How to Think About Alternatives with JPMorgan's Alternative Asset Management CIO Paul Zummo

Barry sits down with Paul Zummo, Chief Investment Officer of J. P. Morgan Alternative Asset Management. They discuss the state of alternatives and Paul's "30 Pearls of Investment Wisdom." They also discuss the early days of hedge funds, investing in the 90's and building a hedge fund division. 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.

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  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

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  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 2:44Barry Ritholtz?

  On the latest Masters in Business podcast, I sit down with Paul Zummo. He's Chief Investment Officer at JP Morgan's Alternative Asset Management. He co-founded this group back in 1994 with essentially pocket change. It now runs over $35 billion in assets for institutions and high net worth investors at JP Morgan. Really, just a fascinating concept of everything about how to stand up a division within a large company, how to think about alternatives, how to recognize when an industry may be average, but the best players in that industry generate significant alpha.

• 3:27Barry Ritholtz?

  I thought this was fascinating, and I think you will also. With no further ado, JP Morgan's Paul Zummo. Paul Zummo, welcome to Bloomberg.

• 3:36Speaker 05

  Thanks for having me. Great to be here.

• 3:38Barry Ritholtz?

  I'm so excited about this because I just fell in love with your 30 Pearls of Wisdom. We'll get to that later. Let's start with your background.

• 3:48Speaker 05

  Sure.

• 3:49Barry Ritholtz?

  Bachelor's from SUNY Albany and then an MBA from New York University. What was the original career plan?

• 3:54Speaker 05

  Sure. So, yeah, when I was young, I was always into, always into investments, or at least intrigued by investments, but also into technology as well. Like arguably, my, to the extent we have a gift in life, it was probably technology. But the technology was so early stage, I didn't exactly know what it was. So I wound up, I wound up pursuing, obviously, the investment side, but kind of use that technology from time to time, especially as we were, we were building a group. But originally, I really wanted to get into, into equity research. And not that I knew exactly what it was, but it was the most like tangible and aligned with who I am in terms of, you know, problem solving and analytics and things like that.

• 4:35Speaker 05

  And wound up instead falling into the hedge fund world and doing what I do today is hedge fund solutions, which actually has a lot of elements in a sense of. What equity research is again, you know, your problem solving at its core and doing analytical work.

• 4:51Barry Ritholtz?

  You get the chartered financial analyst designation and you start at Chase as an analyst. What sort of work were you doing there?

• 4:58Speaker 05

  Yeah, so at a school I was in a pension fund consulting group. And so really what you're doing is a couple of things. I mean, one, performance measurement across client accounts. And, you know, also you're doing some, some research stock, rather manager selection on a traditional side. But I think what was helpful about it is it kind of gave you a really good purview of all different asset classes and all different styles of management. And I remember in early days really appreciating like the importance of stylistic differences in equities as an example. This was again, early days, but like recognizing, you know, small cup world versus small cup value and a drastic differences. But it really, it really just set the stage to understand the industry and styles and

• 5:43Speaker 05

  types and approaches at a much deeper level.

• 5:46Barry Ritholtz?

  So you were a manager of retirement plans at the Interpublic Group. Tell us a little bit about that.

• 5:50Speaker 05

  Yeah, so after Chase, I spent about two years at Chase and then went to the Interpublic Group. So this is a plan sponsor and maybe a somewhat unusual move at that stage in my career. And what attracted me to it was they, they were at a point where they were, so again, this, this is an advertising agency, but I worked in the pension fund group. And they were, they were looking to revise their asset allocation materially. So, you know, change the whole asset allocation, change the manager lineup. And importantly, they, they didn't have a consultant. So they were doing it in-house. So they were affording me, I mean, not solely, but affording me a lot of responsibility to help restructure the whole plan, terminate managers, onboard managers.

• 6:33Barry Ritholtz?

  What year was that?

• 6:34Speaker 05

  So that was 1992 to 1994. And interesting.

• 6:39Barry Ritholtz?

  I'm curious, what led them to say, hey, we're just gonna start over?

• 6:43Speaker 05

  Yeah, I mean, that was before, I mean, that was a kind of a decision that had already been made, you know, and they were changing, you know, again, changing their asset allocation and looking at the whole manager holistically. And interestingly, that's when I first got involved in hedge funds, or at least first met hedge funds. So this is again, you know, early days, right? Nineteen, nineteen ninety.

• 7:04Barry Ritholtz?

  Everybody was producing alpha back then, right?

• 7:06Speaker 05

  Well, then, yeah, I mean, then it was, that's true, but it was so unknown, you know? So I met with a number of kind of market neutral equity managers, a couple of long short managers, and importantly, David Askin. So if you know David Askin, for those that don't know, was one of the, really the first hedge fund, for lack of a better word, blowups. Where he was a mortgage backed derivative manager, and, you know, obviously a quirkyish market and wound up having significant problems. So it was, you know, we did not invest with him, but it was really a very, you know, valuable early kind of lesson

• 7:47Speaker 05

  from a due diligence standpoint that, you know, obviously we didn't pay for, so all the better. But it really like, I don't know, maybe tells you two things. I mean, one, if you don't completely understand something, and admittedly at age twenty-four, I didn't at the time, then, you know, stay away. Don't put money there, and then just have the courage to say, to say no. You know, there's, there's a lot of choices out there and you need to be disciplined and walk away. But we did invest in an equity market neutral fund, and again, that was nineteen ninety-three.

• 8:18Barry Ritholtz?

  So that's the initial exposure to hedge funds. How did you go from there to JP Morgan?

• 8:27Speaker 05

  Yeah, so this is probably another, you know, never burn your bridges, which I'll come to. So I had, as I mentioned, I'd worked at Chase once before. And at the time, I was looking to leave because once you restructure the plan, there's only so much to do, especially when you're, when you're young, so it was ready, you know, it was ready to do something.

• 8:49Barry Ritholtz?

  You literally put yourself out of a job through the restructuring process?

• 8:52Speaker 05

  Well, I mean, I could have stayed, but then you're just, you know, you're just overseeing the investments as opposed to more actively, it's a little less interesting. And so, in any case, I was interviewing at a hedge fund solutions, a fund of funds out of Long Island. And, you know, really liked the guys, a couple of great guys that were there, but at the end of the day, I decided I didn't want to go, you know, I didn't want to reverse commute because I was living in a city and I didn't want to go out to Long Island. So I wound up not pursuing it. But the relevance of that is that what would become my boss, Joel Katzman, was distributing that fund of funds. And he was at Chase.

• 9:33Speaker 05

  So when it came time to do a reference check on me, they asked Joel to do a reference check on me because he was at Chase, I used to work at Chase. And the reference check, I assume, was good, but it turned out I didn't pursue it any further. And Joel, who was distributing the fund of funds at the time, got the idea of, you know what, rather than distributing it, maybe we should start this up anew. And if you want to work in a city, why don't you come work for me?

• 9:57Barry Ritholtz?

  So you're at Chase, which even back in the early 90s is still a very large bank. This seems very entrepreneurial, very startup-like. What was it like building this division inside a giant money-centered bank?

• 10:12Speaker 05

  Yeah, no, it was great. You know, I mean, you know, bear in mind, it was a different world back then in many ways, not only from an investment standpoint, but like what it takes to launch a new business. So, yeah, we launched with a whopping $7.4 million, which is, you know, which is unusual to say the least.

• 10:30Barry Ritholtz?

  Walking around, pocket money.

• 10:31Speaker 05

  And I'd say, yeah, maybe a couple of these. So like, from an investment standpoint, it was the perfect time to start. You had, you know, Orange County issues, you had rates going up, you had, well, David Askin, as I mentioned before, you had dislocation, and that created opportunities. The problem was, you know, not many people knew about hedge funds, and I'd say three quarters of the people that did had a negative view.

