Smack-ish: MSTR, PE, MFT

Summary

Money Stuff: The Podcast – Episode Summary

Title: Smack-ish: MSTR, PE, MFT
Host/Authors: Matt Levine & Katie Greifeld
Release Date: June 13, 2025

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Introduction

In the episode titled "Smack-ish: MSTR, PE, MFT," Matt Levine and Katie Greifeld delve into a contentious debate within the financial industry. The discussion primarily revolves around Jim Chanos's short thesis on MicroStrategy (MSTR), the evolving landscape of private equity (PE) hiring, and the intriguing developments at Tower Research Capital in the realm of high-frequency trading.

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Jim Chanos's Short Thesis on MicroStrategy (MSTR)

The episode opens with Katie referencing a Bloomberg News article highlighting Jim Chanos's skepticism towards Michael Saylor's strategy at MicroStrategy. Chanos posits that shorting MicroStrategy's stock is a viable strategy since Saylor's company trades at a significant premium to its Bitcoin holdings.

• Katie Greifeld (04:09): "Jim Chanos has a short thesis when it comes to Michael Saylor's strategy. The idea being that you basically short strategy and you buy bitcoin because strategy trades at a premium to its actual bitcoin holdings."

• Matt Levine (04:33): "Microstrategy is kind of like fundamental business model is like, wow, stock trades at two times the value of the underlying bitcoin. So we're going to sell a ton of stock and use the money to buy bitcoin."

However, Matt brings an important nuance to the table, noting that MicroStrategy itself engages in a similar trade by selling their own stock to purchase Bitcoin, but with certain advantages Chanos doesn't have, such as not needing to borrow stock or face a short squeeze.

• Matt Levine (06:21): "He was like, no, Nobody should sell MicroStrategy stock to buy bitcoin. That's a crazy thing to do. Why would anyone sell MicroStrategy stock to buy bitcoin? Yeah, except for him."

Katie counters Chanos's position by critiquing Saylor's defense of his strategy as "financial gibberish," emphasizing that Chanos acknowledges the flaws yet Saylor continues unabated.

• Katie Greifeld (05:53): "Mr. Saylor wants you to value his business based not only on the net value of his bitcoin holdings but additionally with a multiple on the change in that nav, exclamation point."

Matt elaborates on the complexity of MicroStrategy’s model, highlighting that from a shareholder perspective, the company's Bitcoin exposure isn't leveraged but rather offers a unique value proposition.

• Matt Levine (06:58): "From the shareholders perspective, it is just not Levered bitcoin exposure. ... If you put in a dollar, you get like 50 cents worth of bitcoin, which is the opposite of leverage."

The hosts contemplate the sustainability of Chanos's short position, suggesting that while Chanos may be correct in critiquing the strategy's foundation, it doesn't inherently guarantee the success of his short trade.

• Matt Levine (07:51): "But MicroStrategy still does. I mean, it's coming a little bit, but it is a little bit weird to me for Saylor to criticize Chanos..."

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Private Equity Hiring Dynamics

Transitioning from the MSTR discussion, Matt and Katie explore the shifting paradigms in private equity hiring, drawing parallels to Jamie Dimon's recent stance on recruitment practices at JP Morgan.

• Katie Greifeld (15:46): "You wrote that no one likes it. It's amazing. They fixed it. They just fixed it."

Matt reminisces about his experience clerking for a federal judge, drawing comparisons to the competitive and often unsustainable hiring practices in private equity.

• Matt Levine (17:20): "I've been interviewing since I was a child. But still like you get a better sense of who actually wants to do it if you interview people after like a year in banking than if you interview them after 20 minutes in banking."

Katie brings up historical attempts by firms like Morgan Stanley to regulate hiring timings, which faced pushback due to competitive disadvantages.

• Katie Greifeld (18:26): "But it sounds like you're saying you don't think that this truce of sorts will last."

Matt speculates on the future of PE hiring practices, predicting that the current resolution may not hold indefinitely.

• Matt Levine (20:10): "Yeah, but you do the same trade. They don't have to pay to borrow the stock. They can't get squeezed out of their short."

The discussion further touches upon the challenges of early recruitment and the potential for increased "duds" in the hiring process due to lack of experience among early recruits.

• Matt Levine (24:20): "I think it's mostly agree with them. I want to tell you about a couple of reader emails I've gotten about this topic."

