How Hedge Funds Have Managed Market Turmoil with Jack and Max
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Hello, everyone. Welcome to this special edition of Other People's Money. I am joined by my friend and business partner, Jack Farley. Jack, thank you so much for doing this today.

Great to be here, Max. Normally, when it's you and me, we're spouting opinions about tariff this, tariff that. But today, I want to ask you everything about what's going on in the institutional investor world, hedge funds. You know, Max, we know the S&P is down so-and-so quarter-to-date, year-to-date. We know what bonds have done, gold has done. What about hedge funds? Has hedge funds, have they blown up? Have they weathered the storm? Give us a picture based off of what you've been reading.

Yeah, it's very interesting. And it's one of those things that the data is like pretty disjointed. So it all depends on where you go. There are a couple of data providers for hedge funds that have indices. You don't quite get all of the constituents unless you pay, you know, their customers are generally like pension funds, large institutional investors, the types of people who are shopping around for hedge funds. So if you can imagine access to data on these funds can be quite expensive.

With that being said, there are some interesting reports that they put out. And Sitco, who is one of the largest fund administrators in the world, they put out a report. It actually just came out today. That was their Q1 report. So it doesn't quite get us through April. We have some other data. We'll get to April. But just looking at the first quarter of the year, hedge funds did very well. The median return for hedge funds through the first quarter of the year was 0.6%.

Obviously, that beats the major equity market indices, whatever you're looking at. It didn't quite keep up with like gold, but they produced a positive return. When you look at the weighted average and you say, what about if we weight this by the amount of money that these funds actually have? That number goes up to 2.8%.

So one of the most interesting trends in hedge funds, and if you're on Twitter and you're in the sort of like thin twit talking about fund space, there's a lot of smaller managers out there and they love to lament the big guys and say, you know, my strategy that lets me play in these smaller markets, that lets me trade securities that these big guys can't trade. That gives me an advantage. Well,

In many ways, that is true, but it doesn't always bear itself out in the data. And Q1 was certainly one of the periods where it did not bear itself out in the data. And the weighted average return was actually 2.8%.

And Sitco breaks it down nicely actually by sort of AUM bands. And it follows pretty much straight down the line. So the median return for funds over $3 billion was 2.3%. If you go for $1 billion to $3 billion, it's 1.6%. And if you go from $500 million to $1 billion, it's 0.6%. And then $200 million to $500 million drops down to 0.4%. And the sub-$200 million guys...

actually produced 0.5%, so slightly better than their slightly larger peers. But again, if you do it by weighted average of dollars, again, even within those bands, it gets even more dramatic. So in the $3 billion range, over $3 billion, if you do the weighted average return, it's 4.6%.

So within the large funds, the largest of the large drove the returns. And then actually $1 billion to $3 billion, it drops where the median return was slightly better. But again, it's 0.8%. So the outperformance by the largest hedge funds overwhelmingly shows that they perform better. And if you go down all the way to the smallest hedge funds and you weight it by dollars, they actually produce a negative return.

Everybody relative to equity market indices did pretty well. Now, that might be slightly different than if you're following hedge funds again on Twitter or you're reading these sort of like hedge fund letter aggregator sites. You might say, oh, man, we've seen a lot of letters with people who had pretty negative returns. And I would say that, you know, the.

the aggregators and then also just the commentary. Like we tend to skew equity focused. Most people who are not trading, uh, non equity asset classes professionally, like they just trade stocks. And so that's what they focus on. You're not looking at letters of commodity traders, uh,

or credit traders or mortgage traders if your portfolio is made up almost exclusively of stocks. And that's what drives the views and the clicks for a lot of these aggregator sites. And so that's where they skew. And so if you're saying, oh, the hedge funds got slammed this quarter, some of that has to do with the selection bias you have of who you're looking at. And then even within them,

you know, like the big equity hedge funds, like they all own the same names and different weights. They all have the same view on like why Google is a great stock. And so again, if you're reading hedge fund letters to look for ideas, you're skewing towards the smaller funds, the value funds. Maybe there are some growth funds, some growth tech funds that are playing in smaller names and you're surfacing new ideas, which is I think why people follow these hedge fund letters with the exception of like

the big managers where you're really more looking for their like macro commentary. Because a lot of times, even if it's an equity shop, there will be a sort of market commentary or macro commentary section. You're not interested in why Druck loves Google. You know why Druck loves Google because it's Google. It's a great company. So Max, I think

You, me, and many people watching have a view we probably inherited from Warren Buffett, where Warren Buffett's life, he grew up, and when he was younger, he was managing smaller amounts of money, and the investment opportunities were ample. He could invest in very small price securities, a handful of a million dollars, and have very, very good returns. Now he's...

His stock is over a trillion dollars and he's sitting on $300 billion in cash. He's struggling to deploy. He's gotten too big. He's had to deploy into things like Apple. And he says, I'm not finding the greatest opportunities anymore. And if I was managing smaller money, I could get 50% a year like I did back in the day. I think a lot of people and a lot of small managers say that, say this is where the opportunity is. And I actually agree with that. I think it's a good argument.

What you're saying, Max, is that the data for this quarter, first quarter, does not bear that out and that the largest fund actually performed the best, that actually the smaller funds performed the worst. And it was, you know, the Bobby Axelrods from billions that those were the funds that actually were driving the outperformance relative to the S&P, which, again, from January 1st to March 31st, the time in question was down 4%.