• 10:55Barry Ritholtz?

  Really? Even in the early 90s?

• 10:58Speaker 05

  Yeah.

• 10:59Barry Ritholtz?

  Because my bias is that the golden era of hedge funds was from the early 90s right up to the financial crisis. There's been far more challenging period post-financial crisis for alpha generating. The 90s, it seemed like everybody was making money.

• 11:18Speaker 05

  So two thing, I mean, maybe we'll get to those points later about about different different cycles. But again, from an investment standpoint, there were people were making money. There's no question about it. I think the public's view and partially like what had often been written in in the press was the negative side of, you know, hedge funds going after this currency or that currency. And I think the perception was one of, you know, I either it was negative or just a lack of understanding. So a lot of what we did early days was just educational, like we would write newsletters internally and educate people on alternatives. But eventually, you know, eventually you put it together and performance kind of speaks for itself and you,

• 11:59Speaker 05

  you know, you build it, you build it over time. But it was great. From an entrepreneurial standpoint, this kind of goes back to my tech side as well. I mean, one, building infrastructure broadly and process. But, you know, early days, building technology as well, like there was no per track, which is something people use, like, so, you know, we and I kind of built it all, you know, so built a research database, built a built a system to analyze returns. And yeah, that was, that was great. It was a lot of, a lot of fun.

• 12:34Barry Ritholtz?

  So today, it looks like the industry is much better known. There's been a giant movement to try and democratize access to all sorts of alternatives from hedge funds to private credit, private equity, real assets. What do you think led to this massive interest in alternatives? It's not like it's been a terrible equity market for the past 15 years. It's been great.

• 12:59Speaker 05

  So, yeah, two thing. I mean, I'd say, even let's go back early days, like part of the vision, this is really, you know, Joel's vision first and foremost, that was that alternatives were going to become mainstream, which, you know, sitting back and hedge funds were going to become mainstream eventually. And then, you know, back in 1994, that was a novel concept, you know, it was just this little thing off to the side. And, and look, we've more or less kind of arrived at that, right? So I think the vision is true. And then the second part is, well, why not retail investors, right? And if you think about 2022, and you think about rising stock bond correlations,

• 13:38Speaker 05

  You know, there's so many investors, many of them more retail oriented or, or, you know, high net worth oriented, that just don't have alternatives or enough alternatives in their portfolios. So the, yeah, that's led to the democratization and, you know, launch of interval funds and, tender offer funds, which is, I think, really interesting. So it's giving those investors access to alternatives, which are really valuable in an overall portfolio context. And it's about building, yeah, I mean, yeah, just to respond, like, sure, equity markets are going up today, but they didn't in 2022. And I think the takeaway is that you need to build a more resilient portfolio, rather than just look at these things in isolation.

• 14:21Barry Ritholtz?

  So you start with barely $7 million. Today, you have over $35 billion that you're directly overseeing. JP Morgan Chase is giant with trillions of dollars. It sounds like there's a whole lot more headroom for alternatives at JP Morgan to continue growing. Like, where do you see this going?

• 14:42Speaker 05

  Yeah, I mean, you know, alternatives are definitely the fastest growing or one of the fastest growing areas within, and not, not just hedge funds, but more broadly, and there's a tremendous amount of support for it. So, yeah, like, I, I think, you know, for us and for other alternatives, we're going to, you know, continue to build, continue to launch new product, continue to, you know, get, get a larger reach into, you know, into other client types and, and geographies. So, yeah, the future is extremely exciting.

• 15:12Barry Ritholtz?

  So I mentioned earlier, 30 pearls of wisdom for 30 years. I want to dive into that in a moment. I have to start with one quote that kind of caught my eye, and we talk about this all the time. "Culture is king. The road to failure is paved with poor cultures." Explain what led you to that conclusion.

• 15:35Speaker 05

  Well, experience. I mean, you I don't know. I mean hedge funds fail for and succeed for different reasons, but culture is definitely at the heart of many of it. And I'd say more importantly, like sometimes people ask, what are, you know, what's like, what do you think about most as your takeaway haven't been doing over 30 years? Like for us, for me, it's culture. Like the culture that we've built as an organization has been spectacular and clearly a differentiator.

• 16:05Barry Ritholtz?

  Is that what's kept you at JP Morgan Chase for 30 years? That's kind of rare these days. Most people don't stay at one shop almost their entire career.

• 16:13Speaker 05

  Yeah, it's a couple of things. I mean, culture and the team, you know, it's like a family for sure. And we make each other better. We challenge each other respectfully. We really enjoy each other's company and appreciate our differences. So yeah, that's been, that's been great. Leadership at Jamie is unparalleled.

• 16:36Barry Ritholtz?

  Jamie?

• 16:37Speaker 05

  Jamie Dimon.

• 16:38Barry Ritholtz?

  Oh, I've heard of him. Remind me to tell you a funny story about him later.

• 16:43Speaker 05

  And then lastly, like, you know, the job itself allows you obviously to meet with some of the, you know, best investment minds in the world, right? Which is just such a privilege. And then to be able to like dig in deep on so many different asset classes, so many different geographies, you're constantly learning. So those three things for sure.

• 17:05Barry Ritholtz?

  I mentioned, you're not exactly very public facing. You're a little below the radar, but you publish these really interesting things. And one of my favorite pieces you wrote was 30 pearls of wisdom from our last 30 years. We don't have time to go through all 30, but I picked a few that they're just so simple and yet so insightful. And we tend to overlook things like this. This one just jumped out. Don't buy the portfolio, buy the process. Stories change, positions are fleeting, but a robust investment process should endure.

• 17:47Barry Ritholtz?

  Like that just sums up so much in two sentences. Tell us about that.

• 17:52Speaker 05

  Yeah, no, it's definitely one of my favorites as well. I mean, it applies to like all different types of hedge funds, but I'd say especially discretionary macro, right? So you're interviewing discretionary macro managers, the vast majority of them are very smart. They tell a very good story, they have great views, but it doesn't necessarily mean they're a moneymaker, right? And again, I think sometimes people make the mistake of agreeing with the view, agreeing with the manager, getting, you know, seduced by someone having insight. And obviously, it's really important, but again, it doesn't necessarily speak to the process. And especially in something like discretionary macro where it's not a high-sharp strategy, it tends to be more volatile strategy.

• 18:35Speaker 05

  And if you don't develop that conviction, and again, first and foremost in the process, you can get shaken from, you know, from that idea, right? Ideas change, the process should endure. So really, really important for sure.

• 18:48Barry Ritholtz?

  Have the courage to make mistakes, mitigate unnecessary risks, but take calculated bets. Again, two simple sentences, so much involved in that.

• 18:59Speaker 05

  Yeah.

• 19:00Barry Ritholtz?

  I find a lot of people in our business don't like to admit mistakes.

• 19:02Speaker 05

  Yeah, I think it's, it's, it's something, not the admitting mistakes so much, but the courage to make mistakes.

• 19:10Barry Ritholtz?

  Take a risk, a calculated risk.

• 19:12Speaker 05

  When I think about like, things that I've done better over the years, that is definitely one of them that comes to mind, where I've given myself more freedom to make mistakes and to maybe size and lean into themes or high conviction managers to a greater degree as well. Where I think, you know, maybe there's a perfectionist in many of them, many of us, and sometimes the flip side of that or the problem with that is you become too conservative, right? So now, yeah, if you make a mistake, you need to, you need to figure it out quickly and change course, but allowing yourself to maybe make mistakes is definitely helpful.

• 19:51Barry Ritholtz?

