To me, like the moment that sticks out in my mind is the CoreWeave guy's interview in the FT, where he basically talked about raising all the capital in the world. Like, yeah, you hear that from a senior executive at one of the most prominent neoclouds out there. That to me is like the big flashing warning. Elon said something to his... it's going to be like 3 to 13 trillion ultimately of capital raises. So it became this sort of bifurcated story where everyone was comfortable going into healthcare, into quality, into sort of even staples, and then basically hiding out in there, which was holding up the index while just selling and grossing in sort of tech. Elon had a tweet about like just one, just this one tweet.
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway and I'm Joe Weisenthal. Joe, I heard with all the market volatility recently...
Yeah, I heard a pod is blowing up.
I heard a rumor. That's something that anyone here? Anyone hearing talk of a pod blowing up somewhere? Or a pod is always blowing up.
No, but I think actually in the past week or so, for a lot of hedge funds, has been kind of historic. So I would say October, just from the numbers that we've already got, awful. And I would say, you know, it was this drip. There's been weakness in a lot of the popular AI-adjacent names really since the middle of the summer. Yeah. But it's building and building, already getting kind of ugly. And then maybe with the midterms or something, you get this huge washout and yeah, big numbers, big losses. Right. So we're recording this on November 10th. And you know, I say the past week because that's when we got all the headlines about October performance for a lot of these funds. But for multi-strats in particular, I mean we've done a lot of episodes on these. These were the hot new funds. They were supposed to be able to manage money in up and down markets instead of relying on like one star investor or one centralized team. You had all these little pods that were supposed to be making bets independent of each other. Uncorrelated correlation, as I always say, is one of the trickiest concepts on Wall Street to actually model. And so it looks like, you know, there are some questions about the business model. Did everyone basically pile into the same trade implicitly? So this is I think the number one question, which is that could you have made a lot of money in the last 12 or 24 months without implicitly being long? I was there so leveraged on and leveraged and leveraged long. Yeah. But like this is like the question, like you can dress up the AI trade in a million ways, right? So you could do it through chips. You could even theoretically create exposure to AI through rates, whatever. But at the end of the day, if you're making money over the last year, up until recently, were you doing it by implicitly being long AI? And did your boss, the risk manager at your firm, understand that the way you were making money was implicitly long AI? If in fact that's what you were doing? Yeah, basically were multi-strats just momentum dressed up in, I don't know, diversification. Yeah, yeah, totally. I'm just drawing that metaphor. But I think that is the question. And I'm glad to say we have two very special perfect guests. Yeah. We're going to be discussing the hedge fund performance specifically with Nishant Kumar. He is the chief correspondent for hedge funds over at Bloomberg News. And then we're going to have on Michael Ball, who's a macro strategist at Bloomberg News, to talk generally about what's going on in markets, because there's a lot right now. So why don't we go ahead and get started. Nishant, thank you so much for coming on Odd Lots.
Why don't we start with a basic question? You've been pretty busy in recent days. I think you've written dozens of stories at this point. But how bad was October, early November for a lot of these funds?
Well, how busy I was in the last 16 years of covering hedge funds, I never saw a day like last week. Wow. I just took a screenshot of all my stories and posted on Twitter, and it got like 750,000 views. So that tells you how busy it was. But in terms of hedge fund performance, look, it was pretty bad. The interesting bit wasn't just that hedge funds lost money. It was that lots of different strategies got hit at the same time. So coming back to your main point that how correlated some of these strategies have become. Take, for example, Millennium, Value, Balyasny, Point72. These are all the mainstream pod shops that you... although, you know, pod shops sound like an insult to many of the people in the industry, but that's what they are. And they all lost money together. So these are the hedge funds who have the biggest concentration of assets, biggest concentration of talent, the most sought-after hedge funds from investors because they have a track record of making money when the downturn hits, and they all failed together and they lost money. Last month, Millennium was down 2.3%. And now, on its own, this may not sound like a huge loss, but in their own context, they annualize at around 14%. And when they lose 2.3% in a month, that's a lot for a steady vehicle like Millennium. Same story at Balyasny, same story at Point72. So yeah, I would say it was really bad. Normally you might see equities had a bad month, but macro did well, or credit good here, or stock pickers were fine. But this was like a perfect storm. Everyone failed together.
Wait, can you explain to me why down 2.3% is that bad? I mean, it's bad. Well, for a start, it was worse than the S&P 500, right? In October? Yeah. Sure. No, yeah, I get that. But like these numbers don't explain to the listener, and by the listener I mean me, why 2.3% not be it, which doesn't sound like the end of the world, is. Wow. This is one of the craziest months you've ever experienced as a reporter.
