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Machines Are Replacing Wall Street's Bonus Culture · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you
• 0:05
  Speaker 1: along with my co host Lisa Brahma Wicks. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money, whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Well, this next story really bothers
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  Speaker 1: me as a twenty year veteran of Wall Street, and
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  Speaker 1: that is analysts expect thousands of jobs on Wall Street
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  Speaker 1: will be replaced by technology. Uh lenan newon financi reporter
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  Speaker 1: for Bloomberg News, joins us on our Bloomberg in our
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  Speaker 1: Actor Broker studio and she has this story. So, Lennon,
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  Speaker 1: we've heard these big financial services come you talk about
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  Speaker 1: the huge investments they're making into technology. That's really changing
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  Speaker 1: the culture of the financial services industry, isn't That's right, Paul.
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  Speaker 1: It's a big wamp wamp on Wall streets this morning.
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  Speaker 1: Bonus culture is starting to disappear because the individual humans
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  Speaker 1: are not responsible for those kind of big blockbuster trades
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  Speaker 1: that used to see. Maybe we're when you were on
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  Speaker 1: the streets. So we're talking about al goes and automated
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  Speaker 1: trading strategies that are really making the money here, which
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  Speaker 1: means that the individual humans don't get as much. So
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  Speaker 1: does this just shift things to more of a salary
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  Speaker 1: type of model. And have we seen that kind of
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  Speaker 1: adaptation at this point, yes, so we've seen bonuses decline,
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  Speaker 1: first of all, and we've also seen more salary models
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  Speaker 1: at the same time as seeing the bonus kind of
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  Speaker 1: being considered as a group effort or team sport, as
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  Speaker 1: one of our sources says in the story boy Back,
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  Speaker 1: And I mean just it was, you know, my total
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  Speaker 1: compensation was the bonus and you started just kind of
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  Speaker 1: obsessing on it the day you come back from summer
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  Speaker 1: vacation in September, all the way through to year end,
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  Speaker 1: jocking for the number. But now it's I know it's
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  Speaker 1: changed now again, bigger percentage of total conversations in um
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  Speaker 1: in the salary. Are they finding that they're able to
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  Speaker 1: attract the same quality of people. This is an interesting
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  Speaker 1: question too, because the tech companies obviously want this kind
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  Speaker 1: of high quality quant talent as well, and so one
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  Speaker 1: of the things that used to be the same in
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  Speaker 1: Grace on Wall Street. Was the bonus, right, which is
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  Speaker 1: that the banking industry could attract high talent because of
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  Speaker 1: the higher pay. But it seems like that's declining now,
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  Speaker 1: So that's a that's another question is whether they'll be
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  Speaker 1: able to attract the talent if the bonuses don't come up. So,
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  Speaker 1: just can you give us a sense of how widespread
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  Speaker 1: this is, because typically the areas where the bonus has
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  Speaker 1: been one of the biggest components is in say the
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  Speaker 1: trading side of things or the banking side of things.
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  Speaker 1: We're actually getting deals done and trading short there can
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  Speaker 1: be some uh, some automation there, although not in every
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  Speaker 1: asset class, and on the banking side same, I mean,
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  Speaker 1: you still have to complete the deal. So where are
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  Speaker 1: we seeing the most disappearance of this culture. That's right, Lisa,
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  Speaker 1: And it's lumpy, it doesn't you know, it's not uniform.
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  Speaker 1: But I think in trading the markets that are most electronics.
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  Speaker 1: So we're talking about equities, we're talking about foreign exchange,
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  Speaker 1: maybe slower as a bond market to kind of get
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  Speaker 1: up to speed in this, but the bond market eventually
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  Speaker 1: is going to go electronic as well. And so we're
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  Speaker 1: seeing more of this happen in the highly electronic automated markets,
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  Speaker 1: and it's across the buy side and the cell side
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  Speaker 1: as well. It's just a good thing from a profitability
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  Speaker 1: perspective for the financial services firm if they can cut
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  Speaker 1: out some of these you know, high cost talent. Uh. Definitely.
