the hour. That's not really true in M and A anymore. A lot of lawyers, like bankers,
get paid success fees. There's a reason why bankers get paid success fees so successfully, Like when the deal closes in like a classic cell side assignment, if you're selling a company and they're getting ten billion dollars for themselves and you're like, I want half a percent of that, and they're like, yeah, it's like free money. It's like all this money gushing in the door, you can have half a percent of it. I think that's a lot
of money. Right. When you are a sell slid banker and you get paid only on deal closing, you are effectively getting paid by someone else, right, the client who hires yours like, ah, it's not my money, Like the buyer is paying that money anyway, will be gone, you know, will be great. You know, we're getting bought out at a premium, so we don't care about giving you half a percent of that. Right, And so if you're a banker, you can charge a bigger fee if it's entirely contingent.
If it's like you pay no money unless you get bought out, right, So it's an attractive proposition. It's just like if more deals don't close, then like your business gets very risky, and like sometimes you don't make any money. You know, lawyers traditionally get paid much more reliably. They build by the hour, even law firms that charge success fees. If a deal doesn't close, they usually get paid something anyway, you know, whereas like bankers traditionally got less of that,
and the lawyers like the way they get paid. And there have been criticisms from like lawyers and judges of how bankers get paid, because like, if you're a banker and you get paid only on completing a deal, you have incentives to make sure that deals get done right. The client is like, I don't know if this is actually a good idea. Do we really want to sell? Like we might be better off on our own. There is
a stereotype. The banker is like, no, you got to sell them, And then I'm not really true and like trusted investment banker knows what to say no and whatever. But it's like something amount of truth to this, where like the investment banker is always incentivized to do a deal, whereas someone else might sometimes correctly advise the company like do nothing. Bill.
I don't know how you feel, but I was very excited reading money stuff this week. And then there was a current news happening that very neatly illustrated what we're talking about, because this, of course what we're talking about, M and A bankers wanting more of the breakup fees in part due to antitrust concerns, and this week one of the biggest sorries was this cybersecurity startup named wiz Google had offered a takeover bid of twenty three billion
dollars and Wiz turned it down. They said that they were gonna go for an IPO instead, but Bloomberg reported that Whiz decided it could ultimately be worth more as a public company, but also concerns about the potential for a protracted regulatory approval process also encouraged it to go this route as well. So, I mean, twenty three billion dollars is hard to walk away from. I think the
CEO called it a humbling offer. But I mean if the deal's probably gonna come under scrutiny and probably won't close, maybe it's not worth a headache.
Yeah, I mean you see a lot of this, like where if you're a company and you get a really tempting offer and you're like, there's a fifty percent chance this won't close for regular tor reasons, Like you're in a much worse situation in a lot of ways if you like spend months working on getting this deal closed, sort of spending all of your operations to plan a merger, and then like it falls apart for regulatory reasons and you're kind of back to nowhere. It's a bad situation.
To be in and so if the money sounds great, but you might say, you know, this is like like a mirage of getting all this money. I mean from the banker's perspective too, the deals that don't close are the ones that in some ways to take the most work, right because like you signed the deal and that's like this anti trust investigation and you're like sort of you know, working to integrate the companies and also like respond to
regulatory concerns. It's a lot of work. And then it doesn't close and you don't get bad.
So who's happy?
Here?
Is there silver lining? Like are the lawyers happy? Maybe the bankers are sad, but the lawyers are happy.
The bankers are fine. Like what's happening is they're changing their free structures to get pop. The people who are unhappy to some degree are like the companies who were used to paying for success, and like you pay nothing unless you get a merger, and now it's like, you know, you pay something if you don't get a merger, and like that's a bummer to have your deal fall apart and still get the bill from the bankers.
Okay, let's get to the good stuff. Let's talk about private asset ETF. So we've already spoken about.
Yea, you were like, I think last week you were like, how were we gonna put private assets into NAIs? Like, Yeah, there's gotta be some way. Now we're going to talk about it for real.
We're gonna talk about it for real because it's one of the most fun and most frequent thought exercises that's happening in the ETF industry right now. You have this like super in demand asset class, this super in demand wrapper, and you have all these big brains trying to figure out how to put private assets into an ETF and no one has cracked the code yet.
But you're gonna tell us how.
