Hedge Funds Are a Team Sport | Ilya Zaides on Continuity at 14B Capital
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Before we get started, I want to do a quick disclaimer that nothing we say here is investment advice or marketing for 14B or any of their funds or products. Everything we say here today is meant to be informative and educational about the fund management industry.

Hello, everyone. Welcome to another edition of Other People's Money. I am joined today by Ilya Zaitis, the founder and CIO of 14B Capital Management. They're split between California, New York, and London. They're a long-short equity fund, but they also consider themselves to be very event-driven. So we'll talk a little bit about the strategy today, but I really want to get into a particular topic, which is the idea that hedge funds have breakups, there are divorces, and things happen that affect

the business that you don't really think about at the outset. So, Ilya, thank you so much for joining us today. Thank you for having me. Why don't we get right into to the meat of it? You weren't always 14B Capital Management. There was a predecessor KG Funds. And now, you know, since 2022, I believe you've gone by 14B. So can you speak to me about why you made this change? So KG, which was the predecessor entity, was founded by myself and my former partner,

We had a long run, a very successful run there. What can I tell you? We divorced at the end of this. My partner was older and he sort of decided to hang up his cleats. I was still

still a young buck in this industry and wanted to continue on. So it is somewhat of a delicate situation with these things. But the reality is that you wanted to keep going. You were able to maintain the track record, continue operations throughout the entire period. So the funds never actually closed or anything like that. You just renamed it, set up a new management company. Correct. So we ran a hedge fund and the

And that I was primarily responsible for that. And then we ran some additional sort of sidecar investments and my partner was more involved there. So we decided to sort of split the children in that regard. So I took the hedge fund. I was the CIO and chiefly responsible for the strategy from the beginning. So that was my track record. And I took that with me as well as the fund.

as you pointed out, under a new management company. And my ex-partner took the sidecars. I like to say, and I think I mentioned this to you on our pre-call, that relationships and hedge funds are like uncontacted tribes. Everybody, they're industry experts who think they have an idea of what it's like, but only the people who actually are members of the tribe really understand how the socialization works within it. Even

Even the children, you know, consider them to be the analysts or the staff. Like they really don't even know what's going on with the parents, the founders. Yeah, that's right. I mean, you know, in our case, the staff, the staff, to the extent that we could keep them, they came with me because the hedge fund was the primary sort of element. But to your point,

That's right. I think that hedge funds at their core are really small businesses and the partnerships and the relationships among the partners are often, they're

I'm sure from an outsider's perspective, even from an insider's perspective, are difficult to assess. Why do divorces happen away from hedge funds? Everybody loves each other and thinks they're going to be together forever and everything's going to be great. There's just too many variables in life to really

predict how the partnerships are going to evolve. You mentioned a lot of the team came over with you. So I know your head of research now was an analyst at the prior entity. Your head of marketing was at the prior entity. Your COO was at the prior entity. Really just on the org chart, just your new biz dev guys, the only person who doesn't go back to KG. Right. He's our only new hire. Everybody else has been with us for, you know, I think...

seven or eight years is the shortest tenure and everybody was here prior to the divorce. How does it affect the investors? Obviously, investors love continuity. They love nice, smooth, no headache type of situations with their funds. So when the divorce happened, how did it go over with your LPs? And maybe we could talk about different types of LPs as well because they're not a monolith.

In our case, we had so my partner was very much responsible for a lot of the marketing that we did. A lot of the LP relationships were his and they stayed with him because they were his relationships. And to be honest, we didn't even really attempt to go after them. This divorce, for better or for worse, happened very, very quickly. Everybody was frankly quite surprised, myself included.

It was really initiated by my ex-partner. So anyway, his LPs sort of stayed with him. We sort of took a hands-off approach and didn't speak to them. His money was a good portion of our capital. He was a wealthy individual, and so it constituted a significant portion of our assets. The money that was both not related to him and not his own

That I would split into two camps. There was an institutional camp and they're, you know, they're frankly just allergic to divorce and change. You know, I would say that the if I could summarize their attitude in a quick sort of sentence, I would say, call us in three years when everything is settled and we'll look at you again.