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  Speaker 1: That's one of the major catalysts behind this move is
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  Speaker 1: the cutting of costs, right, the ability to reduce headcount,
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  Speaker 1: reduce the number of people on the desk, reduced the
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  Speaker 1: bonuses that you pay in order to cut costs. Although
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  Speaker 1: you have to think on the flip side, there's got
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  Speaker 1: to be some people saying that this could potentially hamper
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  Speaker 1: profitability and that it doesn't incentivize people to go out
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  Speaker 1: there uh and obsess when they come in after summer
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  Speaker 1: break and lose hair over the question of how much
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  Speaker 1: money they're gonna make for the company. That's right. If
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  Speaker 1: you eat what you kill, then you're pretty hungry, right,
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  Speaker 1: so you get out there and you try and found
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  Speaker 1: the pavement, whereas um in this model, maybe people are
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  Speaker 1: just collecting their salary. Have there ever been studies that
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  Speaker 1: show how much that hunger adds to profitability? Versus detract
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  Speaker 1: when it comes to risks that go awry. I'm not sure. No,
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  Speaker 1: I don't think so. I'm not aware of anything because
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  Speaker 1: I think after the financial crisis, one of the when
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  Speaker 1: you look back to the financial crisis, a lot of
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  Speaker 1: regulars said it was the bonus culture that contributed to
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  Speaker 1: some of the behavior that we saw from the financial
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  Speaker 1: services firm grinding out bad deals just to grind out
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  Speaker 1: deals to get paid. Yeah, but it was the bonus
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  Speaker 1: culture of who everybody in the firm, including the very
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  Speaker 1: top and the executive managers and the risk managers. I mean,
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  Speaker 1: at a certain point, if you have risk managers, they
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  Speaker 1: try to put a stop to that. But there has
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  Speaker 1: to be a yin and a yang, right, I mean,
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  Speaker 1: I guess that I'm trying to figure out, you know,
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  Speaker 1: where this balance is, and I'm trying to figure out
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  Speaker 1: how important that conversation is exactly. It's really important. How
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  Speaker 1: do you motivate people and how to keep them hungry
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  Speaker 1: and aggressive and wanting to win, while at the same
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  Speaker 1: time not allowing them to do things that are over
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  Speaker 1: the line. And it's really really important question. Lenan Newin,
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  Speaker 1: thank you so much for joining us. It's a really
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  Speaker 1: interesting read and I'm sure prompting a lot of angst
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  Speaker 1: across Wall Street, uh and beyond it. But this is something, Frankly,
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  Speaker 1: it's not just Wall Street, it's it's a lot of industry.
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  Speaker 1: Is the concept of how does automation play with humans?
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  Speaker 1: How do people use its third advantage? Yeah? Not surprisingly.
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  Speaker 1: I guess what the top red story is on the
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  Speaker 1: bloomber terminal right now, Lennan story. Yeah, all the algo
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  Speaker 1: is really eagerly reading about their bonuses. Lennui, and thank
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  Speaker 1: you so much for being with US finance reporter for
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  Speaker 1: Bloomberg News. Well, in the world of global trade, Wednesday
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  Speaker 1: will be a big day. That is the day when
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  Speaker 1: the US and China are set to sign the Phase
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  Speaker 1: one trade deal, and we'll get a sense of what
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  Speaker 1: that means for retailers coming up with Rick Heffelbin. He's
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  Speaker 1: a former chairman and president CEO of the American Apparel
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  Speaker 1: and Footwear Association. So Rick, thanks so much for joining
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  Speaker 1: us here in our Bloomberg Interactive Broker studio. So if
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  Speaker 1: we get this trade deal with again schedule to be
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  Speaker 1: signed U this Wednesday, what does it mean for apparel makers,
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  Speaker 1: footwear makers? This country. Well, clearly, Paul, we're you know,
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  Speaker 1: we're excited they're meeting. We're exciting. They're signing a piece
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  Speaker 1: of paper. Course it's eighty six pages and nobody's seen
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  Speaker 1: it yet, which is a little bit disturbing from everything
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  Speaker 1: that we've heard from you know, our insiders. Uh, we're
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  Speaker 1: not particularly bowled over by this deal. A matter of fact,
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  Speaker 1: we don't think it's going to help us at all,
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  Speaker 1: which is uh a big concern for a whole host
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  Speaker 1: of reasons are really simple to understand. Um, they eliminated
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  Speaker 1: the December fifteen tariff, which we never had, so eliminating
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  Speaker 1: something we never had is not of great value to us.
