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Dominique Mielle on Luck and Resilience in Finance · Masters in Business

0:01
Speaker 1: This is Masters in Business with very Rid Holds on
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Speaker 1: Bloomberg Radio. This week on the podcast, my extra special
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Speaker 1: guest is Dominic Mielle. She is an author and former
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Speaker 1: hedge fund trader specializing in distressed assets. She was a
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Speaker 1: partner and a portfolio manager at Canyon Capital Farm that
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Speaker 1: runs currently about twenty five billion dollars. Her book, Damsel
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Speaker 1: and Distressed, My Life in the Golden Age of Hedge Funds,
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Speaker 1: is really a fascinating read. I know I when I
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Speaker 1: have a guest on with a book, I usually say
0:41
Speaker 1: nice things about the book, and I don't do that
0:43
Speaker 1: if I don't mean it. But I really had fun
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Speaker 1: reading this. It's very witty and charming and revealing about
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Speaker 1: an industry in a way that most books on hedge
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Speaker 1: funds simply are not. I found it to be a
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Speaker 1: very pleasant read, and I think you will also. And
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Speaker 1: I found this to be a fascinating conversation, which I
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Speaker 1: expect you will as well. With no further ado, my
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Speaker 1: interview with Dominic meel, author of Damsel and Distressed. First
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Speaker 1: of all, before we get started, I very much enjoyed
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Speaker 1: the book. You have a very wicked sense of humor
1:19
Speaker 1: which comes through in the pages, starting with the title
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Speaker 1: Damsel in Distressed. What made you decide to write a
1:28
Speaker 1: memoir about your decades in the hedge fund industry. Well,
1:31
Speaker 1: it started with an article that I wrote as a
1:36
Speaker 1: hobby about my experience as a woman at Lehman Brothers.
1:41
Speaker 1: And it was picked up by Business Insider, and I
1:45
Speaker 1: realized a couple of things. One was that I really
1:48
Speaker 1: enjoy writing, and two was that I had never really
1:54
Speaker 1: taken time to think about the lack of women in
1:57
Speaker 1: the business and that there really wasn't a voice to
2:01
Speaker 1: tell the story of female investors. And so that's when
2:05
Speaker 1: I thought, you know, there might be a hole in
2:07
Speaker 1: the market, huh, identifying an inefficiency so to speak. So
2:12
Speaker 1: to speak, except that there's really no money in writing
2:14
Speaker 1: a book. Well, it's best described as a branding exercise
2:19
Speaker 1: and a way to sort of get things off your chest.
2:23
Speaker 1: But but let's roll back a little bit. You get
2:25
Speaker 1: an MBA at Stanford, how do you end up in finance?
2:30
Speaker 1: Was that where you plan to go? Because a lot
2:33
Speaker 1: of the Stanford MBA graduates tend to find the way
2:37
Speaker 1: into technology, not finance. Right. Well, by the time I
2:40
Speaker 1: got to Stanford, I pretty much knew I wanted to
2:43
Speaker 1: be in finance, but where I started was at Lehman
2:47
Speaker 1: Brothers in New York before Stanford, and that was completely
2:53
Speaker 1: that was serendipity. Really. I wanted a job that would
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Speaker 1: take me away from Paris. I wanted to see the world,
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Speaker 1: and whether it was investment banking or basket weaving really
3:04
Speaker 1: had absolutely no bearing on my decision. So I ended
3:09
Speaker 1: up as an investment banker, which you know, like every analyst,
3:14
Speaker 1: I hated after a few years. And so the NBA
3:17
Speaker 1: was sort of a way out of that job, branching
3:21
Speaker 1: into hopefully what I thought were better, better pastures. But
3:27
Speaker 1: still in finance. Would you do with Lehman Brothers that
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Speaker 1: you grew to hate? Were you just a spreadsheet jockey?
3:34
Speaker 1: And of course I was, and I was. It was
3:37
Speaker 1: particularly ruthless because I was in a group called FIG
3:41
Speaker 1: Financial Financial Institutions Group. At the time, there were still
3:46
Speaker 1: a lot of savings and loan institution thrifts, lots of mergers.
3:51
Speaker 1: So what I did basically was model the mergers of
3:58
Speaker 1: any combination you could think of. I mean, I remember
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Speaker 1: it got so bad that there was a spreadsheet with
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Speaker 1: all the different institutions vertically and horizontally, and I had
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Speaker 1: to model them in each queer, and I thought, what happened?
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Speaker 1: What happens to the diagonal? Do they merge with themselves?
4:19
Speaker 1: You want me to model that too, But that was
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Speaker 1: kind of the sort of, you know, almost mindless brute
4:27
Speaker 1: force job that I was doing. So so you you
4:32
Speaker 1: do win a couple of accolades at Stanford when you're
4:35
Speaker 1: getting your MBA. What brought you to the attention of
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Speaker 1: Canyon Partners? How did you find your way there? Well,
4:43
Speaker 1: first I sort of zoomed in on the fact that
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Speaker 1: I wanted to work for a hedge fund that I worked.
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Speaker 1: I wanted to go to the buy side. That was first,
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Speaker 1: and that was sort of really brought to me through
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Speaker 1: a couple of classes that were incredibly illuminating, one taught
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Speaker 1: by Bill Sharp and one by Darryl Duffy, both exceptional minds.
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Speaker 1: So I sort of narrowed down finance to buy side
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Speaker 1: by side, to hedge funds, hedge funds, to something that
5:17
Speaker 1: had to do with junk bonds. Because I was a
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Speaker 1: great admirer of Michael Milkin, had read books about him,
5:27
Speaker 1: and so I thought that seems a very interesting mix
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Speaker 1: of finance, but also strategy. You describe what we now
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Speaker 1: called junk bonds we used to call high yield, what
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Speaker 1: we now call distressed investing, we used to call vulture investing,
5:44
Speaker 1: And you write the only difference between stressed and distress
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Speaker 1: bonds was the immediacy of the bankruptcy. Tell us a
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Speaker 1: little bit about what it was like to wade into
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Speaker 1: the world of distress investing for our bonds. Well, I mean,
6:01
Speaker 1: it was a fairly new asset class. I think, you know,
6:07
Speaker 1: it's not until probably fair Lawn came into existence that
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Speaker 1: it became a real asset class in itself that stressed
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Speaker 1: and distressed was um, you know, a category that was
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Speaker 1: thought as investable, but it was very tiny. I mean,
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Speaker 1: I think there were you know, probably fifteen billion in
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Speaker 1: assets in total of hedge funds investing in distressed at
6:35
Speaker 1: the time in the in the mid nineties. And so
6:39
Speaker 1: if you compare that to today, if you remember, Oak
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Speaker 1: three raised fifteen billion dollar fund in twenty twenty on
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Speaker 1: its own, so the magnitude is not even comparable. So
6:52
Speaker 1: it was a it was a starting industry, very much
6:58
Speaker 1: a sort of a venture but all type of business.
7:01
Speaker 1: New asset class for this type of investing as well. Right,
7:05
Speaker 1: So I like this quote of yours, which is stock
7:09
Speaker 1: owners own a call option on the value of a company.
7:13
Speaker 1: Bond holders have sold a put option. One is long volatility,
7:18
Speaker 1: the other is short, and consequently are at odds in
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Speaker 1: times of changing volatility. Explain why bond holders have sold
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Speaker 1: a put option, because if if the value of the
7:32
Speaker 1: business of the company falls below the part amount of
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Speaker 1: the bond, then the bond holders are going to repossess
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Speaker 1: the company. It's as simple as that. The equity guys
7:44
Speaker 1: give you the keys and it's yours to run, and
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Speaker 1: anything above the part value of the total debt on
7:53
Speaker 1: the capital structure belongs to the equity guys. And so
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Speaker 1: there are a lot of cases where it's really interesting
8:01
Speaker 1: how this sort of game of strategy, this game of risk,
8:06
Speaker 1: starts with a sudden change in volatility. It can be
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Speaker 1: a bankruptcy, but it also can be an MNA event,
8:13
Speaker 1: it can be an LBO, it can be even a
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Speaker 1: change in regulation or in market, or suddenly volatility picks
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Speaker 1: up and the interest of bondholders and shareholders are at odds.
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Speaker 1: And that's really what made the job absolutely thrilling. I'm
8:30
Speaker 1: less of a business lover. I invest less because I'm
8:36
Speaker 1: interested in what widgets a company does, and more in
8:40
Speaker 1: the capital structure and how to position yourself, what the
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Speaker 1: other guy is going to do at the bond level
8:46
Speaker 1: or senior secured level, and how to position yourself to
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Speaker 1: make money. That's the thrill. So you're looking at the
8:55
Speaker 1: various paper that's available. Here's the downside, risk and equity,
9:00
Speaker 1: and for it to work out, the company has to
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Speaker 1: turn itself around and a miracle has to happen. The
9:05
Speaker 1: bonds aren't worthless, but they're definitely not trading it par
9:09
Speaker 1: but they've fallen so far that hey, it gives us
9:12
Speaker 1: a callable option on the company if they do go
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Speaker 1: into bankruptcy. So let's get long. This debt which is
9:19
Speaker 1: trading at a fraction of what it was issued for.