Katie and Matt debate the sustainability and rationality of the current hiring frenzy, considering factors like AI's impact on junior roles and the intrinsic limitations of early recruitment.

• Katie Greifeld (22:33): "The reason why everything has been pushed earlier is theoretically because they want the best analysts."

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Tower Research Capital's Hedge Fund Venture

In the latter part of the episode, Matt introduces a story from the Financial Times about Tower Research Capital, a seasoned high-frequency trading (HFT) firm, which is launching a hedge fund to manage external capital.

• Matt Levine (28:43): "There's a story in the Financial Times about Tower Research Capital... launching a hedge fund to run outside capital."

He explains the traditional role of HFT firms and how Tower's new venture represents a convergence between proprietary trading and hedge fund strategies.

• Matt Levine (29:00): "Mid frequency strategies. I haven't heard that before. We talk about high frequency, but now we're talking about mid frequency."

Katie highlights a quote from a University of Illinois professor, emphasizing the finite earning potential in high-frequency strategies compared to transformative, long-term investment approaches.

• Katie Greifeld (35:26): "There's a quote in here from a professor over at the University of Illinois... Why stick to just mining gold?"

Matt concurs, drawing analogies to other industries and questioning the scalability of high-frequency trading profits.

• Matt Levine (34:45): "You can't make a trillion dollars... There's a lot of money in very high frequency understanding what stocks will go up in the next hundredth of a second."

They conclude by pondering the future trajectory of firms like Tower, balancing between proprietary success and the challenges of scaling with external funds.

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Conclusion

The episode encapsulates Matt Levine and Katie Greifeld's insightful analysis of complex financial strategies and industry practices. From dissecting the contentious MicroStrategy debate to scrutinizing evolving private equity recruitment and exploring innovations in high-frequency trading, the hosts provide listeners with a nuanced understanding of the financial world's dynamic landscape.

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Notable Quotes with Timestamps

• Katie Greifeld (04:09): "Jim Chanos has a short thesis when it comes to Michael Saylor's strategy."

• Matt Levine (06:58): "From the shareholders perspective, it is just not Levered bitcoin exposure."

• Katie Greifeld (05:53): "Mr. Saylor wants you to value his business based not only on the net value of his bitcoin holdings but additionally with a multiple on the change in that nav, exclamation point."

• Matt Levine (24:20): "I think it's mostly agree with them. I want to tell you about a couple of reader emails I've gotten about this topic."

• Matt Levine (34:45): "You can't make a trillion dollars... There's a lot of money in very high frequency understanding what stocks will go up in the next hundredth of a second."

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This comprehensive summary captures the essence of the "Smack-ish: MSTR, PE, MFT" episode, providing listeners with a clear overview of the discussions and insights shared by Matt Levine and Katie Greifeld.

Transcript

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[Matt Levine]

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[Katie Greifeld]

Bloomberg Audio Studios Podcasts, Radio news the bird's doing well, by the way.

[Matt Levine]

So the next milestone is like. He flies.

[Katie Greifeld]

Yes. Great news.

[Matt Levine]

Is he?

[Katie Greifeld]

Yes. So I believe last week I was talking about how we needed to work on flying. Really good at perching, really good at eating.

[Matt Levine]

Sure. You've been showing him YouTube videos.

[Katie Greifeld]

We've been working on flying. He's pretty good at flying. Now. The thing is, how are you? I'm still working on my flying. It apparently came naturally to the bird. I have to keep reminding myself, like, this is a baby bird. Yeah.

[Matt Levine]

When do birds. When do they have their permits, though? When do they.

[Katie Greifeld]

I think he's or she. We can't tell because it's a baby is just entering adolescence because the bird will also, like, peck at you. Like yesterday it was sitting on my shoulder and it was like pecking at my ear. And then I googled it and they go through a teenager phase where they like get into biting you for a little bit and then they kind of grow out of it.

[Matt Levine]

Anyway, congratulations to your bird.

[Katie Greifeld]

Thank you.

[Matt Levine]

Hello and welcome. It's Gonna keep being the Bird Stuff podcast, isn't it?

[Katie Greifeld]

I love it.

[Matt Levine]

Anyway, hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money sometimes. 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]

Katie, in your other life as an anchor for Bloomberg Television, you've been anchoring some Bloomberg Television.

[Katie Greifeld]

Absolutely. Because we had a little bit of a smackdown this week. I'm trying to make this as dramatic as possible.

