WEBVTT - Bespokeness: AI, Passthrough, UST 0:00:02.720 --> 0:00:07.200 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.760 --> 0:00:10.800 Maybe we should talk about the voice thing. I mean, 0:00:10.840 --> 0:00:12.520 it'll become a parent once I start talking. 0:00:13.360 --> 0:00:15.560 I feel like you're closer to normal Katie voice than 0:00:15.640 --> 0:00:17.720 to elastic swallower Nash voice. 0:00:17.800 --> 0:00:18.600 I'm doing better. 0:00:18.960 --> 0:00:21.400 I'm pretty sure I had the flu last week. I 0:00:21.480 --> 0:00:24.919 think a few people missed that I actually was sick 0:00:25.239 --> 0:00:27.800 last week. And it wasn't that engineers turned my voice down. 0:00:27.880 --> 0:00:29.760 I joke about engineers turning your voice down. 0:00:30.360 --> 0:00:34.280 People literally, that was just mother nature at work. I'm 0:00:34.320 --> 0:00:35.480 doing a bit better. 0:00:35.520 --> 0:00:38.000 And people did not like your new voice. 0:00:38.120 --> 0:00:39.040 No, they didn't like it. 0:00:39.120 --> 0:00:42.720 I was thinking that it would improve the audibility of 0:00:42.760 --> 0:00:45.000 this podcast, but no, no, you just have to turn 0:00:45.080 --> 0:00:47.920 me up in hell helium. 0:00:47.920 --> 0:00:49.839 Before I ever read podcast, I got a text from 0:00:49.840 --> 0:00:52.360 one of my PR friends, who I think is maybe 0:00:52.400 --> 0:00:55.280 listening right now, and he was like, Wow, you sound 0:00:55.800 --> 0:00:57.000 really awful. 0:00:56.960 --> 0:00:59.440 In the latest version of money Stuff. What do you 0:00:59.480 --> 0:00:59.920 say to that? 0:01:00.680 --> 0:01:02.720 Yeah, we didn't get any email saying that I sounded 0:01:02.800 --> 0:01:03.720 comparatively better. 0:01:03.920 --> 0:01:06.480 Yeah, next we have to try you know, you you 0:01:06.560 --> 0:01:09.320 taking some helium and getting you up to my level. 0:01:09.760 --> 0:01:12.080 Right, that's interest? Should I do the open. 0:01:12.120 --> 0:01:13.360 Yes, in a full. 0:01:13.160 --> 0:01:15.800 Set up, certainly not. 0:01:16.000 --> 0:01:17.080 And I didn't like that at all. 0:01:17.200 --> 0:01:21.880 No, that was terrible. Yeah out, Hello and welcome to 0:01:21.880 --> 0:01:24.679 The Money Stuff Podcast, your weekly podcast where we talk 0:01:24.720 --> 0:01:28.319 about stuff related to money. I'm Matt Levin and I 0:01:28.360 --> 0:01:30.400 write The Money Stuff Colin for Bloomberg Opinion. 0:01:30.760 --> 0:01:33.120 And I'm Katie Greifeld, a reporter for Bloomberg News and 0:01:33.160 --> 0:01:34.640 an anchor for Bloomberg Television. 0:01:35.440 --> 0:01:36.959 What are we talking about today, Katie? 0:01:37.120 --> 0:01:39.840 We're going to talk about a hostile takeover. Sure, we're 0:01:39.880 --> 0:01:44.840 going to talk about exorbitant pass through fees, and then 0:01:44.840 --> 0:01:48.120 we're going to talk about an interesting humble thought experiment. 0:01:48.800 --> 0:01:50.200 Do we ever talk about anything else? 0:01:53.800 --> 0:01:53.920 All? 0:01:54.040 --> 0:01:54.240 Right? 0:01:54.720 --> 0:01:58.520 Open Ai the Girlies are Fighting is a tweet that 0:01:58.560 --> 0:02:00.840 I saw on this situation, which I thought it was funny. 0:02:01.200 --> 0:02:04.360 I saw a tweet that was like Sam Alton versus 0:02:04.360 --> 0:02:07.160 Elon Musk is like Kendrick versus Drake if both of 0:02:07.200 --> 0:02:07.800 them were Drake. 0:02:08.080 --> 0:02:09.880 Yes, that's so funny. 0:02:10.560 --> 0:02:14.000 No one's performing at the super Bowl here, No one's 0:02:14.000 --> 0:02:14.680 wont a Grammy. 