And that was basically the approach that the institutions took. And so we lost our institutions almost by default. There really wasn't anything we could do about them. The smaller investors, the ultra high net worth individuals, the family offices, they're more flexible and they could sort of look at things, I would say, more pragmatically and ask themselves, you know, is this an investment that we want to invest?

continue to pursue and what's really changed and can we still make money here? So we kept, I would say, a strong majority of that second bucket. So those are the ones that were really willing to sort of

bet that there was sufficient continuity in the organization. They knew me, they knew that I was chiefly responsible for all the investments. I was the owner of the track record, but the institutions simply were unable. We're now approaching the three-year point, so we've just crossed the three-year point, I guess. And so now we're starting to have those conversations again.

obviously from a different place. Why do you think institutions are so allergic to divorce like this? I think they're frankly very bureaucratic. There's a process in place to weed out risk as they perceive it, right? I mean, risk is a funny thing, right? If I talk about return, you and I can speak about it, you know, facilely into the hundredth of a percentile.

If I talk about risk, everyone has a different definition. We speak of it in this, you know, we use this all encompassing term risk, but we all need different things. So their processes, while designed to weed out risk, really are to a large degree, you know, box checking. And I don't mean that pejoratively. I mean that in the sense that, you know, there are certain things that they simply require, you know,

team track record in place. We got kicked out of a lot of institutions simply for that reason. Okay, they viewed our team as in flux and it was. We had to lay off a lot of people, right? We created a new management company, as you pointed out. We took the fun with us. So there was continuity there. If you look at it more pragmatically, who's really responsible?

what is the strategy, what's being affected, you can have varying opinions. But if you look at it from a simple point of view, is this a new entity or not? It's a binary, it's yes or no. So I think that that process that they put into place just sort of eliminates you from consideration.

you know, whether or not it's a good process or not, it's a process designed for large institutions. And I think it's an inevitability, you know, whether or not you think it's correct or smart. The specter of capital raising is over the shoulder of all fund managers. But if you know that you're kind of back to square one with a lot of these institutional relationships, then your responsibility is actually just to go

prove to them that nothing really has changed. The team is still in place. The strategy still works and it's all going to be the same three years from now. You do kind of get to just go back and put your nose to the grindstone on investing, which I think most portfolio managers would love to have that. From an investing point of view, it's been great. It's been a liberating thing, right? Because even though prior to the divorce, I had

large discretion over the portfolio. The reality is that anytime you're in a partnership, you really do need to bring your partners along for the ride, right? If you have significant internal conflict, whether that's from an operational point of view, or certainly from an investment point of view, that creates a level of discord that you just can't

You can't be effective as an investor if you have internal discord. And that goes up and down the chain, right? So you can have that problem amongst partners. You can also have that problem with analysts, right? An analyst is pitching you an idea.

you're discussing it, you have a disagreement as to why it may or may not fit into the book. If there's significant disagreement philosophically as to what's going on, that creates a level of discord that really, it hurts your investment, it hurts your investment process. And frankly, a lot of investing is really judgment made at the right time, right? A lot of

The work you do is studying businesses or whatever investments you're making over time. You collect knowledge, you collect insight over a long period of time. It's really the judgment you apply at crucial moments applied to the knowledge you've created that makes a good investment or a bad investment. So if the judgment part

isn't philosophically aligned with the people in your organization, that creates a level of discord that it creates. I would say good judgment is almost always effective in a cloudy situation, right? When the markets get volatile, when there's significant changes going on, that creates disparities in perception between real value and perceived value, right? And

that is when your decision making is most important. And if the philosophy of your team is in some ways, you know, isn't aligned, that's when things get clouded internally and it prevents you from making good decisions. So, you know, it goes up and down through the organization is the point. It's hugely important.

you know, at all times. And I think at all funds, because as you pointed out sort of in the beginning, hedge funds in general, even fairly large ones are still fairly small businesses where individuals do matter. And, you know, decisions can be made very quickly, especially in a good hedge fund, I would say, you know, you want to have, you know, good judgment at the right time. So.

