| The basic thesis of the big multistrategy multimanager “pod shop” hedge funds is that investing talent is real, identifiable and scarce. There are people who are reliably good at buying stocks that will go up and selling stocks that will go down; they have an investing process that works, so if you give them a billion dollars to manage they will earn steady market-beating returns. The big hedge fund firms are essentially in the business of finding those people; they have a investor hiring process that works — they’re “a massive filter of talent” — so they can run tens of billions of dollars of assets and allocate them to the best possible investors. But this talent is rare, so the people who have it can command a high price, generally 20% or more of the returns they generate, often with tens of millions of dollars guaranteed. And because it is so rare, the big funds have to constantly poach people from smaller funds, and from each other, to fill their seats and generate returns for investors. One amusing irony of this situation is that hedge fund manager talent is artificially scarce. Perhaps there are, say, 5,000 good portfolio managers in the world. How many of them are managing portfolios at any given time? On some plausible assumptions the answer might be 3,000. At Business Insider, Bradley Saacks reports on the hedge fund talent competition: It's not uncommon for a portfolio manager to work for two or three of the top funds over a five-year span, including breaks to avoid violating non-compete clauses in their contracts. A PM who gets fired on a Tuesday often has an inbox full of suitors by Wednesday, and some PMs are even getting re-hired by firms that once pink-slipped them for losing money. … “Historically, capital was the bottleneck,” says one investor in several big-name hedge funds, who asked to remain anonymous in order to speak candidly. “Now it's 100% talent.” If you work for three funds over five years, then those five years will include two gardening leaves, and if you’re senior enough the gardening leaves could easily be a year or more. So you work for maybe three out of five years. That’s probably not everyone’s experience, but still. A meaningful chunk of the available portfolio managers are actually out of the market in any given year. In a world of scarce fixed supply, that has to push up prices. Saacks quotes Izzy Englander, who runs Millennium Management: At a 2023 event with fellow hedge-fund billionaire Paul Tudor Jones, Englander said that long non-compete agreements had helped create a “talent bubble” and an artificially small pool of potential hires that can demand more, according to a source who was in attendance for the talk.
If you are a hedge fund portfolio manager, is this the optimal way to arrange your life? Like, “I will be on vacation for two out of every five years, and when I do work I will get paid a huge premium for my services because there aren’t enough people like me to go around”? I feel like when I put it like that it sounds pretty great? Still I bet a bunch of hedge-fund PMs would prefer less gardening leave. If you love allocating capital and correcting market inefficiencies, it is tough to be out of the game for years at a time. Anyway the story is mostly about how frantic the competition for talent is, and how the big hedge fund managers are annoyed “that their hired guns, who they trained over decades to be mercenaries, are behaving like mercenaries.” And: Millennium alone hired around 160 new portfolio managers last year — an average of three a week — according to a person close to the firm. That's equivalent to the entire workforce of $50 billion Tiger Global, according to regulatory filings. "Does the universe create that many people who you haven't already seen every year?" says an executive whose firm competes with the Big Four. Counterpoint: Yes? Obviously? The universe creates more than 100 million new people every year. Those new people are not immediately useful to hedge fund managers, fine, but colleges create millions of new graduates every year. They’re not immediately useful either, but they’re closer: Much like private equity 15 years ago, multistrategy funds have reached a maturation point, and the shift has necessitated a more traditional workplace culture and structure. Citadel, Point72, and Balyasny have all built training programs for college students and fresh graduates in hopes of creating an internal talent pipeline that fuels a sense of connection to the fund that gave them their first job. Partnership stakes in the business and longer-term financial incentives are becoming more common. Balyasny, for example, added three new partners last year, all of whom are PMs. Point72's Academy program, launched a decade ago, has produced more than 200 analysts. I have sometimes mused about an alternative model of the big multistrategy hedge funds. Pod shops, I sometimes write, are the new banks: They make reliable returns in part by providing well-defined services to the markets; things like the basis trade or the index rebalancing trade are best understood not as “ooh the pod shops are so much smarter than everyone else” but rather “market participants want to do some trade, and hedge funds are nimble at intermediating it.” Twenty years ago banks would intermediate a lot of those trades, but as banks have retreated hedge funds have stepped in. Twenty years ago, banks cared a lot about talent: It was much better to have a good trader than a bad trader. But they also hired people right out of college and trained them. And they thought about “the value