0:02:14.840 --> 0:02:17.240 Yeah, so Elon muss wants to do a hostile takeover 0:02:17.440 --> 0:02:19.920 of Open Ai, which I wrote something like, there's probably 0:02:19.919 --> 0:02:22.800 never been a ninety seven billion dollar hostile takeover of 0:02:22.840 --> 0:02:25.960 a nonprofit before, and people are like, well, at hospitals, 0:02:26.000 --> 0:02:30.400 like there are some like unsolicited bids for nonprofit hospitals, right, 0:02:30.400 --> 0:02:33.240 Like the model for this arguably is like a lot 0:02:33.280 --> 0:02:35.920 of hospitals are nonprofits. They do a lot of for 0:02:36.040 --> 0:02:38.840 profit conversions, and so there is some like kind of 0:02:38.919 --> 0:02:41.560 law and practice around how you convert from a nonprofit 0:02:41.600 --> 0:02:45.359 to a for profit. But this is still pretty weird, right, So, like, yeah, 0:02:45.639 --> 0:02:48.239 open Ai is trying to convert from a nonprofit to 0:02:48.280 --> 0:02:51.640 a for profit. To do that, they need to pay 0:02:51.680 --> 0:02:57.360 out the nonprofit for its control of the business. Their 0:02:57.400 --> 0:02:58.880 plan to do that is to give it, you know, 0:02:58.960 --> 0:03:01.400 a chunk of the shares of the new business or 0:03:01.520 --> 0:03:05.519 the newly for profit business. And Elon Musk came into 0:03:05.680 --> 0:03:07.880 great problems by saying, I'll give you ninety seven billion 0:03:07.880 --> 0:03:09.760 dollars in cash for it, which is more than you'd 0:03:09.800 --> 0:03:12.840 get from the for profit business, and so you should 0:03:12.840 --> 0:03:15.520 sell it to me to preserve fair value, which is 0:03:15.560 --> 0:03:18.040 like everyone sort of assumes it's not a serious bid. 0:03:18.440 --> 0:03:20.760 Yeah, that's a. 0:03:19.880 --> 0:03:22.000 Way to make life more difficult for open Ai. 0:03:22.760 --> 0:03:26.840 I also assume that, yeah, so two points there, one 0:03:26.919 --> 0:03:29.520 being if you only read headlines, which is how a 0:03:29.560 --> 0:03:33.119 lot of people consume news. This was probably pretty confusing 0:03:33.120 --> 0:03:36.240 because the bid ninety seven point four billion dollars. You know, 0:03:36.320 --> 0:03:38.360 I think a few weeks before that, we got some 0:03:38.440 --> 0:03:41.320 headline from the Wall Street Journal that open aies and 0:03:41.360 --> 0:03:43.800 talks to raise forty billion dollars at a three hundred 0:03:43.840 --> 0:03:47.040 and forty billion dollar valuation. The nuance being that they're 0:03:47.040 --> 0:03:49.240 bidding for the nonprofit which owns a steak. 0:03:49.560 --> 0:03:50.880 In the form, they're not even. 0:03:50.680 --> 0:03:53.280 Really bidding for the nonprofit. It's a fun thing to 0:03:53.320 --> 0:03:55.280 say that he's trying to take over the nonprofit, but 0:03:55.320 --> 0:03:58.200 actually he's bidding for the steak. Yeah, the nonprofit has 0:03:58.200 --> 0:04:01.240 like a set of rights o the for profit business, 0:04:01.560 --> 0:04:03.520 and he wants to buy that from them for ninety 0:04:03.520 --> 0:04:06.440 seven billion dollars. The alternative is they would sell that 0:04:06.480 --> 0:04:09.560 set of rights to the for profit business in exchange 0:04:09.560 --> 0:04:11.400 for some stock in the for profit business, which, like 0:04:12.400 --> 0:04:15.119 the numbers I've seen people say, like the nonprofit would 0:04:15.120 --> 0:04:17.720 get like twenty five percent of the business, which you know, 0:04:17.800 --> 0:04:20.480 at a three hundred million dollar valuation, is worth seventy 0:04:20.520 --> 0:04:23.800 five billion dollars. Ninety seven billion is more than seventy 0:04:23.800 --> 0:04:28.000 five billion. I think you could argue that at twenty 0:04:28.040 --> 0:04:30.320 five percents they can open Aiye is in the long 0:04:30.400 --> 0:04:32.200 run worth more than ninety seven billion. But you know, 0:04:32.560 --> 0:04:35.279 Musk is saying you got to get at least as much. Yeah, 0:04:35.320 --> 0:04:37.560 but right, he's not offering to take over the whole 0:04:37.680 --> 0:04:40.680 thing for ninety seven billion, which is less than the 0:04:40.760 --> 0:04:44.640 current market