February 14, 2025 • 31 mins
Katie and Matt discuss the fighting over OpenAI, paying for hedge funds' photocopies, whether hedge funds are worth it or you should just buy buffer ETFs, and Microsoft vs. Treasuries.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
Maybe we should talk about the voice thing. I mean,
it'll become a parent once I start talking.
Speaker 1 (00:13):
I feel like you're closer to normal Katie voice than
to elastic swallower Nash voice.
Speaker 3 (00:17):
I'm doing better.
Speaker 2 (00:18):
I'm pretty sure I had the flu last week. I
think a few people missed that I actually was sick
last week. And it wasn't that engineers turned my voice down.
Speaker 1 (00:27):
I joke about engineers turning your voice down.
Speaker 2 (00:30):
People literally, that was just mother nature at work. I'm
doing a bit better.
Speaker 1 (00:35):
And people did not like your new voice.
Speaker 3 (00:38):
No, they didn't like it.
Speaker 1 (00:39):
I was thinking that it would improve the audibility of
this podcast, but no, no, you just have to turn
me up in hell helium.
Speaker 2 (00:47):
Before I ever read podcast, I got a text from
one of my PR friends, who I think is maybe
listening right now, and he was like, Wow, you sound
really awful.
Speaker 3 (00:56):
In the latest version of money Stuff. What do you
say to that?
Speaker 1 (01:00):
Yeah, we didn't get any email saying that I sounded
comparatively better.
Speaker 2 (01:03):
Yeah, next we have to try you know, you you
taking some helium and getting you up to my level.
Speaker 1 (01:09):
Right, that's interest? Should I do the open.
Speaker 3 (01:12):
Yes, in a full.
Speaker 1 (01:13):
Set up, certainly not.
Speaker 3 (01:16):
And I didn't like that at all.
Speaker 1 (01:17):
No, that was terrible. Yeah out, Hello and welcome to
The Money Stuff Podcast, your weekly podcast where we talk
about stuff related to money. I'm Matt Levin and I
write The Money Stuff Colin for Bloomberg Opinion.
Speaker 2 (01:30):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (01:35):
What are we talking about today, Katie?
Speaker 2 (01:37):
We're going to talk about a hostile takeover. Sure, we're
going to talk about exorbitant pass through fees, and then
we're going to talk about an interesting humble thought experiment.
Speaker 1 (01:48):
Do we ever talk about anything else?
Speaker 2 (01:53):
All?
Speaker 3 (01:54):
Right?
Speaker 2 (01:54):
Open Ai the Girlies are Fighting is a tweet that
I saw on this situation, which I thought it was funny.
Speaker 1 (02:01):
I saw a tweet that was like Sam Alton versus
Elon Musk is like Kendrick versus Drake if both of
them were Drake.
Speaker 3 (02:08):
Yes, that's so funny.
Speaker 2 (02:10):
No one's performing at the super Bowl here, No one's
wont a Grammy.
Speaker 1 (02:14):
Yeah, so Elon muss wants to do a hostile takeover
of Open Ai, which I wrote something like, there's probably
never been a ninety seven billion dollar hostile takeover of
a nonprofit before, and people are like, well, at hospitals,
like there are some like unsolicited bids for nonprofit hospitals, right,
Like the model for this arguably is like a lot
of hospitals are nonprofits. They do a lot of for
(02:36):
profit conversions, and so there is some like kind of
law and practice around how you convert from a nonprofit
to a for profit. But this is still pretty weird, right, So, like, yeah,
open Ai is trying to convert from a nonprofit to
a for profit. To do that, they need to pay
out the nonprofit for its control of the business. Their
(02:57):
plan to do that is to give it, you know,
a chunk of the shares of the new business or
the newly for profit business. And Elon Musk came into
great problems by saying, I'll give you ninety seven billion
dollars in cash for it, which is more than you'd
get from the for profit business, and so you should
sell it to me to preserve fair value, which is
like everyone sort of assumes it's not a serious bid.
Speaker 3 (03:18):
Yeah, that's a.
Speaker 1 (03:19):
Way to make life more difficult for open Ai.
Speaker 2 (03:22):
I also assume that, yeah, so two points there, one
being if you only read headlines, which is how a
lot of people consume news. This was probably pretty confusing
because the bid ninety seven point four billion dollars. You know,
I think a few weeks before that, we got some
headline from the Wall Street Journal that open aies and
talks to raise forty billion dollars at a three hundred
(03:43):
and forty billion dollar valuation. The nuance being that they're
bidding for the nonprofit which owns a steak.
Speaker 3 (03:49):
In the form, they're not even.
Speaker 1 (03:50):
Really bidding for the nonprofit. It's a fun thing to
say that he's trying to take over the nonprofit, but
actually he's bidding for the steak. Yeah, the nonprofit has
like a set of rights o the for profit business,
and he wants to buy that from them for ninety
seven billion dollars. The alternative is they would sell that
set of rights to the for profit business in exchange
for some stock in the for profit business, which, like
(04:12):
the numbers I've seen people say, like the nonprofit would
get like twenty five percent of the business, which you know,
at a three hundred million dollar valuation, is worth seventy
five billion dollars. Ninety seven billion is more than seventy
five billion. I think you could argue that at twenty
five percents they can open Aiye is in the long
run worth more than ninety seven billion. But you know,
(04:32):
Musk is saying you got to get at least as much. Yeah,
but right, he's not offering to take over the whole
thing for ninety seven billion, which is less than the
current market mark on it. Except he sort of is
right because like, right now, the nonprofit controls the thing,
the business, right, the nonprofit has final say over it.
(04:54):
And so the people putting in money at a three
hundred million dollar valuation, the nonprofit board doesn't technically owe
them an shary duties. They're fundraising documents used to say
it would be good to consider your investment in the
form of a donation. Right, So it's like people are
sort of making assumptions about the future path of the business,
and the assumptions they're making are like, you know, sam
(05:15):
Aldman is like a money making guy, and like they
know they need to raise a lot of money, and
so they will do the right thing for shareholders. And
so it's worth a three hundred billion dollar valuation. But
in theory of Elon Musk bought the control rights from the
nonprofit What does that do to the non controlling investors
(05:39):
who have weird cat profit interests in the company. I
don't know. I think he gets like more than twenty
five percent of the company for his ninety seven billion dollars. Like,
I think he gets control over the company for his
ninety seven billion dollars. And that control for him a
guy who runs a competing AI company and runs a
bunch of other companies and runs the US government, that
(06:00):
control is pretty valuable to him in a way that
it's not to the nonprofit board. So if they said
yes to him, if they're like, sure, Elon, here's our stake,
it would be a huge bargain for him.
Speaker 2 (06:10):
Yeah, well that's what I was wondering. So your position,
it sounds like is that Muskus trolling?
Speaker 1 (06:16):
Well, he doesn't think they're going to say yes. And like,
you know, the other thing I wrote is like, like
ninety seven billion does a lot of money, right, Like, yeah,
if they were like, sure, Elon, here you go, Like
he could raise ninety seven billion dollars to do it,
because it's a good deal. But it's not like he
has ninety seven billion dollars committed, Right, that's true, it's
a lot of money.
Speaker 3 (06:33):
That is a lot of money.
Speaker 2 (06:34):
But I mean if we go down into hypothetical lands
and the board did take this seriously and they did say, yes,
what does that look like?
