Bespokeness: AI, Passthrough, UST

Summary

Money Stuff: The Podcast – Episode Summary: "Bespokeness: AI, Passthrough, UST"

Release Date: February 14, 2025
Hosts: Matt Levine & Katie Greifeld

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1. Hostile Takeover Attempt of OpenAI by Elon Musk

In this segment, Matt Levine and Katie Greifeld delve into Elon Musk's audacious attempt to execute a $97 billion hostile takeover of OpenAI. This move is unprecedented, especially considering OpenAI's unique structure, where a nonprofit entity holds control over its for-profit subsidiary.

Key Points:

• OpenAI's Structure: OpenAI operates with a nonprofit parent that oversees its for-profit ventures, aiming to balance profitability with its mission to benefit humanity.
• Musk's Bid: Elon Musk's offer of $97 billion is not for the entirety of OpenAI but specifically to acquire the control rights from the nonprofit. Levine highlights that this sum surpasses the valuation the nonprofit would receive from its existing conversion to a for-profit entity, which was pegged around $75 billion based on a $300 billion valuation.
• Strategic Implications: Musk, known for his leadership roles in various high-profile tech firms, would gain significant influence over AI developments, potentially steering OpenAI’s direction in ways that align with his vision.

Notable Quotes:

• At [04:03] Katie Greifeld: “No one's performing at the Super Bowl here. No one's won a Grammy.”
• At [05:20] Matt Levine: “Musk is saying you got to get at least this much. Right.”
• At [10:22] Katie Greifeld: “It was really personal. It’s also playing out in court and filings, obviously.”

Insights:

• The hosts discuss whether Musk's bid is a genuine attempt or a strategic maneuver to create friction within OpenAI.
• They ponder the potential outcomes if the nonprofit board were to sell control to Musk, considering his extensive portfolio and influence in the tech industry.
• Sam Altman’s stance is examined, where he downplays the seriousness of Musk’s bid, attributing it to personal animosity rather than a business move.

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2. Exorbitant Pass-Through Fees at Multi-Strategy Hedge Funds

Levine and Greifeld shift their focus to the opaque world of multi-strategy hedge funds, particularly scrutinizing their pass-through fee structures. This discussion highlights the contrast between traditional hedge fund fee models and the more convoluted arrangements seen in multi-strategy funds.

Key Points:

• Traditional vs. Multi-Strategy Fees: Traditionally, hedge funds charge a straightforward 2% management fee and 20% performance fee. In contrast, multi-strategy funds incorporate pass-through fees that cover a broad range of expenses, from operational costs to salaries, making the actual fee burden less transparent.
• Investor Perception: While these funds promise stable, high-teens returns with low volatility, the hidden fees can erode investor profits. Greifeld expresses skepticism about the true value being delivered versus the fees charged.
• Market Dynamics: Despite rising scrutiny, there appears to be a lack of fee pressure within the multi-strategy hedge fund sector, a point of contention between the hosts.

Notable Quotes:

• At [17:36] Matt Levine: “Pass throughs are wild. You are paying for everything, including the copier paper.”
• At [19:10] Katie Greifeld: “I have to imagine that maybe I'm wrong. I probably am, that if I'm an 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.”
• At [21:05] Matt Levine: “You get pretty high returns with lower volatility and with hopefully no correlation to the broad market.”

Insights:

• The hosts debate the sustainability and fairness of the multi-strategy hedge fund model, questioning whether the hidden fees justify the purported benefits.
• They compare the model to traditional corporate structures, drawing parallels with how corporations handle expenses and profits.
• Ken Griffin’s recent comments suggesting a decline in the boom of multi-strategy hedge funds are analyzed, with Levine arguing it might be more about internal dynamics than an actual market downturn.

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3. Thought Experiment: Microsoft vs. US Government as Debt Issuers

The episode also explores a thought experiment presented by DoubleLine, where Microsoft is compared to the US Government in terms of debt issuance and creditworthiness.

Key Points:

• Debt Servicing Capacity: Microsoft’s ability to service its debt is juxtaposed with the US Government’s declining receipts-to-interest expense ratio and persistent deficits.
• Credit Ratings: Despite the US Government’s reputation for reliability, Microsoft's higher credit rating is scrutinized, revealing complexities in how debt is perceived and valued.
• Political Risks: The discussion touches upon the potential impact of political instability and policy decisions on the US Government’s debt obligations, contrasting it with corporate management’s focus on maintaining creditworthiness.

