• Criminal Deception in Silicon Valley: With entrepreneurial fraud cases on the rise, we investigate how entrepreneurs carry out criminal deception, employing deceptive means to defraud audiences. Analyzing court data from Silicon Valley ventures and their founders prosecuted for fraud between 2000 and 2023, our findings reveal that entrepreneurs carry out criminal deception through a process of façading: Entrepreneurs construct, perform, and protect illusory appearances (façades) that externally project high-growth performance to audiences while masking ventures’ actual underperformance. An Organization Science paper extending the cultural-entrepreneurship literature — how founders craft compelling narratives to acquire resources, and where dramatized discourse crosses into fraud. (Organization Science)

• How rogue officers turned a nationwide camera network into a tool for stalking: Flock’s array of license-plate cameras was built to fight crime. But at least 50 law enforcement officers were charged with or accused of misusing it and other systems. Drew Harwell on Flock’s license-plate cameras, built to fight crime — and the at least 50 law enforcement officers charged with or accused of misusing them, including to spy on their exes. (Washington Post)

• A Civilian Plane Crashed in New Mexico. Was the Military’s Tech to Blame?: Jeff Wise on a medevac flight out of Roswell and how drone warfare is making the skies more dangerous, even for airplanes far from any battlefield. Drone warfare is making the skies more dangerous, even for airplanes far from the battlefield. (Wired)

• How the Reflecting Pool Came to Mirror Trump’s Washington: The New York Times on the canoe incident’s afterlife — how a shallow pool on the National Mall became the perfect metaphor for a capital where every symbol is contested and every stunt is a federal case. (New York Times)

• REVEALED: The Scope of ICE’s Surveillance of Its Online Critics: Talking Points Memo on the documents showing ICE monitoring journalists, activists, and ordinary critics. (Talking Points Memo) see also How ICE Is Weaponizing Social Media Against Its Critics: The Wall Street Journal’s parallel investigation — the agency is building cases from posts, likes, and follower lists. Agency says its surveillance program searches for threats to agents, but critics see free-speech infringements (Wall Street Journal)

• How predatory trade schools drained $300 million from the GI Bill and cheated veterans: The institutions defrauded Veterans Affairs while cheating thousands out of career training, with some offering training on how to grow grass and make fake rocks, a Post investigation found. The Washington Post’s investigation into the schools charging veterans huge sums to learn how to grow grass and make fake rocks — the GI Bill grift at industrial scale. (Washington Post)

• Blanche Privately Vows to Take Down Abortion Rights Next: The New Republic reports on the AG nominee’s private assurances to conservative groups — the public confirmation-hearing moderation is not the private agenda. (New Republic)

• The Cities That Said Yes to Drugs: Michael Powell walks a mile from downtown Seattle into Little Saigon and finds an open-air market of roughly 250 people at 12th and Jackson. A long look at what harm reduction has and hasn’t delivered. Policies that gave addicts clean needles and places to use drugs were intended to reduce harm. They created a “zombie apocalypse.” (The Atlantic)

• What Happened to Talenti?: Wirecutter investigates the gelato decline — the recipe changes, the shrinking jars, and the private-equity playbook applied to premium ice cream. The comment-section outrage was right. (Wirecutter)

• One Night Only: An Honest Attempt to Understand the Ridiculous World of Callum Turner and Monica Barbaro’s New Rom-Com: Why are single people only allowed to have sex once each year? How on earth is that rule enforced? Is third base permitted? Pull up a chair—and get ready for a deep dive. (Vanity Fair)

Video of the day: The Watches We Were Wrong About

Be sure to check out our Masters in Business next week with Jack Raines, a writer and venture capitalist. We discuss his new book, Young Money.

AI Has Doubled Computing’s Share of U.S. GDP

Source: Paul Kedrosky

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~~~

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This week, I speak with Jack Raines, a writer and venture capitalist. We discuss his new book, “Young Money.” Jack dives into his unlikely journey into finance and venture capital. We discuss how his travels impacted the way he sees money and purpose for young people. He also reviews how to incorporate passion into your career and the impact it will have on your long-term finances.

A transcript of our conversation is available here Tuesday.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube (video), YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Dr. Ankur Crawford, EVP and Portfolio Manager at Alger. She heads the firm’s flagship Alger Capital Appreciation strategies. She was an Engineer at Intel, won the Intel Ph.D. Fellowship, and was awarded fellowship Natl Academy of Sciences, Engineering & Medicine, and holds several U.S. patents.  She was recognized as a “Top Women in Asset Management” in 2020 and serves on the board of The Knowledge House, a Bronx-based charity teaching technology skills to underserved communities.

SPOTIFY EMBED

Current Reading/Favorite Books

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• The Future, Made in China: Beijing is competing with the U.S. for tech supremacy. Who wins will have huge political implications. Beijing is competing with the U.S. for tech supremacy. Who wins will have huge political implications. (New Yorker)

• The Wisdom of Crowds: Michael Mauboussin’s Consilient Observer paper on when crowds are smart and when they’re dangerous — the diversity, independence, and aggregation conditions that make collective judgment work, and what happens when they break down. (Morgan Stanley / Consilient Observer)

• Bernard Arnault: Inside the court of France’s richest man: Investigation’Bernard Arnault’s Empire’ (1/6). The billionaire at the head of LVMH is as secretive as he is powerful. He relies on a devoted entourage in which a mix of fear and admiration prevails. Raphaëlle Bacqué’s six-part series on the LVMH founder — the free-marketeer who whispers in the ear of every president, keeps his media outlets in line, and patronizes the arts. (Le Monde)

• How Hulk Hogan’s Heel Turn Changed Everything: An excerpt from David Shoemaker’s new book. When Hogan joined the nWo he didn’t just rewrite his own legacy — he recalibrated what fans expect from storytelling generally. As this excerpt from David Shoemaker’s new book, ‘Why Hulk Hogan Matters,’ explains, Hulk’s shift to villainy recalibrated how fans watch wrestling—and what they expect out of storytelling on a much deeper level. (The Ringer)

• Can Robots Save an Aging Japan?: The New York Times on Japan’s demographic bet — with a shrinking workforce and resistance to immigration, the country is wagering its future on automation, from elder care to cherry blossom maintenance. (New York Times)

• Nobody Said Stop: Inside 1.8 Million Chatbot Conversations: Digital Digging’s analysis of a massive conversation dataset — what people actually use chatbots for, and how rarely anyone pushes back on anything the AI says. How ChatGPT, Claude, Gemini and Copilot keep the conversation going (Digital Digging)

