The Absolute Return Revival with Tony Yoseloff

Barry speaks with Anthony Yoseloff, Managing Partner and CIO of Davidson Kempner. Tony joined the firm in 1999. He holds a J. D. from Columbia Law School and an M. B. A. from Columbia Graduate School of Business Administration. Aside from his time at Davidson Kempner, Tony also holds various board seats, including the Board of Trustees of Princeton University and the Board of Directors of PRINCO. Additionally, he serves as a member of the Board of Trustees and Chair of the investment committee of The New York Public Library. He is also a member of the Council on Foreign Relations. In this episode, Barry and Tony discuss his path in finance and how it led him to over 20 years at the same firm, the importance of absolute return in a portfolio, and the rise of alternative investing. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 0:31Speaker 01

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• 2:04Barry Ritholtz?

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio. This week on the podcast, strap yourself in for another spectacular conversation. Tony Yoseloff has been with Davidson Kempner pretty much his entire career, past 27 years. What a knowledgeable expert about all things, we used to call it distressed credit, now it's opportunistic investing, much more than merely being credit-driven. They focus on everything from M&A arbitrage, to real estate investing, to private equity,

• 2:43Barry Ritholtz?

  to public debt, a masterclass in how to think about risk, how to think about diversification, how to put together a portfolio of alternatives that is both non-correlated to your core equity portfolio, but simultaneously creates a form of offset or ballast to the volatility of equities. In addition to being CIO and managing partner at Davidson Kempner, he's also chairman of the investment committee for the New York Public Library, he's vice chairman for the investment committee for New York Presbyterian, as well as sitting on the Board of Trustees

• 3:28Barry Ritholtz?

  and the Investment Committee of Princeton University. I thought this conversation was fascinating, and I think you will also. With no further ado, my discussion with Davidson Kempner's Tony Yoseloff.

• 3:41Speaker 03

  Thank you, Barry. I was going to say, longtime listener, first-time caller.

• 3:48Barry Ritholtz?

  So, I'm kind of amazed, I'm kind of overwhelmed by your curriculum vitae and the fact that you've never been in this building, which is kind of amazing because a lot of my guests have similar background, board seats, endowments, investment committees, and I feel like I know everybody, but I don't know everybody. There's a million people. I haven't met and you've been on my list for a while. So, so let's just start a little bit with your background, which is really kind of interesting. Undergrad, you go to Princeton, School of Public and International Affairs, and then you get a J D MBA from Columbia, which leads to the obvious question, what were your original career plans?

• 4:33Speaker 03

  You know, it's interesting. So first of all, I've got a pretty boring background in the sense that I grew up in central New Jersey in a town called East Brunswick. I went to college.

• 4:42Barry Ritholtz?

  Oh, sure.

• 4:42Speaker 03

  I went to college half an hour from where I grew up and then I moved to New York City the day after I graduated from Princeton and haven't left. And so I've lived within a 50 mile radius my entire life. My original career plans, to the extent that they were fully formed, would have been to do a career in law or potentially public policy. My high school happened to have a very good civics type program. I think I was probably at the only public high school in the United States that produced a cabinet member for both the first Trump administration and the Biden administration.

• 5:12Barry Ritholtz?

  Wow.

• 5:13Speaker 03

  Which I thought was pretty amazing for a suburban public high school. It was really during my time at Princeton and during my time at Columbia where I made the decision to pursue money management as a career instead of something in public policy. The 1990s were really the heyday, I'm going to say, of mutual funds and it was sort of the early days of electronic stock trading. My family is a family of academics and book publishers. So it wasn't necessarily through my family background that I got interested in investing, but it was sort of around us in the ether. I did a lot of reading on it in high school and college. I was fortunate enough that I had a number of, my friends' parents were

• 5:55Speaker 03

  willing to take me out to coffee and kind of educate me on the financial services business. And really, the inflection point was when I was at Columbia where I had to kind of choose a path between going to Washington and working for a law firm that would have gotten me in the regulatory side of things versus, you know, working at a law firm, which I did for a couple of years as a summer associate, where the focus was private equity. And that was the path I chose and I sort of never, never I'm really glad I have the legal background. I'm really glad I have the public policy background. It's actually super helpful as an investor, but it wasn't like, you know, I never set out on this path. It's just sort of the journey found me.

• 6:32Barry Ritholtz?

  I'm kind of fascinated by the joint JD MBA. I have a JD and what I always appreciated about law school was that it didn't teach you so much as what to think as to how to think. Whereas an MBA feels more like a deep dive into the specifics of investing theory and a lot of quantitative analytics. How do you find the combination that sort of left brain, right brain JD MBA works for you as an investor?

• 7:02Speaker 03

  Well, it's super helpful. So first of all, I also went to law school with the same idea that you did, that law school was an amazing education and that good things would come out of it, whether I was interested in pursuing law or not. I was very fortunate. I actually finished all my coursework at Princeton in three years and I had a chance to start Columbia Law School during my fourth year at Princeton, which was a program that Princeton and Columbia had with each other at the time, but very few students did. So I kind of had a free look at law school. I enjoyed my time at law school. My time working in law just sort of made it seem like it wasn't for me ultimately, but I think it's a great, a great field and would highly recommend it to others. The business school

• 7:47Speaker 03

  side initially started out as a path to getting a job. I actually found it, you know, it's sort of hard to think today, but it wasn't so easy for someone with a law degree and no work experience to go work on Wall Street in the 1990s. In fact, I had a few HR folks, I'd make it pretty far along in my recruiting process at different places and they'd say to me, how do we know you're going to wake up caring about finance? How do we know you're going to read the Wall Street Journal every day? And so questions that kind of seem silly with the benefit of hindsight, but you know, I had no financial services background there. Once I went to business school, boom, I had the financial services background there. But the courses I took at Columbia were exceptional. Like I really enjoyed taking courses, particularly the ones that were taught by adjunct professors where they had real world experience.

• 8:32Speaker 03

  And so you could learn derivatives from someone who was trading derivatives every day at JP Morgan, or I learned about the retail business from someone who was a former CEO of a midsize regional retailer, department store, there were a lot of department stores at that period of time, and they bring in a different CEO every week to talk to you. And that stuff just fascinated me. And so if I think about like my Columbia Business School education, like there was a lot of good things I took from that. And so the combination proved to be very powerful for me.

• 8:58Barry Ritholtz?

  Huh, really, really interesting. The data point that always sticks out in my head is something like seven years after graduation, 50% of JD holders are no longer practicing law. It's like a big feeder for other fields.

• 9:13Speaker 03

  Yeah, no, I believe that. I mean, look, I'm very fortunate that I went to law school with some folks who were literally among the leaders of their field in the United States as attorneys. And I also went to law school with a number of folks who are no longer attorneys, some of whom found that journey immediately like me, some of whom found it many years into the future. There's no controlling the fact that it's a great education and it's a great way to learn how to think. And especially for the types of investing we do, it's been super helpful.

• 9:37Barry Ritholtz?

  So, so let's talk about some of the investing you do. You joined Davidson-Kempner in 1999, pretty much the peak of the dot com boom. We were at that point, you know, a couple of quarters away from everything peaking and heading south. Tell us about your experience at the tail end of, of the dot com situation and how did that affect how you looked at the world of, of investing?

• 10:02Speaker 03

  You know, it's, it's, it's really interesting, right? So I didn't necessarily seek out to do the type of investing that we do at Davidson-Kempner, which is a combination of opportunistic credit and event-driven investing. But it actually goes back a year earlier to 1998. I was looking for summer jobs for the last summer of my JD MBA program. And so I applied to a number of the banks. I applied to some of the investment shops. And I found Davidson-Kempner because they posted at Columbia for a full-time merger arbitrage analyst. And so I didn't really know any better. So I sent in a, a resume. And I got a call from them and they said, well, we think your background is actually really good. For then what would have been called distressed debt.

• 10:45Speaker 03

  And why don't you come in and talk to us and work for us for this first summer? So I literally met three partners. They offered me a job and I said, hmm, these folks have about a billion dollars under management. And there's about 15 people working here. That seems like a pretty good ratio in terms of number of people to dollars under management. And I knew a little bit about distressed debt investing just because I had taken a bankruptcy course in law school. And there was maybe like half of one class was devoted to what this was. It was really a pretty nascent industry. And so I said, okay, I can go be one of 100 or 200 people or whatever at a bank training program for the summer. Or I could be the only person who is doing this. And I there was they had hired an intern the year before. So I spoke to him on the phone. His name is Dan Zwern.

• 11:30Speaker 03

  He went on to founding money management firm that ultimately didn't work out and now runs Arena Partners. And it seemed like a pretty good ratio in terms of opportunity. And I got there and it just spoke to me. And it spoke to me because I liked the fact that I could do a form of investing that used both my legal background and my financial background. And I felt like there were many areas I might spend time on that might do one or the other, but wouldn't do both of them. So the joke of it is I'm literally the only person who applied for this job. They literally got one resume and that probably speaks as much to the time as it does to anyone else. I mean, so if you weren't doing a dot com startup in the late 1990s from Columbia, you were going to work in investment banking or you were going to work in consulting.

• 12:15Speaker 03

  There were like a handful of people who were going to work in money management at all. Right? That really was not a big area, despite the fact you had a big value investing program there at a time. These would have been the more popular career paths and obviously non financial services career paths as well. And to me, that was kind of fun. Like, I don't know. I mean, so the first two years of my career at Davidson Kepner, I hated most of what I was looking at as an investor. And I kept saying no to things. And what I didn't know is that was actually the right answer. Right? You know, when you get to an investing job, you want to put, you know, investments on the book. And that makes you feel like you're accomplishing things. Most of the companies that were in trouble in the late 1990s deserved to be. And it was because it was ...of a peak of financial markets, the really good opportunities probably started

• 12:56Speaker 03

  three to four years into my career. So I felt very proud of the fact afterwards that I didn't like anything. But at the time, I was like, are they just tossing me the bad stuff that I'm looking at all these investments and not wanting to do them? But it turned out, no, that was actually what most of the opportunity set was in our world in the late 90s.

• 13:12Barry Ritholtz?

  Were you getting guns from senior partners or other people who have lived through other distress cycles saying, hey, you're doing the right thing, you're looking for a diamond in the rough, but most of the stuff is too risky relative to the potential upside?

• 13:25Speaker 03

  Yeah, I mean, look, we obviously would try to steer our time towards things that were actionable. I definitely was getting support. I mean, my senior partners, there was two. There was Tom Kempner and Michael LaFell. I mean, those are the only two folks who really were doing distressed investing.

• 13:38Barry Ritholtz?

  No Davidson?

