The Investor Up 1000% With No Down Years | Chris Brown of Aristides Capital
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Hey, everyone. Jack Farley here. What you're about to hear is a brand new show here on the Monetary Matters Network called Other People's Money. Hosted by my friend and business partner, Max Weethy, Other People's Money is the premier podcast about the business side of the fund management industry. Do us a favor and search for Other People's Money with Max Weethy and subscribe to that podcast.

Before we get started, I just want to do a quick disclaimer. Nothing we say here is investment advice or marketing or advertising for Aristides or any of their funds or products. Hello, everyone. Welcome to another edition of Other People's Money. I am joined today by Chris Brown, the CIO and founder of Aristides Capital based in Louisville, Kentucky. Chris, thank you so much for being here today. Yeah, thanks for having me, Max. It's been a number of years and I know that your firm has grown quite a bit. I'm excited to discuss that growth.

But you've been around for a while. I know you founded the firm just after the great financial crisis and you had tremendous success. So I do want to take it back to sort of the founding of the firm and how you got into this industry, because it is a bit of a roundabout way. Yeah, it was it was pretty crazy. So I was actually a internal medicine doctor in the United States Air Force prior to launching the fund.

I guess I was kind of always a math and science kid growing up, but my dad was a chemical engineer, my mom was a stay-at-home mom, and kind of professions in finance were pretty invisible to me. Like, I didn't really understand that business school was even a thing until I showed up at undergrad, and I was like, "Who are these people? Oh, they're business students."

And so, yeah, I traded my first stock when I was 12. Loved the markets. When I was in medical school, it was kind of the dot-com boom. We had an investment club. I actually started a state-registered investment advisory firm that was also a commodity trading advisor during my second year of school. And

I thought about going into finance right then, but unfortunately I had an Air Force scholarship to school. So I asked them how they'd feel about me paying them back and dropping out of school. And they said, you can drop out of school, but then you're going to be a line officer in the Air Force for the next four years. And I said, no, thank you. So I finished my internal medicine residency at Wright Patterson Air Force Base in Dayton.

Stayed on there as the chief resident in internal medicine for a year and then three more years as the site clerkship director for internal medicine for Uniformed Services University, which was great. So many brilliant people there learned so much actually about evaluation and feedback and some things that have actually really been helpful in terms of helping to develop our staff.

And then in late 2000 or spring of 2007, I came across a backtestable database product from a company in Chicago, built my first quant strategy, started trading that real money with a very small portfolio. It was literally 9000 from me, 9000 from my dad. And we paid, I think, $2,800 for the software.

But we were doing about five trades a week with it and the results were just fantastic. And I knew that I knew this was something that I could do as a career for other people. So in July 1, 2008, when I got out of the military, launched a fund.

All right. And so you launched that fund. Was it just Friends and Family Capital at that time, or had you been able to take some of that success with the back test that you had been running? Or I guess not a back test, the real money trading that you've been doing. Yeah. Some of that real money trading that I've been doing since spring of '07 was really helpful actually. That kind of led to getting a couple of outside investors. It was mostly Friends and Family Money. We were super small. I mean,

most doctors don't have a great reputation for investment prowess. So like, you know, a lot of people were like, what on earth are you doing? But yeah, and literally we had to, it got to be like mid August and I still hadn't gotten quite to the $500,000 that you need to at that time to like start trading on your introduced account at Goldman.

And so I took out a $30,000 loan on one of my credit cards, cash advance, and to get us over the threshold so we could finally start trading August 15th of 2008. But I guess, yeah, I mean, it was friends and family, but our first really outside investor

was actually Andrew Tobias, who is the treasurer of the Democratic National Committee, has written a book on finance called The Only Investment Guide You'll Ever Need, which was a classic for a long time.

And Andy is phenomenal and a big adventurer. And at some point, he was like a celebrity spokesperson for an online brokerage back in the 90s. And so that's kind of how we met at first. It's like we had a pen pal him a few times, actually about like James O'Shaughnessy's work.

back then. And he let me manage a part of his retirement account in the late 90s, which I completely obliterated. Basically, the business I had in the late 90s was trying to predict the behavior of individual investors using variables from the options market and then basically doing the opposite of that.

Unfortunately, Andy wanted me to trade a KEO, which is like a kind of retirement account, but it was a very small account. It was like $15,000. And we were doing...

We were doing equity options on the S&P 500. And at the time, the commission on a $15,000 trade was something like $700. And so we just like we're lighting money on fire. And so when...

When it came time to launch my fund, I was like, Andy, if you're dumb enough to invest with me this time, I lost about $15,000 for you last time. In today's dollars, that's 30 grand. So I will happily waive the first $30,000 in management fee and performance allocation that I'd have otherwise been entitled to. And so Andy is...

the consummate adventurer and he went for it and it worked out really well and he has a nice blog. So we got some great word of mouth and some investors from that through the years. I would be remiss if I failed to mention that Andy actually helped us to

through a relationship, through a friend of his, made the initial introduction to a massive university endowment last year, which subsequently ended up investing with us. And so, yeah, I mean, really, Andy has been just extremely pivotal to our success for the years. So networking is important.

