Garlic Cartel: Markets, Credit, Code

Summary

Money Stuff: The Podcast – "Garlic Cartel: Markets, Credit, Code" Summary

Release Date: November 8, 2024

In this episode of Money Stuff: The Podcast, hosts Matt Levine and Katie Greifeld delve into three interconnected topics: the intricacies of farmers market pricing, the burgeoning private credit industry, and the controversial case of trade secret theft in the realm of quantitative finance. The conversation is enriched with insightful analysis, real-world examples, and engaging anecdotes, providing listeners with a comprehensive understanding of these financial nuances.

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I. Farmers Markets and the Pricing Puzzle

The episode opens with a light-hearted discussion about farmers markets, sparking a deeper exploration into how pricing strategies affect both sellers and buyers.

Garlic Pricing Disparities

• Matt Levine shares his personal experience visiting farmers markets, highlighting the significant price differences he's observed. “I was recognized by a person working at one of the stands […] who offered me free garlic” (03:02).

• Katie Greifeld remarks on the general perception of farmers' market shoppers being less price-sensitive, likening the surprise at high garlic prices to the comedic disbelief in Arrested Development: “It's a banana, Michael. How much could it cost?” (04:04).

Cornell University's Price Aggregation Initiative

• Matt Levine introduces Cornell University's project that aggregates pricing data for farmers to help them set competitive yet profitable prices. “Cornell is helping you charge them more than you do by telling you what the actual Price of garlic is” (05:07).

• The discussion touches on potential antitrust concerns, with Matt drawing parallels to the RealPage case where the Justice Department alleged that aggregated rent data fostered collusion among landlords, ultimately driving up prices for tenants (06:00).

Reader's Story: Price Fixing in Ottawa

• Matt Levine recounts a reader's experience at the Ottawa farmers market, where explicit price fixing rules led to unintended loopholes. “He realized that if he sold the 2 1/2 liter container non-standard size container he could undercut because there was no rule about selling that size container” (13:34).

Key Takeaway: Aggregating pricing data can empower sellers to optimize their pricing strategies, but it also raises questions about market competition and potential regulatory scrutiny.

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II. The Private Credit Boom and Industry Consolidation

Transitioning from farmers markets, Matt and Katie shift focus to the rapidly evolving private credit sector, highlighting the intense demand from large asset managers to acquire private credit firms.

State Street's Aggressive Acquisition Strategy

• Matt Levine discusses how State Street Global Advisors is actively seeking private credit managers, either through full acquisitions or minority stakes combined with product partnerships. “State Street is kicking down their door […] it's just like really attractive” (17:28).

• Katie Greifeld notes the strategic approach of large firms like State Street preferring acquisitions over organic growth due to the high cost and limited market for private credit talent and firms (18:09).

BlackRock's Expansion into Alternatives

• Matt Levine highlights BlackRock's similar aggressive expansion into alternative investments, emphasizing the lucrative fee structures that make alternatives an appealing revenue stream. “Private credit at its core is direct lending to leverage buyouts […] it's a great time to be selling your private credit firm” (19:19).

• Katie Greifeld provides comparative data, revealing that BlackRock charges significantly lower fees (14.6 basis points) compared to firms like Apollo, which charge upwards of 50 basis points (22:16).

Industry Implications

• The hosts discuss the implications of this consolidation, noting that while large firms are scaling up alternative offerings, smaller private credit funds face challenges in maintaining disciplined investment strategies amidst the competitive pressure to deploy capital rapidly (24:08).

Key Takeaway: The private credit sector is experiencing a surge in demand from major asset managers seeking higher-fee, lucrative alternatives, leading to significant industry consolidation and competitive pressures on smaller firms.

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III. Trade Secrets and Quant Funds: The Xiao Zhang Case

The final segment tackles the contentious issue of trade secret theft within quantitative finance, centering on the case of Xiao Zhang, founder of Pinestone, a successful quant fund in China.

The Xiao Zhang Indictment

• Matt Levine outlines the allegations against Xiao Zhang, who is charged with downloading proprietary trading models from his former American employer using a VPN from China before fleeing the country (27:56).

• The conversation contrasts this case with previous instances, such as Sergei Alanikov of Goldman Sachs, who faced legal repercussions for similar misconduct. “There's a real concern that if they're stealing code and setting up shop elsewhere, it can have lasting impacts” (31:28).