mark on it. Except he sort of is 0:04:45.279 --> 0:04:50.600 right because like, right now, the nonprofit controls the thing, 0:04:50.760 --> 0:04:53.720 the business, right, the nonprofit has final say over it. 0:04:54.120 --> 0:04:56.520 And so the people putting in money at a three 0:04:56.560 --> 0:04:59.640 hundred million dollar valuation, the nonprofit board doesn't technically owe 0:04:59.640 --> 0:05:03.000 them an shary duties. They're fundraising documents used to say 0:05:03.320 --> 0:05:05.440 it would be good to consider your investment in the 0:05:05.480 --> 0:05:08.200 form of a donation. Right, So it's like people are 0:05:08.240 --> 0:05:12.719 sort of making assumptions about the future path of the business, 0:05:13.360 --> 0:05:15.440 and the assumptions they're making are like, you know, sam 0:05:15.480 --> 0:05:19.560 Aldman is like a money making guy, and like they 0:05:19.640 --> 0:05:21.280 know they need to raise a lot of money, and 0:05:21.360 --> 0:05:24.000 so they will do the right thing for shareholders. And 0:05:24.040 --> 0:05:26.760 so it's worth a three hundred billion dollar valuation. But 0:05:26.839 --> 0:05:30.800 in theory of Elon Musk bought the control rights from the 0:05:30.880 --> 0:05:39.120 nonprofit What does that do to the non controlling investors 0:05:39.160 --> 0:05:41.440 who have weird cat profit interests in the company. I 0:05:41.480 --> 0:05:44.880 don't know. I think he gets like more than twenty 0:05:44.920 --> 0:05:47.440 five percent of the company for his ninety seven billion dollars. Like, 0:05:47.440 --> 0:05:49.680 I think he gets control over the company for his 0:05:49.760 --> 0:05:53.760 ninety seven billion dollars. And that control for him a 0:05:53.800 --> 0:05:57.400 guy who runs a competing AI company and runs a 0:05:57.440 --> 0:06:00.120 bunch of other companies and runs the US government, that 0:06:00.160 --> 0:06:01.919 control is pretty valuable to him in a way that 0:06:01.960 --> 0:06:05.560 it's not to the nonprofit board. So if they said 0:06:05.600 --> 0:06:07.839 yes to him, if they're like, sure, Elon, here's our stake, 0:06:08.880 --> 0:06:10.560 it would be a huge bargain for him. 0:06:10.800 --> 0:06:14.520 Yeah, well that's what I was wondering. So your position, 0:06:14.560 --> 0:06:16.120 it sounds like is that Muskus trolling? 0:06:16.480 --> 0:06:18.839 Well, he doesn't think they're going to say yes. And like, 0:06:19.080 --> 0:06:20.640 you know, the other thing I wrote is like, like 0:06:20.720 --> 0:06:22.679 ninety seven billion does a lot of money, right, Like, yeah, 0:06:22.720 --> 0:06:24.440 if they were like, sure, Elon, here you go, Like 0:06:24.440 --> 0:06:26.279 he could raise ninety seven billion dollars to do it, 0:06:26.279 --> 0:06:29.200 because it's a good deal. But it's not like he 0:06:29.279 --> 0:06:32.400 has ninety seven billion dollars committed, Right, that's true, it's 0:06:32.440 --> 0:06:33.039 a lot of money. 0:06:33.040 --> 0:06:33.960 That is a lot of money. 0:06:34.400 --> 0:06:37.360 But I mean if we go down into hypothetical lands 0:06:37.400 --> 0:06:41.080 and the board did take this seriously and they did say, yes, 0:06:42.040 --> 0:06:42.920 what does that look like? 0:06:43.160 --> 0:06:45.680 I don't know. It's a great question because it's not 0:06:45.760 --> 0:06:49.360 like they own forty percent of the company. It's not 0:06:49.400 --> 0:06:52.080 like they own ten percent, but they have like a 0:06:52.120 --> 0:06:55.880 super voting shares. Right. What they have is like there 0:06:55.920 --> 0:07:00.000 is this weird quasi for profit subsidiary of the nonprofit 0:07:00.320 --> 0:07:03.760 and it has sold stuff to investors, and that stuff 0:07:03.800 --> 0:07:06.680 is like this like waterfall of profit interests. Every investor 0:07:06.720 --> 0:07:08.760 has like a different deal. It's like not