Well, everybody, I mean, all of the categories I looked at, at least on the median return, did well. So everybody, at least, you know, the majority of people did their job as hedge fund managers of protecting capital in volatile periods. But yes, what you're saying is true. And, you know, to the Warren Buffett point, like, just because...

Warren Buffett liked to play the smaller securities. It's not that he was buying these smaller companies and holding them like he is now. His average holding period was way shorter. He was trading. It's not just that he was buying smaller companies because there's more alpha there. He was also trading these securities, turning them over much more rapidly than he is today, obviously, where he's buying, in some cases, entire companies, and they're just becoming part of Berkshire. So-

It's not just the pool you're playing in. It's the strategy that you're, that you're using in that. Also, he only reported performance, I think once a year. So he didn't have like all of this stuff that we're dealing with now where you have a super volatile period, like March and April and everyone's like, well, how did you do? Um, I don't think he, he would take your money at that period in time. If, uh,

If you wanted to ask him questions about how he was doing, you know, year to date through March. So, you know, it's just a very different, a very different sort of world. But yes, again, the multi strategies, the pods. So according to Sitco, the weighted average return of multi strategies was 4.7%.

The next best category of weighted average return was global macro. Now, their weighted average return of 4.5% is much, much higher in both cases are higher than the median return. So showing that the biggest of the big did the best in those particular categories. And actually, the only strategy that they have broken out is event driven, which was down 2.8% with a weighted average return of negative 3.4%.

And so that usually, I mean, that's a lot of merger ARB funds. So if you could imagine you are as a merger ARB fund, you've got some merger that you think is going to go through the

The one of the securities trades at a discount to the price that the other company has said they're willing to pay. And that's known as the spread or the yield that you can get based off of how long it's going to take for that transaction to close. Well, those merger ARB spreads blew out when the market got more volatile.

They're often known for taking on like a lot of a lot of liquidity or a lot of leverage in these trades to try and like juice the yields. Like you could have something that, you know, it trades at a 5% discount to, you know, the price that this other company has said they're willing to pay.

And, you know, if it takes a year, it's maybe like not that attractive of a return. But if you're able to put a bunch of leverage on that and you have 100 percent confidence that that deal is going to close and you're going to get that 5 percent, you can lever that up and that can start to become attractive to investors. So a lot of leverage in those particular strategies. So in a period where people were degrossing and reducing leverage, you know, you're you're seeing event driven underperform.

But yeah, I mean, a lot of people are saying like, when is this death knell for pod shops going to come through? And yeah,

This was not the event that was going to be the death knell for pod shops. Some of that had to do with the fact that they actually like we had a pretty big down day in the market earlier in March, really before tariffs. Obviously, they were part of what was spooking the market and the new policies coming out of Trump. But it was not it was not Liberation Day, sort of post-Liberation Day volatility and a

And a lot of the pods actually kind of did their degrossing like in that period before we even got to April. And so looking forward now to April,

We don't have, obviously, the month and numbers yet as we record this on April 28th. But, you know, the preliminary data coming out of these funds is that they, you know, are doing OK. And so we didn't see even that Liberation Day event be the sort of knockout punch for POTS. Well, we don't we don't know. Right. So the data is as on March 31st, two days before Liberation.

Liberation Day, you're saying that the pods and the hedge funds outperformed the market for the first quarter of underperformance from January 1 to March 31. And what is your level of confidence that they have outperformed for April as well? I mean, is it knowable?

Yeah, it is relatively knowable. And when you say outperformed, I mean, it all depends. Like, you know, the market, I think the NASDAQ is now up on the month of April. It all depends on what you're looking at. But HFR is another data provider. They have the HFR hedge fund indices where they have the whole hedge fund industry indexed.

They also have different sub strategies indexed in their sort of mid April update that they gave. They have macro down 3.96%. So they did a, they did a mid April update. It came out on April 22nd and it had through April 15th. Um,

And, you know, their overall absolute return index was down 40, 42 bps. Event driven was down 89 bps. So this is for Q1 or April? This is for April, for the halfway through April. OK, so the macro index, so those funds that actually perform pretty well in the sitco data kind of actually underperformed a little bit through the beginning of April. But

equity hedge, market neutral strategies. Yeah. Equity market neutral through their mid-quarter update, which when you hear equity market neutral, think multi-strat. Why? Because that's a lot of what they do. I mean, they're increasingly layering in a lot of things. But market neutral stock trading is the core of what the multi-strats are known for. So they now have like

They have market neutral credit strategies, they have distress strategies, they have macro strategies. But if you think about the number of dollars, the amount of dollars that these large multi-strategy hedge funds are putting to work, I think it's still largely fundamental equity market neutral strategies. So the HFR equity market neutral index through April was up 11 bps. Stig Brodersen : So I'm sorry to be pathetic, but market neutral, that is technically one strategy, it's not multi-strategy.

Yes, it's not multi-strategy. You're saying it's like 50% to 60%. A lot of multi-strategy is market neutral. Yes, and also specifically when people are talking about the pods, that is the core of what they're talking about, which gets back to my point about people talk about hedge funds with this very broad sort of terminology. They say, oh, hedge funds are down or hedge funds is like even...