9:22
Speaker 1: Is that more or less? That's correct, And it can
9:24
Speaker 1: be a lot more complicated than that. Of course, it
9:27
Speaker 1: can be a simple capital structure like PGNE in bankruptcy,
9:31
Speaker 1: which had one layer of equity and one layer of bonds,
9:35
Speaker 1: and it can be very complicated like Puerto Rico that
9:38
Speaker 1: had nineteen different debt issues by different entities with different terms.
9:43
Speaker 1: So not only can you be long one bond, you
9:47
Speaker 1: can be long and short two bonds. You can be
9:50
Speaker 1: long different maturities. You can be long claim insurance in
9:56
Speaker 1: insurance claims. That's the English right insurance claims, meaning meaning
10:03
Speaker 1: the insurance owns a claim against PGNE and that's they
10:07
Speaker 1: want to sell it and get the cash immediately, and
10:10
Speaker 1: they sell it to bound Post at a discount to
10:13
Speaker 1: what they're entitled to. That could be a trade. So, um,
10:17
Speaker 1: there are you know, infinite ways to position yourself in
10:22
Speaker 1: this sort of game of throne type, right, you said
10:27
Speaker 1: all the cursing and none of the sacks of Game
10:29
Speaker 1: of thrones, not that I've witnessed, but you know, lots
10:32
Speaker 1: of cursing. So you were very actively involved in the
10:37
Speaker 1: restructuring of the airlines post nine to eleven. Um, what
10:41
Speaker 1: about what happened with a lot of banks during the
10:44
Speaker 1: financial crisis, I guess other than Lehman Brothers, most of
10:48
Speaker 1: them were either rescued or absorbed into another entity. So
10:52
Speaker 1: there really wasn't a whole lot of restructuring and distressed
10:55
Speaker 1: assets afterwards? Or was there? Tell us about that period
11:00
Speaker 1: after two thousand and eight or nine? Yeah, So financial
11:05
Speaker 1: institutions were not my industry to cover. But of course
11:09
Speaker 1: Lehmann was a huge restructuring and bankruptcy liquidations still going
11:14
Speaker 1: on today, right, Yeah, that isn't crazy exactly. That kept
11:18
Speaker 1: my colleagues occupied and making a lot of money. By
11:23
Speaker 1: oh eight or nine, Look, there were bankruptcies everywhere in
11:27
Speaker 1: every industry, from retail to telecom. Um and there were
11:33
Speaker 1: the great bonanza of later eight and oh nine. Is
11:38
Speaker 1: that there were companies that were not stressed at all.
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Speaker 1: It's just the bonds were trading horribly just because liquidity
11:46
Speaker 1: was gone from the market. So it's it was a
11:48
Speaker 1: pretty different situation from two thousand and one, the whole
11:54
Speaker 1: dot com bust, but more importantly the telecom implosion. That's
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Speaker 1: when all the wire cable uh some wireline companies went bankrupt.
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Speaker 1: Names that maybe your listeners today wouldn't recognize, crossing fiber,
12:10
Speaker 1: you go down. We watched Nortel and Lusen, like, are
12:14
Speaker 1: those companies really going to go belly up? It was
12:16
Speaker 1: sure that it was really fascinating. Yes, so all those
12:20
Speaker 1: don't even exist anymore. Um, and that these were real
12:25
Speaker 1: bankruptcies led by a supply demand imbalance too much, too
12:34
Speaker 1: much leverage and not enough demand for the products, and
12:37
Speaker 1: the demand demand was sort of tardy to come um,
12:41
Speaker 1: so those companies restructured or liquidity, but it was not
12:45
Speaker 1: a liquidity issue. Oh eight was purely liquidity issue, so
12:49
Speaker 1: that the formidable trades were to buy companies that were
12:54
Speaker 1: actually very viable the way they were, and bonds were
12:58
Speaker 1: trading at huge gowns because there were no buyers anymore.
13:02
Speaker 1: Really interesting. So you retire in twenty eighteen, and two
13:07
Speaker 1: years later the pandemic strikes. A lot of companies crashed
13:11
Speaker 1: and recovered, but we've been still watching the fallout. Here
13:15
Speaker 1: it is three years later. Do you ever look at
13:18
Speaker 1: that landscape and say, hey, if I was on the desk,
13:21
Speaker 1: we'd be buying this, that, and the other. Because this
13:24
Speaker 1: is just a temporary stress or. I wouldn't touch that
13:28
Speaker 1: that's going to hell in a handbasket. I do less
13:31
Speaker 1: of that and more thinking about the business of hedge
13:36
Speaker 1: funds in general. So in other words, I'm less interested
13:39
Speaker 1: in bond picking at this point and more interested in
13:44
Speaker 1: what's going on. For example, you talk about the twenty
13:49
Speaker 1: twenty distressed cycle, and it's interesting to me that it
13:54
Speaker 1: was so short, so shallow, right, right, we had about
13:58
Speaker 1: five months Flinken, you miss it exactly, and that is
14:03
Speaker 1: of course due to the FED intervention. But if you
14:07
Speaker 1: think about it, que is a relatively novel tool. Not
14:14
Speaker 1: it wasn't invented it eight, but certainly before that it was.
14:17
Speaker 1: It hadn't been used so massively, so widely, so so systematically.
14:24
Speaker 1: And so you know, since oh eight, the FED had
14:29
Speaker 1: has consistently used quee to rescue the bond market, and
14:37
Speaker 1: with bigger and bigger purchases in more asset classes. And
14:43
Speaker 1: so what that's done is a couple of things. One
14:46
Speaker 1: is the period of time where you have distressed bonds
14:50
Speaker 1: available has shortened, right, It's it was a few months
14:54
Speaker 1: in twenty twenty five months before that twenty sixteen, the
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Speaker 1: energy crisis. Same before that, if you remember the tape
15:03
Speaker 1: per tenttrum in the summer of eleven, I think also
15:06
Speaker 1: a few months. So short you've got to be positioned
15:09
Speaker 1: and ready and have the cash. And second, it's shallow
15:13
Speaker 1: in the sense that the biggest distress companies are very
15:18
Speaker 1: small Historically. If you think of the biggest bankruptcy in
15:22
Speaker 1: twenty twenty was Hurts. That's only twenty five billion in assets, right.
15:26
Speaker 1: Compare that to the Lehman brothers at six hundred billion.
15:30
Speaker 1: Compare that to the period of Old One where we
15:34
Speaker 1: had corporate malfeasans you'll remember Enron, Conseco, worldcome exactly. But
15:40
Speaker 1: those were hundred billion cases. So they just was a
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Speaker 1: ton of distressed and therefore returns were easier to come by.
15:51
Speaker 1: It's a lot harder when you've got, you know, a
15:55
Speaker 1: few twenty billion distress situations to pick from. And meanwhile
16:01
Speaker 1: the giant of the stress have raised funds that are
16:04
Speaker 1: alone fifteen billion, So fewer targets and a lot more
16:08
Speaker 1: funds doing the same thing. Correct. Really very very interesting.
16:11
Speaker 1: So let's talk a little bit about those early days
16:15
Speaker 1: you mentioned in the book. Canyon Capital took a chance
16:19
Speaker 1: on you. First, why do you say that? And then second,
16:23
Speaker 1: how did you get a foot in the door? How
16:25
Speaker 1: did you start with them? Why do I say that?
16:29
Speaker 1: Because I'm I'm a foreigner and I'm a woman, and
16:35
Speaker 1: lots of foreigners and women out in Silicon Valley were
16:37
Speaker 1: at Stanford, so it wasn't and they're in La so
16:41
Speaker 1: it's not. Maybe it's it's rarer in Chicago and New
16:47
Speaker 1: York in Boston, but it's not completely foreign although this
16:51
Speaker 1: was what year did you start a Canyon? Eight? All right,
16:55
Speaker 1: so a lot a little different world than than today,
16:59
Speaker 1: Different and similar at the same At the same time,
17:03
Speaker 1: if you're talking about female representation in hedge funds, it's
17:09
Speaker 1: very similar. There's been nano steps, but it's nowhere near
17:14
Speaker 1: what you would expect for an industry that's grown so
17:17
Speaker 1: much and that's become so institutionalized. And that's something we
17:22
Speaker 1: may want to talk about later. But they took a
17:25
Speaker 1: chance because look, hiring a woman was exceptional. It wasn't
17:31
Speaker 1: the typical profile. It still isn't. And on top of that,
17:37
Speaker 1: hiring a foreigner was an additional hurdle and a French person,
17:45
Speaker 1: which they probably didn't realize at the time, but you know,
17:47
Speaker 1: made me probably raging socialists compared to the average hedge
17:52
Speaker 1: fund political mind, even in California. Yes, sir, yeah, well
17:58
Speaker 1: you were in Orange County, so that I was let No, no,
18:01
Speaker 1: we were in Beverly Hills, but the same exactly. Interestingly,
18:08
Speaker 1: it's it's interesting you're saying that because Kenyon has since
18:11
Speaker 1: moved two Dallas. There you go that that makes a
18:14
Speaker 1: lot of sense exactly. You cite in the book a
18:17
Speaker 1: study that says men overtrade so much that it reduces
18:23
Speaker 1: their risk adjusted returns by two point six percent. So, first,
18:28
Speaker 1: is this just cockiness excess self confidence by male traders
18:36
Speaker 1: versus female traders? What accounts for the difference between the
18:40
Speaker 1: two and your experience working on on the trading desk?