I'm not going to tell you how, but I'm going to talk to you about different attempts to do that, and you're gonna opine on it. Probably there's like all these proxy sort of things. It sort of is similar to when there weren't spot bitcoin or Bitcoin Futures ETF, so you would have these ETFs that were launch that held a bunch of bitcoin miners and things such as
that those exist right now. Then there was this filing for the Crane shares Man Liquid Private Equity Index ETF, which would basically seek to be a quote proxy for private equity performance and risk exposures by focusing on small and MidCap stocks that have characteristics similar to companies in private equity buyout funds. And I thought that was interesting because it's not buying shares of publicly listed private equity firms.
There's a few ETFs that do that right now, but it's basically trying to mimic the portfolio of these private equity companies.
Yeah, there's a theory that like the value add from private equity consists of like taking a certain tranch of kind of smaller MidCap sort of cash flowty companies and then levering them up a lot. The thought is, like you can do that on your own instead of investing with take Care or Blacks. Then to like buy out these like MidCap companies and like put a bunch of
leverage on them. You can just buy their publicly traded shares and like they got a margin and learn answer shares, and then you kind of like recreated a private equity portfolio that is true at like a very high level. And then it's like it abstracts away from like whatever operational improvements they make. Whatever clever financial engineering they do, it takes away all of the like stuff they pride
themselves on doing. But like the basic thing of like buying some companies with cash flows and borrowing against them, Like, yeah, you can do that on your own, the ideas the ETF can do that on insigne. I don't actually do the leverage part as much as like people like started to publicly traded vehicles to like try to make private equity returns by doing that kind of trade.
Yeah, it is unsatisfying.
Though.
One reason it's unsatisfying is that when you talk about like private assets being a hot asset class, like one thing that means is like private credit is very hot. But like when we talk about like people who want to go to parties and say that they own blah blah blah, Like the thing they want to own is like SpaceX right or like stripe right, it's these hot
startups taking a like slice of mid cap companies. Is not that there's no proxy for very fast growing private tech space startups right, Like this is like a proxy for like a middle market private equity fund, which is like not quite the like sexy thing that you're trying to.
Sell yeah, And I mean part of the reason that we're talking about this so much, and I've made us talk about this for two weeks in a row, is because speaking of a deal that actually did work, Blackrock bought private markets data provider Prequin, and then BlackRock's chief financial officer said that basically they want to take some of the data that Prequin has, create investable indices and
launch quote things like exchange traded products. So when I say the best and brightest, I mean, you know, some of the biggest ones.
They're going to do that.
Well, that's the question, Matt, how do they do it. You take a look at the SEC's rule book. They have a fifteen percent limit on liquid investments for funds, So I mean, maybe you have an ETF that's like fifteen percent private assets. But the way that they define a quid investments is that basically they're assets that can't be sold in seven days without significantly changing the market value of the investment. So that's also kind of unsatisfying.
I mean, you have an ETF, it does hold private assets, they can only be fifteen percent of the fund and then you kind of dilute the rest with like equities or cash. Or something.
I love the idea that like it's a fifteen percent priority and like you put the rest in like SMP. Right, Yeah, this is like eighty five percent goes to your index allocation and like fifteen percent goes to your private sellocation, and like you just keep that in mind when you buy the thing. Yeah, that's a cool idea. That's like very like amateurish financial engineering. Like yeah, you know you
do that. You short eighty five percent as much of like an SMP ETF and like, yeah, you're right, you get a private.
Assets ct and that gets you a lot closer than anything else, right now.
Obviously, Yeah, I do think that's like a hard thing to market, to be like this is an eighty five percent SMPTF and a fifteen percent pile of private assets. That's weird.
It is a little bit weird.
It's also weird, by the way, is like the ETF structure is like there are legal limits, but there's also like the point of the ETF structure is that you can create and redeem it in kind, right, or you can create and redeem it anyway, right, So like if the price of the ETF is not in line with like the value of the underlying assets. Then like some arbor treasure can like buy the ETF and you know, sell the assets or vice versa to bring the price
back in line. It's much harder to do with private assets that don't trade even away from like the SEC rules. You need to set up some mechanism to keep the price online. It just like the easy way to do a like private asset ETF more or less is and we've talked about it a bunch of times, the Destiny take one hundred fund.
Right.
The easy way to do it is you have a product that trades, that is a closed end fund that owns private assets.
