The Man Who Hates ETFs Has Found a Way to Save Mutual Funds

I think all three? Yeah, you're right. His name is Peter Krauss. He's starting a venture called Aperture Investors. He's formerly of Goldman Sachs and most recently he was the CEO of Alliance princetein or Yeah. So I mean this is a major league person here who knows the mutual fund industry. He's very well aware of the rise of passive and the cost obsession going on now in the end history, and so he has a solution for the

mutual fund side. So this is a little bit about can they get it back together, can they stop this sort of migration over to low cost passive and we'll try to break it down to how this would practically work for an investor as well. We're also joined by Shannai Basik, who covers finance or finance, depending on how you want to say, for Bloomberg News, this time on Trillians. The man who hates e t s. Okay, so, Peter, you're you've been called the man who hates e T s.

Why do you hate et F so much? Well, I didn't really say I hated ets the New York New York Times. They're trying to get clicks. Yeah, exactly. I think e t s are a useful vehicle. But in all things, in the securities market, there's a lot more than what there appears on the front cover. E t s are actually rather sophisticated security. They are actually derivatives. They aren't really just a package of indie ugual stocks

or bonds. They're actually a set of promises to buy and sell those securities, will hold those securities over time. There are major participants in the marketplace that support that. Some of the e t f s are quite liquid, Some of the e t f s are not very liquid.

Some e t f s have trillions of dollars attached to them, and some ETFs have tens of millions of dollars attached to them, and there's thousands of eats if that exactly My concern with e t s at the time and still is that investors don't really understand their construct and they don't really understand the potential risks the e t F itself, the liquidity e t F itself relies on market participants who actually trade them. But the market participants get paid by having a spread between what

they buy it at what they sell it at. If that spread collapses or that spreads not available, where the market participants somehow feels that they need a bigger spread while the investor is subject to that cost. And we've actually had some experience in the market about three years ago in August when the SPX or the or the standard and Poors ETF separated from the cash market for about thirty minutes by a significant amount, something that people

did not think was going to happen. Having been in the markets for a long time, probably now going on forty years, things like that just don't happen out of thin air. They actually have a rationale, there's actually a reason for that, and it's hard to fix because at the end of the day, it again relies that liquidity relies on market participants, meaning institutional participants, actually having confidence to trade those markets at that point in time in

a very tight bit as spread. If that spread extends or goes away, or it gets larger, the cost becomes very significant. I don't think investors actually understand that risk. Now, for the highly liquid large cap equity markets, that risk

is less and it's actually reasonably modest. But for bond markets, it's actually quite significant, and there's lots and lots of money follow high yield e t s for example, and the high yield e t F S tracking error, which is a measure of the cost of that bit as spread, its actually quite large. It's sometimes seventy eight basis points, almost one percentage point. Well, you wouldn't give up one

percentage point. That's a lot of money in a you know, yield environment of call it five percent for a high yield security, that's the yield. So I think investors need to understand that better. My whole point was understand the e t F better, understand the risks of the ETF better, which is a big part of the show, and I can literally I can feel Eric wanting to pounds right now. So let's just let him ask a question. Well, what you're saying about the reliance on the middleman is true.

You are relying on a lot of these people connected to the system market makers to make markets. If they don't have all the inputs from the stocks and bonds. Like that day on August where some of the stocks were halted, they widen their spreads and that's what caused the dislocation of the e t F. Now since then they've tried to make it to the et F, the stocks are not going to have different halting times. So I think the e t f s are just downstream sometimes from like a rule in the exchange or the

plumbing as I call it. So that has like can when breggsit happened, that did not happen. However, it is true you have to trade the e t F. In the high yield case, I think that most of the money and high yields still goes for mutual funds because active mutual funds that's where they really kick butt. In the high yield area or bonds in general, I think beat h y G So the high yield e t F I think is more used as like quick beta