We're struggling here to articulate what even pod shops really are, but a lot of it is equity market neutral. Yeah. I think an aspect of at least some multi-strategy is relative value fixed income. That will be interesting to watch because of the blow up in the basis trade. Well, we don't know that there were blow ups in the basis trade. We just know that the spreads that the basis traders trade

was widened significantly in early April, particularly April 8th or April 9th. Both cash treasuries relative to futures, but also swap spreads relative to cash

cash bonds and futures. And that's an interesting thing. Like, was it China and Japan selling or was it, you know, Citadel with their incredibly levered fixed income portfolio? We just don't know. Relative value multi-strategy index was down 70 basis points through mid-April.

So, yes. And fixed income convertible arbitrage was down 79 basis points. Event-driven special situation. So, again, those sort of merger arb trades were also down. Not down as much as the NASDAQ, which was down 2.75% through this period.

And, you know, that is one of the things that happens with these funds that have very low exposures is that when you have like the Nasdaq bouncing like it has since April 15th, they don't have that beta to be able to participate, which is the reason that they're so focused on protecting against drawdown because they don't have the V shaped bounce and recovery that the rest of us who are just long all the time have.

And also, I want to caution people about the six-foot-tall man who drowned in the river that was, on average, five feet tall or five feet deep. Just because relative value was up 50 basis points, that could be most funds were up 1% and one fund got annihilated and was down 100%. There's a wide dispersion, so perhaps there's some allocators listening who

are either with their allocations have either radically outperformed or radically underperformed the median. So I say there are very few allocators, even the largest allocator in the world, Norhez, Norwegian Sovereign Wealth Fund, who is like perfectly allocated to all the hedge funds, you know?

Correct. And then, you know, even still the long volatility index, so the funds that are positioned to benefit from spikes in volatility, obviously they've done really well. Some of them are better than others at managing years like 2024. And so it's really easy to say, oh, look at how well long volatility performed this year and forget about volatility.

I mean, I was going through letters to see if there are any interesting letters at the beginning of this. I looked at one fund and I was like, wow, they're up 20% in Q1. It's a great Q1. And then you look back at the track record and it's just pretty poor over the long haul. So you do in these periods, you're going to have funds that have great long-term track records that were caught off guard by tariffs and long

You know, have have performed negatively, you know, year to date, and then you're going to have funds that over the long term, like are really mediocre, don't justify their fees whatsoever, and are up 20% this year, and they're going to be out banging, banging the drum, you know, on how great they are. And I'm not saying that long volatility is is one of those strategies at all.

But I do believe that when you have these periods of wide dispersion in performance, it's important to also zoom out on those periods of performance. I mean, and even like SEC rules around it, there's a marketing rule for hedge funds. Most hedge funds are restricted from marketing to the public because they're 506 rules.

506 B's. That's what most hedge funds are. But even still, when they market behind closed doors to people that they verified are accredited investors, the disclosures they give have to be accurate and complete. So it might be accurate that you were up 20% in Q1. But if you ignore the fact that your long-term performance is negative, then it's not complete.

And so there's a lot of rules around why you can't as a hedge fund manager just go be like, we just had the greatest month of all time and go market that performance when it's not reflective of your strategy's performance as a whole.

And earlier, Max, you hinted at the letters that people may be reading now. They tend to be from, I'll call them the value bros. And those value bros probably manage a few hundred million, maybe single digit billion dollars. But the real action in terms of the scale of the institutional hedge fund industry is in the large pod shops that manage, you know, 10, 20, 30, 40, 50 billion dollars. And that they, you know, their letters maybe are not

not as public, as accessible. And also, they're probably not writing about single stocks. They're much more quantitative and frankly boring to read, as well as more difficult to get. So that people's perception of the hedge fund industry might be a little bit skewed.

Totally what I'm saying. And growth. There are some growth guys out there that you can find their letters. But yeah, I don't think I've ever seen on Insider Monkey or BuySideDigest or any of the...

investor letter aggregators. Like I've never seen like a D.E. Shaw letter. They're not like D.E. Shaw's letter is out. Come read it. It's always like so-and-so value partners or so-and-so growth partners or something like that. And those are the letters that read well, that are good, good light reading before bed to go and find new stocks. If you are a retail or semi-retail investor, because that's what's going to make it into your portfolio. You're not going to be putting on like

You know, specific like curve, even if you were able to find like the great macro shop guys, like, are you going to be trading like, you know, the intricacies of the yield curves of like specific European countries in Eastern Europe? Like you're not. So even if they did do a write up on it, like, are you putting on that trade? So nobody's clicking on it. And then there's no reason for the websites to carry it.

which is why it doesn't make its way out there. And I'd also point out that trading is obviously its own skill. And having macro narratives that are correct is one thing. And generally, outsized performance, if you crush the market, your thesis is right and you trade the market right. But I'd like to say on Monetary Matters, my guests since January have generally seen things pretty clearly in terms of getting the macro right.

