WEBVTT - Soros Fund Management CEO & CIO Dawn Fitzpatrick Talks Private Investment

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<v Speaker 1>All right, let's go now to Soros fun CEO and

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<v Speaker 1>CEO Don Fitzpatrick, speaking with Bloomberg's Eric Shatsker down.

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<v Speaker 2>Did you ever imagine that we'd be here six weeks

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<v Speaker 2>into the Trump two point zero era and the Dow

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<v Speaker 2>is flirting with negative, The S and P five hundred

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<v Speaker 2>is down two and a half percent, the Nasdaq is

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<v Speaker 2>down six plus?

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<v Speaker 3>Did you.

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<v Speaker 4>So?

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<v Speaker 1>I would have thought that the markets would have held

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<v Speaker 1>up better, but I would I would also not have

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<v Speaker 1>thought that we would have had the level of frenetic activity.

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<v Speaker 4>Out of Washington.

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<v Speaker 1>And when we look at the headlines over the past

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<v Speaker 1>twenty four hours, they've they've been kind of breathtaking in

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<v Speaker 1>speed and scale.

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<v Speaker 2>I'd like to point out, because some of you here

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<v Speaker 2>may not know, or perhaps you've forgotten, that the Treasury

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<v Speaker 2>Secretary Scott Bessant once had Don's job as chief Investment Officer.

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<v Speaker 2>He worked at Soros in the nineteen nineties under Georgia

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<v Speaker 2>course and also understand Druckenmeller, and he returned as the

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<v Speaker 2>CIO in twenty eleven. You arrived in twenty seventeen, a

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<v Speaker 2>couple of years after he left, right.

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<v Speaker 4>I arrived about a year after he left.

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<v Speaker 2>I bring this up not just to establish a distinguished lineage,

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<v Speaker 2>but because it serves as a useful reminder that Scott

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<v Speaker 2>Besant has to be right the most market literate and

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<v Speaker 2>market savvy treasury secretary since at least Bob Rubin and

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<v Speaker 2>perhaps in American history. Now we have a president whom

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<v Speaker 2>we know thinks of the stock market as a daily

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<v Speaker 2>report card, and a treasury secretary who's laser focused on

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<v Speaker 2>macro indicators.

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<v Speaker 3>Why is that important?

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<v Speaker 4>So a couple of things.

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<v Speaker 1>Scott is incredibly smart, He's capable, and I think he

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<v Speaker 1>is the more most market savvy treasury Treasury secretary we've

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<v Speaker 1>ever had. I think it matters, matters because when he

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<v Speaker 1>says something, you should you should take him literally. So

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<v Speaker 1>he has said he and Trump care about the level

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<v Speaker 1>of ten year treasuries, and and I think he will

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<v Speaker 1>pay very close attention in.

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<v Speaker 4>A kind of perverse way.

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<v Speaker 1>Right after the election, we had the Trump bump, and

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<v Speaker 1>as Eric pointed out, we've we've had something different in

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<v Speaker 1>the past week or so. And you've seen that ten

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<v Speaker 1>year treasury go from four eighty in the middle of

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<v Speaker 1>January where they were getting nervous and if you remember

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<v Speaker 1>they kind of backed off some of some of the

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<v Speaker 1>tariff timing at that moment in time. Now you have

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<v Speaker 1>a ten year treasury that's going, that's down at before

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<v Speaker 1>twelve level, and I think they should be getting a

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<v Speaker 1>little nervous. I think the one thing that market participants

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<v Speaker 1>maybe have underestimated in the first term, we all said

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<v Speaker 1>Trump is very SPX sensitive, and that was invariably the truth.

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<v Speaker 1>I think with Scott, I think their pain tolerance is different,

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<v Speaker 1>and I think they're more sensitive to a broader set

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<v Speaker 1>of asset classes, and I think they might believe that

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<v Speaker 1>ultimately they have they have more levers to pull when

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<v Speaker 1>and where they need it. That said, when you think

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<v Speaker 1>about tariff's we can all look at a textbook and

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<v Speaker 1>we can and we can say, and I think the

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<v Speaker 1>Treasury Secretary said today manufacturers will absorb the price pressure,

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<v Speaker 1>and then you can also argue that it's a one

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<v Speaker 1>time price shift. But I think what you can't control

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<v Speaker 1>is consumer confidence and corporate confidence, and I think that

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<v Speaker 1>is what is falling off a cliff right now.

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<v Speaker 2>Do you think don that the market is correct to

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<v Speaker 2>as of now pricing in three rate cuts in twenty twenty.