[Matt Levine]

Everyone loves a financial industry smackdown now. Ever since the like the classic Ackman icon one from like a decade ago, everyone's like, oh, a smackdown.

[Katie Greifeld]

I mean, we'll never achieve those heights again. That was. That set the bar. No one's passed it since. But in slightly less interesting smackdowns, smack ish. Last week, I believe it was, there was a splashy Bloomberg News article about how Jim Chanos has a short thesis when it comes to Michael Saylor's strategy. The idea being that you basically short strategy and you buy bitcoin because strategy trades at a premium to its actual bitcoin holdings.

[Matt Levine]

Yeah. And one thing that Jim Chano said that is entirely accurate and revealing and everyone ignored is that MicroStrategy also does the same trade. An enormous size. Microstrategy is kind of like fundamental business model is like, wow, stock trades at two times the value of the underlying bitcoin. So we're going to sell a ton of stock and use the money to buy bitcoin. She's like, yeah, of course it's a great trade. But MicroStrategy has some advantages in putting that trade on that Jim Chanos doesn't have. They don't have to pay to borrow the stock. They can't get squeezed out of their short. But they were doing the same trade. But anyway.

[Katie Greifeld]

Yeah, well, go on. That was Chanos position. We interviewed Michael Saylor on Tuesday of this week. Obviously he disagreed with.

[Matt Levine]

He was like, no, Nobody should sell MicroStrategy stock to buy bitcoin. That's a crazy thing to do. Why would anyone sell MicroStrategy stock to buy bitcoin? Yeah, except for him. But whatever, whatever. No, I mean, to be fair, he's not doing it anymore.

[Katie Greifeld]

Yeah. Oh. He also said that, you know, Chanos doesn't understand how like, his valuation of strategy is offsides. That was on Tuesday. Jim Chanos came on Bloomberg Television on Wednesday with my colleague and friend Scarlet Fu and give his side of the story I mean, he said that Saylor is a great salesman, but basically his argument amounts to financial gibberish. I think he might have said that on social media and not on television.

[Matt Levine]

It's really the case that like, oh.

[Katie Greifeld]

Wait, wait, wait, let me read you the tweet. Actually, it's pretty good. In response to Saylor's television clip from our interview with him, this is of course complete financial gibberish. Mr. Saylor wants you to value his business based not only on the net value of his bitcoin holdings nav at market, but additionally with a multiple on the change in that nav, exclamation point. Because now he can leverage his balance sheet. Lol.

[Matt Levine]

I mean, I'm sorry, that's correct. Like I don't want to say that MicroStrategy's thing can't work right, because it's worked right and like a lot of people have gotten carried out shorting it, right? And like, I'm not saying, oh, this is a great idea, just short microstrategy, but like it is gibberish, right? It's like the point that they're making is bitcoin has gone up a lot. And so when we buy bitcoin, we're creating a ton of value for shareholders. And at some level that's true, but another level, you just buy bitcoin, this is true, and I think I probably said this on the podcast before, but a thing that is just wild to me about MicroStrategy in particular and bitcoin treasury companies generally is you have to tell some story about why you're not just a pot of bitcoins, Right. And there are a number of ways to tell that story. And all credit to MicroStrategy, they've done all of it. They're smart, they're good at finding. This is a well run bitcoin treasury company with a model that I fundamentally don't understand. But they're great at it. But the central story that they tell us, well, we can be levered bitcoin holders instead of just buying bitcoin, putting in the pot, we can borrow money to put bitcoin on the pot. Michael Sellers. We can issued preferred stock that pays 10% and we can buy Bitcoin that goes up by 47% a year. And therefore we're like, we're doing an arbitrage which is like, nobody should ever say the word arbitrage again after that. But the thing that I Find Fascinating about MicroStrategy is that from the shareholders perspective, it is just not Levered bitcoin exposure. The way MicroStrategy works is there's a 60 billion ish dollar pot of Bitcoin that trades at 120 billion ish market capitalization, which means it's not levered bitcoin for you. If you put in a dollar, you get like 50 cents worth of bitcoin, which is the opposite of leverage. Leverage is like you put in a dollar, you get back $2 worth of Bitcoin. So I just find it somewhat crazy making. But here we are.

[Katie Greifeld]

But the thing is, even if Jim Chanos is correct, which you are saying he is, that doesn't mean his trade is going to work.

[Matt Levine]

No, no, he's. Sorry, I want to be clear. The thing that he is definitely correct about is that it's gibberish.