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  Speaker 1: The percent that we've had for a couple of months
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  Speaker 1: now on hats, handbags and gloves, that's sticks, that's still there,
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  Speaker 1: And the fifteen percent that they hit us with on
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  Speaker 1: September one gets cut to seven and a half percent, which,
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  Speaker 1: in our humble opinion, is seven and a half percent
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  Speaker 1: too much. So we don't see an new winds for
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  Speaker 1: our industry at this point in time. We are justifiably
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  Speaker 1: upset for a whole host of reasons, Like, you know,
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  Speaker 1: is there going to be a Phase two are you know,
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  Speaker 1: will talks go on. What's the roadmap for getting rid
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  Speaker 1: of this? Well, remember when you spoke with us over
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  Speaker 1: recent months when you said that it would be an
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  Speaker 1: absolute disaster, death knell if the tariffs are planned for
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  Speaker 1: December had gone into effect. So on on a certain level,
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  Speaker 1: that's good, right, they didn't go into effect. Well they did,
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  Speaker 1: and they didn't. Remember as an industry, we are war.
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  Speaker 1: Prior to the trade war, six percent of all imports
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  Speaker 1: coming into the United States, but we already paid fifty
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  Speaker 1: one percent of all duties collected. So we are a
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  Speaker 1: highly tariffed industry in America. The average terrorists before the
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  Speaker 1: trade war one point two percent. Our average terrorists were
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  Speaker 1: about twelve percent. Okay, Well, just what I'm trying to
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  Speaker 1: understand is going forward, at least we have certainty, right
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  Speaker 1: because Phase two isn't gonna necessarily involve all retail and tariffs. Again,
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  Speaker 1: let's say it doesn't. Is that good enough? No, it's not.
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  Speaker 1: It's gotten. It's not good enough because you're you're essentially
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  Speaker 1: taxing us out of our prime sources supply. And that's
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  Speaker 1: what hurts because a huge percent forty one of all
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  Speaker 1: apparel coming into the United States comes from China. Sixty
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  Speaker 1: percent of all footwear comes from China, percent of all accessories.
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  Speaker 1: So what signing that deal does. It signs a mandate
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  Speaker 1: for us to get out of China. Okay, so we'll
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  Speaker 1: listen to the administration, we'll listen to present, We'll get
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  Speaker 1: out of China. Where are we gonna go? Where we
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  Speaker 1: gonna go? So in this first round, with all the agitation,
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  Speaker 1: people decided to stay there. We got through the holiday
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  Speaker 1: season by renegotiating. But all bets are off going into
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  Speaker 1: so prices have to go up. When prices go up,
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  Speaker 1: sales go down, and retail will end up in a funk.
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  Speaker 1: You know, we lost seventies seven thousand jobs in retail
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  Speaker 1: list year, and retailers everybody knows is essentially two thirds
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  Speaker 1: of the economy. Ten percent or twelve percent of all
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  Speaker 1: jobs are in retail. So we look at this signing
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  Speaker 1: as a concrete step to tell us, okay, you better
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  Speaker 1: make other plans. And you know how long it takes
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  Speaker 1: to make other plans, three to five years. So we're
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  Speaker 1: in trouble. We're hurting. So, Rick, what did your members,
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  Speaker 1: the apparel and footwear retailers, what did they do. How
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  Speaker 1: did they deal with the higher tariffs to day try
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  Speaker 1: to pass along those price increases. Did it eat into
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  Speaker 1: their margin? What did you find so? Well? Remember I
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  Speaker 1: left a f A at the end of the year,
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  Speaker 1: so I can tell you what my former members did,
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  Speaker 1: and what they all did unilaterally was went over to
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  Speaker 1: China and said, look, we make our money in the
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  Speaker 1: fourth quarter of the year. Help us out. Work with
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  Speaker 1: us because we will have to absorb tariffs on inbound
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  Speaker 1: merchant that I have. So pretty much China worked with everybody,
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  Speaker 1: but they say, you know, one time deal, we'll get
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  Speaker 1: you through holiday. So you're on your own. I'm looking
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  Speaker 1: today five below, which is a retailer the prices most
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  Speaker 1: of its goods at five dollars or less. It felt
• 10:11
  Speaker 1: the most since it went public in twelve. It had
• 10:14
  Speaker 1: downgraded some of its forecasts. And it makes me think,
• 10:17
  Speaker 1: particularly with respect to margins, these sort of lower income
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  Speaker 1: are the sort of uh discount goods stores potentially have
• 10:25
  Speaker 1: the most to lose. Is that right? Yeah, the independent
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  Speaker 1: retailers and low price stores are the most at risk.
