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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Maybe we should talk about the voice thing. I mean,

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Speaker 2: it'll become a parent once I start talking.

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Speaker 1: I feel like you're closer to normal Katie voice than

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Speaker 1: to elastic swallower Nash voice.

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Speaker 3: I'm doing better.

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Speaker 2: I'm pretty sure I had the flu last week. I

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Speaker 2: think a few people missed that I actually was sick

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Speaker 2: last week. And it wasn't that engineers turned my voice down.

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Speaker 1: I joke about engineers turning your voice down.

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Speaker 2: People literally, that was just mother nature at work. I'm

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Speaker 2: doing a bit better.

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Speaker 1: And people did not like your new voice.

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Speaker 3: No, they didn't like it.

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Speaker 1: I was thinking that it would improve the audibility of

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Speaker 1: this podcast, but no, no, you just have to turn

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Speaker 1: me up in hell helium.

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Speaker 2: Before I ever read podcast, I got a text from

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Speaker 2: one of my PR friends, who I think is maybe

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Speaker 2: listening right now, and he was like, Wow, you sound

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Speaker 2: really awful.

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Speaker 3: In the latest version of money Stuff. What do you

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Speaker 3: say to that?

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Speaker 1: Yeah, we didn't get any email saying that I sounded

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Speaker 1: comparatively better.

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Speaker 2: Yeah, next we have to try you know, you you

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Speaker 2: taking some helium and getting you up to my level.

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Speaker 1: Right, that's interest? Should I do the open.

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Speaker 3: Yes, in a full.

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Speaker 1: Set up, certainly not.

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Speaker 3: And I didn't like that at all.

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Speaker 1: No, that was terrible. Yeah out, Hello and welcome to

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Speaker 1: The Money Stuff Podcast, your weekly podcast where we talk

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Speaker 1: about stuff related to money. I'm Matt Levin and I

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Speaker 1: write The Money Stuff Colin for Bloomberg Opinion.

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Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and

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Speaker 2: an anchor for Bloomberg Television.

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Speaker 1: What are we talking about today, Katie?

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Speaker 2: We're going to talk about a hostile takeover. Sure, we're

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Speaker 2: going to talk about exorbitant pass through fees, and then

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Speaker 2: we're going to talk about an interesting humble thought experiment.

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Speaker 1: Do we ever talk about anything else?

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Speaker 2: All?

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Speaker 3: Right?

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Speaker 2: Open Ai the Girlies are Fighting is a tweet that

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Speaker 2: I saw on this situation, which I thought it was funny.

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Speaker 1: I saw a tweet that was like Sam Alton versus

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Speaker 1: Elon Musk is like Kendrick versus Drake if both of

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Speaker 1: them were Drake.

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Speaker 3: Yes, that's so funny.

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Speaker 2: No one's performing at the super Bowl here, No one's

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Speaker 2: wont a Grammy.

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Speaker 1: Yeah, so Elon muss wants to do a hostile takeover

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Speaker 1: of Open Ai, which I wrote something like, there's probably

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Speaker 1: never been a ninety seven billion dollar hostile takeover of

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Speaker 1: a nonprofit before, and people are like, well, at hospitals,

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Speaker 1: like there are some like unsolicited bids for nonprofit hospitals, right,

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Speaker 1: Like the model for this arguably is like a lot

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Speaker 1: of hospitals are nonprofits. They do a lot of for

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Speaker 1: profit conversions, and so there is some like kind of

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Speaker 1: law and practice around how you convert from a nonprofit

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Speaker 1: to a for profit. But this is still pretty weird, right, So, like, yeah,

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Speaker 1: open Ai is trying to convert from a nonprofit to

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Speaker 1: a for profit. To do that, they need to pay

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Speaker 1: out the nonprofit for its control of the business. Their

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Speaker 1: plan to do that is to give it, you know,

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Speaker 1: a chunk of the shares of the new business or

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Speaker 1: the newly for profit business. And Elon Musk came into

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Speaker 1: great problems by saying, I'll give you ninety seven billion

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Speaker 1: dollars in cash for it, which is more than you'd

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Speaker 1: get from the for profit business, and so you should

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Speaker 1: sell it to me to preserve fair value, which is

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Speaker 1: like everyone sort of assumes it's not a serious bid.

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Speaker 3: Yeah, that's a.

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Speaker 1: Way to make life more difficult for open Ai.

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Speaker 2: I also assume that, yeah, so two points there, one

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Speaker 2: being if you only read headlines, which is how a

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Speaker 2: lot of people consume news. This was probably pretty confusing

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Speaker 2: because the bid ninety seven point four billion dollars. You know,

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Speaker 2: I think a few weeks before that, we got some

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Speaker 2: headline from the Wall Street Journal that open aies and

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Speaker 2: talks to raise forty billion dollars at a three hundred

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Speaker 2: and forty billion dollar valuation. The nuance being that they're

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Speaker 2: bidding for the nonprofit which owns a steak.

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Speaker 3: In the form, they're not even.

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Speaker 1: Really bidding for the nonprofit. It's a fun thing to

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Speaker 1: say that he's trying to take over the nonprofit, but

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Speaker 1: actually he's bidding for the steak. Yeah, the nonprofit has

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Speaker 1: like a set of rights o the for profit business,

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Speaker 1: and he wants to buy that from them for ninety

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Speaker 1: seven billion dollars. The alternative is they would sell that

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Speaker 1: set of rights to the for profit business in exchange

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Speaker 1: for some stock in the for profit business, which, like

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Speaker 1: the numbers I've seen people say, like the nonprofit would

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Speaker 1: get like twenty five percent of the business, which you know,

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Speaker 1: at a three hundred million dollar valuation, is worth seventy

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Speaker 1: five billion dollars. Ninety seven billion is more than seventy

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Speaker 1: five billion. I think you could argue that at twenty

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Speaker 1: five percents they can open Aiye is in the long

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Speaker 1: run worth more than ninety seven billion. But you know,

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Speaker 1: Musk is saying you got to get at least as much. Yeah,

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Speaker 1: but right, he's not offering to take over the whole

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Speaker 1: thing for ninety seven billion, which is less than the

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Speaker 1: current market mark on it. Except he sort of is

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Speaker 1: right because like, right now, the nonprofit controls the thing,

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Speaker 1: the business, right, the nonprofit has final say over it.