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<v Speaker 1>Five, So I would take the other side of that bet,

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<v Speaker 1>because again I think ultimately they will.

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<v Speaker 4>Bear more pain.

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<v Speaker 1>Than I think market participants originally thought, but there will

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<v Speaker 1>be a limit, and I think they will make deals.

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<v Speaker 2>There's a view in the market that Scott's preoccupation with

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<v Speaker 2>keeping the tenure yield low foreshadows a coming.

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<v Speaker 3>Change and bank regulation.

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<v Speaker 2>You know, if the administration wants to juice demand for treasuries,

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<v Speaker 2>it could exempt treasuries from the supplementary leverage ratio, one

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<v Speaker 2>of the capital penalties that the big US banks have

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<v Speaker 2>to pay.

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<v Speaker 3>Do you think they'll go there? So?

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<v Speaker 1>I definitively think that is going to happen. So when

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<v Speaker 1>you look at kind of the net issuance of treasuries

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<v Speaker 1>post COVID, it's almost all been bought by the levered

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<v Speaker 1>hedge fund community, and I don't think, first of all,

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<v Speaker 1>that's not a sustainable kind of marginal buyer, and it

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<v Speaker 1>also probably isn't isn't good for market structure and market stability.

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<v Speaker 1>And when you look at what came out of Congress

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<v Speaker 1>last week, you know, the deficit is not going lower

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<v Speaker 1>in any any material way. So what I think they're

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<v Speaker 1>going to do is they they will change bank regulation

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<v Speaker 1>and the supplemental leverage ratio allowing banks to buy treasuries

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<v Speaker 1>in ways that that won't be regulatorially punitive. And the

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<v Speaker 1>next step is they will try to take some leverage

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<v Speaker 1>out of out of kind of that that basis trade

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<v Speaker 1>and the leverage leverage levered market. And again I think

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<v Speaker 1>this is where Scott understands and moving parts in ways

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<v Speaker 1>that I think will ultimately.

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<v Speaker 4>Be really helpful.

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<v Speaker 2>You've given us a couple of clues about how you

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<v Speaker 2>might be trading the bond market. You take the other

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<v Speaker 2>side of three rate cuts this year, but at the

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<v Speaker 2>same time you think that the administration will be inclined

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<v Speaker 2>to help lift demand for treasuries. How are you trading treasuries?

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<v Speaker 2>Like what would you buy and where? And are you

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<v Speaker 2>a holder or your seller at any point?

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<v Speaker 1>So, we are a reasonably large holder of US government bonds,

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<v Speaker 1>but we're below our benchmark weight by a little bit.

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<v Speaker 1>And what we've been doing is we've been using volatility

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<v Speaker 1>as our friend. So in January when the tenure rates spiked,

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<v Speaker 1>we were buyers of bonds at that time. And then

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<v Speaker 1>now as you've seen kind of rates go lower, bonds

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<v Speaker 1>rally a lot we're not taking profits, and you'll see

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<v Speaker 1>us continue to build a position into that volatility, and

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<v Speaker 1>I think you're going to see continued volatility again this

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<v Speaker 1>moment in time. Rates are going lower, but I don't

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<v Speaker 1>think that's going to be true for the.

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<v Speaker 4>Next four years.

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<v Speaker 2>Volatility can be your friend. Is that is that?

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<v Speaker 3>I guess I better put it this way.

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<v Speaker 2>What is the what's the best thing and what's the

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<v Speaker 2>worst thing about trying to put money to work in

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<v Speaker 2>this market?

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<v Speaker 1>Yeah, So so we're we're technically we're an endowment, but

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<v Speaker 1>we use the best of the endowment model and the

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<v Speaker 1>hedge fund model, so we can react.

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<v Speaker 4>Very quickly, and I think we're very good.

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<v Speaker 1>I would argue probably one of the best in the

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<v Speaker 1>world at connecting the dots across asset classes. And from

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<v Speaker 1>our perspective right now, the volatility is great.

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<v Speaker 4>I think market.

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<v Speaker 1>Structure is still challenged in that liquidity at moments in

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<v Speaker 1>time when there's a lot of volatility is challenging. So

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<v Speaker 1>you can see a great trade, but sometimes buying as

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<v Speaker 1>much of it as you want is easier said than done.

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<v Speaker 3>Do you have a favorite trade right now?

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<v Speaker 4>That's a good question.

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<v Speaker 1>So we are tactically at the end of last year,

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<v Speaker 1>we bought call spreads on Hong Kong equity indexes and

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<v Speaker 1>I continue to like that trade. So we're holding that position.

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<v Speaker 1>And again, when you see kind of the micro and

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<v Speaker 1>macro economic data coming out of the US.