Impact on Quant Funds

• Katie Greifeld and Matt Levine debate the sustainability of stolen trading models, suggesting that while immediate gains might be possible, the longevity of such strategies is questionable due to market adaptations and the decay of trading signals over time (32:55).

• The hosts also explore the ethical and operational challenges faced by quant funds in different regulatory environments, particularly contrasting the U.S. and Chinese markets (29:07).

Reader Engagement

• A reader contributes to the discussion by highlighting the difficulties in raising capital when a founder’s credibility is compromised, adding another layer to the consequences of such actions (35:21).

Key Takeaway: The theft of proprietary trading models undermines the integrity of quantitative finance but faces significant practical limitations in terms of sustainability and ethical repercussions, highlighting the delicate balance between innovation and intellectual property protection.

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Notable Quotes

• Matt Levine on Cornell's price aggregation: “Cornell is helping you charge them more than you do by telling you what the actual Price of garlic is” (05:07).

• Katie Greifeld on private credit skepticism: “Private credit at its core is direct lending to leverage buyouts […] it's a great time to be selling your private credit firm” (19:19).

• Matt Levine on trade secret theft implications: “There's a real concern that if they're stealing code and setting up shop elsewhere, it can have lasting impacts” (31:28).

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Conclusion

In "Garlic Cartel: Markets, Credit, Code," Matt Levine and Katie Greifeld adeptly navigate complex financial landscapes, from the granular pricing strategies at farmers markets to the expansive growth and ethical dilemmas within private credit and quantitative finance. Their insightful dialogue not only demystifies these sectors but also underscores the interconnectedness of market dynamics, regulatory frameworks, and ethical considerations in shaping the modern financial ecosystem.

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For more in-depth analysis and future episodes, subscribe to the Money Stuff Newsletter on Bloomberg.com and follow Matt Levine and Katie Greifeld on Bloomberg’s various media platforms.

Transcript

[GiveWell Representative]

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[Matt Levine]

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[Matt Levine]

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[Matt Levine]

Bloomberg Audio Studios Podcasts, Radio news 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 farmers markets, we're gonna talk about private credit, and then we're gonna talk about stealing some trade secrets and moving to China.

[Matt Levine]

Sounds good.

[Katie Greifeld]

I printed out the pricing charts for like beef, so we have a meaty section.

[Matt Levine]

I was at one of the farmer's markets near me. I go to two farmer's markets per weekend now.

[Katie Greifeld]

Oh, God.

[Matt Levine]

I was recognized by a person working at one of the stands.

[Katie Greifeld]

Wow.

[Matt Levine]

Who is works in financial media and also works at a farmer's market to get her mind off things and she's apparently a fan of mine and offered me free garlic.

[Katie Greifeld]

Did you take it?

[Matt Levine]

No comment.

[Katie Greifeld]

So you took the free garlic and then you undercut some farm stand, some farmer who, like, put in the labor. And you knew what to charge?

[Matt Levine]

Because this is before I knew anything about farmer's market pricing. I was a babe in the woods in terms of.

[Katie Greifeld]

Oh, I thought this was like, last week. Weekend.

[Matt Levine]

No, it was like, three weekends ago.

[Katie Greifeld]

Oh, okay. If only you had known.

[Matt Levine]

I do not honestly pay that much attention to pricing at the farmer's markets, but I am aware of the disparity in garlic pricing at the different stands. There is a stand where I have seen but not purchased garlic for $3 a head, which seems really high for garlic. But also the farmer's market garlic is so good. Like, I now only get farmer's market garlic and probably pay 5x what I'd pay at a grocery store.

[Katie Greifeld]

Me, but not $3 me. Trying to think of something relatable to say reminds me of the Arrested Development scene where Lucille's like, it's a banana, Michael. How much could it cost? Or something like that. Yeah, I feel like if you're at a farmer's market, you're kind of a price insensitive buyer of produce.

[Matt Levine]

I'm pretty close to the ideal price insensitive buyer of produce, but even I was like, $3 garlic. Hold on.

[Katie Greifeld]

Whoa. It's too rich for my blood. Well, what a timely conversation that we're organically having about pricing at farmer's markets.

[Matt Levine]

It's all I think about. Yeah, sorry, I just said it's not anything I think about at all. And I'm totally price and sort of. Which is closer to the truth. But now I'm thinking about pricing at farmer's markets.

[Katie Greifeld]

Yeah, so is Cornell University. Question mark.