Speaker 1 (06:43):
I don't know. It's a great question because it's not
like they own forty percent of the company. It's not
like they own ten percent, but they have like a
super voting shares. Right. What they have is like there
is this weird quasi for profit subsidiary of the nonprofit
and it has sold stuff to investors, and that stuff
(07:03):
is like this like waterfall of profit interests. Every investor
has like a different deal. It's like not really shares,
it's profit interests and they're capped. So like even knowing
what percentage of the company the nonprofit owns and could
transfer to Elon Musk is like it's kind of uncertain,
right that you can like build a model that converts
these waterflows of cash flows into like some percentage of
(07:26):
the equity. But it's like a little debatable. And then
the other thing that it has is like it has
the board the nonprofit gets to make decisions for the company,
and like says explicitly to investors, like, we don't make
these decisions out of a fiduciary duty to investors. We
make these decisions for the benefit of mankind. The nonprofit
(07:47):
controls the company. But it's not just like share RedZone
controlling paramount right. It's not like a person with super
voting shares. It's like a nonprofit with a social mission
controls the company. So if Elon Musk buys that, does
he get to just control the company however he wants,
or does he like take over the social mission. And
I think in his offer letter he's like, we will
(08:08):
continue the social mission. I don't know. Yeah, So I
think it's really unclear what he would buy, right, But
like there is some package of rights that the nonprofit
open ai is hoping to give up to the for
profit open Ai in exchange for stock, and he's just saying,
whatever that package of right says, I'll buy it for cash. Yeah, Like,
if you take that seriously, that package of rights is
(08:29):
really valuable and like arguably more valuable in the hands
of the world's rich is person that it is in
the hands of fate nonprofit looking out for the benefit
of humanity.
Speaker 2 (08:38):
Well, if you ask Sam Altman, which Bloomberg TV did.
They got an interview with him on the sidelines of
this AI summit in Paris. Sam Altman says that, I mean,
he's not taking this seriously. Obviously, he had some hostile
words about Elon Musk. Did you see this, Yeah, it
was really personal. I mean, he said, of course he
thinks Elon Musk is just trying to slow us down own.
(09:00):
He's obviously a competitor. I wish you would just compete
by building a better product, et cetera.
Speaker 1 (09:04):
But he also said, probably his whole life is from
a position of insecurity. I feel for the guy. I
don't think he's like a happy person that I do
feel for him.
Speaker 2 (09:11):
I mean, this gets back to the girlies we're fighting,
and I don't know, it's pretty personal. It's also playing
out in court and filings obviously, right.
Speaker 1 (09:18):
Because mess is also suing Yes to make them be
more nonprofit and like this is all in the context
of like he owns a for profit AI from right,
so one assumes he's not going to buy open AI, right,
not that he doesn't want to, just that they're not
going to.
Speaker 2 (09:33):
I feel like it even goes deeper than that though,
Like this comes back to the blood feud of him
and Altman founded open ai together.
Speaker 3 (09:39):
Blah blah blah.
Speaker 1 (09:40):
Right, I know I agree with you and with Sam
Altman that this is all largely about petty personal vindictiveness
on a ground scale. But it's also like open ai
is probably the leading you know l M company.
Speaker 2 (09:54):
Yeah, I don't think that's controversial.
Speaker 1 (09:57):
Xai is has gros somewhere in the pack.
Speaker 3 (10:00):
Yeah.
Speaker 1 (10:01):
Open Ai has made it very clear that it's doing
this conversion because it needs to raise like forty billion dollars, right, Yeah,
it's so expensive to run company and to scale it
and to raise that much money. They think they need
to offer investors normal stock and not I think they
use the word structural bespokeness, which is a great word, bespokeness.
(10:23):
And so they need to be a for profit to
raise the amount of money that they need to raise
to continue to be competitive. And this might stop them,
yeah right, And if it stops them, then like yeah,
it's an opening for XII, right, And so how would
this stop them? Like Elon Musk offered to drop his
bid if they agreed to stay a nonprofit. So that's
(10:44):
like one way to stop them, right if they just
agree to stay a nonprofit. But even if they say
no to him, you can't quite ignore him. They have
to at least sort of wave in the direction of no. Actually,
we're getting more value for the nonprofit from open Ai,
like internally than we would from Elon Musk. And I
think most people think that means essentially, the nonprofit needs
(11:04):
to get a bigger steak in the for profit company
than it was planning, right it was planning like let's
say twenty five percent. It needs to get a stake
that I can credibly say is worth more than one
hundred million dollars, right, Yeah, And that just makes it
a little bit harder to raise money, right because you're
giving more of the steak to the more of the
company to the nonprofit. You're cutting back the shares of
(11:24):
like Microsoft and soft Bank and everyone else, And so
it just makes it harder for them to raise money
and creates uncertainty and you know, puts them in a
little bit worse competitive position to raise a lot of
money and kind of stay out of XII.
Speaker 2 (11:36):
Yeah, which is interesting in the context of Stargate or whatever,
that this very ugly public fuse paying out and makes
things a little bit more challenging for open AI.
Speaker 1 (11:46):
But we'll see, right, I mean, one thing I've written
is like, just from the outside, it seems to be
pretty easy for Open Ahead orra is money. They've got,
you know, yeah, like the sexiest product in the sexiest
industry in the world. They've got Sam Alban, who is
an incredible salesman. They've got a lot of advantages. And
you know, there's a lot of this money from soft Bank,
(12:06):
who is not like notorious for driving a hard bargain. Right,
it's weird to be like this bid from Elon Musk
is going to prevent them from raising the money they
need to scale. Like I don't know, man, Like it's
open an eye. They'll be fine, but I.
Speaker 2 (12:21):
Don't Yeah, all right, they'll be fine. Let's just put
a pin in it for now.
Speaker 3 (12:41):
Let's talk about.
Speaker 2 (12:41):
Pass through fees at multi strategy hedge funds do that.
This is a great Bloomberg big take that went out
this week. Reading it, it really feels like rage bait.
Speaker 1 (12:51):
Well it is, right, I mean, like it quits a
guy saying pastors are wild. You're paying for everything, including
the copy.
Speaker 3 (12:58):
Of paper beautiful.
Speaker 1 (12:59):
And it's true that traditionally the way you think of
hedge funds is like investors put in money, the hedgehun
invests the money for them. The hedge fund charges them
two percent of the money and twenty percent of the profits. Right, Like,
those are the stereotypical numbers and the stuff that the
hedge fund keeps. The two and twenty pays for its managers' salaries,
(13:20):
their bonuses, right, their photocopier paper, their lunches, you know,
and whatever. Like, the expenses are covered by the fees, right,
And the multi strategy model, the modern big multi strategy
model is just not that at all. Right, The modern
multi strategy model is, you give us money, we use
the money to do investing. We also use the money
to pay all of the expenses, and what's left over
(13:43):
you get some of what we get some of it, right,
Which is like, as I wrote this week, it's exactly
the same model as a company generally, or like an
investment bank in particular. Right, like an investment bank, the
shareholders pay for the photocopier paper. Right, All of the
expenses of the investment bank are taken out before net income,
and then the sharelders get some of the net income
and like the rest of it goes to the bonuses, or
(14:04):
rather the sharelders get the net income after the expenses
and the bonuses to the employees. And that's how like
companies work. It's how investment banks work. I'm modern like
corporate investment banks work. And the multi strategy model is that, right,
It's like the investors are capital providers. We pay for
all of our expenses out of the investors' money. Yeah,
and the investor you get someone what's left over, right, Yeah,
(14:26):
And that is a model that these firms can sell
to investors. But if you're just like outside of it,
you're like what they're paying for photocopiers, Like it's very annoying.
Speaker 2 (14:36):
Like I am not in LP to a multi strategy
hedge fund, but I mean, reading this story, I hear
the parallels that you're making with an investment bank. But
I have to imagine that maybe I'm wrong. I probably
am that if I'm in LP a potential LP to
a multi strategy hedge fund, I'm thinking about I am
giving my money to a hedge fund for returns. I'm
not investing in an investment bank model. I'm just coming
(14:58):
at this. It's you know, what is my money going
to return?
Speaker 1 (15:01):
Yeah, and like their pitch to you is we return
more than our cost of capital through the cycle. Their
pitch to you is like we can give you a
pretty stable high teens return on your money. And that's
what you're getting. And you're not getting like eighty percent
of the money we make. That's an irrelevant metric. What
you're getting is like a sort of expected high teens
(15:23):
return and like we'll pay for the photocopiers out of
your money.
Speaker 3 (15:26):
It's actually low teens.
Speaker 1 (15:28):
Yeah, there's this, there's a lot of like a lot
of you know, I'm used to the investment banking world
where there's like a thing called the target return on
equity and you're not supposed to get to the target
return on it's just like a number that's in the
present pitch.
Speaker 3 (15:40):
Yeah, I don't know.
Speaker 2 (15:41):
This goes back to a broader question that we talk
about this all the time on the television show that
I have open interest, but why would you ever give
money to a hedge fund?