18:44
Speaker 1: And how has this gap persisted for so many decades? So,
18:52
Speaker 1: first of all, it's not one study, There's now been
18:55
Speaker 1: four studies. It's mutual funds, it's hedge funds across the board.
19:00
Speaker 1: And the reason those studies exist is they're trying to
19:04
Speaker 1: answer the question or men better investors than women? Because
19:08
Speaker 1: if it were the case, then you wouldn't understand why
19:10
Speaker 1: there's a preponderance of men in the investing jobs. And
19:15
Speaker 1: it turns out not to be the case, not because
19:20
Speaker 1: you can answer that men are smarter or not as
19:25
Speaker 1: smart as women, but strictly because the friction of trade
19:29
Speaker 1: overtrading costs a lot. And so why do they overtrade?
19:36
Speaker 1: The studies don't say, and I wouldn't venture a reason
19:41
Speaker 1: that you may have alluded to. What what does your
19:45
Speaker 1: instinct tell you? Is it because the different let me
19:48
Speaker 1: man explain quality. No, but in all seriousness, the broad
19:56
Speaker 1: stereotype about men is, hey, we're idiots. We go anywhere
20:02
Speaker 1: when we shouldn't, and we do it with such bravado
20:06
Speaker 1: and such a surfeit of whether it's earned or unearned
20:11
Speaker 1: self confidence that it leads us into trouble Or Am
20:14
Speaker 1: I just engaging in pop psychology? No? I think that's right.
20:18
Speaker 1: The study your sighting is actually called Boys Will Be
20:21
Speaker 1: Boys over Confidence in Trading. So there you go. But
20:26
Speaker 1: it's interesting that you really can pinpoint the difference in
20:31
Speaker 1: return because there's this sort of impatient or over zealousness
20:35
Speaker 1: in trading your portfolio, whereas standing still and second guessing
20:40
Speaker 1: yourself and really doing quiet studying and reading would produce
20:46
Speaker 1: better returns, which is what women in those studies generally
20:50
Speaker 1: tend to do. So look, my point is very far
20:55
Speaker 1: from saying women are better investors than men. That's sort
20:58
Speaker 1: of a galization that I wouldn't make. But the study
21:02
Speaker 1: does suggest the studies behaviorally men have certain behavioral flaws
21:08
Speaker 1: correct that leads to a difference in outcome. At the
21:11
Speaker 1: very least, I would take those studies and say, look,
21:15
Speaker 1: having more women in your investment teams. In hedge funds
21:20
Speaker 1: is not a matter of fairness or equity. Who cares
21:23
Speaker 1: on the wall street whatever it is money, Yeah, it
21:28
Speaker 1: really is alpha. It's a matter of making better decisions
21:33
Speaker 1: and being more profitable. So it's kind of interesting about
21:37
Speaker 1: the impact of overtrading. A couple of more bullet points
21:41
Speaker 1: from the book I found fascinating. Over the past fifteen years,
21:46
Speaker 1: nine percent of existing hedge funds close every year. Now
21:50
Speaker 1: the first question is is that due to a high
21:52
Speaker 1: watermark and they have to close and reopen in order
21:55
Speaker 1: to be able to get incentive fees or is something
21:58
Speaker 1: else going on. It's a pretty unstable business, really, Oh
22:04
Speaker 1: it is, especially when you're small, meaning sub one billion.
22:10
Speaker 1: You have a category exactly. The survival rate of an
22:15
Speaker 1: emerging manager is low. There are a ton of expenses
22:21
Speaker 1: and they're getting higher with compliance and marketing and reporting
22:26
Speaker 1: and investor relationship, etc. And you typically have one anchor
22:33
Speaker 1: investor maybe two three if you're lucky. But you're really
22:38
Speaker 1: living month to months, and that's great fun when you start.
22:42
Speaker 1: That was the great adventure of Canyon in ninety eight
22:45
Speaker 1: for me. But it's also a you know, every month
22:49
Speaker 1: is make a break. You have a terrible couple of months,
22:54
Speaker 1: your anchor investor pulls his or her money and you're done,
22:59
Speaker 1: or you you know, have a few star traders in
23:04
Speaker 1: analysts who quit very hard. So you mentioned John Merriweather,
23:09
Speaker 1: who was discussed as having bad luck for being in
23:14
Speaker 1: charge of long term capital management, with which spectacularly blew
23:18
Speaker 1: up the same year you began at Canyon. But I
23:21
Speaker 1: didn't realize this. He subsequently opened and closed a couple
23:26
Speaker 1: of more hedge funds. I don't know if he was
23:27
Speaker 1: in three or four old told, all of which didn't succeed.
23:31
Speaker 1: So was this a lack of skill or was this
23:34
Speaker 1: just bad luck? Three times is kind of that's three
23:38
Speaker 1: strikes when you're out in the US kind of. I
23:41
Speaker 1: don't want to speak ill of the guy who I
23:45
Speaker 1: greatly admired, you know from the he's obviously in the
23:49
Speaker 1: book of Michael Lewis, who you interviewed. But but that's
23:54
Speaker 1: the thing, even the guy you think of so highly,
23:59
Speaker 1: you know, after three hedge funds open and closed, you
24:02
Speaker 1: got to wonder if there's some risk management issue there. Yeah,
24:06
Speaker 1: you look at Liar's Poker and it describes him as
24:09
Speaker 1: this larger than life character. And then you read when
24:12
Speaker 1: Genius failed and not so great exactly, and again that
24:17
Speaker 1: is the thrill of this industry. Is that a hero
24:22
Speaker 1: today and a loser tomorrow. Amazing. So let's go to
24:26
Speaker 1: your work as a trader. One of the things that
24:30
Speaker 1: struck me is very self aware and insightful, was you
24:35
Speaker 1: got very quote comfortable being uncomfortable. So let's talk a
24:39
Speaker 1: little bit about First what do you mean by being uncomfortable?
24:43
Speaker 1: And second how did you recognize, Hey, this is uncomfortable
24:48
Speaker 1: for most people, but I'm okay with it. Oh, from
24:53
Speaker 1: many different situations where you know, being French, I grew
24:59
Speaker 1: up with different ferent a different culture, different habits in
25:05
Speaker 1: the US I was at the time. I like to
25:08
Speaker 1: think that I'm more, you know, after thirty years in
25:10
Speaker 1: this country, and I'm a little bit better acclimatized to
25:15
Speaker 1: to how the people live in this beautiful country. But
25:21
Speaker 1: I still do feel somewhat foreign in this country, and frankly,
25:26
Speaker 1: when I go back to France, I feel equally foreign
25:30
Speaker 1: because I'm not really French either. But look, I think
25:33
Speaker 1: it is an important quality to to have to be
25:38
Speaker 1: an investor because ours is an industry or a business
25:44
Speaker 1: of conviction in the face of facts that are sometimes
25:50
Speaker 1: very damning, sometimes very contradictory, especially if you were thinking
25:55
Speaker 1: about investing in the stress you're going to buy a
25:58
Speaker 1: company that is not doing well, where all the signs
26:02
Speaker 1: are telling you this is not going in the right direction.
26:07
Speaker 1: Either the left side of the balanche, the assets have
26:10
Speaker 1: something to to you have to fix something, or it's
26:15
Speaker 1: the right side with the capital structure. But something is
26:18
Speaker 1: the right in this situation, and to most people it
26:22
Speaker 1: would be a sign that you shouldn't touch it, and
26:24
Speaker 1: you have to feel comfortable being in the minority. That's
26:29
Speaker 1: probably true for probably every investor who's a bit of
26:33
Speaker 1: a contrarian. It's it's very uncomfortable to be to be
26:38
Speaker 1: in the minority. And with convictions, say I'm going to
26:43
Speaker 1: buy this company. That's the right thing. There's something that
26:46
Speaker 1: I see that others don't. There's safety and numbers. When
26:50
Speaker 1: you're with the crowd, you're not going to get your
26:53
Speaker 1: you know, your head cut off. You may not outperform,
26:56
Speaker 1: but at least you could hide amongst the middle of
26:58
Speaker 1: the back. Correct. And now we've gone full circle, barry
27:02
Speaker 1: to what we were talking about just a second ago.
