NCI: Is Hedge Fund Investing Dead?

Ram Ahluwalia: [00:00:00] In this episode, in the OA crisis, when he invested in Bank of America and Goldman Sachs, he had deal terms others did not have. He defined the game that he was playing. As he says often, you got to choose which swings you take. You don't have to take all the swings. 

Michael Weinberg: I've been investing in semis for 30 years, as probably you have.

They're cyclical. Semis are cyclical. It is a cyclical industry. It is not a secular growth. It's going to be cyclical, boom, bust, as it always has been. 

Ram Ahluwalia: Now the U. S. is the envy of the world. And now China's trying to encourage Domestic demand consumption. So it's such a funny turning of the narrative between the U.

S. and China. Welcome to Non Consensus Investing. I'm Ram Alawalia, your host and CIO at Lumida Wealth, where we specialize in the craft of alternative investments. At Lumida, we help guide clients through the intricacies of managing wealth so they don't have to shoulder the burden alone. Through this podcast, we draw back the curtain to reveal the [00:01:00] strategies employed by the best in the business for their clients so that you too can invest beyond the ordinary.

Welcome to the next episode of Lumida Non Consensus Investing. I'm pleased to be joined by a friend and special guest. Michael Weinberg. I've known Michael for over a decade now. Michael has had incredible experience as an investor. He worked directly for George Soros, investing for his personal account.

He was at Protégé Partners, notable, at the very least, for having made a bet against Warren Buffett, whether the S& P would outperform a bunch of hedge funds. We'll talk about those experiences. Michael is like a global citizen. He's got views around the world, including on China, we'll talk about that, commercial real estate, are hedge funds dead or not dead?

Opportunities in privates and illiquid and evergreen funds. And he was also part of the rise of the hedge fund sector as well. When you were at FRM [00:02:00] and allocating to different managers and quantitative strategies. So pleasure to have Michael join us here today. Michael, thank you. How are you? Thanks for the kind 

Michael Weinberg: and warm introduction, Ram.

That was very nice. It's been great knowing you over the past decade and more and look forward to the discussion. 

Ram Ahluwalia: We'll have a lot of fun. I think it was in 2011. You actually interviewed me and now I get to run the tables. 

Michael Weinberg: That's right. And that was really like the early precursor before there were podcasts or if they were nascent at the time.

Ram Ahluwalia: That was a great show. I happened to give it a re listen and I'm always hypercritical about anything I've said. I remember listening to the pod and we were talking about single family rentals and buy to rent, which was a great move. We also talked about the Yardeni rule, and we talked about the S& P. I remember saying it was in May.

I said, the S& P is totally overvalued. I think it's worth buying now. And I was cringing because clearly the 20, 2010s were a bull market, but I [00:03:00] timestamped it, and in fact, the S& P went nowhere, corrected in October, six months later, and then it was off to the race. So I felt good about that. But we're going to talk about a couple of different topics.

First off, what was it like? To work for George Soros. And when was that? 

Michael Weinberg: It was the late nineties during the first tech bubble. And it was incredible. It was one of, if not the highlight of my investment career. And it was not just working for George, it was working for George and Stan Druftin Miller and Scott Besson.

And to me, all three of them are among the best macro investors alive and over time. 

Ram Ahluwalia: What were some of the learnings that you took away from there? And I think folks might be familiar with the concept of rough flexibility. Maybe you can introduce that. Druckenmiller's obviously got an extraordinary track record of one down year.

You were so nervous of the stress or burden of managing LPs, you just returned their capital and started investing for themselves, but what were your under the cover insights into those investing strategies? 

Michael Weinberg: I think one of the things that made all three of [00:04:00] them great was their risk management. I'd say one's stopping out losers.

If you look at what George has written extensively about this, every day you should re evaluate your positions in your portfolio, and this applies to everyone, you should re evaluate your positions in your portfolio and say, if I wouldn't want to own it today, then I shouldn't own it. Now obviously that's easier with liquid securities like equities.

Then illiquids and privates where you may have to go to a secondary market along the lines of risk management. For example, if I think back to Stan, one of the things Stan did great was if the portfolio was not behaving well and down significantly, he would just say, look, if I'm down, I forget the number of 15 or 20%.