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Speaker 1: And so the people putting in money at a three

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Speaker 1: hundred million dollar valuation, the nonprofit board doesn't technically owe

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Speaker 1: them an shary duties. They're fundraising documents used to say

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Speaker 1: it would be good to consider your investment in the

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Speaker 1: form of a donation. Right, So it's like people are

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Speaker 1: sort of making assumptions about the future path of the business,

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Speaker 1: and the assumptions they're making are like, you know, sam

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Speaker 1: Aldman is like a money making guy, and like they

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Speaker 1: know they need to raise a lot of money, and

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Speaker 1: so they will do the right thing for shareholders. And

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Speaker 1: so it's worth a three hundred billion dollar valuation. But

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Speaker 1: in theory of Elon Musk bought the control rights from the

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Speaker 1: nonprofit What does that do to the non controlling investors

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Speaker 1: who have weird cat profit interests in the company. I

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Speaker 1: don't know. I think he gets like more than twenty

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Speaker 1: five percent of the company for his ninety seven billion dollars. Like,

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Speaker 1: I think he gets control over the company for his

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Speaker 1: ninety seven billion dollars. And that control for him a

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Speaker 1: guy who runs a competing AI company and runs a

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Speaker 1: bunch of other companies and runs the US government, that

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Speaker 1: control is pretty valuable to him in a way that

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Speaker 1: it's not to the nonprofit board. So if they said

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Speaker 1: yes to him, if they're like, sure, Elon, here's our stake,

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Speaker 1: it would be a huge bargain for him.

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Speaker 2: Yeah, well that's what I was wondering. So your position,

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Speaker 2: it sounds like is that Muskus trolling?

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Speaker 1: Well, he doesn't think they're going to say yes. And like,

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Speaker 1: you know, the other thing I wrote is like, like

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Speaker 1: ninety seven billion does a lot of money, right, Like, yeah,

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Speaker 1: if they were like, sure, Elon, here you go, Like

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Speaker 1: he could raise ninety seven billion dollars to do it,

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Speaker 1: because it's a good deal. But it's not like he

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Speaker 1: has ninety seven billion dollars committed, Right, that's true, it's

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Speaker 1: a lot of money.

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Speaker 3: That is a lot of money.

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Speaker 2: But I mean if we go down into hypothetical lands

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Speaker 2: and the board did take this seriously and they did say, yes,

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Speaker 2: what does that look like?

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Speaker 1: I don't know. It's a great question because it's not

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Speaker 1: like they own forty percent of the company. It's not

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Speaker 1: like they own ten percent, but they have like a

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Speaker 1: super voting shares. Right. What they have is like there

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Speaker 1: is this weird quasi for profit subsidiary of the nonprofit

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Speaker 1: and it has sold stuff to investors, and that stuff

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Speaker 1: is like this like waterfall of profit interests. Every investor

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Speaker 1: has like a different deal. It's like not really shares,

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Speaker 1: it's profit interests and they're capped. So like even knowing

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Speaker 1: what percentage of the company the nonprofit owns and could

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Speaker 1: transfer to Elon Musk is like it's kind of uncertain,

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Speaker 1: right that you can like build a model that converts

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Speaker 1: these waterflows of cash flows into like some percentage of

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Speaker 1: the equity. But it's like a little debatable. And then

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Speaker 1: the other thing that it has is like it has

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Speaker 1: the board the nonprofit gets to make decisions for the company,

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Speaker 1: and like says explicitly to investors, like, we don't make

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Speaker 1: these decisions out of a fiduciary duty to investors. We

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Speaker 1: make these decisions for the benefit of mankind. The nonprofit

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Speaker 1: controls the company. But it's not just like share RedZone

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Speaker 1: controlling paramount right. It's not like a person with super

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Speaker 1: voting shares. It's like a nonprofit with a social mission

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Speaker 1: controls the company. So if Elon Musk buys that, does

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Speaker 1: he get to just control the company however he wants,

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Speaker 1: or does he like take over the social mission. And

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Speaker 1: I think in his offer letter he's like, we will

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Speaker 1: continue the social mission. I don't know. Yeah, So I

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Speaker 1: think it's really unclear what he would buy, right, But

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Speaker 1: like there is some package of rights that the nonprofit

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Speaker 1: open ai is hoping to give up to the for

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Speaker 1: profit open Ai in exchange for stock, and he's just saying,

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Speaker 1: whatever that package of right says, I'll buy it for cash. Yeah, Like,

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Speaker 1: if you take that seriously, that package of rights is

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Speaker 1: really valuable and like arguably more valuable in the hands

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Speaker 1: of the world's rich is person that it is in

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Speaker 1: the hands of fate nonprofit looking out for the benefit

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Speaker 1: of humanity.

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Speaker 2: Well, if you ask Sam Altman, which Bloomberg TV did.

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Speaker 2: They got an interview with him on the sidelines of

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Speaker 2: this AI summit in Paris. Sam Altman says that, I mean,

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Speaker 2: he's not taking this seriously. Obviously, he had some hostile

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Speaker 2: words about Elon Musk. Did you see this, Yeah, it

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Speaker 2: was really personal. I mean, he said, of course he

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Speaker 2: thinks Elon Musk is just trying to slow us down own.

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Speaker 2: He's obviously a competitor. I wish you would just compete

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Speaker 2: by building a better product, et cetera.

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Speaker 1: But he also said, probably his whole life is from

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Speaker 1: a position of insecurity. I feel for the guy. I

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Speaker 1: don't think he's like a happy person that I do

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Speaker 1: feel for him.

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Speaker 2: I mean, this gets back to the girlies we're fighting,

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Speaker 2: and I don't know, it's pretty personal. It's also playing

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Speaker 2: out in court and filings obviously, right.

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Speaker 1: Because mess is also suing Yes to make them be

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Speaker 1: more nonprofit and like this is all in the context

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Speaker 1: of like he owns a for profit AI from right,

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Speaker 1: so one assumes he's not going to buy open AI, right,

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Speaker 1: not that he doesn't want to, just that they're not

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Speaker 1: going to.

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Speaker 2: I feel like it even goes deeper than that though,

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Speaker 2: Like this comes back to the blood feud of him

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Speaker 2: and Altman founded open ai together.

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Speaker 3: Blah blah blah.

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Speaker 1: Right, I know I agree with you and with Sam

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Speaker 1: Altman that this is all largely about petty personal vindictiveness

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Speaker 1: on a ground scale. But it's also like open ai

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Speaker 1: is probably the leading you know l M company.

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Speaker 2: Yeah, I don't think that's controversial.

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Speaker 1: Xai is has gros somewhere in the pack.

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Speaker 3: Yeah.