well even in places where you do have that alignment it's bound to ebb and flow and you're going to have disagreement and misalignment as the market changes as businesses change as people change

So when you do start to recognize a disalignment between whether it's an analyst or a partner, how do you go about addressing that in an effective way? There's no simple answer to that, right? Again, I would say, you know, the best analogy is probably a long-term relationship, right? When you sort of begin to perceive that there are differences in values or perception, like you're saying, you know,

Let's take it, for example, right? One may view shorting as a money losing proposition, right? And over time, it certainly is, right? The best short sellers in the world may not make money for decades at a time, right?

On the other hand, you can very clearly perceive some value from shorting as a very effective method of insuring the book and there's value to that insurance, etc. That's a very simple fundamental part of running a hedge fund. And there can be very strong disagreements as to how and when to short, for example. I would say that the way you have to go about

managing that is through constant and effective communication. There's really no shortcut to it.

Right. And that's part of what I was saying earlier. You have to bring everybody along, even if you have discretion. Right. You have to bring everybody along in terms of your thinking. Otherwise you have periods of discord and that discord tends to erupt at the worst possible time. Right. Discord is usually quiet in periods of prosperity. But as soon as you have

you know, something meaningful going on, the markets are erupting, you know, it's time to think clearly and to act. And now all of a sudden you have discord, that discord sort of erupts. So you have to sort of lay the groundwork in preventing that from happening in the first place. And that starts with clear alignment of philosophies and interests. And you have to maintain that over time. There's no

One way to do it. But if you're not thinking about that and if you're not managing for that, I think it'll eventually come back to haunt you. It's a necessary part of managing a business like this.

Well, I imagine it becomes even more important as well with a strategy like yours, which is highly concentrated. You know, analysts are paid generally based off of the amount of names they get in the book. And if there's less names in the book and getting a name in the book usually means it's a big position where there's going to be meaningful, you know, potential P&L attributable to it. It's a more serious thing than if you're a portfolio and you've got 200 names and they're all, you know, 100 BIPs or 50 BIPs or whatever is a big position.

I'm sure it gets compounded even by the concentration. - Yes. Well, one of the decisions that we took early on, and this goes back to the KG days, was not to pay analysts on the basis of getting names into the book. And it was a very conscious and intentional screening tool when we were hiring to tell people that, that they're not gonna be paid

for the names that they get into the book. Because I think that what that does from our perspective, when you're running a concentrated book is it creates a misalignment of interest as you quickly proceed. When we, for example, when we hire somebody, we just simply tell them, "You're not going to get paid based on if you get a name in the book or not. You may work here for years,

not get an idea on the books. And that's really not, you know, you'll get paid based on the success of our firm and your contribution to our research and our process. Kevin, our director of research, who's been with us since 2013, you know, originally as an analyst and eventually he became our most senior analyst and director of research. We used to joke that he never got any ideas on the books.

he was a very effective analyst um and he played that role very well and he was crucial in in thinking through our ideas and doing our research and understanding you know the landscape and what makes sense and broadening out our our research you know to other areas um and being the expert in the names that we we cover or many of the names that we um you know obviously over time

He has contributed ideas, but it was the better part of the decade before he really did. And it was always a joke, but it wasn't intended to be hurtful. It was just the reality of how we ran things.

So, yeah, I think that that's one of the things that people really do need to think about when building a team is how they're being incentivized. Right. I mean, I think, you know, it's probably Charlie Munger is probably the one who says it best or most often, you know, show, you know, tell me what a man's incentives are and I'll tell you what he does.

And that's just the reality. So you have to make sure that you've set your incentives properly and aligned with your goal. And as you point out for us, we're concentrated and it's very difficult to get names can live in our book for a very long time. It's very difficult to get a new name on the book. So you have to have people who understand that.

and aren't being driven from the type of ego that requires them to have ownership of an idea.