Right.
The whole problem with that is that the trading price of the product doesn't have to have anything to do with the value of the underlying assets, and so Destiny trade out a keete premium in a way that makes it feel not like a great proxy for the assets, because like you're not buying SpaceX or buying this huge premium. Yeah, and that's like a hard nut.
To crack, right, Yeah, it's like the ultimate liquidity mismatch. Some of the conversations that I've been having around private asset ETFs uh, and I've had a lot of them with issuers who aren't quite ready to go on the record yet. But the big question is how do you take a wrapper that is liquid by definition trees like water, take these assets that don't really trade and put them together. And it sounds like a lot of the conversations I was having in early twenty twenty about fixed income ETFs.
There was a lot of I.
Was going to say, like, right, so, first of all, like liquidity mismatch is a term that I used to write about all the time when I had like a jerky daily section in the newsletter. Yeah, that old people are worried about bond rocket liquidity because like, oh, these bond ETFs you can trade them all the time, but the bonds don't trade that much, and like what will happen?
I did see something o her in your eyes and your listener. I wish you could have seen it when.
I spent equity mismatch. It's such a misconception to think that you can't have a liquid wrapper for an I liquid thing, because all stocks are that, right, Like a company is like a bunch of like factories and like employment contracts and all this like super I liquid like hard to value.
Stuff they're not just on the screen, right.
Right, like a company. I'll say, it's just not but you can like completely abstract it to a line that trades like every millisecond. Right, So the liquidity mismatch point is so strange what people worry about with bond funds, And it's really much more about mutual funds than ETFs,
but people lump them together. People worry about like it's not the liquidity of the rapper versus the liquidity of the underlying It's like sometimes you want to take the underlying out of the wrapper, and like that is hard, right, Like you're used to liquidly trading the ETF and then like you like get the bombs and oh, these bonds don't trade with a company. That's not a problem because you're not taking assets out of the company.
Right.
With a closed un fund, it's not a problem because you're not taking assets out of the clothes un fund. The problem is how with a company it can trade at a price that doesn't reflect the value of the underlying assets. I would say the other problem with like this whole idea is that it's one thing to be like people want to buy private assets, so we have to find a convenient rapper to sell these private assets to retail investors. But like, where do you get the
private assets? Like, there's plenty of private assets in the world, right, there's plenty of people who will sell you a private investment, but like there are fewer people who will sell you SpaceX, right, there are fewer people who will sell you Stripe. The
private assets that people really want are allocated. They're like owned fairly tightly by like big investors who one might not want to sell, and two the company tries to keep them close, right, Like Stripe tries very hard to prevent its investors from selling any stock to destiny.
I want to say Blackrock can just do a ton of what forward contracts on Stripe.
If you're big enough, you probably can get some of these things, and you probably can negotiate terms. Right. But there are a lot of big financial institutions that would love to have a big pile of Stripper SpaceX to sell to their customers, and these private companies to them like there's a reason they having on public, right, and like going semi public by like selling some shares to
some vehicle that is going to list publicly. It is like kind of an annoyance for them if you crack the code in such a way that your vehicle provides even by proxy, like a mark for the private assets. Right, if you're like if you can look at the like Kitty Greifeld Private Markets ETF and be like, oh, that tells me that SpaceX is trading at thirty seven, then like that's like what SpaceX is trying to prevent, Like they don't want their price to go up and down
every day. Yeah, and so like, to the extent this works mechanically, it's annoying for the issuers. And then like you know, the question is if you have this product, it's easier for you to get bad private companies. Yeah, like like oh, sure, I'll sell you one hundred million shares for your thing. You know, you talk about Blackrock wanting to index the private markets. Like if you could get like a true like index slice of the private markets, First of all, that might be bad, right, but you
really want it's like the good companies. But like the real worry is like you would end up with not an index of all the companies, but like the bad ones that are willing to be involved in your index. Yeah, that might be even worse.
Than just yeah, so you want your blue chip private companies the one who would have iPod in a normal market. But we're not in a normal market.
It's not clear to me exactly why some of the blue chip companies don't IPO, and like some of it is like we're in a bad IPO market. But I think some of it is you're now in an environment where you can be a very large private company without IPO, and your cost of capital is not that high, and you have some like attractive benefits of not having the nuisances of a public market. ELI and mus doesn't like being public that much, right, Like would SpaceX go public
even in a good IPO market? I don't know.