• Why Is Everyone In Tech So Sad? A lot of people seem to be realizing that knowledge work is mostly pointless. AI might give us the pleasure of finding out what happens if an entire class of workers loses faith in their careers. NOEMA’s essay on the industry’s emotional recession — the layoffs, the AI anxiety, the collapse of the mission-driven self-image, and the malaise settling over the people who were supposed to be building the future. (NOEMA)

• The end of the age of heroes AI will soon be better at math than any human. What does that mean? Noah Smith on the cultural shift away from great-man narratives — the founders, the geniuses, the visionaries — and toward institutions, systems, and collective competence. (Noahpinion)

• The Mentor: How Roy Cohn taught Donald Trump everything. When President Donald Trump’s first Attorney General, Jeff Sessions, recused himself from a federal investigation into ties between the Trump campaign and Russia, in 2017, the President was angry. “Where’s my Roy Cohn?” he yelled. But Roy Cohn—an American scoundrel and the lawyer who helped send Julius and Ethel Rosenberg to the electric chair, aided Senator Joseph McCarthy in implementing the Red Scare, and showed Trump the ropes in the real-estate business—was long gone.  (New Yorker)

• Inside the Long, AI-Powered Quest to Perfect Pringle-Making: The Wall Street Journal on Kellanova’s chip optimization program — machine vision, predictive maintenance, and the surprisingly hard physics of the saddle-shaped crisp. (Wall Street Journal)

Video of the day: How George Lucas Outsmarted Every Studio In Hollywood

Be sure to check out our Masters in Business next week with Jack Raines, a writer and venture capitalist. We discuss his new book, Young Money.

America’s biggest companies report ‘rock solid’ profits as consumers face higher costs

Source: Financial Times

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~~~

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When it comes to investing, sometimes the best moves are the ones you don’t make.

In “How Not to Invest: The Ideas, Numbers, and Behavior That Destroy Wealth — and How to Avoid Them,” financial strategist Barry Ritholtz flips the script on traditional investment advice, focusing on avoiding common pitfalls rather than chasing flashy strategies.

His core message? Successful investing is often about discipline, patience, and steering clear of your own worst instincts. The premise of this book is that investing isn’t so much about what you do right; it is more about avoiding mistakes.

Barry Ritholtz, a Highly Respected Voice

Barry Ritholtz is one of the most respected voices in the world of finance, known for his no-nonsense approach to investing and his ability to cut through market hype. He is the co-founder and chief investment officer of Ritholtz Wealth Management, a firm that emphasizes evidence-based investing and long-term financial planning.

In addition to managing billions in client assets, Ritholtz is a prolific writer and commentator. He has published thousands of columns on investing for the Washington Post, Bloomberg, and The Street, plus more than 43,000 posts on his excellent blog, The Big Picture.

Additionally, he hosts the popular Bloomberg podcast “Masters in Business,” where he interviews top minds in finance, economics, and business.

What sets Ritholtz apart is his deep understanding of behavioral finance — how our emotions and cognitive biases influence investment decisions. “How Not to Invest” distills decades of research and experience into a simple, powerful message: the best investors are the ones who learn what not to do.

Bad Ideas, Bad Numbers, Bad Behavior, and Good Advice

Ritholtz organizes “How Not to Invest” into four clear and compelling sections: Bad Ideas, Bad Numbers, Bad Behavior, and Good Advice.

Each part tackles a different set of investing missteps that can quietly derail your financial success.

Together, these sections offer a roadmap not just for avoiding mistakes but for becoming a more grounded, thoughtful investor.

Here are three takeaways from “How Not to Invest.”

One of the most dangerous habits for investors? Taking cues from the financial media. In “How Not to Invest,” Ritholtz warns that the media isn’t designed to help you build wealth. It’s designed to grab your attention. Headlines are crafted to stir emotion, amplify fear, or promise quick riches, not to offer thoughtful, long-term investment guidance.

Ritholtz argues that reacting to news cycles — whether it’s market crashes, political shifts, or hot stock picks — is a fast track to bad decisions. The media thrives on urgency, but good investing thrives on patience. When you chase breaking news or follow talking heads with bold predictions, you’re more likely to trade impulsively, time the market poorly, or fall for trends that fizzle out.

What to do instead: Ritholtz advises tuning out the noise and tuning into your own financial plan — one grounded in evidence, tailored to your goals, and resilient to the hype machine. After all, the best investment advice is rarely delivered in real-time on cable news.

This is an excellent argument for the Boldin Retirement Planner, arguably the most complete financial planning tool available online, where you are in complete control of your own financial future.

Economic innumeracy refers to the widespread inability to understand, interpret, or critically evaluate economic and financial numbers. It’s not just about poor math skills; it’s about misunderstanding how numbers apply to real-world economic decisions.

Ritholtz highlights economic innumeracy as a core problem in “How Not to Invest” because it leads people to make poor financial decisions based on bad or misunderstood data.

His advice? Learn the basics of how numbers work in an investing context and be skeptical of anyone presenting data without explanation or context.

One of the most underestimated risks in investing isn’t market volatility; it’s how your brain reacts to it.

In “How Not to Invest,” Ritholtz shines a light on the subtle yet powerful role that cognitive biases play in derailing good financial decisions. These are mental shortcuts — built for survival, not investing — that often lead us astray.

Ritholtz explains that biases like confirmation bias, overconfidence, hindsight bias, and loss aversion can cloud our judgment and fuel impulsive decisions.

For example, you might cling to a losing stock because selling feels like admitting failure (loss aversion), or you might ignore warning signs because you’re only seeking opinions that support your existing belief (confirmation bias). Worse, in times of stress, these biases compound, just when clarity matters most.

The danger isn’t just that we have biases. It’s that we rarely notice them. That’s why Ritholtz argues for creating systems that protect us from ourselves: automatic contributions, diversified portfolios, and written investment rules that reduce the space for emotional decision-making.

Recognizing your biases doesn’t make you weak. It makes you a smarter investor. The more aware you are of these mental traps, the better equipped you are to avoid avoidable mistakes.

The post 3 Mistakes You’re Probably Making With Your Investments appeared first on The Big Picture.