for traders. Maybe there's some long term money, but for the most part, I think investors have figured out that you can do better going active in a mutual fund. UM But so just two caveats on that, but I think both points are very valid. Something interesting, UM, you know, in your own research and aperture, you've been in the mutual fund industry for so long, but you still see something wrong with the mutual fund industry. You've said there

are too many of them. Can you explain your thinking here and what's the idea with aperture, what's the what's where did this big idea come from? So um I have been operating in the mutual fund industry for a very long time, and of course any portfolio manager in the mutual fund industry, any portfolio managing the industry, will say that their objective is to actually perform. That's what they would say every day. The problem is the incentive

structure is actually not set up that way. The incentive structure is you're paid based on your asset levels, not based on your performance. And that's a fundamental disconnect. And over many years, thirty forty years. It led to companies being focused on the growth of their assets. I have to before you go any farther, I want to ask if you said this at any of your prior jobs with the table has been flipped over. I did say this that many of my prior jobs at the tables over.

In many cases they did. Now I have been saying this for really literally the past three years, um and I think what happened is is that we got to a tipping point, which was sometime before this, where the size of assets under management was so large it became

difficult to perform. And I spent a lot of time investigating long term performance of managers of different types of managers, concentrated managers, diversified managers, managers and large cap managers and small cap managers outside the United States, and unfortunately, the data that's available, which is you know, publicly available to anybody, really proves the point that there's no easy way to identify a manager that will persistently perform, and on average,

managers do not perform in access of their fees. And that's a really troubling problem. And of course the investor in the world has figured that out and in fact, they've moved their money from you know, mutual fund assets and active management to E t S and passive. And I actually think we need et S and passive because basic hypothesis is there's too much money being managed actively to actually perform. So can you explain your fee structure that what does the future look like when so many

people are going to zero? So if you take the prospect that I'm assuming I'm right for the minute, that there's too much money being managed actively, you need to change the incentive structure. Because if you don't change the incentive structure, then people will just keep managing the assets because they're paid to manage the assets and they're paid to gather the assets. But if you go back to basic principles, which is why is the PM there and

BYM portfolio manager, yes, I'm sorry, I'm sorry. The portfolio manager exists because they want to perform. And if you ask a portfolio manager that that is what they would say, I'm here to create performance for my clients. If that's the basic concept, guess what, let's pay you based on that concept. If you don't perform, you don't get paid. If you do perform, you do get paid. It seems like a fair deal. There's a cap to how much you can get paid. Still, there is a cap in

the US under the the Act rules. There. The the SEC view is that we should have performance linked fees, and there's performance linked fees include a fulcrum structure which creates a cap. But the cap is reasonable and so if managers hit that cap, they're still possible out performance over the cap and the managers performance uh fee. Then it's just declined by the certain pro rata amount by which the actual excess return exceeds the cap. But just

a question on this performance fees. This has been something been hearing a lot about and on Twitter where a lot of I called the gladiator pit of debate with ideas. A lot of people will push back on performance fees and say, well, the problem with them is it it inspires really outrageous bets, reckless behavior, because now you're really looking to get as much money as possible, and couldn't that really turn out bad for the investor? Right, So that's a very good point. And so you need an

ecosystem in which the performance fee exists. So there's both a structure for the performance fee. So point one is Our proposition is that there's too much money being managed actively, And the reason why there's too much money is there too many managers who are paid based on the amount of assets they have rather than the performance. If they were paid on performance, given their historical performance, they wouldn't

exist and therefore be less managers and less capacity. More money would be impassive, but the managers that did exist would perform and produce performance for clients that we're saying there's a dinosaur die off that needs to happen. There is a dinosaur die off. And people have asked me many many times, wouldn't that happen by consolidation, And I've said to people, you know, and consolidation in the manufacturing business,

for example, generally leads to more efficiencies. Consolidation in the asset management business, however, is the opposite. When one firm buys another, they don't expect the portfolio managers in the acquired firm to go out of business. They actually expect the portfolio managers to grow. There's no reduction in the capacity. In fact, there's a there's an expectation that will it will grow. So consolidation is not the answer. The only answer I've said sort of uh uh with gallows humor

is death. You know, then the portfolio manager out of business. But another answer would be to change the revenue structure. And if you change the revenue structure, then those managers who can't perform will be out of business and they won't carry any money. So put that's point one. Point to to go back to Eric's point if I if I'm a longer answer, sorry, Point two is all right, how do we deal with if you pay people in performance?