Speaker 3 (15:51):
I understand the pitch diversification.
Speaker 2 (15:54):
You're supposed to get starty returns of about twelve percent
with few downswings, but I mean at the S and
P five hundred, you can pay three basis points for
the S and P five hundred. Over the last decade,
you've got an annualized return of thirteen percent with three
down years. And I mean thinking about these multi strategy
hedgehoe fees that make two and twenty look cheap, it
(16:17):
just reinforces that notion.
Speaker 1 (16:20):
You get pretty high returns with lower volatility and with
no correlation to the broad market.
Speaker 3 (16:25):
Yeah, the return You're a.
Speaker 1 (16:26):
Giant endowment, right, and like you have a lot of
money in the S and P and you want some
uncorrelatedponse that you know it doesn't pay like treasure rights
pays like two or three times treasures. It's a pitch
that works to a lot of like sophisticated endowments, and
like this is the like the multi strategy pitch is
the one that works, which is like, we give you
very low volatility, pretty high returns, no correlation to the
(16:48):
S and P. It's diversifying your investments. It's allowing you
to put more money into the SMP essentially because you
have like this, yeah, this diversified.
Speaker 2 (16:55):
It's a pitch that I know it works, but I
don't really understand why it works. And I go back
to ETF so I'm sorry, where you have this race
to the bottom and fees, this race to the bottom
doesn't seem to exist in the hedge fund world. And
there is a recent example, I think it's the University
of Connecticut Endowment that just said, actually, we're doing away
with hedge funds. We're gonna put all of our money
(17:16):
in buffer ETFs, which guarantee safety.
Speaker 3 (17:20):
Yeah, exactly how much capacity is there in buffer IDFs?
Speaker 1 (17:23):
I get? How much capacity is there in hedgehunds. No.
I mean, like if you put all of your money
into equities and there's like a big draw down in equities,
you have like a really bad year and you can't
spend on your programs. You know, if you're an endowment
and if you put some of your money into like
it's like a diversification, it's like steady returns. It's like
you don't start from it thinking about the fees, right,
(17:45):
You start from it thinking about like do they provide
steady returns after fees? And if the answer is yes,
then like the fees are none of your business. It's
like investing in Goldman. Right, it's like, you know, if
the equity returns a lot, then like it doesn't matter
that people are getting bonuses, right, Yeah, And like much
as with a public company, the job is to earn
(18:05):
the cost of capital over some medium period of time.
And so like the Big Take article starts with bally
Asthny charging a lot of money in like a relatively
down year, right, And bally Asni's like, well, you know,
it's an anomalist down year, and usually we return our
cost of capital, but like we have this one down year,
and you like point to it and it's like, yes,
in a down year, it is embarrassing to pay tens
(18:26):
of millions of dollars to your traders because like they
didn't make money for the investors. But it's like that's
not the right way to look at it. The right
way to look at it. It's like you're investing in a
business over the long term, and the business they to
pay money for traders.
Speaker 3 (18:36):
Yeah.
Speaker 2 (18:37):
I guess I just don't find it compelling. But you
know what, I'm not in charge of an endowment. I'm
sure if I was, perhaps I would have a different perspective.
Speaker 1 (18:44):
The great like sort of you know, hedge fund pitch
of like twenty years ago is like I will take
your money. M hmm, I will make one hundred percent trains,
I'll take thirty percent of the right, Like there's like
this the sort of swing for the fence's hedgehund model,
where like yeah, you could like make big back.
Speaker 3 (19:00):
And which I do find compelling.
Speaker 1 (19:02):
Yeah, right, I think I think is like much more
intuitively compelling, right, yeah. And the multi strat model is
like you're not like, oh, I put all my money
onto like Fanny May, Right. They put all my money
into like a series of like short term bets on
that are like essentially like liquidity provision and arbitrage trades,
and I can't really tell you about any of them,
and they're not that exciting, and they're on for one
day and they're all uncorrelated and hedged to you know,
(19:22):
a variety of factors, and so it's just like, I mean,
the thing I think about is like they like high
frequency trading model, where like your job is to make
money every day, and it's a little bit like the
job of these firms. It is not literally to make
money every day, but it's to like be very neutral
to market factors and to just sort of make steady
returns doing fairly safe but highly levered trades, and like
(19:46):
that's the thing they're pitching. And I think that resonates
with a lot of like yeah people in that it
seems real and sustainable in a way that like I'm
going to put all the money on Fanny May is
not if you're just like taking big swings, like you're
gonna miss and then like you know, you'll lose money,
Whereas like these guys are like, we're incredibly conscious of
(20:08):
risk and we try to be very neutral to a
lot of factors, so that we're just giving you pure alpha,
which is in some sense like alpha here beans something
like getting paid for providing a service, right, And it's
like we're doing something for the market and we're getting
paid for it. Yeah, And that's more reliable than like
a model of like we're going to make bets on
(20:30):
stocks and hope those bets work out whether or not
an individual pot is quants. Like it's a very quantity
like sort of model of thinking about the world, which
is like making individual bets on stocks has like a
pretty high probability of going wrong, and so you're making
a lot of diversified bets with like a little bit
of edge on each one, right, and like you tell
(20:50):
that model to an institutional allocator of like, yes, this
makes sense. This like feels plausible and sustainable. Whereas when
you come in and you're like, I'm just really good
at picking stocks, it seems bad.
Speaker 3 (20:59):
Yeah, I don't know. I mean I hear what you're saying.
Speaker 2 (21:04):
I still am surprised that there isn't feed pressure here.
It just feels like in every part of the asset
management industry there is fee pressure, and that feed pressure
doesn't apply to these multi strate hedge funds.
Speaker 1 (21:17):
Well, I think there's a reason that's not as pastors,
right because if you're like, we're gonna charge seven and seventy,
be like, yeah, it would be bad, right. But if
you're like, look, the going rate for a portfolio manager
is fifty million dollars, what do you want us to
not hire a portfolio manager? Like, you know, like the
pass of the fifty million dollars.
Speaker 3 (21:35):
Got him in the wrong business. Seriously, letter writer Jesus Christ.
Speaker 2 (21:41):
So, in clicking around in preparation for this conversation, did
you see Ken Griffin? I know you did like a
month or two ago, saying that he thinks the boom
in multi strategy hedge funds is over.
Speaker 1 (21:53):
I do think that if you run a multi strategy
hedge fund, the pricing pressure that you feel is probably
bore about hiring portfolio managers, that it is about your healties. Yeah,
And so for him to be like, oh r, it's over, yeah,
is a way to drive down the prices of portolio
managers more than it is to like signal to healthy
so he doesn't need their money, or like he's like, yeah,
the boom is not really over for him. The other
(22:14):
signal you're sending is the boom is over for potential competitors,
right yeah, which might be true, right, But I don't
think that, like Ken Griffin is worried about being poor
in a year.
Speaker 3 (22:24):
No, I don't think so. Though. Apparently, according to Goldman.
Speaker 2 (22:27):
Assets managed by multi strats did drop slightly in twenty
twenty four, which was the first to client since twenty sixteen.
So I don't know, we'll see. Let's talk about this
(22:52):
humble thought experiment that was put on by Double Line.
I wrote about it. It's pretty interesting. It's a paper
that was released this month. They basically sized up Microsoft
as an issuer versus the US government as an issuer
of debt. They didn't reach a conclusion. They wanted to
leave it up to the reader, but it seemed like
they were leaning towards Microsoft.
Speaker 1 (23:12):
It's a strange thought experiment, yeah, because they basically like,
look at Microsoft's capacity to service that's debt based on
its cash flows, and they compare it to the US
government's capacity to service it's that based on its stock
of debt and cash flows. Yeah, and it's like, Wow,
the US government takes in less than it spends and
Microsoft takes in more than it spends, and yeah, Microsoft
is a better credit. Okay. Like I have a lot
(23:36):
of sympathy for their conclusion. Right, they are doing this analysis,
I would think things like Microsoft is run by professionals
who one believe that they should repay their debt and
to want continued access to capital markets, and also has
a lot of cash flow, right, and so when their
(23:57):
debt comes due, they will pay it.
