Blockhouse Archives

Third Point founder Dan Loeb on the hardest investment lesson he has learned: "I would have to say our investment in FTX." "We could verify it all on the blockchain." "We felt like we had some good company on the cap table with us. We did." "...it wasn't what we thought it was..." "I will say that now our due diligence process, we definitely, like, check bank balances and do, like, the most basic due diligence..."

AQR co-founder Cliff Asness (@CliffordAsness) on a fundraising quip he now calls "staggeringly wrong": "Here's where I was a complete idiot. In going around to raise money in the first six months, I must have had 20 clients say, 'We don't need 22% vol uncorrelated to the market. How about you do a quarter of that?'" "I responded... with a flip tone, 'You want a quarter of the vol? Give us a quarter of the money.'" "I still refuse to admit I was wrong about the math, 'cause I was not. But I was staggeringly wrong because it turns out, Corey, this'll shock you, that down two standard deviations at 20% upsets people more than down two standard deviations at 5%." "Having served on many an investment committee since then, we do not call in the largest standard deviation event. We call in the idiots who are down 35%."

Former Enron gas trader and Centaurus founder John Arnold (@johnarnold), on building "the best seat in the industry" after Enron: "I felt I was among the best. I had also managed to create probably the best seat in the industry." "...my first job out of college was at Enron. I started there when I was 21 years old in 1995... it went bankrupt in late 2001..." "...deciding to start my own hedge fund." "...the classic hedge fund two and 20 structure..." "...intermediary between me and the 20%, right? I was getting the 20%." "...we had very good financial returns early on." "Whenever we had a down month or a down time period, which we had, they weren't calling to redeem, but they would call up and say, 'Do you need more capital?'"

Campbell & Company CEO Kevin Cole on why there's no holy grail model in quant investing: "We don't believe there's any holy grail, or any single model that's going to be the answer in markets." "Markets are not perfectly efficient. But I do like the phrase efficiently inefficient, and that means to me that small edges can be found through hard research, but those edges do get competed away over time. And what was once alpha becomes widely known, it gets commoditized, it becomes beta." "The central risk we face as quants is overfitting, that it's pretty easy to find a good backtest, but just because you find artifacts in past data doesn't mean they're gonna hold going forward." "'Just because you uncover dinosaur bones in an archaeological dig, it doesn't mean that dinosaurs still roam the earth.'"

IDW Group founder and hedge fund headhunter Ilana Weinstein on why remote work made poaching hedge fund talent easier, with a jab from Point72's Steve Cohen (@StevenACohen2): "I will tell you, and maybe I shouldn't say this, but I'll say it, in some ways, my job has become a lot easier in the last couple years." Steve Cohen: "But you're charging the same amount." "They're working from home. They can more clearly see what their value add is versus other people who are maybe just benefiting from being in the room with other smart people." "This year, we have had, which I've never had before, people that we've gone after for years calling us, telling us they're ready to leave."

Balyasny Asset Management founder Dmitry Balyasny on the risk limits every BAM portfolio manager trades inside: "We allocate capital in the form of volatility dollars, and then somebody has an expected Sharpe, and they multiply that Sharpe times the vol dollars to arrive at their expected P&L for the year." "You have a drawdown framework that's very objective and clear that everybody signs off on day one, and that's multi-step, so you're not forced to reduce the portfolio by a large chunk at any one time." "In equity portfolios, you'll have idio versus factor risk limits. And you might say, 'Okay, your idio limit is we want you to run at least an 80% idio, 20% factor portfolio.'" "You have liquidity limits. You have guidelines on things like number of positions and concentration. So lots of things like that, that create a box within which that person can operate."

D1 Capital founder Dan Sundheim on owning Priceline when it was growing 40% a year at nine times earnings: "Booking.com, okay? Which was called Priceline back when I owned it. It was growing 40% a year and traded nine times earnings." "Yes, it didn't make a lot of sense. But like the narrative back then was like, okay, they're just like arbing Google, and like this is like a flimsy business model, whatever." "It's a lot slower than it used to be, and it trades at like 3X the multiple, right?"

Renaissance Technologies CEO Peter Brown on why RenTech pays everyone from the same pot: "Now, as for our secret sauce, of course, there's nothing I'd rather do than disclose in great detail all the intellectual property that we've spent decades and billions of dollars creating." "The company was founded by scientists. It's owned by scientists. It's run by scientists. We employ scientists. Guess what? We take a scientific approach to investing and treat the entire problem as a giant problem in mathematics." "We encourage people to work in teams. We constantly change those teams up so that people get to know others within the firm." "We pay everyone from the same pot instead of paying different groups in accordance with how much money they've made for us, and so forth."

Balyasny's Global Head of Quantitative Research Giuseppe Paleologo (@__paleologo), formerly of Citadel, Millennium and HRT, on how the three firms actually differ: "I'll actually quote a co-head of one of these firms, without mentioning his name, who once told me, 'Citadel is Singapore. It's centrally managed, it's very efficiently managed. Everything is clean and working.'" "'Millennium is the United States because it's federated. If you want, you could say it's siloed, it's messy, it's big, but things work out in both models.'" "I would add that HRT is a little bit like Wakanda. So HRT is smaller, in a sense it's cooler. The human capital, the quality of people, I think is probably the highest among the firms that I've worked at."