really shares, 0:07:08.800 --> 0:07:12.360 it's profit interests and they're capped. So like even knowing 0:07:12.680 --> 0:07:17.360 what percentage of the company the nonprofit owns and could 0:07:17.400 --> 0:07:19.679 transfer to Elon Musk is like it's kind of uncertain, 0:07:19.760 --> 0:07:23.240 right that you can like build a model that converts 0:07:23.680 --> 0:07:26.560 these waterflows of cash flows into like some percentage of 0:07:26.560 --> 0:07:28.840 the equity. But it's like a little debatable. And then 0:07:28.840 --> 0:07:31.120 the other thing that it has is like it has 0:07:31.160 --> 0:07:35.200 the board the nonprofit gets to make decisions for the company, 0:07:35.200 --> 0:07:38.560 and like says explicitly to investors, like, we don't make 0:07:38.600 --> 0:07:41.800 these decisions out of a fiduciary duty to investors. We 0:07:42.560 --> 0:07:47.200 make these decisions for the benefit of mankind. The nonprofit 0:07:47.280 --> 0:07:50.640 controls the company. But it's not just like share RedZone 0:07:50.720 --> 0:07:54.080 controlling paramount right. It's not like a person with super 0:07:54.160 --> 0:07:57.160 voting shares. It's like a nonprofit with a social mission 0:07:57.360 --> 0:08:00.120 controls the company. So if Elon Musk buys that, does 0:08:00.160 --> 0:08:03.320 he get to just control the company however he wants, 0:08:03.680 --> 0:08:05.680 or does he like take over the social mission. And 0:08:05.720 --> 0:08:08.360 I think in his offer letter he's like, we will 0:08:08.360 --> 0:08:11.920 continue the social mission. I don't know. Yeah, So I 0:08:11.920 --> 0:08:15.720 think it's really unclear what he would buy, right, But 0:08:15.760 --> 0:08:18.880 like there is some package of rights that the nonprofit 0:08:18.920 --> 0:08:20.920 open ai is hoping to give up to the for 0:08:21.040 --> 0:08:24.240 profit open Ai in exchange for stock, and he's just saying, 0:08:24.240 --> 0:08:27.600 whatever that package of right says, I'll buy it for cash. Yeah, Like, 0:08:27.680 --> 0:08:29.760 if you take that seriously, that package of rights is 0:08:29.800 --> 0:08:32.920 really valuable and like arguably more valuable in the hands 0:08:32.960 --> 0:08:35.280 of the world's rich is person that it is in 0:08:35.280 --> 0:08:37.840 the hands of fate nonprofit looking out for the benefit 0:08:37.880 --> 0:08:38.440 of humanity. 0:08:38.920 --> 0:08:41.800 Well, if you ask Sam Altman, which Bloomberg TV did. 0:08:41.880 --> 0:08:43.720 They got an interview with him on the sidelines of 0:08:43.760 --> 0:08:47.920 this AI summit in Paris. Sam Altman says that, I mean, 0:08:47.920 --> 0:08:51.760 he's not taking this seriously. Obviously, he had some hostile 0:08:51.760 --> 0:08:55.000 words about Elon Musk. Did you see this, Yeah, it 0:08:55.120 --> 0:08:58.079 was really personal. I mean, he said, of course he 0:08:58.120 --> 0:09:00.199 thinks Elon Musk is just trying to slow us down own. 0:09:00.240 --> 0:09:02.840 He's obviously a competitor. I wish you would just compete 0:09:02.840 --> 0:09:04.360 by building a better product, et cetera. 0:09:04.440 --> 0:09:06.920 But he also said, probably his whole life is from 0:09:06.920 --> 0:09:08.920 a position of insecurity. I feel for the guy. I 0:09:08.920 --> 0:09:10.320 don't think he's like a happy person that I do 0:09:10.320 --> 0:09:10.839 feel for him. 0:09:11.360 --> 0:09:13.840 I mean, this gets back to the girlies we're fighting, 0:09:14.080 --> 0:09:16.080 and I don't know, it's pretty personal. It's also playing 0:09:16.080 --> 0:09:18.840 out in court and filings obviously, right. 