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  Speaker 1: There's more buying power the higher you go up the
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  Speaker 1: food chain, so you know, certain retailers will do okay,
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  Speaker 1: they'll get around it, and certain retailers will suffer. Can
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  Speaker 1: you give us a sense of the sort of scale here?
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  Speaker 1: I mean, in other words, how does that affect department
• 10:47
  Speaker 1: stores the Macy's is of the world, or the it
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  Speaker 1: affects them because of the huge quantity of merchandise that
• 10:54
  Speaker 1: they bring in. They were reliant on their suppliers, and
• 10:58
  Speaker 1: their suppliers don't have an other place to go. So
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  Speaker 1: the big guys will get hurt. The question of what
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  Speaker 1: degree of how much hurt there will be in the
• 11:07
  Speaker 1: in the plan, you will see it. You're gonna see
• 11:09
  Speaker 1: earnings coming up. You know, everybody goes holiday was great.
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  Speaker 1: You know we did three point forward to four percent increase.
• 11:16
  Speaker 1: Maybe we did about seven hundred thirty billion dollars during
• 11:19
  Speaker 1: the holiday season. Awesome. What about earnings? You know everybody
• 11:23
  Speaker 1: gets so excited about sales. What about earnings? Earnings reports
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  Speaker 1: are coming out the next three weeks. You're gonna see
• 11:30
  Speaker 1: how we did. And yeah, well, the next time, my
• 11:33
  Speaker 1: ten year old comes to me and says, I saw
• 11:35
  Speaker 1: this watch and it was discounted by eight percent. We
• 11:39
  Speaker 1: gotta buy it. I'm gonna look at him and I'm
• 11:40
  Speaker 1: gonna say what about the earnings? See what about the earnings?
• 11:43
  Speaker 1: And he'll he'll look at me and he'll say, oh
• 11:45
  Speaker 1: my god, why are you my mother? Rick Halvin by,
• 11:47
  Speaker 1: and thank you so much for being with us. Rick
• 11:49
  Speaker 1: Calvin Bien, former chair at president and chief executive officer
• 11:52
  Speaker 1: of the American Apparel and Footwear Association, joining us here
• 11:56
  Speaker 1: in our interactive broker studio is a really timely discussion.
• 12:13
  Speaker 1: Well en was the everything rally markets across the world
• 12:18
  Speaker 1: performing quite well, asset classes performing very well, and not
• 12:23
  Speaker 1: just US equities of questions, what do you do for
• 12:25
  Speaker 1: an encore? Uh in. Christina Hooper, chief Global market strategist
• 12:30
  Speaker 1: for Investco, joined us here in our Bloomberg in Actor
• 12:33
  Speaker 1: Broker studio to share her thoughts. So, Christina, again, you've
• 12:36
  Speaker 1: just taken a look at the SNPI about in bonds
• 12:41
  Speaker 1: rallied as you go into how do you think about
• 12:46
  Speaker 1: an encore? Well, I think we should expect modest returns
• 12:50
  Speaker 1: for U S docks. They had a really strong run
• 12:53
  Speaker 1: up in and I do believe there is certainly a
• 12:57
  Speaker 1: bias to the upside, just given very a common midative
• 13:00
  Speaker 1: monetary policy, especially from the Fed. But I think leadership
• 13:05
  Speaker 1: will rotate. Uh, it will shift to the emerging market
• 13:08
  Speaker 1: space for a few key reasons. First and foremost, we
• 13:12
  Speaker 1: saw balance sheet normalization and back in September, and interestingly,
• 13:17
  Speaker 1: that's when e M took off. E M outperformed the
• 13:20
  Speaker 1: US in the fourth quarter, and in fact, China was
• 13:23
  Speaker 1: a standout within the emerging market space. And I think
• 13:26
  Speaker 1: a lot of that had to do with balance sheet
• 13:27
  Speaker 1: normalization ending. Okay, balance sheet normalization is one thing. Balance
• 13:31
  Speaker 1: sheet re expansion is another. And that's really what we saw, right.