Yes, networking is important. It sounds like, Leo, I love to hear that he had a blog and that you were willing to go out there. And most funds are pretty reticent to say anything in public. And I know you obviously take compliance and regulation very seriously, but I think there's a lot of things that people believe that maybe just ain't so.

about being a hedge fund and what you can and can't say in public. So, you know, obviously early on, he put you on his blog. Did you have compliance concerns about that? No, I mean, you know, I mean, I wrote the compliance of the compliance issue there is like, really, you can't just be generally disseminating your material to investors, right? But, yeah,

Basically, we would have from time to time a really good trade idea and Andy would just share it with like, "Hey, my smart friend at the small hedge fund,

wasn't like, hey, you should go invest in this hedge fund. It was just like, here's this cool trade. One of them at the time was Blockbuster A shares versus B shares, for example, which got really out of line. Or we have a nice trade with Ford Convertible Preferred versus the Common. So just trades like that. And so I think people

people, you know, some people do those own trade, do their own trades. But I think also, like a lot of people are just looking, especially around that time, you know, that was maybe counterintuitively a fantastic time to launch a fund, because

you know, people in a bull market, I think if you're generally very satisfied with your investments, you're not going to try something new and different versus if the world is on fire and your portfolio is getting destroyed and someone else performed well through that period, then maybe you're more apt to say, all right, I will give this different thing and try. So really, I'd say like the financial crisis was great for us and that it was like a really

a good test of whether we could manage risk and generate alpha through a difficult time. And also it made people more willing to try something new. And as well, you know, obviously there were a bunch of hedge funds that made out like bandits and, and hedge funds themselves. Like we got a book from Michael Lewis that turned into a movie that, you know, I think probably has done more to you know, stamp a,

caricature of what a hedge fund is into like the mind of the general population really then like a true understanding of what hedge funds are or what they do and that's part of what this show is kind of about is to showcase there's a lot more to it but yeah I know what you mean I mean even on the financial media side like when things hit when the shit hits the fan that's when the clicks go up everybody starts to care a little bit more about their money when things are going haywire

So you had this great early investor who trusted you, but a lot of outside investors, they need to see a track record. You've been very fortunate to build a very long and strong track record. You're very quantitatively focused. I know that you do a ton of attribution. You have a great understanding of how you make your money and where it's coming from.

So I want to talk a little bit about building a track record and also like that a track record is more than just the monthly returns on the tear sheet. There's so much attribution and data and understanding of your strategies that for people, for more sophisticated investors that they want to see. Yeah, I think if I had my druggers or for other folks who are doing this, having

Having as much capital as you possibly can at launch or near launch is really helpful. I think people look at our track record kind of the first two, three years and they're like, well, you did really well, but your assets were quite small. I remember I think in 2011, I was at a kind of an allocator speed dating event and a guy from Michigan MERS was meeting with me and he's like,

Are your assets under management really only $14 million? And so there is that attitude out there. I would say for us, and I think this is true for a lot of smaller funds, the way that we

were able to really build a track record and to build a viable business, especially early on, was high net worth individual investors. When it's not people's own money that they're investing, when it's other people's money, they

especially when there's career risk involved. People tend to have a lot of check boxes and a lot of we want this and that and the other and things that are maybe not so feasible for a very small fund to be able to do versus high net worth individuals are basically like, yeah, I know this guy, I like this guy, I'll allocate to them or I'll invest with them. And also like

their friends are more willing to allocate and things like that. I remember, obviously an institution is pretty much always going to do their own work, right? But early on, we had one investor in the Midwest, I think we were only maybe five or six years in, who sent me an email. He's like, "I have decided to allocate your fund. Also CC are a few friends of mine who may

may want, maybe interested in as well. And it was, I don't know if you're old enough to remember the commercial when EF Hutton talks, people listen. But it was like this guy was like the EF Hutton of old Midwestern excellent investors, because like within three hours, I'd heard from all five of the people CC'd and like nearly all of them are still investors in our fund today. So, you know, high net worth individuals are like very sticky.

and they're very kind and they will refer their friends. And so building an asset base that way is a great way to start out. - Well, how do you get on that first person's initial radar? I mean, I worked at a small fund myself. I can't tell you how many times talking to the head of operations, like, so how do we get in front of these guys? And it's like, I don't know, like, do they, is there a club that they hang out at?

is there a conference that they go to? It's not like going down to iConnections or, you know, Miami Hedge Fund Week and all the allocators are there and everybody's in the same room. Like, how do you reach high net worth individuals? Yeah. So obviously, you know, it's nice if you're like Scott Besant and Soros is like, you're a smart guy. Here's 2 billion to launch your own fund. But I think obviously like most of us don't necessarily have that opportunity. And yeah,

So it, you know, for, for me, it's, it was like really a matter of, um, of personal connections. I found like meeting strangers at an event. I don't know. I mean, I'm a little on the spectrum, so I'm not like the most, uh, you know, the most, like my, I don't have like the overwhelming charisma to be like, you know, give me all your money. But, um, I feel like for the, you know, the folks who know you already kind of know what you're about. For example, um,

you know, one of, one of our early investors was my, you know, like two of my former flight commanders from the air force were like, yeah, I really like Chris. And like, there was a, a guy who is, uh, you know, one of our larger investors, who's, uh, um, uh, ICU doctor that I had worked with. Um, and he kind of knew he knew my work ethic and like, he just felt like, you know, this is a, this is a good chance to take. So, you know, really starting with,

with people that you know is good. And then, you know, you can kind of kindly suggest every once in a while. I don't do it more often than once a year or so. Like, hey, do you know anyone else who might be interested or who might benefit from my investment management? Or, you know, do you have any friends that are in not a great investment situation who might need some help? And people are very...

willing to refer their friends if they feel good about what you're doing and they don't feel like you're pushing them hard to do it. One other thing that I guess is important to mention, the databases that are out there are actually really important. I feel like the performance reporting databases, however many you can report to,

Believe it or not, we did have like a lot of strangers be like, hey, I found you on Eureka Hedge or I found, you know, like just whatever the database is.