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Speaker 1: Open Ai has made it very clear that it's doing

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Speaker 1: this conversion because it needs to raise like forty billion dollars, right, Yeah,

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Speaker 1: it's so expensive to run company and to scale it

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Speaker 1: and to raise that much money. They think they need

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Speaker 1: to offer investors normal stock and not I think they

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Speaker 1: use the word structural bespokeness, which is a great word, bespokeness.

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Speaker 1: And so they need to be a for profit to

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Speaker 1: raise the amount of money that they need to raise

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Speaker 1: to continue to be competitive. And this might stop them,

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Speaker 1: yeah right, And if it stops them, then like yeah,

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Speaker 1: it's an opening for XII, right, And so how would

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Speaker 1: this stop them? Like Elon Musk offered to drop his

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Speaker 1: bid if they agreed to stay a nonprofit. So that's

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Speaker 1: like one way to stop them, right if they just

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Speaker 1: agree to stay a nonprofit. But even if they say

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Speaker 1: no to him, you can't quite ignore him. They have

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Speaker 1: to at least sort of wave in the direction of no. Actually,

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Speaker 1: we're getting more value for the nonprofit from open Ai,

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Speaker 1: like internally than we would from Elon Musk. And I

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Speaker 1: think most people think that means essentially, the nonprofit needs

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Speaker 1: to get a bigger steak in the for profit company

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Speaker 1: than it was planning, right it was planning like let's

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Speaker 1: say twenty five percent. It needs to get a stake

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Speaker 1: that I can credibly say is worth more than one

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Speaker 1: hundred million dollars, right, Yeah, And that just makes it

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Speaker 1: a little bit harder to raise money, right because you're

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Speaker 1: giving more of the steak to the more of the

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Speaker 1: company to the nonprofit. You're cutting back the shares of

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Speaker 1: like Microsoft and soft Bank and everyone else, And so

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Speaker 1: it just makes it harder for them to raise money

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Speaker 1: and creates uncertainty and you know, puts them in a

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Speaker 1: little bit worse competitive position to raise a lot of

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Speaker 1: money and kind of stay out of XII.

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Speaker 2: Yeah, which is interesting in the context of Stargate or whatever,

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Speaker 2: that this very ugly public fuse paying out and makes

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Speaker 2: things a little bit more challenging for open AI.

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Speaker 1: But we'll see, right, I mean, one thing I've written

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Speaker 1: is like, just from the outside, it seems to be

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Speaker 1: pretty easy for Open Ahead orra is money. They've got,

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Speaker 1: you know, yeah, like the sexiest product in the sexiest

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Speaker 1: industry in the world. They've got Sam Alban, who is

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Speaker 1: an incredible salesman. They've got a lot of advantages. And

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Speaker 1: you know, there's a lot of this money from soft Bank,

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Speaker 1: who is not like notorious for driving a hard bargain. Right,

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Speaker 1: it's weird to be like this bid from Elon Musk

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Speaker 1: is going to prevent them from raising the money they

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Speaker 1: need to scale. Like I don't know, man, Like it's

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Speaker 1: open an eye. They'll be fine, but I.

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Speaker 2: Don't Yeah, all right, they'll be fine. Let's just put

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Speaker 2: a pin in it for now.

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Speaker 3: Let's talk about.

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Speaker 2: Pass through fees at multi strategy hedge funds do that.

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Speaker 2: This is a great Bloomberg big take that went out

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Speaker 2: this week. Reading it, it really feels like rage bait.

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Speaker 1: Well it is, right, I mean, like it quits a

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Speaker 1: guy saying pastors are wild. You're paying for everything, including

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Speaker 1: the copy.

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Speaker 3: Of paper beautiful.

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Speaker 1: And it's true that traditionally the way you think of

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Speaker 1: hedge funds is like investors put in money, the hedgehun

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Speaker 1: invests the money for them. The hedge fund charges them

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Speaker 1: two percent of the money and twenty percent of the profits. Right, Like,

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Speaker 1: those are the stereotypical numbers and the stuff that the

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Speaker 1: hedge fund keeps. The two and twenty pays for its managers' salaries,

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Speaker 1: their bonuses, right, their photocopier paper, their lunches, you know,

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Speaker 1: and whatever. Like, the expenses are covered by the fees, right,

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Speaker 1: And the multi strategy model, the modern big multi strategy

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Speaker 1: model is just not that at all. Right, The modern

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Speaker 1: multi strategy model is, you give us money, we use

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Speaker 1: the money to do investing. We also use the money

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Speaker 1: to pay all of the expenses, and what's left over

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Speaker 1: you get some of what we get some of it, right,

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Speaker 1: Which is like, as I wrote this week, it's exactly

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Speaker 1: the same model as a company generally, or like an

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Speaker 1: investment bank in particular. Right, like an investment bank, the

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Speaker 1: shareholders pay for the photocopier paper. Right, All of the

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Speaker 1: expenses of the investment bank are taken out before net income,

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Speaker 1: and then the sharelders get some of the net income

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Speaker 1: and like the rest of it goes to the bonuses, or

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Speaker 1: rather the sharelders get the net income after the expenses

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Speaker 1: and the bonuses to the employees. And that's how like

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Speaker 1: companies work. It's how investment banks work. I'm modern like

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Speaker 1: corporate investment banks work. And the multi strategy model is that, right,

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Speaker 1: It's like the investors are capital providers. We pay for

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Speaker 1: all of our expenses out of the investors' money. Yeah,

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Speaker 1: and the investor you get someone what's left over, right, Yeah,

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Speaker 1: And that is a model that these firms can sell

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Speaker 1: to investors. But if you're just like outside of it,

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Speaker 1: you're like what they're paying for photocopiers, Like it's very annoying.

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Speaker 2: Like I am not in LP to a multi strategy

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Speaker 2: hedge fund, but I mean, reading this story, I hear

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Speaker 2: the parallels that you're making with an investment bank. But

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Speaker 2: I have to imagine that maybe I'm wrong. I probably

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Speaker 2: am that if I'm in LP a potential LP to

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Speaker 2: a multi strategy hedge fund, I'm thinking about I am

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Speaker 2: giving my money to a hedge fund for returns. I'm

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Speaker 2: not investing in an investment bank model. I'm just coming

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Speaker 2: at this. It's you know, what is my money going

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Speaker 2: to return?