But I guess then what are the types of things that add value for you as a portfolio manager if it's not new ideas? Is it the type of adding conviction so that you can size things up and feel comfortable dealing with the volatility that comes with having a position that's 20, 25% of the book? What is it that an analyst can add to you as a portfolio manager if it's not new names? I would put it this way. It's continuous research.

and being able to, you know, it's not like if you're studying a company, let's say, you know, I'm just picking on a random company, let's say like an app. There's very little that you're going to learn that isn't already understood by a broad community of analysts. What you're really looking for is

You know, a continuous process that gives you a full understanding of where the company has been, how they've made decisions over time and what implications that has more broadly to partners of Apple. Right. To suppliers of Apple, you know, you know, maybe getting off Apple for a second. You know, we have a big sort of over time we've been exposed to the financial sector.

And there have been lots of changes in the financial sector, especially since 2008, 9, the great financial crisis. There's been a ton of legislation. There's been new government agencies put in place, regulations that have broad implications. You really need to understand kind of, as Gretzky says, right, where the puck is going.

And it's that sort of combination of, okay, you know your names really well and you have a very clear and a reasoned opinion as to how change is happening within your industry.

and where things are going and how that affects different players and who's maybe being overlooked as a result and why. That kind of sort of continuous approach to research is really what we aim for. And I think that, you know, that gives you sort of insights that maybe other people don't have. And they're insights that are built over

you know, "Oh, we've seen this sort of thing before. There's something to learn here. It may not be directly applicable, but there's an analogy here that seems to make a lot of sense. We should explore that further."

And it's really directing your attention to where you should be looking. And that's really the main emphasis, I think, for us. And that's really what we value on the research side. We want to see people who are able to sort of stick with their research and gain insights that are

pretty big in nature. And then you can sort of dig through some of the smaller opportunities or I would say more specific opportunities that amount from that bigger picture view. I believe you're generalist. Financials, comms, technology are the sandboxes you've played in the most. Obviously, with the benefit of hindsight, that seems like it's been a pretty good

pretty good set of sandboxes to play in over the last 10, 15 years. How do you decide as a generalist where you're going to focus your efforts into specific sectors and subsectors? Is it just that research process? Are you paying attention to what is working in the market? Let me sort of backtrack, for example, and maybe give you a little history and that maybe informs the question of

because it's a very good question. So, for example, when we launched in 2008, you know, that was the financial crisis. It was Dodd-Frank. You know, there was a lot of regulation and, you know, banks, you know, especially balance sheet heavy financials were really the ground zero for everything that was going on in the market at the time. Right.

So there was a lot of confusion and change, and especially with balance sheet heavy companies, there was a lot of discord. And so that's where we focused our initial attention. What started to become clear to us was that the balance sheets of these companies were going to be impaired for quite a while.

And there were opportunities to find ideas in companies whose balance sheet whose balance sheets actually hadn't been damaged for one reason or another, but were in, you know, they were too close to ground zero. And so the market just brought their valuations down, you know, it's kind of fire ready aim in that regard, right. And so there were a lot of opportunities there. But

brought more broadly, what we started to perceive was, you know, technology was having a real impact on the financial sector, particularly in areas like payments, right? Where

there were we were just changing the nature of how we we paid for goods and so we spent a lot of time pulling on that string because again those names were brought down by their proximity to financials right payments was you know obviously very close to financials um but they weren't balance sheet companies their balance sheets weren't impaired um there was regulation all throughout dodd-frank things like the durbin amendment which

um you know uh affected broad swaths of the payments industry you know so as you start pulling on that string you start to get more into sort of the services and software layer as it affects financials and then you start to you know run headlong into some of the what i would call the the funnel you know the aggregators right the googles of the world you know the medicine um

And so in order to understand what's going on in one area, you have to focus your attention on the technology side of things. For us, payments has always been an interesting one because it's where financials, which is a very heavily regulated, very old industry, where it dovetails with technology and technology is obviously move fast and break things.

And it's the, you know, where these things kind of start to intertwine is where it gets really interesting because, you know, from one perspective, the technology guys, they don't appreciate how thick and heavy the regulation is and how entrenched it is and how crucial it is to our society in a lot of ways and how it's just in many ways not going away.