Speaker 3 (23:59):
They certainly well.
Speaker 1 (24:00):
Barring some sort of tele risk catastrophe. The US government
is not, for instances, run by a president who is
who has boasted about his use of bankruptcy I heard
about this the other day. This is wild, Like people
can get him to say anything. And he was talking
about like Elon Musk going through the payment system and irregularities, right,
(24:22):
like the treasury. No one says what the irregularities are,
but oh, this fraud. Right, And so Donald Trump said,
there could be a problem.
Speaker 2 (24:28):
You've been reading about that with treasuries, and that could
be an interesting problem because it could be that a lot.
Speaker 1 (24:35):
Of those things don't count.
Speaker 2 (24:37):
In other words, that some of that stuff that we're.
Speaker 1 (24:39):
Finding is very fraudulent. Therefore, maybe we have less debt
than we thought of. Think of that, therefore, maybe we
have less debt than we thought of.
Speaker 3 (24:49):
That was amazing that landed like during the super Bowl.
Speaker 1 (24:52):
So like some treasuries may not count. Who knows which
treasuries don't count? Who knows why? Like there might be
from fraud. Right, maybe your treasuries were fraud. Yeah. I
don't place a high probability on that happening. But like
you know, the guys go around, some treasures don't count.
Microsoft doesn't say that.
Speaker 2 (25:07):
No, no, Microsoft would not say that. And what was
interesting about Trump saying that over the weekends was, first
of all, it took a little bit. There was a
lag between when he said that and when someone from
the administration clarified that he wasn't talking about treasury bonds
or whatever it was. But there wasn't there wasn't a
reaction in the treasury market, which I don't know, maybe
(25:28):
points to maybe Trump losing some of his juice here
that he could suggest that maybe we wouldn't count some
of the treasuries in the market just totally looked past it.
Speaker 1 (25:36):
I'm not saying that the US government is no longer
interested in paints. I just say, like you look at
the measurement of Microsoft, you think the management.
Speaker 2 (25:45):
So it sounds like you would end up even though
maybe you're looking at different factors in your own analysis.
Speaker 3 (25:50):
Very different factors, but you end up in kind of
the same.
Speaker 1 (25:52):
Oh yeah, yeah, I mean not investment it was. I mean,
I appreciate the thought expert.
Speaker 3 (25:59):
I should note that double line.
Speaker 2 (26:01):
This truly is a thought experiment because they don't own
Microsoft debt. The reason being that there's just better value
to be found elsewhere. Obviously because Microsoft trades.
Speaker 1 (26:10):
Treasure that they have.
Speaker 3 (26:11):
It's a good question too.
Speaker 2 (26:13):
I don't know, but Microsoft, I mean, you look at
their thirty year debt, and it trades very similarly to
treasures like forty.
Speaker 1 (26:21):
One basic points of a treasures, which is like a
meaningful premium if you think it's safer, No, it's I mean,
it's them compared to highal bonds, but it's a lot
compared to Yeah, you think it should be negative, right,
if you think it should, it's a good trid.
Speaker 2 (26:33):
I mean, they do point out that if you do,
you know, end up on the side of Microsoft debt
is safer, then there's some income opportunity there, but they're
personally not exploiting that their analysis though. Just to put
some numbers behind what we've been talking about. So Microsoft
can pay its annual interest expenses more than fifty times over,
it is expected to generate nearly forty eight billion dollars
(26:56):
of free cash flow in fiscal twenty twenty five. It
also has a higher rate from the credit agencies than
the US government, which is pretty funny. Whereas you compare
that to the US government, our country's receipts to interest
expense has declined to five point two times as is
twenty twenty three. Also, we've run a deficit since two
thousand and two. So those are some of the factors
(27:18):
that went into what double Line is looking at.
Speaker 1 (27:21):
I mean, first of all, the traditional analysis is the
US government can always pay back.
Speaker 2 (27:24):
It's that because the full faith and credit, because it.
Speaker 1 (27:26):
Can print money. Yeah, so in the worst case, the
US government prints money and inflates away the debt, and
that's just as bad for Microsoft's that as it is
for US government as reading. Like you know, there's like
a traditional theory of the sovereign ceiling where like people
use that more for like emerging market spuds, where it's
like the idea is that you can't have a better
(27:47):
credit rating or a lower yield for a corporate in
an emerging market then for the sovereign because like it's
not clear why, but it's like, you know, there's some
theory that like you know, first of all, like the
economic conditions that affect the sovereign would affect the corporate
as well. And secondly, like a catastrophe for the sovereign,
is the sovereign going to like seize the assets of
(28:09):
the corporate? You know, Like, so it have the sovereign ceiling,
but it's like a sort of soft ceiling, and there's
like history of ratings agencies occasionally rating corporates in Argentina
higher than this. Yeah, Microsoft can't print dollers, but I'm
pretty close. And I think that like, if I were
trying to like think about like my credit risk as
a credit of the US government, I would worry a
lot more about like government shutdowns, that ceiling bridges, elon musk,
(28:33):
deleting the database, you know, like all that stuff. Then
I would about like cash flow, yeah, because like cash
flow can be solved by printing currency, right, but like
all that other stuff, like you you might get like
you know, delay on your payments, right. Yeah, So I
think that stuff is like idiosying credit to the current
US government and wouldn't apply to like the highest rated
corporates in the US.
Speaker 3 (28:54):
Yeah.
Speaker 2 (28:55):
And I mean we're talking about forty nine basis points
in terms of the spread in.
Speaker 1 (29:00):
Keep saying that small, That seems big. That seems like so.
Speaker 2 (29:03):
You're saying, I don't, I don't know, maybe you should
go buy some This isn't investment advice, as Matt said,
but I mean, in em it's not unheard of to
see corporates trade through the sovereign, which is cool. Also,
I got some interesting feedback on this one. A terminal
client wrote in, and I liked this email a lot.
(29:24):
Not talking about em but this person said I'd certainly
rather own Loreal bonds than French bonds, which I found amusing.
So there's other examples you could use.
Speaker 1 (29:35):
But yeah, there's like, you know, like the big companies
are sort of multinational and like arguably have less exposure
to some of the conditions in their countries than the
sovereign does.
Speaker 2 (29:45):
Yeah, so I asked Bloomberg Intelligence about this, and I
thought this was a fun stat as well. Microsoft has
a zero point zero six percent five year cumulative default risk,
which is pretty stinking close to the US government's risks
free alternative. So microsofts, I don't know, I don't know
what that number. I think that they just have a
(30:07):
really low chance of defaulting.
Speaker 1 (30:10):
Sorry, zero point zero six.
Speaker 3 (30:12):
Percent, Yeah, cumulative. What do you think is the chance
of Microsoft the US.
Speaker 1 (30:19):
Government missing a payment on it's debt in the next
four years?
Speaker 3 (30:22):
Maybe zero?
Speaker 1 (30:24):
Is it bigger than zero point zero six percent?
Speaker 2 (30:27):
I was going to answer zero point zero six percent, Okay, yeah, what's.
Speaker 3 (30:32):
Your what I mean?
Speaker 1 (30:34):
Zero point zero eight percent?
Speaker 3 (30:35):
Okay, there you go. Then you could have written this paper.
Speaker 1 (30:39):
Exactly programming note. We're taking next week off.
Speaker 3 (30:44):
I'll see you in two weeks.
Speaker 1 (30:50):
And that was the Money Stuff Podcast.
Speaker 3 (30:52):
I'm Matt Livia and I'm Katie Greifeld.
Speaker 1 (30:54):
You can find my work by subscribing to the Money
Stuff newsletter on Bloomberg dot.
Speaker 2 (30:58):
Com, and you can find me on Bloomberg TV every
day on Open Interest between nine to eleven am Eastern.
Speaker 1 (31:04):
We'd love to hear from you. You can send an
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Speaker 2 (31:11):
You can also subscribe to our show wherever you're listening
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people find the show.
Speaker 1 (31:17):
The Money Stuff Podcast is produced by Ana ma Aserakus
and Moses onam Ar.
Speaker 2 (31:21):
Thea music was composed by Blake Maples.
Speaker 1 (31:23):
Friend and Frances Newnham is our executive producer.