And no one is, you know, no one's going to write a check because of a number that they see there, but they are, that's definitely something that some really savvy high net worth individuals will find you there. Well, the caveat to that is that if you filter by, you know, performance, you're showing up at the top of the list. So it's really helpful to be on those databases if you're doing well.

In general, I think that's a great point about fundraising is like, if you are not, you know, if you don't have a strong offer, you have to, you have to A, have a convincing, you know, consistent source of alpha, and then B, have recent performance in the top quartile, at least, even better top decile. And if you don't, it's really, really, really hard for small funds out there.

And so, I mean, I think that's, I think people know abstractly, like it is a difficult fundraising environment for small funds. But I mean, yeah, we absolutely have had friends and colleagues who've tried to make a go of it and haven't. And, you know, I get...

i get a lot of inquiries and i'm happy to talk to people who reach out on twitter or linkedin or wherever about starting a fund but i mean there's a lot of guys who want to start a fund because it's fun you know my i i always recommend to people like like especially the first three market wizards books are fantastic that whole series because it kind of shows you know like the

like what it takes in terms of strategy and psychology to run a fund. But if you, if you don't have, if you just want to do it because it's fun and cool and you don't have a consistent source of alpha, like it's starting a fund is probably not a great idea. Yeah. I mean, I've had conversations myself with people where you have to say like,

Look, looking at the track, I'm not saying you can't fit into somebody's portfolio somewhere. I just don't know. I don't have the answer to you, the silver bullet or golden arrow or whatever it is that's going to get you across the finish line. There might be somebody out there for you. There's somebody out there for everything.

But is it enough to sustain a business? But sustaining a business is like, I want to get into that. I mean, you talked about taking out like a $30,000 loan to be able to work with Goldman. Like what was the amount of investment that you had to make into the business over those early years before you hit a break even or even a profitable level at the management company? I mean, the reality, Max, is the...

this is the best business in the world, right? Like managing a long short fund or if people, you know, or someone will pay you one and a half and 20 to manage a long only fund, good for you. But like the gross margins are as close to 100% as can possibly be, right?

And so these days, I think the compliance costs and burdens are probably a little bit higher or considerably higher than they were. And that's probably more in terms of people and time than when I started. But like, honestly, like even your initial offering documents, you know, that cost can be capitalized and paid for by the fund investors. There is not a tremendous...

there's not a prohibitive outlay of expense upfront. And I mean, we went with like really good, you know, we went with like a top law firm. We decided to go with Satus and Goldberg. But I mean, obviously there's like a lot of cheaper fund formation options out there if you, if you need to use them. So I would say the cost is not,

Should not be discouraging to people. I mean, rather insanely. I mean, I just remember thinking like how weird society's priorities were that with less than a million dollars in assets under management, I was making more money than I had as an Air Force physician. Admittedly, like our performance was very good, but it was, you know, it's really not...

It's not super challenging. I mean, thank goodness. That's funny because my then wife, I've since been divorced, but my wife at the time was a hospitalist just before...

I launched the fund, but she was going to be taking some time off. And so, I mean, we were just like, yeah, I mean, I kind of just had confidence that things were going to work out. You know, it helps when you're doing something that's kind of partially quantitative and it's back testable and you've been real money trading it for a while and you know that it works. That gives you a lot of reassurance.

Okay. Well, it probably also helped that you didn't have like a 400K a year lifestyle and big city expenses and all of that that you have to keep up with. I think so many people who are jumping into the fund world have been working in banking or they've been a mid-level guy at a larger shop and it pays well and you can live a very expensive lifestyle off of that.

Yeah. That's a really important point too. If you're used to being like a, an air force doctor in Dayton, the lifestyle is very different. I remember we had a, we had a friend who was a long only manager of about a $300 million small cap portfolio. And I was like very excitedly one day I was like, Hari, I have this like cool strategy that I came up with. And just this one quant strategy, I think I can manage like 25 million with it. And Hari was like,

I was like, I was like, I don't understand. Like, why is this out there? Like, why is this anomaly still available? Like, it seems like this should have been, you know, competed away by the market. And Hari is like, well, well, firstly, like, nobody in their right mind is going to leave a good job on Wall Street to have a $25 million fund, which is very true. I feel like that's

One thing we've done incredibly well as a fund is you could almost think of it as like a very mini pod shop or like basically we're willing to take a lot of different strategies that you couldn't possibly run a fund with on their own because they're just too small or too capacity constrained for some of them. And as a firm, we have a saying that like some free money is better than no free money. And that's...

Like being willing to use those smaller strategies is kind of like free alpha that's sitting there if you're willing to take it.

well i think that's what a lot of um proprietary shops are kind of like known for and they're willing to you know give somebody a pretty small amount of a small amount of capital in the like sense of of the other people's money game um to to run these strategies and and they have they have pretty you know significant splits with those traders i think a lot of

A lot of proprietary traders, they get to take home half of whatever they make. And so if you're only able to run $20 million on it, but it's a good strategy, you can live off of that. Whereas if you have all the overhead and all the burden of running a fund, it's not quite as attractive.