And then on the other side, you have the old school financial community, which really doesn't appreciate how important the technology is and how quickly change is happening. So it creates a lot of discord in the markets, and that's where things can get really interesting. So you have to sort of pull all these things together. And then over time, that evolves into sort of other trends, right?

you know, as you start looking at, you know, a lot of the technology players, you know, you inevitably end up in media and communication services, right? Because ultimately they impact, you know,

you know Google becomes YouTube right and so that impacts you know your viewing um and then at the same time you know how do you get these services right you have to there's a pipe that you know basically comes into your house whether it's you know you know in the ground or over the airwaves right either way you have to be familiar with how you're getting these services so that's kind of the evolution and from our perspective as I mentioned earlier it's the continuous research

that we want to have so that we get this sort of perspective on a broader landscape and how things are going. So there might be like a central node where this is ground zero for everything that's happening in the market. And then you go out, it branches out, you kind of have a mini node. And then from there, you start to branch out. And before you know it, you've found a bunch of different sectors that maybe have some correlation, but are not entirely correlated in

It starts to look like a portfolio almost. Yes. So what you sort of find, I think, is that the ideas lead you from one place to another. How are these...

companies correlated financially? I mean, ultimately, everything in the financial markets has some level of correlation, right? Because it's dealing with your money and you have alternatives. So if you invest in Bitcoin, you might not be investing in treasuries, right? How are these things truly related? What's the direct chain? Maybe three people in the world truly understand the direct

implications, but we all know that they're correlated because they all essentially are part of the same ocean of ideas. But yeah, that's basically it. You pull on the strings and you go from idea to idea and eventually it's like swimming through a cave or something. And then eventually you emerge and you're like, wow, I didn't know all of this was here.

And certainly you had to go through this little tiny tunnel, but the tunnel and this giant sort of expanse that you found yourself in maybe don't have all that much to do with one another. And you have to be flexible mentally enough to pursue the ideas as they present themselves, right? If you have too much of a preconceived view, I think it's dangerous because you end up sort of

turning a blind eye to changes, opportunities, and just where things are going in general. Yeah. So obviously, the industry has grown a lot towards the idea of very strict risk management, market neutral approach. They're extremely, extremely tedious about managing drawdown risk.

Your strategy is very different than that. Obviously, it's worked for you over time, but investor appetites still matter in terms of building 14B as business. So how do you deal with raising capital and getting your strategy out there in a world where people seem more and more focused on finding opportunities?

whether you call it uncorrelated or orthogonal or whatever, people are very hyper-focused on this idea of correlation and reducing drawdown. I can't talk to our exposures or our betas or our funds and such. But from a broad perspective, I would say what you're talking about from my perspective is

I look back to sort of when I first started, you know, the industry was far less institutionalized, right? It was much more of a, you know, hedge funds were sort of go anywhere, do anything type of investments, you know.

Mostly for wealthy individuals who were interested in getting outsized returns over time and they trusted their manager to sort of go out and find those things. Sometimes that would be beta and sometimes that would be the opposite of beta. And what they really wanted is for their manager to be flexible.

I think that as the industry has evolved, it's become much more of a box checking exercise for institutions, right? So they want, you know, their event driven guy and they want one guy who does merger arm and they want the best merger arm that they can find. Another guy that does, you know, maybe distressed investing and they want the best distressed investor that they can find. And, you know, I think that those strategies

Essentially, because of the amount of money going into hedge funds from institutions that really want to look at the world that way, it drives incentives to be far more rigid.

If you're a very good merger arb, you can be a multi-billion dollar merger arb. I don't know if merger arb is a strategy that warrants that today or has over the last 10 years. But just as an example, right, let's think of the incentives very simply. Like if I'm a billion dollar fund, for instance, right, and I have a 10% return, right, I have the same basic incentive fee.