• 13:34
  Speaker 1: This isn't just normalization ending. This is uh, you know,
• 13:38
  Speaker 1: I don't know if you want to call it qui
• 13:39
  Speaker 1: again because I'll get absolutely pasted on Twitter. But some
• 13:43
  Speaker 1: sort of easing through the expansion of the balance well,
• 13:46
  Speaker 1: that certainly has helped as well. But I think we
• 13:48
  Speaker 1: can overlook how much balance sheet normalization impacted emerging markets.
• 13:53
  Speaker 1: It was creating a liquidity suck, so much so that
• 13:56
  Speaker 1: the former Reserve Bank of India governor or Chip Patel
• 14:01
  Speaker 1: had an op ed piece in the Financial Times in
• 14:03
  Speaker 1: June of two eighteen, essentially an open letter of the
• 14:06
  Speaker 1: FEDS saying, hey, please slow down bouncy normalization. You're creating
• 14:11
  Speaker 1: a liquidity suck that is impacting negatively emerging markets. So, Christina,
• 14:16
  Speaker 1: as we think about the US equity markets, mostly a
• 14:21
  Speaker 1: story of multiple expansion, not much earnings growth. That really
• 14:25
  Speaker 1: puts the pressure on this market to deliver earnings growth.
• 14:29
  Speaker 1: What do you think the outlook should be for investors
• 14:31
  Speaker 1: for earnings growth? Well, I think earnings growth will be
• 14:34
  Speaker 1: rather modest. But I do believe because of how extraordinary
• 14:38
  Speaker 1: the FEDS accommodative stances, because the bar is so high
• 14:43
  Speaker 1: on any kind of rate hike after three insurance cuts,
• 14:47
  Speaker 1: I do believe it's an environment where risk assets benefit,
• 14:53
  Speaker 1: and so there is some upside potential even if you
• 14:56
  Speaker 1: do have lackluster earnings. So let's talk about the main
• 14:59
  Speaker 1: cause for a twenty It sounds like emerging markets will
• 15:01
  Speaker 1: continue to get a lift from this dynamic. Is that right? Yes?
• 15:04
  Speaker 1: But I would say we need to be selective within
• 15:06
  Speaker 1: the emerging market space, so favor Asia e M in
• 15:09
  Speaker 1: particular Chinese equities certainly benefiting from what all of em
• 15:14
  Speaker 1: is benefiting from in terms of the end of balance
• 15:16
  Speaker 1: sheet normalization, more liquidity UM, but in particular Chinese equity
• 15:20
  Speaker 1: should benefit from a phase one US China trade deal.
• 15:24
  Speaker 1: Why aren't we seeing more of a lift in the
• 15:26
  Speaker 1: small and MidCap shares the Russell's two thousand, especially in
• 15:29
  Speaker 1: light of the rally that we're seeing in junk bonds. Well,
• 15:31
  Speaker 1: because growth remains quite modest, and so this is an
• 15:36
  Speaker 1: environment where investors are drawn to larger cap names and
• 15:42
  Speaker 1: are drawn to secular growth. Uh that that doesn't mean
• 15:46
  Speaker 1: that secular growth is going to outperform for the full year.