But let's talk about developing those strategies and cultivating them, bringing them in. Obviously, there's the period when you're sort of more of a one man band to where you are today. Now you've over, I think, 10 employees. So let's maybe put those into two different buckets. Yeah, I think it's funny because I definitely know people who've been a one man shop like I was for a few years. And then it feels so good when you finally get someone to...

to help out with the administration and things like that. Um, so it's, you know, I don't know, I don't know if you know, uh, like Jacob Ma Weaver out at a cable car capital in San Francisco, but I think he's another good example of like someone who started, um, on his own and, and has gotten, you know, is used, has used his great track record to be able to, to get a little bigger, uh, and, and bring in some staff. Um, it feels great when you finally have the room to hire someone. And I did like, um,

All I can say is if you're very resource constrained and you have to do it on your own, you're basically going to be doing all the admin work when the markets close. You're going to be using extra hours. It's going to be really long hours. It's going to be like kind of doctor hours, like 90 or 100 hours a week. But the thing is, when you bring in a new investor and you're manually filling out all this paperwork for them,

Like you get to think about, all right, well, if I do well and this guy stays in the fund for X number of years, you know, here's the annuity stream that I'm going to get paid for that. And so, you know, on the one hand, like the paperwork is pretty brutal. But on the other hand, like you, you have this really tangible sense of reward for it. I think, you know, our first hire, we did, we hired

had one guy we heard briefly who didn't work out. But Daniel, who's my number two now, started in 2012, so four years after I launched the fund. Our model, which I know, I don't know, a lot of people would do things differently, but for a very small fund, it worked well, which was like, I'm going to bring someone in who can

do the paperwork, but who also has a great investment background. So if you find people who are young and talented and kind of very motivated and adventurous and don't need a huge salary, but realize the opportunities there and they want to here's a chance to have a career with a lot of growth and a lot of learning.

People are excited to do that. Ultimately, Daniel ended up hiring Andrew. Daniel was a senior and undergrad. Andrew was a freshman. So they kind of knew each other through the investment community at University of Kentucky. Kind of the same deal. You come in, be half-time, half-time ops, full-time investment. Obviously, you get to a certain point as a business where that is not the model that you want anymore. And the more you can afford...

to hire people to help you to be focused on the absolute highest value things you can do the better. So for us, I would say like probably our most transformational hire was actually not necessarily an ops person because we didn't have like a great ops person until mid this year.

Honestly, we've had ops people, but having a superstar ops person was something we finally sprang for 16 years into the business. The thing for us that was most helpful was in 2018, we hired Caleb, who has a master's of financial engineering from Berkeley, used to work in cybersecurity at Citi.

he was like a teenage hacking prodigy and is just like one of the best software developers and really good to work with too. Like just really dedicated to his job and has a great attitude. And so for us, like,

it helps so much because like you mentioned like oh we have a good handle on attribution and reporting and it's like all those internal things you know if you've got a good quant guy like you can do all of those things well and then you can also take your investment processes and really because i mean a lot of what we a lot of our success was based on all right if we find one opportunity here we want to keep coming back to it again and again and again

And like, there's only so much that three people looking at things manually can do. But like in 2024, if you've got a guy you can program well,

then you can have a lot of cool shit running in an automated way. So that was very transformational. And Caleb was so valuable to us that we hired a backup Caleb in 2023 because we're like, oh my gosh, if this guy goes on paternity leave, then

We can't do anything new. Well, it's the same thing with the strategy. You're going to keep putting money towards a strategy until it stops making more money. So one, Caleb, why not try two? Until the return diminishes, we'll probably hire more people.

yeah and then being able being able to hire like a very capable ops person who completely frees us up from the ops test like that's that's been a gift so i mean we we just got super lucky and that we had some turnover at the op spot and we're like we need to find an ops person again and then uh we found a guy who was uh

living in Louisville but had spent like eight years at Citadel, eight years at ICAP, six or seven years at DRW, which is a trading firm in Chicago, in huge leadership roles there and wasn't super happy in his last gig and had just decided to step down. And he was just coming out of his non-compete and then

you know lo and behold we're looking for an ops guy in Louisville and you know he couldn't believe that we existed and we were shocked that he was there and so it was just like such a great find and then one of his uh former uh colleagues got laid off and so we were able to bring her in as well and so now we have like the the backup great ops person um and so it's you know and we were able to

finally hire a dedicated investor relations person this year. I can't remember. I think it was Einhorn who like, I remember reading one of his investor letters one day where he

you know, he hired like some, some person with like a, uh, it was like a, a young 20 something with a liberal arts degree from a Midwestern, uh, liberal arts college. And I thought that is such a great idea. And so, um, so we hired an IR person who's like nearly fresh out of school, but is phenomenal at communicating. Um, and that's been, uh, that's worked out really well so far as well. And so when you're bringing on, you know, these superstars, is it, uh,

contractual points handshake you know we trust each other sort of thing how do you think about points as currency and obviously you know you're

you're in this business to make money yourself and retaining your own personal economics. So, um, you know, certainly as well when you're small, the ability to pay large salaries is just not there. So I'm sure it changes over time as, as the, I mean, well, honestly, I would say like, we still, you know, I don't know that we pay huge salaries to anyone. I mean, we've like paid our ops guy a pretty decent fixed amount of money to, to join us. But, um,