So as I said, again, 2.3 in isolation is not bad. Yeah. But you have a specific purpose in a portfolio. Okay. The value of a hedge fund in a pension fund portfolio or a sovereign wealth portfolio. And we are talking about this tens of billions of dollars worth of portfolios. Your role in a portfolio is to soften the blow from any market turmoil. Okay, that's the purpose. And you are not expected to match, as in, S&P 500 returns when S&P 500 is surging. That's not what is expected from a hedge fund. But when it goes down, when there is a turmoil, investors look at you to protect you. And that's where the problem is. To be fair, it was bad for pretty much every hedge fund out there. But there was at least one I saw that produced positive returns for October. And that was, I think, Citadel.
What did they do differently to others, or what do we think they did differently?
Well, we don't know how, but yes, there were some exceptional winners. On the multi-strat side, Citadel was one, D.E. Shaw was another. And there were some odd quant funds that did well. But overall the picture is still down. Maybe some coins worked out. Well, if someone was shorting heavily, maybe they were positioned right for last month. But yeah, we don't have portfolio-level details to explain what went right or even what went wrong at certain hedge funds.
What's your working, I guess, hypothesis for why everything went wrong for the vast majority of funds?
Okay. It was a complete mayhem. Last month you had AI stocks crashing. You had a surprise election in Brazil, and you have this huge selloff in the high-yield bond market. And they all combined to create this perfect storm for a lot of different hedge fund industry. You had like the French issues and French bonds going down as well. So, you know, there were so many different trades, there were crowded trades, and all these hedge funds had piled into them. And one after another they started to go down. Take, for example, just the AI stocks. We don't know about Situational Awareness yet, but there is another fund. There was a rumor that they were piling back into the market. Right. Yeah. Tell us about this for a company I know, or this Vara fund, but I hadn't heard of it until someone said it was like a Situational Awareness clone. So it was. And we wrote a story about how much of a portfolio overlap there was between Vara and Situational Awareness. So Vara, for example, lost 33% in October. That's like losing a third of your portfolio. But here's a killer statistic. They are still up for the year. So that's how much money they had made before losing. They had a tough month earlier this year as well. So that's the kind of destruction we are seeing in AI stocks. If you are crowded and largely concentrated in a few AI stocks, you take Whale Rock, again an equity fund, down 12%. So there were these highly concentrated single strategies, maybe single market funds, which lost a lot of money. But then if you look at macro hedge funds, they also lost money. Crispin Odey, which has like billions and billions of dollars, and they're a macro hedge fund, they lost 6.4%. That was their biggest down month since they started trading. Chris Rock was another legendary macro hedge fund manager. We just reported today. He lost almost 5% last month. So there was really nowhere to hide in this market last month.
So you know, earlier this year, we did a live show of Odd Lots, and we had Torsten Slok from Apollo. We had him deliver his slides, his favorite chart, the king of charts, Torsten Slok from Apollo. And his basic thesis is that the market has emerged into the... there's the AI factor and then there's the anti-AI factor. And maybe like you can't hide because everything is implicitly this trade one way or another. When you look at the results, do you come to the same conclusion that whether you're talking about a macro fund, whether you're talking about a sort of traditional long-short, whether you're talking about a single manager, whether you're talking about a strategic one, that at the end of the day, if you had been making money in this market prior to October or maybe prior to June or whatever, that you had been making money implicitly via long AI? But if that is the measure, then I don't know who is in the AI because I don't see many winners here.
Like yeah, for the whole industry as a whole, there might be some exceptions, but it doesn't seem to be an equal split or even maybe 25, 75. It looks like the entire industry has piled into this, I think maybe not directly through stocks, but maybe that they have exposure to credit that has exposure to AI. Or maybe AI had started to impact macro, started to impact interest rates. Yeah, yeah.
I was just going to say, yeah, short Treasuries could be an AI or a long AI trade, right? Yeah. Well, actually, on this note, we did get a really interesting report. We do have some analysis that we can look at to get like clues of what these funds were actually doing. So Pivotal Path put out this report last week saying that hedge funds were basically all crowding into the same names, which again, for multi-strats at least, was exactly what you were supposed to not see. They were supposed to be diversified and making all these independent bets. Talk to us about what Pivotal Path actually found.