[Matt Levine]

Great transition.

[Katie Greifeld]

Yeah. Why don't you tell me about what they're doing?

[Matt Levine]

They're aggregating prices for farmers. They have, like, a website that publishes free information on prices of various agricultural goods for farmers at farmer's markets to basically help them set their prices. Because basically, if you're a farmer at a farmer's market, you are in the business of working the land, growing the produce, and you're maybe not a savvy pricer of produce at farmer's markets. And the buyers at farmer's markets are not necessarily savvy prices of produce either. So you could probably charge them a lot more than you do. And Cornell is helping you charge them more than you do by telling you what the actual Price of garlic is.

[Katie Greifeld]

Seems like a real antitrust concern, potentially, you know.

[Matt Levine]

You know, I sort of have jokingly suggested that people got kind of mad at me, like from two perspectives. One is like, no, it's not like.

[Katie Greifeld]

The farmers got mad.

[Matt Levine]

No, no, no, no. Like just my regular. So is like, no, it's not an antitrust concern, which it is not really an antitrust concern. But the other thing is like, I made that suggestion because the Justice Department a couple of months ago sued RealPage, which is like, I'm going to exaggerate and say this, but for landlords, right? It's like a software product that tells landlords how much other landlords are charging for rent, so they know how to set the rent on their apartments. And the justice department said that RealPage is fostering collusion among landlords and reducing competition in the rental space and raising prices for tenants. And I sort of tongue in cheek compared this farmer's market stuff to RealPage and people got mad because they were like, but the RealPage case is real. There's more stuff there, right? Like the RealPage case, the Farmer's market stuff. They're essentially using fairly straightforward technology to aggregate prices at a bunch of farmer's markets and also supermarkets. RealPage is getting private information from landlords, right? So it's like they get more information than just like what's available to the public and they're also using it to suggest to landlords, or this is what the Justice Department alleges, they're using it to suggest that landlords raise their prices. And they've explicitly said things like, a rising tide lifts all boats. So they're in the business of trying to make landlords higher rents. This one is based on publicly available prices. It's harder to get mad at it. It seems to me that there is a real continuum and that it just used to be the case that it was hard to be sophisticated about knowing your competitors prices in all sorts of areas because, yeah, your competitors prices weren't easily available on the Internet and now it is so much easier to like, aggregate public data about prices. And so now you can. Anyone can be more sensitive to like what their competitors are charging. And the Justice Department gets nervous about that, not the farmers.

[Katie Greifeld]

But in general the goal here for the farmers is explicitly to raise prices.

[Matt Levine]

Yeah, that's true.

[Katie Greifeld]

Like there's, there's a quote from someone involved, in other words, to give them a better day at the farmer's market because they're going to be there for eight or six hours whether they make $400 or $800. So we're looking for how we can help them earn more in those hours. So that's the goal.

[Matt Levine]

That is the goal.

[Katie Greifeld]

They want the farmers to charge more. We should say, this is from a Marketplace article. It was a really fun read. It was fun, I realized. So I was reading your Real page column and it occurred to me that perhaps I'm being naive. I just don't see any situation where there wouldn't be a race to the bottom.

[Matt Levine]

What do you mean a race to the bottom?

[Katie Greifeld]

Like, in terms of, like, okay, we're all only going to charge $3,000 per month, guys. That's the bottom. I feel like, why wouldn't you just undercut that, right?

[Matt Levine]

I mean, these cases are weird, right? This notion of tacit collusion or algorithmic collusion is different from a classic cartel where you get together in a room and you're like, none of us are going to charge less than $3,000. And if you do, we'll break your legs. There's no suggestion of breaking your legs here, right?

[Katie Greifeld]

This is just like, well, not written down.

[Matt Levine]

No, I don't think at all.

[Katie Greifeld]

You're joking. They're not going to break your legs, Matt.