  Coming up, we continue our conversation with Paul Zummo, Chief Investment Officer at JP Morgan Alternative Asset Management, discussing 30 pearls of wisdom from our last 30 years. I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio.

• 20:29Speaker 00

  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

• 21:04Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 21:46Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 22:29Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Paul Zumo. He is Chief Investment Officer at JP Morgan Alternative Asset Manager, helping to oversee $35 billion in external hedge fund assets. He's also Chair of the Alternative Asset Management Investment Committee. He co-founded the group back in 1994. I really like this. "Don't be afraid to run into fires. Some of the greatest investment opportunities and manager access are sourced during dislocation." Tell us about running into fires.

• 23:07Speaker 05

  Yeah, so this is obviously really important. Like, I love behavioral issues and behavioral finance and like the challenges that come to that. And of course, we're all wired, you know, inappropriately from an investment standpoint in that we're wired to avoid pain, which is why many people make the wrong decisions during periods of crisis or periods of heightened volatility. I think some managers do a great job. You know, I wrote it about, I guess the manager I had in mind was David Tepper.

• 23:41Barry Ritholtz?

  Runs into fires all the time.

• 23:42Speaker 05

  You know, yeah, I mean, it's kind of, you know, less so these days, but certainly certainly over his.

• 23:47Barry Ritholtz?

  He moved to Florida, kind of chilled out a little bit.

• 23:50Speaker 05

  But, you know, like, he, again, having watched things play out over 30 years, I always thought he did, you know, he's done a really good job. But, and again, like, this is something I think we've done a better job at over time as well. When I think about, you know, the crises, 1998, 2008, 2020, like, you know, as I say, many of these things rhyme, and you've seen it before. Like, you know, you know what it feels like kind of coming out of it and going in. And if you're playing the appropriate defense, like, you should afford yourself the opportunity to really lean into where you think there is dislocation, especially more technical-oriented dislocation. So, yeah, it's critically important. I mean, that's where you make outsized returns during those inflection points.

• 24:32Barry Ritholtz?

  So, let's talk about outsized returns. Success can be a dangerous achievement. Complacency, distractions, and misalignments can be silent killers.

• 24:43Speaker 05

  Yeah, so.

• 24:45Speaker 05

  I guess you could come at that one from a couple of different ways, but one of which is the most important is like when you find success, sometimes people, you know, the firm grows, the number of analysts grow, the complexity of the business grows, and the portfolio manager, you know, goes from managing portfolios to managing people. And, you know, like I've seen that movie so many times.

• 25:08Barry Ritholtz?

  Maybe they have that skill set, maybe they don't.

• 25:10Speaker 05

  And maybe they don't, and that's probably not where you want them to spend their time, you know. So I think like, if you think about the hedge fund graveyard and like what the issues have been over this, like that, there's a big area that kind of has that footprint, if you will. So, yeah, people, you know, the star portfolio manager no longer spending the appropriate time on a portfolio, managing people, getting distracted. Or the second piece of it is just, quite frankly, making too much money, right? So, you know, when I bought the third yacht.

• 25:41Barry Ritholtz?

  I was about to say.

• 25:43Speaker 05

  It's time to leave, you know, it's probably time to leave after, before the first yacht, but.

• 25:48Barry Ritholtz?

  The first time I heard, that has to be like 20, 25 years ago. Hey, when your fund manager buys a 40 foot or a 50 foot boat, it's time to move on.

• 25:57Speaker 05

  Yeah, I mean, it's more than that, but yes, you have to, you have to watch the personal lifestyle at times as well, and make sure people are focused. Now, you know, there are people that are billionaires, and they're still in the office 70 hours a week, right? But, and it's just innate, they couldn't do anything but that. But yeah, you have to, you know, you have to understand what am I buying? And maybe it changes, right? So maybe that star portfolio manager's built out enough of a team, and you're not buying anyone singularly, you're buying something broader.

• 26:32Barry Ritholtz?

  That process you mentioned earlier.

• 26:35Speaker 05

  But, but yeah, it's a risk, for sure. And it's an area where many of successful hedge funds have kind of either become, you know, potentially mediocre, or have had challenges because they've taken our eye off the ball in one way or another.

• 26:48Barry Ritholtz?

  Huh, really, really interesting. I love this one, "The opposite of long isn't short." Great short sellers are wired differently, don't expect success on the long side to necessarily translate to a successful short book. First, I love the quote. Second, are there really any short sellers left? I think this last run feels like they steamrolled over everybody.

• 27:12Speaker 05

  So, yeah, maybe a couple of things. So, I mean, just on the quote itself, I have to, like, of all the lessons learned and all the mistakes we've seen people make, that one has probably right at the top, or certainly right toward the top. Like, the opposite of a long is definitely not a short, and, you know, sometimes people will suggest it is. I mean, the math is different, risk management is different, like, the timing is different. Like, I would even say, like, successful shorting is about risk management first and stock picking second. And you see that, I mean, you've seen that when he, you know, 1999, when the internet is blowing, you know, going nuts. You see that in the meme stocks,

• 27:55Speaker 05

  you see that today with quantum computing and some of the AI names. Again, it's risk management first, stock picking second. Timing is critical, timing and sizing is just critically, critically important. Go ahead.

• 28:09Barry Ritholtz?

  I was gonna say, I have a buddy who used to run a hedge fund trading desk, and he always used to say, "The opposite of love is in hate, the opposite of love is indifference."

• 28:18Speaker 05

  There you go.

• 28:18Barry Ritholtz?

  And it's the same basic, and he was talking about stocks, but it's the same sort of thing. They're not mirror images, are they?

• 28:26Speaker 05

  No, definitely not.

• 28:27Barry Ritholtz?

  Are there any short sellers around? I know, like, 13030s have become popular, and a lot of quants approach it that way.

• 28:34Speaker 05

  So, maybe there's two, you know, two different aspects of it. So, there are successful and good short sellers out there. I'd say there are, you know, less that are dedicated short sellers. So, from 1995 to 2008, we used dedicated short sellers and short bias managers, and it was really interesting, and actually a tremendous source of overall alpha. After 2008, we no longer use dedicated short sellers and short bias managers, so I don't follow the space nearly as much. But there are, you know, there are certainly good ones within long short equities, you know, maybe, you know, I'm sure there are some on a standalone basis. It's a very difficult business model.

• 29:12Barry Ritholtz?

  Tough gig.

• 29:13Speaker 05

  And one of the interesting things in short selling, which I think people don't, you know, I don't know, I've never heard it spoken about before, is You know, and this, again, this is dated, but the, when you, when you looked at, again, let's say, pre 2008, where there were probably, I don't know, I don't know, there's, you know, certainly a few dozen dedicated short sellers and short bias managers, I want to say like 40% of them were women.

• 29:37Barry Ritholtz?

  Really?

• 29:38Speaker 05

  Which, which people don't.

• 29:40Barry Ritholtz?

  That's fascinating.

• 29:41Speaker 05

  You know, so, Charlotte Hughes, Stephanie Ross, Dana Galante, like, all these, you know, very successful short sellers, and in an industry that was more male dominated, it always struck me as just really interesting that, in that segment, that, you know, an overwhelming amount, at least on a percentage basis.

• 30:00Barry Ritholtz?

  Right.

• 30:01Speaker 05

  You know, maybe it wasn't great than 50%, but like.

• 30:02Barry Ritholtz?

  But compared to the rest of the industry, it was outsized.

• 30:05Speaker 05

  It was outsized, you know, it was just, it was just interesting.

• 30:07Barry Ritholtz?

  There have been a number of academic studies that say female fund managers outperform their male counterparts by anywhere between 50 and 100 basis points, and it's always, you know, the joke is testosterone poisoning, but it's fascinating to hear, I'm, I'm curious as to why female short sellers, um, is it an objectivity, is it just a different approach? It's kind of really intriguing.