[Katie Greifeld]

Right.

[Matt Levine]

Just from an aesthetic point of view, it's gibberish.

[Katie Greifeld]

That doesn't.

[Matt Levine]

Doesn't mean the st down.

[Katie Greifeld]

That's the thing, and that's something we've talked about before with these bitcoin treasury companies, is that in the stock market, people are happy to pay double. Basically, in the case of strategy, the.

[Matt Levine]

Trade is fundamentally about that that can't last. And you see cracks in it. GameStop is now a big treasury company and issued converts this week, and the Stock was down 20% at some point two weeks ago. I would have said, yeah, any company can announce it's a bitcoin treasury company and trade at 2x the value of its bitcoin. It's not quite as true anymore.

[Katie Greifeld]

Yeah, Kind of immediate it became not true.

[Matt Levine]

Yeah. Which is great. But MicroStrategy still does. I mean, it's coming a little bit, but it is a little bit weird to me for Saylor to criticize Chanos, because as Chanos has said, and as I just said, Saylor was doing the same trade. MicroStrategy is in the business of selling its own stock to buy bitcoin. So clearly, at some point in the fairly recent past, like this year, MicroStrategy has thought that bitcoin was a better asset than its stock. You could sell a stock to buy bitcoin. That's no longer as true. Right now they're doing lot of weird stuff and they've moved kind of further away from equity. They started doing stock and convertible bonds, and then they moved into this very high premium convertible preferred, and they moved into, I think, higher premium convertible preferred that has less and less equity content. And now they're selling straight 10% preferred that doesn't convert into stock. So they're basically, if you just look at their actions, it suggests that they thought their stock was overvalued at some point and now they think their stock is fairly valued. I think he said on TV something like, watch out, Jim Chanos, because we could issue preferred and if the premium comes down, we'll just issue more preferred. Which I took to mean that they might buy back stock, which is also crazy.

[Katie Greifeld]

Making this might be what you're referring to. He said, if the stock trades at a weak premium, we're just going to sell the preferred and if the stock rallies up, he's going to get liquidated and wiped out.

[Matt Levine]

Yeah. Which doesn't exactly say we're going to buy the st, but I don't know, Whatever.

[Katie Greifeld]

So he also said, so if the premium declines enough, he will issue preferred also in that scenario, and then buy back the common shares.

[Matt Levine]

Well, whatever.

[Katie Greifeld]

He has a few different game plans.

[Matt Levine]

Buy back the stock.

[Katie Greifeld]

Something that I thought was interesting from that interview, which I'm still trying to formulate an opinion on, so maybe you can give me one, is I asked him, you have all these copycat Bitcoin treasury companies that are coming out. Do you view them as competition? He said, I don't view them as competition. I view ETFs that track preferred shares as competition. Such as Invesco has one. I think the ticker is PGX. It has like $4 billion in assets. So I guess he's trying to compete for investor attention. Like he wants investors to buy his preferred shares, not broadly preferred shares. I don't really know.

[Matt Levine]

Interesting. Yeah. The Bitcoin treasury thing is interesting because he has for a long time been a proselytizer for other companies. Should do this. Right.

[Katie Greifeld]

Yeah.

[Matt Levine]

And when you think about the model, Jim Chanos and I can talk about the premium all we want, but fundamentally Michael Saylor views MicroStrategy as. I bet that Bitcoin will go up. And so the main thing they want is for Bitcoin to go up. The more companies that devote themselves to buying Bitcoin, the more Bitcoin will go up and the better off MicroStrategy and its shareholders. So they're not competition.

[Katie Greifeld]

Right.

[Matt Levine]

In a world of enormous competition for people to invest in this thing, would MicroStrategy's premium come down? Maybe. But if MicroStrategy's premium comes down by Bitcoin going up 10x, then that's great for Michael Saylor, the preferred thing. Yeah. I actually don't know who. I've always thought of straight Preferred as A pretty niche financial product. A lot of banks issue it and there's some utility ones. It's not a huge. You don't regularly have tech companies being like, I'm going to issue a straight preferred. That's not like a real thing. Bankers don't go around marketing 10% preferred stock to tech companies. And MicroStrategy is doing it in size. And yeah, I guess they're competing for the fairly limited pool of retail investors who want preferred stock. They're offering 10% and they're like, take our 10%. And I guess surely somewhere out there there's a fixed income investor who is like, I just want a safe high dividend. And the best dividend paying stock that I can get is this microstrategy referred. And I don't care what the business model, it's fine.