How do we deal with risk taking? Because on the one hand, people say, well, I don't like the fact that I pay you a fee to try to perform and you get it whether you do or you don't. I don't like that, But I also don't want to pay you a performance fe because I'm worried you'll take too much risk. Now, look, you sort of can't have your cake and eat it too, But just for the moment, let's assume that that's the position. When so what we've

said at apertures, look, that's a fair point. So number one, in the forty act vehicles, the fees are capped, and so excessive risk taking that is attempting to produce a return and excess of the cap doesn't actually pay the manager, so they really don't have any real reason to do that. But the way we set up the compensation structure is quite interesting. So we've said two managers, look, we're going to pay you on performance, but half of your compensation

is deferred. You receive that compensation if in the succeeding two years you actually produce zero or positive returns for your client. If you actually produce negative returns for your client, you reduce that deferred compensation or potentially lose all of it. So that is a very significant impact on how the manager takes risk. Now there's a further interesting element in the ecosystem. You've heard of high water marks. In the

head fund industry, firms use high water marks. I don't like high water marks they do in gender risk taking because what happens in a high water mark is if you're down five you have to earn the five percent back before you earn any money. That actually makes you a risk taker. It take makes you take too much risk, And if you actually don't earn the five percent in the second year, then you're really swinging for the fences because you're gonna be you won't have earned any money

for two years. So we we set the performance every year and we use this three year averaging, and that deferred compensation is a way to control risk. So it's a complicated ecosystem, yes, but I think we've actually addressed your concern. You were talking about consolidation being a bad thing. It's funny you say that because earlier this year we broke that JP Morgan was among um large banks that

we're looking to buy et F companies. So you know, with JP Morgan, with Goldman's Acts becoming massive et F players, now, is this a good thing or a bad thing for their business models? Well, my proposition is is that we need more passive investing vehicles essentially, or more passive providers.

I don't like the fact, although I think it's gonna be hard to change because passive is so benefited by scale that between you know, the two large players, three large players, State Street, Van Guarden and black Rock, you have you know, enormous concentration, and so you have operational risk in inside of those firms, which the market completely discounts, but there is real risk there. Having said that, investors will need to continue to have passive vehicles to allocate

capital too. And everybody's portfolio should include a substantial amount of passive and managers who are paid for performance, who actually produce performance. And then over the whole portfolio managers clients will actually get performance, which today they're not getting. UM. And so I think that JP Morgan, Goldman Sachs getting into the t F business just provides for a more diversification of the passive vehicles. And that's a good thing. Um.

And let's talk about this. There needs to be more passive. So let me give you the numbers here right now, I think the fund industry is about sixteen trillion dollars that is passively managed. The rest is active. Obviously that swing from a pendulum twenty years ago where it was active. Where is that pendulum going to stop, in your opinion, where they'll have a nice new equilibrium were active will

be right sized fifty passive. Great question. I don't know the answer, as you would you would expect that that's a guess. But um, look we know. One of the reasons why I pushed very hard to try to change the revenue structure in the industry is that the existential question is that if managers were paid fixed fees I eat, paid to try as opposed to pay to perform. Over time, more and more money would leave the active industry and

go into the passive industry. And what I was concerned about is that you didn't have a level playing field between active and passive. Fee structures inactive were just materially higher than fee structures in passive and ets. So investors were saying, look, I don't get I don't get returns net of fees in the active space. I might as well just pay less fees and get the market return

minus the fee. And if you if you looked out over a long period of time and said, well, philosophically, that means that people would just move from active to passive because they're not getting paid anything to be an active in fact, their returns are less than what they would get in passive. Then you end up with a market that's pent passive. And that, of course, theoretically is a disaster because now you don't have a capital market

that actually prices. So I I went down to Washington to talk to the SEC and I said and the tragicy Department, And I said to them, look, you have a philosophical or fiduciary problem. Nobody wants the markets to be passive because we will be able to price an ip L. That's a really bad thing. And this is the largest capital market in the world, and we need to be the most robust capital market in the world.