27:05
Speaker 1: If you have ten white guys from Harvard, what are
27:08
Speaker 1: the odds that one of them will be completely outside
27:13
Speaker 1: the sort of think tank that is, you know this team.
27:20
Speaker 1: If you again want to be uncomfortable, if you want
27:23
Speaker 1: to be outside the box, you probably need people who
27:27
Speaker 1: look different, who think different, who were raised differently. And
27:31
Speaker 1: I'm not just talking about women, I'm talking about minorities.
27:35
Speaker 1: So you talk about a couple of really interesting things
27:39
Speaker 1: in the book relative to that, one of which is,
27:44
Speaker 1: it's really more implied than anything what's changed in the
27:49
Speaker 1: US since the eighties regarding economic mobility? That there used
27:55
Speaker 1: to be a huge ability to move up or at
27:59
Speaker 1: least in a better situation than your parents were, and
28:02
Speaker 1: the data implies that from the nineteen eighties forward that
28:05
Speaker 1: kind of stopped. Tell us about how you saw this
28:11
Speaker 1: lack of diversity and the lack of economic mobility. What
28:16
Speaker 1: is your perspective as a someone who grew up in
28:19
Speaker 1: France come to the United States and seeing, Hey, I
28:22
Speaker 1: thought there was a lot more mobility here, or at
28:25
Speaker 1: least there used to be. Yeah, it's a look, I'm
28:28
Speaker 1: not saying that France is much better, but over the
28:33
Speaker 1: last thirty or forty years, probably forty years since the
28:37
Speaker 1: Reggan years. If you look at the wealth and the
28:44
Speaker 1: income distribution in this country, it really has sort of
28:49
Speaker 1: gelled at the top right, very much so, not just
28:51
Speaker 1: the one percent, but the point one and the point
28:54
Speaker 1: on one percent. Correct, you know, the one percent probably
28:59
Speaker 1: controls eighty percent of the wealth in this country. And
29:03
Speaker 1: that's something that most Americans are not aware of. If
29:06
Speaker 1: you ask them to describe their country, they'll describe a
29:10
Speaker 1: country of which wealth structure resembles Norway. Right, We're not
29:18
Speaker 1: in Norway Rum. But there was a lot more movement
29:25
Speaker 1: upward movement. You know, back in the sixties and in
29:31
Speaker 1: the seventies, there were marriages between the boss and the secretary.
29:37
Speaker 1: They were jobs that allowed people to move up. Strangely,
29:44
Speaker 1: you know, finance is still one of those jobs that
29:47
Speaker 1: could take people from a very modest background. If you
29:51
Speaker 1: think about George Soros, this is a guy who had
29:55
Speaker 1: nothing when he was an emigrat from Hungary. Came here
29:59
Speaker 1: more or less. And so I do recognize that finance,
30:03
Speaker 1: in particularly investing in hedge funds, has this immense potential
30:08
Speaker 1: for social mobility. But generally speaking, our society is pretty
30:13
Speaker 1: frozen in that really disparate classes of people. There's a
30:21
Speaker 1: quote in the book, the idea we're all equal and
30:24
Speaker 1: the harder working and smarter people naturally come out ahead
30:27
Speaker 1: is simply the childish statement of a person, most likely
30:32
Speaker 1: an upper middle class Caucasian mail right. That's really very telling.
30:37
Speaker 1: But one of the things I've learned doing this and
30:40
Speaker 1: speaking to a lot of wildly successful people, men and women,
30:46
Speaker 1: is how often the concept of luck comes up, Like
30:50
Speaker 1: very successful people with a little bit of self awareness
30:54
Speaker 1: seemed to recognize, Hey, you know, this could have just
30:58
Speaker 1: gone a little differently, and we're not having a conversation
31:01
Speaker 1: because I'm not, you know, running a successful business. How
31:05
Speaker 1: important is the role of luck in people's success, be
31:10
Speaker 1: it whether they're born in this country or elsewhere, whether
31:13
Speaker 1: they're born male or female, or just in their day
31:16
Speaker 1: to day life. How significant is law? Huge? Huge? Really?
31:22
Speaker 1: I think so. And it's all a matter of how
31:26
Speaker 1: whide your definition of luck is. If you're thinking very specifically,
31:32
Speaker 1: did I win the lottery, did I meet somebody who
31:38
Speaker 1: offered me a job at Canyon or you know, another
31:42
Speaker 1: successful then you could say, well, no, I'm not lucky.
31:45
Speaker 1: I worked really hard. But if you look at luck
31:48
Speaker 1: in the much broader context of I was born in
31:52
Speaker 1: a free, wealthy country, France, to parents who were both
31:58
Speaker 1: educated and value education. Not particularly wealthy, but middle class,
32:05
Speaker 1: upper upper middle class. Right. I was born white, yes,
32:12
Speaker 1: a woman, which you know has came with some difficulties
32:16
Speaker 1: in the field that I chose, But I would say
32:19
Speaker 1: incredible luck. Right. And then the biggest luck of it
32:25
Speaker 1: all is I joined Kenyon in the nineties and there
32:29
Speaker 1: was a tsunami that literally lifted all waves of hedge
32:34
Speaker 1: funds from ninety to two thousand and eight and even beyond.
32:39
Speaker 1: You know, no offense to Canyon, but there you know,
32:45
Speaker 1: their growth is very much a beta phenomenon that happened
32:49
Speaker 1: to fair Long, to Citadel, to Omega, to I mean
32:53
Speaker 1: new name exactly. It's funny because I was discussing luck
32:58
Speaker 1: earlier today with someone who said, you know, if you
33:02
Speaker 1: started as a bond trader, you were lucky to begin
33:06
Speaker 1: your career in the early part of a thirty year
33:09
Speaker 1: bull market in bonds, to which I said, well, at
33:13
Speaker 1: the time, you didn't know it was going to last
33:14
Speaker 1: thirty years. You had to be able to conceptualize that,
33:18
Speaker 1: and the takeaway is luck is great to have, but
33:22
Speaker 1: it's not a durable edge. It won't persist even if
33:26
Speaker 1: you happen to be in the midst of the greatest
33:28
Speaker 1: bond bull market. You have to be long. You can't
33:31
Speaker 1: be on the other side of it. That's true. So
33:33
Speaker 1: luck is the starting point, and then resilience is what
33:37
Speaker 1: makes it. You gotta stick with it. There's a quote
33:41
Speaker 1: you have at the end of one of the chapters
33:44
Speaker 1: on endurance and resilience, and I'm going to throw the
33:47
Speaker 1: quote at you and let you comment on it. The
33:50
Speaker 1: woman the Canyon Partners hired was not a good girl
33:53
Speaker 1: who chose to get along with people as her seminal virtue.
33:57
Speaker 1: I was a girl who was good at seeing what
33:59
Speaker 1: she wanted and convinced deep down she could get it.
34:04
Speaker 1: Tell us a little bit about that. These are my qualities,
34:07
Speaker 1: you know, I'm resilient. I'm I'm you know, in between
34:10
Speaker 1: a dog and a donkey, you know, persistent. You know,
34:15
Speaker 1: I get the bone and I and I just keep it.
34:20
Speaker 1: That's you know. And by the way, Barry, I do
34:23
Speaker 1: think these are huge qualities for investors. Resilience, the ability
34:27
Speaker 1: to lose money on a daily basis and get back
34:31
Speaker 1: into it and make up for it. That's an amazing
34:36
Speaker 1: lesson in life, right to take failure and losses as
34:41
Speaker 1: business as usual. It's just a flip side of a
34:44
Speaker 1: winning trade. And you know, because you've interviewed so many
34:50
Speaker 1: of those amazingly successful investors that the image of them
34:55
Speaker 1: never having a losing trade is a fallacy. It's all
34:58
Speaker 1: about what you do with failure that determines whether or not.
35:02
Speaker 1: And it's also the average. Do you win on average
35:06
Speaker 1: more than you lose, but you are going to lose.
35:08
Speaker 1: I don't know a single investor who doesn't lose money regularly.
35:13
Speaker 1: Someone once said, it's not how often you lose, but
35:16
Speaker 1: it's how big your losses are, which is really interesting. Correct,
35:20
Speaker 1: it's I know, I'm stealing that quote from somebody, somebody
35:25
Speaker 1: very smart. Sure, it's it's the probability and the severity
35:29
Speaker 1: of your loss. But sticking with it is you know
35:35
Speaker 1: what it what it takes, endurance and resilience. Let's talk
35:40
Speaker 1: a little bit about the peak we've seen in hedge funds.
35:44
Speaker 1: For a lot of funds, the early two thousands saw
35:47
Speaker 1: a lot of opportunity in the distressed market and in
35:51
Speaker 1: other spaces. Why was the first half Why was the
35:55
Speaker 1: pre financial crisis decade so lucrative for funds? I don't
36:02
Speaker 1: think it's any different from any industry starting out right.