Yeah, And I mean Stripe is sort of the same idea they could have iPod, right, I mean, if you had an index of private assets, could you just do like swaps for disposure.
That's the other thing I was thinking, like when I was thinking about just like the abstract question of like
can you do an ETF of private markets? The natural way to do it is the way bitcoin ETFs worked before the like spot bitcoin ETFs were approved for whatever reason, you can't hold the asset here because you can't buy the shares or because you have liquidity rules that don't allow you to buy the shares, so you hold like a derivative on the underlying asset, right, Like you get some hedge fund bank speculator to write you a swap on the value of SpaceX shares and then you use that,
you put that in the thing, and like that's your proxy.
That sounds like it could happen pretty soon.
Yeah, it's like tricky, right, first all the SEC has rules about derivatives and funds. But like again, like it can be done, right, Bitcoin futures ets did it. Secondly, you have to have someone write you that swap and like be short SpaceX restrip, which is a risky pat Now, somebody who writes you that swap might be able to hedge it by owning the underlying shares, right, but like that's a risky proposition too, Like you don't know who that person is, and like you know their contracts with
the company. You might ban them from hedging by writing swaps. And you have like pricing problems, right because like you know the forward contracts for some of these private companies.
It's like when they go public, you deliver the shares and so like, there's ultimately a price for the forward contract, but like, how do you market to market before they go public with an ETF, Like you kind of need a daily market price, and it's hard to hard to mark that thing to market without actual trading, and with swaps, it's not obvious that some of these things will ever go public. So I don't know you could do it that way. But like, you have a lot of mechanics to work.
There a lot of big questions. But boy, isn't it fun to think about?
I love it.
It's time for mail bag, mail bag, mail bag.
So we did a call out for mail back questions last week. We were thinking, well, should we say we want you to keep sending questions?
We got really good ones. We did get really try to like respond to them enthusiastically so that you'll send us more.
Yeah, please send us more. We're going to answer a few of them right now.
But please send us more more in the hopper.
Yeah, boy, and they are fun to read. Andrew had a fun one. We were talking about Ron Barron last week, and and Andrew wrote, I was catching up with Friday Show, listening to the general trend of active management getting squeezed on their fees. It reminded me of a conversation I had in the sauna with this guy who was in town for the Baron Funds annual meeting. He ran money for an institution and told me he kept some money in their funds just for the entertainment at their annual meeting.
Look at the bands that get to perform at their meetings, Fleetwood, Mac, Justin Timberlake, lots of others. I thought that type of thing would have been eliminated years ago, but he said, you just have to have any amount of money invested and you get an invite. That is incredible. I love that.
It's like a real model in investment management. Right. Yeah, It's like you give your clients some like you know, ancillary cool service and exchange. You get to manage some of their money for them at higher fees than they would pay the van card.
Right.
The guy in this lot is like an institutional allocator, which is like a little weird, right yeah, because like he's putting his clients money into Barren so that he can go to the justin Termala truck. But like you read about like private equity funds have like LP advisory councils like sort of like a board of directors or like a private equity fund, Like you know, ten of their big investors will be on some sort of board where like every quarter they review the investments and like
they chat with the GP. But they have those meetings and like vacation destinations and like those meetings are fun. Right if you're like the like state treasurer or whatever, you can like go to like a really ritzy resort for a weekend to like be on your advisory council and like then maybe you all get some more money to that private equity fund.
Makes a lot of sense to me. I was so delighted to get this email because this touches on something that you were writing about in the newsletter this past week. You quoted Sebastian Mallaby. He is the author of More Money than God Hedge Funds and the Making of the New Elite. And one of the conclusions that you reached in the newsletter this week was that the parties are less fun because traditional stock picking is going away.
There was a vogue for hedge funds being like celebrity stock pickers who like went to conferences and were like ah, putting my best idea is blah blah blah. Right, and now it's a much more like grinding out alpha kind of business. And you know it's just like more professionalized and less like party driven, but it's still like there's still a lot of like party driven stuff. And oh yeah, finance.
The other thing you know in this vein a famous fact about finance is like some number of investment firms either like started as or like are marketed by email newsletters, and like Bridgewater is the most famous one. Like Bridgewater sort of starts as an investment newsletter and people like, yeah, your newsletter is so good, I'd like to give you money.