[Katie Greifeld]

Don't tell me about that.

[Matt Levine]

Yeah, don't tell me about it. As long as they keep paying the dividend. And yeah, that's a thing that someone might buy.

[Katie Greifeld]

I could have seen him embracing these ETFs and other funds that track preferred shares because theoretically MicroStrategy. Yeah, so I don't know.

[Matt Levine]

Yeah, I don't fully understand it either. But to the extent that instead of buying a diversified dividend fund, retail investors like, I want that MicroStrategy dividend, like pure play.

[Katie Greifeld]

Yeah, yeah. Who won?

[Matt Levine]

Who won? Yeah, like to the extent that, like, I'm the judge of this match, like I'm going to award it to Jim Chanos on points. To the extent that, like, you know, we'll find out when someone gets knocked out. Like Jim Chanos is going to exit this trade before Michael Saylor does.

[Katie Greifeld]

That's true. That's true. Saylor's going to do great.

[Matt Levine]

He's going to do great.

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[Katie Greifeld]

On cycle Recruiting. You wrote that no one likes it.

[Matt Levine]

It's amazing. They fixed it. They just fixed it.

[Katie Greifeld]

Well, Jamie Dimon especially didn't like it. And you're right. He solved the problem.

[Matt Levine]

So I have some backstory here. So I clerked for a federal judge after law school. And clerkship hiring has the same issues where, like, basically there's a pool of candidates and there's a pool of judges, and there's like a ranking of prestigious judges, There's a ranking of prestigious candidates, and everyone's the best candidates or the best judges. And, you know, it used to be that, like, towards the end of law school, you'd interview with the judge to get a clerkship. And then some judges were like, we'll interview a little earlier for clerkships to start in two years, and then we'll get the first cut at the best candidates. And it crept up earlier and earlier, and it became, like, untenable. And when I was a clerk, my judge was the leader of the clerkship hiring plan that told people you can't hire before the beginning of the third year of law school. And it was kind of mostly enforced, but a couple of judges defected and hired in the second year, and I couldn't enforce it, but I was in a dudgeon when people would hire clerks too early. I saw this process play out where it got too early. Everyone was like, this is dumb. It's too early. Let's move things back and hire on a normal Schedule where we can see people's grades and know what they're like and not just hire at the beginning of law school. And we set it back and then immediately it started decaying again. So I think that private equity hiring is a little of that, where there's a logical time to hire new private equity associates. And it's as they get to the end of their investment banking jobs, it's three months before those jobs end or whatever. And because prestigious firms want prestigious candidates, they'll be like, we'll just interview a month earlier and then everyone rushes to keep up with them. And so now the hiring is like before the investment banking jobs start. And everyone thinks that's dumb. And so Jamie Dimon is like, that's dumb and we won't let you do it. And because he's Jamie Dimon, because JP Morgan is a big prestigious bank, like, you know, they've had some traction where I think Apollo and General Atlantic have already said, yeah, not going to hire people this year for their 2027 start dates.

[Katie Greifeld]

But it sounds like you're saying you don't think that this truce of sorts will last.

[Matt Levine]

I think in five years we will be reading articles about how private equity hiring is, you know, starting before investing.

[Katie Greifeld]

And talking about it on this podcast.

[Matt Levine]

Talking about, on this podcast for sure. This is, yeah, this is a, this is a, this is long run content for this podcast. Will this equilibrium decay like next month? I don't think so. Like, I think there's going to be like a real impact where like people who started private equity in 2027 might get interviewed in 2026 rather than 2025. Like that could really happen because it has gotten sort of comical and like there is like some goodwill around, like moving things back. But like, will it last forever? I don't know. I don't think so.

[Katie Greifeld]

Well, it's interesting. I took a dig in some of the Bloomberg historical archives. Morgan Stanley tried to do something like this.

[Matt Levine]

Everyone's tried to do this. This. Yeah.

[Katie Greifeld]

Well, in 2013, Morgan Stanley then abandoned their attempt to block first year bankers from talking with recruiters for outside firms. Employees complained and the complaint, this is all according to people familiar from the time. The complaint was that they're being put at a disadvantage to other entry level bankers at other firms.