So what you you're not going to say, as regulators, we're going to outlaw passive or you can't have more than ext percent passive. That's not going to happen. But what you can do is create a level playing field so that competition allows investors to actually move money into vehicles that makes sense to them, and that will create a balance in the market. And that was why I was pushing the regulators and treasury to think about a structure where the base fee was this et F like fee.

Then investors could say, look, I could have either active or passive at the same cost, but I have an option on the active managers performing. So Derik's question, I think passive will continue to grow. It's at thirty today. I think it will easily get the fifty. Whether it goes beyond fifty or sixty, I don't know. My guess is that somewhere in the fifty to six level is kind of where it tops out. I think that, uh, if you thought about, well, of your sixteen trillion, could

eight trillion be actively managed? You know, that's a question. I don't know, but I do think in ten to fifteen years there's going to be at least a trillion dollars managed by these performance structors. And you know, the old industry isn't going to go away tomorrow. The old industry is going to remain for a long period of time. By the way, there are managers in the old industry that do perform, that do cap their capacity, but they're very small number. Is it hard to recruit talent? You're

pushing down fees across the board? Do people want defer and differing compensation? You're telling people they are going to get paid less, So what is it like to recruit money managers? Well, I'm actually not telling people they're gonna get paid less. I'm actually telling people if they perform, they're going to get paid substantially more, actually substantially more, And we pay the managers thirty of the that's a significant improvement in the percentage of the revenues that they

earn relative to industry standards. Let's focus on appertuers, I can what products are you selling and how much are they going to cost? So I can't focus on specific products because as you know, there's a registration process, but we do expect to have all of our products available in both registered investment vehicles, both in the US and in Europe and perhaps in Asia over time, as well

as separate accounts for institutions. So what we are our thesis is that we want these investing vehicles and these fees available to anybody who wants to be able to participate them, anybody meaning retail investor all the way to institutional investors. So does that mean mutual fund Yes, that would mean mutual funds. Act Advisor of funds UH and use its funds which are mutual funds in Europe. And of course they could be in different vehicles if we were in Asia, but for the time being, I think

the U S and Europe's a very big market. Now there's a couple, there's I think at least one e t F that has a folk groum fee. Why not do this in the e t F structure is because you don't want to show your holdings every day, or specifically because of what you talked about earlier, not like the trading aspect. Why a mutual fund because clearly, you know, people are all kind of thinking et F right now. I wouldn't want to be where the money is going.

So it's a very interesting question, Eric, very interesting question. I hope you're ready for the response embracing Okay, well we'll see so. Um. Along with the idea that I wanted to change the revenue structure of the market, I also think that the structure of the mutual fund and the pricing of the mutual fund meaning NAV at the end of the day, is an anachronism. I mean, we have that structure because it's seventy years old, not because we would design it that way. Today, we can price

a mutual fund all day long. What stops a mutual fund from being priced all day long like a security answer? Nothing, just the rules. So one of the things that I think the industry needs to do is to recognize that continuous pricing for mutual funds is actually very healthy for

invest sters. If you continuously priced mutual funds, what's the difference shereet of mutual fund and in e t F Exactly nothing excepted in the mutual fund case, we actually are not disclosing the positions to the street and allowing the street potentially to disrupt the pricing value that the investor keeps because the securities are known only to the investor.