You know, I would say like the number one priority for us in hiring and also I'd say the candidates we hire is probably cultural fit. I think a lot of us, if not everyone, are kind of like on the spectrum more or less to some extent. We've got a lot of like very sincere people.

very strongly self-motivated people who just want space and autonomy, but also some professional development at the same time. And we just have like a really fun, collegial, open workplace. You know, like I think one of the things we learned at Ushas was like, at Uniformed Services University was this whole evaluation and feedback bit

To the extent that like my boss's boss who has like clinical education awards named after him, if you were out to dinner and the waitress poured the wine the wrong way, like he would be like, is it okay if I give you some feedback? And it was like, it was incredibly awkward, but yet, I mean, and so like we don't, you know, it's not like Bridgewater where we have like a cult, you know, but we,

we're like, we do have performance reviews every quarter that are 360 people, you know, and we, you know, we're very upfront about like, here's, here's the things you're doing well, here's the things you need to do better. And like, especially on investment process, we try to make it like not personal at all. Like if you think, if you think something is a shit idea because X, Y, and Z will be like, this is a shit idea because of this. And so, yeah,

and it's it's great you see people um you see people get better over time and like you know when i if if i've got like the largest short position ever in the history of my fund um i want my employees telling me like i don't like this position because such and such right and i may agree or disagree but like you sure as hell want people who will tell you

help identify the risks and the ways in which trades can go wrong. Right. So yeah, in terms of like, we're a little unusual in that we don't use a point system. We have internally a system that's basically based on trade credit. So every trade that we do,

we assign credit to whichever staff members are on that trade and we'll kind of like put it in the database. And so then at the end of the year, it's pretty easy to say like, all right, trades attributable to this person generated this much alpha and this much P and L. And so then at that point you,

you pay everyone who's not an investment person for the value that they created. And some of that is obviously intangible and a decision. And then you think about some of the ways in which people added extra value. So maybe they were really on top of news flow and helped other people keep up with their positions, or maybe they helped bring in extra capital to the firm or whatever. And then

And then after that, it's pretty, you know, not exactly 100% systematic, but it's pretty close. And so I'd say we pay people pretty aggressively.

We pay our service providers pretty aggressively. I mean, if a sell-side firm comes to us with a good trade, we're, you know, we're happy to pay like 20%. If someone comes to us with a quick hitting catalyst driven trade that does well, we're going to pay that sell-side firm like 20% of profits because, you know, we want, you know,

we want firms who come to us with solid ideas that are time sensitive. And, you know, it's, if you, you know, our, our number one reason for, I guess, giving up or not working with someone on the sell side anymore is that, you know, it's, it takes like 12 or 18 months sometimes for people to understand what we're looking for. And we just can't have people who give us,

50% of the time this idea kicks ass and 50% of the time it blows up in our face. Like just managing risk and knowing what you know is really important to us. And that's kind of important internally too. Like you have to know the things you know on a trade.

It's so easy to focus on the attribution aspect for marketing, but sometimes it's crazy to me talking to funds that are just not as focused on it. They're so focused on their investment process or whatever it is. And then you're like, "Okay, well, we're going over marketing materials or something like that." I'm like, "Well, do you have

attribution to these things. And, you know, I'm like, it's really important for allocators, but also for you, like you say that this is what you do well, right? Like, do you even know that? Do you know that this is what you do well or that this is where the money comes from? I mean, it's one thing like for the allocator conversation for them to know like, okay, well, you had a great 2021 and you say it's because you're a great stock picker, but it turns out it's because you took like a massive flyer on Bitcoin. One of our analysts came to us after, you know, his, his,

his fund that he was an analyst for made the unfortunate decision right before COVID to become long only instead of long short, which was just not great timing. That was his boss's decision. But one of his frustrations was like the year before he had absolutely killed it. And they're like, Hey, nice job. Here's an Apple watch. And you know, like, that's just not, that's not the way you compensate people for, for doing really well for you. So, um,

keeping your people happy is really important. And then to your point, like if you don't know what actually worked,

How do you know to do more of it? So like I have, I have literally only one note that I have posted on my computer and I have it taped to the top of my monitor. So I see it every day and it just says, do more of what works and less of what doesn't. But as you pointed out, like you have to know what works and what doesn't in order to apply that.

Yeah. And it's one of the hard things in this industry is like, you can kind of only know when you're wrong. Like even when you're right, like there could be a reason why the price moved. That's sort of like not why you thought it was like, you know, it, it's all, you're only able to know that you were wrong. Like you thought this was going to happen and it didn't. Well, clearly your reasoning was wrong, but even sometimes when something works and you make money, it's not for the same reason that you thought you would, you would have in the first place. Yeah.

And so the intellectual honesty of like, okay, we made money. How did we make money? Is it really the reasons that we thought we made money? And is it going to happen again? It's really important to sort of like do that rigorously and to be intellectually honest and with yourself. And I know intellectual honesty is something that you –

like definitely pride yourself in and also authenticity. You're not as much on Twitter anymore. But, you know, at Midwest Hedgie is a strong account with strong views on the world. And so, you know, I want to talk a little bit about that authenticity, being yourself and how that helps you connect with investors and sometimes how it takes investors away from you and how you deal with that.