[Matt Levine]

We'll get to a story about that. But there's no explicit cartel, right? It's just like everyone wants to charge as much as they can and they're limited by competitive pressures where they have to charge less. And there is this suggestion that if you know your competitors prices, it is easier to not undercut them or to undercut them less. Right. If you don't know what everyone else is charging, you might be like, I want to be the low cost provider and so I'll charge 2,700. But if you know what everyone else is charging, you can be like, oh, charge 29.99, right? Like you can. It's a little bit easier to coordinate on the same price if you have complete information. This is a theory. It's not necessarily true. And the Justice Department has been interested in the idea of like, price sharing because like, there's this theory that if like, competitors in industry are getting together and sharing prices with each other, it's because it's anti competitive. Right. You don't have to know exactly what they're doing with the prices. You have to be like, well, if they're sharing prices with each other, that's probably not good for consumers. They're probably doing it for a reason that involves maximizing their profits. And the Justice Department has Long been interested in that. And they had guidelines that were like, certain kinds of price sharing are okay, including if it's aggregated and not broken down by a competitor. Because, by the way, if you know what each of your competitors charges, then you can break the legs of the one who charges it the least. Whereas if it's just aggregated, it's a little bit more just informational. But they said aggregated data is okay and data published by a third party. So like a trade magazine, publishing prices rather than the competitors getting together and sharing prices. They said that stuff was okay. And recently there's been a change in their guidance where they're like, we're going to actually look at that stuff more closely. And I think the impression is that they are worried that machine learning algorithms are going to make companies better at using this data to price at the maximum level to extract profits. And like, the sharing of data is going to make industries less competitive. So there's also this interesting paper from a couple of months ago by Junyoung Jiang of University of North Carolina called Salaries on Display Unintended Consequences of Wage Disclosure. Or this is a paper about, you know, like, there's a lot of states have wage transparency laws where, like, when you advertise a position, you have to.

[Katie Greifeld]

Say, New York does now.

[Matt Levine]

Yeah, exactly. And Jiang finds that those seem to lead to lower wages because if you don't have information, like, the market is going to have disparities. Right. And like, some people are going to pay more than others because they're ignorant. Right. Whereas, like, if you know what everyone else is paying, you're not going to pay any more. You'll pay like a dollar more or you'll like, be a little competitive, but there will be no outliers. And so I think that's the same intuition with pricing stuff where if everyone is sharing information, you won't have any outlier cheap providers. Because everyone knows, like, you know, the market price is this, like, I shouldn't charge less.

[Katie Greifeld]

Hmm, that's interesting. The thing that I think the wage disclosure laws lead to is just super wide salary ranges that make no sense. But that's.

[Matt Levine]

I agree with that. Like, they don't seem to tell you that much, but yeah.

[Katie Greifeld]

Do you want to talk about some meat prices?

[Matt Levine]

Sure.

[Katie Greifeld]

Actually looked at the website from Cornell. This is monthly data, so I don't think it's the, like, weekly data.

[Matt Levine]

It's going to be a long podcast where you read out the price.

[Katie Greifeld]

Well, I think it's interesting. So at the farmer's Market in September. We're looking at price summary statistics across multiple meat products collected from 10 farms selling in 21 different farmers markets in New York state. For chuck roast in September, your weighted average price per pound was $9.60. Can you guess what it was from the grocery store?

[Matt Levine]

$7.20.

[Katie Greifeld]

$8.25.

[Matt Levine]

Okay, I don't know if I was close.

[Katie Greifeld]

I think you were doing, but that's the average price per pound versus the weighted average price.

[Matt Levine]

So farmer's market's barely charging more than the grocery store and like your experience, can't be beat.

[Katie Greifeld]

Hold your horses there, my friend. Big farmer's market prepound non organic bacon from the farmer's market in September. According to this data, $17.21 per pound. What do you think it was from the grocery store?

[Matt Levine]

$7 per pound.

[Katie Greifeld]

So close. $7.98 per pound.

[Matt Levine]

Let's forget I almost said eight.

[Katie Greifeld]

So quite a markup on your bacon like that.

[Matt Levine]

Farmer's market bacon is going to be delicious.

[Katie Greifeld]

Is it? I don't know. I'm not a bacon person.

[Matt Levine]

I'm a big farmer's market guy. I love great experience, great food.

[Katie Greifeld]

Yeah.

[Matt Levine]

Garlic cannot be beat. The ginger I got at my local farmer's market. Astonishingly expensive. So good.

[Katie Greifeld]

We were driving back from Albany this past weekend and we went to a rest stop and there was a farmer's market outside like on the highway.

[Matt Levine]

I'm sure that was great.

[Katie Greifeld]

I got some dried beet chips and I got these.

[Matt Levine]

I think I know that stand, but okay.

[Katie Greifeld]

Yeah, it was on the cusp of New Jersey.

[Matt Levine]

No, I just mean like, oh, there's like stands that you see at a lot of farmers markets.