And I feel good about having served our listeners in that regard, my listeners in that regard. But I'd say probably there are people at Citadel who probably didn't get the macro right, but because they are such precise quantitative traders and risk managers, they have delivered performance to their investors and in a risk-adjusted way, satisfied their investors without getting the micro right. And also, someone could have listened to Monetary Matters and

had a macro thesis that was right and traded poorly. So trading is its own skill, and that's what hedge funds are. And Max, I think I'm a little bit skeptical. I think Ken Griffin of Citadel himself has said that we've reached peak pod shop. So I don't think that trillions of dollars can be in the pod shops, and they continue to develop superior risk-adjusted returns. But I think so far, comparing what I'm seeing in Q1, they have somewhat earned their reputation as able risk managers. Is that fair to say?

Yeah, and of course, like, we're having this conversation now after what has been an extremely volatile Q1 and an even more volatile April.

In January, the conversation about hedge funds was, why do they even deserve any money whatsoever? Because look how good the S&P 500 did. Look how good the NASDAQ did. Look how good Bitcoin did in 2024. Who needs these guys? You can just go buy assets and it's all hunky dory. Fair, but also hedge funds often have a beta of lower than one. And if the S&P, which has a beta of one, is down a lot,

of anything is going to outperform. Something that has a lower bid is going to outperform. Oh, of course. Of course. And again, that also comes back to like looking at one of the HFR indices, like there's the equity market neutral index and then there's the equity hedged index.

So, within equity hedge, I don't even know if you're 80% net long, are you hedged, are you long biased? Where do you categorize yourself and how do you end up in that bucket? To be equity market neutral, I think you have to have a pretty tight exposure around beta of zero to fall in that index. Within equity hedge, you could have funds that run 25 net, you could have funds that run 50 net, which is why...

You think like, oh, a fund is hedged, but it means different things depending upon the magnitude of the hedge and the exposure that you have. So it's...

It is an extremely difficult industry to keep track of unless you have all the data or you have a Bloomberg terminal and you have data providers like Prequin and HFR or whatever that are making it so that you can truly look at specific strategies and see how they perform. Because even the data that we get here in these indexes,

I don't know who all the constituents are. It's hard to say. At least with CITCO, we can say, okay, well, these are funds that use CITCO as their administrator, which is a lot of major funds.

And Max, I'll say, even as people who don't have a Bloomberg terminal now, but used to, I think a lot of data, even if you're paying $25,000 a year for a Bloomberg terminal, you can't just get it. You have to also subscribe to the data on top of it. So it's more expensive than just a Bloomberg terminal. And also, you have to have these enterprise subscriptions to

Prequin or Eureka Head, Barkley, something as well. And we try and subscribe to what we can. And also, as a media company, we get a lot of things for free, which is a bonus. But yeah, I totally agree. Very hard to keep track of.

Yeah. And but Bloomberg is getting better. Like they have increasingly been trying to get hedge funds to report their performance to Bloomberg. And so you do you are starting to see like, again, in January, when people were kind of like dunking on the hedge funds as being like terrible and like, why would they why would you ever pay them the fees that they do? Like a lot of the screenshots that were going around were actually Bloomberg screenshots of all of the top multi-manager funds. Yeah, but I think that was from Bloomberg News that, you know, cost $40 a month.

No, but you can get hedge fund. I used to work at a fund and we had a Bloomberg ticker. And if you had a regular Bloomberg subscription, you could put in the ticker and you would get the monthly returns in the tear sheet. So Bloomberg is increasingly tracking private fund performance and making it accessible to their core data customers. Got it. Max, one thing we haven't talked about is private equity.

Obviously, the big news has been Yale and then Harvard announcing that they're selling their private equity stakes. Yeah, Yale has sold $6 billion. Harvard, as we record, is rumored to be selling. It's announced it may sell. So I don't think Harvard has actually signed over and received the money. But yeah, Yale has sold. And it's a strange confluence of, number one, uncertainty from tariffs.

Number two is the Trump administration is actively going after the tax exempt status of these universities. And, you know, I'm not going to say that, like, if Harvard, they have 50 billion dollars that they need grants from the U.S. government to keep the lights on. Like that kind of makes sense to me. But just the reality is that they're under increased pressure. And then the third reason, Max, maybe the most important reason was pointed out to me by I forget his name, but he's very smart.

person on Twitter that they're using those two first two reasons as an excuse to sell because they were drastically overweight private equity. And now they finally have the headline to give them a justification for what they already wanted to do.

Yeah. And look, private equity is not going the way of the dodo just because Yale is choosing to like sell some of it. And so these things are like there are important relationships here. And, you know, Yale is not going to come out and be like, yeah, it's the top guys we're selling. Oh, we're doing it for, you know, we're losing these grants. We're potentially worried about our tax exempt status because that's the other side to like the amount of the university's budget that is funded by grants and also funded by.

Funded by the endowments. One of the factors you didn't mention, Jack, is that they're not getting distributions. So they're selling in the secondary market. Like these are LP stakes that they are selling in the secondary market. And the private equity fund gets to raise a new fund to invest in the secondaries.

Yes, yes, that is something that's happening too. Look, increasingly, they're doing other things. A friend of mine who's a lawyer who does a lot of ESOP plans actually sent me some stuff about the guy who's the head of the ESOP organization. He's like, I'm all for private equity doing more employee ownership. But to call them ESOPs is crazy because ESOPs, when you leave a company,

You get your money. It's yours. They have to, the company has to provide liquidity to the employee. In cash, not stock. In cash. Yes, in cash because there is no stock. It's, you know, it's a private company. And so they have to, they have to,

They have to provide that liquidity. And so now you have these private equity guys who there's no IPOs. They've kind of already like bought and sold everything between each other that they possibly could. There's for the first time ever not new money coming in to raise new funds to go sell your stuff from your existing fund to your new fund. And so who's left? Well, the employees. Right. And so they're like, oh, it's great. We're, you know, look at how great ESOPs are. We're democratizing financial act. That's two alternatives. Yeah. Yeah.