Speaker 2 (31:26):
And Stage Bauman is Bloomberg's head of Podcasts.
Speaker 1 (31:28):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
Maybe we should talk about the voice thing. I mean,
it'll become a parent once I start talking.
Speaker 1 (00:13):
I feel like you're closer to normal Katie voice than
to elastic swallower Nash voice.
Speaker 3 (00:17):
I'm doing better.
Speaker 2 (00:18):
I'm pretty sure I had the flu last week. I
think a few people missed that I actually was sick
last week. And it wasn't that engineers turned my voice down.
Speaker 1 (00:27):
I joke about engineers turning your voice down.
Speaker 2 (00:30):
People literally, that was just mother nature at work. I'm
doing a bit better.
Speaker 1 (00:35):
And people did not like your new voice.
Speaker 3 (00:38):
No, they didn't like it.
Speaker 1 (00:39):
I was thinking that it would improve the audibility of
this podcast, but no, no, you just have to turn
me up in hell helium.
Speaker 2 (00:47):
Before I ever read podcast, I got a text from
one of my PR friends, who I think is maybe
listening right now, and he was like, Wow, you sound
really awful.
Speaker 3 (00:56):
In the latest version of money Stuff. What do you
say to that?
Speaker 1 (01:00):
Yeah, we didn't get any email saying that I sounded
comparatively better.
Speaker 2 (01:03):
Yeah, next we have to try you know, you you
taking some helium and getting you up to my level.
Speaker 1 (01:09):
Right, that's interest? Should I do the open.
Speaker 3 (01:12):
Yes, in a full.
Speaker 1 (01:13):
Set up, certainly not.
Speaker 3 (01:16):
And I didn't like that at all.
Speaker 1 (01:17):
No, that was terrible. Yeah out, Hello and welcome to
The Money Stuff Podcast, your weekly podcast where we talk
about stuff related to money. I'm Matt Levin and I
write The Money Stuff Colin for Bloomberg Opinion.
Speaker 2 (01:30):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (01:35):
What are we talking about today, Katie?
Speaker 2 (01:37):
We're going to talk about a hostile takeover. Sure, we're
going to talk about exorbitant pass through fees, and then
we're going to talk about an interesting humble thought experiment.
Speaker 1 (01:48):
Do we ever talk about anything else?
Speaker 2 (01:53):
All?
Speaker 3 (01:54):
Right?
Speaker 2 (01:54):
Open Ai the Girlies are Fighting is a tweet that
I saw on this situation, which I thought it was funny.
Speaker 1 (02:01):
I saw a tweet that was like Sam Alton versus
Elon Musk is like Kendrick versus Drake if both of
them were Drake.
Speaker 3 (02:08):
Yes, that's so funny.
Speaker 2 (02:10):
No one's performing at the super Bowl here, No one's
wont a Grammy.
Speaker 1 (02:14):
Yeah, so Elon muss wants to do a hostile takeover
of Open Ai, which I wrote something like, there's probably
never been a ninety seven billion dollar hostile takeover of
a nonprofit before, and people are like, well, at hospitals,
like there are some like unsolicited bids for nonprofit hospitals, right,
Like the model for this arguably is like a lot
of hospitals are nonprofits. They do a lot of for
(02:36):
profit conversions, and so there is some like kind of
law and practice around how you convert from a nonprofit
to a for profit. But this is still pretty weird, right, So, like, yeah,
open Ai is trying to convert from a nonprofit to
a for profit. To do that, they need to pay
out the nonprofit for its control of the business. Their
(02:57):
plan to do that is to give it, you know,
a chunk of the shares of the new business or
the newly for profit business. And Elon Musk came into
great problems by saying, I'll give you ninety seven billion
dollars in cash for it, which is more than you'd
get from the for profit business, and so you should
sell it to me to preserve fair value, which is
like everyone sort of assumes it's not a serious bid.
Speaker 3 (03:18):
Yeah, that's a.
Speaker 1 (03:19):
Way to make life more difficult for open Ai.
Speaker 2 (03:22):
I also assume that, yeah, so two points there, one
being if you only read headlines, which is how a
lot of people consume news. This was probably pretty confusing
because the bid ninety seven point four billion dollars. You know,
I think a few weeks before that, we got some
headline from the Wall Street Journal that open aies and
talks to raise forty billion dollars at a three hundred
(03:43):
and forty billion dollar valuation. The nuance being that they're
bidding for the nonprofit which owns a steak.
Speaker 3 (03:49):
In the form, they're not even.
Speaker 1 (03:50):
Really bidding for the nonprofit. It's a fun thing to
say that he's trying to take over the nonprofit, but
actually he's bidding for the steak. Yeah, the nonprofit has
like a set of rights o the for profit business,
and he wants to buy that from them for ninety
seven billion dollars. The alternative is they would sell that
set of rights to the for profit business in exchange
for some stock in the for profit business, which, like
(04:12):
the numbers I've seen people say, like the nonprofit would
get like twenty five percent of the business, which you know,
at a three hundred million dollar valuation, is worth seventy
five billion dollars. Ninety seven billion is more than seventy
five billion. I think you could argue that at twenty
five percents they can open Aiye is in the long
run worth more than ninety seven billion. But you know,
(04:32):
Musk is saying you got to get at least as much. Yeah,
but right, he's not offering to take over the whole
thing for ninety seven billion, which is less than the
current market mark on it. Except he sort of is
right because like, right now, the nonprofit controls the thing,
the business, right, the nonprofit has final say over it.
(04:54):
And so the people putting in money at a three
hundred million dollar valuation, the nonprofit board doesn't technically owe
them an shary duties. They're fundraising documents used to say
it would be good to consider your investment in the
form of a donation. Right, So it's like people are
sort of making assumptions about the future path of the business,
and the assumptions they're making are like, you know, sam
(05:15):
Aldman is like a money making guy, and like they
know they need to raise a lot of money, and
so they will do the right thing for shareholders. And
so it's worth a three hundred billion dollar valuation. But
in theory of Elon Musk bought the control rights from the
nonprofit What does that do to the non controlling investors
(05:39):
who have weird cat profit interests in the company. I
don't know. I think he gets like more than twenty
five percent of the company for his ninety seven billion dollars. Like,
I think he gets control over the company for his
ninety seven billion dollars. And that control for him a
guy who runs a competing AI company and runs a
bunch of other companies and runs the US government, that
(06:00):
control is pretty valuable to him in a way that
it's not to the nonprofit board. So if they said
yes to him, if they're like, sure, Elon, here's our stake,
it would be a huge bargain for him.
Speaker 2 (06:10):
Yeah, well that's what I was wondering. So your position,
it sounds like is that Muskus trolling?
Speaker 1 (06:16):
Well, he doesn't think they're going to say yes. And like,
you know, the other thing I wrote is like, like
ninety seven billion does a lot of money, right, Like, yeah,
if they were like, sure, Elon, here you go, Like
he could raise ninety seven billion dollars to do it,
because it's a good deal. But it's not like he
has ninety seven billion dollars committed, Right, that's true, it's
a lot of money.
Speaker 3 (06:33):
That is a lot of money.
Speaker 2 (06:34):
But I mean if we go down into hypothetical lands
and the board did take this seriously and they did say, yes,
what does that look like?
Speaker 1 (06:43):
I don't know. It's a great question because it's not
like they own forty percent of the company. It's not
like they own ten percent, but they have like a
super voting shares. Right. What they have is like there
is this weird quasi for profit subsidiary of the nonprofit
and it has sold stuff to investors, and that stuff
(07:03):
is like this like waterfall of profit interests. Every investor
has like a different deal. It's like not really shares,
it's profit interests and they're capped. So like even knowing
what percentage of the company the nonprofit owns and could
transfer to Elon Musk is like it's kind of uncertain,
right that you can like build a model that converts
these waterflows of cash flows into like some percentage of
(07:26):
the equity. But it's like a little debatable. And then
the other thing that it has is like it has
the board the nonprofit gets to make decisions for the company,
and like says explicitly to investors, like, we don't make
these decisions out of a fiduciary duty to investors. We
make these decisions for the benefit of mankind. The nonprofit
(07:47):
controls the company. But it's not just like share RedZone
controlling paramount right. It's not like a person with super
voting shares. It's like a nonprofit with a social mission
controls the company. So if Elon Musk buys that, does
he get to just control the company however he wants,
or does he like take over the social mission. And
I think in his offer letter he's like, we will
(08:08):
continue the social mission. I don't know. Yeah, So I
think it's really unclear what he would buy, right, But
like there is some package of rights that the nonprofit
open ai is hoping to give up to the for
profit open Ai in exchange for stock, and he's just saying,
whatever that package of right says, I'll buy it for cash. Yeah, Like,
if you take that seriously, that package of rights is
(08:29):
really valuable and like arguably more valuable in the hands
of the world's rich is person that it is in
the hands of fate nonprofit looking out for the benefit
of humanity.