[Katie Greifeld]

Were you also at the rest stop on the highway? Yeah, but I don't think I'm a farmer's market person. I don't think I have the patience. Anyway, that was a robust discussion.

[Matt Levine]

I want to add one more thing which I did write about, but I love it so much.

[Katie Greifeld]

Yeah.

[Matt Levine]

I got an email from a reader about the Ottawa farmer's market where this reader sold strawberries for a while.

[Katie Greifeld]

Yeah.

[Matt Levine]

And like Ottawa's farmer's market had explicit price fixing where like the rules of the farmer's market said you couldn't undercut the prices that were agreed on. And he didn't say that legs were broken, but a little bit implied. He found a loophole where it was like a 4 liter container of strawberries had to cost this much. And he realized that if he sold the 2 1/2 liter container non standard size container he could undercut because there was no rule about selling that size container.

[Katie Greifeld]

Wow.

[Matt Levine]

So he would sell two and a half liters for half the price of four liters and get more business. The kicker to this story is that he's now a data scientist at a tech firm. Because I assume that a tech firm recruiter is walking through the market and being like, this guy knows how to price at auctions.

[Katie Greifeld]

I wouldn't have guessed that the pipeline worked in that direction, but that's pretty cool.

[Matt Levine]

You're right, it normally goes. And I don't know if he was a data scientist taking a break by selling strawberries.

[Katie Greifeld]

Maybe he was on gardening leave.

[GiveWell Representative]

GiveWell, a nonprofit that researches and recommends giving opportunities, takes the impact of donations seriously. To ensure their recommendations withstand tough scrutiny, GiveWell had their own researchers spend months trying to identify flaws in their past work. They then publish their findings, mistakes and all for any donors to use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of the year or as long as matching funds last. To claim your match, go to givewell.org and pick pod and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast.

[Matt Levine]

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[Katie Greifeld]

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[Katie Greifeld]

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So private credit. In the sober world of private credit, there's a lot going on. Is there? Or are there just a lot of headlines?

[Matt Levine]

I don't know. There was a really interesting Financial Times story. The title of something like State street is shopping for a private credit Memory.

[Katie Greifeld]

That's exactly what it is.

[Matt Levine]

Photographic memory. Amazing. The thing that I thought was interesting is that the CEO of State street is like, yes, we're desperate for a private credit manager. Do you know any? I need to buy one right away. It's just like the intensity of the search for like every big asset manager.

[Katie Greifeld]

Yeah.

[Matt Levine]

Really wants to buy a private credit manager, which is just like a great position to be in. A few few years ago, launched your private credit firm, people were like, yeah, that's weird. What does that do? Yeah, it was like a little bit of time where private credit was like, you know, like a little bit in the wilderness, a little bit of a niche strategy. And now it's like all these managers are like, State street is kicking down their door.

[Katie Greifeld]

Yeah, I wish that that's how I would spend my pandemic. But here I am recording this podcast, but I kind of like the honesty and the aggression. So this is the CEO of State Street Global Advisors. It's their asset management arm. She said this area is so well established and given the size of our clients and their need to build and invest in a meaningful size, I think it just makes more sense for us to either partner or take a stake in a much more established firm where it's one plus one equals three. That's interesting. Rather than trying to do it organically, they're like, we're behind already, let's go.

[Matt Levine]

By the way, do it organically isn't even a thing because I do it organically means, like, pay huge guarantees to the people you hire. There's no, like, the market for people in private credit is just really pricey whether you're hiring them or buying their firms.

[Katie Greifeld]

Yeah. I started thinking about Apollo because she also said we're shopping for either a full acquisition or a minority stake combined with product partnerships. And they have a planned product partnership with Apollo. That ETF filing heard around the world between Apollo and State street for a private credit etf, which I don't know if that one is going to launch. There's a lot of skepticism over that, but that's interesting.

[Matt Levine]

Oh sure. But like they want a private credit offering for their like institution clients. Right. Like they want to be able to chuck billions of dollars of institutional money into a private credit offering. And everyone wants that.

[Katie Greifeld]

Yeah.

[Matt Levine]

You know, if you are running a private credit firm, you're raising funds and like you're getting all these offers from all these traditional firms.

[Katie Greifeld]

Yeah.