Citadel CEO Ken Griffin on the college put trade that made him study the market maker's edge: "in my college dorm as a freshman, I bought two put contracts in Home Shopping Network, and in some sense I owe my career to good journalism." "fortunately from the perspective of my career, the stock cratered shortly thereafter." "When I sold those put contracts, the market maker paid me less than their intrinsic value, and that made me very curious about the pricing of derivatives, because I realized that I got very lucky in buying those puts with an expiration that fell after the stock had cratered, but the market maker made a risk-free profit." "I was very interested in trying to learn about the pricing of derivatives, and that took me to understanding the pricing of convertible bonds, which is the area that I started in from my college dorm room when I, I began my first hedge fund."

PWL Capital (@PWLCapital) CIO Ben Felix on how a leveraged ETF went to zero after a market drop triggered its swap contract's termination: "a lot of the leveraged ETFs are getting their leverage from swap contracts." "But now you've got counterparty risk." "you've got the risk of the counterparty closing the contract after an extreme downward move in the asset, which has happened." "The, the swap contract had a provision for the contract closing if there was a certain downward move in a day. That happened, and then the ETF became worthless."

A portfolio manager can be wrong almost half the time and still be an all-star. Dmitry Balyasny on hit rates and why the size of the wins matters alongside how often they happen. In equities, a modest hit rate can still produce strong results: "in equities, we find, portfolio managers who have hit rates in the 50s with decent slugging could be very, very good" But that trade-off has limits: "It's hard to find somebody with, you know, 25% hit rate and enough slugging to kind of overcome that because there's just, there's just too many reps." Hit rate is only part of the picture. The other question is how much the wins make relative to what the losses cost.

A terrible investment led Blackstone to require a negative view from everyone at the table. Stephen Schwarzman, CEO of @blackstone, explains: "I approved a terrible investment as the second investment we did. And we lost money, and it was incredibly devastating to me." "We had to go around the table and everyone had to express themselves. And they had to do it with something negative about the proposed investment, risks that people didn't see." "criticism is not personal, it's impersonal. It has nothing to do with you bringing the deal. It has nothing to do with them pointing out the shortfalls in the deal, because every deal will be treated exactly the same, and every person will have that same role."

The 2008 lesson: don't pretend to be a bank unless you are a bank. A near-death experience at Citadel, Ken Griffin explains: He recalls his hope that the firm would still be in business at the end of the day. "If you were a bank, you had access to the Fed, you had access to a much broader safety net. If you were not a bank, you were much more left on your own." "We had access to the wholesale funding market. We could fund at pricing near or sub-LIBOR. We had incredibly, incredibly great access to credit. And what none of us appreciated was that in a period of crisis, that access to credit would actually not just slow down or fall a bit. It would cease. It would end."

He has been critical of bonds for 10 years — and he still owns them. The 60-40 'Superman diversifier' was a historical accident: a 20-year bond bubble. @andrewdbeer1, co-founder of Dynamic Beta Investments, explains: "It was fueled by the 20-year bond bubble." "Because bonds were the statistically perfect diversifier to your stock portfolios for 20 years." "I used to call them the Superman of diversifiers. Nothing could compete with them." "It drops into your account." "your own money handing you money every month that you can go spend."

Take a small starter, then add to your winner only on a confirmation signal—not upfront size. A wrong thesis costs ~100 bucks; a confirmed one, you add and it can balloon bigger. Alex Temiz explains: "it's always okay to take a starter, right?" "If you get that signal of confirmation, that is when you add to your winner." "If you're taking a starter, maybe your chances of winning are 50%." "Then you get a death candle. Chances go to 75%." "But 10% of the time, it's gonna go from low of the day to high of the day and kick your ass."

AI makes intelligence a commodity. The edge that's left: creativity. On what humans keep when AI commoditizes intelligence, Perishing Square founder @BillAckman explains: "I, I sort of make the argument that what's left when everyone has access to low cost super intelligence is sort of creativity, right?" "Not clear to me that AI can be creative yet, right?" "Einstein's, uh, light bulb moments, E equals MC squared or theory of relativity, I don't think that anything that came before Einstein, uh, that a, that AI would've read would've come out with that formula, if you will." "But I do think it could lead to, uh, abundance, um, as, uh, I think there's gonna be an explosion of entrepreneurship, uh, and, um, I think there can be a, a, an explosion in overall GDP, or global growth."

A football result shouldn't move a stock market. 1,000 games say it does. Why mood, not just fundamentals, moves prices. Alex Edmans, Professor of Finance @ London Business School, explains: "what you learn in any finance class is that the market is affected by fundamentals." "But what research actually finds is that sentiment and emotions make a difference." "if you study over 1,000 soccer games, after a country is knocked out of the World Cup, the market falls by about a half a percent the next day, which is 15 billion pounds when applied to the UK stock market." "You are human, and if you're human, then you are susceptible to your emotions, and something like this does affect how you trade or maybe how you assess a company."