And now like they have the most money of any hedge fund, they sort of say, well, you know, some investors allocate to Bridgewater not because the returns are so great, but because they like getting Bridgewater's research right. You know, it's more boring and like going to the justin Timberlake party.
But again, it's like you're providing some benefit other than like managing the money in the best way, and people are willing to give you some of the money in exchange for like nice aura around all the services you provide and they hope that they'll that you'll make the money.
You have.
Interesting that you mentioned justin Timberlake but not Fleetwood Mac.
It was just like thinking that the kids these days, But of course justin Timberlake is like far bend the kids these days.
It's going to ruin the tour.
It's going to ruin.
Is pokers taking a security?
Is poker's taking a security? Do you want to read the email? Yes?
No, I love reading from an anonymous reader. Writer, No, I guess they're a reader anyway, from an anonymous reader. It is fairly common for poker players to be staked. By that, I mean that a person or a group of people provide some or all of the money the poker player is gambling with parentheses, either as the entry fee to a tournament or the bank roll they used to play in cash games, and in return they get some agreed upon percentage of the winnings, if there are any.
There are even sites where you can buy and sell stakes for tournaments. Do poker steaks past the Howie test? Are these staking websites unregistered security exchanges?
So I was having any people an investment firm last week, and they kept asking a questions and I kept saying, I'm sorry to do this, but really this is about cryptoe. I'm sick of crypto. We're all sick of CRI. Yeah, but like crypto has really changed how a lot of people understand a lot of things in finance. And like, this question is a crypto.
Question, Like do you feel like they're trying to trick you?
No, No, I'm not sure that our anonymous reader thinks it's a crypto. It's just like it is a cryptical question. So here's the deal. There's like an ancient Supreme Court case called Howie where the Supreme Court said that a security, subject to like sec securities regulation, is an investment of money in a common enterprise, with profits to come solely
from the efforts of others. Right. And so for most of my career, if you ask what is a security, people like, yeah, it's like a stock or a bond, right, And most sec cases are stocks and bonds, not all, but like most. And that was like the focus of securities. And so you had this world where people would offer stocks and bonds and the sec would regulate it. And you have the world of people that other like investment opportunities and they're like you know, ways to make money.
People trade baseball cards, you know, like people had beanie babies, and all this stuff was like clearly not a security, and like no one would think it was a security. And then crypto came along, and cryptos like, we're gonna start companies. We're gonna raise hundreds of millions of dollars
from public offerings. We're gonna use that money to do businesses and promise people share of the profits of that business, and we're gonna all call it crypto on the blockchain, and it's not going to be a security because it's not a stock or a bond, and we're gonna not be regulated, and we're gonna steal half of the money, right Yeah. And so the SEC responded to that slowly by saying, this is all securities, right, this is all passes.
The how he does this is an investment of money in a common enterprise with profits to come solely from the efforts of others, and so it's all a security. And this is like hotly litigated and there's a lot of fighting over like particular cases, but like that's what the SEC things. But one result of that is like the SEC then like kind of goes back and looks at everything else that like no one would have thought was the security twenty years ago and was like, oh,
that's not a security like that. That kind of also
looks like a crypto token. I quote sometimes Hester Pierce is a SEC commissioner, Like the SEC basically like approved some crypto company for doing like gift cards for private jet travel or something, and Aster Pierce said in a speech like if those tokens are security is then you can't distinguish them from any other sort of gift card, because a Starbucks gift card of security, right, and like there's like now kind of almost like a live question
as a Starbucks gift card of security. So anyway, poker, like if you're investing in someone's like poker business, like, yeah, that's clearly a security.
It just is.
We looked online and there's some lawry articles being like, yeah, this is obviously security. Is there any history of enforcement? In twenty seventeen, the SEC looked into one of these taking platforms, and the staking platform actually sued the SEC to make them drop their case and say we're not a security. That didn't get litigated. The SEC moved on and dropped the case, it's twenty seventeen. Like, I think the twenty twenty four SEC one might not bother because
they're busy with all the crypto lawsuits. But two, if they did bother, they'd be like, this is clearly a security what are you doing here? So I don't know, I might be missing something in the legal analysis that poker staking sites are currently doing, but like, yeah, this is a thing that the current SEC would probably think is a security.