36:08
Speaker 1: We talk about an S curve for most industries, and
36:12
Speaker 1: there's a very rapid expansion when you start with a
36:16
Speaker 1: good idea and few people going after a very large pot,
36:23
Speaker 1: especially for distressed When you think of the two thousand
36:26
Speaker 1: and one two thousand and two periods, I think, if
36:30
Speaker 1: I recall correctly, there were some six hundred bankrupt companies
36:34
Speaker 1: in one year, some lots of work, lots of work,
36:38
Speaker 1: lots of gold to mine, and the industry was very small,
36:44
Speaker 1: so it was a lot easier to make good returns,
36:48
Speaker 1: and we indeed do who did produce amazing double digit
36:54
Speaker 1: twenty percent return on the regular basis. Right, So you
36:58
Speaker 1: have the dot com implosion, you have the telecom sector
37:02
Speaker 1: going belly up, you have the airline industry in total
37:06
Speaker 1: distress post nine to eleven. What else was going on?
37:10
Speaker 1: I mean that seems like that's a lot just those
37:12
Speaker 1: three areas, and in between corporate malfeasans was rampants. We
37:17
Speaker 1: talked about how does how does that affect distress fund investing?
37:20
Speaker 1: Do people just dump they have certain requirements? Well, though,
37:23
Speaker 1: those companies went bankrupt, so that was more and Ron Concco, Tycho,
37:33
Speaker 1: huge companies that produced um, you know, bad financials and
37:40
Speaker 1: as a consequence, accounting malfeasans earnings freud. You go down
37:45
Speaker 1: the list. It was. That was before we got to
37:47
Speaker 1: the analyst scandal and the IPO spinning, and there was
37:51
Speaker 1: a ton of stuff that basically made Main Street look
37:55
Speaker 1: at Wall Street and saying, why am I even giving
37:57
Speaker 1: you any money? You guys, can't you know, stay out
38:00
Speaker 1: of jail. That was before socks, that was shortly after
38:06
Speaker 1: reg FD. It's it's hard to believe, but there was
38:09
Speaker 1: a time when companies disclosed different facts to different cotively, right,
38:15
Speaker 1: very selective. I mean, I think any investor today would
38:19
Speaker 1: gasp at the idea that a company could tell you
38:23
Speaker 1: and me about their earnings next month and not to them.
38:28
Speaker 1: It's amazing. And there have been other hedge fund managers
38:33
Speaker 1: who've written tell all books from the nineties and you
38:37
Speaker 1: go through these books and you're like, none of the
38:39
Speaker 1: stuff could happen today. All of their alpha is illegal today,
38:43
Speaker 1: exactly it's a lot of the whole concept of whisper numbers,
38:48
Speaker 1: which we still use the phrase, but it doesn't really
38:52
Speaker 1: exist anymore. It doesn't. And so a lot of the
38:55
Speaker 1: competitive advantages that hedge funds really capitalized only on have
39:01
Speaker 1: been regulated away or competed away. So let me let
39:06
Speaker 1: me share a quote with you from Jim Chanos, who
39:10
Speaker 1: runs Mechano's Partners, and he said when he started in
39:14
Speaker 1: the late eighties or early nineties, there were a couple
39:17
Speaker 1: hundred hedge funds and they all generated alpha, and it was,
39:20
Speaker 1: you know, a few billion dollars. It wasn't a lot
39:22
Speaker 1: of money. Today it's three trillion dollars, eleven thousand hedge funds,
39:27
Speaker 1: but it's still the same five hundred generating alpha. Is
39:31
Speaker 1: that an exaggeration or is there more than a little
39:33
Speaker 1: truth to that. I actually don't know that they're the
39:38
Speaker 1: same funds generating alpha. The numbers are correct. When I started,
39:44
Speaker 1: there were two thousand hedge funds managing maybe three hundred
39:48
Speaker 1: billion or eleven thousand or so, and now it's one
39:51
Speaker 1: hundred as correct. What I do know is that there's
39:57
Speaker 1: a handful or actually a bit more than a handful
40:01
Speaker 1: that um are still in business today and that have
40:06
Speaker 1: become the market right from Apollo to Citadel to oak Tree.
40:12
Speaker 1: These are the mammoth of hedge funds. So um is
40:19
Speaker 1: he talking about that there's a handful of guys who
40:23
Speaker 1: started early and have become huge and are still added
40:28
Speaker 1: um and still racking funds from investors. That's true, but
40:34
Speaker 1: they're not producing alpha. If you look at their returns,
40:40
Speaker 1: you know it's it's not particularly uh. They're not outperforming
40:45
Speaker 1: the market at least not not systematically, and that was
40:49
Speaker 1: really the promise of hedge funds. Well, well, you mentioned
40:52
Speaker 1: in the book size is the enemy of performance. That
40:56
Speaker 1: was at an issue before the financial crisis, or so
41:00
Speaker 1: much money flowed into the space that it's become self defeating,
41:05
Speaker 1: and all these formally high performers are now just so
41:09
Speaker 1: big they're very happy collecting the management fee in the
41:12
Speaker 1: performance fee managers less. By the way, you show the
41:14
Speaker 1: math in the book very very easily and understandable for
41:19
Speaker 1: those who may not be as Mathie, which is basically
41:23
Speaker 1: a giant fund collecting two percent is much better than
41:27
Speaker 1: a smaller fund that's killing it. But they're not starting
41:30
Speaker 1: out with a lot of assets no, that's totally true.
41:32
Speaker 1: That that is exactly what's happening. Size is the enemy
41:37
Speaker 1: of outperformance. And if you think about it in very
41:41
Speaker 1: simple terms, those funds have become the market. How could
41:46
Speaker 1: they outperform the market. They are so big that they
41:49
Speaker 1: are that they are the market. So that's one thing.
41:52
Speaker 1: The second is that, yes, they're very happy collecting fees
41:56
Speaker 1: because that is the business they're in. The business they're
42:01
Speaker 1: in now is not to outperform the market, it's to
42:04
Speaker 1: collect funds and so and there are studies that showed
42:08
Speaker 1: that the incentive is about what they call hoarding funds,
42:12
Speaker 1: so you know they're hoard funds, not hedge funds. I
42:15
Speaker 1: have that question two and twenty. Hoard funds is not
42:19
Speaker 1: about performance, it's about more assets under management, which raises
42:23
Speaker 1: the question why should investors pay such large fees for beta?
42:30
Speaker 1: Shouldn't the incentive fee be on alpha alone? In other words,
42:34
Speaker 1: I go buy an SMP five hundred funds for three BIPs?
42:37
Speaker 1: Why do I need to give you in two and
42:39
Speaker 1: twenty tell you what I'll give you twenty on anything
42:42
Speaker 1: you beat the SPX with And that seems reasonable. I'm
42:46
Speaker 1: surprised that hasn't really caught on yet amongst endowments and foundations. Well,
42:50
Speaker 1: to be fair, there is pressure on fees, so I
42:54
Speaker 1: think at this point there are very few hedge funds
42:57
Speaker 1: able to charge still two percent and twenty that it's
43:01
Speaker 1: one in fifteen, one in fifteen, but it's it's really
43:05
Speaker 1: coming down. So there is the awareness from institutional investors
43:09
Speaker 1: that fees are too high. But I can think of
43:12
Speaker 1: a couple of reasons of why that's going on, and
43:15
Speaker 1: the main one is that it used to be that
43:18
Speaker 1: hedge funds were populated with risk tolerant investors. It's not
43:25
Speaker 1: the case anymore. It's mostly institutional investors who are advised
43:29
Speaker 1: by third party lookers or consultants, and those consultants are
43:36
Speaker 1: not paid to take risks. Nobody's going to get fired
43:40
Speaker 1: by recommending that you put money with oak Tree, right right,
43:44
Speaker 1: That's the safe thing to record. They've put up some
43:47
Speaker 1: pretty good numbers lately, they have, But that is the
43:52
Speaker 1: recommendation you'll get from every consultant to every family office
43:57
Speaker 1: or you know, because that is the safe thing to
44:00
Speaker 1: because those middlemen are paid for safety. So we've come
44:04
Speaker 1: to this kind of surprising outcome where people put their
44:12
Speaker 1: money really with the biggest funds and paying for safety
44:18
Speaker 1: rather than outperformance. I'm not saying against paying for safety.
44:22
Speaker 1: The question is how much do you pay for that?
44:25
Speaker 1: That's five BIPs, is my answer exactly. The other thing
44:29
Speaker 1: I can think of is that there'll always be room
44:32
Speaker 1: for hedge funds in a portfolio allocation for diversification, and
44:37
Speaker 1: that's a perfectly valid reason to invest in hedge funds.