Notable Quotes:

• At [29:55] Katie Greifeld: “It's a strange thought experiment... they didn't reach a conclusion, but it seemed like they were leaning towards Microsoft.”
• At [35:54] Katie Greifeld: “Gaing up some basis points in terms of the spread in...”

Insights:

• Levine and Greifeld debate the practicality and relevance of comparing a multinational corporation like Microsoft to a sovereign entity, highlighting differences in their operational and financial frameworks.
• They discuss the concept of the "sovereign ceiling," questioning whether it accurately applies when comparing corporate and government debt.
• The hosts conclude that while the thought experiment provides interesting perspectives, the inherent differences between corporate and government structures make direct comparisons challenging.

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Conclusion

In "Bespokeness: AI, Passthrough, UST," Matt Levine and Katie Greifeld navigate through complex financial topics with clarity and depth. From Elon Musk’s bold maneuver against OpenAI to the intricate fee structures of multi-strategy hedge funds, and finally to an unconventional comparison between Microsoft and the US Government's debt profiles, the episode offers listeners a multifaceted view of contemporary financial landscapes. The inclusion of notable quotes enriches the discussion, providing tangible insights into each subject matter.

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Notable Quotes Summary:

• Katie Greifeld at [04:03]: “No one's performing at the Super Bowl here. No one's won a Grammy.”
• Matt Levine at [05:20]: “Musk is saying you got to get at least this much. Right.”
• Katie Greifeld at [10:22]: “It was really personal. It’s also playing out in court and filings, obviously.”
• Matt Levine at [17:36]: “Pass throughs are wild. You are paying for everything, including the copier paper.”
• Katie Greifeld at [19:10]: “I have to imagine that maybe I'm wrong. I probably am, that if I'm an 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.”
• Matt Levine at [21:05]: “You get pretty high returns with lower volatility and with hopefully no correlation to the broad market.”
• Katie Greifeld at [29:55]: “It's a strange thought experiment... they didn't reach a conclusion, but it seemed like they were leaning towards Microsoft.”

This comprehensive summary encapsulates the essence of the episode, ensuring that even those who haven't listened can grasp the critical discussions and insights presented by the hosts.

Transcript

[Mikaela Shifrin]

The global industrial renaissance is transforming our world. Over the next decade, industries like energy, infrastructure and technology will need an estimated 75 to $100 trillion to modernize and meet demand. Long term projects need long duration capital. That's where Apollo steps in. With scale, flexibility and a focus on growth, Apollo partners with companies to drive the future one innovation at a time. Learn [e-mail] Renaissance Success it's discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. It's the best in each of us, made better by the best in all of us. Whatever success looks like to you, Stifel is invested in yours. That's why Stifel is one of the fastest growing global wealth management firms in the country. So when you're ready to chase success, our financial advisors are ready for you. At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row. If you're an advisor or an investor, choose Stifel. Where success meets success. Stifel, Nicholas & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower. Compensation provided for using not obtaining the award Are your hands full? More to get done than resources to do it.

[Matt Levine]

Get the help you need for your workforce from Express employment professionals visit ExpressPros.com today.

[Katie Greifeld]

Whether you're looking for contract workers or a new team member, the streamlined process from Express Employment Professionals is more efficient than hiring on your own.

[Matt Levine]

[e-mail] Hope you enjoyed this podcast brought.

[Katie Greifeld]

To you in part by Express Employment Professionals. Bloomberg Audio Studios Podcasts Radio News maybe we should talk about the voice thing. I mean, it'll become apparent once I start talking.

[Matt Levine]

I feel like you're closer to normal Katie voice than to last week's Swallowed or Nastray voice.

[Katie Greifeld]

I'm doing better. I'm pretty sure I had the flu last week, right? I think a few people missed that. I actually was sick last week and it wasn't that engineers turned my voice down.

[Matt Levine]

My joke about engineers turning your voice down people took literally.

[Katie Greifeld]

That was just Mother Nature at work. I'm doing a bit better.

[Matt Levine]

And people did not like your new voice?