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Speaker 1: Yeah, and like their pitch to you is we return

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Speaker 1: more than our cost of capital through the cycle. Their

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Speaker 1: pitch to you is like we can give you a

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Speaker 1: pretty stable high teens return on your money. And that's

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Speaker 1: what you're getting. And you're not getting like eighty percent

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Speaker 1: of the money we make. That's an irrelevant metric. What

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Speaker 1: you're getting is like a sort of expected high teens

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Speaker 1: return and like we'll pay for the photocopiers out of

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Speaker 1: your money.

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Speaker 3: It's actually low teens.

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Speaker 1: Yeah, there's this, there's a lot of like a lot

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Speaker 1: of you know, I'm used to the investment banking world

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Speaker 1: where there's like a thing called the target return on

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Speaker 1: equity and you're not supposed to get to the target

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Speaker 1: return on it's just like a number that's in the

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Speaker 1: present pitch.

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Speaker 3: Yeah, I don't know.

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Speaker 2: This goes back to a broader question that we talk

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Speaker 2: about this all the time on the television show that

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Speaker 2: I have open interest, but why would you ever give

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Speaker 2: money to a hedge fund?

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Speaker 3: I understand the pitch diversification.

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Speaker 2: You're supposed to get starty returns of about twelve percent

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Speaker 2: with few downswings, but I mean at the S and

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Speaker 2: P five hundred, you can pay three basis points for

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Speaker 2: the S and P five hundred. Over the last decade,

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Speaker 2: you've got an annualized return of thirteen percent with three

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Speaker 2: down years. And I mean thinking about these multi strategy

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Speaker 2: hedgehoe fees that make two and twenty look cheap, it

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Speaker 2: just reinforces that notion.

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Speaker 1: You get pretty high returns with lower volatility and with

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Speaker 1: no correlation to the broad market.

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Speaker 3: Yeah, the return You're a.

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Speaker 1: Giant endowment, right, and like you have a lot of

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Speaker 1: money in the S and P and you want some

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Speaker 1: uncorrelatedponse that you know it doesn't pay like treasure rights

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Speaker 1: pays like two or three times treasures. It's a pitch

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Speaker 1: that works to a lot of like sophisticated endowments, and

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Speaker 1: like this is the like the multi strategy pitch is

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Speaker 1: the one that works, which is like, we give you

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Speaker 1: very low volatility, pretty high returns, no correlation to the

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Speaker 1: S and P. It's diversifying your investments. It's allowing you

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Speaker 1: to put more money into the SMP essentially because you

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Speaker 1: have like this, yeah, this diversified.

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Speaker 2: It's a pitch that I know it works, but I

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Speaker 2: don't really understand why it works. And I go back

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Speaker 2: to ETF so I'm sorry, where you have this race

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Speaker 2: to the bottom and fees, this race to the bottom

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Speaker 2: doesn't seem to exist in the hedge fund world. And

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Speaker 2: there is a recent example, I think it's the University

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Speaker 2: of Connecticut Endowment that just said, actually, we're doing away

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Speaker 2: with hedge funds. We're gonna put all of our money

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Speaker 2: in buffer ETFs, which guarantee safety.

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Speaker 3: Yeah, exactly how much capacity is there in buffer IDFs?

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Speaker 1: I get? How much capacity is there in hedgehunds. No.

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Speaker 1: I mean, like if you put all of your money

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Speaker 1: into equities and there's like a big draw down in equities,

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Speaker 1: you have like a really bad year and you can't

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Speaker 1: spend on your programs. You know, if you're an endowment

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Speaker 1: and if you put some of your money into like

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Speaker 1: it's like a diversification, it's like steady returns. It's like

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Speaker 1: you don't start from it thinking about the fees, right,

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Speaker 1: You start from it thinking about like do they provide

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Speaker 1: steady returns after fees? And if the answer is yes,

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Speaker 1: then like the fees are none of your business. It's

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Speaker 1: like investing in Goldman. Right, it's like, you know, if

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Speaker 1: the equity returns a lot, then like it doesn't matter

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Speaker 1: that people are getting bonuses, right, Yeah, And like much

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Speaker 1: as with a public company, the job is to earn

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Speaker 1: the cost of capital over some medium period of time.

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Speaker 1: And so like the Big Take article starts with bally

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Speaker 1: Asthny charging a lot of money in like a relatively

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Speaker 1: down year, right, And bally Asni's like, well, you know,

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Speaker 1: it's an anomalist down year, and usually we return our

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Speaker 1: cost of capital, but like we have this one down year,

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Speaker 1: and you like point to it and it's like, yes,

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Speaker 1: in a down year, it is embarrassing to pay tens

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Speaker 1: of millions of dollars to your traders because like they

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Speaker 1: didn't make money for the investors. But it's like that's

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Speaker 1: not the right way to look at it. The right

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Speaker 1: way to look at it. It's like you're investing in a

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Speaker 1: business over the long term, and the business they to

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Speaker 1: pay money for traders.

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Speaker 3: Yeah.

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Speaker 2: I guess I just don't find it compelling. But you

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Speaker 2: know what, I'm not in charge of an endowment. I'm

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Speaker 2: sure if I was, perhaps I would have a different perspective.

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Speaker 1: The great like sort of you know, hedge fund pitch

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Speaker 1: of like twenty years ago is like I will take

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Speaker 1: your money. M hmm, I will make one hundred percent trains,

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Speaker 1: I'll take thirty percent of the right, Like there's like

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Speaker 1: this the sort of swing for the fence's hedgehund model,

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Speaker 1: where like yeah, you could like make big back.

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Speaker 3: And which I do find compelling.

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Speaker 1: Yeah, right, I think I think is like much more

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Speaker 1: intuitively compelling, right, yeah. And the multi strat model is

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Speaker 1: like you're not like, oh, I put all my money

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Speaker 1: onto like Fanny May, Right. They put all my money

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Speaker 1: into like a series of like short term bets on

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Speaker 1: that are like essentially like liquidity provision and arbitrage trades,

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Speaker 1: and I can't really tell you about any of them,

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Speaker 1: and they're not that exciting, and they're on for one

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Speaker 1: day and they're all uncorrelated and hedged to you know,

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Speaker 1: a variety of factors, and so it's just like, I mean,

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Speaker 1: the thing I think about is like they like high

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Speaker 1: frequency trading model, where like your job is to make

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Speaker 1: money every day, and it's a little bit like the

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Speaker 1: job of these firms. It is not literally to make

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Speaker 1: money every day, but it's to like be very neutral

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Speaker 1: to market factors and to just sort of make steady

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Speaker 1: returns doing fairly safe but highly levered trades, and like