Speaker 2 (08:38):
Well, if you ask Sam Altman, which Bloomberg TV did.
They got an interview with him on the sidelines of
this AI summit in Paris. Sam Altman says that, I mean,
he's not taking this seriously. Obviously, he had some hostile
words about Elon Musk. Did you see this, Yeah, it
was really personal. I mean, he said, of course he
thinks Elon Musk is just trying to slow us down own.
(09:00):
He's obviously a competitor. I wish you would just compete
by building a better product, et cetera.
Speaker 1 (09:04):
But he also said, probably his whole life is from
a position of insecurity. I feel for the guy. I
don't think he's like a happy person that I do
feel for him.
Speaker 2 (09:11):
I mean, this gets back to the girlies we're fighting,
and I don't know, it's pretty personal. It's also playing
out in court and filings obviously, right.
Speaker 1 (09:18):
Because mess is also suing Yes to make them be
more nonprofit and like this is all in the context
of like he owns a for profit AI from right,
so one assumes he's not going to buy open AI, right,
not that he doesn't want to, just that they're not
going to.
Speaker 2 (09:33):
I feel like it even goes deeper than that though,
Like this comes back to the blood feud of him
and Altman founded open ai together.
Speaker 3 (09:39):
Blah blah blah.
Speaker 1 (09:40):
Right, I know I agree with you and with Sam
Altman that this is all largely about petty personal vindictiveness
on a ground scale. But it's also like open ai
is probably the leading you know l M company.
Speaker 2 (09:54):
Yeah, I don't think that's controversial.
Speaker 1 (09:57):
Xai is has gros somewhere in the pack.
Speaker 3 (10:00):
Yeah.
Speaker 1 (10:01):
Open Ai has made it very clear that it's doing
this conversion because it needs to raise like forty billion dollars, right, Yeah,
it's so expensive to run company and to scale it
and to raise that much money. They think they need
to offer investors normal stock and not I think they
use the word structural bespokeness, which is a great word, bespokeness.
(10:23):
And so they need to be a for profit to
raise the amount of money that they need to raise
to continue to be competitive. And this might stop them,
yeah right, And if it stops them, then like yeah,
it's an opening for XII, right, And so how would
this stop them? Like Elon Musk offered to drop his
bid if they agreed to stay a nonprofit. So that's
(10:44):
like one way to stop them, right if they just
agree to stay a nonprofit. But even if they say
no to him, you can't quite ignore him. They have
to at least sort of wave in the direction of no. Actually,
we're getting more value for the nonprofit from open Ai,
like internally than we would from Elon Musk. And I
think most people think that means essentially, the nonprofit needs
(11:04):
to get a bigger steak in the for profit company
than it was planning, right it was planning like let's
say twenty five percent. It needs to get a stake
that I can credibly say is worth more than one
hundred million dollars, right, Yeah, And that just makes it
a little bit harder to raise money, right because you're
giving more of the steak to the more of the
company to the nonprofit. You're cutting back the shares of
(11:24):
like Microsoft and soft Bank and everyone else, And so
it just makes it harder for them to raise money
and creates uncertainty and you know, puts them in a
little bit worse competitive position to raise a lot of
money and kind of stay out of XII.
Speaker 2 (11:36):
Yeah, which is interesting in the context of Stargate or whatever,
that this very ugly public fuse paying out and makes
things a little bit more challenging for open AI.
Speaker 1 (11:46):
But we'll see, right, I mean, one thing I've written
is like, just from the outside, it seems to be
pretty easy for Open Ahead orra is money. They've got,
you know, yeah, like the sexiest product in the sexiest
industry in the world. They've got Sam Alban, who is
an incredible salesman. They've got a lot of advantages. And
you know, there's a lot of this money from soft Bank,
(12:06):
who is not like notorious for driving a hard bargain. Right,
it's weird to be like this bid from Elon Musk
is going to prevent them from raising the money they
need to scale. Like I don't know, man, Like it's
open an eye. They'll be fine, but I.
Speaker 2 (12:21):
Don't Yeah, all right, they'll be fine. Let's just put
a pin in it for now.
Speaker 3 (12:41):
Let's talk about.
Speaker 2 (12:41):
Pass through fees at multi strategy hedge funds do that.
This is a great Bloomberg big take that went out
this week. Reading it, it really feels like rage bait.
Speaker 1 (12:51):
Well it is, right, I mean, like it quits a
guy saying pastors are wild. You're paying for everything, including
the copy.
Speaker 3 (12:58):
Of paper beautiful.
Speaker 1 (12:59):
And it's true that traditionally the way you think of
hedge funds is like investors put in money, the hedgehun
invests the money for them. The hedge fund charges them
two percent of the money and twenty percent of the profits. Right, Like,
those are the stereotypical numbers and the stuff that the
hedge fund keeps. The two and twenty pays for its managers' salaries,
(13:20):
their bonuses, right, their photocopier paper, their lunches, you know,
and whatever. Like, the expenses are covered by the fees, right,
And the multi strategy model, the modern big multi strategy
model is just not that at all. Right, The modern
multi strategy model is, you give us money, we use
the money to do investing. We also use the money
to pay all of the expenses, and what's left over
(13:43):
you get some of what we get some of it, right,
Which is like, as I wrote this week, it's exactly
the same model as a company generally, or like an
investment bank in particular. Right, like an investment bank, the
shareholders pay for the photocopier paper. Right, All of the
expenses of the investment bank are taken out before net income,
and then the sharelders get some of the net income
and like the rest of it goes to the bonuses, or
(14:04):
rather the sharelders get the net income after the expenses
and the bonuses to the employees. And that's how like
companies work. It's how investment banks work. I'm modern like
corporate investment banks work. And the multi strategy model is that, right,
It's like the investors are capital providers. We pay for
all of our expenses out of the investors' money. Yeah,
and the investor you get someone what's left over, right, Yeah,
(14:26):
And that is a model that these firms can sell
to investors. But if you're just like outside of it,
you're like what they're paying for photocopiers, Like it's very annoying.
Speaker 2 (14:36):
Like I am not in LP to a multi strategy
hedge fund, but I mean, reading this story, I hear
the parallels that you're making with an investment bank. But
I have to imagine that maybe I'm wrong. I probably
am that if I'm in LP a potential LP to
a multi strategy hedge fund, I'm thinking about I am
giving my money to a hedge fund for returns. I'm
not investing in an investment bank model. I'm just coming
(14:58):
at this. It's you know, what is my money going
to return?
Speaker 1 (15:01):
Yeah, and like their pitch to you is we return
more than our cost of capital through the cycle. Their
pitch to you is like we can give you a
pretty stable high teens return on your money. And that's
what you're getting. And you're not getting like eighty percent
of the money we make. That's an irrelevant metric. What
you're getting is like a sort of expected high teens
(15:23):
return and like we'll pay for the photocopiers out of
your money.
Speaker 3 (15:26):
It's actually low teens.
Speaker 1 (15:28):
Yeah, there's this, there's a lot of like a lot
of you know, I'm used to the investment banking world
where there's like a thing called the target return on
equity and you're not supposed to get to the target
return on it's just like a number that's in the
present pitch.
Speaker 3 (15:40):
Yeah, I don't know.
Speaker 2 (15:41):
This goes back to a broader question that we talk
about this all the time on the television show that
I have open interest, but why would you ever give
money to a hedge fund?
Speaker 3 (15:51):
I understand the pitch diversification.