I can still come back from that. I got to cut my losses. Refresh, reboot, restart, and reevaluate everything. 

Ram Ahluwalia: Druckenmiller would go to cash if he had a 15 percent drawdown and then reassess. And then what would he do, just hang out for a week or a month and then get back in? No, he would go to cash and then reassess.

Michael Weinberg: And then if [00:05:00] he said the right thing to do is potentially get back, he would get back. The point is, He would re, he would cut them so that it was like he's starting with a clean slate. The conclusion might be to get back in the same positions, but the point was get rid of those, refresh, 

Ram Ahluwalia: restart.

It's super interesting because there is this bias according to Kahneman and Tversky around the endowment effect, where people tend to value what they own more than that which they do not own. People don't want the cognitive dissonance of being wrong with their prior sales. They want to. Maintain some continuity there.

And I love the point you raised earlier, assuming when you wake up that you've got the wrong positions, which is a Paul Tudor Jones quote as well. Now Druckenmiller is known for being long momentum and long trends, right? So Soros and Druckenmiller would own futures contracts too, unlike equities. If equities dropped 15%, it's probably time to buy.

Cause they're mostly corrections. You [00:06:00] probably should. Whereas. If you have a commodity, it's a different kind of scenario. I just want to clarify that for the audience so people don't start going to cash, right? When they're probably at the bottom of a correction, it's a different kind of model here. Could you double click on this concept and theory of reflexivity?

What is that about? 

Michael Weinberg: Yeah, George was always a fan of quantum mechanics, hence the names of our funds at the time were Quantum Quasar Quota and things often related to quantum mechanics. Quantum mechanics is Schrodinger's theory and basically the act of observing impacts what you're actually observing.

One of George's points with reflexivity is the act of being a market participant impacts the very market you're observing and it's reflexive. I think the easiest way to. Elucidated for listeners is boom bust. George is quite well known for that. And he's written books about this. But you have the boom, which is self fulfilling and reflexive.

And then you have the bust, which is also a self fulfilling and [00:07:00] reflexive. And when I was there investing on his behalf and with him, we had the first tech bubble. We knew it was a bubble. That was pretty clear. As the stocks got richer, more people bought them. There was more momentum. The valuations got richer.

They could then have a more highly valued acquisition currency. They could buy more equities, which in turn were accretive to earnings. And the valuations actually got lower. You could make the argument that they're less expensive again, and on it went. A good example is like, to this day, like Amazon buying Whole Foods, right?

Amazon's a very richly valued stock. And Whole Foods was a very Relatively, Amazon's valued as a technology stock and Whole Foods was valued as a grocery stock. There was a huge accretion to the earnings from Amazon buying Whole Foods. There are the leverages all that. It's a good example where you use an expensive acquisition currency.

To buy something less. Leverage 

Ram Ahluwalia: accelerated that because if you're buying on margin and margin debt was a big deal in the dot com era. Now we call it zero DTT options. [00:08:00] It's synthetic leverage. And obviously OA featured a lot of leverage through securitization. So leverage just shows up in a different kind of financial innovation.

If you bought something on margin and the stock went up, then your margin consumption actually went down. And so you can afford to buy more and then in reverse, when stocks are dropping, you've got a margin call, you've got to sell assets, others are selling. That dynamic seems to explain why markets overshoot on the upside and over correct on the downside, combined with psychology.

Michael Weinberg: Yeah, it's exactly what you said. And it was working. So people's view was, it's working, I should do more of it. As we both know, with hindsight, most capital went into the NASDAQ in the fourth quarter of 1999, or possibly first quarter of 2000, right at the top, exactly when everyone should have been selling, most people were going in.

Ram Ahluwalia: Now, one of Druckenmiller's regrets is, he actually did get out of the market. I think it was either early 2000 or end of [00:09:00] 4Q99. And the market kept going up. It was going parabolic. And allegedly there were others at Soros that were still in it and still making money. And he decided to get back in the market.

And he top ticked it on that day. And he has some regret for that. I guess the question would be, how did they temper their emotions? And did they have tools? To govern their decision making and say, okay, here's the mechanical rule that I'm going to use to identify where we are and get out.

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