For better or for worse, I've never shied away from saying how I feel about things. I think one of the gifts of being on the spectrum a little bit is you're not bound as much by social convention and you're not as worried about hurting other people's feelings or if they like you or not or whatever.

So I'm pretty blunt and I kind of, you know, I believe what I believe. And so, you know, one of the, that's funny, you know, obviously like I'm non-binary, I'm trans. And so like that, you know, we've, it's funny because we've had, even before I came out, like we had a lot of queer money in the fund, which is a little bit unusual. So, yeah.

Andy Tobias also, I didn't mention it earlier, but under a pseudonym, he had written this seminal book on growing up gay and closeted. I think it was called The Best Little Boy.

And so best little boy in the world. And so at one point early on, like we had like roughly like 30% of our money was like LGBTQ. And then kind of coincidentally, like early on, we had a,

like our first RIA that wanted to refer clients to us was a firm in Marin County, California, which kind of definitely I'd say most of the clients there lean pretty left. So my, I guess my politics were not, you know, not, not a hindrance to that. And I think people, people like to see that authenticity. And I think in the,

you know in the investment world i think you definitely have kind of like a dominance of right wing or center right voices um oftentimes um and so just or just people who are like hey i'm just gonna like you know uh i'm not i'm not gonna piss anybody off and i'm just gonna like go along with whatever and you know so it's interesting i mean it's an interesting balance when you're so outspoken on things i think people people have it in their head sometimes that like

you know, like, well, Chris hates Elon Musk, and that's why he's short Tesla. And like, you're letting your feelings dictate. And it's like, I don't, you know, I mean, I think everyone thinks like, oh, I don't, but it's hard. I don't know. Like, did I want Harris to win the election? Like 100%. Absolutely. But like, when that stupid Iowa poll came out, I went over to predict it.

and I took my entire predicted balance and I bought Trump at 43 cents because of, you know, it's like, this is insane. Like, you know, you people are clueless, like Bayes theorem, right? Like what are the odds that Harris is suddenly ahead in Iowa? They're like, versus the odds that you just did a bad poll. And so, you know, like realism is very important. As you said, like intellectual honesty or being, you know, being honest with yourself.

I like the authenticity angle, but I don't really have a choice. It's the thing that I have, so I'm going to take it as far as I can. Yeah, the authenticity is truly authentic in this case.

So, you mentioned that you got introduced to a large investor and before the call, you said you kind of have a fund of one set up for them. So, I want to talk about the demands for larger, more institutional investors, SMAs, fund of ones, whatever it is that the wrapper ends up being. It is kind of important to be flexible to take on that money and it's one of those things

things that there is no true right answer. I mean, I've had people on who said, don't take the big seed, build small, build with smaller investors. And I've had people like, yeah, you get the big check, you take it. It's great. You only have to work with one client. So there's two sides to the coin here. You've got a little bit of both going on. So what is different in terms of demand from a large endowment or a large investor? And then what does that wrap up? Having a large investor...

It's a little bit like a marriage. It is a large commitment. And I think it's important to recognize you are going to need things from this person or this entity, and they are going to expect things from you. And we have had...

You know, we have a large investor that didn't work out. We had another large investor that didn't work out just because they like their it was a fund of funds and their performance was just mediocre in three years and they got too small to be viable as a business. You know, like when I started this,

I was loathe to ever have a separately managed account or another vehicle or whatever. I was like, I am starting the only fund that I will ever personally need to invest in. It is going to be aligned 100% with my investors.

And then, and then, you know, then we had to start a 3C7 fund in 2014, but it was still like, I am going to invest pro rata in this. It's going to keep it as aligned as possible. And like, ultimately, eventually you meet someone who's like institutional needs are just a little bit different. And the question is like, are these guys worth changing our process for?

because to have a fund of one, and these guys actually have two funds of one, it is absolutely extra work. But on the other hand, they're like, we don't want you to make a fortune off of management fee, but to the extent that they're paying us pretty generously and close to full management fee. And we were able to use it to beef up a little bit.

I would say like the thing that was most important in deciding to go forward with this current relationship is getting to talk to some of the other funds that they were invested with. You know, John Hempton in particular was like, yeah, these, his, his guy was like, these guys are absolutely great to work with and they've helped us in these other ways when we needed help. And their demands are not unreasonable enough.

that was big. We're happy to accommodate someone's needs as long as it doesn't interfere with the obligations and duties we have to our existing investors otherwise. And so, you know, having a partner who is good in that regard is really important. I mean, there were countless times that I was offered

many different various shitty business situations that we said no to. We had people come to you all the time like, do you want first loss capital? Or we'll give you X amount of dollars for X percent of your business. We had a Silicon Valley firm or a West San Francisco firm is phenomenal at raising capital. Young people, Teal Fellows,

And they're like, we want to start a quant product adjacent to what we do. We know you guys can develop it for us.

we'll give you X percent of the economics. If it doesn't work out, you get to keep the economics from your existing firm. If it doesn't work out, you can de-merge. So we're like, okay, that sounds great. So they came up, they visited. I told Daniel, I think this person is a sociopath, but as

as long as we protect ourselves, I think I'm still okay. I would still be okay merging with these people, which was a mistake. I mean, I think that the moral story is do not ever under any circumstances

you know, get in a business relationship with someone that you don't feel great about and probably also don't do it with a 20 something. Sorry. But I turned 30, I turned 30 in less than a month. So I'm off that. Oh my gosh. Sorry, Max. So yeah.