[Katie Greifeld]

No, they didn't like it.

[Matt Levine]

I was thinking that it would improve the audibility of this podcast, but no no, you just have to turn me up. Inhale helium.

[Katie Greifeld]

Before every 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. In the latest version of Money Stuff. What do you say to that?

[Matt Levine]

Yeah, we didn't get an email saying that I sounded comparatively better.

[Katie Greifeld]

Yeah. Next we have to try, you know, you taking some helium and getting you up to my level.

[Matt Levine]

Yeah, right. That seems right. Should I do the Open?

[Katie Greifeld]

Yes.

[Matt Levine]

In a falsetto?

[Katie Greifeld]

No, certainly not. I didn't like that at all.

[Matt Levine]

No, that was terrible. We're gonna cut that out. Hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

What are we talking about today, Katie?

[Katie Greifeld]

We're gonna talk about a hostile takeover.

[Matt Levine]

Sure.

[Katie Greifeld]

We're going to talk about exorbitant pass through fees.

[Matt Levine]

Exorbitant. Okay.

[Katie Greifeld]

And then we're gonna talk about an interesting, humble thought experiment.

[Matt Levine]

Do we ever talk about.

[Katie Greifeld]

All right. OpenAI, the Girlies are Fighting is a tweet that I saw on this situation, which I thought was funny.

[Matt Levine]

So I saw a tweet that was like, sam Altman versus Elon Musk is like Kendrick versus Drake. If both of them were Drake.

[Katie Greifeld]

Yes. That's so funny. No one's performing at the super bowl here. No one's won a Grammy.

[Matt Levine]

Yeah. So Elon Musk wants to do a hostile takeover of OpenAI, which I wrote something like, there's probably never been a $97 billion hostile takeover of a nonprofit before. And like, well, at hospitals, there are some unsolicited bids for nonprofit hospitals. The model for this arguably, is a lot of hospitals are nonprofits. They do a lot of for profit conversions. And so there is some 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, OpenAI 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 plan to do that is to give it 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 $97 billion 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 and it's a way to make life more difficult for OpenAI. I also assume that.

[Katie Greifeld]

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. $97.4 billion. I think a few weeks before that, we got some headline from the Wall street journal that OpenAI is in talks to raise $40 billion at a $340 billion valuation. The nuance being that they're bidding for the nonprofit which owns a stake in the for profit.

[Matt Levine]

They're not even 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 stake. Yeah, like, the nonprofit has like a set of rights over the for profit business, and he wants to buy that from them for $97 billion. 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, the numbers I've seen people say, like, the nonprofit would get like 25% of the business, which, you know, at a $300 billion valuation is worth $75 billion. 97 billion is more than 75 billion. I think you could argue that 25% stake in OpenAI is in the long run worth more than 97 billion. But, you know, Musk is saying you got to get at least this much.

[Katie Greifeld]

Yeah, but.

[Matt Levine]

Right. He's not offering to take over the whole thing for 97 billion, which is less than the current market mark on it. Except he sort of is, because, like, right now, the nonprofit controls the thing, the business.

[Katie Greifeld]

Right.

[Matt Levine]

The nonprofit has final say over it. And so the people putting in money at a $300 billion valuation, the nonprofit board doesn't technically owe them any fiduciary duties. Their 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 Altman 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 $300 billion valuation. But in theory, if Elon Musk bought the control rights from the nonprofit, what does that do to. To the non controlling investors who have weird, capped profit interests in the company? I don't know. I think he gets more than 25% of the company for his $97 billion. I think he gets control over the company for his $97 billion. 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 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 steak, it would be a huge bargain for him.

[Katie Greifeld]

Yeah, well, that's what I was wondering. So your position, it sounds like, is that Musk is trolling.

[Matt Levine]

Well, he doesn't think they're gonna say yes. And the other thing I wrote is like, $97 billion is a lot of money, right? If they were like, sure, Elon, here you go. He could raise $97 billion to do it because it's a good deal, but it's not like he has $97 billion committed. Right?

[Katie Greifeld]

That's true.

[Matt Levine]

That's a lot of money.

[Katie Greifeld]

That is a lot of money. But I mean, if we go down into hypothetical land and the board did take this seriously and they did say yes, what does that look like?