• 30:36Speaker 05

  Yeah, well, my wife would probably say it's, it's, it's because they don't have the egos of the men.

• 30:41Barry Ritholtz?

  Right, right, that's the poisoning, absolutely. If it doesn't work out, they cover it and move on.

• 30:46Speaker 05

  Yeah, I, you know, I think there's probably, you know, of, of course, there's great examples of both, but, you know, again, risk management and discipline is definitely, is definitely the key to successful short selling, so, there has to be something about it.

• 31:00Barry Ritholtz?

  Let's, let's go with another bullet point that speaks directly to that, I love this one, "Avoid casinos, black isn't on a roll and red isn't due, very few managers add value over time through timing the market, even if it sometimes look like, looks like it, don't reward a manager for gambling."

• 31:21Speaker 05

  Yeah.

• 31:22Barry Ritholtz?

  Again, so much insight in two sentences, explain how you reached this conclusion, which I just think is brilliant.

• 31:29Speaker 05

  Yeah, so, I, I give credit to Chris Marshall and the team, he, I think he, he's the one that came up with that quote, but, it, it really, again, is the observation that the vast majority of managers are, are, the vast majority of them are good stock pickers, but bad portfolio managers, and. Two different skills.

• 31:48Barry Ritholtz?

  It's two different skills.

• 31:49Speaker 05

  And timing decisions, you know, the vast majority of managers are subtracting value from their portfolio management.

• 31:57Barry Ritholtz?

  Really? The vast, you're gonna say top quartile, top decile? Where's the alpha coming from?

• 32:02Speaker 05

  I mean, the alpha's coming from, like, if you look at, let's put it this, if you look at fundamental long-short equities that live within the pods, and you look at alpha generation with them on, you know, turn of leverage or whatever you want to say, and then you look at the standalone long-short universe and the alpha that's generated there, there's a disconnect, right? And it's not because they're not good stock pickers. The disconnect, I think, is because the portfolio manage, you know, bad portfolio management or subpar portfolio management is subtracting value from their stock picking. So maybe they're adding, you know, 5% of alpha in their stock picking and it's decaying that by 3% from portfolio management decisions.

• 32:45Speaker 05

  And I just think it's difficult and, you know, there's been tremendous factor moves in the last number of years. There's also issues when you're operating on a standalone basis, like there's business considerations, rightly or wrongly, right? So if someone's operating in a 10-vol and markets are going down and they're, you know, in a hole by 8%, now are they acting differently from a, you know, they should be buying a lot more because the markets are down and things look interesting, but are they?

• 33:14Barry Ritholtz?

  They're playing scared.

• 33:15Speaker 05

  They're playing scared, you know? And I think it's, again, it's not, it's not everybody, for sure, and there's some that do it well. I just think it is very challenging to do. You know, it's much easier to find good stock pickers that are adding alpha than it is for someone to consistently be able to make, you know, I don't know, contrarian or correct portfolio management decisions.

• 33:40Barry Ritholtz?

  Well, the old joke is the crowd is right most of the time, so if you're, if you're constantly fighting the crowd, you're on the wrong side of the trend.

• 33:47Speaker 05

  Yeah, there you go.

• 33:48Barry Ritholtz?

  Last one, and again, another, another brilliant one. Dinosaurs go extinct, innovation must be constant.

• 33:56Speaker 05

  Yeah, and this is for, you know, this is for hedge funds as well as us, and, you know, and part of it relates to the managers themselves, part of it relates to strategies, and again, part of, part of it is business model. But when I think about, you know, I think about strategies that we used to invest in in 1995 where you can make a lot of money, like, let's take merger arbitrage, you know, like. Or you're up to again, you could, you could make double due to returns. It was less competitive.

• 34:21Barry Ritholtz?

  Plus you need mergers.

• 34:22Speaker 05

  And you, well, yeah, that, that, that helps for sure. But now like the strategy, I mean, there are some very successful people that do it on a standalone basis. Usually they do it with credit or other events, but like it's a much more difficult place to make money. It's, it's become largely commoditized. When it becomes interesting, there's a swarm of money that will kind of go into it.

• 34:41Barry Ritholtz?

  Isn't that true for every style, every sector?

• 34:44Speaker 05

  Well, eventually, which is why you need to innovate. You need to, you know, so let's take, you know, machine learning quant. Right? Like machine learning quant, it started investing 10 years ago, like that was novel. And, and, you know, today it's obviously gaining a lot more momentum. People understand it more. But you have to kind of continue to reinvent. Like from our perspective, need to continue to do, look after different strategies, different types of managers to find kind of high alpha. And then from a manager's standpoint, again, let's think about quant again.

• 35:18Speaker 05

  The managers need to reinvent themselves and refine themselves from an alpha standpoint. So like alphas decay, you know, yesterday's alpha is tomorrow's beta, right? And, you know, a lot of what has made them successful from an alpha standpoint is going to decay. So if you don't, you know, maybe it's 15, 20% is going to decay and be irrelevant each year. So you need to constantly kind of reinvent yourself.

• 35:44Barry Ritholtz?

  So, so when you start putting together the next 30, over the next 30 years, yesterday's alpha is tomorrow's beta. That, that's number 31.

• 35:52Speaker 05

  There, there you go. That's right.

• 35:54Barry Ritholtz?

  So let's talk about what's going on today. Hedge funds have had to adapt to a very challenging era, certainly since the financial crisis. I, I've heard financial repression and all sorts of reasons for why some funds have been underperforming, less volatility, increased dispersion and equity returns.

• 36:20Barry Ritholtz?

  What's going on in the world of hedge funds today?

• 36:22Speaker 05

  So, yeah, the last five years especially have been a great time for hedge funds. So let me maybe frame it. And actually, we just came out with a paper called Hedge Funds and the End of the Alpha Winter. And I should do a shout out for Emmy Hodges, who did a great job on putting the piece together. But maybe just taking a step back, there were, we identified kind of three big picture variables that really drive excess return in hedge funds. So one of them is volatility. Everything else, if you want vol higher, that creates dislocation, sloppy trading.

• 36:57Barry Ritholtz?

  Opportunity.

• 36:58Speaker 05

  Opportunity is the fuel of what drives alpha, right? The second is dispersion. So equity dispersion first and foremost, but wider dispersion as well. So more winners and losers, you know, obviously, if you're a stock picker, that's helpful. And the third is rates being higher than 2%. And higher rates help in a number of ways, but both kind of mechanically, if you, obviously, if you have floating rate debt, it's helpful, higher rates. But also, again, we've seen this like in a period of rising inflation where rates are going higher, that's going to fuel increased volatility. So it's a little circular, right? But elevated volatility, or at least normal volatility, elevated dispersion and rates that are greater than 2%.

• 37:42Speaker 05

  When you have those three elements, so even two of those three variables kind of as a tailwind rather than a headwind, alpha generation is really, really strong. So what we've done is like, we looked at three different periods. The first, starting with 2000-ish, kind of a 10-year period. You know, I forgot the exact percentage, but like a large percentage at the time, two of those three variables were at your back. They were helpful. And you saw excess return, that was very, very high. The middle period, which is the alpha winter.

• 38:16Barry Ritholtz?

  2010s, is that what we're talking about essentially?