So I think one of the things that has to happen in the next year or so is the sec needs to examine continue to examine the possibility for continuously trading mutual funds. If you continuously traded mutual funds as a security that was listed in the New York Stock Et Change, you could tomorrow take sixteen trillion dollars and turn them into e t s, the only difference being the tax treatment, which is a biggie for a lot of people. It's about the tax treat of capital gains.

Let's talk about the tax treaming. There is no reason on Earth why e t f s should have deferred taxes and mutual fund should pay taxes every year. The only reason why it exists is that e t f s were dreamt up a long time after Earth the I R S built the code. The fact that inside and E t F every transaction is treated is a light kind exchange is kind of a silly thing. You're

shooting so many arrows at your fort right now. Mutual funds should not pay tax eating now you're you're gonna be You're gonna be dead by the time i'm Mutual funds should not pay taxes, and E t F s it should avoid paying taxes. There should not be a subsidy running between mutual funds and ets. They both should be treated the same. Right In other words, eat Mutual funds are kind of double taxed. When you sell it, you get taxed, and you also get taxed for doing nothing.

You're saying, kill one of the taxes in the mutual fund to make it even with the E t F. To be precise, mutual funds are not double tax Mutual funds are taxed in two ways. You're not double taxed. You're taxed as gains and losses occurred during the course of the year and distributions occur in the year, and then you are taxed with your adjusted basis relative to your sale value. The E t F the same thing happens, but it's all deferred, so there is it's a timing difference.

It's actually not a permanent difference. It's a timing difference between when you pay the tax. But there's no earthly reason why the e t F should not pay that tax. If the I R S wants to increase its revenues, which I would think they do, given that the government's going to post i think latest reading eight billion dollar deficit, they ought to tax et S and there's no reason why they shouldn't other than the sort of silly rule that existed well before you created an e TF for

just fell down. Well, no, I actually completely understand that point of view. From the mutual fund side, it's not fair. In fact, the tax efficiency of an et F was a happy accident, as Kathleen Mori already told, didn't mean to do that. It was just a nice byproduct. And it turns out that for some people that's the number one benefit. For others it's maybe two or three. But it certainly adds to this whole like basket of advantages that has helped the ETF. So so I agree with you.

I've actually analyzed this in great detail because I'm actually intellectually interested in it. So the e t F is the greatest to state vehicle in the world. If you buy the e t F and die with it, it's a step up in basis you never pay the tax. That's a terrific opportunity. The number of people to take advantage of that is less than point one percent. E t F holding periods, you know, are within one to

two years, maybe three years max. The benefit that that holder is getting is the net present value of the tax payments over that time period at today's interest rates. It's the minimus. People think it's an attractive thing. It really doesn't pay that much, but it is a marketing pitch that e t F organizations use a happy accident. It's nice to say to somebody, why don't you take advantage of the happy accident? The fact that mutual funds

pay taxes. That's just the facts. That's fine. There's another interesting issue. If you force the e t F to actually pay taxes, their costs would actually go up because they'd actually have to account for the ten forty to get sold that gets sent to you each year, So there's also a cost differential. That's actually the thing that bothers me the most. It's not so much a act is because the net present value is a small number.

It's the fact that the mutual fund structure has to actually account for that taxation every year, send out information to their constituents, their mutual fund holders. They pay attacks, the e t F doesn't pay that, and then the e t F says, my fees are lower. But that's that's what really bothers me. Yeah, and Mike Tyson's punch out. You're the guy who's like days in the corner right now. No, I mean this is something wrong with the t F. Yeah. I just think this is an inequality in the system

that needs to be addressed. Listen, I call this the fighting spirit on Twitter. I'm amazed that how few people are out there pushing back on this sort of raw, rob passive thing. I like it. This is good debate. This is what people need. It's there. There aren't that many people on the active side who are fired up like this. It's it's odd. But I have one quick question though, in terms of your funds, right, you have equity Right, let's say we talk about an equity fund.