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Speaker 1: that's the thing they're pitching. And I think that resonates

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Speaker 1: with a lot of like yeah people in that it

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Speaker 1: seems real and sustainable in a way that like I'm

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Speaker 1: going to put all the money on Fanny May is

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Speaker 1: not if you're just like taking big swings, like you're

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Speaker 1: gonna miss and then like you know, you'll lose money,

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Speaker 1: Whereas like these guys are like, we're incredibly conscious of

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Speaker 1: risk and we try to be very neutral to a

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Speaker 1: lot of factors, so that we're just giving you pure alpha,

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Speaker 1: which is in some sense like alpha here beans something

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Speaker 1: like getting paid for providing a service, right, And it's

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Speaker 1: like we're doing something for the market and we're getting

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Speaker 1: paid for it. Yeah, And that's more reliable than like

438
00:20:28,240 --> 00:20:30,040
Speaker 1: a model of like we're going to make bets on

439
00:20:30,119 --> 00:20:33,080
Speaker 1: stocks and hope those bets work out whether or not

440
00:20:33,160 --> 00:20:35,360
Speaker 1: an individual pot is quants. Like it's a very quantity

441
00:20:35,480 --> 00:20:38,040
Speaker 1: like sort of model of thinking about the world, which

442
00:20:38,080 --> 00:20:43,199
Speaker 1: is like making individual bets on stocks has like a

443
00:20:43,240 --> 00:20:45,400
Speaker 1: pretty high probability of going wrong, and so you're making

444
00:20:45,440 --> 00:20:47,239
Speaker 1: a lot of diversified bets with like a little bit

445
00:20:47,240 --> 00:20:50,480
Speaker 1: of edge on each one, right, and like you tell

446
00:20:50,520 --> 00:20:52,720
Speaker 1: that model to an institutional allocator of like, yes, this

447
00:20:52,840 --> 00:20:56,520
Speaker 1: makes sense. This like feels plausible and sustainable. Whereas when

448
00:20:56,560 --> 00:20:58,080
Speaker 1: you come in and you're like, I'm just really good

449
00:20:58,080 --> 00:20:59,440
Speaker 1: at picking stocks, it seems bad.

450
00:20:59,640 --> 00:21:02,919
Speaker 3: Yeah, I don't know. I mean I hear what you're saying.

451
00:21:04,080 --> 00:21:08,000
Speaker 2: I still am surprised that there isn't feed pressure here.

452
00:21:08,440 --> 00:21:11,040
Speaker 2: It just feels like in every part of the asset

453
00:21:11,040 --> 00:21:14,080
Speaker 2: management industry there is fee pressure, and that feed pressure

454
00:21:14,520 --> 00:21:17,840
Speaker 2: doesn't apply to these multi strate hedge funds.

455
00:21:17,920 --> 00:21:19,680
Speaker 1: Well, I think there's a reason that's not as pastors,

456
00:21:19,760 --> 00:21:22,160
Speaker 1: right because if you're like, we're gonna charge seven and seventy,

457
00:21:22,560 --> 00:21:25,800
Speaker 1: be like, yeah, it would be bad, right. But if

458
00:21:25,840 --> 00:21:28,320
Speaker 1: you're like, look, the going rate for a portfolio manager

459
00:21:28,400 --> 00:21:30,239
Speaker 1: is fifty million dollars, what do you want us to

460
00:21:30,280 --> 00:21:32,960
Speaker 1: not hire a portfolio manager? Like, you know, like the

461
00:21:33,080 --> 00:21:35,120
Speaker 1: pass of the fifty million dollars.

462
00:21:35,400 --> 00:21:40,040
Speaker 3: Got him in the wrong business. Seriously, letter writer Jesus Christ.

463
00:21:41,520 --> 00:21:45,720
Speaker 2: So, in clicking around in preparation for this conversation, did

464
00:21:45,760 --> 00:21:48,560
Speaker 2: you see Ken Griffin? I know you did like a

465
00:21:48,600 --> 00:21:50,840
Speaker 2: month or two ago, saying that he thinks the boom

466
00:21:50,920 --> 00:21:52,800
Speaker 2: in multi strategy hedge funds is over.

467
00:21:53,280 --> 00:21:55,040
Speaker 1: I do think that if you run a multi strategy

468
00:21:55,080 --> 00:21:58,560
Speaker 1: hedge fund, the pricing pressure that you feel is probably

469
00:21:58,680 --> 00:22:02,240
Speaker 1: bore about hiring portfolio managers, that it is about your healties. Yeah,

470
00:22:02,280 --> 00:22:04,280
Speaker 1: And so for him to be like, oh r, it's over, yeah,

471
00:22:04,440 --> 00:22:06,440
Speaker 1: is a way to drive down the prices of portolio

472
00:22:06,520 --> 00:22:09,119
Speaker 1: managers more than it is to like signal to healthy

473
00:22:09,600 --> 00:22:11,560
Speaker 1: so he doesn't need their money, or like he's like, yeah,

474
00:22:11,600 --> 00:22:14,760
Speaker 1: the boom is not really over for him. The other

475
00:22:14,800 --> 00:22:18,159
Speaker 1: signal you're sending is the boom is over for potential competitors,

476
00:22:18,240 --> 00:22:21,120
Speaker 1: right yeah, which might be true, right, But I don't

477
00:22:21,119 --> 00:22:23,600
Speaker 1: think that, like Ken Griffin is worried about being poor

478
00:22:23,600 --> 00:22:24,000
Speaker 1: in a year.

479
00:22:24,200 --> 00:22:28,120
Speaker 3: No, I don't think so. Though. Apparently, according to Goldman.

480
00:22:27,920 --> 00:22:32,440
Speaker 2: Assets managed by multi strats did drop slightly in twenty

481
00:22:32,480 --> 00:22:34,760
Speaker 2: twenty four, which was the first to client since twenty sixteen.

482
00:22:35,000 --> 00:22:52,159
Speaker 2: So I don't know, we'll see. Let's talk about this

483
00:22:52,200 --> 00:22:54,960
Speaker 2: humble thought experiment that was put on by Double Line.

484
00:22:55,000 --> 00:22:57,280
Speaker 2: I wrote about it. It's pretty interesting. It's a paper

485
00:22:57,280 --> 00:23:01,440
Speaker 2: that was released this month. They basically sized up Microsoft

486
00:23:02,080 --> 00:23:04,960
Speaker 2: as an issuer versus the US government as an issuer

487
00:23:05,119 --> 00:23:08,240
Speaker 2: of debt. They didn't reach a conclusion. They wanted to

488
00:23:08,280 --> 00:23:10,200
Speaker 2: leave it up to the reader, but it seemed like

489
00:23:10,240 --> 00:23:11,719
Speaker 2: they were leaning towards Microsoft.