• 38:19Speaker 05

  Yeah, to 2010, right? The middle period, which is, I think, you know, nine-ish or, you know, eight, nine year period, which admittedly is quite long. Was one that where you saw a lot of central bank intervention, where those variables were generally, you know, depressed. You could think about 2017 realized vol being really low. Obviously, we had rates at zero for a chunk of that period as well. That was difficult to generate alpha, not only for hedge funds but broadly, and that's kind of the alpha winter. We would suggest that that period is abnormal. And, you know, even if rates go down, even if vol comes down, like you're not likely to go back to a period

• 38:59Speaker 05

  that's so dominated by that period of central bank intervention. And, you know, most importantly, the postscript to that is for the last five-ish years, you've gone back to kind of the good old days of alpha generation, right? So the last five years, you've had volatility that's, you know, generally normal or higher, dispersion that's really high, and rates that are accommodative as well. And excess return in alpha has resumed and looks very much like what it looked like 20 years ago versus that kind of middle alpha winter period.

• 39:35Barry Ritholtz?

  So, so the past five years have been really interesting. 2022, obviously, stocks and bonds down double digits. That seems to happen once every 40 years or so.

• 39:45Speaker 05

  Yep.

• 39:45Barry Ritholtz?

  What, what about 2025? What sort of role is deglobalization and shifting trade policies playing in shaping hedge fund returns?

• 39:55Speaker 05

  Yeah, I mean, it, well, obviously, you have a lot of different, so, you know, it's a lot of different strategies, a lot of different sub-strategies. It's very difficult to talk about the whole hedge fund industry as, as, as one thing. But like, when I think about excess return, you know, all the things that you mentioned are generally good for hedge funds, right? So the rest of the world is getting worried, like that is, again, the fuel of what drives hedge fund returns, right? So when you see, when you see, you know, rising, rising vol, and that's, that's going to be good from fiscal arbitrage, it's going to be good generally for balanced stock pickers, it's going to be good for discretionary macro managers, when you see deglobalization and some of the trends that come out of that.

• 40:34Speaker 05

  Whether it's onshoring, whether you see some of the moves in, you know, in gold and like that, that's good from a trend following standpoint, it's good for discretionary macro managers. When you see Japan right, uh, increasing rates, the US decreasing rates, that's hopeful because it's two bets discretionary macro managers to place. It's not just like everyone operating in the same way. So those things are good. I mean, generally because it gives people more of a palette to, you know, an alpha palette to which to choose from, place more bets, diversify more. Um, and also heightened volatility and heightened uncertainty is going to be positive for the vast majority of strategies, especially from a excess return alpha standpoint.

• 41:19Barry Ritholtz?

  So you mentioned Japan. I'm curious what regions around the world are attracting the most new capital. We've seen Europe suddenly catch a bid. Obviously Japan has been doing well, the rest of Asia, the Middle East, and even the US. What, what areas are attracting new capital and what's driving that trend?

• 41:38Speaker 05

  Yeah. I mean, one of the areas that we're most excited about for sure and have been leaning in for the last few years is Japanese corporate governance. Now, interestingly, if you look at dollar flows into Japan, it's actually not, I mean, it is positive, but it's kind of modest in the grand scheme of things, which kind of shocks me, honestly. And like, I don't, I don't mind because we're playing events first and foremost. Um, but you, you really haven't seen that many dollar flows in, which again is unusual, given like everyone in the world in, in every way, shape or form is probably underweight Japan and it's, and it's obviously inexpensive. But most importantly, you have a material dramatic catalyst that's driving value through, through Japan. Um, and yeah, we're excited about it. I mean, corporate, corporate governance has been talked about in Japan for decades. The

• 42:23Speaker 05

  reality is until, you know, Abe had his third arrow and you've, you know, which really set off a number of regulatory and policy changes and, and importantly, like cross shareholder relationships started to unwind, that really set the stage for increased corporate governance. So it's, you know, we, we, again, we've been there for three years. I think we're maybe halfway through what needs to be done and, and there's still a very, very fertile opportunity set. So that's. That's one. The other thing I would point out is just the Middle East. Now, obviously, you know, it's not to say that there's a lot of money from an investment standpoint going

• 43:03Speaker 05

  into the Middle East, but I had just come back from a week-long trip in the Middle East and, you know, got there maybe 18 months prior, and it's really exciting what's going on. I mean, clearly, there's a lot of interest from an investment standpoint in hedge funds and alternatives in the Middle East. There's no question about it.

• 43:20Barry Ritholtz?

  Is this because all the sovereign wealth funds located in Qatar and Arab Emirates and go down the list?

• 43:28Speaker 05

  It's certainly coming from them, but it's broader as well. I mean, it's family office money in addition to the sovereigns, and they're interested in alternatives. They're interested in hedge funds.

• 43:40Barry Ritholtz?

  Local family office or European-American family office in the Middle East?

• 43:44Speaker 05

  All of the above. You know, I mean, there's also been, which is maybe to tie together one other part, I mean, there's also been a lot of movement of people of hedge funds setting up businesses in Dubai, Abu Dhabi, and people moving there with wealth, and in turn, they become, you know, potential investors in alternatives. So that's definitely a prominent story as well. The number of people that are setting up in the region are opening up offices.

• 44:09Barry Ritholtz?

  So when we used to talk about New York, London, Tokyo, Hong Kong as centers, do you put Abu Dhabi or Dubai in that list as Middle East?

• 44:20Speaker 05

  It's, you know, for the larger hedge funds, for sure. I think it's becoming, you know, the vast majority of them are opening offices or have offices in the region. So it is definitely an area that is attracting a lot of interest. And then, from an investment standpoint, you know, again, it's a much smaller market, but I think the policy changes and regulatory changes which allow foreign ownership and derivatives markets starting is encouraging as well. It's early days, and again, it's not, you know, the breadth and depth of the market still needs to improve. But again, it's exciting from that standpoint as well.

• 44:57Barry Ritholtz?

  Really kind of intriguing. What are hedge funds thinking about with assets like crypto or gold? How are they dealing with what are some of the biggest winners past couple of years?

• 45:08Speaker 05

  So you've seen, I mean, on gold and precious, but I mean, discretionary macro managers have, you know, many have had that bet on. It's been a very successful bet and theme, given.

• 45:20Speaker 05

  You know, concerns on inflation and debt levels. So you know, you can, you continue to see that, that theme in people's portfolios. Crypto is a little more, you know, interesting and specific. Some managers, again, mostly discretionary macro managers have invested in crypto, mostly, you know, mostly Bitcoin or ETH, more from that inflationary, you know, debt standpoint. Although others have from other standpoint as well, from a, you know, from like a trend following standpoint on futures, people have done it. A bid on statistical arbitrage side, some people play from like a cash future standpoint, from an arb standpoint as well.

• 46:01Speaker 05

  But it's still small, at least, let's say the traditional hedge funds investing in crypto, it's still small. That being said, obviously you have a large number of like dedicated crypto funds that are trading both directionally as well as, as well as on the arb side as well.

• 46:17Barry Ritholtz?

  Coming up, we continue our conversation with Paul Zumo, Chief Investment Officer at JP Morgan Alternative Asset Management, discussing the state of hedge fund investing today. I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio.

• 46:46Speaker 01

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• 47:28Speaker 01

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• 48:12Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Paul Zumo. He is Chief Investment Officer at JPMorgan Alternative Asset Manager, helping to oversee $35 billion in external hedge fund assets. He's also Chair of the Alternative Asset Management Investment Committee. He co-founded the group back in 1994. So what styles in hedge fund worlds are doing well in 2025? I've noticed over the past few years, emerging managers have made some consistent gains. Quants have done well. Some of the multi-strats have done well. What are you seeing in the rest of the field?

• 48:54Barry Ritholtz?

  Some of which, even in this high volatility, high alpha market, have been struggling.

• 49:00Speaker 05

  Yeah, I'd say, so we look at Pivotal Path as their industry is first and foremost. I think they're very, very good quality industries and I think paints a very good picture. And that's kind of what I have in mind. So like when you, when you look at it, you'd find that most strategies and sub-strategies have done pretty well this year in the grand scheme of things. You know, the one exception to that is CTAs, which have struggled.