[Matt Levine]

I don't know. It's a great question. Because it's not like they own 40% of the company. It's not like they own 10%. 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 is like this waterfall of profit interest. Every investor has a different deal. It's not really shares. It's profit interest, and they're capped. So even knowing what percentage of the company the nonprofit owns and could transfer to, Elon Musk is like, it's kind of uncertain, right? You can build a model that converts these water flows of cash flows into some percentage of the equity, but it's 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 controls the company, but it's not just like Shari Redstone 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? Does he get to just control the company however he wants or does he take over the social mission? And I think in his offer letter he's like, we will continue the social mission. I don't know. So I think it's really unclear what he would buy. Right. But there is some package of rights that the nonprofit OpenAI is hoping to give up to the for profit OpenAI in exchange for stock. And he's just saying, whatever that package of rights is, I'll buy it for cash.

[Katie Greifeld]

Yeah.

[Matt Levine]

Like, if you take that seriously, that package of rights is really valuable and like, arguably more valuable in the hands of the world's richest person than it is in the hands of a nonprofit looking out for the benefit of humanity.

[Katie Greifeld]

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?

[Matt Levine]

Yeah.

[Katie Greifeld]

It was really personal. I mean, he said, of course he thinks Elon Musk is just trying to slow us down. He's obviously a competitor. I wish he would just compete by building a better product, et cetera. But he also said probably his whole.

[Matt Levine]

Life is from a position of insecurity.

[Mikaela Shifrin]

I feel for the guy.

[Matt Levine]

I don't think he's like a happy person.

[Mikaela Shifrin]

I do feel for him.

[Katie Greifeld]

I mean, this gets back to the girlies are fighting and I don't know, it's pretty personal. It's also playing out in court and filings, obviously.

[Matt Levine]

Right. Because Musk is also suing to make them be more nonprofit. And this is all in the context of he owns a for profit AI firm. Right. So one assumes he's not going to buy OpenAI.

[Katie Greifeld]

Right.

[Matt Levine]

Not that he doesn't want to, just that they're not going to.

[Katie Greifeld]

I feel like it even goes deeper than that, though. Like, this comes back to the blood feud of him and Altman founded OpenAI together, blah, blah, blah.

[Matt Levine]

Right. I know. I agree with you and with Sam Altman that this is all largely about petty personal vindictiveness on a grand scale. But it's also like OpenAI is probably the leading LLM company.

[Katie Greifeld]

Yeah. I don't think that's controversial.

[Matt Levine]

XAI is has grok somewhere in the pack.

[Katie Greifeld]

Yeah.

[Matt Levine]

OpenAI has made it very clear that it's doing this conversion because it needs to raise like $40 billion. Right.

[Katie Greifeld]

Yeah.

[Matt Levine]

It's so expensive to run an LLM 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. 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. And if it stops them, then there's an opening for xii. And so how would this stop them? Elon Musk offered to drop his bid if they agreed to stay at a nonprofit. So that's 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 OpenAI internally than we would from Elon Musk. And I think most people think that means essentially the nonprofit needs to get a bigger stake in. In the for profit company than it was planning. Right. It was planning, like, let's say 25%. It needs to get a stake that it can credibly say is worth more than $100 billion. Right?

[Katie Greifeld]

Yeah.

[Matt Levine]

And that just makes it a little bit harder to raise money. Right. Because you're giving more of the stake to the more of the company to the nonprofit. You're cutting back the shares of, like, Microsoft and SoftBank 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 ahead of xai.

[Katie Greifeld]

Yeah. Which is interesting in the context of Stargate or whatever, that this very ugly public feud is paying out and makes things a little bit more challenging for OpenAI. But we'll see, right?

[Matt Levine]

I mean, one thing I've written is, like, just from the outside, it seems to be pretty easy for OpenAI to raise money. They've got, you know, like, the sexiest product in the sexiest industry in the world. They've got Sam Altman, who is an incredible salesman. They've got a lot of advantages, and they're raising a lot of this money from SoftBank, who is not notorious for driving a hard bargain.

[Katie Greifeld]

Right.

[Matt Levine]

It's weird to be like this bid from Elon Musk is going to prevent them from raising the money they need to scale. I don't know, man. It's OpenAI. They'll be fine, but I don't know.