• Some 64% of Young Men Day Trading Stocks Feel Like Failures. One-quarter of men aged 18-29 said they trade stocks daily, and almost two-thirds of them (64%) report feeling like failures, according to a study of 2,000 men published Wednesday by the Institute for Family Studies, a pro-marriage think tank. The survey data on the day-trading generation shows a correlation between trading frequency and misery at exactly what the behavioral literature predicts. (Bloomberg via Yahoo Finance)

• The Winning Formula for Fund Investors, and Why Others Left Money on the Table: US stock fund investors got the bag. Crypto fans fumbled it. (Morningstar)

• NYC’s Pied-à-Terre Owners Hunt for Creative Ways to Dodge New Tax: Owners of second homes are ‘apoplectic’ over the levy; some are highlighting flaws to reduce their home’s value or moving in family members. The Wall Street Journal on the avoidance strategies already in motion — LLC restructurings, residency claims, and creative occupancy arrangements. The tax passed; the lawyers are billing. (Wall Street Journal)

• The messy politics behind Google’s big AI shakeup: Google’s AI leadership changes may have come down to pressure to speed up products — and internal ethical conflicts. The Verge on the Jeff Dean–Demis Hassabis power struggle — the org chart battle that reveals how Google is really thinking about the DeepMind integration and the AI race. (The Verge)

• Can Reddit fend off a new wave of AI SEO spam? The era of AI-powered search has made Reddit mentions highly valuable. Subreddit moderators are catching brands trying to take advantage. The Verge on the marketers flooding Reddit with AI-generated posts designed to game AI search results — the last authentic corner of the internet is under siege precisely because it’s the last authentic corner. (The Verge)

• These Drivers Are Taking Extreme Measures to Avoid New Car Technology: Curmudgeonly roadblocks or the last beacons of sanity? These car owners disable alarms and reconfigure dashboards in search of low-tech bliss. (Wall Street Journal)

• Americans Are Turning on Trump: The president’s big gains with Black, Hispanic, and young voters in 2024 suggested a major shift. Less than two years later, he has lost those new supporters. The Atlantic on the polling shift — Black, Hispanic, and young voters who moved toward Trump in 2024 are moving away faster than any cohort in modern midterm history. (The Atlantic)

• How to Exist: Here’s an experiment for a true daredevil. Sit there for a three minutes, following two rules: 1. Don’t do anything; 2.Be content. By “don’t do anything,” I mean don’t move, don’t fidget, don’t indulge any thoughts or daydreams. You’re allowed to breathe, and blink. Raptitude’s meditation on the baseline skill nobody teaches — being present in your own life without optimizing, producing, or performing it. (Raptitude)

• No, You Don’t Want to Time Travel: A physicist’s spoilsport tour of why every time travel scenario is worse than advertised — the physics, the paradoxes, and the practical horrors. (D. Giles)

• What happens when an NFL ball goes into the stands? In this case, a lawsuit. Hamilton’s lawsuit says he was approached by stadium employees after Hurts handed him the ball, and “they misrepresented and lied to Mr. Hamilton claiming the football was not his property, and that he was violating law if he kept it and demanded that the football be returned.” The Athletic on the fan fight over a Jalen Hurts game ball that ended up in litigation — property law, stadium policy, and the absurd economics of sports memorabilia. (The Athletic)

Video of the day: The Economics Of Billy Joel

Be sure to check out a special bonus episode of Masters in Business interview with Mike Kelly, chief investment officer of Future Standard, a $90 billion multi-strategy platform for wealth management clients. Previously, he was at Omega Advisors and Tiger Management.

This indicator is giving the bull market another lease on life

Source: Marketwatch

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I am up in Maine discussing economics and markets; bandwidth is hard to come by, as is reception. In the meanwihle, enjoy this 2019  Businessweek piece about the event

Talking Rates in the Maine Woods With Economists Over Good Wine
Taking place right before the Jackson Hole Economic Symposium, the gathering is a chance for money managers, traders, and economists to discuss crucial issues without restraint.
Businessweek, August 27, 2019

Let’s get this out of the way upfront: There is no such entity as the “Shadow Kansas City Federal Reserve Board.”

This isn’t a “The first rule of Fight Club” situation. No one denies that a gathering of money managers, bond traders, and economists has been taking place at Leen’s Lodge in Grand Lake Stream, Maine, for several decades. It’s just that most of the conversations are off the record or governed by the Chatham House Rule, which doesn’t allow identification of speakers without their permission. Many attendees have an affiliation with the Federal Reserve, as current or former employees, but aren’t authorized to speak on the Fed’s behalf.

The long weekend in Maine takes place shortly before the Jackson Hole Economic Symposium, an event dating to 1982, held in Wyoming and hosted by the Kansas City Federal Reserve. Hence, the gathering became known in some circles as the “Shadow Kansas City Federal Reserve Board” because of the Fed affiliation of many attendees, more than a few of whom head off to Jackson Hole right after the gathering.

The group makes no claim to any official imprimatur. Instead, “Camp Kotok,” as it has become known—after David Kotok, chairman and cofounder of Cumberland Advisors, who began holding the meetings more than 20 years ago—has fishing and drinking and hiking and shooting and smoking of cigars in the pristine wilds of Maine, all of which may be great fun, but it’s hardly the reason to gather each year.

The main draw is the opportunity to discuss and debate the big issues of monetary policy, economics, and finance, with a like-minded group of serious policy wonks and high-profile money managers, away from the usual routines of the office. At dinner the dining room represents about $2 trillion in capital, not counting attendees from various governments and central banks from around the world.

In the past, discussion topics ranged far and wide; but this year, the focus was all Fed all the time: whether it should cut rates and by how much; if the inverted yield curve is signaling a recession; whether negative bond rates from Japan and Europe would make their way here. Perhaps the most passionate discussions were on the independence of the Federal Reserve in the face of unceasing pressure from President Trump.

Almost all attendees related similar anecdotes about presidential pressure on the Federal Reserve. Harry Truman famously called the entire Federal Open Market Committee to lunch at the White House, warning, “If you don’t cut rates, you are doing Stalin’s bidding.” Lyndon Johnson invited Fed Chairman William McChesney Martin to his ranch in Texas. LBJ threw Martin against the wall, saying, “Boys are dying in Vietnam, and Bill Martin doesn’t care.” Ronald Reagan’s chief of staff, Jim Baker, invited Fed Chairman Paul Volcker to the president’s library, adjacent to the Oval Office in the White House. With Reagan sitting next to him, Baker told Volcker, “The president is ordering you not to raise interest rates before the election.”

In each of these examples, pressure from the U.S. president was private, personal—and mostly effective. The very concept of a public dispute between a president and his own appointed Fed chair was unthinkable. Not only because it might roil the markets, but simply because adults don’t behave that way.

Alas, those were simpler times, decades before presidential tweeting was a thing. Before public bullying and harassment campaigns, there was direct and personal persuasion. The record suggests it was an effective way for presidents to influence monetary policy. Attendees at Camp Kotok repeatedly noted the current approach was not only unseemly but also had not ever been effective. The president calling out his hand-selected FOMC chair to an audience of 60 million-plus Twitter followers doesn’t seem to be having the desired result.