That I would have a hundred million dollar fund, but I have a hundred percent return. Well, you tell me what's easier a 10% return or a hundred percent return, right? So the incentive is always to go for the larger pool of capital because you know You can certainly you can make way more money managing more money than you can Managing smaller pools of capital and that those large pools of capital or institutions and those institutions are rigid and

So and that's just the evolution of the industry over time. I still think there's a place for the small funds that do have a more opportunistic approach and really are trying to evolve

their exposures, I guess would be the term, over time to match the opportunity set. And that's really the only way to get outsized returns over time, right? If you're sticking to a very niche product, you can get a large asset base and you can be very, very good at that product. But eventually you're just beta to that asset class.

And you can do very well doing that. That's just, you know, frankly, not our approach. You know, I would die of boredom doing that. So it's not my DNA. Yeah. But I guess when you are speaking to people, are they thinking about you as if you think about an allocator's role?

book, their book, maybe that they've been told they need to have 50% in global stocks and 20% in some sort of fixed income investments, whether that's sovereign bonds, investment grade, whatever, and then another 30% in alternatives. When your returns look more equity-like, are they thinking about you in that alternatives bucket? Or are they thinking about you as maybe, hey, we're going to use this to replace some of that 50% to global stocks?

How do you fit in that sense? First of all, you know, there's large institutions and small institutions and large institutions tend to be very rigid. And the small institutions tend to want to have the discipline

that they see in the larger institutions, but they really don't want to be tied down the way the larger institutional framework requires. So for the smaller institutions, and I'm talking now family offices or smaller endowments and foundations, et cetera, there's always kind of, there seems to be always

yes, we can view you this way or we can view you that way. And they're trying to be more opportunistic within the framework that they lay out, right? So if you're talking about, I don't know, like a Texas teachers or something, that is a very rigid system. And so either you fit into this box or that box. And once you get into a box, you're in that box, you might be in that box for a decade, regardless of how you evolve.

And they may not view your evolution as a good thing, frankly. But if you're going after a smaller foundation or endowment or a family office, they tend to have flexibility in terms of bucketing you and they might shift your bucket. So we at times have been bucketed as long short and other times we've been bucketed as event driven, as other times we've been bucketed as equity alternative.

by the same group, let alone different groups. So I would say that a lot of these guys, they set up a framework, but then in their heads, they're thinking, I have to be opportunistic. And so they do sort of break their framework from time to time. And sometimes, you know, that's a good thing. And sometimes it's a bad thing. You know,

discipline is good if it keeps you on track and keeps you out of the pool hall. It's bad if you follow your peers marching into the sea. You have to have some level of flexibility. I think even the large institutions, they change their frameworks over time because they recognize, okay, we've marched too far into the ocean, for example, but

it takes them a much longer period of time, whereas the smaller institutions can be more nimble. So they oftentimes say that they're, you know, sort of, you know, they have a process and a box checking process, but then they're willing to break it when they see the opportunities, right? A lot of times, you know, it's just like in anything that we do, right? A lot of times we know what the answer is, but we can't necessarily articulate it.

right we can't explain what it is that we see or feel but we're convinced that there's something here or something is wrong or not right um and that's essentially where you know the institutions fall out as well and so that we tend to find that that if you have a compelling offering you know you can convince people as to what you're doing and they can find a place for you

You know, it's not the easiest thing. I think it is easier to run a very, you know, proper segmented business and just, you know, be the cream of the crop in terms of that particular niche. Well, you do have a sort of go anywhere mandate and you have strategies that fit into different buckets, but you're very good at quantifying them over time as well. How does that transparency, you know, in terms of

having good data on your exposures, having good data on your strategies make conversations easier with outliers. Yeah, no, it's a great point. Look, you have to bring people along. We had an investor once, pretty famous person. I'm not going to share the name, but he's a widely recognized investor and financial person.

And he said, you know, I like it when people challenge my ideas and I like it when I can't convince somebody that I'm right, because then maybe they've proved to me that I'm wrong. And so that

notion that you have to communicate effectively with the people you're working with and your investors are people you're working with, right? You have to view them as such, right? If you view yourself as investment god and you're going to take everybody along for the ride and you're going to be right in the end, first of all, you may not be right.