Yes, totally. So the combination of like, you know, retail through the private wealth channels getting access. I mean, I know you've talked about, um,

private equity and private credit coming to ETFs. But there's also more like private employee stuff. And so just like the head of the ESOP organization came out and he's like, I'm all for employees participating. And if it's not exactly an ESOP, I'm not saying that isn't a good thing, but to call it an ESOP is you're horning in on our thing here that has very specific definitions and very specific benefits. It, you know, they're not, it's not reliant on the, on the private equity company selling the, um,

selling the company for you to get your liquidity. And so, you know, there are a lot of things that signal, whether it's Yale, whether it's the increased focus on private wealth channels, turning towards employees being the buyers of these companies or at least providing some amount of liquidity that signals we might be closer to the top in private equity than we are in the bottom, at least locally.

Yeah. And I'm not a specialist in the private markets at all. But I do think that you see very advanced institutional investors selling a little bit, trimming, trimming. You see a desire to get new money in from less wealthy and perhaps less sophisticated people, the retail wealth channel. And I think...

The question is, oh, Jack, do you like private equity? It's like saying, do you like stocks? Are we talking about buying Meta in 2022? Or are we talking about buying some horrible company in 2021 that's probably down over 90%? It depends on the asset class. One of Carlisle's most successful deals was buying out Gulfstream. Very, very successful deal. Yeah, in that case, I like private equity.

Are we talking about having a roll-up where we're rolling together all the gas stations in Boise, Idaho, and then that's suddenly a business? Maybe I'm a little bit less excited about that. I don't really know, but I just know there's a lot of money has flown in

flooded into this asset class. And I think that in the public markets, we're seeing a lot of dispersion. In the private markets, we are not seeing that dispersion because these things don't trade. That doesn't mean that the dispersion isn't there.

Yeah. And to your point, actually, like some of the most sophisticated LPs, like people who've been who've been doing private equity for a long time are increasingly doing like single deal specific SPVs where you go out. There's a company that's a target and you go talk to people and you do an SPV specifically for that deal because they don't want access to they don't want exposure to the entire company.

a new vintage fund of ideas. They know that overall, that's going to be diluted, that there are a couple of great deals that are in there that are going to carry the performance overall, and they feel like they can do diligence to those deals directly. And so a lot of the

A lot of the smartest LPs are not buying the new vintage funds. I think that's called co-invest, and I think it's getting increasingly popular. Yeah, yeah, co-investment. So, yeah, you know, it's not something that I track as much because it's harder to track. But, yeah, a lot of interesting things happening there. For sure. Max, anything else on the other people's money front before we talk a little macro just for fun?

We had an interesting podcast that came out with Matt Josav of Trivalli Capital. That was the last episode we had. They're a mortgage-focused fund manager that just launched. They got pretty solid institutional backing from the Raptor Group and Seaport Global Securities. Raptor Group is Jim Pallotta. So he owns AS Roma. He was an owner of the Boston Celtics. I think he

I don't know if he still owns the Celtics or whether he sold that, but they're serious hedge fund seeders. And for people who are listening to this, who are in the business, who are thinking, God, I would love to get a seed investment from Raptor or Seaport. I think it's really interesting to listen to because this gets back to the size thing that we were talking about. And I'm somewhat talking out of school here because I'm not Raptor. I'm not Seaport. I don't know.

But if I were putting myself in their shoes and I had a choice between backing somebody's capacity constrained small cap equity strategy that they've told us they're going to close at 500 million or a mortgage focused strategy, which could be.

you know, $10 billion, $20 billion and still be a tiny fish in the mortgage market that trades $250 billion a day, you know, from a venture perspective, because these seed backers, they're not just giving you money. They're also getting, you know, generally a piece of the GP economics as well in the fund. So they're like venture capital that's coming in. They're giving you money to invest so that you can build a track record. But they're also saying, you know, because we're doing that,

We want some of the economics of the overall GP. And so, you know, you should be thinking about if you really want to have a seed investor, like how are you going to bring something to these seeders that has an attractive trajectory if you do reach maturity and you are a successful fund?

And I don't think that that's something people focus on enough. They focus on like what they like. And as you said, we all kind of start out like hearing about Warren Buffett and this idea that if I had a million dollars today, I could make 50 percent a year. And, you know, there is some truth to that. But.

Funds are in a marketplace. They're a marketplace of financial products and strategies that you have to choose between. And it's not about what you like. It's about what the market will bear and what people are actually buying. And you can lament private equity. People did for a very, very long time lamented private equity, and they just continued to just hoover up assets.

And so, you know, I think all fund managers of which, you know, I don't count myself in that group, but I am a observer, a close observer of the industry. I think that that is one of the biases that I see probably the most. They focus on what they like and what they think they're good at rather than what is selling right now.