• 15:49
  Speaker 1: That doesn't mean that large caps are going to outperform
• 15:51
  Speaker 1: for the full year. I think we'll get short periods
• 15:54
  Speaker 1: of time, sort of bursts in which um smaller cap names,
• 15:59
  Speaker 1: more cyclical name perform well in But I do think
• 16:03
  Speaker 1: when we look back on the year in full that
• 16:06
  Speaker 1: secular growth tends to outperform and larger cap tends to
• 16:10
  Speaker 1: outperform because growth is rather modest. All right, let's say
• 16:14
  Speaker 1: that I'm concerned about evaluation. One of the sectors that
• 16:17
  Speaker 1: screams out as cheap as energy. Is there any reason
• 16:20
  Speaker 1: to get my toe in the energy space. Well, you
• 16:24
  Speaker 1: always want to be well diversified, and that includes some
• 16:26
  Speaker 1: exposure to energy. And she just said, now it's like
• 16:33
  Speaker 1: forget it, and if one word to assume that the
• 16:37
  Speaker 1: US Iran conflict does not end today and in fact
• 16:41
  Speaker 1: has some sort of legs. UM. That's another rationale for
• 16:45
  Speaker 1: having exposure to to some energy stocks. UM. But I
• 16:49
  Speaker 1: do believe in the grand scheme of things, UH, energy
• 16:53
  Speaker 1: is not going to perform as well as other sectors
• 16:56
  Speaker 1: like technology. I was reading an article this morning about
• 16:59
  Speaker 1: how a dollar, which is kind of a key component
• 17:01
  Speaker 1: when we talk about everything from commodities to emerging markets, UH,
• 17:05
  Speaker 1: that the dollar has not served as the haven that
• 17:08
  Speaker 1: it once has, and that during bouts of geopolitical turmoil
• 17:11
  Speaker 1: or other issues like what you mentioned with Iran in
• 17:13
  Speaker 1: the US, the dollar hasn't necessarily rallied to the degree
• 17:16
  Speaker 1: that you would expect. Do you buy the argument? I mean,
• 17:19
  Speaker 1: this sort of feeds into the whole dollar weakening UH
• 17:22
  Speaker 1: kind of concept in the US losing its cloud and
• 17:24
  Speaker 1: the international community, at least with respect of the currency
• 17:28
  Speaker 1: is Do you buy that? I think there's some truth
• 17:30
  Speaker 1: to that argument. We certainly have seen gold as a
• 17:34
  Speaker 1: safe haven asset class of choice as well as the
• 17:37
  Speaker 1: Japanese yen. So I think that is true, and I
• 17:40
  Speaker 1: think there are a variety of reasons why. But certainly
• 17:43
  Speaker 1: one of them is a desire on the part of
• 17:46
  Speaker 1: some countries to move away from the US dollar as
• 17:49
  Speaker 1: the reserve currency of choice. Wednesday is a fairly big
• 17:53
  Speaker 1: day for those global trade folks. We're gonna get that
• 17:55
  Speaker 1: Phase one deal signed. We don't know what the deal is.
• 17:58
  Speaker 1: I guess we haven't seen any but is that all
• 18:01
  Speaker 1: the market needs is just to see this thing kind
• 18:03
  Speaker 1: of taken off the table. I think the market certainly
• 18:07
  Speaker 1: will benefit from this issue being taken off the table. Now,
• 18:10
  Speaker 1: we have to recognize that this does not end risks
• 18:14
  Speaker 1: when it comes to trade, because if a Phase one
• 18:17
  Speaker 1: deal is signed between the US and China, it could
• 18:21
  Speaker 1: mean that the US then turns its sites on Europe
• 18:25
  Speaker 1: and embarks on more in the way of trade wars
• 18:30
  Speaker 1: with the EU, which could be quite problematic. Who suffers most, Germany? Yes,
• 18:36
  Speaker 1: I think Europe suffers. Germany in particular suffers in an
• 18:40
  Speaker 1: environment like that, especially if we were to see tariffs
• 18:43
  Speaker 1: applied to European autos, which I think would be the
• 18:47
  Speaker 1: eight hundred pound guerrilla in the room. That's that's what
• 18:51
  Speaker 1: I was thinking. I mean, we hear about the wine tariffs,
• 18:53
  Speaker 1: and I know a lot of people, uh, Tom Keane quitted,
• 18:57
  Speaker 1: whine and cheese. It's it's very upsetting the idea that
• 18:59
  Speaker 1: that the cost of wine might go up. And it
• 19:01
  Speaker 1: really is all about cars, right, it is it is.
• 19:03
  Speaker 1: That's that's the big danger and that's the giant hammer
• 19:07
  Speaker 1: that the US wheels with the EU. Christina Hooper, thank
• 19:11
  Speaker 1: you so much for being here. Thanks for having me.
• 19:13
  Speaker 1: Christina Hooper as chief market strategist at Investco. Talking about
• 19:17
  Speaker 1: the market outlook, the headlines surrounding hedge funds tend to
• 19:33
  Speaker 1: be somewhat conflicted. On one hand, you have underperformance when
• 19:36
  Speaker 1: it comes to total returns when compared versus the s
• 19:39
  Speaker 1: MP five hundred. On the other, assets continue to climb
• 19:42
  Speaker 1: to all time high records even though you have withdrawals.