[Matt Levine]

I don't think JP Morgan could enforce this. Yeah, the private equity firms hadn't come out in support of it. The calculation of JP Morgan is not just, we will stop people from taking offers too early because that is really hard to do. Because everyone going into banking wants to be in private equity. And you'd lose analysts if you said you can't go into private equity. But I think because also the private equity firms don't love has a chance to succeed.

[Katie Greifeld]

Well, that's what I'm curious about. Apollo kicked this off. Mark Rowan said in an emailed statement to Bloomberg. When someone says something that is just plainly true, I feel compelled to agree with it. But is part of the calculation on Apollo's part that they're going to earn some Brownie points with Jamie Dimon and that's more valuable than getting an early shot at some of these analysts?

[Matt Levine]

I think it's both. I think they're not kidding that it's dumb to hire people before they graduate from college for a job that starts in two plus years and interview them about LBO modeling when they've never worked on a deal. It's genuinely dumb. Yes, being in the good graces of Jamie Dimon is not a bad idea for any private equity firm. But no, I think mostly agree with them. I want to tell you about a couple of reader emails I've gotten about this topic. One is I heard from someone who was like, yeah, I started in banking, I accepted my PE job immediately. And then after a couple of weeks in banking, I realized I didn't like to do deals. Backed out of his PE offer. Which first of all, yes, when generally and Apollo talk about this, they're like, we want to get recruiting. Right. And if you're recruiting people before they start in banking, you don't really know that you're getting the people who really want to and will be good at doing private equity. Right? Yeah, they don't know anything about, they've ever worked on. Well, whatever. This is part of a bigger process where everything has crept up earlier and become more intense. So now like you internally.

[Katie Greifeld]

Well, we talked about university finance a few weeks.

[Matt Levine]

Like I'm like, oh, they don't know anything about banking, but they've been like doing banking since they were children. But still like you get a better sense of who actually wants to do it if you interview people after like a year in banking than if you interview them after 20 minutes in banking. I thought it was interesting that like this doesn't happen that much. Like people backing out. Like he was like, yeah, my firm was then like advertising for someone to fill the spot really quickly because like they don't over hire. It's not like, you know, an airline where they sell 20% more seats because they figure people will Drop out. They just figure everyone they hire is going to start two years later, which is pretty wild. The other thing that I got is a couple of people are, you ask, why is Apollo jumping? To agree with JP Morgan. One possibility is they think that recruiting this early is not a good idea and they would like to recruit later to have a more informed recruiting conversation. Another possibility is they want to curry favor with Jamie Dimon. A third possibility is that they don't need as many people. Yeah, a third possibility is you're hiring for 2027. You're like, okay, in two years. First of all, there's all this stuff about how private equiforms have nothing to do, they can't get any exits, people are kind of bored, they're not doing as many deals, they can't raise money. It might be good to tighten this for 2027. But then there's also just the theme of what AI will do for junior hiring and financial services. So if you're running a big private equity firm and you're looking at your need for junior headcount two years out, it might feel a little uncertain and you might say, you know what, we don't need to hire everyone for 2027 right now. We can take a pause on that and see how many people we actually need in 2027. So I generally don't know if you were a junior if you're about to start your banking job. Like, I don't know whether you'd rather have private equity recruiting now or not. It's kind of nice to have your entire future sewn up for the next five years. But at the same time, it's like stressful to interview now without knowing anything and without, you know, having done any deals and commit yourself to, you know, your jobs for the next five years. I would think it's better for candidates to have a little bit more time.

[Katie Greifeld]

Yeah.

[Matt Levine]

But not if like, the reason for.

[Katie Greifeld]

That is that the dystopian.

[Matt Levine]

The dystopian future.

[Katie Greifeld]

Yeah. That AI will just replace them anyway. Also, I wanted to talk about this a bit more from the perspective of an Apollo or another PE firm. The reason why everything has been pushed. Are we saying back or forward earlier? The reason why everything is getting pushed earlier is theoretically because they want the best analysts. And it almost seems like a trade off, that to get the best analysts, part of the price you pay is probably some of the folks that you hire two years early before they have any experiences. Some of them are going to be duds.