44:41
Speaker 1: I get that, But again, how much do you pay
44:45
Speaker 1: for diversification and how good is it? Because lately diversification
44:50
Speaker 1: has not been good from hedge funds. So every year
44:55
Speaker 1: institutional investor puts out their rich list. Just came out
44:58
Speaker 1: this week, and it's exactly what you're talking about. It's
45:02
Speaker 1: all the giant funds, all the usual names that we
45:06
Speaker 1: usually see at the top of the list. Ken Griffin,
45:09
Speaker 1: Stephen Cone, Dave Tepper, Ray Dalio, Dsho, Jim Simons, that
45:15
Speaker 1: whole list are all making a billion plus a year.
45:19
Speaker 1: More or less. Ken Griffin had a good year, he
45:21
Speaker 1: had a four billion dollar year. Is it now winner
45:25
Speaker 1: take oil and hedge funds. Is that that same fat
45:28
Speaker 1: headlong tail distribution of wealth even amongst the hedge fund community.
45:33
Speaker 1: Oh yeah, I think it's definitely the case that the
45:37
Speaker 1: biggest hedge funds are attracting the most money and the
45:41
Speaker 1: smallest emerging managers are having a very tough time fundraising.
45:47
Speaker 1: And this is you blame this on the consultants, that
45:50
Speaker 1: they're the parties who or am I overstating that? I
45:55
Speaker 1: think they're very much. I don't blame them because people
45:59
Speaker 1: will act the way they're incentivized, and they're incentivized to
46:04
Speaker 1: advise you to put your money with the safest all
46:09
Speaker 1: in one shopping you know, very well staffed, compliance wise,
46:17
Speaker 1: investor relation wise companies. Those are the big ones, right,
46:21
Speaker 1: That's what they're incentivized to do. It's sort of like
46:26
Speaker 1: any think of a mature industry like fashion. You know
46:31
Speaker 1: you're not gonna buy Why do you buy Gucci sunglasses?
46:35
Speaker 1: It's not because you see better, It's because the brand
46:39
Speaker 1: says something that nobody's gonna make fun of you for
46:44
Speaker 1: wearing Gucci glasses. It has a certain cachet of quality.
46:51
Speaker 1: It's probably gonna last, and that's why people But that's
46:55
Speaker 1: all marketing, right, That's the old expression used to be
46:58
Speaker 1: nobody gets fired from buying IBM. If you bought an
47:01
Speaker 1: IBM product, it was considered safe. But I don't really
47:05
Speaker 1: think of investing along those same lines. But then again,
47:10
Speaker 1: I don't have a family office with a billion dollars
47:12
Speaker 1: in it, so maybe I might think differently. Who knows,
47:15
Speaker 1: and it's not only the family office. The family offices
47:18
Speaker 1: might be the ones willing to take a bit more risk.
47:21
Speaker 1: But think of the pension plans, think about the school endowments.
47:27
Speaker 1: They really need some safety. And you know, the thought
47:34
Speaker 1: that they could be invested in a lot of emerging
47:38
Speaker 1: managers that go belly up, you know, the year after
47:42
Speaker 1: is not is not going to fit with their risk profile.
47:48
Speaker 1: Huh really quite interesting. Let's talk a little bit about
47:52
Speaker 1: what seems to be a bit of a reckoning for
47:55
Speaker 1: hedge funds Following the financial crisis in O eight o nine,
48:00
Speaker 1: hedge fund performance seemed to change markedly. What happened? Was
48:05
Speaker 1: it simply size or is there more going on there?
48:08
Speaker 1: What happened is in a way that was shocking, is
48:11
Speaker 1: hedge funds that were supposedly hedge We're down thirty forty
48:15
Speaker 1: so where was the hedge in that? And redemptions started flowing,
48:21
Speaker 1: which led to you know a huge number of hedge
48:27
Speaker 1: funds closing or putting up their gates, and I think
48:32
Speaker 1: the realization then became, Okay, if we want to survive
48:37
Speaker 1: and have a solid business going forward and also really
48:44
Speaker 1: build equity value for fund we need to be large.
48:49
Speaker 1: We need to offer multiple products. We need to think
48:53
Speaker 1: about structure and think less about evergreen funds where people
48:58
Speaker 1: can go in and out without friction, and start thinking
49:02
Speaker 1: about locked up funds. So essentially, investment managers became captains
49:11
Speaker 1: of industry, became people who thought about their fund not
49:16
Speaker 1: just as shuffling money, but as a business with the
49:20
Speaker 1: marketing team, with a strategic team, with different geographic offices,
49:28
Speaker 1: a real business that could offer sort of that one
49:33
Speaker 1: stop shopping to investors. That's a fundamental rethink of the
49:38
Speaker 1: previous business of hedge funds, isn't it. So that raises
49:42
Speaker 1: the question that seems like they're professionalizing and institutionalizing hedge funds,
49:48
Speaker 1: but the pre financial crisis our performance didn't really seem
49:53
Speaker 1: to follow. Why do we think that? Is? Is it
49:56
Speaker 1: the FED? Is it technology? What change markets? Structure? What
50:01
Speaker 1: is it that changed that led so many funds to
50:05
Speaker 1: no longer perform the way they were well, size is
50:08
Speaker 1: certainly one and I think probably the biggest one. But
50:11
Speaker 1: also if you think about all those competitive advantages that
50:16
Speaker 1: we had in the beginning, they were taken away from
50:21
Speaker 1: us or competed away. So the information advantage before reg FD,
50:27
Speaker 1: that was gone. And not only that reg FD I
50:31
Speaker 1: think was implemented in two thousand. But what happened that
50:35
Speaker 1: was that with technology, the information became cheap and available
50:40
Speaker 1: to all of US retail and institutional investors. It wasn't
50:44
Speaker 1: the case before. You couldn't just turn on your computer
50:48
Speaker 1: and have your ten k's and ten q's on any
50:51
Speaker 1: company and earnings release you know, webcast on Bloomberg at
50:58
Speaker 1: your fingertip. So it was really an equalization of the
51:02
Speaker 1: information that took away a competitive advantage. There's the fact
51:08
Speaker 1: that there were so many more hedge funds, so not
51:12
Speaker 1: only are they a bigger but also it's a very competitive,
51:17
Speaker 1: mature industry. So that was you know, the story of
51:23
Speaker 1: performance that was very subdued. Really. Some people have blamed
51:28
Speaker 1: dilution of talent that when there's a few thousand hedge funds,
51:32
Speaker 1: hey you could grab a great analyst, a great trade
51:34
Speaker 1: or a great PM, but at eleven thousand, you're sort
51:38
Speaker 1: of tapping into the ranks of the B players. Correct.
51:42
Speaker 1: There there was a study on that that is called
51:47
Speaker 1: I Think Hedge Fund How big is too Big? But
51:50
Speaker 1: essentially they claim that there are two issues. One is,
51:54
Speaker 1: if your out performance is related to an asset class
51:58
Speaker 1: that's a liquid when you're too big, you're going to
52:01
Speaker 1: run out of assets to invest in long term capital
52:04
Speaker 1: management is correct. And if you're trading an asset class
52:08
Speaker 1: that is very liquid with sort of unlimited supply like
52:12
Speaker 1: the stock market, you're going to run out of talent.
52:15
Speaker 1: And it's exactly as you said. When we started with
52:20
Speaker 1: five hundred million in assets, you need ten excellent ideas.
52:24
Speaker 1: When you have twenty five billion in assets, you need
52:27
Speaker 1: two hundred excellent ideas. Well, let me tell you, maybe
52:30
Speaker 1: the first ten are pretty good. The next one hundred
52:34
Speaker 1: and fifty have the potential to really dilute the excellency
52:39
Speaker 1: of your top ten investing ideas. Huh, that's really interesting.
52:43
Speaker 1: Let's talk a little bit about in Vitro wealth creation.
52:48
Speaker 1: You tell a story in the book that the Stanford
52:50
Speaker 1: Alumni Organization asked you for a donation, which you promptly
52:55
Speaker 1: make At the same time, Stanford works out in arrangement
53:00
Speaker 1: with the fun you're working, and they put some money
53:02
Speaker 1: into Canyon. Canyon collects big fees from Stanford, which they
53:07
Speaker 1: then essentially bank for your bonus next year. And then rinse, lather, repeat,
53:13
Speaker 1: just do the same thing over and over again. How
53:16
Speaker 1: real is that sort of thing across the whole industry?