Okay. There's always the possibility, no matter how well researched you are and how well reasoned you are, there's always the possibility that things take a turn, whether within or outside of your thesis, right? That, that, you know, makes you wrong. So you have to be clear, I think, in expressing how you're going, right? That's why we try to tell people, okay,

Look, we bucket things in event driven. We try to explain what that means to us.

right? And how we're defining it and why we put certain names into that category. And people may say, well, this is how is this an event driven name? And we say, this is why we perceive it as event driven. And we tend to write lengthy letters, which I'm not sure that very many people get through. But the point is for them to understand what process we're applying and why we see it the way we see it, why we bucket it the way we bucket it. And so

I just think that that's the crucial aspect

of not only your communication, but also generating the kind of feedback that informs you as to, you know, am I looking at this in the right way? Right. Because a lot of times, you know, they always, you know, it's like, it's like, um, oftentimes the best criticisms come from people who were completely outside the industry. Right. And they say something to you that is, you know, so

clearly correct, but could not never have been said by somebody who's inside the industry because they're too clouded by their framework to really see outside of it and see what effects are taking, what's taking place outside of your purview.

So I think that being very clear with your investors is just another way to communicate and it's another way to get feedback and it's another way to inform yourself as to what it is that you're doing. I just think it's crucial.

I will say Institutional Investor did a survey of their readers on what content institutional investors want to read most. And they said written content, far and away dominated podcasts. So to all the institutional investors listening to this, thank you for helping to boost those stats for us. But they did say that they would prefer five-pagers. Five-pagers is what they want. You know, we failed them in that regard. You know, and...

I personally look if I was so smart that I could write all my ideas down in five pages, you know, I think that'd be amazing. But I personally can't. You know, I think that that it's a little bit of the difficulty. And once you get into institutional investors, right there, they're they're receiving

dozens, if not hundreds of letters from funds, some of which they're invested in and some of which they're not invested in and their sell side information, you know, they're just inundated with, you know, letters, opinions. I think it's easier to digest them when they're fairly short and pithy. And sometimes that's effective, I think, but

You know, again, we run a concentrated approach. So when we're talking about our ideas, it's oftentimes the nuance that really gives you the insight into why something will work or won't work. And it's hard to do that in five pages and really convince people that your contrarian view to things that the market is in essence wrong, right?

You know, I mean, you know, it's funny, you know, there are names out there that might have, you know, $10 billion, for example, of market cap. People don't realize that those names are covered by, you know, maybe, maybe 10 reasonably good, you know, sell side shops and

Nobody pays attention to those. So the coverage there, it's not by the main analyst, really. It's by a junior analyst. It's his first coverage assignment. And, you know, his boss isn't really necessarily paying attention to, you know, the 75th smallest software company, right? He's paying attention to Apple. And so even if this sell-side analyst has,

you know, great insight that doesn't necessarily make it into, you know, the reports. So at the end of the day, you might have only really, you know,

two or three sell-side shops that are really paying attention to a specific issue. And maybe there's, you know, 10 buy-side analysts that really truly cover this. So you're talking about like a dozen people institutionally, globally, that cover maybe a $10 billion business. There can be a lot that's missed.

um there can be a lot that's overlooked or or just it doesn't you know it might get mentioned but it's not really focused on and people don't really understand how important these things might be to like the evolution of a business and those are the things that you can pick up on but you can't pick up on that and say oh well look see the analysts miss this right people say well so who cares you know analysts miss things all the time does that matter and you really do have to i think

you know, have an expose as to why this matters and why this is important, why this is going to drive business value and why this is all missed. And I think that what people really just don't comprehend is yes, there's information, there's coverage, but it doesn't always flow through to investing dollars. You know, it's like, you know, what's the great line from, uh,

that movie, Usual Suspects, right? The devil's greatest trick. The greatest trick the devil ever pulled was convincing people he didn't exist. He didn't exist, right? And there's something sort of very similar going on in the financial market. And that's why people think, oh, the market is efficient, right? All the information is out there. And yet you have stocks that can go up regularly, 50, 70, 80% in two, three, four quarters, right?