But yeah, I mean, and that was that was totally bizarre because like Daniel started, we got we got pretty far along in the negotiations and then they just ghosted us like like ghosted, ghosted, like never heard from them again. And it's like, who does that? So, yeah, I would just like I think it is.

it is really draining to put a lot of resources into cultivating a relationship with someone who is not a good partner. And the stakes are every bit as high as interpersonal relations. So I think both internal in our hiring process and then external in terms of who we do business with,

We want to deal with very competent, well-intentioned nerds who are not out to fuck people over. It's like as simple as that. So. But not effective altruists?

Yeah, I gotcha. Well, you know, you mentioned like they don't want you to get rich off the management fee, but you were still able to use that. And like using your partner analogy, like I like to play tennis. It's really hard to play tennis in New York. It takes a lot of time. Like having, you know, I have to have that conversation with my partner. Like, hey, I need this time, like a couple times a week. I know that it means we're not going to be able to have dinner that night or whatever, but like I need this. I need to exercise. This is what

I love to do. It keeps me happy and healthy so that when we do spend time together, I'm not unhappy and feeling like crap. And so how does that conversation go where you're saying like, yeah, we need this management fee. This is what you're going to get out of it. This is what we're going to reinvest in to become a better firm for you, to give you what you really want to get out of this relationship.

Yeah, I mean, we just were really, I mean, they came to us with kind of an initial proposal that we're like, you know, like, gosh, I really, I was like, yeah, I really, I really like you guys a lot. I really want to work with you. But for it to make sense for us, like we need to get paid at least $1,000.

such and such. We've always had a really easy time saying no to deeply discounted fees, and we're not here to work for free. A decent part of what we do is capacity constrained. And so if you believe in what you're doing and you think that you're going to get there anyway in the long run,

it's it's pretty easy if someone is only offering to underpay you it's just pretty easy to say no to that so it's just I don't know I mean for us it's like you know here's here's what we need in order for it to make sense for us to do can you know can you do that for us um and they had a weird request in terms of the way they wanted to structure performance allocation and we were you know we're like okay yeah that makes sense I can see where that would be

Like that makes sense for you guys. So we did it. Yeah. And on that, giving up the management fee versus giving up on performance fee, like is, is it all each deal is different or. Yeah. And we didn't even like, it wasn't a matter of give up. Like, fortunately what happened was like, because these guys were referred to us by an existing investor and not by a third party marketer, like we basically, I

I mean, ultimately what it boiled down to is we're getting the same net economics that we would get were they referred by a third party marketer. But there's basically no third party marketer taking that share.

So if you're listening to this and you want to allocate 5 million to us and get the same deal, you can't have it. There's a very specific reason why. I mean, if you say to us,

We want to allocate $170 million to you over the course of three years, and we're world class and we'll help you out in other ways. Then we're receptive to that. Let's talk about that helping out in other ways. How do LPs help out? It's funny, I've talked to a number of managers who have said, my LPs are high net worth individuals. A lot of them own private businesses. We have talks about their industries and how they work.

Obviously, if you're running a more quantitative strategy, you're probably not getting industry insight from your LPs. But how do high quality LPs feedback into investment process or things like that? Yes, we do both. About half of what we do at the firm is fundamental.

So yeah, like literally some of our LPs will absolutely call us and say, like, I think this is a, you know, like it might be a pain management doctor, for example, who's like, you know, I was in the clinical trials for such and such. This is going to be an awesome product when it comes to market. Like you absolutely should be involved. Like this is best in class for such and such. There's no, no second best. These guys deserve to, you know,

you know you got to buy the stock they're going to be beating and raising in perpetuity um not not every LP is that savvy we certainly get a lot of you know uh the the the kind of like oh you know I heard you know like uh yeah there's people people hear things you know the Tesla's gonna go to 5 000 and all that sometimes um but yeah no it's it's it's that it's um

referrals are a huge thing. And then also if there's, I would say for institutions,

If there's something we haven't done before that either they've done before or some of their other managers have done before, just people are willing to make that connection. And if it's an obscure special situation or whatever the new thing is that you want to get into that you don't have as much experience with, they're willing to help you out. So it's...

Yeah, it's definitely a two-way street. Plus, one of our guys sends us country ham, which is just amazing. It's his own ham that he makes himself. It can't be country ham that you made yourself. That's the highlight of my year, probably.

That's awesome. That is great to hear. Well, I want to final question that I want to end on is about growth and the cyclicality of it. So you obviously just hired a bunch of people, took on this big investor. How do you think about, you know, pressing forward and and.

growth in the future versus taking your foot off the gas and how much of this stuff is plannable versus just taking the opportunities when they come to you? Our focus as a firm has always been first and foremost on performance, and we want to do well with the assets that we have. But we also know that we develop new capabilities all the time. We get better and better at what we do, and

we want to slowly and steadily grow not to a $5 billion fund, but like if you told me that, you know, three years from now, we were, you know, like,

500 or 600 million and not 320 million, like I would be like, yeah, it sounds about right. When one of the great things about hiring people who are mostly young is when you have a firm that is full of 27 to 34 year olds, everybody wants more, you know, more growth and more responsibility and, you know, the chance to like help cultivate and develop new younger people.