[Katie Greifeld]

Yeah, all right. They'll be fine.

[Matt Levine]

They'll be fine.

[Katie Greifeld]

Let's just put a pin in it for.

[Mikaela Shifrin]

The Global Industrial renaissance is transforming industries and reshaping our world. Over the next decade, sectors like energy, infrastructure and technology will require an estimated 75 to $100 trillion in CapEx to modernize and meet the growing demand. This unprecedented level of investment is beyond the scope of public markets alone. Long term projects need long duration capital. That's where private capital comes in and that's where Apollo leads with significant scale, the flexibility to adapt to evolving capex needs and a steadfast focus on enabling economic growth. Apollo is partnering with companies to provide the financing solutions that fuel the future. Learn [e-mail] Renaissance I'm alpine skier Mikaela Shifrin. I've won the most World cup ski races in history. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stifel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there. At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row. If you're an advisor or investor, choose Stifel. Where success meets success. Stifel, Nicholas & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit JDPower.com Awards compensation provided for using not obtaining the.

[Matt Levine]

Award OK business leaders, are you playing defense or are you on the offense? Are you just. Excuse me. Hey, I'm trying to talk business here. As I was saying, are you here just to play or are you playing to win? If you're in it to win, meet your next MVP. NetSuite by Oracle NetSuite is your full business management system in one suite. With NetSuite, you're running your accounting, your financials, HR, E commerce, and more, all from your online dashboard. One source of truth means every department's working from the same numbers. With no data delays and with AI embedded throughout, you're automating manual tasks plus getting fast insights for your next move. Whether you're competing on your home turf or looking to conquer international markets, NetSuite helps you get the W. Over 40,000 businesses have already made the move to NetSuite. The number one, Cloud ERP. Right now get the CFO's Guide to.

[Mikaela Shifrin]

AI and Machine Learning at netsuite.com stereo.

[Matt Levine]

Get this free guide at netsuite.com stereo okay guys.

[Katie Greifeld]

Let'S talk about pass through fees at multistrategy hedge funds.

[Matt Levine]

Let's do that.

[Katie Greifeld]

This was a great Bloomberg big take that went out this week. Reading it, it really feels like rage bait.

[Matt Levine]

Well, it is, right? I mean like it quotes a guy saying pass throughs are wild. You are paying for everything, including the copier paper.

[Katie Greifeld]

Beautiful.

[Matt Levine]

And it's true that traditionally the way you think of hedge funds is like investors put in money, the hedge fund invests the money for them, the hedge fund charges them 2% of the money and 20% of the profits. Right. Like those are the stereotypical numbers and the stuff that the hedge Fund keeps the 2 and 20 pays for its manager's salaries, their bonuses, their photocopier paper, their lunches, whatever. The expenses are covered by the fees. And the multi strategy model, the modern big multi strategy model is just not that at all. 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. You get some of it, 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 an investment bank in particular. An investment bank, the shareholders pay for the photocopier paper. All of the expenses of the investment bank are taken out before net income and then the shareholders get some of the net income and the rest of it goes to bonuses. Or rather the shareholders get the net income after the expenses and the bonuses to the employees. And that's how companies work. It's how investment banks work, how modern corporate investment banks work. And the multi strategy model is that it's like the investors are capital providers. We pay for all of our expenses out of the investors money and the investors get some of what's left over, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

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. It's very annoying.

[Katie Greifeld]

I am not an 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 an 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 at this. It's, you know, what is my money going to return?

[Matt Levine]

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 80% of the money we make. That's an irrelevant metric. What you're getting is like a sort of expected high teens return. And, and like we'll pay for the photocopiers out of your money.

[Katie Greifeld]

It's actually low teens.

[Matt Levine]

Yeah, there's this, there's a lot of like 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 equity. It's just like a number that's in the presentation.

[Katie Greifeld]

Yeah. I don't know. This gets 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? I understand the pitch diversification. You're supposed to get starter your returns of about 12% with few downswings. But when you look at the s and P500, you can pay three basis points for the S&P500 over the last decade. You've got an annualized return of 13% with three down years. And I mean thinking about these multi strategy hedge fund fees that make 2 and 20 look cheap, it just reinforces that notion.