0:09:18.640 --> 0:09:21.120 Because mess is also suing Yes to make them be 0:09:21.240 --> 0:09:23.520 more nonprofit and like this is all in the context 0:09:23.520 --> 0:09:26.800 of like he owns a for profit AI from right, 0:09:27.200 --> 0:09:30.120 so one assumes he's not going to buy open AI, right, 0:09:30.640 --> 0:09:32.720 not that he doesn't want to, just that they're not 0:09:32.760 --> 0:09:33.080 going to. 0:09:33.160 --> 0:09:34.920 I feel like it even goes deeper than that though, 0:09:34.960 --> 0:09:37.079 Like this comes back to the blood feud of him 0:09:37.080 --> 0:09:39.600 and Altman founded open ai together. 0:09:39.920 --> 0:09:40.720 Blah blah blah. 0:09:40.800 --> 0:09:42.760 Right, I know I agree with you and with Sam 0:09:42.760 --> 0:09:46.319 Altman that this is all largely about petty personal vindictiveness 0:09:46.360 --> 0:09:49.400 on a ground scale. But it's also like open ai 0:09:49.640 --> 0:09:54.360 is probably the leading you know l M company. 0:09:54.679 --> 0:09:56.599 Yeah, I don't think that's controversial. 0:09:57.280 --> 0:10:00.480 Xai is has gros somewhere in the pack. 0:10:00.720 --> 0:10:00.920 Yeah. 0:10:01.360 --> 0:10:03.320 Open Ai has made it very clear that it's doing 0:10:03.320 --> 0:10:06.640 this conversion because it needs to raise like forty billion dollars, right, Yeah, 0:10:06.679 --> 0:10:10.800 it's so expensive to run company and to scale it 0:10:10.960 --> 0:10:15.000 and to raise that much money. They think they need 0:10:15.040 --> 0:10:19.160 to offer investors normal stock and not I think they 0:10:19.200 --> 0:10:23.679 use the word structural bespokeness, which is a great word, bespokeness. 0:10:23.960 --> 0:10:25.840 And so they need to be a for profit to 0:10:26.080 --> 0:10:28.040 raise the amount of money that they need to raise 0:10:28.160 --> 0:10:33.320 to continue to be competitive. And this might stop them, 0:10:33.520 --> 0:10:35.680 yeah right, And if it stops them, then like yeah, 0:10:35.679 --> 0:10:37.800 it's an opening for XII, right, And so how would 0:10:37.800 --> 0:10:41.000 this stop them? Like Elon Musk offered to drop his 0:10:41.040 --> 0:10:44.000 bid if they agreed to stay a nonprofit. So that's 0:10:44.040 --> 0:10:45.240 like one way to stop them, right if they just 0:10:45.280 --> 0:10:47.520 agree to stay a nonprofit. But even if they say 0:10:47.559 --> 0:10:49.960 no to him, you can't quite ignore him. They have 0:10:50.000 --> 0:10:52.520 to at least sort of wave in the direction of no. Actually, 0:10:52.520 --> 0:10:56.720 we're getting more value for the nonprofit from open Ai, 0:10:56.880 --> 0:11:00.600 like internally than we would from Elon Musk. And I 0:11:00.600 --> 0:11:04.440 think most people think that means essentially, the nonprofit needs 0:11:04.440 --> 0:11:07.040 to get a bigger steak in the for profit company 0:11:07.280 --> 0:11:08.960 than it was planning, right it was planning like let's 0:11:08.960 --> 0:11:11.840 say twenty five percent. It needs to get a stake 0:11:11.880 --> 0:11:13.520 that I can credibly say is worth more than one 0:11:13.559 --> 0:11:16.960 hundred million dollars, right, Yeah, And that just makes it 0:11:17.000 --> 0:11:18.800 a little bit harder to raise money, right because you're 0:11:19.040 --> 0:11:21.320 giving more of the steak to the more of the 0:11:21.320 --> 0:11:24.440 company to the nonprofit. You're cutting back the shares of 0:11:24.480 --> 0:11:26.600 like Microsoft and soft Bank and everyone else, And so 0:11:26.640 --> 0:11:28.280 it just makes it harder for them to raise money 0:11:28.720 --> 0:11:32.000 and creates uncertainty and you know, puts them in a 0:11:32.040 --> 0:11:33.959 little bit worse competitive position to raise a lot of 0:11:34.000 --> 0:11:35.720 money and kind of stay out of XII. 0:11:36.040 --> 0:11:40.600 Yeah, which is interesting in the context of Stargate or whatever, 0:11:40.720 --> 0:11:44.680 that this very ugly public fuse paying out and makes 0:11:44.720 --> 0:11:46.520 things a little bit more challenging for open AI. 0:11:46.720 --> 0:11:49.120 But we'll see, right, I mean, one thing