490
00:23:12,080 --> 00:23:15,520
Speaker 1: It's a strange thought experiment, yeah, because they basically like,

491
00:23:15,800 --> 00:23:18,960
Speaker 1: look at Microsoft's capacity to service that's debt based on

492
00:23:19,040 --> 00:23:21,360
Speaker 1: its cash flows, and they compare it to the US

493
00:23:21,440 --> 00:23:24,439
Speaker 1: government's capacity to service it's that based on its stock

494
00:23:24,440 --> 00:23:26,440
Speaker 1: of debt and cash flows. Yeah, and it's like, Wow,

495
00:23:26,480 --> 00:23:28,280
Speaker 1: the US government takes in less than it spends and

496
00:23:28,400 --> 00:23:30,960
Speaker 1: Microsoft takes in more than it spends, and yeah, Microsoft

497
00:23:31,000 --> 00:23:36,280
Speaker 1: is a better credit. Okay. Like I have a lot

498
00:23:36,280 --> 00:23:40,720
Speaker 1: of sympathy for their conclusion. Right, they are doing this analysis,

499
00:23:40,800 --> 00:23:45,520
Speaker 1: I would think things like Microsoft is run by professionals

500
00:23:45,920 --> 00:23:50,320
Speaker 1: who one believe that they should repay their debt and

501
00:23:50,440 --> 00:23:54,760
Speaker 1: to want continued access to capital markets, and also has

502
00:23:54,760 --> 00:23:57,600
Speaker 1: a lot of cash flow, right, and so when their

503
00:23:57,640 --> 00:23:59,360
Speaker 1: debt comes due, they will pay it.

504
00:23:59,440 --> 00:24:00,600
Speaker 3: They certainly well.

505
00:24:00,480 --> 00:24:05,879
Speaker 1: Barring some sort of tele risk catastrophe. The US government

506
00:24:06,000 --> 00:24:09,199
Speaker 1: is not, for instances, run by a president who is

507
00:24:10,119 --> 00:24:14,320
Speaker 1: who has boasted about his use of bankruptcy I heard

508
00:24:14,320 --> 00:24:16,640
Speaker 1: about this the other day. This is wild, Like people

509
00:24:16,640 --> 00:24:18,080
Speaker 1: can get him to say anything. And he was talking

510
00:24:18,080 --> 00:24:22,320
Speaker 1: about like Elon Musk going through the payment system and irregularities, right,

511
00:24:22,320 --> 00:24:24,719
Speaker 1: like the treasury. No one says what the irregularities are,

512
00:24:24,720 --> 00:24:27,720
Speaker 1: but oh, this fraud. Right, And so Donald Trump said,

513
00:24:27,880 --> 00:24:28,880
Speaker 1: there could be a problem.

514
00:24:28,880 --> 00:24:32,400
Speaker 2: You've been reading about that with treasuries, and that could

515
00:24:32,400 --> 00:24:35,800
Speaker 2: be an interesting problem because it could be that a lot.

516
00:24:35,760 --> 00:24:37,119
Speaker 1: Of those things don't count.

517
00:24:37,160 --> 00:24:40,000
Speaker 2: In other words, that some of that stuff that we're.

518
00:24:39,880 --> 00:24:44,440
Speaker 1: Finding is very fraudulent. Therefore, maybe we have less debt

519
00:24:44,480 --> 00:24:47,960
Speaker 1: than we thought of. Think of that, therefore, maybe we

520
00:24:48,000 --> 00:24:49,280
Speaker 1: have less debt than we thought of.

521
00:24:49,520 --> 00:24:51,880
Speaker 3: That was amazing that landed like during the super Bowl.

522
00:24:52,280 --> 00:24:54,560
Speaker 1: So like some treasuries may not count. Who knows which

523
00:24:54,560 --> 00:24:57,040
Speaker 1: treasuries don't count? Who knows why? Like there might be

524
00:24:57,040 --> 00:24:59,679
Speaker 1: from fraud. Right, maybe your treasuries were fraud. Yeah. I

525
00:24:59,680 --> 00:25:03,359
Speaker 1: don't place a high probability on that happening. But like

526
00:25:03,400 --> 00:25:05,960
Speaker 1: you know, the guys go around, some treasures don't count.

527
00:25:06,200 --> 00:25:07,560
Speaker 1: Microsoft doesn't say that.

528
00:25:07,840 --> 00:25:10,239
Speaker 2: No, no, Microsoft would not say that. And what was

529
00:25:10,359 --> 00:25:13,560
Speaker 2: interesting about Trump saying that over the weekends was, first

530
00:25:13,560 --> 00:25:15,000
Speaker 2: of all, it took a little bit. There was a

531
00:25:15,080 --> 00:25:17,480
Speaker 2: lag between when he said that and when someone from

532
00:25:17,480 --> 00:25:20,800
Speaker 2: the administration clarified that he wasn't talking about treasury bonds

533
00:25:21,160 --> 00:25:24,679
Speaker 2: or whatever it was. But there wasn't there wasn't a

534
00:25:24,760 --> 00:25:28,000
Speaker 2: reaction in the treasury market, which I don't know, maybe

535
00:25:28,040 --> 00:25:30,600
Speaker 2: points to maybe Trump losing some of his juice here

536
00:25:30,640 --> 00:25:33,439
Speaker 2: that he could suggest that maybe we wouldn't count some

537
00:25:33,520 --> 00:25:36,360
Speaker 2: of the treasuries in the market just totally looked past it.

538
00:25:36,800 --> 00:25:39,960
Speaker 1: I'm not saying that the US government is no longer

539
00:25:40,000 --> 00:25:41,639
Speaker 1: interested in paints. I just say, like you look at

540
00:25:41,680 --> 00:25:43,560
Speaker 1: the measurement of Microsoft, you think the management.

541
00:25:45,440 --> 00:25:47,600
Speaker 2: So it sounds like you would end up even though

542
00:25:47,600 --> 00:25:50,760
Speaker 2: maybe you're looking at different factors in your own analysis.

543
00:25:50,359 --> 00:25:52,480
Speaker 3: Very different factors, but you end up in kind of

544
00:25:52,520 --> 00:25:52,720
Speaker 3: the same.