[Matt Levine]

You get pretty high returns with lower volatility and with hopefully no correlation to the broad market.

[Katie Greifeld]

Yeah, the return.

[Matt Levine]

You're a giant endowment and like you have a lot of money in the S and P and you want some uncorrelated opponents that you know, doesn't pay like treasury rates, pays like two or three times treasury rates. 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 S and P. It's diversifying your investments. It's allowing you to put more money into the S and P essentially because you have like. Yeah, this diversified.

[Katie Greifeld]

It's a pitch that I know it works but I don't really understand why it works. And I go back to ETFs, I'm sorry, where you have this race to the bottom in 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 going to put all of our money in buffer ETFs, which guarantee safety.

[Matt Levine]

Buffer ETFs.

[Katie Greifeld]

Yeah. Exactly.

[Matt Levine]

How much capacity is there in buffer ETFs? I guess, how much capacity is there in hedge funds? No, I mean, if you put all of your money into equities and there's a big drawdown in equities, you have a really bad year and you can't spend on your programs if you're an endowment. And if you put some of your money into a diversification, it's steady returns. You don't start from it thinking about the fees. You start from it thinking about, do they provide steady returns after fees? And if the answer is yes, then the fees are none of your business. It's like investing in Goldman. Right. It's like, if the equity returns a lot, then it doesn't matter that people are getting bonuses. Right. And much as with a public company, the job is to earn the cost of capital over some medium period of time. And so the big take article starts with Baliasny charging a lot of money in a relatively down year. Right. And Baliasny is like, well, it's an anomalous down year, and usually we return our cost of capital, but we have this one down year and you point to it and it's like, yes, in a down year, it is embarrassing to pay tens of millions of dollars to your traders because 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 is like you're investing in a business over the long term and the business needs to pay money for traders.

[Katie Greifeld]

Yeah. 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.

[Matt Levine]

The great hedge fund pitch of 20 years ago is, I will take your money. I will make 100% returns. I'll take 30% of them. There's the sort of swing for the fences hedge fund model where you could make big bets, which I do find compelling. Yeah, right. I think it's much more intuitively compelling. And the multi Strat model is you're not like, oh, I put all my money onto Fannie Mae. Right. I put all my money into a series of short term bets that are essentially 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 a variety of factors. And so it's just like, I mean, the thing I think about is the high frequency trading model where your job is to make money every day. And that's a little bit like the job of these firms. It's not literally to make money every day, but it's to be very neutral to market factors and to just sort of make steady returns doing fairly safe but highly levered trades. And that's the thing they're pitching. And I think that resonates with a lot of people in that it seems real and sustainable in a way that I'm going to put all the money on. Fannie Mae is not right. If you're just taking big swings, you're going to miss and then you'll lose money. Whereas these guys are like, we're incredibly conscious of 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 means something like getting paid for providing a service. Right. It means like we're doing something for the market and we're getting paid for it.

[Katie Greifeld]

Yeah.

[Matt Levine]

And that's more reliable than like a model of like we're going to make bets on stocks and hope those bets work out.

[Katie Greifeld]

Yeah.

[Matt Levine]

Whether or not an individual pot is quant, it's a very quantity sort of model of thinking about the world, which is like making individual bets on stocks has a pretty high probability of going wrong. And so you're making a lot of diversified bets with a little bit of edge on each one. And you tell that model to an institutional allocator like, yes, this makes sense. This feels plausible and sustainable. Whereas when you come in and you're like, I'm just really good at picking stocks, it seems bad.

[Katie Greifeld]

Yeah, I don't know. I mean, I hear what you're saying. I still am surprised that there isn't fee pressure here. It just feels like in every part of the asset management industry there is fee pressure and that fee pressure doesn't apply to these multi strat hedge funds.

[Matt Levine]

Well, I think there's a reason it's done as Pastors Right. Because if you were like, we're going to charge seven and 70 would be like, yeah, it would be bad. Right. But if you're like, look, the going rate for a portfolio manager is $50 million. What, do you want us to not hire a portfolio manager? You know, like pass through the $50 million.

[Katie Greifeld]

God, I'm in the wrong business.

[Matt Levine]

Seriously. Going right for a newsletter writer.

[Katie Greifeld]

Jesus Christ. 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?