I've written 0:11:49.200 --> 0:11:52.360 is like, just from the outside, it seems to be 0:11:52.400 --> 0:11:54.640 pretty easy for Open Ahead orra is money. They've got, 0:11:54.720 --> 0:11:57.520 you know, yeah, like the sexiest product in the sexiest 0:11:57.520 --> 0:11:59.800 industry in the world. They've got Sam Alban, who is 0:11:59.800 --> 0:12:04.520 an incredible salesman. They've got a lot of advantages. And 0:12:04.880 --> 0:12:06.760 you know, there's a lot of this money from soft Bank, 0:12:06.920 --> 0:12:10.800 who is not like notorious for driving a hard bargain. Right, 0:12:12.160 --> 0:12:15.840 it's weird to be like this bid from Elon Musk 0:12:15.920 --> 0:12:17.760 is going to prevent them from raising the money they 0:12:17.800 --> 0:12:19.600 need to scale. Like I don't know, man, Like it's 0:12:19.679 --> 0:12:21.280 open an eye. They'll be fine, but I. 0:12:21.280 --> 0:12:24.920 Don't Yeah, all right, they'll be fine. Let's just put 0:12:24.920 --> 0:12:26.800 a pin in it for now. 0:12:41.160 --> 0:12:42.119 Let's talk about. 0:12:41.880 --> 0:12:45.520 Pass through fees at multi strategy hedge funds do that. 0:12:45.760 --> 0:12:48.520 This is a great Bloomberg big take that went out 0:12:48.559 --> 0:12:51.240 this week. Reading it, it really feels like rage bait. 0:12:51.559 --> 0:12:53.960 Well it is, right, I mean, like it quits a 0:12:54.000 --> 0:12:57.640 guy saying pastors are wild. You're paying for everything, including 0:12:57.679 --> 0:12:58.319 the copy. 0:12:58.120 --> 0:12:59.240 Of paper beautiful. 0:12:59.679 --> 0:13:01.440 And it's true that traditionally the way you think of 0:13:01.480 --> 0:13:05.640 hedge funds is like investors put in money, the hedgehun 0:13:05.720 --> 0:13:08.480 invests the money for them. The hedge fund charges them 0:13:08.640 --> 0:13:11.800 two percent of the money and twenty percent of the profits. Right, Like, 0:13:11.840 --> 0:13:15.840 those are the stereotypical numbers and the stuff that the 0:13:15.840 --> 0:13:20.079 hedge fund keeps. The two and twenty pays for its managers' salaries, 0:13:20.520 --> 0:13:24.280 their bonuses, right, their photocopier paper, their lunches, you know, 0:13:24.280 --> 0:13:27.200 and whatever. Like, the expenses are covered by the fees, right, 0:13:27.960 --> 0:13:31.199 And the multi strategy model, the modern big multi strategy 0:13:31.200 --> 0:13:33.320 model is just not that at all. Right, The modern 0:13:33.360 --> 0:13:37.880 multi strategy model is, you give us money, we use 0:13:37.880 --> 0:13:39.880 the money to do investing. We also use the money 0:13:39.920 --> 0:13:42.960 to pay all of the expenses, and what's left over 0:13:43.080 --> 0:13:44.640 you get some of what we get some of it, right, 0:13:44.840 --> 0:13:47.040 Which is like, as I wrote this week, it's exactly 0:13:47.040 --> 0:13:50.720 the same model as a company generally, or like an 0:13:50.720 --> 0:13:53.400 investment bank in particular. Right, like an investment bank, the 0:13:53.440 --> 0:13:56.800 shareholders pay for the photocopier paper. Right, All of the 0:13:56.840 --> 0:14:01.080 expenses of the investment bank are taken out before net income, 0:14:01.080 --> 0:14:02.600 and then the sharelders get some of the net income 0:14:02.640 --> 0:14:04.040 and like the rest of it goes to the bonuses, or 0:14:04.080 --> 0:14:07.160 rather the sharelders get the net income after the expenses 0:14:07.200 --> 0:14:10.120 and the bonuses to the employees. And that's how like 0:14:10.160 --> 0:14:13.120 companies work. It's how investment banks work. I'm modern like 0:14:13.160 --> 0:14:16.880 corporate investment banks work. And the multi strategy model is that, right, 0:14:16.920 --> 0:14:20.040 It's like the investors are capital providers. We pay for 0:14:20.200 --> 0:14:22.600 all of our expenses out of the investors' money. Yeah, 0:14:22.600 --> 0:14:26.000 and the investor you get someone what's left over, right, Yeah, 0:14:26.040 --> 0:14:30.040 And that is a model that these firms can sell 0:14:30.080 --> 0:14:32.760 to investors. But if you're just like outside of it, 0:14:32.880 --> 0:14:36.360 you're like what they're paying for photocopiers, Like it's very annoying. 