• 49:24Barry Ritholtz?

  Even with gold running away and?

• 49:26Speaker 05

  CTAs got hurt in April, where they were very, very long equities. And yet, you know, Liberation Day and markets correct a lot. So you saw, you know, a bit of a retrenchment in CTA's performance in April. They got hit pretty hard and they've been trying to like piece it together.

• 49:47Speaker 05

  The last couple of months have been have been stronger.

• 49:49Barry Ritholtz?

  To be fair, it's very challenging to follow a trend when the trend is dependent on the whims of one person.

• 49:57Speaker 05

  That that is true.

• 49:58Barry Ritholtz?

  Right? Doesn't show up.

• 50:00Speaker 05

  But the good news is most other strategies are actually doing quite well, right? So if you look at across relative value, as you mentioned, quant, the multi-strat pos, convertible bond arbitrage has been good with with strong issuance. Discretionary macro, as we talked about some of the themes, whether it's, you know, whether it's gold or, you know, or rates themes has done well as well. You might say, okay, well, the markets are up, but it's not just beta, it's alpha. So a couple of people have come up with, you know, if you if you look at the alpha generation this year, it's about 5%, 5.5% in long short, which is quite healthy. And even, you know, merger arbitrage events done well, you know, credits done fine.

• 50:41Speaker 05

  So I'd say it's been a good year overall with most strategies generating, you know, strong kind of single mid-single digit to high single digit returns or high single digit returns. And, you know, overall, definitely a good year for the industry.

• 50:56Barry Ritholtz?

  So we've seen the rise of multi-strategy managers over the past few years. And there have been a number of very large multi-strats. And it seems to be a direction a lot of funds are heading. How has that changed competition within the industry? Or is there more collaboration within a multi-strategy shop amongst all the different pods? How is that playing out?

• 51:20Speaker 05

  Well, I think collaboration amongst themselves. I think like I think there's a.

• 51:24Barry Ritholtz?

  I'm assuming they're not competing, they're not collaborating with the fund across the street. It's all internal, right?

• 51:31Speaker 05

  I'm sorry, collaboration for the pods, pod to pod or within the pods?

• 51:35Barry Ritholtz?

  Collaboration within a multi-strat from, hey, here's the macro, here's the long short. Here's the quant group, here's the trend group. What are we are we seeing?

• 51:46Speaker 05

  So like cross-pollinization across teams. I think it depends on the model, you know, like if you if you look at the pods, obviously there's some prominent ones out there. They differ materially from like strategies that they pursue. They differ materially from the culture that they pursue. They just differ in many, the risk management approaches is different. So it really depends. There are some managers where they are benefiting from maybe cross-pollinization across teams or a center book that's maybe drawing upon best ideas. But it's really going to differ kind of pod to pod based on the style and how they operate.

• 52:27Barry Ritholtz?

  Fair enough. Let's talk about risk management. There were obviously some lessons learned this year in April and plenty of lessons learned in 2022. What do you think are going to be the most impactful lessons for managers looking forward?

• 52:42Speaker 05

  Looking forward. I mean, things we're worried about today is just complacency. I mean, any time you have markets going up for a while, inevitably complacency develops in some way, shape or form. So we're certainly being front-footed and having discussions, where is that? And whether it's credit or equity markets and how do we, or specific areas with hedge funds and how do we guard against that a little bit? But I think some of the events last year, like we're talking about Liberation Day or maybe a DeepSeek event and some managers being...

• 53:15Barry Ritholtz?

  God, was DeepSeek 2025, it seems like decades, years and years ago.

• 53:19Speaker 05

  Maybe it was.

• 53:20Barry Ritholtz?

  No, it was. It was January this year. It blew everybody's minds.

• 53:23Speaker 05

  I mean, I think it really underscores a couple of things. I mean, one, risk management first and foremost. And certainly on Liberation Day, I think a lot of people were caught off balance in their books. And then again, oftentimes kind of retrenched after that, lock and losses, it's not a great recipe. So sizing positions and sizing risk across areas in which people invest are obviously always critically important. And then on DeepSeek, look, AI is extremely exciting. It creates tremendous opportunities, but going back to what we were saying about short selling before, it also creates tremendous risk.

• 54:03Speaker 05

  And risk of just being one-sided bet, but also the risk of, again, operating on a long-short fashion and thinking about offsetting risks and basis and sizing. So those things are critically important.

• 54:20Barry Ritholtz?

  So, speaking of AI, I just overheard Paul Tudor Jones speaking to somebody on Bloomberg saying, you know, maybe AI might be developing into a small bubble, but it's not a giant headache. How are you looking at all this bubble chatter, high valuation, concentrated markets? This seems to be part of the wall of worry that markets are climbing. What's your perspective on this?

• 54:48Speaker 05

  I mean, if Paul said it, it must be right.

• 54:50Barry Ritholtz?

  You could do worse than finally Paul Tudor Jones.

• 54:54Speaker 05

  That's right, that's right. I mean, look, is it a bubble? Obviously, it's real, it's going to be impactful, it's, you know, it's going to be enormously important, it's going to reshape how we do so many, so many things, for sure. Is there excess in certain areas related to it? There has to be, for sure. Again, I think it comes down to risk management first and foremost. You know, assuming you want to set up a balanced book, it comes down to risk management first and foremost. And if you don't, if you just want to play it from a thematic standpoint, again, it also comes down to risk management, just from a sizing standpoint. You need to size it to be able to handle the inherent volatility of it. But is it rich? Well, of course, it's rich. Is it a bubble? I don't know.

• 55:38Speaker 05

  I'm not the best one to say, but it certainly is real, it's certainly going to revolutionize and change our lives.

• 55:44Barry Ritholtz?

  Every time someone asks me about it, I like to remind them, Greenspan's irrational exuberance speech was 96. You still have a long way to go before that really became a bubble.

• 55:56Speaker 05

  But also, look, you know, we're talking about, you know, dot com, right? So, I mean, as a little bit of your, you know, your model and your playbook, right? So, I mean, obviously, Amazon came out of that, but there's a lot, you know, pets.com, you know, dating myself, but, you know, and I have-

• 56:13Barry Ritholtz?

  Metro Media Fiber-

• 56:14Speaker 05

  I have the stock puppet on my desk, you know, like-

• 56:17Barry Ritholtz?

  Really?

• 56:18Speaker 05

  It's going to be winners and losers.

• 56:20Barry Ritholtz?

  Right.

• 56:21Speaker 05

  And it is extremely important, extremely powerful, but it's not going to lift all boats at all, all times. So, you need to be selective and you need to size it right.

• 56:30Barry Ritholtz?

  Makes great sense. Last question before we get to our favorite questions. What do you think hedge fund managers and investors are not talking about, but really should be? What topics, assets, policies are getting overlooked but shouldn't?

• 56:47Speaker 05

  Well, I mentioned complacency a little bit just because where we are in the cycle. But maybe if it's okay, I'll take in a different direction to say like it's more of a misnomer about the hedge fund industry, which is, if that's okay, it's a little different. So like one thing I would say that's frustrating, I think a lot of people get wrong, is they look at the hedge fund industry as an asset class. And what I mean by that is if you have an asset class, then you know, everything in an asset class should be more or less, you know, highly correlated to each other, right? It's the same, it's the same thing. And if you take the 10,000 or so hedge funds that are out there, the correlation, the cross correlation, pairwise correlation is something like point, point two or point two five.

• 57:29Barry Ritholtz?

  Nowhere near one.