Speaker 2 (15:54):
You're supposed to get starty returns of about twelve percent
with few downswings, but I mean at the S and
P five hundred, you can pay three basis points for
the S and P five hundred. Over the last decade,
you've got an annualized return of thirteen percent with three
down years. And I mean thinking about these multi strategy
hedgehoe fees that make two and twenty look cheap, it
(16:17):
just reinforces that notion.
Speaker 1 (16:20):
You get pretty high returns with lower volatility and with
no correlation to the broad market.
Speaker 3 (16:25):
Yeah, the return You're a.
Speaker 1 (16:26):
Giant endowment, right, and like you have a lot of
money in the S and P and you want some
uncorrelatedponse that you know it doesn't pay like treasure rights
pays like two or three times treasures. It's a pitch
that works to a lot of like sophisticated endowments, and
like this is the like the multi strategy pitch is
the one that works, which is like, we give you
very low volatility, pretty high returns, no correlation to the
(16:48):
S and P. It's diversifying your investments. It's allowing you
to put more money into the SMP essentially because you
have like this, yeah, this diversified.
Speaker 2 (16:55):
It's a pitch that I know it works, but I
don't really understand why it works. And I go back
to ETF so I'm sorry, where you have this race
to the bottom and fees, this race to the bottom
doesn't seem to exist in the hedge fund world. And
there is a recent example, I think it's the University
of Connecticut Endowment that just said, actually, we're doing away
with hedge funds. We're gonna put all of our money
(17:16):
in buffer ETFs, which guarantee safety.
Speaker 3 (17:20):
Yeah, exactly how much capacity is there in buffer IDFs?
Speaker 1 (17:23):
I get? How much capacity is there in hedgehunds. No.
I mean, like if you put all of your money
into equities and there's like a big draw down in equities,
you have like a really bad year and you can't
spend on your programs. You know, if you're an endowment
and if you put some of your money into like
it's like a diversification, it's like steady returns. It's like
you don't start from it thinking about the fees, right,
(17:45):
You start from it thinking about like do they provide
steady returns after fees? And if the answer is yes,
then like the fees are none of your business. It's
like investing in Goldman. Right, it's like, you know, if
the equity returns a lot, then like it doesn't matter
that people are getting bonuses, right, Yeah, And like much
as with a public company, the job is to earn
(18:05):
the cost of capital over some medium period of time.
And so like the Big Take article starts with bally
Asthny charging a lot of money in like a relatively
down year, right, And bally Asni's like, well, you know,
it's an anomalist down year, and usually we return our
cost of capital, but like we have this one down year,
and you like point to it and it's like, yes,
in a down year, it is embarrassing to pay tens
(18:26):
of millions of dollars to your traders because like they
didn't make money for the investors. But it's like that's
not the right way to look at it. The right
way to look at it. It's like you're investing in a
business over the long term, and the business they to
pay money for traders.
Speaker 3 (18:36):
Yeah.
Speaker 2 (18:37):
I guess I just don't find it compelling. But you
know what, I'm not in charge of an endowment. I'm
sure if I was, perhaps I would have a different perspective.
Speaker 1 (18:44):
The great like sort of you know, hedge fund pitch
of like twenty years ago is like I will take
your money. M hmm, I will make one hundred percent trains,
I'll take thirty percent of the right, Like there's like
this the sort of swing for the fence's hedgehund model,
where like yeah, you could like make big back.
Speaker 3 (19:00):
And which I do find compelling.
Speaker 1 (19:02):
Yeah, right, I think I think is like much more
intuitively compelling, right, yeah. And the multi strat model is
like you're not like, oh, I put all my money
onto like Fanny May, Right. They put all my money
into like a series of like short term bets on
that are like essentially like liquidity provision and arbitrage trades,
and I can't really tell you about any of them,
and they're not that exciting, and they're on for one
day and they're all uncorrelated and hedged to you know,
(19:22):
a variety of factors, and so it's just like, I mean,
the thing I think about is like they like high
frequency trading model, where like your job is to make
money every day, and it's a little bit like the
job of these firms. It is not literally to make
money every day, but it's to like be very neutral
to market factors and to just sort of make steady
returns doing fairly safe but highly levered trades, and like
(19:46):
that's the thing they're pitching. And I think that resonates
with a lot of like yeah people in that it
seems real and sustainable in a way that like I'm
going to put all the money on Fanny May is
not if you're just like taking big swings, like you're
gonna miss and then like you know, you'll lose money,
Whereas like these guys are like, we're incredibly conscious of
(20:08):
risk and we try to be very neutral to a
lot of factors, so that we're just giving you pure alpha,
which is in some sense like alpha here beans something
like getting paid for providing a service, right, And it's
like we're doing something for the market and we're getting
paid for it. Yeah, And that's more reliable than like
a model of like we're going to make bets on
(20:30):
stocks and hope those bets work out whether or not
an individual pot is quants. Like it's a very quantity
like sort of model of thinking about the world, which
is like making individual bets on stocks has like a
pretty high probability of going wrong, and so you're making
a lot of diversified bets with like a little bit
of edge on each one, right, and like you tell
(20:50):
that model to an institutional allocator of like, yes, this
makes sense. This like feels plausible and sustainable. Whereas when
you come in and you're like, I'm just really good
at picking stocks, it seems bad.
Speaker 3 (20:59):
Yeah, I don't know. I mean I hear what you're saying.
Speaker 2 (21:04):
I still am surprised that there isn't feed pressure here.
It just feels like in every part of the asset
management industry there is fee pressure, and that feed pressure
doesn't apply to these multi strate hedge funds.
Speaker 1 (21:17):
Well, I think there's a reason that's not as pastors,
right because if you're like, we're gonna charge seven and seventy,
be like, yeah, it would be bad, right. But if
you're like, look, the going rate for a portfolio manager
is fifty million dollars, what do you want us to
not hire a portfolio manager? Like, you know, like the
pass of the fifty million dollars.
Speaker 3 (21:35):
Got him in the wrong business. Seriously, letter writer Jesus Christ.
Speaker 2 (21:41):
So, in clicking around in preparation for this conversation, did
you see Ken Griffin? I know you did like a
month or two ago, saying that he thinks the boom
in multi strategy hedge funds is over.
Speaker 1 (21:53):
I do think that if you run a multi strategy
hedge fund, the pricing pressure that you feel is probably
bore about hiring portfolio managers, that it is about your healties. Yeah,
And so for him to be like, oh r, it's over, yeah,
is a way to drive down the prices of portolio
managers more than it is to like signal to healthy
so he doesn't need their money, or like he's like, yeah,
the boom is not really over for him. The other
(22:14):
signal you're sending is the boom is over for potential competitors,
right yeah, which might be true, right, But I don't
think that, like Ken Griffin is worried about being poor
in a year.
Speaker 3 (22:24):
No, I don't think so. Though. Apparently, according to Goldman.
Speaker 2 (22:27):
Assets managed by multi strats did drop slightly in twenty
twenty four, which was the first to client since twenty sixteen.
So I don't know, we'll see. Let's talk about this
(22:52):
humble thought experiment that was put on by Double Line.
I wrote about it. It's pretty interesting. It's a paper
that was released this month. They basically sized up Microsoft
as an issuer versus the US government as an issuer
of debt. They didn't reach a conclusion. They wanted to
leave it up to the reader, but it seemed like
they were leaning towards Microsoft.
Speaker 1 (23:12):
It's a strange thought experiment, yeah, because they basically like,
look at Microsoft's capacity to service that's debt based on
its cash flows, and they compare it to the US
government's capacity to service it's that based on its stock
of debt and cash flows. Yeah, and it's like, Wow,
the US government takes in less than it spends and
Microsoft takes in more than it spends, and yeah, Microsoft
is a better credit. Okay. Like I have a lot
(23:36):
of sympathy for their conclusion. Right, they are doing this analysis,
I would think things like Microsoft is run by professionals
who one believe that they should repay their debt and
to want continued access to capital markets, and also has
a lot of cash flow, right, and so when their
(23:57):
debt comes due, they will pay it.
Speaker 3 (23:59):
They certainly well.