0:14:36.680 --> 0:14:39.400 Like I am not in LP to a multi strategy 0:14:39.480 --> 0:14:42.280 hedge fund, but I mean, reading this story, I hear 0:14:42.360 --> 0:14:44.800 the parallels that you're making with an investment bank. But 0:14:44.920 --> 0:14:47.800 I have to imagine that maybe I'm wrong. I probably 0:14:47.800 --> 0:14:50.680 am that if I'm in LP a potential LP to 0:14:50.720 --> 0:14:52.720 a multi strategy hedge fund, I'm thinking about I am 0:14:52.760 --> 0:14:55.000 giving my money to a hedge fund for returns. I'm 0:14:55.000 --> 0:14:58.600 not investing in an investment bank model. I'm just coming 0:14:58.600 --> 0:15:00.800 at this. It's you know, what is my money going 0:15:00.840 --> 0:15:01.360 to return? 0:15:01.600 --> 0:15:05.840 Yeah, and like their pitch to you is we return 0:15:06.080 --> 0:15:08.080 more than our cost of capital through the cycle. Their 0:15:08.080 --> 0:15:10.840 pitch to you is like we can give you a 0:15:10.920 --> 0:15:15.480 pretty stable high teens return on your money. And that's 0:15:15.480 --> 0:15:18.880 what you're getting. And you're not getting like eighty percent 0:15:18.960 --> 0:15:21.280 of the money we make. That's an irrelevant metric. What 0:15:21.320 --> 0:15:23.400 you're getting is like a sort of expected high teens 0:15:23.440 --> 0:15:25.760 return and like we'll pay for the photocopiers out of 0:15:25.800 --> 0:15:26.160 your money. 0:15:26.200 --> 0:15:28.000 It's actually low teens. 0:15:28.760 --> 0:15:31.880 Yeah, there's this, there's a lot of like a lot 0:15:31.920 --> 0:15:34.520 of you know, I'm used to the investment banking world 0:15:34.520 --> 0:15:36.240 where there's like a thing called the target return on 0:15:36.320 --> 0:15:38.680 equity and you're not supposed to get to the target 0:15:38.680 --> 0:15:40.320 return on it's just like a number that's in the 0:15:40.320 --> 0:15:40.760 present pitch. 0:15:40.880 --> 0:15:41.520 Yeah, I don't know. 0:15:41.560 --> 0:15:44.640 This goes back to a broader question that we talk 0:15:44.680 --> 0:15:48.000 about this all the time on the television show that 0:15:48.040 --> 0:15:50.520 I have open interest, but why would you ever give 0:15:50.560 --> 0:15:51.560 money to a hedge fund? 0:15:51.680 --> 0:15:54.120 I understand the pitch diversification. 0:15:54.320 --> 0:15:57.680 You're supposed to get starty returns of about twelve percent 0:15:57.800 --> 0:16:00.480 with few downswings, but I mean at the S and 0:16:00.480 --> 0:16:04.160 P five hundred, you can pay three basis points for 0:16:04.240 --> 0:16:06.520 the S and P five hundred. Over the last decade, 0:16:06.560 --> 0:16:10.520 you've got an annualized return of thirteen percent with three 0:16:10.560 --> 0:16:13.880 down years. And I mean thinking about these multi strategy 0:16:13.920 --> 0:16:17.000 hedgehoe fees that make two and twenty look cheap, it 0:16:17.160 --> 0:16:19.080 just reinforces that notion. 0:16:20.200 --> 0:16:23.040 You get pretty high returns with lower volatility and with 0:16:23.560 --> 0:16:24.920 no correlation to the broad market. 