[Matt Levine]

I do think that if you run a multi strategy hedge fund, the pricing pressure that you feel is probably more about hiring portfolio managers than it is about your LPs. And so for him to be like, oh, it's over is a way to drive down the prices of portfolio managers more than it is to like signal to LP so he doesn't need their money.

[Katie Greifeld]

Right.

[Matt Levine]

Like he's like, the boom is not really over for him. The other 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.

[Katie Greifeld]

No, I don't think so. Though apparently, according to Goldman, assets managed by multistrats did drop slightly in 2024, which was the first decline since 2016. So I don't know. We'll see.

[Mikaela Shifrin]

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[Katie Greifeld]

Foreign let's talk about this 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.

[Matt Levine]

It's a strange thought experiment. Yeah, because they basically look at Microsoft's capacity to service its debt based on its cash flows and they compare it to the US Government's capacity to service its debt based on its stock of debt and cash flows. And it's like, well, the US Government takes in less than it spends and Microsoft takes in more than it spends. And so Microsoft's a better credit. Okay. I have a lot of sympathy for their conclusion. Right. If I were doing this analysis, I would think things like Microsoft is run by professionals who one, believe that they should repay their debt and two, want continued access to capital markets and also has a lot of cash flow. Right. And so when their debt comes due, they will pay it. They certainly will, barring some sort of tail risk catastrophe. The US Government is not, for instance, is run by a president who has, who has boasted about his use of bankruptcy. And I heard about this the other day. It's just 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.

[Katie Greifeld]

In the treasury, no one says what.

[Matt Levine]

The irregularities are, but there's all this fraud, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

And so Donald Trump said there could be a problem. You've been reading about that with Treasuries and that could be an interesting problem because it could be that a lot.

[Mikaela Shifrin]

Of those things don't count. In other words, that some of that.

[Matt Levine]

Stuff that we're finding is very fraudulent.

[Mikaela Shifrin]

Therefore maybe we have less debt than we thought of.

[Matt Levine]

Think of that. Therefore maybe we have less debt than we thought of. Right.

[Katie Greifeld]

That was amazing. That landed like during the Super Bowl.

[Matt Levine]

Yeah. So like some Treasuries might not count. Who knows which Treasuries don't count? Who knows why? Like there might be some fraud. Right. Maybe your Treasuries were fraud. Yeah, I don't like place a high probability on that happening. But like, you know, the guy's going around talking about like assume treasures don't count. Microsoft doesn't say that.

[Katie Greifeld]

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. But there wasn't, there wasn't really a reaction in the treasury market, which I don't know, maybe points to maybe Trump losing some of his juice here that he could suggest that maybe we wouldn't count some of the Treasuries and the market just totally looked past it.

[Matt Levine]

I'm not saying that the US Government is no longer interested in paying. I just say like you look at the management of Microsoft, you look at the management of the U.S. government.

[Katie Greifeld]

So it sounds like you would end up, even though maybe you're looking at different factors in your own analysis, very.

[Matt Levine]

Different factors, but you end up in.

[Katie Greifeld]

Kind of the same place.

[Matt Levine]

Oh yes, very much so, yeah. I mean, not investment advice, but no, I mean, I appreciate the thought experiment.

[Katie Greifeld]

I should note that double line. 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 Treasuries.

[Matt Levine]

Do they own.

[Katie Greifeld]

It's a good question too. I don't know. But Microsoft, I mean, you look at their 30 year debt and it trades very similarly to Treasuries.

[Matt Levine]

Well, he said it traded like 49 basis points over Treasuries, which is like a meaningful premium if you think it's safer. No, I mean it's slim compared to high yield bonds. But it's a lot compared to. You think it should be negative. Right? If you think it should be, that's a good trade.

[Katie Greifeld]

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 50 times over. It is expected to generate nearly $48 billion of free cash flow in fiscal 2025. It also has a higher rating 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 5.2 times as of 2023. Also, we've run a deficit since 2002. So those are some of the factors that went into what DoubleLine is looking at.

[Matt Levine]

I mean, first of all, the traditional analysis is the US Government can always pay back its debt because it can.

[Katie Greifeld]

The full faith and credit because it can print money.