[Matt Levine]

You know, there's another article in the Wall Street Journal about blackrock looking for alts managers like private credit or other like alternatives. And the reason for it is so clear. Like you can charge like roughly one order of magnitude more in fees for running alternatives than for running, you know, traditional long only money.

[Katie Greifeld]

Well, to the point that State street be shopping. BlackRock has been shopping in a big way. I mean, they bought Prequen, for example. That was for data global infrastructure partners that finally closed.

[Matt Levine]

Yeah. By the way, I forget if it was the State street or something else, but one of the articles was like they're shopping for private credit or infrastructure. But it's like, yeah, anything. And alts. Yeah, let's do it.

[Katie Greifeld]

Yeah, as long as it's alts. And also maybe BlackRock is going to buy HPS. I don't know.

[Matt Levine]

There's a fascinating story about HPS a while back. HBS is nominally preparing an IPO, but also shopping themselves hard to probably BlackRock. But also there's talk of JP Morgan is maybe Jamie Dimon, I think was asked about buying a private credit firm and he's like, no, we would never do that. And then came back later and was like, my team tells me we might.

[Katie Greifeld]

Yeah, I've been informed.

[Matt Levine]

Yeah. Yeah, they pulled him back. But a lot of ways that HPS could go. But one of those ways is selling themselves to BlackRock for an enormous premium.

[Katie Greifeld]

This strategy has worked out for BlackRock. They have like $450 billion in alts. At least $116 billion is coming from GIP, for example. So it's a really easy way to just scale up.

[Matt Levine]

Yeah, I mean, like scale up like, you know, Is like what, like 4% of BlackRock's assets. Right, but it's like the very juicy 4%, right? It's like the.

[Katie Greifeld]

The 4% that makes a lot of money.

[Matt Levine]

Yeah, you charge, it makes a lot of the money and it gets a higher multiple and it's like, yeah, it's just like really attractive. And like, you know, saying we're a giant index fund provider is just less appealing to investors now than saying we're a giant alts provider.

[Katie Greifeld]

I have some numbers. In your column. You referenced this Wall Street Journal article that pointed out that BlackRock's market cap is similar to those of Blackstone, Apollo, KKR, et cetera. Even though BlackRock manages like 11 and a half trillion and day manage a fraction of that. I wrote about this in mid October following BlackRock's earnings, just about how much money they make per dollar of AUM. And for BlackRock, it's like according to Bloomberg Intelligence, they have an annualized fee rate of 14.6 basis points. You compare that to Apollo and It's something like 52 basis points.

[Matt Levine]

So I would have guessed a higher number for Apollo.

[Katie Greifeld]

Well, apparently for Blackstone and KKR and Ares, that figure ranges from 50 basis points to 100 basis points, right?

[Matt Levine]

Classically 2 and 20, right? Yeah, but it's a much, much, much richer fee product. And a lot of the stories about private credit are like, wow, there's so much more money in this.

[Katie Greifeld]

Oh my gosh, this is a Bloomberg.

[Matt Levine]

Article from September Bonus Starved bankers are jumping ship for private credit riches. Yeah, why wouldn't you do that?

[Katie Greifeld]

That makes sense.

[Matt Levine]

All these private credit funds are started by people who were lebfin bankers at Goldman and went to start their own funds when that was a somewhat contrarian move. And now they can sell their firms for billions of dollars to BlackRock.

[Katie Greifeld]

If I could do it, I would.

[Matt Levine]

It's just like one thing I wrote about this is it seems hard to run a private credit fund now from the perspective of being an investor. Josh Harris said to David Rubenstein the other day that a lot of these alts funds are like the beta of alts. Right? Private credit at its core is direct lending to leverage buyouts. And so you are in a business of being friends with 20 private equity sponsors. And when they do a buyout, they call you and they say, would you like to lend us the money? And you say yes, because if you say no, then they stop calling you. And then you don't have the paper to feed your hungry investors. And so there's this sense in private credit that, like, it is hard to be a disciplined investor and it's hard to look for value and make do really careful credit work because you're essentially in the business of saying yes to every buyout that gets offered to you because you just have to do deals. But it's a great time to be selling your private credit firm. It's this huge boom that any huge boom makes it hard to be a careful investor because you have to deploy a lot of money, but it's a great time to be a seller.

[Katie Greifeld]

Yeah, I was actually just having this conversation with a private credit person and this person was talking about how there's private credit beta right now. And you know, you have to get more esoteric to find the alpha, et.