• 13:39Speaker 03

  Marvin Davidson was still running the firm at the very end of his career, but he really deferred to Tom and Michael in terms of running the debt portfolios that we had at the time. So we found things ultimately that I would call like solid singles, you know, things where like you could, you know, buy a bond in the mid 90s and there was a takeout at 101 and you'd earn a coupon. It wasn't things you were going to earn giant amounts of money, but you were going to earn very good IRRs on them. And so I cut my teeth doing things where you could put relatively small amounts of money to work. And keep in mind, we had a billion dollars at the time. So, you know, a $10 million investment was a 1% investment in the fund. It was, it was still meaningful to what we were doing.

• 14:14Barry Ritholtz?

  I'm intrigued that they got one application for one open, opening. You got the job and you've been there for 25 years. It kinda talks to how we never know what the future holds and how completely random sometimes these things feel. Had you not applied there, how might your career have been completely different?

• 14:38Speaker 03

  You have those what-if moments in life. I do believe in fate to some degree and I got very fortunate with how it all worked out. And, look, I liked what I was doing and I liked who I was doing it with. And I would say probably those are two of the most important factors that you have in choosing a career is what are you doing and who are you doing it with? And so I never felt the need to leave. The other thing I would say is, you know, Davidson-Kepner is an old-school, Wall Street-style partnership, where we make new partners every couple of years. When partners leave our firm, they get an earn-out of their shares, and the shares are ultimately effectively acquired by the ongoing partners in the firm. And that structure existed in the 1990s.

• 15:20Speaker 03

  We've made some changes over the years to it, but a lot of it's still substantially similar to what things look like. And that's because if you look at the founding of Davidson-Kepner, you know, Marvin Davidson had been a senior executive at Bear Stearns, and Tom Kepner was a junior person at Goldman Sachs, but knew the Goldman Sachs structure quite well. And they didn't know each other when they formed the partnership in the mid-1980s. And so they came up with an arms-length agreement that took the best of what they knew from Bear and Goldman. And that structure stuck, and it sticks today. And so what I knew for me was if I did a good job, there could be a career for me at Davidson-Kepner. And so not only did I have, like, people that I liked, and a thing I liked doing with my time, but I knew if I put my head down and did a good job, there was, like, a future

• 16:05Speaker 03

  there for me. And so that was just very, very powerful. I mean, I will say, like, you look back, it's, I mean, from when I started for the summer, it's almost 27 years ago. It does feel like a long time, but it never felt that way along the way. You know, I mean, you know, with any career, there's always good and bad. But overall, I've had an amazing experience.

• 16:22Barry Ritholtz?

  The days are long and the decades are short. You know, it's funny, you mentioned that Davidson-Kepner is a partnership. There was a lot of, I don't want to say criticism, but when a lot of the big Wall Street partnerships went public, there was a little bit of pushback and some questions. What is this going to do to risk management? And when, not that much long after, we have the financial crisis, the companies that were partnerships still, with their joint and several liability, somehow managed to not get into trouble. I guess they were highly focused on putting everything at risk. The agency problem with companies

• 17:04Barry Ritholtz?

  that had become public, where the partners no longer have joint and several, they, look at every company that ran into trouble, none of them were partnerships. It's kind of fascinating how that turns out.

• 17:18Speaker 03

  I hadn't thought about it that way, but I agree with you in terms of your conclusion. And you know, look, there's basic building blocks of what you're doing in as an investor, as a firm, and who you're doing it for, you know? So I take like the basic building blocks of Davidson Kepner today, which by the way, we're similar to what they were 27 years ago. We're primarily an investing firm. We're not an asset gathering firm. And so for us to offer an investing fund, my partners and I, we want to invest our own money.

• 17:48Barry Ritholtz?

  Right.

• 17:48Speaker 03

  Side by side with our LPs. We're by far the largest single investor collectively in our funds. And so if an investing product is not a good idea, we're not going to offer it, even if we have clients who would want it, because we can't put our, you know, impromptu or whatever behind it.

• 18:05Barry Ritholtz?

  Or your own money. You don't want to put your own money into it.

• 18:07Speaker 03

  So I think that speaks very powerfully. We require all of our partners to reinvest a substantial majority of their net worths back into the funds every year. We all invest pari passu across our funds, so you can't cherry pick which funds you want. The partnership chooses collectively.

• 18:22Barry Ritholtz?

  Straight across. So if you offer it to clients, the partners and employees of the firm are the largest investors in most of these.

• 18:29Speaker 03

  Yeah, not necessarily in any individual fund, but collectively across the funds. We are in any individual fund, we're going to put a meaningful amount of money relative to the size of the fund.

• 18:37Barry Ritholtz?

  So you eat your own cooking, essentially.

• 18:38Speaker 03

  Yeah, and that's the first test to me. I mean, you know, in investing, how much money do you have in the product? How much skin do you have in the game? You know, we obviously use operating partners sometimes in our private market investments. That's the first question I ask. How much money does the operating partner have in the investment? And is it meaningful to them? Right? So sometimes it's not just the quantum of money, it's how meaningful it is to the person who's involved. And again, having a, being a private firm, you know, we're 100% owned by our current and retired partners, with our retired partners in an earn out, so they eventually don't own shares of the firm anymore. And so you're beholden to two constituencies. You're beholden to your LPs and you're beholden to yourself and your employees. And you know, that's really how we run our business. And so, you know, it kind of keeps you out of trouble.

• 19:21Speaker 03

  It also keeps you very focused when things are going bad, right? You know, we've lived through a lot of crises. I lived through. The global financial crisis, I lived through the COVID crisis. COVID was probably even harder in a way because Tom Kepner had just retired a few months before that. And I joked that he left me a playbook for a financial crisis, but he didn't leave me a playbook for a pandemic. And so some of the HR things we all had to deal with and getting people out of the office and getting people back in the office. We had to kind of invent along the way. It really focuses the mind when you've got your money where your mouth is.

• 19:52Barry Ritholtz?

  Yeah, to say, to say the very least. So you brought something up that's really intriguing and I don't know if there's an answer to this, but I just want to get your take on it. So over the past 27 years, we've had a repeated 100 year flood every five or seven years, which while not statistically impossible, certainly seems unlikely. So we have the dot com implosion and then after that, nine 11. And then we have the financial crisis. And then in the 2010s, we have Brexit and the threat of Grexit. And we have the flash crash ultimately leading a few years later to the pandemic. Does it feel like we have these situations, these credit crises,

• 20:36Barry Ritholtz?

  which must be great for an opportunistic credit investor? But does it seem like they're coming along more frequently than historically? Like my recollection is, growing up is the SNL crisis. And then we really didn't have like a major problem until the dot com crisis. Are we getting these more frequently or does it just feel that way?

• 20:56Speaker 03

  Well, you know, I would maybe say a couple of things for that. So, so first of all, I think the pandemic was an exception compared to some of the other crises, because I would suggest that the dot com bubble or the GFC, or maybe some of the European crises in the mid 2010s were very predictable. Like if you looked at where share prices were in the 1990s for tech stocks, or how levered banks were with coupled with the subprime crisis that was going on in the mid 2000s, or you know, some of the issues with, you know, the sovereign credit in Europe in the mid 2010s. Like those were all with the benefit of hindsight, like, oh yeah, of course that was going to happen.

• 21:31Barry Ritholtz?

  Predictable, but not well predicted.

• 21:33Speaker 03

  Predictable, but not well predicted. I mean, hindsight's always 2020 in these things, right? But they were. Certainly predictable by people who are following markets. I would differentiate the COVID crisis from the sense that, you know, you probably had a month or two head start if you really followed what was going on in Wuhan. But fundamentally, it was much harder to figure that out. Like six months earlier, no one was going to say a pandemic was going to overwhelm financial markets. And so the reason I want to flag that is, you know, we do a lot of up down analyses in what we're doing. Right. And we try to really stress test investments. And so when you're a credit investor, there's a lot of things that you say, well, this can happen and that can happen. But we're still not going to lose money on this investment. Right. Because there's subordination below you one way or another in the capital structure.

• 22:17Speaker 03

  Or there's assets that you can clom onto that you can sell off. Or maybe not all those assets are markets driven. COVID created a lot of random winners and losers. Sometimes they were winners and losers for a year or two and ultimately made their way back. And so I think there was some more random noise in what happened in COVID. So I probably would take less lessons on a going forward basis from the COVID crisis than I would take from some of these other crises. I do think that, you know, if you look at a very long period of time, 25 years, you had 12 or 13 of them where you had interest rates at zero, right? Or close to zero, maybe closer to 15 when you add it up. And then the interest rates for most of the rest of the time, you know, US Treasury is probably peaked around 6%. A lot of it's been 4% or 5%. And so, you know, these have been pretty tame periods of time.

• 23:02Speaker 03

  And so you are going to have an occasional crazy. I mean, you go back over like long periods of time in finance. I do think having the economy blow up every 10 years was a very, you know, 1880s, 1890s thing as well. And so I think, I think history does repeat itself a lot. To me, I don't want to say it's part of the fun of being an investor because I don't mean to be crass. You know, these are people's jobs and livelihoods.

• 23:25Barry Ritholtz?

  I know exactly what you mean by that. Because, because if you identify.

• 23:30Barry Ritholtz?

  If you identify something that is potentially a great investment opportunity, especially if you're one of the few voices talking about it, and everybody says, "No, no, no, that's not a big deal," when the opportunity comes along, it's got to be deeply satisfying that you sussed out something that the rest of the investment community missed.

• 23:50Speaker 03

  Well, I mean, one of the fun things about doing opportunistic credit is that you need to be a little contrarian, right? Because you are looking at opportunities that other people have turned down, right? So, you know, there's this idea in credit, or in opportunistic credit, of good company, bad balance sheet, right? And those exist sometimes, but not often. And the reality is that the market's efficient enough that many people will figure out quickly it's a good company with a bad balance sheet, and so it's not going to price the way it probably would have priced 25 or 30 years ago. But there are a lot of businesses that just go through cycles, right? And they may appear to be bad businesses today, but they're actually going to be great businesses again tomorrow. And it's more of like a temporary thing that happens to the business and not a permanent thing. And, you know, that's where

• 24:33Speaker 03

  I get really excited. I mean, it's interesting, you have to be a little bit contrarian to do what we do, but you have to also actually be a little bit optimistic when other people aren't optimistic. And so you take a bad situation, you say, "Hey, this is how we're going to make it good." And sometimes we're actually, you know, especially in our private market investments, we're applying the elbow grease, we're making the management changes to make it better. In our public market investments, we're serving on creditors committees and often bringing in a new management team to do that, repositioning a business, sometimes selling off subsidiaries that don't make sense for them to have, that can't afford to have anymore. And so, yeah, it does feel satisfying, you know, three to five years later to look at that and say, "See how this is perceived today compared to how it was perceived when we got involved in it." You know, we were among the only people who, you

• 25:17Speaker 03

  know, figured this out at the time, or we figured it out first, or whatever it is. So, that, you know, I sort of, as I just said, like, that's part of the enjoyable part of this job. Some of the psychic benefit is being first or among the first to figure these things out.