One thing that's coming up a lot lately is active share. So the amount of the portfolio that say, isn't in the benchmark. How much you need exposure are you getting? Do you plan to have a high active share, which I assume you would if you're on a performance fee, and thus, how would you use it in a portfolio as like a ten percent add on to a low cost passive core or you look into sell funds that would have smaller active share that would be used as

your complete core position. Yeah, great question. So what I love about this fee structure is the portfolio manager is emancipated. Literally, I'm paying them to perform. And so what you find with portfolio managers, and look, I've interviewed the hundred portfolio managers over the last nine months and and probably had three meetings each with them, So that's three interviews. Which you find with portfolio managers is they all have styles. They all have I don't mean styles like value growth,

I mean investing styles. They have ways in which they take risk, ways in which they're comfortable taking risk. And you never before in a mutual fund could actually do what you said, which is have a small active position that was really all of your alpha and then the rest of your port folio was just an index. And the reason why you couldn't is because you were charging sixty five basis points to the client. The client would say, how can you have you know your portfolio index, I

could pay you know, ten basis for that. We're changing that model entirely. You're paying us ten basis points in a US large cap portfolio. If we chose, if the portfolio manager chose to have a portion of that in an index, actually an index, or just replicate the index in a swap, you wouldn't be upset because you're not actually charging more getting charged more for that than you

would if you bought it outside the mutual fund. So portfolio managers are going to construct these portfolios and ways in which they're comfortable taking risk, which I think increases the probability that they actually create a return. Because you want portfolio managers to be able to manage portfolios in with the least amount of constraints as possible. You lower

the constraints, you increase the probability for performance. The people that are going to come and be portfolio managers are aperture, are people that actually believe they can perform. And I've I've had a couple of debates with folks that are in the traditional industry and they say, listen, some years people don't perform. You know, you can't hold the talent, and I said, look, I don't want the talent that's in your company, because the talent in your company is

happy to get paid whether or not they perform. I actually want talent that wants to get paid when they perform. I'll pay them more. They'll be more focused on performance, and they're aligned with the client. And this one last thing, it's critical, which we haven't talked about this whole active passive debate, is focused on capacity because you know that when you manage more and more dollars, it becomes more and more difficult to produce returns. If I pay you

on performance, you will cap your own capacity. That is a huge benefit, huge benefits, the biggest benefit that aperture offers, because if you don't have that, then the owner of the company, of the asset manager, and the portfolio manager are always fighting over you know, who's got you know, how much capacity is there really available in the industry.

The portfolio manager will always say they can manage more money, and unfortunately the asset manager themselves, the shareholders of those of those companies, they're incentivized to grow the assets too. So this is the only company that I've seen so far with the owner the equity, meaning me and generally that both of us are incentivized to actually cap the capacity because we make money when the clients make money, and the same thing for the for the portfolio manager.

That's a key difference. So, speaking of which, what do you view as going to be your your ideal size? So I think the ideal size of the company. First of all, this is a company that I believe will take eight to ten years to get to, you know, the ideal size. I don't think you can build asset managers. You know, over a short period of time. We're committed to this business. We generally and I are committed to

this business over the long run. I've I've been lucky enough to head two asset managed organizations and both basis it took eight plus years to either stabilize them or grow them to scale. I don't really think this will be any different. Um, I think that we will have ten to fifteen managers over long periods of time. So over ten years, you know, if we're lucky enough to have three to five billion dollars per manager, you know, you can do the math, call it, you know, billion.

We don't need to be a hundred billion dollar or two hundred or five hundred or trillion dollar company. In fact, I think that you probably can't produce the alpha at that basis. I think what the industry needs is lots of apertures out there, and in that way, I think that people can control their capacity. They can be specific alpha generating engines, and they can produce for the investor a much better environment over time. Your investor is interesting.