At the Jackson Hole gathering, Fed Chairman Jerome Powell’s  speech was a refresher on the history of monetary policy in the post-world war era. The section on current circumstances gave little comfort to a president apparently concerned about a possible recession and its potential effects on his reelection chances. Powell appears to have figured out three important things:

1. In the current era of low rates, low inflation, and modest economic expansion, the Fed’s rate policy is having little to no impact on stimulating the broader economy. Consumers have been buying big-ticket items such as houses and cars, regardless of modest increase in rates we’ve seen the past two years; we are still at historically low and accommodative levels. It’s noteworthy that corporations have been borrowing large sums of capital not to invest and hire, but to buy back their own shares. Lowering rates won’t change that behavior; if anything, it will only encourage more of it.

2. The Fed cannot offset an ill-advised trade war. The economy is having the expected textbook reaction to tariffs, treating them as an unnecessary tax on consumer spending, both here and abroad. If there was any expectation on the part of the occupants of the White House that this would cause the Fed to blink and cut rates, they appear to have been mistaken. “While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rule book for international trade,” Powell said.

3. Perhaps No. 2 above occurred because of the following: Powell seems to have deduced that Trump can’t fire him—at least, not without causing a constitutional crisis. This last conclusion allows the chairman to focus on protecting his institution from undue pressure from the president.