of the seat”: If you made a lot of money doing basis trades for Goldman Sachs, how much of that was attributable to your skill and how much of it was attributable to trading for Goldman Sachs? They did not think of investing talent as an exogenously scarce resource: They hired a bunch of smart people and taught them how to do the job, and the ones who learned to do the job well got paid a lot. Shouldn’t that happen here? If on the one hand “multistrategy funds have reached a maturation point, and the shift has necessitated a more traditional workplace culture and structure,” and on the other hand hedge-fund talent is so rare that nobody can find anyone to hire, shouldn’t the market … create more hedge-fund talent? Is part of the thesis that investing skill can be taught, or at least learned? “Work three years out of every five and get paid $100 million” is obviously attractive, and people will respond to that market signal.  | | | One thing that some companies do is borrow against their accounts receivable: You sell some stuff to some customers, the customers have 60 days to pay you, you want money now, so you bundle together a bunch of invoices and sell them to a lender. You get money now, and when the customers pay you in 60 days, you give the money to the lender. Probably when you first do this, the lender will come in and do some due diligence and talk to the customers and make sure this is all a good credit risk. But after you’ve been doing it for a while, everyone will get increasingly comfortable, and you can just email over 1,000 PDF invoices to the lender and get back cash the same day. And then another thing that, uh, surprisingly many companies do is borrow against fake invoices? You can see the temptation. Instead of emailing over 1,000 real PDF invoices, you can sprinkle in, like, 200 fake invoices and borrow a few extra thousand dollars. This creates an obvious problem, which is that you have to pay back the extra money, and there is no actual extra customer money coming in. So probably in 60 days you will have to do this again, but more so: You’ll have to make even more fake invoices to borrow even more money to pay back the money you borrowed from the previous fake invoices. And this snowballs. Probably when you first do this, it is a wrenching moral quandary that you keep quiet out of shame and fear. You make the fake invoices late at night when no one else is in the office. You tell only the people who absolutely need to know, and you tell them in person in a nervous whisper in the bathroom with the water running so no one can overhear. You don’t put it in writing. But then you do it again in 60 days. And after you’ve been doing it for a while, everyone will get comfortable, and eventually you’ll just send mass emails like “hey everyone, time to fake the invoices again.” I don’t know, maybe that doesn’t happen much, and this isn’t any sort of advice. But we have talked a few times about allegations that auto parts supplier First Brands Group faked a bunch of invoices, and now here’s this: First Brands Group founder Patrick James ordered members of the finance department to transfer hundreds of millions of dollars of corporate cash to his personal bank account, a family trust and various businesses he controlled, the company’s new chief executive said during testimony in federal court Monday. Charles Moore also testified that within weeks of arriving at First Brands, he uncovered evidence of massive financial fraud at the auto-parts company, from fake invoices to using the same assets to win loans from different lenders, a process known as double pledging collateral. … First Brands lawyers showed a 2022 message from one member of the company’s finance department to another, in which an employee suggests they may have to make “dummy invoices” to secure additional financing. In a subsequent message, a top member of the finance department doesn’t express any concerns about falsifying invoices, Moore testified. That surprised Moore, he said. “I would think that if the notion of creating a dummy invoice was new or not happening, there would be some reaction to that,” Moore said on the witness stand. Right, you’re never going to find the first email saying “hey guys let’s fake some invoices.” That’s not an email! The hundredth is. I am generally skeptical of claims that the public stock market is too focused on short-term results, that chief executive officers of public companies cannot pursue their long-term visions because of the daily pressure from investors to report good quarterly earnings, and that only startups backed by patient long-term venture capitalists can pursue really ambitious projects. It seems to me that there are plenty of public companies whose shareholders trust them to take the long view. All the big public tech companies are cheerfully planning to spend trillions of dollars on long-term artificial intelligence projects. Elon Musk complains loudly about the short-term pressures of the public markets, but Tesla Inc.’s shareholders just agreed to pay him $1 trillion to build the robot army that currently exists in his imagination. It’s fine. But the Financial Times reports: Meta’s chief artificial intelligence scientist Yann LeCun is planning to leave the social media giant to found his own start-up, as Mark Zuckerberg seeks to radically overhaul the company’s AI operations. ... Zuckerberg has pivoted away from the longer-term research work of Meta’s Fundamental AI Research Lab (Fair), which LeCun has headed since 2013, to focus on more rapidly rolling out models and AI products