[Matt Levine]

Cetera, because you don't have to find the alpha. You can charge 2% and you know, you can charge 50 basis points and you can.

[Katie Greifeld]

At least this person would like to.

[Matt Levine]

That's why I'm saying it's hard because, like, everyone is like, constitutionally, like, wants to be doing good deals and not doing bad deals. But there's a lot of money in doing, like, private credit beta.

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[Katie Greifeld]

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[Matt Levine]

Foreign.

[Katie Greifeld]

Let'S talk about some trade secrets.

[Matt Levine]

So there's a Bloomberg story about Xiao Zhang, who's the founder of Pinestone, which is this big and very successful quant fund in China. He was charged criminally in Boston Federal court in Boston for allegedly he had a former job at an American asset manager and he allegedly downloaded all the models of Left for China. Actually he left for China and then downloaded all the models.

[Katie Greifeld]

He was out of the country first.

[Matt Levine]

Out of the country first. Which is smart. There was another story a while back about a guy who did the reverse. Like he downloaded the models and then he left the country like that night and like by the time he landed they had them detained. And like it didn't work out for him. But this guy left the country first, wasn't supposed to be able to get into his corporate hard drive, but used a VPN to somehow log into work from China, which I think is probably not technically feasible anymore at most quant firms. But he allegedly did it and he allegedly downloaded all the models. And it's an indictment. It's not full of detail. There's a suggestion that he used these models to set up his now very successful Chinese quant fund. I don't know if that's even what they're charging, but there's a hint that these things were useful in his subsequent career.

[Katie Greifeld]

Well, I would like to know his returns.

[Matt Levine]

Well, they're great.

[Katie Greifeld]

Well, you point out in your column that the US Market is different than the Chinese market.

[Matt Levine]

It's very different. You know, there've been a lot of stories about, like, Chinese quant funds getting wrecked in, like, regime changes, where the Chinese government is like, oh, you, like, can't bet against stocks or whatever. And, like, you know, your long, short fund just, you know, explodes because you can't be short anymore. You know, you think of, like, a quant fund stereotypically being trained on some relatively recent history and being bad at adapting to sharp changes in how the world works. That's probably an overly simplified stereotype. And some quant algorithms are really good at adjusting to new information, but that's the stereotype. And it does seem hard to run a quant fund that is like, these are the returns of going long this basket of stocks and going short that basket of stocks. And then you update it for, you can't short stocks anymore. This seems hard.

[Katie Greifeld]

Yeah. Or the government comes in with, like, a ton of stimulus and just completely changes the narrative.

[Matt Levine]

Right, exactly right.

[Katie Greifeld]

Which we saw a couple weeks ago.

[Matt Levine]

Right. It's not. It's not necessarily regulatory. That's right. Like, the economic environment can change rapidly, and it does seem very hard to deal with that. And, like, there are a lot of quant funds that blew up. And as a sort of, like, amateur tourist reading those stories, I'm like, the lessons of, like, the sort of classical development of, like, quant investing in the US Might not apply perfectly to China, but presumably people know that. Right. It's like, well, they stole the code. But, like, by the way, his firm is doing great. If he just stole the code and, like, plugged in, like, US Trading to Chinese markets, like, either that worked really well or, like, there's something we're missing there.

[Katie Greifeld]

Perhaps he tweaked it a little bit. You could draw parallels to another case we've talked about that was Jane street and Millennium's trade secrets. Tell us about the nuances here.

[Matt Levine]

Well, I mean, one thing is, like, there's actually a lot of these cases where the person gets charged criminally. I was going to say arrested. But this guy's not been arrested because he was out of the country. But a number of them get arrested. The one that is famous is Sergei Alanikov, who allegedly stole code from Goldman Sachs and got arrested and spent quite a long time in jail before his. I think his convictions were ultimately overturned. And he was like, he had kind of a rough go of it. He was arrested roughly the time that I left Goldman. And although I did not steal any code.

[Katie Greifeld]

Do you want to say that again?