545
00:25:52,760 --> 00:25:57,840
Speaker 1: Oh yeah, yeah, I mean not investment it was. I mean,

546
00:25:58,160 --> 00:25:59,480
Speaker 1: I appreciate the thought expert.

547
00:25:59,600 --> 00:26:01,000
Speaker 3: I should note that double line.

548
00:26:01,040 --> 00:26:03,200
Speaker 2: This truly is a thought experiment because they don't own

549
00:26:03,240 --> 00:26:06,560
Speaker 2: Microsoft debt. The reason being that there's just better value

550
00:26:06,600 --> 00:26:10,160
Speaker 2: to be found elsewhere. Obviously because Microsoft trades.

551
00:26:10,720 --> 00:26:11,480
Speaker 1: Treasure that they have.

552
00:26:11,560 --> 00:26:12,520
Speaker 3: It's a good question too.

553
00:26:13,359 --> 00:26:16,959
Speaker 2: I don't know, but Microsoft, I mean, you look at

554
00:26:16,960 --> 00:26:19,800
Speaker 2: their thirty year debt, and it trades very similarly to

555
00:26:19,920 --> 00:26:21,440
Speaker 2: treasures like forty.

556
00:26:21,240 --> 00:26:23,159
Speaker 1: One basic points of a treasures, which is like a

557
00:26:23,200 --> 00:26:26,240
Speaker 1: meaningful premium if you think it's safer, No, it's I mean,

558
00:26:26,320 --> 00:26:29,440
Speaker 1: it's them compared to highal bonds, but it's a lot

559
00:26:29,520 --> 00:26:32,040
Speaker 1: compared to Yeah, you think it should be negative, right,

560
00:26:32,040 --> 00:26:33,440
Speaker 1: if you think it should, it's a good trid.

561
00:26:33,560 --> 00:26:35,159
Speaker 2: I mean, they do point out that if you do,

562
00:26:35,640 --> 00:26:38,479
Speaker 2: you know, end up on the side of Microsoft debt

563
00:26:38,560 --> 00:26:41,800
Speaker 2: is safer, then there's some income opportunity there, but they're

564
00:26:41,880 --> 00:26:44,960
Speaker 2: personally not exploiting that their analysis though. Just to put

565
00:26:45,000 --> 00:26:48,560
Speaker 2: some numbers behind what we've been talking about. So Microsoft

566
00:26:49,320 --> 00:26:52,280
Speaker 2: can pay its annual interest expenses more than fifty times over,

567
00:26:53,080 --> 00:26:56,240
Speaker 2: it is expected to generate nearly forty eight billion dollars

568
00:26:56,240 --> 00:26:58,959
Speaker 2: of free cash flow in fiscal twenty twenty five. It

569
00:26:59,000 --> 00:27:02,360
Speaker 2: also has a higher rate from the credit agencies than

570
00:27:02,880 --> 00:27:06,080
Speaker 2: the US government, which is pretty funny. Whereas you compare

571
00:27:06,119 --> 00:27:10,000
Speaker 2: that to the US government, our country's receipts to interest

572
00:27:10,040 --> 00:27:13,159
Speaker 2: expense has declined to five point two times as is

573
00:27:13,200 --> 00:27:15,960
Speaker 2: twenty twenty three. Also, we've run a deficit since two

574
00:27:16,000 --> 00:27:18,680
Speaker 2: thousand and two. So those are some of the factors

575
00:27:18,680 --> 00:27:20,920
Speaker 2: that went into what double Line is looking at.

576
00:27:21,080 --> 00:27:22,800
Speaker 1: I mean, first of all, the traditional analysis is the

577
00:27:22,920 --> 00:27:24,200
Speaker 1: US government can always pay back.

578
00:27:24,200 --> 00:27:26,440
Speaker 2: It's that because the full faith and credit, because it.

579
00:27:26,359 --> 00:27:29,399
Speaker 1: Can print money. Yeah, so in the worst case, the

580
00:27:29,480 --> 00:27:33,080
Speaker 1: US government prints money and inflates away the debt, and

581
00:27:33,160 --> 00:27:36,359
Speaker 1: that's just as bad for Microsoft's that as it is

582
00:27:36,359 --> 00:27:39,760
Speaker 1: for US government as reading. Like you know, there's like

583
00:27:39,800 --> 00:27:42,880
Speaker 1: a traditional theory of the sovereign ceiling where like people

584
00:27:43,000 --> 00:27:44,920
Speaker 1: use that more for like emerging market spuds, where it's

585
00:27:44,960 --> 00:27:46,919
Speaker 1: like the idea is that you can't have a better

586
00:27:47,480 --> 00:27:51,800
Speaker 1: credit rating or a lower yield for a corporate in

587
00:27:51,840 --> 00:27:56,320
Speaker 1: an emerging market then for the sovereign because like it's

588
00:27:56,320 --> 00:27:58,280
Speaker 1: not clear why, but it's like, you know, there's some

589
00:27:58,320 --> 00:27:59,760
Speaker 1: theory that like you know, first of all, like the

590
00:28:00,000 --> 00:28:02,680
Speaker 1: economic conditions that affect the sovereign would affect the corporate

591
00:28:02,720 --> 00:28:06,640
Speaker 1: as well. And secondly, like a catastrophe for the sovereign,

592
00:28:06,840 --> 00:28:09,840
Speaker 1: is the sovereign going to like seize the assets of

593
00:28:09,880 --> 00:28:12,359
Speaker 1: the corporate? You know, Like, so it have the sovereign ceiling,

594
00:28:12,359 --> 00:28:13,920
Speaker 1: but it's like a sort of soft ceiling, and there's

595
00:28:14,000 --> 00:28:18,360
Speaker 1: like history of ratings agencies occasionally rating corporates in Argentina

596
00:28:18,440 --> 00:28:21,920
Speaker 1: higher than this. Yeah, Microsoft can't print dollers, but I'm

597
00:28:21,920 --> 00:28:25,080
Speaker 1: pretty close. And I think that like, if I were

598
00:28:25,080 --> 00:28:27,879
Speaker 1: trying to like think about like my credit risk as

599
00:28:27,920 --> 00:28:29,639
Speaker 1: a credit of the US government, I would worry a

600
00:28:29,680 --> 00:28:33,640
Speaker 1: lot more about like government shutdowns, that ceiling bridges, elon musk,

601
00:28:33,720 --> 00:28:36,400
Speaker 1: deleting the database, you know, like all that stuff. Then

602
00:28:36,440 --> 00:28:39,840
Speaker 1: I would about like cash flow, yeah, because like cash

603
00:28:39,840 --> 00:28:42,240
Speaker 1: flow can be solved by printing currency, right, but like

604
00:28:42,440 --> 00:28:44,440
Speaker 1: all that other stuff, like you you might get like

605
00:28:44,600 --> 00:28:47,400
Speaker 1: you know, delay on your payments, right. Yeah, So I

606
00:28:47,400 --> 00:28:51,040
Speaker 1: think that stuff is like idiosying credit to the current

607
00:28:51,160 --> 00:28:53,600
Speaker 1: US government and wouldn't apply to like the highest rated

608
00:28:53,720 --> 00:28:54,720
Speaker 1: corporates in the US.