• 25:33Barry Ritholtz?

  So, so last crisis questions, and it might have predated you because you probably were still in school during this, but before the dot com implosion in the late 90s, we had a series of credit problems. First was the Asian contagion with the Thai bot crisis. Then we had the Russian ruble default, and then long-term capital management was the direct result of, of the Russian default. What was your experience during those periods? Or is that really early history to you?

• 26:05Speaker 03

  Nah, I mean, it's, it's, it's literally right when I started, right? So I started at Davidson Kepner as a summer intern in May of 1998. And so the Russia crisis and the long-term capital crisis were August or September of 1998. By the way, thank goodness they liked me at Davidson Kepner and were willing to give me a job because it was a very tough job market in the fall of 98.

• 26:25Barry Ritholtz?

  I'm sure.

• 26:26Speaker 03

  Dealing with those particular things. The Asia contagion, I think, was more 97. And so we, we, I saw parts of it. I mean, that was also a learning lesson. People made a fortune in Asia. We just weren't equipped to do it at DK. We looked at a few things, and what we figured out, which was right, was we couldn't invest there unless we had boots on the ground and a real knowledge base. And so we didn't. And so folks like Goldman Sachs made a fortune in that era. Those are lessons I corrected later on, where we sort of built boots on the ground in places around the world to take advantage of opportunities as they emerged. But I learned that from Asia in terms of what we weren't doing. But look, I mean, I was on a trading desk when the world was falling apart in August of 1998. And, you know, I've told this to some of our younger people over time, like, the

• 27:08Speaker 03

  best time to be on a trading desk is when you have no responsibility, right? So it's not your fault that things are going bad, and you just learn from it, and you watch the people around you. And I remember how cool and calm and collected everyone was in the face of, you know, dramatic adversity. And, you know, that was super helpful to me when I was dealing with those seven or oh eight or things that happened after the fact. And so, you know, I quite enjoyed having that, that opportunity.

• 27:33Barry Ritholtz?

  Huh, really, really interesting.

• 27:35Speaker 00

  At KKR, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance, and sports, KKR has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. KKR, Understanding What Matters. Visit kkr.com/whatmatters.

• 28:07Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Millions of Americans are taking peptides, short strings of amino acids that can act as biological signals for cells. Peptides like insulin can occur naturally in the body, or they can be synthetically introduced to induce a biological process, as happens with semaglutide, the active ingredient in Ozempic. Now Bloomberg's Annika Inamputi reports peptides may be exploring their next frontier: the brain. People are taking peptides for mental clarity and cognitive benefits as alternatives to psychiatric medications, and to gain a competitive edge or stave off the effects of aging. Both insulin and semaglutide are approved by the U.S. Food and Drug Administration.

• 28:51Speaker 01

  Because importing or selling unapproved peptides for human use is not legal in the U.S., many people turn to online forums for guidance and overseas vendors with questionable credentials to obtain them. Unapproved peptides, which are marketed as research chemicals, have been circulating in what's become a billion-dollar gray market amid the rise of do-it-yourself medicine as people increasingly turn to social media or artificial intelligence for medical help. Doctors warn against self-experimentation and advise talking to providers before trying any new therapies. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 29:30Barry Ritholtz?

  So let's talk a little bit about a piece that you and the firm put out titled, "The Party Is Just Getting Started." Discuss.

• 29:40Speaker 03

  Sure. Well, you know, it's interesting. This is something that I reflected on last year. And so the general subject of "The Party Is Just Getting Started," which is a white paper that we put out recently, is about the role of absolute return in a portfolio. And the reason I reflected on this is if you go back to the start of my career, so the 1990s and the 2000s, you would have relied upon absolute return strategies to be a volast in your portfolio and a diversifier in your portfolio. But you also would have relied upon To get you home in terms of the overall portfolio objectives, right? So if you look at a typical allocator, right? They've got a 5% spend rate and they want to earn something plus inflation over that. So many allocators are shooting for kind of higher single-digit rate returns,

• 30:25Speaker 03

  7% or 9% depending on the institution and the needs. And in the 2000s, when I started my career, was the first partner at Davidson Kepner, that would have been the expectation of absolute return, was that you were going to earn high single or lower double-digit rates of return in the strategy and be a diversifier and have low volatility. There were other, you know, strategies within absolute return that might have had higher return and higher volatility expectations, but that would have been the base expectation. So what happened, right? You had a period of time with 15 years roughly of 0% interest rates. The longer that period went on, the more and more returns got reduced in the area. I would say by 2020, when the pandemic hit, and allocators' expectations for absolute return strategies

• 31:10Speaker 03

  would have just been to be abolished against their portfolios. And what I mean by that is, we need a bolus, we need a volatility dampener. We're going to use absolute return for that, but we expect to earn our quote-unquote "real" returns off of our equity strategies. So whether that's public equities or private equities, or maybe if you're a little bit more adventurous, growth equity or venture capital, and you pair those two things together, you'd have a great portfolio. So you fast forward to 2024, I think things are very different today. And we wanted to figure out why. I mean, absolute return strategies collectively had their best year in a very long time last year. I think they're off to a very good 2025 as well. So why is this happening? So is it just rates? And so you're unquestionably in a period of higher rates today versus what you were in the 2010s, but it's not just rates.

• 31:55Speaker 03

  It's actually dispersion. And so what we did is we looked over long periods of time, and there's a high correlation between dispersion and markets and higher rates. And so not only do you get the benefit of a interest rate premium today compared to what you had four years ago, but you actually get about 50%. It's a touch more than that expectation of return above the risk-free rate today because of where dispersion is in markets. Dispersion exists in both credit markets and equity markets. So it's in both those strategies. And that's why you're getting better performance and absolute return. We think the rate story is here to stay, but even if it's not for a period of time, even if you have the short-term rate go down ultimately, we think that dispersion is going to last

• 32:38Speaker 03

  for a long time, which is kind of what happened in the 2000s as well. And so, again, you have a whole generation of allocators who are trained for absolute return to serve one role in their portfolios. And we actually think it serves a second role in their portfolios as well, which is a return driver. And so, you take those two things together, we think it's a really powerful asset class. And I wrote this paper because I just don't think there's been a lot of work that's out there on it. You see headlines about people getting more interested in absolute return or hedge funds. Again, you see other headlines that there's not a lot of capital available for the strategy because many allocators are over-allocated to private equity or growth equity or venture capital, and they don't have the illiquid capacity for it. But I think for those who do, who are interested in it, they're getting rewarded for it right now. And so, that's the root of the paper.

• 33:22Barry Ritholtz?

  So I'm fascinated by so many aspects of that. One is, you brought up ballast. And when I think of what's typically been the ballast to offset volatility of public equities, it historically has been bonds. But once yields went down to practically nothing, the question was, what's going to take up that role? I know a lot of people just said, all right, go 70-30, and the equity will make up for the performance, but not for that offsetting diversified ballast. Is it distressed credit? Is it absolute returns? What is filling that role going forward?

• 34:04Barry Ritholtz?

  And then we'll talk about how the higher rates have changed the calculus somewhat later. But what is the new ballast today that used to be bonds?

• 34:14Speaker 03

  Well, I mean, again, I'd start out with like, I think absolute return can play that role. So opportunistic credit can be part of a absolute return strategy, whether it's accessed in public format or private format. Some people put opportunistic credit in larger, what they would call private credit buckets as well. But I do actually think that absolute return will eliminate the rate risk portion of things. You know, I mean, bonds are a ballast, except if they're not, right? So you go back to 2022, and 2022 was certainly the worst year for fixed income in 100 years. It may have arguably been the worst year for fixed income in the history of the United States. If you go back over

• 34:55Speaker 03

  very long periods of time and performance of bonds, you were basically down mid teens, depending upon what you owned, whether it was treasuries or investment grade or high yield or things along those lines. 2020 was not a great year for the equity markets either, right? So that was a year where people started to seriously question the 6040 or 7030 model with where things were. If you were an absolute return type strategies, you did much better that year. If you were an opportunistic credit strategies, you did much better that year. You protected capital, I think, at a minimum in those strategies, and that gave you more of a chance to take advantage of upside in 2023 and 2024. I mean, opportunistic

• 35:35Speaker 03

  credit has the additional advantage that it tends to be pretty inversely correlated in terms of when it does well to strategies like growth equity and venture capital. So again, those are like perfectly good strategies. I'm not like purpoing them. I'm just saying they're very cyclical in terms of making investments in those strategies. And so they actually pair very well with opportunistic credit in portfolios because typically opportunistic credit is doing well when those strategies are not doing well and sometimes face first.

• 36:01Barry Ritholtz?

  Right. And to put a little meat on that worst year in fixed income in 2022, the last time you had both stocks and bonds down double digits, I want to say was 1981, about 41 years earlier. So these things don't come along very often. But when they do, I would imagine event-driven opportunistic credit is a perfect offset.

• 36:24Speaker 03

  We completely agree with that. And also, you know, I think that it's tough to just do a simple 60, 40, or 70, 30 portfolio. I mean, maybe for very smaller institutions, that makes sense. But once you have some degree of sophistication that you can bring into your portfolio, it makes sense to have some alternatives of different sorts to balance out that risk.

• 36:45Barry Ritholtz?

  So you mentioned higher rates as an ongoing issue. It certainly looks like higher for longer is the Fed's posture, which raises the question, are higher rates a tailwind for absolute return strategies, especially opportunistic credit? Or are they a headwind?

• 37:03Speaker 03

  Well, I would say a couple of things. So first of all, we're in an environment of higher rates. It doesn't mean that we're in an environment of high rates, right? And so if you look at the 100, the nice thing about interest rates is you have hundreds of years of history you can actually look at in these things. And so if you look at the 100-year history of interest rates in the United States, I believe the 10 years, between 4% and 5%, right? So that's about where it is today. So you don't have a high 10-year today. You only have a high 10-year today compared to what people got used to from the late 2000s until 2021 in terms of rates of return. So first of all, I do think that higher rates is a tailwind for absolute return strategies in general. So that would include opportunistic credit strategies, it would include event-driven strategies,

• 37:47Speaker 03

  which we do. It would also include relative value strategies. So we've got some of that in our portfolio, but it's not the dominant strategy that we have because of the dispersion you have in markets in that period of time. I also think it's a really good tailwind for opportunistic credit specifically, but I give a little bit more of a nuanced answer to that. And in opportunistic credit, I think you need to go back to how we got here, right? So it's not the absolute rate of return in fixed income today that's interesting. It's the 16 months that it took from early 2022 for the base rate to go from 0% into the 5%. And obviously, it's come off of that a little bit since then. So most capital structures

• 38:29Speaker 03

  that are in the marketplace today were set entirely, or in some cases, You know, partially, but meaningfully, prior to 2022, when the base rate was zero. And when you're close to 15 years into a base rate of zero, companies were assuming, or people who owned assets were levering them, were assuming, and probably rightfully so, that the base rate would stay zero forever. And in fact, you know, it's one of those things where it's so easy to foresee with the inflation we had in 2020 and 2021, that the base rate was going to rise, but it still came as a shock to the markets where it actually rose. And so you're now in the middle of this, I think, several year period of time where owners of assets are like, hey, I got to actually raise money in my capital structure

• 39:14Speaker 03

  to delever. I mean, some assets are going to be, you know, need to be just fully restructured because they aren't worth what the debt is worth anymore. But there are many other asset owners who have assets who have equity value, maybe not as much equity value as they had previously, and they look at their capital structures, and you probably need to raise $20 to $40 of equity for every $100 of debt that you had before to delever your capital structure. And that's super interesting, because there's a lot of different ways companies can do that. They can do liability management exercises to try to whittle down the debt. They can sell assets off to, you know, get their house in order in direct corporate lending land, private credit land, they can just pick. They can say, hey, we're not going to pay you interest for a year or two, so just tack it on to the principal, and let's sort of try to fix the ship that way.