• 57:30Speaker 05

  It's nowhere near one, right? So what you really have is a collection of strategies, a collection of sub-strategies. Importantly, the characteristics of those strategies are just vastly different from each other in many cases. And the way you use them in a portfolio is vastly different. So when people think about the hedge fund industry and they're looking at like a hedge fund benchmark, which is, or you know, like 10,000 funds cobbled together, oftentimes they look at it and they're like, well, I don't, I don't know what to make of this. It has an okay return and an okay volatility with okay characteristics, maybe I don't need it. And it's the right conclusion to the wrong answer, right?

• 58:11Speaker 05

  And, and, and, oh, I'm sorry, the right conclusion for the wrong question, right? And, and like, again, the observation's correct, but really the question is, can I look at subsets of this industry that are deeply valuable, rather than just looking at the whole thing as a whole? And we would strongly suggest that if people are just looking at the aggregate industry, they're missing a point that beneath that, there are strategies and sub-strategies and certainly managers that are adding enormous, enormous value that's being overlooked by, you know, someone who's plugging the average into an optimizer.

• 58:52Barry Ritholtz?

  I'm so glad you said that because over the course of 25, 30 years, I've watched the hedge fund industry change so dramatically. And my own views on it have evolved. It's very easy to look at a broad index and say, gee, this is expensive and doesn't generate great returns. But again, depending on where you want to draw the line, top quartile, top decile. When you look at the top performing funds, there is genuine alpha generation.

• 59:21Speaker 05

  Yeah, for sure. And interesting, like if we would have met, you know, 25 years ago, 15 years ago, like I would have said the same thing is that like I'm not here to say the hedge fund industry as a whole is such a tremendous value proposition. Like that was never the thesis, you know? The thesis is more, are there 100 or 200 managers out there that are adding enormous value? Yes. And, you know, can through great due diligence, like can myself and other people find them if they if they spend the time and do a great job? Yes. And is that tremendously valued in portfolios? Yes. You know, but it's not about the hedge fund industry as a whole and the averages are gonna

• 1:00:05Speaker 05

  knock the lights out.

• 1:00:07Barry Ritholtz?

  Jim Chanos has this quote of, he says, you know, when he started out in the late 80s, early 90s, there were a couple of hundred hedge funds and they all generated alpha. Today, there's 11,000 hedge funds and it's the same 200 hedge funds generating alpha. Which, you know, there's a lot of truth to Sturgeon's Law. There's a lot of truth to 90% of everything is not great.

• 1:00:30Speaker 05

  Yeah. Yeah, I don't know if it's the same 200, but.

• 1:00:33Barry Ritholtz?

  No, you said the same number, not necessarily the same.

• 1:00:36Speaker 05

  Right.

• 1:00:36Barry Ritholtz?

  Funds that come and go.

• 1:00:38Speaker 05

  Yeah, look, it's a it's an industry and an asset class and a fee structure that attracts a lot of people, but and, you know, and many of them deserve that fee structure and many of them are great. But yeah, you know, obviously you need to be selective.

• 1:00:56Barry Ritholtz?

  Absolutely. All right, let's jump to our favorite questions that we ask all of our guests. Starting with, tell us about your mentors who helped shape your career.

• 1:01:07Speaker 05

  Sure, I think, so two come to mind. I mean, if I go back really, you know, back to high school and I'm forgetting, I'm forgetting his name, it's my wrestling coach. I swear to God, I knew you were gonna say that. Yeah, it's my wrestling coach. He was my economics professor. And this is when I first started getting interested in investments and started reading, you know, I don't know, some of like the classic books from way back when. Reminiscences of a stock trader. Reminiscences of a stock trader, you know. And he was the one that kind of encouraged, and we actually played this game at the end of the year, which was like a stock market game, and I actually found an arbitrage and we made more money than anyone had ever made,

• 1:01:50Speaker 05

  you know. And he's like, you know, that's kind of like real life finance. You should, you know, if you, it's not interesting, you should explore. So I credit him for kind of pushing, helping push me in that direction. And then, from a career standpoint, I mentioned Joel Katzman, you know, hired me to, you know, start the business with him. And yeah, he was really instrumental. I mean, one of the things, I don't think we spend as much time, but like skepticism is really important. I'm a deeply skeptical person. I think it helps you navigate things. It's one of the pearls of wisdom. Be a skeptic, approach due diligence from the perspective, where does this break? Where does it break? Yeah. And, I mean, it's like approaching due diligence, I give

• 1:02:32Speaker 05

  an analogy of like thinking about a balance sheet where people, again, behavioral biases, you know, too many people say, approach it from the asset side. How much can I make? What's the story? You need to approach it from the liability side. Like, what can go wrong with this manager? What can go wrong with the strategy? Where does it break? And then turn to the asset side and effectively say, am I getting compensated for that, right? And you could teach people some of that, but part of it has to be innate as well. Like, you need to be a neat skeptic, maybe. So, any case, Joel, you know, Joel, I think, shared my skepticism for sure. He certainly taught me a lot about the business and, you know, running a business. So, yeah, you know, props to Joel.

• 1:03:15Speaker 05

  Let's talk about books, since you mentioned some books. What are some of your favorites? What are you reading currently? Yeah, so books, so I have a, so we invested around 120 hedge funds and

• 1:03:26Barry Ritholtz?

  That's what you're reading.

• 1:03:26Speaker 05

  The vast majority of what I'm reading is their letters, their research, you know, my, my analyst research and that's the, you know, it's a vast majority. And then like Michael Semblist does great work.

• 1:03:39Barry Ritholtz?

  Yep, love his work.

• 1:03:40Speaker 05

  Really, really good work. So I have to say that's consuming the vast majority of my time. The only thing that stands out, there's a book, um, what is it? Uh, Speak Like Churchill and Stand Like Lincoln that my old boss Jamie Kramer gave to me, which is about public speaking, uh, which is actually really, really good and insightful, like easy, easy read book.

• 1:04:00Barry Ritholtz?

  Speak Like Churchill, Stand Like Lincoln.

• 1:04:03Speaker 05

  Yeah. And it's a real, real easy read to, you know, just some like, uh, reinforcing some good lessons of, of, uh, public speaking.

• 1:04:13Barry Ritholtz?

  You, you mentioned Michael Semblist. So I consume his regular output and then the JP Morgan Quarterly Guide to the Markets is just a spectacular, spectacular resource.

• 1:04:28Speaker 05

  Agreed.

• 1:04:29Barry Ritholtz?

  Really, really find it amazing. Let's, let's talk about what's keeping you entertained these days. Are you watching or listening to anything interesting?

• 1:04:37Speaker 05

  Uh, like Netflix and, you know, so, uh, yeah, well, I, so I have a five and a half year old and so she's, she's dominating my, the Netflix account. Uh, usually it's the K-pop, uh, Demon Hunters.

• 1:04:52Barry Ritholtz?

  That's the number one thing on Netflix now.

• 1:04:53Speaker 05

  I was gonna say, I don't know if you know what that is.

• 1:04:55Barry Ritholtz?

  Every time I'm searching for anything, I put it on for 30 seconds and my wife is, what are we watching? Can you take this off, please?

• 1:05:03Speaker 05

  Yeah. So unfortunately it's, it's a little, it's, it's a little too much of K-pop Demon Hunters. But, you know, away from, away from work, uh, I like wine. So it's probably some podcasts or, or related to wine, just to, when I'm not reading the, you know, or the manager notes. So, but there's a, there's a great one called Wine With Jimmy. Which is, uh...

• 1:05:28Barry Ritholtz?

  Wine with Jimmy.

• 1:05:29Speaker 05

  If you want to do a deep dive on wine.

• 1:05:30Barry Ritholtz?

  Yeah, yeah. I literally just bought, um, the, I forgot the name of it, but during Amazon Prime, it was on my wishlist and it was like 98 bucks and it showed up for 30 books, the 30 bucks, the, um, Atlas Guide to Wine Around the World.