[Matt Levine]

Oh yeah, and this is, I Mean, this is what they say when they agree with Jamie Dimon. We want to get the recruiting right. I did get one reader email. I was like, it's really hard to do recruiting. We've never found a way to be really confident that we're getting the right people. And so who did the good job in the interview and is going to Goldman is like, fine. To me, it seems like this would be a bad recruiting system because you would not know anything about people's performance. But the counterargument is like, yeah, you never know anything anyway. That's fine. But, yeah, I would think that you'd get a lot of duds or people who aren't motivated, or you'd miss a lot of people who don't have the most prestigious backgrounds, but actually kill it. In banking, it seems like a worse recruiting process than waiting until people have done deals for a while.

[Katie Greifeld]

Also, in all the coverage I've read about this over the past months and past couple of years, it just seems like there's only one pipeline to get into PE at the entry level, and that's to come from banking. Do they hire from anywhere other than ib?

[Matt Levine]

Yeah, historically, some number of management consultants, some number of post MBA people. But I think it's increasingly hard and increasingly like the pipeline is the pipeline and there's one way to do it, particularly because they're interviewing so early.

[Katie Greifeld]

Well, we'll see how long this truce lasts.

[Matt Levine]

Yeah. I think there's something interesting about people emailed me to be like, if they want to compete for the best people, why don't they just wait and pay more? There's a weird fungibility about both the people and the firms, where it's like, we all have to do the same recruiting at the same time because we're getting the same people to do the same job. You could imagine one private equity firm going to people a week before the job starts and say, look, I know you've accepted a job at another private equity firm, but we think you're good, we'll double your salary. You could imagine doing that, but I think it's not done. Sort of frowned upon. And it's a small enough industry that people wouldn't do it. But it is a strange thing that everything feels so fungible and it's such a direct competition for the same people to do the same thing, rather than trying to differentiate yourself in some way other than hiring 20 minutes earlier.

[Katie Greifeld]

Yeah.

[Unknown]

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[Katie Greifeld]

The Grand Convergence Right.

[Matt Levine]

There's a story in the Financial Times about Tower Research Capital, the very delightful high frequency trading firm.

[Katie Greifeld]

Yeah, One of the oldest ones.

[Matt Levine]

Yeah, yeah.

[Katie Greifeld]

If not the oldest, I don't know.

[Matt Levine]

It's hard to know what counts as a high frequency trading firm, but they're a sort of big, established high frequency trading firm, and they're apparently launching a hedge fund to run outside capital. Because you're a high frequency trading firm, you run your own capital. You get market signals that tell you what stocks to buy in the next three seconds. And those signals throw off enough exhaust that you can be like, I don't know what stocks to buy in the next three minutes. Right. And you reach your capacity for how much of that you can do with your own money. And then you're like, we'll open up to outside money and charge people 20% for telling them what stocks to buy in the next three hours or whatever. So it's an interesting convergence of what hedge funds do and what high frequency trading firms do.

[Katie Greifeld]

Yeah, this is an interesting one. I liked this phrase that was in the FT article. Let me find it where I put it in my notes. Oh yeah, I like this. Mid frequency strategies. I haven't heard that before. We talk about high frequency, but now we're talking about mid frequency.

[Matt Levine]

You and I run in different circles. I don't know what it means because I think different people have different. I think there are definitely people in the world who you're like, oh yeah, I'm a high frequency trader. I trade every couple of days, right? But when HFT people say it, they mean when HFT people, you're like, I trade every second. They're like, oh, that's so low frequency.

[Katie Greifeld]

What a pedestrian pace of trading.

[Matt Levine]

You know, I've, I've said milliseconds in articles and people have been like, milliseconds are so slow. What are you talking about? But no, mid frequency is somewhere between a microsecond and an hour. Yeah, sorry. It's between. Somewhere between a microsecond and a month. Somewhere in that range.

[Katie Greifeld]

I do like to imagine like a full circle moment though. Like Tower being an example of, okay, they're, you know, going out the time spectrum and maybe just. We end up with long only fund managers at a certain point.

[Matt Levine]

I don't think we're going to end up. Well, sure, this is the thing. People who are doing a lot of quantitative research into signals that tell them what stocks to buy and sell, there are different ways to use that and often it's at different timescales where if you have a pretty good method for knowing which stocks are likely to go up or down, one natural thing to do is to buy the ones that will go up and short the ones that will go down. But another thing to do is you buy the ones that will go up and not short anything and run a long only fund. Right? And so you have like, you know, AQR and other people who run, you know, hedge funds and also are like, well, just take the long signals and run long only money because people want long only products. Or like, you know, I was thinking about like other examples of this kind of thing and like, you look at Renaissance and it's never clear exactly what the dividing line is, but Like Renaissance, you know.