• 19:46
  Speaker 1: Reading us down to break it out down and get
• 19:48
  Speaker 1: a sense of what to expect in the year, head
• 19:49
  Speaker 1: is Don Steinberger. He's managing partner at Agecroft Partners based
• 19:53
  Speaker 1: in Richmond, Virginia. Don, thank you so much for being
• 19:56
  Speaker 1: with us. Can we just start there in terms of
• 19:58
  Speaker 1: what you're expecting this year with flows for hedge funds. Yeah,
• 20:03
  Speaker 1: so last year there were net redemptions of about three
• 20:07
  Speaker 1: percent to the industry, but the average hedge fund was
• 20:10
  Speaker 1: up about nine, so industry assets were up six. I think,
• 20:15
  Speaker 1: you know, industry assets have gone up ten at the
• 20:17
  Speaker 1: last eleven years. I think you're going to go up again,
• 20:20
  Speaker 1: uh in two thousand and twenty. I think the amount
• 20:23
  Speaker 1: of redemptions is going to be less this year than
• 20:26
  Speaker 1: last year. A lot of that is due to the
• 20:28
  Speaker 1: fact that interest rates are so low, and I think
• 20:30
  Speaker 1: you're gonna see some major institutions take some money out
• 20:34
  Speaker 1: of their fixed income allocation shifted into either uncorrelated hedge
• 20:39
  Speaker 1: fund strategies or potentially start buying hedge funds within their
• 20:43
  Speaker 1: fixed income portfolio, like direct lending, specialty finance, structure, credit
• 20:48
  Speaker 1: to stress debt. So don it's interesting, you know, I
• 20:51
  Speaker 1: look at the hedge fund business. My personal opinion is
• 20:54
  Speaker 1: is the long short equity business kind of peaked in
• 20:56
  Speaker 1: two thousand six, and if you look at performance, you
• 20:59
  Speaker 1: know it's really been soppointing. How can the hedge fund industry,
• 21:01
  Speaker 1: written large, continue to attract capital when it underperforms well,
• 21:08
  Speaker 1: I agree with you that long shirt equity did peak
• 21:11
  Speaker 1: a number of years ago. A lot of long shirt
• 21:13
  Speaker 1: equity managers have had a difficult time. You've seen a
• 21:17
  Speaker 1: lot of money come out of long shirt equity and
• 21:19
  Speaker 1: go into other hedge fund strategies. But I think the
• 21:21
  Speaker 1: reason that hedge fund asseture and all time high is
• 21:25
  Speaker 1: because most of the money going into the hedge fund
• 21:27
  Speaker 1: industry is into other strategies that help diversify a portfolio.
• 21:32
  Speaker 1: You know, you have these very large pension endowments foundations
• 21:36
  Speaker 1: that can't be a dent in equity, and they are
• 21:38
  Speaker 1: loaded up in equity when you combine public equity, private equity,
• 21:43
  Speaker 1: real estate equity, so they're you know that one of
• 21:46
  Speaker 1: their main choices is invested in fixed income, and outside
• 21:48
  Speaker 1: the US rates are close to zero. In the US,
• 21:51
  Speaker 1: the aggregates about two point two percent. So they're looking
• 21:54
  Speaker 1: at diversifying away from fixed income into hedge fund strategies,
• 21:58
  Speaker 1: and they're not looking at out the form the SMP.
• 22:00
  Speaker 1: They're looking at generating kind of a mid to high
• 22:03
  Speaker 1: single digit uncorrelated return across a diversified list of strategies.
• 22:09
  Speaker 1: It's interesting to me that direct lending is among those
• 22:11
  Speaker 1: that you mentioned, because how is that a hedge fund area.