Simply stated, the Fed believes cutting rates is not the panacea the president believes it to be. Therefore the Fed would rather wait to cut rates when it would be much more effective—in a mild recession—than risk an increase in inflation from an even more accommodative stance than we’re in at present.

~~~

To be invited to Camp Kotok, you must check three boxes: First, a group member must nominate you as someone capable of adding to the conversation. Original ideas, thoughtful disagreement, and intelligent variant perspectives are all welcome.

Second, you must get the thumbs-up from Kotok.

Third, the rules mandate that each attendee brings a case of wine. The group contains some serious oenophiles, and you’d best bring your A-game. Lots of thought goes into the wine selection—along with 20-year-old Scotch whisky, rare tequila, and the occasional brandy. This year I brought two cases of a delightful Spanish albariño from Ramón Bilbao; it was a cheap (so two cases) and unexpected delicious treat. It made a surprisingly good impression in the face of overrepresented—and overpriced—Napa Valley cabernets.

Most evenings there is a featured discussion before dinner. Senators, governors, and representatives have made appearances. Every Saturday night there’s robust debate. The topics include currency issues, the latest crises, and economic philosophy. The theme of this year’s Jackson Hole Economic Symposium was Challenges for Monetary Policy. So it was no coincidence that the debate, in Maine this year, ably moderated by Jim Bianco of Bianco Research LLC, was on Modern Monetary Theory, also called MMT. The surprising consensus was that whether it comes from the political Left or Right, MMT is inevitable. Expect future infrastructure projects, Medicare for all, and/or tax cuts to be funded by bonds authorized by Congress, issued by the Treasury, and purchased by the Federal Reserve. The group takeaway was as simple as it was snarky: “Free money! Whatever could possibly go wrong with that?!”

One cannot gather 50 economists and their ilk and not expect forecasting to occur. All participants answer 25 questions on where they think various prices and economic indicators will be one year hence. The stock market, unemployment, bond yields, gold, gross domestic product, yen, euro, inflation, oil, and other questions are not only discussed and forecast but gambled upon at $5 per prediction. I usually do pretty well, and this year I won $52. (Ties change the payouts.) Sizable side bets occur, and some people have been known to make rather large and ill-advised wagers under the influence of alcohol. I have done that, too, but thankfully, the rules preclude me from going into details.

There is a stable core of about 35 to 40 people, with a few newbies showing up each year to shake things up. Not everyone gets invited back. My slot opened up a dozen years ago when a Chicago currency trader decided to stand up in his canoe, flipping it over, sending everyone and everything on board into the lake.

My own tenure almost came to a premature end when I left a wet towel on a radiator to dry; it instead smoldered. Camp Kotok lore is that I almost burned down the cabin, and bank analyst Josh Rosner led a mock prosecution that evening to have me tossed out for my recklessness and negligence. My defense: This was no accident; I was trying to murder Rosner and his snoring bunkmate and fellow bank analyst Christopher Whalen, so the rest of us could get a night’s sleep. That this argument carried the day gives you some sense of the gallows humor of the dismal set who gather—and why I still get an annual invitation.

For a few years, electronic media were present in large numbers (including Bloomberg Radio and TV). One Friday evening, on Aug. 5, 2011, a television truck was accidentally still present—it couldn’t exit the narrow parking area because a car with a missing set of keys blocked the way—when Standard & Poor’s unexpectedly downgraded the credit quality of the U.S. It was a television producer’s dream, a huge news event scoop, with a live TV feed and a few dozen tipsy economists happy to chat about it, alcohol-induced buzz be damned. These were the first people to share their views with the world about what the downgrade meant. The consensus that it mattered much less than people feared was borne out by the subsequent course of history.

This year the concerns were focused on the many conundrums of monetary policy. The inverted yield curve—when short-term bonds pay a higher yield than the rates paid on longer-term bonds—is worrying, and the main question being debated was whether it was foreshadowing a recession or a sign that interest rates are still too low.

Yet the U.S. has the highest rates in the developed world, which is not ideal, in several economists’ view. The risk is a “giant flow of currency to the U.S.” to capture that yield, and an “overvalued dollar that is way too strong.”

Negative interest rates were even more worrying to the group. The entire economic system, it was pointed out, is based on positive interest rates. And if rates flip negative in the U.S., as they already have in Germany and Japan, no one knows what will happen.

Photos and videos here

Source:
Talking Rates in the Maine Woods With Economists Over Good Wine
Barry Ritholtz
Businessweek, August 27, 2019

The post Returning to Camp Kotok appeared first on The Big Picture.

• Your phone is the most intricate machine you’ve ever held. Let’s take it apart.Fingerprint Resistant Coating, Chemically hardened glass armour, An invisible grid that senses your fingers, and Millions of lights forming everything you see… (Everything Machine)

• The Investing Heavyweights That Backed Situational Awareness Before It Blew Up: The Wall Street Journal’s exclusive on Aschenbrenner’s imploding fund — the marquee names who piled in at the top, and the redemption queue forming now. Hedge fund behind aggressive AI bets tapped into roster of big-name investors; some warned the founder about the risks of heavy borrowing (Wall Street Journal) see also Situational awareness – do we have it? The companion research note on markets’ collective blind spots. Leverage in ETFs, margin accounts and hedge fund books that was encouraged by more than a decade of low and stable rates. Indeed, reports that over 3% of Korea’s adult population received a margin call over the last two weeks is deeply concerning if true.  (Deutsche Bank Research Institute)

• The Anatomy of a Blow-Up: Ted Seides dissects how funds die — the leverage, the crowding, the redemption spirals, and the pattern that repeats from LTCM to the present. (Capital Allocators with Ted Seides)

• US diesel prices overtake Biden-era average in blow to Trump: The Financial Times on the inconvenient fuel data — diesel is now more expensive than the average under the administration Trump ran against on energy prices. (Financial Times)

• Uber’s Strategy for Fighting Sexual Assault Suits: ‘What Were You Wearing?’ Emily Steel on a company that promised to handle claims “in a way that is best for the survivor” while its lawyers pursued a far more aggressive strategy. The ride-hailing giant promised to handle legal claims “in a way that is best for the survivor.” Its lawyers are pursuing a far more aggressive strategy. (New York Times)

• The Great Romance Slump: Faith Hill at a candlelit Manhattan loft for a “mindful singles event” designed as the antidote to dating apps. Ninety seconds into a three-minute hug with a stranger, she began to think dying alone might not be so bad. Why are so few young people finding love? (The Atlantic)

• How Does the Qatar-Donated Air Force One Compare With Other Presidential Jets?: The donated aircraft lacks midair refueling and nuclear hardening, and goes in for more modifications this fall. Boeing’s two next-gen planes are due in 2028, more than $3 billion in losses later. From laser weapons to color schemes, transporting the president around the world is a study in details (Wall Street Journal)

• GOP Staffers Say the Party Has a Groyper Problem: In group chats and at happy hours, party veterans fret that the pipeline of young Republican talent is veering into terminally online extremism. Party veterans are concerned that the pipeline of young Republican talent is veering off course — and into terminally online extremism. (Politico) see also Let’s Be Clear: Todd Blanche Is an Unqualified Hack Who Shouldn’t Be U.S. Attorney General: Esquire’s Charles Pierce holds nothing back on the AG nomination — the résumé, the conflicts, and the Senate Republicans pretending not to notice. If Congressional Republicans had any spine at all, they wouldn’t let something like this happen (Esquire)

• Why ‘super movers’ have healthier brains — and how to be one: Defined as people who are able to walk significantly faster than most of their aging peers, they are about half as likely to experience cognitive decline, a study found. The Washington Post on the research linking movement variety to cognitive health — it’s not just exercise volume, it’s the range of ways you move. (Washington Post)

• On ‘Ted Lasso,’ She’s Ruthless. Off Camera, She’s ‘Quite a Goofy Nugget.’: The New York Times profiles Hannah Waddingham ahead of the show’s fourth season — the West End years, the late-breaking stardom, and the Rebecca Welton evolution. Waddingham is a rare British actor to beat a path from musical theater to the screen. (New York Times)

Video of the day: I Asked Michelin Chefs How They Cook Steak

Be sure to check out a special bonus episode of Masters in Business interview with Mike Kelly, chief investment officer of Future Standard, a $90 billion multi-strategy platform for wealth management clients. Previously, he was at Omega Advisors and Tiger Management.