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<v Speaker 4>And you see the data in China, I think.

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<v Speaker 1>You will see a tactical deal out of economic necessity

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<v Speaker 1>between China and the US. And I think when you

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<v Speaker 1>look at investors, generally they've left China for dead, So

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<v Speaker 1>I think there's going to be money forced into that market.

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<v Speaker 4>Again for US, that's.

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<v Speaker 1>More a short term tactical trade than a longer term position.

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<v Speaker 2>I feel like I have to ask you the requisite

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<v Speaker 2>MAG seven question. Those talks are down about thirteen percent

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<v Speaker 2>or so from the peak in December. That was as

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<v Speaker 2>of yesterday I didn't check this morning, Probably down by more.

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<v Speaker 2>Tesla's off what forty Nvidia has lost twenty four percent

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<v Speaker 2>of those buying opportunities.

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<v Speaker 1>Yeah, so I think the MAG seven are I mean,

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<v Speaker 1>those are extraordinary companies with real earnings power, and the

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<v Speaker 1>onwind here has been pretty pretty violent, So I would

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<v Speaker 1>take the other.

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<v Speaker 4>Side of that trade.

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<v Speaker 2>And of course, we are witnessing some historic shifts in

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<v Speaker 2>US foreign policy, it would appear that the United States

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<v Speaker 2>is to a degree abandoning Europe perhaps embracing Russia. And

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<v Speaker 2>Vladimir Putin has that translated? Will it translate into great

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<v Speaker 2>macro trades?

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<v Speaker 4>Yeah?

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<v Speaker 1>So, you know, Russia is not that relevant from a

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<v Speaker 1>trading perspective when when they invaded Ukraine it didn't really

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<v Speaker 1>reverberate through markets. And I think the context of what's

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<v Speaker 1>going on now, the only thing that's worth watching, in

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<v Speaker 1>my opinion, the context of trading markets is oil and

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<v Speaker 1>whether ultimately, and this is a big if, if Trump

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<v Speaker 1>can negotiate a piece between Russia and Ukraine, whether part

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<v Speaker 1>of that deal is Trump needs more oil, right, part

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<v Speaker 1>of what he's been promising the US consumer is lower prices,

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<v Speaker 1>and particularly lower prices when it comes to the gas pump.

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<v Speaker 1>The US really can't drill more. It's not in Saudi

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<v Speaker 1>Arabia's best interests to produce a lot more. They need

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<v Speaker 1>about ninety dollars a barrel to balance their budget. So

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<v Speaker 1>the lever he can really pull there is Russia. And

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<v Speaker 1>one kind of wild card would be Russia dropping out

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<v Speaker 1>of OPEC, and that would have a real impact on

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<v Speaker 1>oil price in the cots of moving it lower.

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<v Speaker 2>What about America ripping the security blanket away from Europe?

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<v Speaker 3>You know, I could imagine that.

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<v Speaker 2>We've already seen, right, the Germans move toward spending. In fact,

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<v Speaker 2>I think they found some flexibility this morning, right, two

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<v Speaker 2>hundred billion euros on additional two hundred billion on defense,

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<v Speaker 2>and we hear the same noises out of France that

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<v Speaker 2>surely that has to result in at least some some

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<v Speaker 2>bond issuance.

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<v Speaker 4>Yeah.

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<v Speaker 1>So if you you know, if you look at Europe

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<v Speaker 1>and if they they end up spending the two and

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<v Speaker 1>a half, you know, three percent of GDP on defense,

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<v Speaker 1>that's one hundred and seventy five billion dollars a year.

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<v Speaker 1>And when you think about the fiscal space they need,

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<v Speaker 1>just generally, the amount of bond issuance out of the

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<v Speaker 1>EU and European sovereigns is going very materially higher at

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<v Speaker 1>the same time when US net issuance is also going higher.

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<v Speaker 1>So I think one of the things that we might see,

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<v Speaker 1>and this isn't going to happen tomorrow, but I think

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<v Speaker 1>it could happen in the next twelve to twenty four months,

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<v Speaker 1>is a failed auction.

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<v Speaker 4>Out of Europe.

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<v Speaker 1>I just think at some point sourcing that marginal buyer

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<v Speaker 1>is going to become extremely difficult.

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<v Speaker 2>Do you feel confident enough to predict which country will

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<v Speaker 2>failed to sell enough bonds?

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<v Speaker 1>The two most vulnerable countries are the UK and France

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<v Speaker 1>in my opinion, don.