• 39:58Speaker 03

  There's a lot of different ways this can get solved for. And that's like the theme in opportunistic credit that we've been living the last couple of years, and it's a theme I think we're going to be living the next couple of years. And so I think it's super interesting, because unless you believe that rates are going to rise materially, like, there's no bailing out of this situation of these companies. It's just math in terms of where things are. And if you're an asset owner, you're going to play out your lower interest rate coupon to the very end. It's an asset, it's an asset that burns off. And so you're either going to try to be opportunistic and use that to get something from your creditors, or you're going to say, hey, we're just going to pay low rates for a while, and we'll see what things happen closer to maturity.

• 40:33Barry Ritholtz?

  Huh, really, really interesting. Who knew the mantra move fast and break things would be adopted by the Fed?

• 40:40Speaker 03

  Yeah.

• 40:41Barry Ritholtz?

  Right? That's more Silicon Valley. So I'm fascinated by, by the concept of opportunistic credit.

• 40:48Barry Ritholtz?

  You've been with Davidson Kepner for 27 years, 26 years, something like that. How has the DNA of the firm, when it comes to event-driven investing, evolved over that time? It can't be the same today as it was in the 1990s.

• 41:04Speaker 03

  No. I mean, so first of all, you know, I'm a believer in some of the truism of markets, which is that capital chases returns and returns become efficient over time. Like, there's no getting away from that. If you have an asset class and people are doing well in it, other people will show up in your asset class and eventually change the dynamic, right? That is what it is. We had a couple of strategic inflection points that I think were very helpful in our business. So the first of which was opening our international offices. So, you know, I mentioned earlier the fact that we kind of missed the opportunity set in Asia in the late 1990s because we just weren't staffed to do it. I'm a big believer, if you're going to invest in markets outside the US, you want local people with local relationships and local language skills doing that, right?

• 41:49Speaker 03

  You don't want it to just be a bunch of smart people in the room doing it from New York or London. We opened our London office, I don't know, at the end of 2000 or 2001, something along those lines. And we really invested in that, in that office. I mean, the story I like to tell is, we had a pretty good-sized office in London. I make a point of going, you know, four or five times a year. I showed up in early January 2009, which I remember because I remember seeing all the Harrods holiday ornaments for sale in the gift shop at the Heathrow Airport on my way home. And I go to see the old Merrill's, right? So Merrill Lynch had been merged into Bank of America at this point, but they were still there. And they said, "We just want you to know, you're the first American who's come to our office in four months."

• 42:29Barry Ritholtz?

  Wow.

• 42:30Speaker 03

  And I said, "Oh, my God. How is that possible?" And they said, "Well, you know, there's a lot going on in the US." This was right past the fall 2008, right? And I said, "You know what? There's an opportunity here." So we did a massive hiring spree in London over the next three or four years. And I said, "Okay, London..." Because, you know, all the stuff in the US had cracked, and in London, it hadn't cracked in the same, in the same way. And so the European opportunities came a few years later, but they came in big droves. And, you know, we followed the same playbook in Asia as well. We opened an office in Hong Kong in 2010. We now have smaller offices in Mumbai and Shenzhen as well to access the China and India markets. And that was a fantastic decision. Those markets are less efficient than the US is. Some of that's structural, some of that

• 43:15Speaker 03

  there's just fewer people trying to access those opportunities. You need to have local people, you need relationships, it's much more relationship driven. That was like one change that we made, that I think set us up for continuing to grow and survive and thrive as a firm. The second one I'd reference is our entry more seriously into private markets. And so if you go back prior to 2010, all the capital we had was sort of hedge fund structure capital, where it was reasonably liquid, maybe you had the small ability to do a side pocket, we generally didn't do that. And so you had to mostly stick to liquid securities in what you were doing. We thought there was going to be a really good opportunity

• 43:57Speaker 03

  in buying less liquid, longer duration opportunities, where you might own assets for four to six years, let's say, versus things that were mark to market on a daily basis. And we thought there were things that you could do to those assets to improve them over time. This was sort of the first wave of bank selling that probably came to the US in the 2008 to 2011 timeline and probably came to Europe in the 2012 to 2015 timeline. So we had our first sort of private equity style strategy to do opportunistic credit, which launched in 2011. And even though the opportunity to buy from the banks ultimately dissipated, what we discovered was as private markets grew, this just became a bigger and bigger opportunity. And so this has really been a substantial portion of the growth of our

• 44:42Speaker 03

  business in the last 15 years is being in private markets and being in opportunistic credit in private markets led us ultimately to being in asset-backed lending, led us to being in real estate as well, which is a big strategy for us with opportunistic credit. And I think it's really important to have both tools in your toolkit. There's this term for technology investors, which is crossover tech investors, which is basically investing firms like COTU or Tiger Global that have both big public market and private market I wanted to be a crossover credit firm. And by that, I didn't mean between high yield and IJ. What I meant was between public markets and private markets. Because I think you learn a lot being in private markets. That's helpful for public markets. And I think you learn a lot as a public markets investor. That's helpful for private markets as well. So it's very complimentary.

• 45:27Speaker 03

  And especially if you can have both pools of capital in one place. And you can kind of toggle how you spend your resources between public and private markets. It's just super helpful. And so those are maybe two of the bigger things that we've done as a firm in the last 25 years to really help us to thrive where the world is in 2025 versus where it was in 2015 or 2005.

• 45:51Barry Ritholtz?

  Really, really, really interesting. Leads to a question. You're the perfect person to ask this because whenever we talk about what's going on in Europe and the UK, especially Brexit, you sort of get an academic answer from a distance. You have a major presence in London. You've been there for the past decade and a half. Tell us a little bit about the opportunities you see on the continent and in the UK. And how much has the Brexit affected the dynamic, not just London and the UK, but in Europe overall?

• 46:28Speaker 03

  Yeah, I think there's a lot of different things going on in Europe. So first of all, Europe tends to be a lower growth economy structurally than the US. I think there's a couple of reasons for that. One is regulatory, but the second one really is the country by country nature and how things operate. I mean, overall, it's a giant market. But when you break it down and you've got Italian companies and French companies and German companies, that's just much of a less efficient approach. There obviously are some multinational companies in Europe, but it's maybe a smaller part of how things work over there. And so while I'm not sure I'd want to be a tech investor in Europe, I'm super happy to be an opportunistic credit or an event driven investor there because these are really very deep value markets in terms of where you're investing.

• 47:13Speaker 03

  In terms of the specific impacts of Brexit, I mean, so first It's not been great for the UK in terms of where things are. I keep thinking they're going to turn it around at some point, but it's been a tough seven or eight years there in terms of the economy and the need really for the human capital that they've lost and maybe have a harder time attracting as a result of where Brexit is. In the continental markets, it's really a country by country scenario. And so I look at markets like Greece or Portugal or Italy, and they've actually proven to be really strong markets for us. And those are markets that folks, particularly a pond away, often shy away from because it's

• 47:56Speaker 03

  complex to be there. They don't know how business is done. They have certain assumptions about the markets that maybe aren't always true. And then people have assumptions about the Northern European markets that also aren't true. I mean, Germany's in a very hard spot right now. There's no getting around that. Again, I've got confidence it will turn around over time, but I do expect there'll be a lot of opportunities there between now and now and then. And there's definitely a big macro lens over Europe as well in terms of what can happen in Europe over the next five years, which is not just related to Brexit, but maybe related to some of the geopolitical forces that are in play in 2025 as well. We like complexity, like we seek out complexity, like when there's

• 48:37Speaker 03

  very few buyers of assets or people willing to lend because, you know, you have to sort through a lot of stuff, like even just the complexity of understanding how different restructuring laws are in Spain versus Portugal, right? Like, that's super helpful for us in our strategies. The fewer people can be involved in assets, the better it is for us. And Europe creates those opportunities. And so it continues to be a fruitful area for us. But if folks in the United States don't want to look at it, that's okay.

• 49:06Barry Ritholtz?

  I totally get that. It's funny because on the equity side, I don't know, for the past five years, maybe even longer, 10 years, people have been saying, US is pricey, Europe is cheap, now's the time to move money from the US public equity to Europe. And that trade hasn't worked. You arguably, European stocks are cheap for a reason, and US stocks are expensive for a reason. What do you see on the credit side? What do you see on the private side? Do you run into similar valuation issues? Or the math is the math, and when the opportunities arise, it doesn't matter?

• 49:44Speaker 03

  Yeah, I mean, look, I don't necessarily expect a valuation premium for Europe, but I get it. Right? So I think we can earn more money on our comparable European opportunities than we can on US opportunities. And maybe some of that's getting paid for the complexity and the things that we're speaking about in terms of how we do that. I do wonder in the equity side, if you take out tech, if there's really such a valuation gap. I mean, it's something like half the market cap in the US is tech at this point. When you look at the S and P, that's not to say I'm in Europe, right? There's very little tech industry. So I do think the tech separation is a big part of the US versus European separation. For better or for worse, you don't do a lot of technology-related investing in opportunistic credit. You get some chances sometimes. Tech companies are not often great for opportunistic credit.

• 50:25Speaker 03

  Perhaps software will be different if there's often, if there's ultimately a crack in the software world. Excuse me, but I would say that, you know, in the sectors that we invest in, which is basically everything else, you know, we are getting paid a premium to invest in Europe for the reasons that we, that we said.

• 50:44Barry Ritholtz?

  So you've recently transitioned to becoming executive managing member. That goes back to the pandemic after, was it Davidson or was Kempner who retired?

• 50:56Speaker 03

  Yeah, I became our executive managing member with Tom in 2018. And then Tom formally retired on January 1, 2020. So I became the sole, the sole head of the firm at that point.