Speaker 1 (24:00):
Barring some sort of tele risk catastrophe. The US government
is not, for instances, run by a president who is
who has boasted about his use of bankruptcy I heard
about this the other day. This is wild, Like people
can get him to say anything. And he was talking
about like Elon Musk going through the payment system and irregularities, right,
(24:22):
like the treasury. No one says what the irregularities are,
but oh, this fraud. Right, And so Donald Trump said,
there could be a problem.
Speaker 2 (24:28):
You've been reading about that with treasuries, and that could
be an interesting problem because it could be that a lot.
Speaker 1 (24:35):
Of those things don't count.
Speaker 2 (24:37):
In other words, that some of that stuff that we're.
Speaker 1 (24:39):
Finding is very fraudulent. Therefore, maybe we have less debt
than we thought of. Think of that, therefore, maybe we
have less debt than we thought of.
Speaker 3 (24:49):
That was amazing that landed like during the super Bowl.
Speaker 1 (24:52):
So like some treasuries may not count. Who knows which
treasuries don't count? Who knows why? Like there might be
from fraud. Right, maybe your treasuries were fraud. Yeah. I
don't place a high probability on that happening. But like
you know, the guys go around, some treasures don't count.
Microsoft doesn't say that.
Speaker 2 (25:07):
No, no, Microsoft would not say that. And what was
interesting about Trump saying that over the weekends was, first
of all, it took a little bit. There was a
lag between when he said that and when someone from
the administration clarified that he wasn't talking about treasury bonds
or whatever it was. But there wasn't there wasn't a
reaction in the treasury market, which I don't know, maybe
(25:28):
points to maybe Trump losing some of his juice here
that he could suggest that maybe we wouldn't count some
of the treasuries in the market just totally looked past it.
Speaker 1 (25:36):
I'm not saying that the US government is no longer
interested in paints. I just say, like you look at
the measurement of Microsoft, you think the management.
Speaker 2 (25:45):
So it sounds like you would end up even though
maybe you're looking at different factors in your own analysis.
Speaker 3 (25:50):
Very different factors, but you end up in kind of
the same.
Speaker 1 (25:52):
Oh yeah, yeah, I mean not investment it was. I mean,
I appreciate the thought expert.
Speaker 3 (25:59):
I should note that double line.
Speaker 2 (26:01):
This truly is a thought experiment because they don't own
Microsoft debt. The reason being that there's just better value
to be found elsewhere. Obviously because Microsoft trades.
Speaker 1 (26:10):
Treasure that they have.
Speaker 3 (26:11):
It's a good question too.
Speaker 2 (26:13):
I don't know, but Microsoft, I mean, you look at
their thirty year debt, and it trades very similarly to
treasures like forty.
Speaker 1 (26:21):
One basic points of a treasures, which is like a
meaningful premium if you think it's safer, No, it's I mean,
it's them compared to highal bonds, but it's a lot
compared to Yeah, you think it should be negative, right,
if you think it should, it's a good trid.
Speaker 2 (26:33):
I mean, they do point out that if you do,
you know, end up on the side of Microsoft debt
is safer, then there's some income opportunity there, but they're
personally not exploiting that their analysis though. Just to put
some numbers behind what we've been talking about. So Microsoft
can pay its annual interest expenses more than fifty times over,
it is expected to generate nearly forty eight billion dollars
(26:56):
of free cash flow in fiscal twenty twenty five. It
also has a higher rate from the credit agencies than
the US government, which is pretty funny. Whereas you compare
that to the US government, our country's receipts to interest
expense has declined to five point two times as is
twenty twenty three. Also, we've run a deficit since two
thousand and two. So those are some of the factors
(27:18):
that went into what double Line is looking at.
Speaker 1 (27:21):
I mean, first of all, the traditional analysis is the
US government can always pay back.
Speaker 2 (27:24):
It's that because the full faith and credit, because it.
Speaker 1 (27:26):
Can print money. Yeah, so in the worst case, the
US government prints money and inflates away the debt, and
that's just as bad for Microsoft's that as it is
for US government as reading. Like you know, there's like
a traditional theory of the sovereign ceiling where like people
use that more for like emerging market spuds, where it's
like the idea is that you can't have a better
(27:47):
credit rating or a lower yield for a corporate in
an emerging market then for the sovereign because like it's
not clear why, but it's like, you know, there's some
theory that like you know, first of all, like the
economic conditions that affect the sovereign would affect the corporate
as well. And secondly, like a catastrophe for the sovereign,
is the sovereign going to like seize the assets of
(28:09):
the corporate? You know, Like, so it have the sovereign ceiling,
but it's like a sort of soft ceiling, and there's
like history of ratings agencies occasionally rating corporates in Argentina
higher than this. Yeah, Microsoft can't print dollers, but I'm
pretty close. And I think that like, if I were
trying to like think about like my credit risk as
a credit of the US government, I would worry a
lot more about like government shutdowns, that ceiling bridges, elon musk,
(28:33):
deleting the database, you know, like all that stuff. Then
I would about like cash flow, yeah, because like cash
flow can be solved by printing currency, right, but like
all that other stuff, like you you might get like
you know, delay on your payments, right. Yeah, So I
think that stuff is like idiosying credit to the current
US government and wouldn't apply to like the highest rated
corporates in the US.
Speaker 3 (28:54):
Yeah.
Speaker 2 (28:55):
And I mean we're talking about forty nine basis points
in terms of the spread in.
Speaker 1 (29:00):
Keep saying that small, That seems big. That seems like so.
Speaker 2 (29:03):
You're saying, I don't, I don't know, maybe you should
go buy some This isn't investment advice, as Matt said,
but I mean, in em it's not unheard of to
see corporates trade through the sovereign, which is cool. Also,
I got some interesting feedback on this one. A terminal
client wrote in, and I liked this email a lot.
(29:24):
Not talking about em but this person said I'd certainly
rather own Loreal bonds than French bonds, which I found amusing.
So there's other examples you could use.
Speaker 1 (29:35):
But yeah, there's like, you know, like the big companies
are sort of multinational and like arguably have less exposure
to some of the conditions in their countries than the
sovereign does.
Speaker 2 (29:45):
Yeah, so I asked Bloomberg Intelligence about this, and I
thought this was a fun stat as well. Microsoft has
a zero point zero six percent five year cumulative default risk,
which is pretty stinking close to the US government's risks
free alternative. So microsofts, I don't know, I don't know
what that number. I think that they just have a
(30:07):
really low chance of defaulting.
Speaker 1 (30:10):
Sorry, zero point zero six.
Speaker 3 (30:12):
Percent, Yeah, cumulative. What do you think is the chance
of Microsoft the US.
Speaker 1 (30:19):
Government missing a payment on it's debt in the next
four years?
Speaker 3 (30:22):
Maybe zero?
Speaker 1 (30:24):
Is it bigger than zero point zero six percent?
Speaker 2 (30:27):
I was going to answer zero point zero six percent, Okay, yeah, what's.
Speaker 3 (30:32):
Your what I mean?
Speaker 1 (30:34):
Zero point zero eight percent?
Speaker 3 (30:35):
Okay, there you go. Then you could have written this paper.
Speaker 1 (30:39):
Exactly programming note. We're taking next week off.
Speaker 3 (30:44):
I'll see you in two weeks.
Speaker 1 (30:50):
And that was the Money Stuff Podcast.
Speaker 3 (30:52):
I'm Matt Livia and I'm Katie Greifeld.
Speaker 1 (30:54):
You can find my work by subscribing to the Money
Stuff newsletter on Bloomberg dot.
Speaker 2 (30:58):
Com, and you can find me on Bloomberg TV every
day on Open Interest between nine to eleven am Eastern.
Speaker 1 (31:04):
We'd love to hear from you. You can send an
email to Moneypot at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 2 (31:11):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (31:17):
The Money Stuff Podcast is produced by Ana ma Aserakus
and Moses onam Ar.
Speaker 2 (31:21):
Thea music was composed by Blake Maples.
Speaker 1 (31:23):
Friend and Frances Newnham is our executive producer.
Speaker 2 (31:26):
And Stage Bauman is Bloomberg's head of Podcasts.
Speaker 1 (31:28):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff
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