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<v Speaker 2>There's a lot of Western money, including some of yours,

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<v Speaker 2>trapped in bets on Chinese private companies. Bite Downs of

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<v Speaker 2>course tops the list, but there are lots of others.

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<v Speaker 2>Could that logjam maybe start to break if Presidents Trump

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<v Speaker 2>and She negotiate some kind of a deal, whether it

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<v Speaker 2>concerns trade or whether it goes even beyond trade.

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<v Speaker 4>So I think there's a lot of people hoping for that.

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<v Speaker 1>And as Eric said, US included, where we have private

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<v Speaker 1>capital in China and we've been you know, everyone thought

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<v Speaker 1>these companies would come private, I mean public years ago,

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<v Speaker 1>and the markets just didn't allow for that, and if

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<v Speaker 1>you remember, the Chinese government kind of closed that door

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<v Speaker 1>at the eighteenth hour. So if there is a tactical

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<v Speaker 1>deal between the US and China, I think there's a

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<v Speaker 1>lot of market participants US included, that will hope that

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<v Speaker 1>the private to public market's unfreeze and we can get

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<v Speaker 1>some money out I think if you get money out

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<v Speaker 1>of privates, it's only going to be in that very

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<v Speaker 1>very tight.

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<v Speaker 4>Top tier like a Bye Dance.

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<v Speaker 1>And to be clear, Bye Dance is probably the most

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<v Speaker 1>largely held private company by real asset investors in the world,

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<v Speaker 1>So there's a lot of people with that hope trade on.

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<v Speaker 2>This feels like a good time for us to wade

0:13:57.120 --> 0:14:00.600
<v Speaker 2>into the public private debate for a moment because for

0:14:00.720 --> 0:14:03.640
<v Speaker 2>years right foundations like yours and endowments and pension funds

0:14:03.679 --> 0:14:06.199
<v Speaker 2>and sovereigns have been plowing money into private equity.

0:14:06.600 --> 0:14:08.120
<v Speaker 3>Of course, they've had some trouble.

0:14:07.800 --> 0:14:09.800
<v Speaker 2>Getting that money out of private equity over the past

0:14:09.800 --> 0:14:12.439
<v Speaker 2>couple of years, and now private credit is the rage,

0:14:12.880 --> 0:14:15.560
<v Speaker 2>and more and more capital as a result is flowing

0:14:15.559 --> 0:14:20.600
<v Speaker 2>into liquid vehicles. Why do you believe in liquidity when

0:14:20.800 --> 0:14:24.480
<v Speaker 2>everyone else, right from Apolla to Blackrock, is extolling the

0:14:24.600 --> 0:14:27.640
<v Speaker 2>virtues and the benefits of private markets.

0:14:28.840 --> 0:14:29.160
<v Speaker 4>Yeah.

0:14:29.160 --> 0:14:34.040
<v Speaker 1>So, over the last again, we typically are benchmark against

0:14:34.080 --> 0:14:37.920
<v Speaker 1>the typical largest US endowments, but over the last six

0:14:38.040 --> 0:14:43.200
<v Speaker 1>years we actually let our private equity positions roll off.

0:14:43.240 --> 0:14:45.680
<v Speaker 1>We still allocated to the best managers.

0:14:45.200 --> 0:14:46.600
<v Speaker 4>But with a really hot high.

0:14:46.480 --> 0:14:49.880
<v Speaker 1>Bar, so we lost about one thousand basis points of

0:14:49.920 --> 0:14:53.400
<v Speaker 1>exposure there, which, to be clear, has has served us

0:14:53.480 --> 0:14:57.280
<v Speaker 1>really well. And at the same time we pivoted to

0:14:57.400 --> 0:15:00.640
<v Speaker 1>public markets. And it's interesting, I think think a lot

0:15:00.680 --> 0:15:06.960
<v Speaker 1>of both high net worth and institutional investors pivoted to

0:15:07.000 --> 0:15:11.600
<v Speaker 1>private markets in part because you didn't get a scorecard

0:15:11.640 --> 0:15:16.720
<v Speaker 1>every day and your sharp ratio and the returns looked

0:15:17.840 --> 0:15:22.680
<v Speaker 1>artificially good. And by doing that, first of all, I

0:15:22.720 --> 0:15:26.480
<v Speaker 1>think those investors are in a world of hurt right now,

0:15:26.520 --> 0:15:29.760
<v Speaker 1>both in context of liquidity and in the context of

0:15:30.320 --> 0:15:36.120
<v Speaker 1>they've massively lagged a equity market that has until the

0:15:36.200 --> 0:15:40.040
<v Speaker 1>last couple of weeks been on fire. But the other