• 51:05Barry Ritholtz?

  What was that transition like because your chief investment officer, I got to imagine 35 plus billion dollars and how many employees are you guys up to?

• 51:14Speaker 03

  It's about 500.

• 51:15Barry Ritholtz?

  I mean, that's no small task to run. How do you balance the two? What was that transition like?

• 51:22Speaker 03

  Well, you know, I'm very fortunate in the sense that the transition with Tom and I took place over many years. And so I'm actually the third managing partner of Davidson Kepner. Marvin Davidson was the first and Marvin Davidson ran DK for about 20 years before Tom took over and then Tom did ran DK for about 15 years. I was there for the last five years of Marvin's running the firm. And so I got to actually see two models. I got to see Marvin's model and Tom's model, which were very different from each other. And then I was the deputy managing partner for several years before becoming the co-head with Tom for two years. You know, Tom was very focused on succession and leaving the place in better shape than he got there with, so to speak. And that's super helpful. I got a lot of calls because we're now third generation and running the business about

• 52:07Speaker 03

  how you do this. And my first thing I say to people, which is sort of a joke, but it really isn't, is the person in front of you has to want to retire. Like that's step one. You know, if transitions don't go well, if the person who's leaving doesn't actually want to retire, I was very fortunate, Tom actually wanted to.

• 52:22Barry Ritholtz?

  That's what the chairman emeritus is for.

• 52:24Speaker 03

  Tom actually wanted to retire and do, and do other things. I mean, there's things you learn along the way. I mean, again, I wouldn't have wished a pandemic upon anybody, but it was sort of sink or swim, right? Because, you know, it was two months in, the markets were falling apart. No one wanted to be in the office in early March of 2020, right? For reasons that obviously became pretty clear soon afterwards. And how do you make that all work? How do you get everyone on the same page? How do you broadcast your message out? How do you make sure that things that are happening in the portfolio are happening in a way that you want them to happen? How do you empower people when everyone's sitting in their home or whatever? So we rode through the pandemic and we learned a lot. But I did have, you know, 20 plus years of training to do this.

• 53:06Speaker 03

  And because I've only been at one firm in my entire career, like I didn't have the benefit of being CEO somewhere else, but I had the benefit of really knowing Davidson Kepner cold. And that probably. To be the biggest advantage.

• 53:16Barry Ritholtz?

  How do you maintain a corporate culture when everybody's working from home and you have people in how many different cities around the world?

• 53:25Speaker 03

  So we have seven offices, although, you know, two of those offices are quite small, sub 10 people. And another two of those offices are, you know, three of those offices.

• 53:35Barry Ritholtz?

  But it's still far flung, different time zones.

• 53:38Speaker 03

  It's far, it's far flung. So first of all, like when you go from 15 people to 500 people, you have to understand there's parts of your culture that you're going to maintain. And there's parts of your culture that you're not going to maintain. So for example, when I got to Davidson Kepner, every time it was someone's birthday, you get a birthday card signed by the whole office and you get a cake, right? And so we have kept the cakes, but we got rid of the birthday cards at some, at some point, right? We have brought in different things over the years to speak to what our workforce is today, not what our workforce was 10 or 20 years ago. So the example I gave is when I got to Davidson Kepner in the 1990s, I feel like our workforce mostly cared that we had clients, right?

• 54:20Speaker 03

  And by 2008, 2009, they didn't want too many of the clients to be fund of funds, just because fund of funds weren't doing very well at that period of time. That was a transition where more and more investors in absolute return strategies were investing directly. Obviously, there are still a few allocators that are out there of scale in that world. And then by the mid 2010s, people wanted to know not only that we had clients, but what public good are we doing, right? So we instituted a program called DK pledge, right? And it was a way that people could learn a little bit about what our clients did, you know, so where the returns went to, you know, a lot of our clients are endowments or foundations or pension funds or people who are doing real good. And even our high net worth clients, many of them have big philanthropic arms that are doing very good things with the returns that we generate for them as well. But it was also a chance for our employees to give back to charities,

• 55:04Speaker 03

  bring charities into the organization. So I don't know, we've given away like $6 million that I think had a thousand different organizations. We've impacted 2,500 hours of volunteer time. That's all stuff that came from like thinking about where our workforce was today. It's not to say that our workforce wasn't very philanthropic in the 1990s and 2000s. It actually was. It's just people did that more outside the office. And by the mid 2010s, our people wanted more of an integrated experience where they could do things that were philanthropic while doing their day jobs, right? And so you have to just kind of keep a pulse to where people are today. And I've tried to really do that in terms of my role. You know, again, the place isn't going to be exactly the same. In terms of how do you

• 55:45Speaker 03

  keep people in seven offices, like singing from the same page, there actually were really good learning lessons from that in the pandemic. And by the way, I did my best to get people back in the office as soon as humanly possible. We returned to the office, I think, well before many of our peers did. That was important to me in terms of continuity of the teams and keeping the culture. But I started doing a biweekly email to the entire firm during the pandemic. And I did that because that was the best way to communicate with people. We did some videos and things like that, too. But I wanted something in writing, and it was a combination of pep talk, firm news, sometimes some market insights. I'm not sure I've got amazing market insights every two weeks, but over time, I certainly do, right? And when I really had something to say, I would,

• 56:27Speaker 03

  I would say it. And we've kept doing those even through today. It's become like a hallmark of our firm. We get very good internal feedback on that because it was important to me. Like I said, that's the way everyone knows they're going to hear from me every couple of weeks, no matter what.

• 56:39Barry Ritholtz?

  Huh, really interesting. Last DK question. So you've been there for 27 years. Kind of unusual these days. Not many people have that sort of longevity with one firm. Tell us what's kept you at Davidson Kempner this whole time.

• 56:55Speaker 03

  Well, I'm very fortunate. You know, I sort of joke, I show up at my college reunions, right? And if I'm not the only person who's been at one firm the entire time, it's virtually, I'm virtually the only person who's done that. I got very fortunate, right? And I got very fortunate that I happened to find people that I really wanted to work with in an industry that I really liked that was growing, right? And so I think if you hadn't had any one of those three factors aligned, like, you know, possibly I could have stayed, but if there wasn't going to be growth in the industry, I wanted there at least to be growth for me, right? I still wanted to be doing different things at a more senior level 27 years in than where I, where I started that. But fortunately, all three of those things did align. Look, there's real human capital you

• 57:38Speaker 03

  get by being at a place for a long time, right? I mean, you don't, you don't want to be somewhere for a long time just because of that. But the reality is there are switching costs that you have when you leave roles. And so I was very fortunate that I was able to grow with the organization. And I'm very fortunate that I enjoy what I do.

• 57:54Barry Ritholtz?

  Huh, really, really interesting.

• 57:58Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Millions of Americans are taking peptides, short strings of amino acids that can act as biological signals for cells. Peptides like insulin can occur naturally in the body, or they can be synthetically introduced to induce a biological process, as happens with semaglutide, the active ingredient in Ozempic. Now Bloomberg's Anika Inamputi reports peptides may be exploring their next frontier, the brain. People are taking peptides for mental clarity and cognitive benefits as alternatives to psychiatric medications and to gain a competitive edge or stave off the effects of aging. Both insulin and semaglutide

• 58:39Speaker 01

  are approved by the US Food and Drug Administration. Because importing or selling unapproved peptides for human use is not legal in the US, many people turn to online forums for guidance and overseas vendors with questionable credentials to obtain them. Unapproved peptides, which are marketed as research chemicals, have been circulating in what's become a billion-dollar gray market amid the rise of do-it-yourself medicine, as people increasingly turn to social media or artificial intelligence for medical help. Doctors warn against self-experimentation and advise talking to providers before trying any new therapies. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 59:21Barry Ritholtz?

  Talk a little bit about the rise of alternatives and why this has become one of the hottest parts of the investing world for really more than a decade, certainly since the Fed took rates down to zero. People started looking around. DK has a variety of different strategies. Let's start with distressed investments. Tell us a little bit about the work DK does in distressed investments and why do you think this space has such legs?

• 59:51Speaker 03

  You know, I would say a couple of things on, you know, we could call it distressed investments, we can call it opportunistic credit, it's probably some combination of the two things. And so for Davidson-Kepner, you know, we're actively investing in both public and private markets in terms of distressed debt or opportunistic credit. So we're buying public securities that have declined in price, or where the people have questions as to whether companies can mature their debt. There can be all sorts of different reasons that things are trading down, and that's one strategy. We also have a very active strategy where we've got more private equity style capital, where we can basically take control of assets, fix them, sell off divisions, add things, you know, et cetera. Those are typically more like four to six year type of investments, and we're able

• 1:00:34Speaker 03

  to do this, you know, across different asset types. So we've got a big business buying real estate, we've got a big corporate business. You find a lot of things like liquidations that don't necessarily fit into any one neat category. Occasionally sovereign debt's not a big part of our book, but every once in a while, we've got a big involvement with the sovereign as well. And I would say a couple of things about that strategy and why people are attracted to it. So number one, the outright rates of return that you can earn on strategies like that, I think are compelling compared to many things in the market over time. But they also are very good diversifiers in portfolios. And so like, why are these strategies attractive to allocators? They're attractive to allocators because you can achieve your overall objectives just being in the strategy. Most people are not,

• 1:01:15Speaker 03

  obviously. But you can also do it in a way to diversify your overall portfolio. And not only does it diversify your overall portfolio in terms of when you earn rates of return, i.e. these strategies tend to do better when other strategies aren't doing well. It's sometimes when capital is returned to you, too. So, you know, we did some work a couple of years ago, we actually published a white paper on this in 2023, where there's actually an inverse correlation between when opportunistic credit funds return capital to their LPs versus when growth equity and venture capital funds return capital to their LPs. And that kind of makes sense intellectually. So if you're, you know, an allocator, you probably don't want to only have growth equity and venture capital funds in your portfolio. I think the allocators who had

• 1:02:01Speaker 03

  Too many of those have, some of them have learned that the hard way in the last couple of years. Those are strategies that manifest themselves over a very long period of time. But if you've got a mixture of both strategies in your portfolio, that's a much more powerful way to earn returns.

• 1:02:13Barry Ritholtz?

  And when you talk about distressed assets with sovereign nations, I'm imagining that it's not so much the sovereign that's distressed as whatever investing fund is the holder of that debt, or am I misreading that?

• 1:02:29Speaker 03

  Well, look, I mean, you know, these are all public names, so whether it's, you know, Greece, or Argentina, or Puerto Rico, there's a number of different sovereigns that have gone through restructurings of different sorts over the last several years. There are certainly times when holders of debt that's at least linked to municipalities, you know, may want to sell, and there's sort of forced selling because of that. But I'd say more, you know, credits are credits, right? There's only so much that any one person can borrow, any one entity can borrow. And so, you know, there've been reasons you've had to restructure. Greece has been an incredibly successful restructuring. The Greek economy's booming right now, right? So that would be an example of one. And they don't come very often. It's not a very big part of our business, but they're out there in terms of things that people have invested in.