0:16:25.080 --> 0:16:26.440 Yeah, the return You're a. 0:16:26.440 --> 0:16:28.160 Giant endowment, right, and like you have a lot of 0:16:28.160 --> 0:16:29.520 money in the S and P and you want some 0:16:30.080 --> 0:16:34.200 uncorrelatedponse that you know it doesn't pay like treasure rights 0:16:34.240 --> 0:16:36.800 pays like two or three times treasures. It's a pitch 0:16:36.840 --> 0:16:40.720 that works to a lot of like sophisticated endowments, and 0:16:40.800 --> 0:16:43.160 like this is the like the multi strategy pitch is 0:16:43.160 --> 0:16:44.520 the one that works, which is like, we give you 0:16:44.880 --> 0:16:48.160 very low volatility, pretty high returns, no correlation to the 0:16:48.200 --> 0:16:51.880 S and P. It's diversifying your investments. It's allowing you 0:16:51.920 --> 0:16:53.800 to put more money into the SMP essentially because you 0:16:53.800 --> 0:16:55.320 have like this, yeah, this diversified. 0:16:55.680 --> 0:16:58.240 It's a pitch that I know it works, but I 0:16:58.280 --> 0:17:00.680 don't really understand why it works. And I go back 0:17:01.360 --> 0:17:03.800 to ETF so I'm sorry, where you have this race 0:17:03.840 --> 0:17:05.760 to the bottom and fees, this race to the bottom 0:17:05.800 --> 0:17:07.879 doesn't seem to exist in the hedge fund world. And 0:17:08.240 --> 0:17:10.840 there is a recent example, I think it's the University 0:17:10.840 --> 0:17:14.040 of Connecticut Endowment that just said, actually, we're doing away 0:17:14.080 --> 0:17:16.000 with hedge funds. We're gonna put all of our money 0:17:16.000 --> 0:17:19.840 in buffer ETFs, which guarantee safety. 0:17:20.080 --> 0:17:23.320 Yeah, exactly how much capacity is there in buffer IDFs? 0:17:23.400 --> 0:17:25.560 I get? How much capacity is there in hedgehunds. No. 0:17:25.680 --> 0:17:27.680 I mean, like if you put all of your money 0:17:27.680 --> 0:17:31.680 into equities and there's like a big draw down in equities, 0:17:31.720 --> 0:17:34.320 you have like a really bad year and you can't 0:17:34.520 --> 0:17:36.800 spend on your programs. You know, if you're an endowment 0:17:37.119 --> 0:17:38.679 and if you put some of your money into like 0:17:39.119 --> 0:17:42.119 it's like a diversification, it's like steady returns. It's like 0:17:42.600 --> 0:17:44.880 you don't start from it thinking about the fees, right, 0:17:45.080 --> 0:17:47.560 You start from it thinking about like do they provide 0:17:47.600 --> 0:17:51.080 steady returns after fees? And if the answer is yes, 0:17:51.160 --> 0:17:53.520 then like the fees are none of your business. It's 0:17:53.560 --> 0:17:55.800 like investing in Goldman. Right, it's like, you know, if 0:17:55.800 --> 0:17:58.760 the equity returns a lot, then like it doesn't matter 0:17:58.760 --> 0:18:01.720 that people are getting bonuses, right, Yeah, And like much 0:18:01.760 --> 0:18:05.320 as with a public company, the job is to earn 0:18:05.359 --> 0:18:08.960 the cost of capital over some medium period of time. 0:18:09.560 --> 0:18:12.320 And so like the Big Take article starts with bally 0:18:12.359 --> 0:18:14.920 Asthny charging a lot of money in like a relatively 0:18:14.960 --> 0:18:17.000 down year, right, And bally Asni's like, well, you know, 0:18:17.080 --> 0:18:19.600 it's an anomalist down year, and usually we return our 0:18:19.640 --> 0:18:21.920 cost of capital, but like we have this one down year, 0:18:21.920 --> 0:18:23.560 and you like point to it and it's like, yes, 0:18:23.680 --> 0:18:26.680 in a down year, it is embarrassing to pay tens 0:18:26.680 --> 0:18:29.480 of millions of dollars to your traders because like they 0:18:29.480 --> 0:18:31.200 didn't make money for the investors. But it's like that's 0:18:31.200 --> 0:18:32.320 not the right way to look at it. The right 0:18:32.320 --> 0:18:33.639 way to look at it. It's like you're investing in a 0:18:33.680 --> 0:18:35.720 business over the long term, and the business they to 0:18:35.800 --> 0:18:36.679 pay money for traders. 0:18:36.760 --> 0:18:37.000 Yeah. 0:18:37.359 --> 0:18:39.720 I guess I just don't find it compelling. But you 0:18:39.760 --> 0:18:41.840 know what, I'm not in charge of an endowment. I'm 0:18:41.840 --> 0:18:44.600 sure if I was, perhaps I would have a different perspective. 0:18:44.840 --> 0:18:46.800