YouTube is now bigger than Netflix and Disney’s streaming services combined in terms of TV viewership in the US

Source: Nielsen via Bloomberg Screentime

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This week, a special bonus episode!

I speak with Mike Kelly. He’s president and chief investment officer of Future Standard and a member of the firm’s management committee. We discuss his career on Wall Street, from his time at Omega Advisors and Tiger Management to his work today, including how he helped build Future Standard, a $90 billion multi-strategy platform for wealth management clients.

A transcript of our conversation is available below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, , YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business this weekend with Jack Raines, author of the new book, “Young Money: A Field Guide to Wealth and Purpose in Your Twenties.”

Transcript:

MASTERS IN BUSINESS: Mike Kelly
President and Chief Investment Officer, Future Standard
Host: Barry Ritholtz  ·  Bloomberg Radio  ·  Episode air date: August 5, 2026  ·  Running time 1:24

ANNOUNCER  00:00:02
Bloomberg Audio Studios, podcasts, radio, news. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ  00:00:16
This week on the podcast, an extra special guest, Mike Kelly, has an absolutely fascinating career from Omega to Tiger, currently President and Chief Investment Officer at Future Standard. Really about as knowledgeable an individual as you’ll find covering private credit, infrastructure, and the wealth channel, and what the future of what we broadly call alternatives looks like. I thought this was fascinating, and I think you will also. With no further ado, my conversation with Mike Kelly.

Mike Kelly, welcome to Bloomberg.

MIKE KELLY  00:00:52
Thanks, Barry. It’s great to be here.

BARRY RITHOLTZ  00:00:54
So I’m fascinated by both your background and your career path, which is really, really interesting. But let’s roll back a little bit. Bachelor’s at Cornell, MBA from Stanford. What was the original career plan?

MIKE KELLY  00:01:12
So, taking a step back, I grew up on the border of Queens and Long Island. My dad was an NYPD cop in the South Bronx and in Queens. Mom raised the five of us kids in a traditional Irish American household and valued education.

I knew from a pretty early part of my life that I wanted to go into investing. I’ll tell you a little story. So when we turned 13 in my family, you got the big gift, and at the time I was a nerdy kid. I was into computers. My dad would drop me off at the Queens Village Public Library, and I would learn how to program on this Apple computer. They had just gotten the Apple IIe in. And for my 13th birthday, I asked my parents for — you got up to $300 — $300 of Apple stock. That was my request.

BARRY RITHOLTZ  00:02:07
Really? Wow.

MIKE KELLY  00:02:07
And the big day came. They gave me an envelope. I was really excited. I opened it up, and it was a savings bond for a local bank. And my parents noted the disappointment in my face and said, “You know what, Michael? We’re sorry, we don’t know how to buy stock.”

BARRY RITHOLTZ  00:02:25
This is, like, late eighties?

MIKE KELLY  00:02:26
This is ’83.

BARRY RITHOLTZ  00:02:26
’83, okay.

MIKE KELLY  00:02:26
So I said then and there, I am going to teach myself how to do this, how to invest in these companies. And I set out — I still have it, I have the notebook over here, I actually brought it with me — about stocks and all the things that I would read about investing and investing in the stock market. And so from an early, early part of my life, I wanted to go into investing.

And so throughout the years at Cornell, at the time, I did some great internships. One at a boiler room — they made a movie about that. One for Steve Wynn at the Mirage, which was exciting. And then I studied in Japan, studying the banking system there for one summer. And as I was coming back, the only firm that actually would interview me was Salomon Brothers. And so I wound up, fortunately, getting a job at Salomon Brothers.

BARRY RITHOLTZ  00:03:27
In what capacity? What would you do?

MIKE KELLY  00:03:27
In the financial institutions banking group.

BARRY RITHOLTZ  00:03:30
Okay. So you started as an i-banker, then—

MIKE KELLY  00:03:31
Started as an i-banker. Loved Salomon Brothers. Wound up going to the 42nd floor of Seven World Trade Center, which is where Michael Lewis wrote the book Liar’s Poker. So I wound up going to the fixed income trading floor for my third year and really got bit by the bug of markets. I knew I wanted to make the transition from investment banking over to the buy side. So as I headed off to Stanford Business School, that was my mission — to find my way into the buy side.

BARRY RITHOLTZ  00:04:05
So there’s a sort of urban legend that you kind of cold-called your way from Salomon Brothers into an internship with hedge fund legend Lee Cooperman at Omega. First of all, is that a true story? And if it is, walk us through that call.

MIKE KELLY  00:04:23
Right. So I was at Stanford and I knew I wanted to make this transition into the buy side. And in looking at the careers of the greatest minds in investing, they all seemed to be relegated to this corner of the market of hedge funds and private equity firms. We’re talking about the mid-nineties here, when people didn’t have a lot of understanding of what these firms actually did. But it struck me as an incredibly intense and exciting career path. Many of the people were very young and seemingly making a lot of money doing it, and really working on some dynamic investing strategies.

And so I had a directory. It was called the Van Hedge Fund directory. It was a printed-out piece of paper, like from a fax machine, and it had the names and addresses of, at the time, the top 25 hedge funds. So it had Bruce Kovner in there, and Paul Tudor Jones and George Soros. And so I went through this directory and literally called, from a payphone, these individuals.

BARRY RITHOLTZ  00:05:37
Come on. “Hey, Druckenmiller, it’s Mike Kelly.” That sort of call?

MIKE KELLY  00:05:42
Now, the disadvantage is most people were screening their calls. Their assistants were like, “Yeah, he’ll never call you back.” The advantage for me was one of those individuals, Lee Cooperman, often didn’t use an assistant and answered his own phone.

BARRY RITHOLTZ  00:05:58
He’s there at five in the morning, he’s there at eight at night. If you call outside of business hours, Lee’s the only guy in the office.

MIKE KELLY  00:06:05
And he picks up and goes, “Lee.” And that’s how he starts the conversation. “Mr. Cooperman, I’m a kid from the boroughs like you. I just want to break into the industry. I’ve worked at Salomon, but I’ve never been an investor before. I am willing to do whatever it takes. I am willing to sleep on my parents’ couch and work for you for free.”

And he said, “I only hire PhDs.”

BARRY RITHOLTZ  00:06:30
Really?

MIKE KELLY  00:06:30
And I said, “Well, I’m getting my MBA right now.” And he said, “No — poor, hungry, and driven.” And I was like, “Well, I’m all three of those. I check those boxes.” And he said, “Well, I’m a value investor and I like the price. You can come work for me for free.”

BARRY RITHOLTZ  00:06:47
No kidding. “I like the price.” Oh my God.

MIKE KELLY  00:06:50
I show up day one at Omega and Lee comes to me and says, “Let’s go to breakfast.” And I thought, this is amazing. I’m—

BARRY RITHOLTZ  00:07:00
In heaven.

MIKE KELLY  00:07:01
First day, and I’m going to breakfast with the legendary Lee Cooperman. So we go across the street — 100 Wall Street — we go across the street to an Au Bon Pain for breakfast, and we get to the counter, we order, and Lee turns to me and says, “You are buying.” So here I am, day one, and I’m already $30 in the hole in my illustrious investment career. But it turned out okay.

And that was how I got my start in the investment business, and in particular in hedge funds and the alternative investment business.

BARRY RITHOLTZ  00:07:36
That’s unbelievable. So after Omega, you leaped from Lee Cooperman to working under Julian Robertson at Tiger Management. How did that come about?

MIKE KELLY  00:07:47
So I had worked full-time after business school for Lee and for Omega Advisors. I received a phone call a few years later from Tiger Management. They were looking for someone in their macro trading and analyst group. And at that time, getting a call from Tiger was like getting a call from the New York Yankees. It was the illustrious, incredible firm. Was very honored and flattered, interviewed there.

BARRY RITHOLTZ  00:08:14
Let me interrupt you a second just to remind listeners that the 1980s and 1990s were peak hedge fund years. They were masters of the universe. They put up the best numbers. For any investor that wanted to allocate to them, it was not easy to get into any of those funds. The world changed after the financial crisis, but that was the golden era of hedge funds, wasn’t it?

MIKE KELLY  00:08:41
Most definitely. And I think what I appreciated the most about those first few firms I worked at — Salomon, Omega Advisors, Tiger Management — there was a commonality of culture, in that these were very intense work environments with very intellectually curious individuals who were super smart but liked to have fun, and were a joy to be around and learn from. And so I really enjoyed the aspects of the culture of those environments in my early career and really got a lot out of it. And it really appealed to my personality, kind of an obsessive, intense personality. So I really enjoyed that.