• 1:03:11Barry Ritholtz?

  And you mentioned public securities. I'm curious, are you buying equity in distressed companies, or are you buying the debt, or some combination, when we're talking about publicly traded firms?

• 1:03:22Speaker 03

  It's a combination. I would say the supermajority of what we're doing, certainly in the public markets, is credit, and it's not equities. But there are occasionally times where credit will lead us to the equities. Another strategy I will use sometimes is I may put a tail of equity onto a larger position in credit. You know, often, the credit and the equity move the same way. Not always the case, but it happens frequently enough. And so if you like a credit, you know, a tail of equity, my theory is if it doesn't work, you've just spent some of your coupon on sort of equity optionality. If it does work, you can really juice your return. So, again, not something we do in every time in all the situations. Many of the companies we invest in public credit actually are private

• 1:04:04Speaker 03

  companies, so there's no opportunity to do that in those, obviously. But every once in a while, a credit opportunity. will lead us to an equity opportunity.

• 1:04:12Barry Ritholtz?

  And you've mentioned also that you're expecting some form of an M and A revival. Let's talk about that. Is this structural because we've gone through such a long period of low rates, not a lot of M and A activity and some administrative hostility to big mergers? Is this the politics of the moment? Or is it just, hey, it's been so long since there's been consolidation and we're due?

• 1:04:39Speaker 03

  Well, I put it into two categories. And so I've now been at Davidson-Kepner long enough that I was at DK for multiple Democratic and Republican administrations prior to the Biden administration. And in most administrations, the people who are setting the antitrust policy are career professionals. It's a science, right? There's a lot of math behind the science. It's something I studied in law school. I'm sure you studied it in law school as well. And so my take was that the decisions would mostly be the same with a Republican or Democratic administration. And then a couple of times in administration, they'd make a case in something that they really thought they wanted to go after. So, you know, there were some prominent cases in both the first Trump administration and the Obama administration in that regard.

• 1:05:21Speaker 03

  The Biden administration tried to change the antitrust laws and they tried to use the laws as deterrents in terms of people doing mergers. And it was actually very effective in that regard because, you know, if you're a corporate CEO or you're a board and you think you're going to get stuck in 18 to 24 months of litigation and your merger may not go through, you might just choose not to do the merger, right? And so you fast forward to 2025. It's not totally clear what the new antitrust regime is going to be, but all signs are it's going to be much more accommodating to mergers. Maybe not in every industry. I'm not sure this is true in big tech, but in many other industries as well. And so you've got a number of management teams and boards that we think have been sitting on the sideline. And then, you know, people need to find growth, right? And M and A is sometimes an easy way for

• 1:06:05Speaker 03

  people to find growth in their businesses. There are a lot of businesses that deserve to be consolidated or should be consolidated. And, you know, the financing markets, I think, are very amenable to it, right?

• 1:06:15Barry Ritholtz?

  A lot of pent up demand?

• 1:06:16Speaker 03

  A lot of pent up demand, a lot of demand for new debt to finance. Acquisitions for sure because there's a huge amount of demand for performing debt in general right now. So in my mind, this is probably a US centric story first and foremost. You may see some in Europe, but I think you're going to see a lot more in the US. I don't know if it's two months into the administration or 10 months into the administration, but I think it's coming. And these things tend to have positive effects, like the more M&A you get, the more M&A you'll have because all of a sudden, if you're in an industry and two of your competitors have done a deal and you haven't, you're behind and it could actually endanger your franchise. And so there's a reason why the M&A comes in buckets in terms of like specific industries. And so, once that like flywheel effect happens, I think

• 1:07:00Speaker 03

  you'll see a lot more of it. So that's my viewpoint on where M&A is heading in 2025.

• 1:07:05Barry Ritholtz?

  So let's talk about real estate. It's certainly been tumultuous and you've mentioned dispersion earlier in equity and credit, wide range of different real estate opportunities. How are you looking at the space? What are you seeing in terms of credit and especially distressed and opportunistic credit?

• 1:07:24Speaker 03

  Yeah, so I would say a couple of things. First of all, we take a very opportunistic approach into how we invest in real estate. And so, we don't limit ourselves by geography. We primarily invest in the US and Europe, but we're willing to invest across those two areas. And we don't limit ourselves in product type. And so, we're happy to invest in self-storage or industrial or data centers or residential or whatever it is that we think provides the best risk return in a given country. Many real estate investors don't invest that way. Many real estate investors specialize in a country or they specialize in a sector. I think that's hard. I mean, if you look at the last 15 years, right, and you were to go back, you know, I don't know, 2010, right? So I think retail assets and office assets

• 1:08:09Speaker 03

  would have been perceived much better in 2010. And I think that data center assets and industrial assets would have been perceived much worse in 2010, right? So, just like there's, I don't have a mathematical answer for this, but just like there's substantial dispersion in performance in equity and credit markets, I think there's actually substantial dispersion in performance in real estate markets as well. Geography too, by the way, there's geographies that have been big winners and geographies that have been big losers. And so you could have been the best office fund manager for the last 15 years and it's been a really hard place to make money. Right. And so we try to take that out by investing across these areas. So the benefit of doing opportunistic real estate investing, and I don't just mean across geography or product type within real estate,

• 1:08:51Speaker 03

  but I mean, buying into assets that other people don't want to own is real estate markets have gotten hit much harder by the rise of interest rates, even than corporate markets have, you know, corporates at least, there's been some growth, right? So real estate, much less growth in terms of rents in most of these areas, data centers and industrial would be an exception to that. And the covenants in real estate debt are much less forgiving than they are in corporate debt. And the term of the debt is much shorter in real estate debt than it is in corporate debt. And so the crisis in real estate is like here and coming very quickly compared to maybe corporates, where companies in some cases have a little bit more duration, a little bit more time to try to solve their problems. And so, you know, for us, real estate is a very interesting asset class. It's an asset class many people avoided in the 2010s with rates where they were.

• 1:09:36Speaker 03

  I think there's a lot more allocator interest in it than there was previously. There's different approaches, there's different ways to win in it, but we think it's very worthy of our attention.

• 1:09:44Barry Ritholtz?

  You mentioned it has been fun to be a manager of investments in office space. Outside of the super A's, everybody else seems to be struggling.

• 1:09:58Barry Ritholtz?

  You look over at Hudson Yards, a giant layout of capital. Generally speaking, the castle card swipe tracking is still showing we're 50, 60, 70% back to return to office. I remember after nine 11, all of lower Manhattan was, it was just a boom in converting office space to residential. Seems like you kill two birds with one stone if we do that in Manhattan and elsewhere. Is that a viable opportunistic space in real estate? Or is it just building by building, case by case?

• 1:10:34Speaker 03

  It's, it's building by building, case by case. There have been some issues in New York. I think actually we're in among the best positions of any. Cities in the US in terms of

• 1:10:42Barry Ritholtz?

  Really?

• 1:10:42Speaker 03

  Oh, yeah.

• 1:10:43Barry Ritholtz?

  That is not the general consensus.

• 1:10:45Speaker 03

  You go to Chicago or you go to San Francisco. Some of these places, it's it's still a ghost town. You know, we have many more people coming to the office here because there's a vibrancy to New York than New York has.

• 1:10:56Barry Ritholtz?

  You know, every time I every time someone tells me New York City is dead, I'm like, have you been here recently?

• 1:11:00Speaker 03

  Yeah.

• 1:11:00Barry Ritholtz?

  Well, I'm like, it's you can't get reservations. Broadway plays are sold out. Torsten Slak actually tracks Broadway. It's back to above pre pandemic levels. Like every time I hear about the death in New York, it's always from people who haven't visited in a decade.

• 1:11:17Speaker 03

  Yeah, no, I'm very fortunate that I get to go to most of the major cities in the US on a regular basis. And so I get to see it with my own eyes and I agree with you 100%. Look, it's building by building because office conversion to residential is not so easy.

• 1:11:31Barry Ritholtz?

  It's hard, especially some of those 60s and 70s buildings where there's no windows.

• 1:11:36Speaker 03

  That's that's what I was gonna say as a starting point, right? So a lot of office buildings are square and a lot of residential buildings are rectangle. And it's because there's this rule that we have in New York City where I think every livable room has to have a window in it. Right? And so very hard to put a window in all the square floor plan rooms, right? You went up with a huge amount of square footage in the middle of the building that eventually becomes unusable.

• 1:12:01Barry Ritholtz?

  Right?

• 1:12:02Speaker 03

  And then it's a huge cost to retrofit, right? So in many cases, you're actually better just tearing the thing down and starting over.

• 1:12:08Barry Ritholtz?

  Wow.

• 1:12:08Speaker 03

  But if you look at the price that loans trade at, most of them don't assume you're doing that, right? So you're not buying them for land value or things along those lines. Maybe occasionally get that opportunity, but it's not regular. So you have to kind of pick your spots. It's not to say there aren't conversions that that makes sense. There definitely are some of those, but I don't think it's the majority of situations. And so, you know, you do, and it really is the 60s and 70s buildings that are the ones that are in trouble. Because, you know, I think about like Midtown East where we are right now. It actually isn't so easy to get space in Midtown East.

• 1:12:38Barry Ritholtz?

  Oh.

• 1:12:39Speaker 03

  Right now, because guess what the Plaza District, which is what it's widely called, is like a super popular place to be. Not everyone wants to be in Hudson Yards, no offense. And so if you want to be in this area and you want office space, there's only so much of it. Right? And by the way, because rates are high and people are down on office, they're not building a lot more of it, and it's super expensive to build more of it. I mean, the cost of what JP Morgan's doing on Park Avenue in the 40s is astronomical.

• 1:13:02Barry Ritholtz?

  Right.

• 1:13:02Speaker 03

  And so not everyone can afford to do that or wants to invest in that. And so if you want to be in the area, actually, people are rapidly running out of space. That's not true for Class B buildings, right? Class B buildings, you can't give them away in terms of where the space is. And so, you know, you may have, you know, eventually the market will come to equilibrium, right?

• 1:13:18Barry Ritholtz?

  But it has, you brought something up that I'm kind of intrigued by. The market has yet to price out a lot of these buildings as only worth land value. They're still valuing as if, hey, we're going to have a 75% occupancy rate for the next 30 years. What's it going to take for that mispricing to get more in line with what's going on on the ground?

• 1:13:42Speaker 03

  You know, my experience with private assets in general is eventually buyers and sellers find each other, right?

• 1:13:47Barry Ritholtz?

  Eventually.