A slightly more cynical, but I think true, is that there is a difference between what will perform well over the next five and 10 years and what is popular now. And sometimes it can even be a contrarian indicator that they are adversely or negatively correlated. For example, I bet, you know, relative value.

mortgage strategies were quite popular in 2005. By the way, the people you interviewed, it's my understanding that a lot of their risk is about extension risk, reinvestment risk, less so on the credit risk. So not like a 2008 type scenario, but those extremely, oh, I'm going to be levered 10 to 1 and I'm going to invest in very,

very low quality subprime mortgages. That was quite a popular strategy in 2005. It obviously didn't end up well. Being a growth investor, investing in bubbly tech stocks was probably most popular right before the crash of the dot-com crash. And people were mocking Warren Buffett in 99 and mocking the value investors who also had an extraordinary performance

of 2000 to 2005. And I also think, Max, the value bias that a lot of the hedge funds kind of still have in terms of the people like reading the letters. And, you know, I think that that is because sort of the not it wasn't the real birth of the hedge fund industry. I think that goes back to Alfred Winslow Jones, who was like long short back in the late 50s, early 60s. But I think that that was really the birth of the modern hedge.

hedge fund, not George Soros, but of just people who got into the business and they just massively outperformed. And I think that it can be a little bit difficult for your perception if every day the market's down 1% and your portfolio is up 1%. And so I think maybe there's a little bit of some value hubris going back to those early days of 2000 to 2003 when the Nasdaq was down 1% every day and the value stocks went up 1% every day.

They update like these sort of like bibles of value investing like regularly. And you can find some of the original additions. Like if you go back to like the original edition of securities analysis back, I think it's from the thirties, like they're

they're talking about price ratios and it's not that price ratios can't be useful to you but you know they're saying like this price ratio is attractive and they're like single digit like price to dividend ratios you know and so if you were to take somebody who read that in 1933 or whenever um

security analysis first came out and you were to tell them about the multiples that people are paying today, like their head would explode. And so what is a value stock today? What people say, wow, that's trading so cheap relative to the market compared to what it was back then. Like we, we already, like the world is already so different than it was, you know, even 20 years ago. And, and we're following, you know, these treatises that are, uh,

in many cases, approaching 100 years old now. That doesn't mean they still don't have lots of value. That could be useful for managers, but

I do tend to think that you need to evolve what you're doing to the modern environment. I completely agree. I think like yours, Max, my investment philosophy is still informed by what I consider to be value of things, intrinsic value, buying things that are for less than their worth. But I

To me, value is buying something, a stock no one's ever heard of, and you're buying it at a dividend yield of over 20%, and no one's ever heard of it, and it's a good stock. But whereas I think a lot of value managers are like, oh, the S&P multiple is at 19, and this stock is...

has a multiple of 13, a price to earnings, and the stock is a much lower quality company than the average company in the S&P, to me, I don't think that is likely to work outside of macro periods where value does work, which is highly cyclical environments.

Yeah. And it's funny, though, like and you can even take people who like understand these things and have evolved their perspective on the market. Like, I think it was a couple a couple weeks ago when the China tariffs had come out. It was before we had had sort of the back off on it. And people were like, oh, man, this is going to crush Apple. Right. And.

The market, Apple hadn't really been hit that hard by it yet. Yeah, I was short Apple at pretty much the relative lows and covered at a loss. So, you know, got some nice taxable losses. So but I think that in a world where China tariffs are 125 percent and there's no exemptions,

I don't think that fundamentally is good for Apple, but I think that maybe that is such an adverse scenario for the entire world or maybe the U.S. market. And eventually the Trump administration will realize... Well, not realize, but I don't think the Trump administration and President Trump himself will be satisfied with that environment. So, I mean, there's just so much uncertainty. And I think that's... I don't know. I don't think the...

The lows are in and on a short term basis, I favor bonds over stocks. I also think that Max, we're recording on Monday, April 28th. The exemptions to the de minimis tariffs of if an item is less than $800 from China, you don't have to pay tariffs on it. And that has fueled the huge influx of cheap goods from Timu and Sheen. And if a woman wants to buy a dress for $5, she can do it.

and there's no tariffs on that. On Liberation Day, when President Trump signed, that all goes away on May 2nd. I mean, what is that? Thursday or Friday. So I think either President Trump will, I don't want to use the word cave, will reverse course on that and moderate, or I think the Pinduoduo and all these Chinese companies that are massive beneficiaries of that

are going to suffer massively. I'm struggling to see a third outcome of

Trump administration moderates or if the Pinduoduo suffers massively. I don't know. What do you think? You talked about it in your conversation about bank earnings. Uncertainty is the top word, I think, for earnings call transcripts right now. Nobody really knows. We are going to start to get the data starting towards the

the i think we'll get guidance people will be adjusting guidance for q2 towards the end of q2 here into into late june so you know we'll start to start to get some data on that you know i i'm not i'm not going to be able to play this guessing game i felt pretty confident that like he was going to do tariffs they were going to be serious and they were going to be greater than you know what the market was ready for and that was largely just based off of like

everybody being like, oh, trade wars are good. Haven't you heard? We changed our mind on that. Um,

sort of the first time, that was kind of the easy thing to predict. And now I don't have any edge in predicting the way policy is going to be shaped moving forward. Me neither. Also, people are speculating, did Japan sell? Did China sell? Well, I looked at the data from the Japan Ministry of Finance, or just Japan, but they are a huge investor in the US treasury market. They did sell. They sold a lot of US treasury bonds. I