[Matt Levine]

So in the worst case, the US Government prints money and inflates away the debt. And that's just as bad for Microsoft's debt as it is for US Government debt. Right. I was reading like, you know, there's like a traditional theory of the sovereign ceiling where like people use that more for like emerging markets bonds where it's like the idea is that you can't have a better credit rating or lower yield for a corporate in an emerging market than for the sovereign because it's not clear why. But it's like there's some theory that first of all, the economic conditions that affect the sovereign would affect the corporate as well. And secondly, in a catastrophe for the sovereign, is the sovereign going to seize the assets of the corporate. So you have the sovereign ceiling, but it's a sort of soft ceiling. And there's history of ratings agencies occasionally rating corporates in Argentina higher than the sovereign. Microsoft can't print dollars, but it can get pretty close. I think that if I were trying to think about my credit risk as a creditor of the US Government, I would worry a lot more about government shutdowns, debt ceiling breaches, Elon Musk, deleting the database, all that stuff than I would about cash flow because cash flow can be solved by printing currency. But all that other stuff, you might get a delay on your payments.

[Katie Greifeld]

Yeah.

[Matt Levine]

So I think that stuff is like idiosyncratic to the Current US government and wouldn't apply to like the highest rated corporates in the U.S. yeah.

[Katie Greifeld]

And I mean we're talking about 49 basis points in terms of the spread in.

[Matt Levine]

You keep saying that small. That seems big. That seems like.

[Katie Greifeld]

So you're saying, I don't know, maybe you should go buy some.

[Matt Levine]

I don't buy anything. Good.

[Katie Greifeld]

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, not talking about em, but this person said I'd certainly rather own L'Oreal bonds than French bonds, which I found amusing. So there's other examples you could use.

[Matt Levine]

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.

[Katie Greifeld]

Yeah. So I asked Bloomberg Intelligence about this and I thought this was a fun stat as well. Microsoft has a 0.06% five year cumulative default risk, which is pretty stinking close to the US government's risks. Free alternative. So Microsoft, I don't know.

[Matt Levine]

I don't know what that number means.

[Katie Greifeld]

I think that they just have a really low chance of defaulting.

[Matt Levine]

Sorry, 0.06%.

[Katie Greifeld]

Yeah. Cumulative.

[Matt Levine]

What do you think is the chance.

[Katie Greifeld]

Of Microsoft defaulting of the US government.

[Matt Levine]

Missing a payment on its debt in the next four years?

[Katie Greifeld]

Maybe zero?

[Matt Levine]

Is it bigger than 0.06%?

[Katie Greifeld]

I was going to answer. 0.06%.

[Matt Levine]

Okay.

[Katie Greifeld]

Yeah. What's your. What?

[Matt Levine]

I mean 0.08%.

[Katie Greifeld]

Okay. There you go then. You could have written this paper.

[Matt Levine]

Exactly. Programming note. We're taking next week off.

[Katie Greifeld]

I'll see you in two weeks.

[Matt Levine]

And that was the Money Stuff podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.

[Katie Greifeld]

And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodlumberg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

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.

[Matt Levine]

The Money Stuff podcast is produced by Anna Mazarakis and Moses Andam.

[Katie Greifeld]

Our theme music was composed by Blake.

[Matt Levine]

Maples, Brendan Frank Frances Newnham is our.

[Katie Greifeld]

Executive producer and Sage Bauman is Bloomberg's Head of Podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff podcast. We'll be back next week with more stuff.

[Mikaela Shifrin]

This podcast is supported by BetterHelp, offering.

[Katie Greifeld]

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Here's BetterHelp head of clinical Operations Hes Yu Jo discussing who can benefit from.

[Katie Greifeld]

Therapy I think a lot of people think that you're supposed to be going to therapy once you're like having panic attacks every day. But before you get to that point, I think once you start even noticing that you feel a little bit off and you can't maintain this harmony that you once had in relationships, that could be a sign that maybe you want to go talk to somebody. There's always a benefit in talking to someone because we can all benefit from improved insight about ourselves and who we are and how we behave with other people. So if you're human, that's like a good indicator that you could benefit from talking to somebody.

[Mikaela Shifrin]

Find out if therapy is right for you. Visit betterhelp.com today. That's betterhelp.com growing your business can come with its challenges, but with the all.

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