• 1:13:48Speaker 03

  And so, you know, that usually is more pain for the sellers and usually buyers getting a little bit more realistic about how cheap they're going to buy things. And by the way, it's also banks and owners of assets, right? So, you know, the other thing is institutions don't like to sell assets at a discount where they're marked at them, right? And so the first place is for marks to get correct, right? So whether that's real estate funds and their marks, or whether it's banks and their marks, you know, once things are marked down at levels, they can sell the loan at a profit, they're much more likely to get sold. And that just takes time. I mean, that could take years in terms of where it is.

• 1:14:18Barry Ritholtz?

  Really? Wow, that's quite amazing. So we've covered opportunistic credit, we've covered M&A, we've covered real estate. I have to get into the world of acronyms. You have to explain to me, what are LMEs and PIKs? I don't know how you pronounce either.

• 1:14:35Speaker 03

  So, LMEs are liability management exercises.

• 1:14:39Barry Ritholtz?

  Liability, so if you're an insurance company or a more likely a pension fund, and you know you're going to owe out X 10, 15, 20 years from now, is...

• 1:14:49Speaker 03

  No, these are corporate issuers. So basically, if you look at corporate debt, right? So 90% of the debt that gets issued in leveraged loan markets and public markets has fairly light covenant. And so what that allows companies to do is basically have carve outs of baskets where they can offer to creditors a chance to exchange their debt for a smaller amount of debt that might rank ahead of you in the capital structure, right? So if you own a bunch of unsecured debt and they come to you and they say, well, you owe a hundred cents, but we're going to offer you 75 cents of, you know, debt that's got a higher coupon and it's higher in the capital structure than where you were. And so you almost are co-opted into having to take that agreement because if you,

• 1:15:31Speaker 03

  everyone else takes it and you don't take it, all of a sudden you've been primed by everyone else in your capital structure, even if it's only 75% of the amount. And so that's a very active exercise that's going on in, in public markets right now. Some of the companies have to do this because they really don't have any other chance to right-size their capital structures. Other companies are trying to do it opportunistically. They're saying, hey, if we can get something from the creditors for nothing, why don't we do that?

• 1:15:57Barry Ritholtz?

  What's the flip side of that? It sounds like the creditors, all right, they're getting secured where they might not have been earlier, but they wanted the higher yield and they're taking a big hit. Are they unhappy about this? Or is this just, hey, it's a risk?

• 1:16:11Speaker 03

  It depends on the creditors. So the term that gets used a lot, which I don't think is great, is creditor-on-creditor violence, right? So there's some of it that's driven by the companies and there's some of it that's driven by creditors and the creditors may say, hey, we're going to put some new money in alongside with that 75% and we're going to make sure we're first in line for that 75 cents or we're going to get paid first. And the other, you know, usually less than 50% of the capital structure that's not along with us, they're going to get less and then we're going to look even better than they look because we've gotten a better return on the same instrument than they have.

• 1:16:42Barry Ritholtz?

  Creditor-on-creditor violence. It's perfect.

• 1:16:43Speaker 03

  That's just a perfect phrase. Violence there. Well, you all may have invented it. I didn't invent it.

• 1:16:48Barry Ritholtz?

  I've never heard it before, but it's both perfect and amusing.

• 1:16:53Speaker 03

  So, you know, that's, that's one of the, the big themes that's going on in the public markets. In the private markets more, people are doing what's, so PIC is often called picking. It's payment in kind. And so, you know, if you're a direct corporate lender and there's, you know, there might be five people in your group or there might be 20 people in your group. They usually try to work together on things, although I think even the fabric of that is starting to fray a bit. And they may say, okay, company, you can't pay your debt. We're going to stay marked at par, so we're going to keep the debt at par, but we're not going to make you pay interest for the next year or two while you right-size your business, and we're going to tack that on to the principal. So if it's 10% coupon a year, you're not going to owe us 120 of principal, and during that coupon holiday, you're going to fix

• 1:17:36Speaker 03

  your business so the business is magically worth 120 at the end.

• 1:17:39Barry Ritholtz?

  Uh huh. So in other words, they waive their payment stream for that period, but they're not just taking that payment stream and tacking it on at the end. They're taking that payment stream plus, and it sounds like there's a little bit of a markup.

• 1:17:53Speaker 03

  Yeah, I mean, there's usually an additional amount of interest that you might get for picking versus paying cash pay. But fundamentally, that lender is marking it at par usually, or some high 90s price, because they're saying, hey, we're not getting this cash currently, but we're going to get it in the future. And so it's just part of the loan. And that's a different way of sort of achieving in private markets what is happening in public markets with liability management exercises. But it's been being done in a way where there's no mark-to-market. That only works if the loan is worth par at the end, at the new amount, right? So if the loan is worth 120 cents at the end of this, that's when that works. If the company isn't worth more, and often the companies might be worth less through the end of this process, you wind up with a loan that's got less value. If the company

• 1:18:35Speaker 03

  was worth 90 cents to begin with, instead of being 90 out of 100, you're 90 out of 120. So all of a sudden, what's left is worth 75 cents. And so it's a way to postpone problems for a few years. It doesn't always solve problems. Liability management exercises are a way to postpone problems for a few years. They also often don't solve problems.

• 1:18:54Barry Ritholtz?

  You guys manage a lot of different types of assets, both geographically, risk-wise, strategy-wise, public, private, equity, debt. How do you manage your risk across all these diverse strategies?

• 1:19:12Speaker 03

  You know, we have a framework where we look at individual strategies. And so there might be a different framework in how we manage risk in our convertible arbitrage strategy, for example, than how we manage risk in an opportunistic credit strategy. And then we try to look at risk across strategies. And risk across strategies is harder to measure than risk in individual strategies. I mean, some of it's obvious, right? If you have the same Qsips or positions in a public markets fund that happen to be in different areas, that's an obvious area that you're going to find risk. Industry concentration will be the second most obvious area that you're going to find risk. Things like how are each of our books going to perform during a COVID-type crisis or a GFC crisis? You stress test, but ultimately you don't know, right?

• 1:19:55Speaker 03

  Because there are different markets that do better than you think in different markets and worse than you think in different markets. And so it goes down to my basics. The thing with having a risk arbitrage business is it allows you to think about risk reasonably simply. The risk arbitrage mantra is what can you make if your deal closes? And that's a pretty defined amount of money. What do you lose if your deal doesn't close? And we're pretty good at calculating that. What's the probability of success? And then what's the probability that the market is implying with its price to success? And if you can get those four things right, it's basically like poker. You can underwrite everything, right? And ultimately, if you know your odds every time, you can win consistently over time. You try to take that mantra and you apply it everywhere else.

• 1:20:38Speaker 03

  Unfortunately, most other parts of our portfolio, there's several different scenarios things can go down. So I go back, and credit in particular. One of the questions we like to ask is what are all the bad things that can happen to us where we still get our money back, right? And that's how I sort of... There's trading risk and there's ultimate downside risk. And I like investments where you could really, really stress it and you're still going to get most of all your money.

• 1:20:58Barry Ritholtz?

  All right. So let me throw you one curve ball before we jump into our favorite questions. And that's you're chairman of the New York Public Library Investment Committee, you're vice chair of the Investment Committee at New York Presbyterian, and you also sit on the committee for Princeton's endowment. These are three very distinct sort of endowments. That has to be a fascinating set of experiences. Tell us a little bit about all three of those entities that you are either sitting on today or have worked on in the past.

• 1:21:28Speaker 03

  Yeah, so first of all, I'm very fortunate to be involved with all three great institutions. I serve on all of their boards of trustees. They're all institutions that are very near and dear to my heart for different reasons. The super majority of my wife and my philanthropy is in the education space. My wife served for a long time on the board of trustees of her alma mater, Bryn Mawr College. I'm very fortunate that I can serve these institutions in a way that they find helpful. They've all asked me to serve on their investment committees, which is why I've done so. New York Presbyterian is newer. I got involved in that in 2021, and that was a situation where I felt like the city needed me and the healthcare organization in the city needed me. I had a very close relationship with that institution, so it wasn't random, but it was

• 1:22:11Speaker 03

  one where we kind of came to it later on. And in terms of the endowments, they're all very different. I mean, New York Presbyterian is in the low double-digit billions. New York Public Library is between one and a half and two billion, and Princeton is in the 30s in terms of what they are. They require different things in terms of being a trustee. At a smaller institution, you typically have a board-driven model where the board at least formally is approving investments. We're fortunate, I've got really, really strong teams in all three places, so we've got great, great investment professionals that work at each of those institutions. But smaller endowments tend to be board-driven models, and larger endowments tend to be staff-driven models, where your role as being a trustee or on an investment committee is more guardrails than anything else.

• 1:22:56Speaker 03

  Each of those committees kind of has a different approach in how they want to run their portfolios and manage their portfolios. And I like to think I contribute to the meetings. I also learn a lot while I'm there. I'm certainly a subject matter expert in each of the areas that we invest in. I think I'm reasonably knowledgeable about all the areas that all the endowments invest in, but I'm not a subject matter expert in venture capital or things along those lines. And so it's been a fantastic experience and a good way to give back. But when you're at a smaller endowment, and I don't view two billion as small in the real world, but when you're at a smaller endowment, you have to think about things differently. You're going to have less Less staffing, you can cover less number of managers. Your institution's needs with respect to your cash flow might be different than a larger institution.

• 1:23:38Speaker 03

  You have to put each of them in framework in terms of what you're trying to achieve. And you have to make sure there's buy in to that model up and down the organization. So the investment committee needs to buy into what the staff is doing, which needs to buy in. There needs to be buy in from what the management of the organization is doing. There needs to be buy in from the full board. When you get all four of those things right, you can do really powerful things.

• 1:23:58Barry Ritholtz?

  So we really don't hear much about the Princeton endowment, which is probably a good thing. Because when you look, especially in the Ivies, at some of the endowments that have been in the public eye. It's rarely because they're shooting the lights out. Harvard went through a whole transition when they got rid of

• 1:24:20Barry Ritholtz?

  the people running the Harvard management company. And then they persistently wildly underperformed for a decade plus. And then obviously, the Yale model under David Swensen was unique. And once Swensen began thinking about retiring, that no longer was putting up the sort of numbers they had in prior decades. What is Princeton doing other than just keeping their head down and quietly doing what they're doing?

• 1:24:50Speaker 03

  Yeah, I mean, without maybe speaking specifically about what's going on underneath the hood at Princeton. I'll just repeat a couple of things that have been out there in the public market. So first of all, you know, we had our longtime CIO, Andy Golden, retire during the middle of 2024. Andy was a disciple of David Swensen and worked for him for a few years earlier in his career. Had a spectacular, almost 30 year run running Prinko. And he's been replaced by a brand new CIO, Vince Tuohy, who came from MIT and had a very long career there. MIT has been among the best performing endowments as well. And the head of its endowment, Seth Alexander, is also a disciple of David Swensen. The second thing, which was, came out in our, in our recent president's letter, which he publishes annually,

• 1:25:34Speaker 03

  is that you do have to look that endowment returns have come down over long periods of time. And that's nothing to do with Princeton or Yale or any of these august institutions. It has to do with, you know, what I mentioned earlier. Capital chases returns and markets become efficient over time and things that David or Andy were doing that were completely visionary in 1980s, 1990s today are commonplace.