• 22:15
  Speaker 1: Isn't that more of the sort of closed down fund
• 22:18
  Speaker 1: kind of long term, hold the maturity, get involved with
• 22:22
  Speaker 1: the company if you need to kind of strategy. Well,
• 22:26
  Speaker 1: I would say that the lines so, hedge funds are
• 22:30
  Speaker 1: a fund structure, you know, hedge funds are an open
• 22:32
  Speaker 1: end fund that have different type of liquidity provisions. Private
• 22:36
  Speaker 1: equity is more of a draw down structure where you
• 22:39
  Speaker 1: hold assets and then you paid out over a number
• 22:41
  Speaker 1: of years. And the difference between hedge funds and private
• 22:44
  Speaker 1: equity are are very gray. And there are a number
• 22:48
  Speaker 1: of hedge fund organizations that are coming out with private
• 22:51
  Speaker 1: equity structures or they're coming out with hedge fund structures
• 22:56
  Speaker 1: that have very limited liquidity. So you know, again, I
• 22:59
  Speaker 1: think depends what your definition a hedge fund is. A
• 23:02
  Speaker 1: lot of hedge funds are broadening out their product lineup.
• 23:05
  Speaker 1: When I was looking at the hedge fund business back
• 23:07
  Speaker 1: in the day, it was about delivering absolute returns above
• 23:10
  Speaker 1: and beyond the market, uncorrelated. This whole argument about I'm
• 23:14
  Speaker 1: going to give you mid single digit uncarrelated returns is
• 23:17
  Speaker 1: totally a new pitch by the hedge fund industry in
• 23:19
  Speaker 1: my opinion, don how about the days when a big
• 23:24
  Speaker 1: trader from Goldman Saxom more in Stanley, you know, has
• 23:26
  Speaker 1: a great ten year run and then decides to go
• 23:28
  Speaker 1: out and raise a billion or two billion dollars. Is
• 23:30
  Speaker 1: that still possible today? I think it's very, very difficult.
• 23:35
  Speaker 1: You have a couple of very high profile launches UH
• 23:39
  Speaker 1: in the hedge fund industry, but the amount of launches
• 23:42
  Speaker 1: has gone down significantly, and you have two different dynamics.
• 23:46
  Speaker 1: I mean, one is that the costs of running a
• 23:49
  Speaker 1: hedge fund have gone up significantly. You need a lot
• 23:52
  Speaker 1: more infrastructure. In addition to that, you have a huge
• 23:55
  Speaker 1: squeeze on fees, so the break gaping level from an
• 23:58
  Speaker 1: asset standpoint has gone up a lot. A lot of
• 24:01
  Speaker 1: these new hedge fund launches are offering founders share for
• 24:05
  Speaker 1: the first hundred millions of assets are about the normal fee,
• 24:09
  Speaker 1: So the business are becoming much more competitive. I think
• 24:13
  Speaker 1: you're gonna see less and less launches over time, and
• 24:16
  Speaker 1: I think you're going to see a consolidation of the
• 24:18
  Speaker 1: number of hedge funds in the industry over time. Where
• 24:20
  Speaker 1: are we in terms of hedge funds turning into family offices. Well,
• 24:26
  Speaker 1: you know that there's been some very high profile stories
• 24:30
  Speaker 1: about a few hedge funds that have closed down, decided
• 24:33
  Speaker 1: to give their money back, and you know, the fact
• 24:37
  Speaker 1: of the matter is there's an arms race for alpha.
• 24:40
  Speaker 1: You know, you've got to come continually up your game,
• 24:43
  Speaker 1: and a strategy that worked ten years ago doesn't necessarily
• 24:46
  Speaker 1: mean it's going to work today. So you do have
• 24:49
  Speaker 1: some high profile managers that are closing down, but a
• 24:51
  Speaker 1: lot of those are closing down because they haven't had
• 24:55
  Speaker 1: good performance over the past five years. They're suffering redemptions.
• 24:59
  Speaker 1: So you know, there are some very successful hedgha managers
• 25:02
  Speaker 1: that made you know, a billion dollars by generating great
• 25:06
  Speaker 1: returns a decade ago, no longer generating good returns and
• 25:10
  Speaker 1: are deciding to convert to family offices. Hey, Don, thanks
• 25:14
  Speaker 1: so much for joining us. We always appreciate your thoughts
• 25:16
  Speaker 1: on the hedge fund business. Don Steinbruger, Managing partner for
• 25:19
  Speaker 1: A Partners based in the Capital of the Confederacy, Richmond, Virginia.
• 25:24
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 25:26
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• 25:29
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• 25:38
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