But going to Tiger was incredible. A very young group of people who have obviously gone on to do great things in their investment careers, a really intellectually challenging place to work. But I learned a ton about investing from Lee and from Julian and from the other individuals that I worked with, and it sort of shaped my investment philosophy as time went on.

BARRY RITHOLTZ  00:09:52
I’m curious, because there are obviously such different styles. Lee is a deep value guy. Tiger is known as momentum and growth and technology — a very, very different opportunity set. What did you learn from each of those? How different were Julian’s and Lee’s approaches?

MIKE KELLY  00:10:13
Well, I think Julian and Lee, at the inception of it, both had a very value-oriented approach. I think within Tiger there was an evolution over time and an adaptation — even with some of the Tiger Cubs — of adopting a more growth-oriented strategy. But it was a time when doing real intense work could uncover really great long and short opportunities. I do think years later, decades later, it became much more difficult with indexation and ETFs, and the market structure changed.

But back then, I would say from an investment philosophy standpoint, there was a view that every single day you rebuy your portfolio. It doesn’t matter if you’re losing money or you’re in the money, you’ve made a double already. If you own it, think about it and re-underwrite it as if you just bought it today. And are you as excited, from a long and short perspective, about that opportunity in the go-forward period? And I think that discipline of re-underwriting your holdings every single day is something that’s remained with me.

I think secondly, I would say what I would call a variant perception — or what is called a variant perception, something that Michael Steinhardt popularized — of, when you make an investment, how is your view different from the market? Because if you want to outperform the market, you can’t just agree with the thesis that’s already embedded in the price or value of an investment. And so that variant perception of, how do you look at it differently — you’re either more bullish about that opportunity, or you think that opportunity is overdone and so you’re either selling or you’re shorting, or what have you.

And so I think that variant perception is really, really an important aspect of the philosophy. Having investment conviction is another principle. Go all in, do your work, get to a high-conviction thesis, but hold it loosely. Hold on loosely, like—

BARRY RITHOLTZ  00:12:13
“Strong opinions, loosely held” is the expression I heard years ago.

MIKE KELLY  00:12:17
Right, that’s exactly right. Because if you have disconfirming evidence, don’t ignore it. Don’t double down with your escalation of commitment. Re-underwrite it and ask yourself, well, maybe I have to change my mind. The greatest investors, in my mind — someone like Stanley Druckenmiller — is willing to change his mind all the time based on new information. And so I think these principles form an investment philosophy that, if you don’t know what your competitive advantage is in making an investment, whether you’re a private market investor or a public market investor, you probably don’t have a reason to be in that investment in the first place.

BARRY RITHOLTZ  00:12:50
That’s exactly right. I love the concept of re-underwriting. So many new investors — and I started on a trading desk — any position you had, you had to justify every moment you owned it. Hey, this is capital. I can turn this into capital in a millisecond. Would you buy this if this was back as cash and not as a holding? Where you bought it, whether you are underwater or ahead, is totally irrelevant. Would you continue to re-underwrite that? That’s a great way to describe that. I’m really impressed with that.

So from Tiger, you go to FrontPoint Partners and helped turn it into a truly institutionalized hedge fund. Tell us a little bit about FrontPoint.

MIKE KELLY  00:13:34
So I got a call from the two original founders of FrontPoint and they asked me to look at the business plan and to give them a critique, which I did. I thought it was fascinating. At the time, a lot of hedge funds were frankly run almost like family offices as a business.

BARRY RITHOLTZ  00:13:51
A third of the capital was the founders’, half the time anyway, not precisely.

MIKE KELLY  00:13:55
Right. And most of the investment capital came from ultra-high-net-worth and family offices, like the Memphis mafia and others. And so there was a view that institutions would begin to embrace alternative strategies, and for them to embrace alternative strategies, the firms they would allocate capital to would need to look like the institutional asset managers they were used to, like in the traditional mutual fund business. But a lot of hedge funds didn’t look and feel that way. They were run more like family offices.

And so we had a view that by forming a real institutional-quality asset management firm that would house diversified strategies and managers who could provide absolute return strategies to these institutional clients, that that would be embraced — embraced because of the excellence of the investment teams, but also by the world-class asset management infrastructure that we would build with FrontPoint. And so that was the thesis. You’re going back to 2000 now, and to be invited to join a firm — and these guys were in their fifties, I was 29, 30 years old — to build a company was an exciting thing for me at the time.

I still wanted to become Paul Tudor Jones. I wanted to be a macro investor, I wanted to be an investment manager, but I thought I’ll start by helping these individuals build this firm, and then I’ll go back to running a fund, probably at FrontPoint.

BARRY RITHOLTZ  00:15:29
Didn’t you begin at FrontPoint as CIO and eventually become co-CEO? Is that right?

MIKE KELLY  00:15:34
I was the head of manager selection and overseeing the investment teams. Then I became chief investment officer and head of the multi-strategy, and then I became co-CEO of the firm. So it was an evolution over time. But at the outset, hiring the investment teams, overseeing what they were doing, picking and selecting them, was a fascinating job for me. I loved learning about different approaches — Market Wizards, Stock Market Wizards, all the different ways you could skin a cat with investing. So it was like a kid in a candy store.

And I began to reflect on my career at that time, in that everyone goes into the investment business with the mindset of, I want to become a great investor. I want to become Warren Buffett, I want to become Julian Robertson, I want to become Paul Tudor Jones. I was no different. That is a very crowded pond, and a lot of luck and things have to go your way to conspire to result that way, to become one of the top decile, quartile managers out there.

And I thought at the time, building an asset management company like this, like I’m doing with my partners at FrontPoint — I’m a young guy, I’ve got my whole career ahead of me — no one ever sets out in the investment world wanting to become Larry Fink, right? Or Chip Mason, who built Legg Mason. They want to become Warren Buffett or Julian Robertson. And I thought, actually, if I spent my career building asset management companies and managing them, that could be a pretty robust career. I could really enjoy myself. And it’s a pond no one seems to be fishing in, and maybe 20 years from now this might result in something. And so it was at that moment, within FrontPoint, that I began to move away from investing professionally in the markets and more toward building investment organizations and overseeing investment managers and strategies.

BARRY RITHOLTZ  00:17:21
So the next step along your career path, you joined ORIX Asset Management as CEO?

MIKE KELLY  00:17:28
Right. So we had sold FrontPoint to Morgan Stanley. I had run it with my partner there for a few years. I was hired away by ORIX to be the CEO of their asset management unit. It’s a Japanese holding company. They were looking to diversify their holdings into the US and into various industries, one of them being asset management. They had a lot of capital to deploy and a low cost of capital, being a Japanese holding company, and I thought I could exceed that hurdle and build something here.

So it was back in 2012, and it was during the PIGS crisis, in thinking about where could we acquire compelling asset management capabil—

BARRY RITHOLTZ  00:18:07
Capabilities. Let me interrupt you. For the people who might not have been trading through it — whatever the PIGS crisis was: Portugal, Italy, Greece, Spain, is that right? Spain?

MIKE KELLY  00:18:19
That’s correct, that’s correct. And at that time, the European Central Bank and some of the local national banks of these European countries were encouraging financial parties to divest of their non-core holdings. And so as we were thinking about where in the world could we deploy capital to acquire asset management capabilities, Europe seemed a logical place because there was forced selling happening. And so there was a jewel in the crown of Rabobank Holdings, the private bank in the Netherlands. And they needed to divest of Robeco, which had been around for—

BARRY RITHOLTZ  00:18:58
Which was giant back then.

MIKE KELLY  00:18:59
$300 billion plus. And they had purchased that historically and had owned it, but it was non-core to their private bank. And so we positioned ourselves as an advantageous buyer to them. We purchased it at a very attractive valuation. It was the largest in ORIX’s history.

BARRY RITHOLTZ  00:19:22
Wow.

MIKE KELLY  00:19:22