You have a large one of the largest, you know, insurers in the world, Generalize, one of the largest Italian insure that's also been looking to expand their asset management base. Why an insurance company to build an asset manager need two things. One is far more important than the other. You need a little bit of capital to run the business. So this company has about forty million dollars of initial

capitalization between myself and generally. That's interesting, but not very Which really interesting is the seed capital because what drives portfolio managers to actually come to a company is I can start you off with a sizeable amount of capital, and that means if you perform, you actually can get paid a reasonable amount of money. What does an insurance company have that most other entities don't have? They have

very long duration liabilities. You know, people live for long periods of time, their insurance premiums are paid over long periods of time. Insurance company balance sheets have these very long duration liabilities, which means that they can invest over long periods of time. So an insurance company is the perfect balance sheet to actually provide seed capital. And what you need is an innovative insurance company who's willing to understand that building the asset manager might in fact be

cheaper and more attractive over time than buying it. Most have bought them. I have bought lots of asset managers. I've sold lots of asset managers. Is very difficult to buy an asset manager. All kinds of issues plague you, and you have to pay for the fair value of the asset, which means that in order to get your money back, it has to grow faster than it's currently growing, and that's not an easy thing to do, particularly in today's market. So I think what Generality's insight was that, well,

this is an innovative, disruptive model. We are an innovative and disruptive company. Fits with what we want to do, and we have the long duration liability that actually could fund it. So that's how it came together. When we talk active like your funds and the managers are hiring. A huge trend right now is quantitative active, which is actually not a human making decisions per se, but a system that humans used converted into an index. We call

it smart beta. Are you going to use any of that or you're gonna have are going to be more quote like old school where you're discretionary active, you can decide what to do on any given day. Is that the kind of active you're gonna sell? Are you're gonna maybe have a murder of two? Very good Questionnaeric, you have very good questions. Really really, I'm way steep in this stuff. No, No, you're very good. Um. So I've

managed quantitative managers over time, M built quantitative systems. Which interesting about quantitative systems, and you alluded to this is that they are actually just um disciplined and um mechanized human research processes, and so they aren't that different than what a human does. They're just routinized and they presumably exclude human biases in making decisions. I say presumably, because that's actually not true, because the research factors that actually

drive them haven't bedded in them some bias. To begin with. The challenge with UH with the quantitative system is they have a very hard time seeing inflection points. And so if you actually run a quantitative model, the quantitative model will say, even though it lost money yesterday, that today it's going to make money, and it continues to actually

execute the way it was the past day. It's hard for that quantitative model to actually see an inflection point and change and that's the biggest risk in quant models in the world. Then they're all basically the same one form or another. So sometimes some of the engineers of the quant models actually can see the inflection points and change the model, and so effectively they inject into the process a human element that wasn't really supposed to be there.

And often and oftentimes they don't get it right, but sometimes they get it. They do get it right, and that's what makes some of these you know, unique quantitative models more successful versus others. I think that's interesting, But my own view of the world is that um the quantitative models are more likely to not see the inflat action point and take on too much money over time because the quantitative model also doesn't have a capacity, you know, instinct,

it's just a it's just a machine. It just keeps trading. So I've concluded that I think the human actually, on balance, has more to offer than the machine. Wow, that is controversial. I like him. He's going after passive and quants. I like it. So this is you're taking on two huge trends. There's a whole discussion about artificial intelligence that AI, you know, effectively will trump human thinking. And look, that may be true fifty years from now, it is not true today.

And so if you wanted to build a investment management company on AI driven quantitative investing, I don't think that that's in the cards right now. It's funny, how you know, all this movement into passive and quant and the news flow, how original saying a human being human being? Fun It's like, Wow, how novel? SELLI Bazak, Peter Krause, Your church is called Aperture Investors. Thanks for joining Sun Trillions. Thank you so much.

Thanks for listening to Tricks Until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple podcast, Spotify, and wherever else you'd like to listen. We'd love to hear from you on Twitter. I'm at Joel Webber Show. He's at Eric Baltunas. Shanali's at at s O n A l I b A s A K. Trillions is produced by Magnus Hendrickson. Francesca Leedy is the head of Bloomberg podcast by