Poker staking poker station is a security Starbucks gift cards though.
Not legal advice. Got There's two questions, like one is is it a security? And the other is like are you offering it to the public, because if you are, you have to register at the SEC blah blah. If you're not, if you're like only doing it to the certain kinds of credit investors, and it's like less of a problem. So maybe that's how Hooker's taking works. But it's like a little risky. Yeah, all right, her reader asks, having just listened to the episode on hedge fund training programs.
I'm wondering where the tipping point for too many portfolio managers is, like, is alpha like calculus where you just keep reducing it into smaller and smaller amounts, and the marginal return on a new PM is falling or is their finite alpha. So when we train our ten thousandth or one hundred thousandth portfolio manager, we have perfect equilibrium where all the pro portfolio managers find all the new alpha for the day and no more can be found.
Then you just have a replacement market for portfolio managers. Like long snappers, in the NFL, there's always exactly thirty two professional long snappers because teams all carry exactly one long snapper. I think imagine being the thirty third best long snapper. There's like camps for long snappers. Yeah're like, they train you to be a long snapper, and if you're the thirty third best in the world, you're like, yeah, you know.
Gotta say, I have no idea what a long snapper is.
Uh.
It's a guy who throws the football between his legs a long distance so that someone can ticket.
Jeez, Louise, it sounds like a fish.
Uh.
But in any case, I do love this idea that there's finite alpha, that like alpha is a scarce commodity.
So I was talking actually this week to a hedgehund manager who like helped me orient my thinking on this. If you think about what hedge funds do, and particularly like these kinds of hedgeh ones. So we were talking about like the hedge funds that have like the big multi strategy funds that have a lot of portfolio managers and like have training programs to like identify new portfolio managers. What those funds are doing is like they're providing some
sort of financial service to the market. They're providing like typically liquidity, but like they are intermediating some trades in some ways. They're doing what banks used to do. Right, we think about like the big trades that like these like multi strategy funds do. It's things like index rebalancing, where they like buy all the stocks before they get put into the index and then they sell them to
the index funds. Or it's like the basis trade where they buy treasury bonds and sell treasury futures and like they're buying the bonds from treasury essentially, and they're selling the futures to like investment managers who for whatever reason don't want to own the bombs themselves. All this stuff is like service provision. It's like intermediation. It's like liquidity provision. It's like some sort of like business. Right. It's not like the mystical skill of like picking the stocks that
will go up. It's like doing work on behalf of people and then you charge them money and they pay. So I think if you have that model, this question is like a little easier to understand, right, Like how
much alpha is there? It's not alpha, it's like you know, fees for services, and so like if you find a new market where it would be valuable to provide liquidity in it, then like there's more alpha in the world, and like you can do some of that and you can get paid, right, And so like the question of like how do you train new portfolio managers? Like again, like when I hear this description, I think of like what banks used to do before they got like more
risk averse and more capital regulated. Like when I worked at a bank, It's like heay, like, let's find a new customer base that we can sell new kinds of derivatives too, right, And like you sit in the lab and you cook up derivatives and you try to sell them. I think there's like something like that at Multi Strategy Hedge funds where it's like you sit in the lab and you think up, not like what alpha can we extract from the market, but like what's the need that
people have? Like what's a demand for a product that we can intermediate and then make money on. So I think that's the answer, right, Like, and I think the other part of the answer is like if you're doing that, one thing you're doing is making financial markets more efficient, right, Like when you talk to a lot of these multi strategy hedge funds, you're like, what are you doing for society besides making a lot of money? And the answers are making markets more efficient?
Right.
If you make markets more efficient, there's more trading, and like you're capturing a smaller slice of that trading because the market's more efficient, but like you're capturing a smaller slice of a bigger pie because you've made the market more attractive, some more people trade. So like is there finite alpha now? Like if you like make the market more efficient, then like there'll be a bigger market and you'll get more of it.
Just maatging that written on a tombstone here lies so and so they made markets more efficient, beloved.
You know all the biggest stairs.
That's true. So they just throw the football between their legs. That's it.
Well yeah, yeah, well but accurately, like with people running at them.
Yeah, all right, it's a hard job. But like again, I scream at a little camera for hours. Yeah, accurately, right you also and worthy, Yeah.
That was so fun.
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