609
00:28:54,920 --> 00:28:55,560
Speaker 3: Yeah.

610
00:28:55,600 --> 00:28:58,120
Speaker 2: And I mean we're talking about forty nine basis points

611
00:28:58,200 --> 00:28:59,760
Speaker 2: in terms of the spread in.

612
00:29:00,160 --> 00:29:03,240
Speaker 1: Keep saying that small, That seems big. That seems like so.

613
00:29:03,240 --> 00:29:05,520
Speaker 2: You're saying, I don't, I don't know, maybe you should

614
00:29:05,520 --> 00:29:11,120
Speaker 2: go buy some This isn't investment advice, as Matt said,

615
00:29:11,360 --> 00:29:14,880
Speaker 2: but I mean, in em it's not unheard of to

616
00:29:14,880 --> 00:29:17,920
Speaker 2: see corporates trade through the sovereign, which is cool. Also,

617
00:29:18,240 --> 00:29:21,680
Speaker 2: I got some interesting feedback on this one. A terminal

618
00:29:21,680 --> 00:29:24,320
Speaker 2: client wrote in, and I liked this email a lot.

619
00:29:24,440 --> 00:29:28,760
Speaker 2: Not talking about em but this person said I'd certainly

620
00:29:28,840 --> 00:29:32,280
Speaker 2: rather own Loreal bonds than French bonds, which I found amusing.

621
00:29:32,480 --> 00:29:35,080
Speaker 2: So there's other examples you could use.

622
00:29:35,120 --> 00:29:37,560
Speaker 1: But yeah, there's like, you know, like the big companies

623
00:29:37,560 --> 00:29:40,760
Speaker 1: are sort of multinational and like arguably have less exposure

624
00:29:40,840 --> 00:29:44,640
Speaker 1: to some of the conditions in their countries than the

625
00:29:44,680 --> 00:29:45,280
Speaker 1: sovereign does.

626
00:29:45,440 --> 00:29:48,600
Speaker 2: Yeah, so I asked Bloomberg Intelligence about this, and I

627
00:29:48,600 --> 00:29:51,480
Speaker 2: thought this was a fun stat as well. Microsoft has

628
00:29:52,120 --> 00:29:56,760
Speaker 2: a zero point zero six percent five year cumulative default risk,

629
00:29:56,800 --> 00:30:01,080
Speaker 2: which is pretty stinking close to the US government's risks

630
00:30:01,120 --> 00:30:05,080
Speaker 2: free alternative. So microsofts, I don't know, I don't know

631
00:30:05,080 --> 00:30:07,440
Speaker 2: what that number. I think that they just have a

632
00:30:07,520 --> 00:30:09,520
Speaker 2: really low chance of defaulting.

633
00:30:10,560 --> 00:30:12,200
Speaker 1: Sorry, zero point zero six.

634
00:30:12,040 --> 00:30:17,160
Speaker 3: Percent, Yeah, cumulative. What do you think is the chance

635
00:30:17,760 --> 00:30:19,480
Speaker 3: of Microsoft the US.

636
00:30:19,360 --> 00:30:22,000
Speaker 1: Government missing a payment on it's debt in the next

637
00:30:22,040 --> 00:30:22,680
Speaker 1: four years?

638
00:30:22,920 --> 00:30:23,880
Speaker 3: Maybe zero?

639
00:30:24,080 --> 00:30:26,800
Speaker 1: Is it bigger than zero point zero six percent?

640
00:30:27,000 --> 00:30:33,120
Speaker 2: I was going to answer zero point zero six percent, Okay, yeah, what's.

641
00:30:32,960 --> 00:30:33,800
Speaker 3: Your what I mean?

642
00:30:34,240 --> 00:30:35,520
Speaker 1: Zero point zero eight percent?

643
00:30:35,600 --> 00:30:39,800
Speaker 3: Okay, there you go. Then you could have written this paper.

644
00:30:39,920 --> 00:30:43,960
Speaker 1: Exactly programming note. We're taking next week off.

645
00:30:44,280 --> 00:30:45,520
Speaker 3: I'll see you in two weeks.

646
00:30:50,440 --> 00:30:51,920
Speaker 1: And that was the Money Stuff Podcast.

647
00:30:52,080 --> 00:30:54,120
Speaker 3: I'm Matt Livia and I'm Katie Greifeld.

648
00:30:54,520 --> 00:30:56,600
Speaker 1: You can find my work by subscribing to the Money

649
00:30:56,640 --> 00:30:58,440
Speaker 1: Stuff newsletter on Bloomberg dot.

650
00:30:58,280 --> 00:31:00,760
Speaker 2: Com, and you can find me on Bloomberg TV every

651
00:31:00,840 --> 00:31:04,240
Speaker 2: day on Open Interest between nine to eleven am Eastern.

652
00:31:04,640 --> 00:31:06,360
Speaker 1: We'd love to hear from you. You can send an

653
00:31:06,360 --> 00:31:09,560
Speaker 1: email to Moneypot at Bloomberg dot net, ask us a

654
00:31:09,640 --> 00:31:11,040
Speaker 1: question and we might answer it on air.

655
00:31:11,520 --> 00:31:13,720
Speaker 2: You can also subscribe to our show wherever you're listening

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Speaker 2: right now and leave us a review. It helps more

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Speaker 2: people find the show.

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Speaker 1: The Money Stuff Podcast is produced by Ana ma Aserakus

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Speaker 1: and Moses onam Ar.

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Speaker 2: Thea music was composed by Blake Maples.

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Speaker 1: Friend and Frances Newnham is our executive producer.

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Speaker 2: And Stage Bauman is Bloomberg's head of Podcasts.

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Speaker 1: Thanks for listening to The Money Stuff Podcast. We'll be

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Speaker 1: back next week with more stuff