One of the biggest selling weeks was from the Monday to the Friday with the Thursday with the Wednesday being the Liberation Day. So I guess it was ending on the week ending April 4th. There were a huge seller. There were huge seller of foreign bonds, which to me means U.S. bonds. Like I think a huge percentage or a large percentage of Japanese foreign holdings of Japanese holdings of foreign bonds is U.S. bonds. They did reallocate towards foreign equities, however, and

And they also drastically increased their foreign liabilities, which I don't really know what it means. I mean, I think that, you know, it would mean that they borrowed money in cash.

dollars or in euros. I think that is what that means. And that is effectively like shorting the dollar. So I haven't looked at the Chinese data at all, the European data at all. But I did, you know, a week ago, wake up quite early to look at the Japanese flows. And yeah, I think there is some early evidence that this narrative of the foreigners are selling the treasuries

I don't know if it's just a narrative. I'm seeing some corroboration of that in the data, but it's also, it's not like President Xi is calling the People's Bank of China and asking them to dump. The Japanese flows was entirely from the private sector.

Not the Bank of Japan. Entirely private. Which honestly is more alarming because I think if it's in the government, it can be contained on political will. If it's in the private sector, you can't control the 20,000 institutional investors in Tokyo. You can't control them. Who knew the bond vigilantes were Japanese the whole time? Yes.

No, but going back to like it does remind me of one of the trends that we didn't talk about from the hedge fund letters and data that I was looking at, which is, you know, some of the sites that track letters, they also will take like what was the quarterly performance of the fund. BuySide Digest is one that I like that has this.

You can actually sort by the year to date and quarter to date performance. And then on the right, they have like what are the main tickers that were mentioned? And so you can even like follow tickers if you want. But they, you know, a lot of the top funds actually had a lot of Japanese tickers in them. And so like the funds that are up on the year tended to be have more non-U.S. exposure.

precious metals exposure, specifically Japanese exposure. Yeah. And Max, I'm glad that we had the very true and balanced take that, okay, actually multi-strategy funds have so far appeared to weather it well in aggregate and the hedge fund industry in general. But I will say, you know, we'd be remiss if we didn't mention there are a few instances of, you know,

some quite large losses in the market turmoil. For example, oil trader Pierre Onderon, his fund is down 52% year to date. There's a quantitative trend following fund out of, I believe, it's Systematica Investments was down 18.8% year to date. So just as I'm sure there's a lot of retail investors who are down a lot of money, a lot of long only funds, there are some hedge funds that have quite large losses. But I think

In aggregate, the hedge fund industry has so far weathered the storm well. Yes? Yes. And notice trend. Trend and momentum are not the same thing because momentum is looking at performance relative, I think, to other assets, whereas trend is to itself. How is the asset doing relative to itself, whereas momentum is how is it doing relative to other things? But they are similar, and it's like momentum strategies did poorly.

Trend strategies did poorly. People who took big directional bets, like unless they were short sellers, like whatever these types of events happen, you start to see articles. The articles are, it's a barbell. Like the article is either about how XYZ hedge fund manager who's worth billions of dollars is even richer than yesterday. Or they're about how this hedge fund manager is down 20%. And aren't we all so glad that they are human too? And so,

So I think it's super important for anybody who is judging hedge funds or especially if you're thinking about investing in them, zoom out, look at how these things do across regimes, across different periods. Look at the months. If you could find an energy trader and then go back to months where oil was down 10%,

And then the fund was only down like 2%. Like that's to me when I'm looking at funds to say like, who's an interesting manager to bring on OPM? Those are the things that I'm looking at usually to say, hmm, there's something more to this person than just they have beta to a particular theme or a particular asset class that is doing well right now. Are they able to produce returns effectively?

through different types of environments. That doesn't mean you can't take a drawdown or anything like that, like when the market is volatile. I just want to say I'm not endorsing anybody who I bring on, but I do like to try and find people that the reason why they exist is

is clear that they do something interesting. They have made money, whether it's for more recently or if it's over the long run, because there's so many funds out there, so many managers, where the only real question anybody has is, how the hell do you still have any clients?

And as much as I would love to bring on those people and interview them and ask that question, it's not a very good way to build a podcast or to get compliance at hedge funds to approve. If I say, oh, look at this interview I did with XYZ manager. And I'm like, yeah, so your returns, they really suck. Although Max, the views would be there, I think. Because they must and they must be master marketers as well. So probably interesting to interview. Yeah.