• 1:05:49Speaker 05

  That's a fat book.

• 1:05:50Barry Ritholtz?

  Fat. And I'm like, alright, that's absolutely worth having on the, on the dry bar.

• 1:05:55Speaker 05

  Now you have to read it. You look, you look, look good. You look smart with it at least.

• 1:05:59Barry Ritholtz?

  Yeah, absolutely. It's more of a re, uh, reference guide, but give us some of your favorite wines. If you're not gonna give us, uh, more books, give us some wines. What do you, what do you drink? What do you like?

• 1:06:07Speaker 05

  Well, this is, um, I mean, I, I like, uh, I like red more than white. I like, you know, a, I don't know, a, a, a tan, like a Barolo, so, uh, a tan, a nice tannic red.

• 1:06:19Barry Ritholtz?

  Uh-huh.

• 1:06:20Speaker 05

  Uh, red wine. So I, you know, I drink, uh, Barolo, uh, Tempranillo.

• 1:06:24Barry Ritholtz?

  So we're always looking for a house wine.

• 1:06:27Speaker 05

  Uh-huh.

• 1:06:27Barry Ritholtz?

  Just like something reasonable that you could pop open anytime. This, this, um, Intre Natali Verga is about a $20 bottle and it drinks like a $50 bottle.

• 1:06:39Speaker 05

  Nice. Finding those values. What, where's it from?

• 1:06:42Barry Ritholtz?

  Um, Italy.

• 1:06:43Speaker 05

  Okay.

• 1:06:43Barry Ritholtz?

  But you, they, they only, like, it's a small winery. They make,

• 1:06:47Speaker 05

  Yeah.

• 1:06:47Barry Ritholtz?

  you know, a few thousand cases. You can't get, like, I'll get a case and that's it. It's, you're done till next year.

• 1:06:53Speaker 05

  We'll, we'll swap grade value wines after, after.

• 1:06:56Barry Ritholtz?

  Um, there, there was, um, another one called Xanthos that was a Meritage. X-A-N-T-H-O-S.

• 1:07:02Speaker 05

  Okay.

• 1:07:02Barry Ritholtz?

  And the 2017 was spectacular. You can't find anywhere.

• 1:07:05Speaker 05

  Yeah.

• 1:07:06Barry Ritholtz?

  It was like a $15 bottle of wine. Drank like a $50 bottle of wine. I, I don't feel like I have a palate to go much beyond that. Like, alright, I appreciate...

• 1:07:16Speaker 05

  Listen, if you could find $20 bottles of wine and drink like $60 wine, but, you know.

• 1:07:20Barry Ritholtz?

  My, my, um...

• 1:07:21Speaker 05

  I'm forgetting the name, but I have a Sangiovese like that.

• 1:07:23Barry Ritholtz?

  Yeah.

• 1:07:24Speaker 05

  Which I found at one of the wine, you know, you, you go to these like wine tasting events where you, you go around and you could taste a bunch of...

• 1:07:31Barry Ritholtz?

  Blind tastings, right?

• 1:07:32Speaker 05

  It could be blind, but this is like a James Suckling one.

• 1:07:35Barry Ritholtz?

  Uh-huh.

• 1:07:35Speaker 05

  You taste all different types of wines and, um, and then you, you know, you, you, you, I don't know. For me, I take pictures of the ones I like and then you go back. And then you look it up and some of them are like $150, you're like, oh, I didn't find anything. And then you, you know, you see one that's like 20 bucks and you're like, oh, maybe I, maybe I found the, the jewel.

• 1:07:53Barry Ritholtz?

  Right. It's easy to get disappointed in $150 bottle of wine at $20. It's um.

• 1:07:59Speaker 05

  There's a lot of great wine out there.

• 1:08:00Barry Ritholtz?

  And then you go to Italy and you sit at a cafe and you get an $8 carafe and it's the best thing you've had. Right. It's, it's just so crazy trying to figure, figure that out. Um, so our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investing or hedge funds or alternatives?

• 1:08:22Speaker 05

  Yeah. So, um, I mean, first, you know, and I guess it's, it's cliche, but like the, like, do what you love thing is so real and valuable, but I think you have to like, find what you love first. Like when you're, when you're 20 years old, I don't know that anyone.

• 1:08:37Barry Ritholtz?

  It's a big world.

• 1:08:38Speaker 05

  Yeah. Like has a great vision on it. I, I would say like, trust your instinct, you know? So like, it's obvious to me today, why I'm doing what I'm doing. It's like, this is, I don't know, I'm, I'm skeptical, I'm structured, I'm creative, I'm like curious, like it makes sense today. It didn't make sense completely at the time, but like you follow your instinct, you're like, oh, I, I love to do this. So I'm working on the weekend every week because like this really intrigues me and it's interesting and like, you know, they, I don't know, they, they did not pay me and I'm still doing this. Right? So like, I think being true to yourself and really exploring like what makes you happy, what makes you, you know, intrigued, what really makes you dive deep on things and then

• 1:09:23Speaker 05

  continue to lean in and continue to pursue and learn, learn more and more. Um, maybe the second part of it is just be a student of history. So whether you, so I like baseball and you know, I think like, when I was young, like how much I learned about the, you know, Ty Cobb's and DiMaggio and Ruth's and everybody. Like I think if you're a baseball player, like you should know the history. If you're going to the hedge fund industry, like you should know the history. When I say David Askin, you know, you should know that it, you know? So like. Take the time to understand the history because it, I mean, a number of reasons. One, it gives you context, but two, like the mistakes and the opportunities often, you know, often rhyme with each other, right? So like, how do you, like, investing in 2020, in March 2020, turns out it looked a lot

• 1:10:07Speaker 05

  like 2018, 2008, 1998, like, there were elements that are very, very similar. And being a student of history helps you navigate much better in the future.

• 1:10:18Barry Ritholtz?

  To say the, say the very least. Final question, what do you know about the world of investing and hedge funds today that would have been useful back in 1994 when you were first launching JP Morgan Alternative Asset Management?

• 1:10:33Speaker 05

  I mean, there was no internet, right? So, so back in 1995, I mean, I, I don't know, you know, like, we knew a fraction, we knew 5% of what we knew today, but it was 50% more than next person knew, right? So, I mean, it's all about, it's all about getting, you know, it's all about getting an edge and continue to reinvent yourself. I think the biggest, the biggest lessons learned for, you know, for us, but for the industry is, and what I would have taken back if I could, is just the, the depth of understanding on financing. So, you know, in, in financing agreements, right, like prime broker agreements and term

• 1:11:13Speaker 05

  and triggers and all, all sorts of things that have caused problems over the years. If you could take that one, you know, and it's caused a lot of, you know, pain historically from time to time, and if you had that knowledge and you pull that back to 1995, wow, you would be able to, you know, navigate seamlessly across the industry in a way that, you know, was much bumpier for everybody along the way.

• 1:11:41Barry Ritholtz?

  Paul, thank you. This has been absolutely fascinating and thank you for being so generous with your time. We have been speaking with Paul Zummo. He's Chief Investment Officer at JP Morgan Alternative Asset Management. If you enjoy this conversation, well, check out any of the 600 we've done over the past 12 years. You can find those at Spotify, iTunes, Bloomberg, YouTube, wherever you find your favorite podcasts. And be sure and check out my new book, How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them, wherever you buy your favorite books. I would be remiss if I did not thank the crack team that helps put these conversations together each week.

• 1:12:24Barry Ritholtz?

  Alexis Noriega is my video producer. Anna Luke is my regular producer. Sage Baumann is the head of podcasts here at Bloomberg. Sean Russo is my researcher. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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