after deciding that Meta had fallen behind the competition. … Zuckerberg’s pivot followed the botched release of Meta’s most recent Llama 4 model, which performed worse than the most advanced offerings from Google, OpenAI and Anthropic, while its Meta AI chatbot has failed to gain traction with consumers. LeCun, however, has long argued that the LLMs that Zuckerberg has put at the centre of his strategy are “useful” but will never be able to reason and plan like humans, increasingly appearing at odds with his boss’s AI vision. Within Fair, LeCun has instead focused on developing an entirely new generation of AI systems that he hopes will power machines with human-level intelligence, known as “world models”. These systems aim to understand the physical world by learning from videos and spatial data rather than just language, though LeCun has said it could take a decade to fully develop the architecture. From this telling of the story, it does sound like Meta and Zuckerberg are prioritizing short-term rollouts and monetization of current AI models over long-term fundamental research. “Zuckerberg has come under growing pressure from Wall Street to show that his multibillion-dollar investment in becoming an ‘AI leader’ will pay off and boost revenue,” reports the FT, and tinkering with world models for a decade is not the way to boost revenue today. It is perhaps a little odd that Zuckerberg feels this pressure? Zuckerberg controls 62% of Meta’s voting stock, and the company says that “our current capital structure allows our board of directors and management team to focus on the long term.” And Meta does have a long history of making bold bets based on Zuckerberg’s long-term vision rather than the needs of short-term earnings management. Still, when you get big enough, you do have to care a bit about what the stock market wants. And when you are paying your AI researchers hundreds of millions of dollars in stock, it does help if the stock goes up. Also: How easy do you think it will be for LeCun to raise a lot of money from venture capitalists to tinker with world models for a decade? Very very very very very very very easy, would be my answer. LeCun is famous, and this is a great pitch. We talked recently about Mira Murati’s AI startup, Thinking Machines, which had “not yet released a product” or “talked publicly about what that product will be,” but which had raised $2 billion in few-questions-asked funding at a $10 billion valuation from top venture capitalists. I wrote: If you are a top AI researcher, probably a lot of your friends are also top AI researchers. If you all got together, you could (1) hang out and have fun and (2) also do some top AI research. And then you could go out to investors and say “hey, look, top AI researchers here, give us a billion dollars.” And if the investors said “yes but what are you all doing together,” you could give them a disapproving look and take a step toward the door, and they would say “we’re so sorry, we don’t know what we were thinking, to make it up to you here’s $2 billion.” And then you’d have $2 billion dollars to hang out with your friends. And do top AI research with them, if you want. You probably do want! That’s how you got to be top AI researchers. But do you need to do boring stuff like have a business plan or pursue revenue? I don’t … I don’t really see why you would? It is really an amazing time to be an AI researcher. You can come into work to pursue pure science, uncontaminated by any need for near-term practical applications or making money. And when your boss comes to you and says “hey guy not to be annoying but I am paying you $100 million, is there any way we could turn any of this stuff into money,” you can quit in a huff and find venture capitalists who will give you billions of dollars to be even less commercial. And they’re not even wrong! Betting on long-term theoretical AI research has turned out to be hugely lucrative for a lot of investors; there’s no reason not to keep doing it. It’s a golden age of academic researchers getting bazillions of dollars to pursue pure research. Elsewhere in AI profitability: “Anthropic Is on Track to Turn a Profit Much Faster Than OpenAI.” I can’t really tell who is taking the long view here: The financial road maps, both shared with investors this summer, suggest that the world’s two most-valuable AI startups are taking vastly different approaches to growing their businesses. OpenAI expects thinner margins than Anthropic from its sales for the next five years. Yet it is investing far more in the chips and data centers needed to build its AI technology, and doling out more stock-based compensation to attract top researchers.
I guess “lose lots of money now to become the dominant player” is traditional long-term thinking, while “live within our means and grow gradually” is more of the public-company approach. But in AI the stakes are different, and “rush to build a superintelligence as fast as we can” is arguably a bit short-sighted. If you gave me $100 for safekeeping, and I promised to give you back the $100 without interest in a year, and in the meantime I parked your $100 in a savings account at a big US bank, you’d be like “yeah sure sounds right.” That’s the normal place to park dollars for safekeeping. If I parked your $100 in a money market mutual fund, or in US Treasury bills, that would be good and normal too. Microsoft Corp. bonds? Ehh maybe, sure, I guess, though there is more risk there. If I parked your $100 in Tesla Inc. stock, that would be significantly weirder. Tesla is volatile; it can go down; there