Yeah. And yes, they certainly are. But also part of it is that, you know, there used to be a saying like in the wealth management industry is like nobody ever got fired for buying IBM. Right. Or or and the same thing is true for like if you were in like I.T. and like you were choosing like what tech stack you're you're using.

company was going to be on. Nobody in procurement ever got fired for choosing IBM to be the computer provider of your corporation. And the same thing is true in funds. If you go take a bet that everybody else is taking and you're wrong, you're with the field, you're with the pack. But if you go take a bet on a two-year-old manager who has no track record and

they don't quite have institutional scale or service providers, you are probably, you know, you're taking some career risk. And on top of that, if it's a well-built institutional portfolio, even if that person is up 100% or 200% next year, it's probably going to be like almost unnoticeable in the like overall returns of the portfolio based off of how it's sized. So,

being wrong, taking a huge loss, having to explain that, pull your money. Everybody notices that. Making a great choice on an unknown fund manager, you're really not even getting that much benefit from it too as an allocator. And so that is, it really drives a lot of

of the flows and the investment. And so, you know, you as a, for aspiring fund managers, like you really do need to think about and ask yourself the question of,

What am I providing? How am I making it so that the person on the other end of this transaction is able to make the decision not to give money to Citadel, not to give more money to private equity or private credit where they don't have to worry about the volatility? If the choice is between you or them or zero fee Vanguard funds, you have to make that decision very easy for them. And that often means you're providing them something that they're not able to get

from those. And so that usually means, you know, not equity beta. Right. Well, Max, you know, we do have a, uh, fun consulting business that we've been pretty quiet about, but, uh, yeah, we, we do, we, we are in that, in that business as well. As people can tell you, you know, a lot about the hedge fund industry, but not in particular, um,

and what LPs are looking for. We'll just leave it there. I'll just leave my final macro thoughts is I think a lot of assets like gold and Bitcoin have done on a relative and absolute basis quite well. I think people should look at... It's the US dollar.

that has gone down against other currencies so like the gold gold priced in yen or in euro has also done really well but not quite as well so that's why gold price in dollars has done so phenomenally well and um yeah i don't know max i feel like betting on them betting on the market to collapse is almost always a very very stupid thing um but it just feels to me like with the vix uh at

and the short-term VIX futures, for example, at 24. And then within the past 30 days, we've had some insane moves of down 5%, down 6%, up 10%. It just feels to me like maybe the market is

pricing in the volatility markets, everything's going to be hunky dory and that might not be it. Normally my exposure to VIX related products is zero and perhaps for some sophisticated investors, it can be slightly negative, AKA shorting volatility, that normally works. But in this environment, I would be very cautious about shorting volatility.

And for sophisticated investors, it might be time to look at some hedging opportunities. But again, a lot of that depends on execution. I think gold could definitely short term have a correction. But if it is the People's Bank of China and Chinese retail institutional investors who are buying it, I don't know if that trend can stop. And then, yeah, I mean, my macro thesis continues to be basic.

of if Trump moderates severely on tariffs or if there are real substantial trade deals, then yeah, the stock market is not at all overvalued and probably will rally a lot. But if the Trump administration means business with tariffs, as I think it does, I think it could be a little bit of a bumpy ride. So just to share my macro thoughts closing. Max, give you the final word.

Yeah, I think I would have to agree with you that I think they mean business on tariffs. I mean, where the final line in the sand is, I don't necessarily know. And I do think that the market clearly has demonstrated that they want to be optimistic about tariffs. They wanted to be optimistic about tariffs coming into the announcement. They wanted to be optimistic about tariffs as they've backed off here. And so, yeah,

I think there will be some aspect of real data to come through that we're going to need for true downward movement here in China.

in stocks to say, hey, these tariffs are real and they're going to be bad because the desire to be optimistic about this is very clearly there. And that buy reflex is strong. Actually, I think hedge funds were net sellers. They degrossed a lot coming into this. And retail were the buyers. Retail stepped in strong through all of this and kept buying. And

So, you know, there is something to be said about like positionings kind of like already washed out for hedge funds.

Whereas for retail, it's not. So does that mean that there's going to be another flush for retail? I'm not necessarily sure. You know, hedge funds are increasingly looking at like alternative data sources. So maybe we'll start to see some things move through before earnings. But, you know, I would expect like Q2 earnings to be very, very important for where we end the year.

Yes. And also forward-looking measurements, which I normally don't pay too much attention to because they just are basically emotional tests of how are you feeling? Are you feeling like you're going to buy more? Feeling like you're going to... I normally don't put... But those have absolutely fallen off a cliff. Meanwhile, some hard data actually has pulled strong, but I think that's demand pulling forward because people are buying stuff in anticipation and trying to front run the tariff. So I think that it will make the data look artificially good. The hard data look artificially good for...

a few weeks, a month. But I think, you know, we're just we're seeing container volumes go down sharply. And also we're seeing, for example, you know, China to Australia freight pricing is going up, whereas pricing of Shanghai to New York or to L.A. is going down because, you know, who wants to ship and pay one hundred forty five percent tariff? No one. I was talking to a friend who they purchased a British car.

this month and they were talking to the salesman and he said this is like one of the best months he's ever had that people are definitely front running the tariffs with purchases specifically of high ticket items like automobiles. If that data for retail says that for April that will come out in early May if it's a great piece of data on the car data I think President Trump will say isn't this great our economy is already so strong even though it is kind of

guaranteeing that it will be in, you know, have an adverse effect later. So we shall see. No one knows. I do think with, you know, Max, an early in our conversation after liberation day, I pointed out that I was watching Fox news and the comments of

extremely strong among the Trump base support for President Trump's actions. And that would incentivize President Trump to not back down. I think you're seeing some moderation based on my read from amongst Trump's base of support for the tariffs, but still quite strong. So, you know, if tariffs are widely unpopular, you know, Trump is a populist. I do expect him to respond to the moment. But I don't think we're quite there yet. Yeah. All right, Jack, let's leave it there. Thank you so much.