So mainly they were arguing for crowded trades. That was my reading. And I will separate it from momentum and everything. Okay. You can, like, have ten very sophisticated hedge funds independently deciding they like the same stock, perhaps because they're liquid or maybe the earnings are strong, or maybe it fits in your risk framework. That doesn't make them momentum traders, but it does create this problem. You know that if they all change their mind at the same time, which seems to be what has happened, maybe last month, then it's a big problem. So Pivotal Path says the ten largest firms in it control about 2.2 trillion, including borrowed money. That is a massive amount of money. And the capital backing that trade was something like 300, 350 billion. So that gives you a sense of how much leverage is in the system. So the report itself doesn't predict stress. But if you look at another report which is from Goldman, you know, the broader work that they have done shows that correlations between multi-strategy funds themselves have stayed roughly in a 0.2-0.3 band for years. So that doesn't point to maybe too much correlation. But crowding has become a big issue and it's backed by huge amounts of leverage. And then it's concentrated in this tiny little world, or maybe not tiny after Anthropic IPO, tiny world of AI stocks. So when one thing cracks, it leads to like a flood of problems for hedge funds. And that's what happened last month.
So just on the leverage point, when a fund's positions start to go down, and I'm particularly interested in multi-strats here, but we can talk about funds in general too. When positions start to go down, what happens next? Is it like the portfolio manager decides to start cutting risk, or you know, the centralized risk management team says you have to cut back on risk, or you have a volatility model that says you need to trim down exposure? Or in some famous cases recently, does the prime broker start asking for more collateral? And so you're forced to start liquidating positions.
Yeah. So let's look at this multi-strat model. In a way they are the real hedge fund industry right now. Like everything connects to them. You know, the way I think about multi-strat is, you know, they're like a hedge fund supermarket. Instead of one store manager making all the decisions, you have these hundreds of individual portfolio managers or what we call pods trading different things. So one team may be trading US stocks, another macro, another trading credit, commodities, and so on and so forth. And sitting above all of that is a very powerful risk management machine. At most of the, at all the hedge funds like this is the key. The firm decides how much capital each PM gets, how much they can lose, how much leverage they can use, how much risk the whole platform wants. If a PM loses money, risk gets cut. So, for example, if you have $100 to manage and if you lose 5% of that, so $5, at many of the firms, your capital will be cut into half if you lose another 2.5%. So total loss becoming seven and a half, you know, you are closed out. You can be liquidated and you can get fired immediately. And that's why this is a very ruthless risk management arrangement that multi-strats have. And that's what makes them wonderful in a way. This ruthlessness, you know, makes the machine work really well because they don't allow you to lose so much that you become a problem for the whole hedge fund. If the losses continue, the allocation can disappear. And obviously, eventually, the portfolio manager.
The theory here really is that lots of relatively small, uncorrelated return streams are more robust than like one gigantic star portfolio manager putting on a bet. So you are avoiding the key man risk, like a star manager can make you really, really insanely rich. But if he gets it wrong, he has the ability to also destroy your machine altogether. They're very okay. There's this trade, but there's various flavors of how you can express bullishness on AI. And so let's say I'm the risk manager at one of these. And Tracy is sort of long chips or maybe long memory. And I would never go on. And Nishant, you're like short Treasuries because you think there's going to be a lot of CapEx and that's going to drive inflation, etc. Isn't it my job to say like, yes, they're actually making this same trade? This is not diversification. And so it's like, yeah, maybe, maybe I'll fire both of you, but is it for having a bad month? Because Treasuries really have rallied a lot over the last few weeks. But isn't it my fault for not having identified the fact that you are not giving me diversification? You are all making the same trade in different skins. But have you seen any risk manager fire? I don't know, like, do you ever hear, is that a thing? But like if I have a lot of PMs making correlated bets, like isn't it my fault?
Well, the beauty of correlation is that it's not visible all the time. Yeah. It goes up and down and in moments like last month it really goes up. Yeah. So that interconnectedness, you know, the impact of leverage in the system, how everyone is positioned. It's a very complex mathematics, I think, and it's a complex job. Plus you can't rule it out if you see, you know, Mach 7 and all these tech stocks going so much. And if you as a risk manager come in and then say that, okay, let's cut it out. And if you underperform, that's a very hard decision to make. And that's where some of these multi-strats, I mean, to be, you know, precise, I mean, they are great at it. You know, they do care about correlation and they do manage it. But eventually if everything falls together, and it's not that everything fell together. It was first AI. Yeah. Then you sort of kind of rebalance your portfolio. Then the bonds go down and then the problem in the credit market and then Brazil's. So it happened week after week after week. So that's where I think all the problems started to emerge.