is some probability that, in a year, I won’t have $100 to give back to you. Maybe it’s fine: Broadly speaking Tesla mostly goes up, and there’s a good chance that by putting your money in Tesla I’ll have way more than enough to pay you back. But it seems like an unnecessary risk, and you’d think it was kind of odd for me to do that. What if I parked your $100 in Bitcoin? Well, mostly, same answer: Bitcoin is volatile, it can go down, etc. If I parked your $100 in Bitcoin, you might reasonably say “why did you do that?” But I might have an answer. My answer — if I was the sort of person who took your $100 and parked it in Bitcoin — might have a certain hard-money flavor to it. My answer might be “look, the dollar itself is not very stable; inflation and government debt are constantly eating away at its value, and the only way to preserve stable value is to put your money in hard assets like Bitcoin.” [1] You might reasonably reply: “What, no, that doesn’t matter; you promised to give me back a specific number of dollars; if the dollar is debased or whatever that doesn’t matter to our arrangement; all you have to do is give me the dollars back. If Bitcoin goes up against the dollar that won’t help me; if Bitcoin goes down against the dollar then you won’t have enough dollars for me. You’re just making a proprietary bet with my money. The stuff about debasement and preserving value is irrelevant; keep my dollars in dollars.” This objection strikes me as obviously correct, but I think that some people will disagree. What if I parked your $100 in gold? My instinct is that the analysis is exactly the same as for Bitcoin: Gold can go down against the dollar, that would be bad, but I might go around saying like “ooh debasement inflation ooh, got to get some hard assets in here to back your dollar claims.” And you might reasonably find that incoherent: Your claim is for dollars, not for gold, and inflation is irrelevant to my obligations to you. But there is a very long and respectable history of gold being treated as a hard monetary asset, and in particular of central banks and national treasuries keeping some of their reserves — which in the modern world really are mostly a way to support dollar claims — in gold. “I have a lot of dollar obligations, which I back using mostly dollar-denominated debt assets but also with some gold” is kind of a weird approach from first principles, but it is also quite traditional and normal. Anyway historically Tether, the stablecoin issuer, has been the sort of company that would take your $100 and park it in Bitcoin, or much weirder stuff, and certainly it is the sort of company that would take your $100 and park it in gold. And it is now a big enough manager of reserves that it is a player in the gold market. Bloomberg’s Jack Ryan, Jack Farchy and Yihui Xie report: Tether Holdings SA is hiring two of the world’s most senior precious metals traders from HSBC Holdings Plc, as the stablecoin giant deploys its deep pockets to build a vast gold reserve and challenge the established players of the bullion market. … Tether has aggressively expanded its presence in precious metals in recent years, amassing one of the world’s biggest hoards of gold outside of banks and nation states as part of its more than $180 billion in reserve assets. HSBC is a powerhouse in precious metals, widely seen as the largest player after JPMorgan Chase & Co., with operations spanning futures trading, vaulting and sending gold bars across the globe. … Tether — which owns bullion as part of the reserves backing its flagship US dollar stablecoin — held more than $12 billion of the precious metal in September, according to its last reserves report. The El Salvador-based company has added to those holdings at an average rate of more than one ton a week in the year through September, according to Bloomberg calculations. That makes Tether one of the biggest buyers in the market, without including the bullion held against its own gold-backed stablecoin, or any private investments bought with Tether’s billions of dollars of profits. The company has also taken stakes in other parts of the gold supply chain, including royalty companies. The Tether stablecoin, or USDT, is convertible on a one-to-one basis with the dollar, and relies on reserves mostly composed of US government debt, as well as other assets like gold. The company also issues the stablecoin Tether Gold, or XAUT, of which roughly $2 billion worth are in circulation, 100% backed by about 1,300 gold bars, according to a Tether website. I keep saying this, but Tether really does have the simplest and best business in the world: It can borrow $180 billion at 0% interest, invest it in one-month Treasury bills at like 4%, take no risk whatsoever, collect $7 billion of interest a year and spend it all on yachts. But it does like to make things more complicated. SoftBank Sells Nvidia Stake for $5.8 Billion to Fund AI Bets. Morgan Stanley Starts Research Product Focused on Private Firms. Berkshire’s Buffett Plans to Keep Class A Shares Until Successor Wins Over Investors. Reverse mortgages edge up as US economy squeezes older Americans. The Credit-Card Rule That Powers Rewards Cards Just Got Broken. Coinbase Launches Platform for Digital Token Offerings. Neuberger Berman Raises $7.3 Billion for Private Credit Fund. Manulife CQS Raises $1.1 Billion for Synthetic Risk Transfers. Apollo Buys Majority Stake in Soccer Club Atlético de Madrid. The Celebrated Chef Who Robbed Banks. Papa Johns Stock Soars on Fake Buyout News. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