0:15:40.120 --> 0:15:43.760
<v Speaker 1>thing is if your Soros fund management and you have

0:15:43.800 --> 0:15:47.840
<v Speaker 1>a long term perspective in public markets, you have a

0:15:47.840 --> 0:15:50.800
<v Speaker 1>lot less competition because it's it's most of the active

0:15:50.840 --> 0:15:56.560
<v Speaker 1>money is large multi strat investors. So the for us,

0:15:56.600 --> 0:16:01.360
<v Speaker 1>the capital allocated to public markets above our bench. We've

0:16:01.440 --> 0:16:05.160
<v Speaker 1>annualized six hundred and fifty basis points of excess return

0:16:05.200 --> 0:16:07.720
<v Speaker 1>over the last five years, and I think it's because

0:16:07.720 --> 0:16:08.720
<v Speaker 1>we play our own game.

0:16:09.240 --> 0:16:13.040
<v Speaker 2>What does that mean in actual numbers, six hundred and

0:16:13.080 --> 0:16:15.880
<v Speaker 2>fifty over what last year? Six hundred and fifty over

0:16:15.920 --> 0:16:16.920
<v Speaker 2>what in twenty twenty, So.

0:16:17.480 --> 0:16:21.040
<v Speaker 1>It's always we our beta benchmark is MSCI AQUI and

0:16:21.040 --> 0:16:23.160
<v Speaker 1>then we have the risk free rates, so we don't

0:16:23.160 --> 0:16:26.280
<v Speaker 1>give ourselves any credit for what you can get, you know,

0:16:26.320 --> 0:16:28.400
<v Speaker 1>by by in money markets or what you can get

0:16:28.400 --> 0:16:31.440
<v Speaker 1>by buying buying beta, and we assume we're at our

0:16:31.480 --> 0:16:34.880
<v Speaker 1>benchmark weight in those so add those together and then

0:16:34.920 --> 0:16:37.280
<v Speaker 1>add six hundred and fifty basis points by the way

0:16:37.320 --> 0:16:41.520
<v Speaker 1>the other. But the thing that's pretty interesting is when

0:16:41.600 --> 0:16:45.560
<v Speaker 1>you look at the last two years, your private equity

0:16:46.200 --> 0:16:50.680
<v Speaker 1>has lagged by more than that, so you needed that

0:16:51.520 --> 0:16:54.480
<v Speaker 1>active return in public markets to make up for the.

0:16:54.440 --> 0:16:58.440
<v Speaker 4>Sins in private equity. But we think our.

0:16:58.360 --> 0:17:02.240
<v Speaker 1>Peer endownment and foundations haven't had that offset.

0:17:02.720 --> 0:17:05.439
<v Speaker 2>So you're thinking more along the lines of a hedge fund.

0:17:06.760 --> 0:17:09.959
<v Speaker 2>Is tell us what you returned in twenty four what

0:17:10.000 --> 0:17:13.240
<v Speaker 2>are you here to date? And and when you look

0:17:13.280 --> 0:17:15.679
<v Speaker 2>at those numbers, do you think of your competition as

0:17:15.960 --> 0:17:17.080
<v Speaker 2>a citadel or do you think.

0:17:17.000 --> 0:17:18.600
<v Speaker 3>Of your competition as the Ford Foundation.

0:17:20.080 --> 0:17:23.560
<v Speaker 5>So so we think of both like we want it

0:17:23.600 --> 0:17:27.000
<v Speaker 5>to be clear, we want to take the best from

0:17:27.080 --> 0:17:30.080
<v Speaker 5>from both of those those operators.

0:17:30.080 --> 0:17:31.800
<v Speaker 4>And but We don't play Sitadel's games.

0:17:31.840 --> 0:17:36.000
<v Speaker 1>There is no one Citadel plays there like the multi

0:17:36.040 --> 0:17:39.119
<v Speaker 1>strack game, and nobody plays it better than them, And

0:17:39.160 --> 0:17:43.959
<v Speaker 1>I think the distance between Citadel and their competition has

0:17:44.000 --> 0:17:49.240
<v Speaker 1>has only grown and again, relative to other foundations and endowments.

0:17:49.359 --> 0:17:51.399
<v Speaker 1>There's some things they do really well, and we like

0:17:51.440 --> 0:17:57.080
<v Speaker 1>to take those pieces. But but uh, you know again,

0:17:57.440 --> 0:17:58.960
<v Speaker 1>play our own game and play a game that we

0:17:59.000 --> 0:18:00.800
<v Speaker 1>think no one else in the world old can can

0:18:00.840 --> 0:18:02.600
<v Speaker 1>do quite the way we do it.