53:20
Speaker 1: All these endowments and by the way, anybody could go
53:24
Speaker 1: on a certain website and look up every non for
53:26
Speaker 1: profit endowment and who their investors are. Yeah. I mean
53:30
Speaker 1: that's the kind of thinking that made me widely unpopular
53:36
Speaker 1: with the marketing team at Canyon and sort of, you know,
53:40
Speaker 1: them deploring what a sort of socialist French citizen that
53:45
Speaker 1: was even twenty years into being in this country is
53:48
Speaker 1: that socialism? I live five minutes from Friends Academy, which
53:53
Speaker 1: is a private school that has like a surprisingly big endowment,
53:58
Speaker 1: and you go through what the endowment is invested in,
54:01
Speaker 1: and there are a few sites that do this because
54:04
Speaker 1: it's because they have to do tax filings, so it's
54:06
Speaker 1: all available. And what a coincidence. A lot of the
54:11
Speaker 1: funds they invest in, or parents of kids who go there,
54:14
Speaker 1: and it's this really incestuous relations is it is. So
54:19
Speaker 1: it's not this isn't like a one off example. There's
54:22
Speaker 1: a ton of this. I mean, if you think about it,
54:25
Speaker 1: you know, the people who work in the hedge funds
54:27
Speaker 1: and make a lot of money, or typically Harvard, Stanford,
54:31
Speaker 1: the Colombia, people on the list exactly. You go down
54:35
Speaker 1: the list exactly, and those schools have huge endowments that
54:38
Speaker 1: they have to invest and since you know, David Swinson
54:44
Speaker 1: at Yale was so instrumental in making allocation to private
54:50
Speaker 1: equity and hedge fund a real pillar of the portfolio
54:56
Speaker 1: of those endowments, it's been systematically, okay, systematically the case
55:01
Speaker 1: that those school endowments invest in hedge funds where they
55:05
Speaker 1: are students are going and getting paid. And so as
55:08
Speaker 1: you said, look, I'm not saying it's wrong. Obviously everything
55:13
Speaker 1: is very transparent and legal. But there's something that strikes
55:18
Speaker 1: me as not quite right when you know this money
55:24
Speaker 1: is sort of recycled. It's a little icky. It's a
55:28
Speaker 1: little icky, right, it just seems like, oh so that okay,
55:31
Speaker 1: it's a little you know, it just feels like it's
55:36
Speaker 1: not arms length what I would imagine is Hey, if
55:40
Speaker 1: you're investing on behalf of the public, you have to
55:44
Speaker 1: have an arms length relationship. It can't be that sort
55:47
Speaker 1: of old boys network. But apparently it's not illegal. It's
55:53
Speaker 1: just not pretty. It's just that's exactly what it is.
55:57
Speaker 1: I'm not saying that there's any other way. I don't
56:01
Speaker 1: have a genius idea to say, you know, those endowments
56:05
Speaker 1: should invest with mutuo funds at five bibs a fee.
56:11
Speaker 1: I just feel like the way you describe it, there's
56:14
Speaker 1: something that is surprising in the way the world is working.
56:23
Speaker 1: So there's a quote in the book that I really
56:25
Speaker 1: really liked. My conviction is that the job of investing
56:30
Speaker 1: is a highly creative enterprise, and that the qualities it
56:34
Speaker 1: requires our imagination, ingenuity and guts tell us a little
56:40
Speaker 1: bit about imagination, ingenuity and guts. Well, I think the
56:46
Speaker 1: stereotype of a good investor is somebody who's incredibly quick
56:51
Speaker 1: at numbers, or you know, a very ruthless deal maker.
56:56
Speaker 1: And my experience is that at least when you trade
57:03
Speaker 1: an invest in in distress, but probably in every other category,
57:08
Speaker 1: there are other qualities that people don't talk about enough.
57:11
Speaker 1: And imagination and creativity and being a good listener or
57:16
Speaker 1: some of them. If you think about what it takes
57:18
Speaker 1: to restructure a company, a lot of negotiations, thinking up
57:23
Speaker 1: a new capital structure, explaining it, explaining it to other stakeholders,
57:30
Speaker 1: having a vote on that. But it takes a lot
57:34
Speaker 1: of you know, thinking outside the box and ingenuity to
57:39
Speaker 1: see the potential of a different cap structure or different
57:45
Speaker 1: type of assets. Selling a business that's no longer profitable,
57:50
Speaker 1: or closing some stores, or expanding in an area where
57:55
Speaker 1: the company hasn't done before. That's all stuff that is
58:00
Speaker 1: just thinking up ideas and scenario that has very little
58:05
Speaker 1: to do with numbers. I'm not saying it doesn't help
58:07
Speaker 1: to have some ease with numbers, but it's certainly not
58:12
Speaker 1: the foundation for success in my mind. When you're talking
58:16
Speaker 1: about these highly creative qualities, you also note that men
58:20
Speaker 1: and women possess these qualities in equal measure for sure,
58:24
Speaker 1: for sure, And that was very much in response to
58:29
Speaker 1: the idea of the concept that men are better at
58:32
Speaker 1: taking risks or they're more aggressive, And that may be so,
58:38
Speaker 1: but I don't think risk for the sake of risk
58:42
Speaker 1: is the quality required in being a good investor. You know,
58:46
Speaker 1: there's a famous joke by fran Leboiz who say, Hey,
58:51
Speaker 1: I'm a smoker. I'm great at taking risk, and you know,
58:55
Speaker 1: we'd have all smokers in trading rooms if that was
58:57
Speaker 1: the case. You need to have a return for risk,
59:00
Speaker 1: and return is the ability to think up a solution.
59:05
Speaker 1: Look the hedge fund business, we're in the business of ideas,
59:09
Speaker 1: and ideas are equally distributed between men and women. All Right,
59:14
Speaker 1: I got a couple of curveball questions for you, starting
59:18
Speaker 1: with it's not so much a glass ceiling as a
59:22
Speaker 1: quicksand floor. Explain what you mean by that. I think
59:27
Speaker 1: when I got stuck, or I saw other women stuck,
59:30
Speaker 1: it's not so much that they were hitting their head
59:33
Speaker 1: against some invisible ceiling, is that they were sort of
59:36
Speaker 1: pulled down. They just had to and I had to
59:40
Speaker 1: fight so much for what seemed to be much easy,
59:46
Speaker 1: easier to get to for men. Now, of course, it's
59:50
Speaker 1: just my impression. I was not a man, I was
59:52
Speaker 1: a woman, and you could tell me, well, you had
59:54
Speaker 1: the wrong impression, but it was sort of systematic and
1:00:00
Speaker 1: enough for me to think it's very hard to get
1:00:05
Speaker 1: up because I have to be so aggressive and fight
1:00:07
Speaker 1: so much for you name it the capital behind my ideas,
1:00:11
Speaker 1: the business line I want to lead, the extra analyst
1:00:15
Speaker 1: I need. So it's twenty five years later since you
1:00:19
Speaker 1: started at Canyon. In finance, generally we see women running
1:00:24
Speaker 1: all sorts of companies and divisions in the world of finance,
1:00:28
Speaker 1: but as you mentioned, we really haven't seen the changes
1:00:31
Speaker 1: take place at the hedge fund sector. Why do you
1:00:36
Speaker 1: think that is? Yeah, I mean hedge funds really do
1:00:39
Speaker 1: remain a bastion of white men. It is changing some,
1:00:44
Speaker 1: but slowly, I mean nano steps, and again certainly not
1:00:48
Speaker 1: where you would expect them to be for the size
1:00:50
Speaker 1: and the influence the industry has. I think it takes
1:00:53
Speaker 1: two things. One is outside push from investors, and we're
1:00:57
Speaker 1: definitely seeing that LPs really do want diversity and they
1:01:02
Speaker 1: insist and ask questions about it. But the piece that's
1:01:05
Speaker 1: still not completely bought in, I think is internally. I
1:01:11
Speaker 1: still don't think hedge fund managers have bought the idea
1:01:15
Speaker 1: that they'll make more money with a more diverse investing
1:01:18
Speaker 1: fun and a ton of research supporting that. There is
1:01:23
Speaker 1: really interesting and my something that just cracked me up
1:01:27
Speaker 1: in the book. I'm gonna read you a quote and
1:01:30
Speaker 1: you're gonna have to explain this to me. You walk
1:01:33
Speaker 1: into the kitchen at Canyon and an imposing, handsome man
1:01:37
Speaker 1: with a killer smile was pouring himself a cup of
1:01:40
Speaker 1: coffee in the common kitchen. I said hello. One of
1:01:44
Speaker 1: the other analysts, visibly excited, asked me, did you see him? Yes,
1:01:48
Speaker 1: I think it's fabulous. We're bringing diversity onto the team.
1:01:51
Speaker 1: And the other analyst says, to you, what are you
1:01:54
Speaker 1: talking about? That was Magic Johnson. He's heading the Canyon
1:01:58
Speaker 1: Johnson real Estate joined venture. You're from France. Still you
1:02:03
Speaker 1: don't recognize Magic Johnson. New idea. I saw this LA Lakers.
1:02:08
Speaker 1: You're in LA famous one of the most famous basketball
1:02:13
Speaker 1: players ever up there with Michael Jordan. Didn't mean anything
1:02:18
Speaker 1: to you. Yes, and when you you know, when you're
1:02:20
Speaker 1: talking about being comfortable being uncomfortable right there? That was
1:02:24
Speaker 1: that was an awkward pause. But no, I didn't recognize him.