• 1:25:56Barry Ritholtz?

  Right, that white space was wide open then and now it's well dropped.

• 1:26:00Speaker 03

  Someone asked me, so I asked Tom Kempner, I said, Tom, is it true that David Swenson invented the term absolute return? And he said to me, it's completely true.

• 1:26:10Barry Ritholtz?

  Really?

• 1:26:11Speaker 03

  And it was in the middle of the 1980s and David decided that was a much more august word to use to describe strategies that people used to call as hedge fund strategies in that period of time. And so that literally just came from David Swenson's head, that term that we all use generically today. I can't substantiate it, but I take Tom's word for it in terms of being a thing. And so you look at what these institutions created and now the incredible industry that's come from it, it's, it's pretty staggering.

• 1:26:37Barry Ritholtz?

  Huh, really, really amazing. All right, I only have you for a limited amount of time. Let's jump to our favorite questions, starting with, what are you doing to stay entertained when you're not at work? What are you watching or listening?

• 1:26:50Speaker 03

  So, you know, I don't watch a lot of streamed content because I find when I'm at home, I want to veg. And so the good ways to do that are either watching sports or watching the news. Honestly, news is less good for vegging than sports probably. Two things I am looking forward to though are season three of White Lotus, which is just in the process of being out, and season three of Gilded Age, which I believe is going to come out this fall.

• 1:27:15Barry Ritholtz?

  Gilded Age?

• 1:27:15Speaker 03

  So Gilded Age is an HBO show and it's basically about life in the 1880s and 1890s, so hence the Gilded Age of the United States. And there are characters that are based on Cornelius Vanderbilt or Jay Gould.

• 1:27:29Barry Ritholtz?

  Oh, really?

• 1:27:29Speaker 03

  Or some of the leading lights of the era. It's always an era, I found it very historically fascinating, and I think they've done a great job with the show. It's a great period piece. I mean, if you look around, there's more buildings left here or Newport or Albany from that era than you would think. So they've done a very good job of integrating CGI with some of the older historic buildings.

• 1:27:49Barry Ritholtz?

  You know, I love the first season of Lotus, the second season. Was a little frustrating, especially with the way they wrapped it up. I'm curious to see the direction they go in, in season three. I'm going to check out Gilded Age. I'm assuming you've seen The Crown?

• 1:28:07Speaker 03

  Um, my wife watched it, so I've seen portions of it.

• 1:28:09Barry Ritholtz?

  Can I tell you, it's just so good and every episode. If you want that sort of historical run-up. No Stone Left Unturn, their production. Like, I am not a historical TV fan and I got sucked into that. It really, it's just spectacular from start to finish. Let's jump to your career and your mentors. Who helped shape your career? I have a feeling I have, I know the names of a few of them.

• 1:28:42Speaker 03

  Yeah, you know, I, I go back further than the obvious, you know, Tom and Marvin in terms of starting. I mean, first of all, I'm very fortunate to come from a family where I had a few mentors as well. We had a family business which was started and founded by my grandfather and my father ultimately ran. It was book publishing and like I mentioned before, my, I come from a family of book publishers and academics. And so it was good to sort of learn over the dinner table when I was a kid, what was working and what wasn't working. My mother was very into volunteer work when I was younger. And when I was 13, she said, you don't need me anymore. I'm going to go back to work and had a 25-year career as a senior administrator at our local community college. So that was very influential on me as well. Growing up, you know, I ran track, both in high school and in college.

• 1:29:27Barry Ritholtz?

  What'd you run?

• 1:29:27Speaker 03

  I ran like half mile and cross-country.

• 1:29:30Barry Ritholtz?

  The worst. The half mile is the top, I ran the half mile in high school and the two-mile relay. And then we would do the three-mile, cause why not? But the half mile is brutal, isn't it?

• 1:29:41Speaker 03

  Yeah, because it's a sprint, right? So you're sprinting for two laps, right? But I had some great track coaches along the way that really helped me out as well. You know, I mentioned earlier that we had this amazing civics program at East Brunswick High School with this legendary teacher named John Calamano, who was super helpful for me in that as well. And then in the working world, you know, I was very fortunate, like I, I learned. A lot from both Tom and Marvin. They had very different styles and how they did things. But I also found people out there whose investing style I admired and I would try to figure out what they were doing and reverse engineer it. And so that's super helpful. I mean, some of that you can do just by reading, but there's other portions of it. Like when you see the trades and you see the investments and like you're involved in them and you see how someone did it better.

• 1:30:24Speaker 03

  And then you can figure out after the fact, like what you could do next time better. Like I just found that like super helpful. It's I'm a little bit further removed from that today. So it's probably a little bit harder for me to do that, but that's some of the ways I really taught myself to invest over time.

• 1:30:37Barry Ritholtz?

  Really interesting. Let's talk about books. What are some of your favorites? What are you reading right now?

• 1:30:42Speaker 03

  Um, well, I'll start with the ones I'm reading right now, and then maybe I'll talk about some of the ones historically that I've quite enjoyed. So I'm rereading Only The Paranoid Survive by Andy Grove. So, you know, I mentioned earlier that I think our business in general is at a strategic inflection point in terms of what's going on in alternative asset management. One of the main things he speaks about in that book is strategic inflection points in businesses and how you deal with that. I'm also part of the way through a book called Gambling Man, which is about Masayoshi Son, written by Lionel Barber. And that's a book where he's a fascinating character. I think a lot of people know about, you know, the last 10 or 15 years of Maso's career.

• 1:31:23Speaker 03

  I don't think that many people know about how he got there. All the times he had near misses with the whole thing could have blown up or things along those lines. So that's very interesting to me. You know, early in my investing career, there were a number of books that are classics that I, that I, I read. It's actually not The Intelligent Investor by Ben Graham. It's obviously a great book, but it's books like Extraordinary Popular Delusions and The Madness of Crowds by Charles McKay, or Reminiscences of a Stock Market Operator by Edlin Lefebvre, which was a pseudonym for Jesse Livermore, who was a famous trader in the 1920s and 1930s. Or Where Are the Customers' Yachts by Fred Swed. You know, very early in my career, like that's how I learned, even before I started at DK.

• 1:32:05Speaker 03

  That's how I learned was reading these books. And so even though they're books, maybe I haven't read in a little while, like they're all classics. I still readily recommend.

• 1:32:13Barry Ritholtz?

  You know, it's funny, Bill Bernstein, who wrote The Four Pillars of Investing, has a new book out on the delusions of crowds. He's both an investor and a retired neurologist/physician. And so, he takes a very, I want to say, almost medical evolutionary approach to looking at why people go mad in crowds. If you haven't seen that, it's kind of fascinating.

• 1:32:39Speaker 03

  I'll definitely check it out.

• 1:32:40Barry Ritholtz?

  I suspect you'd really appreciate that. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either opportunistic credit or investing generally?

• 1:32:53Speaker 03

  Well, I think both pieces of advice would apply to both, so I'll share two. The first of which is, I'm going to share advice I got from a law professor I had of mine, named John Quigley, who had been at Nassau Capital, which was Princeton's in-house private equity organization in the 1990s. So, he was my professor in law school. When I was considering going to work at Davidson and Kepner, what he said to me was, "The best way to learn how to invest is to actually invest. And so, if you get a chance to go into an investment firm, take it. Don't worry about not having the training for it. Don't worry about having to do other things first." You know, I was torn early in my career. Do I go work on the sell-side first and learn some stuff before I go into investing? And it was great advice. I mean, you know, we do hire a handful of people out of college every year at DK. And I think

• 1:33:36Speaker 03

  it's super great if you can start doing it as soon as you want to. If you know what you want to do, you should go do it, right?

• 1:33:41Barry Ritholtz?

  Right.

• 1:33:42Speaker 03

  And so, that's piece of advice, number one. Piece of advice, number two, I got from my post-college roommate's mother. And my post-college roommate ultimately followed the same advice, but it took him 15 years. And the advice I got was, and I'm going to use Goldman Sachs for this, because it's what she said at the time, but you could apply a number of other firms to it today. She said, "Don't go work at Goldman Sachs. Goldman Sachs is going to be a rat race to the top. All the top smart people want to go work at Goldman Sachs. Figure out what's going to be the next Goldman Sachs and get in on the ground floor there instead." And I sort of got lucky and sort of felt like I did that with Davidson and Kepner.

• 1:34:14Barry Ritholtz?

  That's really, really good advice. And our final question, what do you know about the world of, fill in the blank, distressed investing? Alternatives, private credit today that might have been helpful 27 years or so ago when you first got started.

• 1:34:29Speaker 03

  Well, you know, look, it's, it's, when you start a career in investing, I think by definition, you start pretty broad and then you get narrower and narrower. Like, you start with the premise that you want to invest, and then you ultimately find a firm, and the firm usually has you in a strategy, and if you do a good job, you'll learn that strategy cold over a longer period of time. And what I'd say today, and this is also colored by my experience on investment committees, but it's also just being at Davidson-Kempner, is that, you know, investing is a very broad universe. Things are interlinked. So, for example, if you don't know what's going on with technology investing, you may not understand what's going on with opportunistic credit, even though they're different things, and, you know, you need different expertise to do well in each of them. And so, it was something I didn't really think about early in my career. I started broad, and then I got really narrow, and I've probably gotten broader as both

• 1:35:14Speaker 03

  I've gotten more senior, and I've gotten more different types of experience in the investing world in general. But to some degree, you should always stay broad, even if you're going narrow. So, you know, you're going to have to go narrow to be successful in your career. There's very few people who can do everything as an investor and be successful. But as you go narrow, like, don't lose sight of other asset classes and what's going on in the world, because you can get blinded to bigger trends if you do that.

• 1:35:35Barry Ritholtz?

  Really, really, really interesting. Tony, thank you for being so generous with your time. We have been speaking with Tony Yoseloff. He's Chief Investment Officer and Managing Partner at Davidson-Kempner, overseeing over $35 billion in assets. If you enjoy this conversation, check out any of the 500-plus we've done over the past 11 years. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcasts. And be sure and check out my new book, coming March 18th, "How Not to Invest: The Bad Ideas, Numbers, and Behaviors That Destroy Wealth." I would be remiss if I did not thank the crack team that helps put these conversations

• 1:36:19Barry Ritholtz?

  together each week. John Wasserman is my audio engineer. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the Head of Podcasts at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

• 1:36:50Speaker 04

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