[Matt Levine]

I did not steal any code, to be clear. But I was worried because I was going into media and I was like, what if they get mad at me and say that I stole code? There's a real time of. Looked like Goldman could have you put in prison if they didn't like you. Or it looked to me like that because I was paranoid. Anyway, they put him in prison. But the Jane street stuff, no one's going to get put in prison for a variety of reasons. But a big one is there's no allegation of code stealing. There's a difference between. Between stealing ideas, which is like a really fuzzy area. Right. Like, Jane street is convinced that these traders stole a proprietary complicated trading strategy that was developed with much work and investment at Jane street and belongs to Jane Street. And Millennium is like, no, these guys, they learned how to trade options and now they're trading options for us. There's nothing proprietary about that. I think probably the truth is somewhere in between. But even if Jane street is right, that kind of like, know how you can get mad? You can get sued, you can be like, stopped from working at the new firm. You, like, have to pay them back. But, like, you're not going to go to jail for that. Probably not legal advice. Whereas, like, if you like download code from a vpn, like, yeah, you go to jail.

[Katie Greifeld]

Yeah.

[Matt Levine]

If you're caught.

[Katie Greifeld]

Well, this guy, what's going to happen to him? Because he is in China?

[Matt Levine]

Nothing. So this is interesting.

[Katie Greifeld]

Just so you can't go back to.

[Matt Levine]

The U.S. it's like real consequence.

[Katie Greifeld]

Yeah, that is a consequence. Does his firm get to keep doing great and using these models?

[Matt Levine]

I think there's a widespread assumption that this stuff decays.

[Katie Greifeld]

Yeah.

[Matt Levine]

Maybe he downloaded the whole framework for how to build a quantitative trading firm. But that stuff is kind of public domain to the extent he downloaded signals those decay. No one thinks that three years after you've stolen stuff from your firm. I mean, maybe if it was Renaissance, but for the most part, this stuff decays. And so there's there's this notion that you have to be stopped from using it for some period of time. But then after that it's probably not worth worrying about. You see that in the Jane street case, where it's like whatever secret trade, they're doing options in India, but options in India doesn't tell you very much about the trade. Jane street will say it's some very complicated, clever implementation, but no one thinks that's going to make $100 million a year forever. It's like Jane street had some window in which to do that trade and then like Millennium butted in and now they have to split the profits or the profits go away. Probably that's what's happening here. But also, you can't be shooting the lights out trading Quant in China solely with stolen models.

[Katie Greifeld]

He's only 33. Yeah, yeah. And he stole these secrets allegedly in 2021.

[Matt Levine]

That's the other cool thing is the indictment says that he was an associate and was not responsible for these models. Often you have some dispute about whether the person was downloading their own work. But here the implication is kind of like he showed up as an associate, did the training, and then downloaded all the models and left. There's an implication that he was just taking other people's work.

[Katie Greifeld]

This did prompt a response from your readers, as I understand it.

[Matt Levine]

Oh, yeah. So I wrote about the high level problems with doing this. You just download code and then go start your own firm. The big problem is that you get arrested. Moving to China solves that problem. But then a secondary problem is you're crowding a trade. That is there's not that much profit in it necessarily. So if you and your old firm are both doing it, you both make less money. One reader pointed out that actually the biggest problem with this, besides getting arrested, is raising money from clients. Because if you work at a hedge fund and you download their code, then how do you raise money? You're like, I still could from my old hedge fund. No one's going to invest with you for that. Or you can be like, I'm just really smart. I have some great ideas. But it's like.

[Katie Greifeld]

Or you can track record. I'm going to undercut that hedge fund and I'm going to give it to you at a cheaper price, which gets us neatly back to farmers markets.

[Matt Levine]

It does. But I do think that that pitch, while it might work for garlic, is very bad for a hedge fund client because you're taking on a lot of operational and regulatory and reputational risk for saving some money because this hedge fund strategy fell off the back of a truck and I'll give it to you for cheap. That's not a good long term strategy for an endowment. But moving to China and saying, hey, we've developed our skills at a leading US Institution and now we can apply them to this somewhat less fully efficient market, that's a good pitch. And if you're like nudge, nudge, wink, wink, also, we stole the models, maybe that's a fine pitch too. I don't know.

[Katie Greifeld]

Yeah.

[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 moneypodloomburg.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 Andon.

[Katie Greifeld]

Our theme music was composed by Blake Maples.

[Matt Levine]

Brendan Francis Newnham is our executive producer.

[Katie Greifeld]

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.

[Katie Greifeld]

Thanks for listening to the Money Stuff Podcast. If you never want to miss a story, become a Bloomberg.com subscriber today. Check out our special intro offer right [e-mail] podcastoffer or click the link in our show notes. You'll also unlock deep reporting data and analysis from reporters around the world.