1:02:29
Speaker 1: I saw this really handsome black men with killer smile, right.
1:02:35
Speaker 1: Can't argue with that. So I said hello, and I
1:02:37
Speaker 1: was I was very excited to, you know, have some
1:02:40
Speaker 1: diversity in the team. That's hilarious. That really is funny. Um,
1:02:44
Speaker 1: let me move on to my favorite questions that I
1:02:47
Speaker 1: ask all of my guests, starting with what is keeping
1:02:52
Speaker 1: you entertained these days? What are you watching or listening to? Netflix,
1:02:56
Speaker 1: Amazon podcast whatever? Uh? Well, I do watch quite a
1:03:00
Speaker 1: few French shows. There's one on Netflix that's called Standing
1:03:05
Speaker 1: Up about stand up comedians standing up in France or
1:03:11
Speaker 1: in France, in France in French translated, of course, that's
1:03:16
Speaker 1: quite funny. I recently benched on Silicon Valley, so that
1:03:23
Speaker 1: I had seen before, but it's such a classic, and
1:03:26
Speaker 1: you'll notice the first time around I didn't pay much
1:03:30
Speaker 1: attention to how the private equity guys are depicted. It's priceless. Really,
1:03:36
Speaker 1: I have to go back. It's really spot on. So
1:03:39
Speaker 1: that that's Those are the two things that I've been watching.
1:03:43
Speaker 1: So I got a couple of questions to ask you
1:03:45
Speaker 1: about that. First, we loved to call my agent. I
1:03:49
Speaker 1: don't know if you watch that. That's excellent, so good,
1:03:52
Speaker 1: And in fact we ended up watching Emily in Paris,
1:03:56
Speaker 1: not because it was good, just because the scenery was
1:03:59
Speaker 1: just so amazing, like you could watch it on mute
1:04:02
Speaker 1: and the architect yeah, no, it looked great. Just ignore
1:04:09
Speaker 1: the plot line. And then if you like Silicon Valley
1:04:14
Speaker 1: and this is just a touch more out there. Um,
1:04:18
Speaker 1: there's a show on Apple TV called Mythic Quest, which
1:04:22
Speaker 1: is about a game company, and it's the same sort
1:04:26
Speaker 1: of crazy, quirky characters, and I hear it's only slightly exaggerated.
1:04:33
Speaker 1: I got the same sense from Silicon Valley. This seems exaggerated.
1:04:37
Speaker 1: And the response was not as much as you would guess. No,
1:04:40
Speaker 1: Bill Gates was an advisor to this show. It's amazing noted.
1:04:45
Speaker 1: We were in Andres and Horowitz, um for for a podcast. Actually,
1:04:50
Speaker 1: and that weekend I'm watching Silicon Valley and I'm laughing. Oh,
1:04:54
Speaker 1: there is the outside with the waterfall around it. I
1:04:58
Speaker 1: was like, we were just there. They literally go into
1:05:01
Speaker 1: these VC shops and film in it around it like
1:05:04
Speaker 1: all the b roles were. They were really amazing. Yeah. Anyway,
1:05:08
Speaker 1: if you like Silicon Valley, see if you like Mythic Quest.
1:05:11
Speaker 1: It's a little weird, it's a little quirky. It's very fun.
1:05:14
Speaker 1: Tell us about your early mentors who helped shape your career.
1:05:19
Speaker 1: I don't know that I've had mentors. It's it's a
1:05:21
Speaker 1: relatively new concept. Did you have mentors. There were people
1:05:26
Speaker 1: who I put an outside value on their influence. Some
1:05:33
Speaker 1: of them knew me, some of them we never spoke,
1:05:36
Speaker 1: but I could create a list of Hey, these ten
1:05:40
Speaker 1: people had an outside impact on how my career developed,
1:05:45
Speaker 1: some without even their knowledge, right exactly, So, I think
1:05:48
Speaker 1: it's when I think of mentor, my definition is somebody
1:05:51
Speaker 1: who takes a special interest in developing your career. And
1:05:55
Speaker 1: certainly that didn't really exist when I started. Did people
1:06:01
Speaker 1: have an influence on my career. Obviously my ex co
1:06:05
Speaker 1: partners Mitch Julius and Josh Friedman. I mean I grew
1:06:09
Speaker 1: up with them. They ran the business. I learned most
1:06:12
Speaker 1: of what I know from them, and they were interested
1:06:16
Speaker 1: in my making money for the fund where they interested
1:06:20
Speaker 1: in me Dominique having a wonderful career for the sake
1:06:23
Speaker 1: of my career. No, not particularly. They had a fun
1:06:27
Speaker 1: to run and money to make, and you know they
1:06:30
Speaker 1: made sure that I performed. Let's talk a little bit
1:06:34
Speaker 1: about books. You mentioned when Genius failed in Black Edge
1:06:38
Speaker 1: in the book. What are some of your favorite books?
1:06:40
Speaker 1: What are you reading right now? So my favorite books
1:06:44
Speaker 1: are not financed books. I'm a huge reader. I read
1:06:47
Speaker 1: in English in French. I read poetry, play. My favorite
1:06:51
Speaker 1: books or have nothing to do with business, The Little
1:06:55
Speaker 1: Prince by Santi Exipani and Kim by Rudier Kipling. I
1:07:00
Speaker 1: am reading now a book called When We Were Orphans
1:07:04
Speaker 1: by Ishiguro. I'm in a Japanese phase and so I'm
1:07:08
Speaker 1: meeting Japanese contemporary authors. That's a good list. I get
1:07:12
Speaker 1: emails from people all the time that tell me. Most
1:07:15
Speaker 1: of what they read they find in recommendations from people
1:07:19
Speaker 1: like you on the show. So a list of ideas
1:07:22
Speaker 1: from other people, you know, I have a long list
1:07:25
Speaker 1: of books. What sort of advice would you give to
1:07:29
Speaker 1: a recent college grad, male or female who was interested
1:07:33
Speaker 1: in a career in either hedge funds or distressed assets.
1:07:38
Speaker 1: I'm not very good at giving sort of open ended advice,
1:07:42
Speaker 1: but I'll try it, and that would be to make
1:07:46
Speaker 1: sure they go into the field because they love it,
1:07:50
Speaker 1: meaning it sounds don't just chase the bucks. That's what
1:07:56
Speaker 1: I meant, and I think they were quite a few
1:08:01
Speaker 1: people that I've interviewed in the later years where obviously
1:08:06
Speaker 1: the money was the main incentive, and it's not clear
1:08:10
Speaker 1: to me that you're going to be resilient enough if
1:08:13
Speaker 1: that's your motivation, and as we spoke, I really think
1:08:16
Speaker 1: that's an important quality if you If you can't stick
1:08:19
Speaker 1: with it, it's going to be hard to be successful,
1:08:23
Speaker 1: and sticking with it is what is required. You're not
1:08:26
Speaker 1: going to get rich in a just a few years.
1:08:29
Speaker 1: And our final question, what do you know about the
1:08:32
Speaker 1: world of investing today? You wish you knew twenty five
1:08:35
Speaker 1: or so years ago when you were first getting started.
1:08:39
Speaker 1: I think it's mostly that people who speak with authority
1:08:44
Speaker 1: and great, you know, the great assertive tone, don't always
1:08:50
Speaker 1: know what they're talking about other than that nothing because
1:08:56
Speaker 1: it was a great adventure. It's sort of a thrill
1:09:00
Speaker 1: to discover a field, right, That is really what makes
1:09:04
Speaker 1: a job so fascinating. Well, Dominique, thank you for being
1:09:08
Speaker 1: so generous with your time. I really enjoyed the book
1:09:11
Speaker 1: and heartily recommend it. Damsel and Distressed My Life in
1:09:16
Speaker 1: the Golden Age of Hedge Funds by Dominic Mielle. If
1:09:19
Speaker 1: you enjoy this conversation, well check out any of our
1:09:22
Speaker 1: previous four hundred and eighty seven such discussions we've had.
1:09:27
Speaker 1: You can find those at YouTube, iTunes, Spotify, wherever you
1:09:32
Speaker 1: find your favorite podcasts. Sign up for our daily reading
1:09:35
Speaker 1: list at Riholtz dot com. Follow me on Twitter at Ridholts.
1:09:39
Speaker 1: Follow all of the Bloomberg podcasts on Twitter at podcast
1:09:44
Speaker 1: I would be remiss if I did not thank the
1:09:46
Speaker 1: crack team that helps put these conversations together each week.
1:09:49
Speaker 1: Justin Milner is my audio engineer. Atika Valbron is our
1:09:54
Speaker 1: project manager. Paris Wold is my producer. Sean Russo is
1:09:59
Speaker 1: my head of research. I'm Barry Results. You've been listening
1:10:03
Speaker 1: to Masters in Business on Bloomberg Radio