And it's, you know, you got to grow. Like you can't, I mean, it's the whole conception I had when I started the fund of like, oh, I'm just going to do great with, you know, $25 million or whatever. Like that's just not a, it's not a business, you know? And like now it's a business, which is great. You know, you see like the analysts come in and really improve, you know, use the tools that you give them and improve their alpha and their P&L, right?

and learn from their mistakes and really clean up like the left side of their distribution and not have negative 100 or negative 150% kind of losses on shorts anymore. It's good. I don't know if that, I feel like there was a second part of your question that I kind of missed there. Oh, just how much of the growth is plannable? I think the thing I really want to say on that is like,

Some of it is very plannable. The thing is, if you know that you're going to have needs for capital,

And it's funny because we've closed to new investors three times through the history of the fund. So there's been times where I felt like, all right, we've got as much capital as we can do well with now, let's close. And I think that's great. I think one of the best things we ever did is in the first half of 2016, I wasn't happy with the performance. We had one position that was going through a bankruptcy restructure or out-of-court restructuring. And

ended up just absolutely kicking ass and being a blockbuster great position in the second half of 16. But I was miserable with how our performance was for people in the first half of 16. So we're like, we're not going to charge you any management fee in the second half of 16, which was a great call. People appreciate that. They like knowing that you're here to do good. And if you're not doing good, you don't need to take a lot of money.

If things are going well, and if you know you're going to need capital, and if you're a smaller fund, like absolutely take the capital when it's offered. Because everyone is going to have times where what they do is a little bit out of favor. And like, those are probably the times that objectively are going to be the times that like,

you really want more capital. Like, I mean, September of 2020, I sent out in our monthly letter, this ridiculous, like, yes, I'm using the Porter Stansberry font. Like we are seeing tremendous opportunities. Send us money now. But like, because the first half of 2020 had been so rough for us, like,

I don't know if people believed us or not, but like whether they believed us or not, like I had a couple high net worth guys who'd been with me for a long time. I'm like, yeah, I'm putting money in. And it was like the total amount was like 1.5 million or 2 million that came in. There's like no new institutional money coming in when you, you know, and so I feel like.

you know, like times like now when the opportunity set is like average to above average, but we haven't had great struggles or anything like that. That's when people are excited about giving you money. And, you know, within reason, I'm going to take it. Like if I can get another 50 million in the door in the next six to 12 months, I'm absolutely going to take it right now because I know that I'll need it eventually.

And I know that we'll do well with it. And it's just like, you can't, it's not like a pump or a switch where you can just turn it on when you need it. Like you have to take the money when people are willing to give it to you. And I guess the one thing we didn't talk about is we actually started, since last we talked, like we started an offshore fund.

we had a we had a large hong kong investor who came to us you know for the longest time i'm like why am i going to start an offshore fund if i don't have an you know and so it was like this chicken versus egg thing and then finally we had these guys from hong kong they were like we will give you 10 to 20 million dollars to see an offshore seemed like it was gonna be 20. so we're like okay and so we did the work we got an offshore um all queued up we did all the work you know probably

There's a lot of- Cayman master feeder? Yes. So a lot of organizational expense. And so we got it all queued up and then they're like, "You know, we're actually... Our firm has frozen all allocations for whatever." But you know what? If you build it, they will come, actually does work to some extent because now we had this thing and we're like, "All right, who might be interested in this?" And so

I think right now we have like four or five investors in the offshore, which isn't a lot. Definitely still not at critical mass yet. We're still doing a fee waiver to cap fees for people. But I know that we'll get there very soon. And then these guys from Hong Kong are back in touch now, probably going to come in early next year. Write about your international trades. You'd be amazed.

Oh, like if you write more about international trades, it's more attractive to international investors?

Trust me, if you are trading outside of the US, if you're trading non-US stocks, so much of the financial press and media and research is around US markets that write up one UK small cap and you'll meet 10 new potential British investors. Wow. Well, thank you. We definitely have UK small caps we could write about. So thank you. Oh, yeah. Yeah. If offshore is where you're trying to grow, just...

These people are interested in other markets. I mean, they're obviously interested in U.S. markets, too. But yeah, it's, you know, if you own a lot of Japanese stocks or anything like that, like you'd be amazed right about those and people will come in. And like I have talked to funds of the same problem about the chicken and egg of the offshore. And one of the things you can do is you can kind of like soft sell the fund a little bit and say, hey, would you be interested in this?

And then you can kind of get soft commits. And then I say divide that by four or five. Like if you're saying like, hey, we want to launch with 10 for the offshore, like get 50 in soft commits and then you might be able to launch with 10. I feel like, as you said, like soft commits do tend to be very soft. That's the...

Yes. Yes. Very, very, even the hard commits can be, can end up being soft. Anybody can back down. That's how we ended up with that cash advance. It was like, I knew the money was coming, but like, when is it coming is a whole different, yeah. A whole different thing. All right. Well, Chris, I think we'll end it there. Thank you so much for, for coming on and sharing. And I look forward to doing it again soon when you have a new level of growth and all new problems that we can talk about and share with everyone.

Cool. All right. Thanks, Max. Have a great rest of your day. Have a happy Thanksgiving.