[Katie Greifeld]

Yeah.

[Matt Levine]

As a very famous extraordinarily successful hedge fund called Medallion that has been closed to outside money for decades now because it's too good and it only has so much capacity.

[Katie Greifeld]

Right, yeah.

[Matt Levine]

And so they close it outside money and they run their own money and they make themselves billionaires and then they're like, well, we have all this pretty good signals that we reach capacity on our own money, but we can use those signals to run institutional money and not quite as good, but good enough. So there's a lot of that where people who have really good signals that have limited capacity will run their own money with those really good signals. And then there's some second tier of we can run other people's money and still be pretty good.

[Katie Greifeld]

Yeah.

[Matt Levine]

By the way, I don't know that Tower is advertising that. Maybe they're like, oh, our mid frequency signals are even better. You should definitely get in on this. But I do think in Renaissance it's quite explicitly the case that they're like, we have really good stuff for us and like, okay, stuff for you.

[Katie Greifeld]

Yeah, yeah, yeah. The article doesn't go into that, but it does say that this would mark one of the first examples of a large high speed proprietary trading shop opening a product for outside investors.

[Matt Levine]

Yeah, sort of. Although like Jane street has issued bonds. Right? Yeah, not, not a product for outside investors per se, but like the idea that like you are a big successful proprietary trading firm and so you use outside money to grow your business is not like completely unheard of.

[Katie Greifeld]

True.

[Matt Levine]

And also I think some of them have taken outside equity investments, although I'm not sure about that.

[Katie Greifeld]

You touched on this, but one of the quotes in the article attributed to a person close to Tower is that there's just a finite limit to the amount of money that you can make with the really high frequency strategies. Why is that? Is it just because they're dealing with the likes of Citadel and Jane street and trying to compete against them or what does that mean?

[Matt Levine]

Well, like stocks don't go up that much in a microsecond. Right. What is investing? Right. Sort of deep question here. Why should you make money by buying stocks? Right. And the answer is in the long term because you're allocating capital to its best uses. And you are saying this AI company is going to transform the world. And so if I invest in it now, it'll like 10x my money because it'll be transformative to the world. Right. And if you're like, why should you make money holding stocks for 1/1,000th of a second. The answer is because you're providing a tiny, tiny liquidity service to somebody and it turns out that you can make a really nice living providing a tiny liquidity service to people, but you can't make a trillion dollars. You're not allocating capital to changing the world. You're like, yeah, providing a little service. So there shouldn't be that much money. There's a lot of money in very high frequency understanding what stocks will go up in the next hundredth of a second. But there's more money in understanding how the economy will transform the next 10 years, right?

[Katie Greifeld]

Yeah. Because I read that quote and I was like, isn't that true of a lot of things?

[Matt Levine]

What do you mean?

[Katie Greifeld]

There's only a finite amount of money that you make?

[Matt Levine]

I don't think there's. I think the one place where there is not a finite amount of money is in understanding what companies and technologies will be transformative for the world. If you pick where economic growth will be, you can make a trillion dollars. Not really, but you can. Facebook is a trillion dollar company. You can know what the future will look like and make a trillion dollars. You can't. In most businesses, you're providing a service. Yeah. Limit to how much money you can make.

[Katie Greifeld]

Well, there's a quote in here from a professor over at the University of Illinois quote, that just made me think a little bit. If you're a firm that gets really good at mining gold, why stick to just mining gold? It's like, well, because you're good at it. That was another thinker.

[Matt Levine]

Nice living mining gold. Right.

[Katie Greifeld]

But that's like asking.

[Matt Levine]

You're really good at writing a newsletter. Why not? Why not? Why stick to that? Why not watch a podcast? 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 Andam.

[Katie Greifeld]

Our theme music was composed by Blake Maples.

[Matt Levine]

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[Katie Greifeld]

And Sage Bauman is Bloomberg's Head of.

[Matt Levine]

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

[Unknown]

At gsk, our focus is on doing the right thing for patients. We believe they should be free to focus on doing what they love, especially when they're living with a disease like cancer. That's why we focus where we can make the biggest difference matching the right treatment with the right patient. At gsk, we're pioneering advanced technologies like antibody drug conjugates that precisely target and attack cancer cells. By uniting science, technology and talent, we work tirelessly to stay ahead of cancer together. Visit gsk.com to discover more.

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[Matt Levine]

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