Well, I still remember we did that episode with Krishnakumar about multi-strats. This was one of the first episodes you ever did about multi-strats. And his characterization of the funds was that they're not maximizing for long-term returns. They're maximizing for short-term returns. So like every macro event that happens or every move, they react to it very quickly. Right. And so when you have a succession of all of these like idiosyncratic things happening, you could see them sort of cutting positions. I think they cut AI exposure going into the midterms. But then the market started rallying on Wednesday. And so they went back in. And then it falls on like Friday. And the Thursday was the day they got a really... Yeah. And so they're just like reacting very strongly to each new day, which I think, you know, has posed a problem certainly in recent weeks. So on that note, what do we need to see to know that the multi-strats are like piling back into the market, or that leverage limits or exposure limits are starting to go up and they're able to take on risk on?
Well, there are many statistics in the market and banks are in the best position to see that. But you know, this week things have already recovered a lot. It seems there is already mean reversion that is buying the dip. It seems. But the problem is we are in November, and ten days are gone. And a lot of these portfolios are bleeding. On top of that, talking to people, the anecdotal evidence I see is that dozens and dozens of portfolio managers, big risk takers in equity space, in macro space and credit space, they have been fired or they have been poached by others, or they're spending their long non-compete on the beach. So there are a lot of people who are not in the market. And we are in November, just 40 more days left. Yeah, for this year, you know, do they have courage to get into this market and take risk and make the most out of the next one and a half months? That is the question. And at the same time, not, you know, so many people are out of this market. So, you know, next two months is going to be very, very, very difficult. You know, what will it take traders to take risk now? And if they are wrong, you know, already bad performance can become so worse that, you know, they will lose their job.
Anyways, Joe, I just had a great idea for our merch. Yeah. You know those like religious devotional candles? Oh yeah. The candles with like pictures of Jesus. I love them. We need to do one that's like mean reversion. You light a candle and pray to the God of mean reversion to come save us. That would be good. I think that would be really popular, Odd Lots candles. I really, I really like that idea.
Nishant, I just have one last question. Setting aside the performance of October, and this is an industry-related question, but setting aside the performance of October, you've just been hearing a lot about sort of like how many more multi-strats or variations on a theme are really necessary. How many more launches can we have that roughly either try to replicate the Citadel model or the Millennium model or whatever it is? Where do we stand with this? Like in your view, have we, is this just sort of saturated, especially when you consider the cost of, say, acquiring new talent? So I again, in my imaginary world, I wanted to launch a new multi-strat. I'm going to have to pay up to hire seasoned traders that know what they're doing. Like where do we see the sort of, what inning is this industry?
So we have already seen the problems in the multi-strat industry in terms of starting a new multi-strat. We saw at GSA Global, we saw at what, like, cutting back equities trading. We have seen Icarus shutting down. So that's one side of the story. But in terms of demand for these strategies, you know, why do another multi... why do we need another multi-strategy hedge fund? Or why do anyone try to launch a new multi-strategy hedge fund? Because investors really want this strategy. It lets you run more money, right? Like the more pods you add, the more money you got to run. You can, you can. But there is a limit to that. Like how many ways, if you already have like dozens and dozens of equity portfolio managers, how much an incremental or additional five or more equity fund manager will diversify your strategy? So I think there is a cap on that as well. So investors want it. They can't deploy enough capital to these multi-strategy hedge funds. If you look at the top players, all of them are closed to new money. One example which shows you how hot these hedge funds are. Millennium wanted to raise about $20 billion in new capital earlier this year. They got demand for more than $30 billion. They took in $22 billion. I don't think more than 2% of the hedge fund industry, or even 1% of the hedge fund industry by number, manage $20 billion. So that's the kind of demand that these hedge funds have. At the same time, many of these large players are returning capital between D.E. Shaw, Point72 and Citadel. Almost 35, 40 billion have been returned to investors. Now, those investors need to find a new home for this capital. Where do they put it? This is a $40 billion problem for investors. So capacity is a real issue. If someone can genuinely build a multi-strat and create decent capacity with reasonable returns, there is demand for another multi-strat. The question whether someone can build it or not is very tough to answer. We have seen many failed attempts. And that is the problem. Whether a new multi-strategy hedge fund has the right resources to sort of employ another or, you know, poach another trader and hire the best people. That is the big question. I don't think they can.
Yeah. I think the obvious takeaway from this is that more teams, more pods, more money does not necessarily translate into more risk-adjusted returns, basically. Yeah. All right. Nishant, thank you so much for coming on Odd Lots. Really appreciate it. We'll let you get back to reporting because there's probably eight stories you need to write today. Thank you. All right. Well, that was our conversation with Nishant Kumar. And now let's talk a little bit more about the markets. We have here Michael Ball, macro strategist at Bloomberg News. He's going to explain to us all these big moves. Michael, thanks for coming on the pod. First time, I think, right?
First time. Thanks for having me. Big honor.