How is a business worth 100% more this year than it was last year when sales improved by 5%? It doesn't really match. So it's like people believe in this efficient market and you look at all the evidence to the contrary and you have to ask yourself, is this what you mean by efficient?

Is this efficient? I'd like to personally thank the University of Chicago for all the great work they've done for investors throughout history. Don't get me started there.

You already did. I know what you mean, but we talked a little bit about touch points. So obviously your quarterly investor letters are the sort of cornerstone touch points that everybody has with potential investors, with their actual investors. What are the other touch points you have with...

your, your, both your current investors to, to bring them along for the ride, as you've been saying, and then also these potential investors. And, uh, you know, we are just coming out after, uh, you know, hedge fund week down in Miami just finished up. I know Chris, your, um, your business development guy was down there. So maybe we could talk a little bit about how you think about touch points with potential investors and conferences and things like that. In my previous days,

When we were KG, we spent a lot more time building up our investor base in marketing. Since then, we've been more concentrated with a smaller handful of investors.

And we run our business pretty leanly, so we're happy to run it that way. We always we're sort of looking for to broaden out our investor base. But the reality is that it's very important, especially from a small fund perspective, to have good investor alignment philosophically. And so the letters

Like you point out, if we wrote a five page letter, it would probably be more digestible to the market. It probably would be, and it would benefit our marketing. But I don't think it provides the type of alignment that I want. It doesn't tell people what I would want to know if I were in their shoes. That's my aim is to really provide that kind of information.

And so you're inevitably going to have a smaller pool of people to choose from, but that pool is going to be more convinced that your approach is sustainable or makes sense. Right. And so we've gone more towards the approach of let's make sure we're available to our clients, have a smaller pool of clients, maybe more concentration in our clients.

but be available to speak to them openly and for longer periods of time. I regularly get into conversations that last two hours with our clients. They probably don't want to hear all the things I have to say to them, to be honest.

I think that having that approach, it allows you to keep your clients for a longer period of time and have them be confident that if you're in a, you know, in a, you know, maybe we haven't had a lot of huge drawdowns, but we have had, you know, of course, periods of underperformance. And it's during those times, you know, they want to know, did you get hit with the dumbstick?

And I think what you want to do is you want to be available to them and explain to them what you're doing and why you're maybe going in a different direction than maybe is more broadly popular right now. And hopefully that gets rewarded. But that type of communication is more direct client on client. I personally like that.

But it's probably not the most effective for building out a large organization. I think if you want to build a large organization, you want, as you put it, more digestible, regular commentary. Unless you're a huge, you know, research organization, unless you're like a Bridgewater and you can write, you know, the daily observations and, you know.

No, I mean, one of the earlier fund managers I spoke to, they have multiple strategies, but they put out weekly research, quantitative research every week, essentially since, I don't know, 2016. Now they've got a library of like 500 pieces that they've put out. You know, that's a lot of work. And they're like, well, it only works for us because we're quants. Like that's what we do all day is do this research. Like if we were a different fund, we couldn't do this thing.

So it does matter the alignment with the strategy and the content you put out because just pumping stuff out there for the sake of putting things out, people are smart, especially people who are considering writing multi-million dollar checks. They generally have a few brain cells to rub together and they'll be able to tell if it's fluff or whether it's actually value add. Yeah. Well, and also, as you point out, that from a quant perspective, that may work, right? We...

we engage more in analysis with specific companies, right? And so I don't have what I would consider to be great new insights every day. Our research might focus on something, you know,

very esoteric, like, you know, the tax, you know, the tax structure of Bitcoin and how that affects payments companies. You know, a lot of it is really not it's building, right? It's little blocks like things you don't you don't understand about something. And you'll research that. How does that help you in a broad, you know, in communicating to a broad client base? I frankly think it's just too esoteric, right? It just just

you know, nobody really wants to nuances of accounting or tax law. You'd be, you'd be amazed. You would be amazed. Well, Ilya, thank you so much for doing this. It's been a pleasure. Looking forward to having you on again soon as the business grows and we have new updates to give on 14B. Thank you, Max. Appreciate you having us. I really enjoyed the conversation.