We acquired that capability. And at the time it was exciting to get that deal done. We had bought other stakes in other managers in the alternative space, but really I wanted to do something more entrepreneurial again. And so I began to look at, what is the next business within asset management — like FrontPoint — that I could set my career out to build? And that is how the inception of coming across what was then Franklin Square, now Future Standard, came about.

BARRY RITHOLTZ  00:19:58
So when you joined, did you join as CIO or president, or what was the initial role?

MIKE KELLY  00:20:04
Yeah, so I was introduced to Michael Forman, the founder of Franklin Square, through a headhunter friend of mine, Scott Fletcher. And I was also introduced by Bennett Goodman and Doug Ostrover at GSO in Blackstone. And they had encouraged me to go meet with their partner who they had partnered with. As I was describing what I thought the next big thing in asset management would be, it would be the arc of history of bringing alternatives from family offices and ultra-high-net-worth throughout the eighties and nineties, and then the endowment model with David Swensen, and eventually institutions began adopting it. The one constituency that was still left out were the individual investors below ultra-high-net-worth and family offices. And so I had a view that at some point that would change, and I wanted to help effectuate that change. And that is where I was introduced to Michael Forman and his vision for what he was doing with Franklin Square, and had been doing.

And he had built this incredible chassis around productizing and distributing income strategies, and convinced me to join up with him as president — to go join him and be the chief investment officer, help build out the asset management capability. Now, at the time, Franklin Square was a product and distribution firm, so they were creating the wrappers and distributing them, but other external parties — at the time, Blackstone — were the ones sub-advising and providing all of the investment acumen.

And as I would describe it today, and I use this analogy of Netflix: it was like seeing the red envelopes and DVDs. But Michael had created this incredible distribution engine, a hundred-million-person mailing list type of distribution capability. And just like Netflix figured out how to digitize their business and create their own in-house TV and movie studio, that was my pitch to Michael — you could eventually diversify this product base and you could bring in-house capabilities, so long as the quality is still very high. You can put it through these channels and offer them to private wealth clients. And so that’s what we set out to do.

BARRY RITHOLTZ  00:22:27
Really, really fascinating. Coming up, we continue our conversation with Mike Kelly, Chief Investment Officer and President of Future Standard, discussing how he helped build the company into a $90 billion multi-strategy platform for wealth management clients. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

BARRY RITHOLTZ  00:23:01
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Mike Kelly. He’s president and Chief Investment Officer of Future Standard. They are an alternatives manager focused on the wealth channel, running over $90 billion in client assets.

When you joined, what was Franklin Square — before it became Future Standard, FS Investments? They effectively had one credit strategy plus whatever they were reselling on behalf of other people. A little over $10 billion. You’re almost 10 times the size now, with a full multi-strategy platform. How did that evolution come about? What were the key inflection points? Was that a tough sale to get everybody in-house to accept that, hey, we have a nice little business here, Mike, why do you want to mess with it?

MIKE KELLY  00:23:56
Right. Well, there was a nice business there, and change comes with resistance. But I think we’ve had a fortuitous progress of change over the last 12 years. And I would say it started out with forming multiple partnerships with various outside firms that Michael and I had relationships with — the likes of KKR and GoldenTree, Rialto in real estate, EIG, Magnetar, Wilshire — in order to create some diversified strategies that we could offer to clients with best-of-breed managers across various disciplines.

And so that was the first stage of evolution, moving into more of a multi-manager architecture. Concurrent to that, I began to hire internal talent, which is something similar to what I had done at FrontPoint, and brought in individuals like Andrew Beckman and helped him build out his internal private credit team. We made some acquisitions as well — Chiron Asset Management, Portfolio Advisors, Post Road Group — in various disciplines. And so it was a combination of an evolution of external partnerships, in-house hiring and talent and development and growing those, and inorganic acquisitions of capabilities and managers to bring on.

And I’d say, starting from this inception of packaging and distribution, we then evolved into a diversified asset manager. And then, after the series of in-house capabilities and acquisitions, we adapted the firm into what I would call a true alternative platform. And I’ll distinguish a platform from a diversified asset manager, because I do think they are different. A diversified asset manager, you have different strategies that you offer to clients, but those strategies don’t have to interrelate at all with one another, and there may be no shared set of relationships or gleaned insights or what have you. A platform, as I would call it, is more interwoven. There’s more collaboration, there’s shared underwriting, there’s shared origination and relationships for deal flow, there’s an exchange of insights and specializations, all with the intention of improving outcomes for clients. And that evolution, if you will — it’s easy to whiteboard that out and describe, we’re going to do this. To your point, it’s really hard to actually execute on that.

BARRY RITHOLTZ  00:26:52
So there’s an underlying thesis in this. Once this full platform is built out, hey, there is a giant wealth channel that a lot of alts are not tapping into. It’s the next great frontier. High-net-worth, mass affluent want the same sort of access to strategies that they see foundations, endowments, institutions having access to. Tell us a little bit about how you see that opportunity. How large is it? How much has already been captured? Where are we in the cycle of this getting pushed out to mom-and-pop investors?

MIKE KELLY  00:27:30
So, backing up to when Michael first started Franklin Square — this is now back in ’07, ’08, launched the fund in January of ’09. So auspicious, great timing for a credit strategy and delivering income to individual investors through the independent broker-dealer channel. And if you remember that time, you had this declining yield environment and the Fed cutting rates over that course of time. And so there was a search for income, particularly for retirement accounts.

And so in the early days, a lot of our offerings were income strategies, income-oriented — whether it’s middle market lending, CLOs, offering real estate lending strategies and so forth. So, generating income. And I think we saw that post the great financial crisis, banks would begin to withdraw from those lending activities and cede those over to asset managers and direct lenders like ourselves, but also that private wealth and individual investors would begin to embrace these strategies to pick up income sources. And so those two trends, I think we got correct.

What we probably didn’t foresee was the adoption curve. I think we probably assumed it would be more linear than it actually turned out to be. It took longer. You think about it — this is now going back, I mean, Franklin Square was started almost 20 years ago. It’s very topical today and we’ve seen a lot of flows in the last five-plus years, but it has been more recent that adoption is picking up and being spoken about across the entire industry. So I do think there’s been this arc of evolution and adoption, but I would tell you, Barry, it’s still very much in the early days, given the dynamics of private companies and their capital needs.

BARRY RITHOLTZ  00:29:27
So let’s put that into a little context. The 2010s — you not only had zero interest rate policy, ZIRP, you had QE, you had Operation Twist. The Fed did everything it could do to make cash trash and force people off the sidelines. Hence TINA, there is no alternative, became popular. In hindsight, it’s kind of surprising that it took private credit as long as it did to really find a bid. You would think that in that era of zero interest rates, hey, we’re going to give you 7%, but it’s variable — if the Fed raises rates, we should see a bump up in yields. What was it like building out into that environment, not just as an executive but also as an investor, as a CIO?

MIKE KELLY  00:30:17
Yeah, I would say two things. One’s a market backdrop issue and one’s more of an operational issue. On the market backdrop issue, I define this golden era of investing as post-Volcker, like 1987 up until 2021 as we’re coming out of COVID. And if you look at a chart of spectacular US stocks and bond prices, 60/40 made incredible sense. You had disinflationary forces, you had benign demographics, you had globalization, and it was great to set it and forget it with a 60/40 mix.

BARRY RITHOLTZ  00:30:54
That era was a 35-year bull market in bonds. It’s incredible — there are long stretches where fixed income is outperforming equity in that run.

MIKE KELLY  00:31:05
Right. So why do you need an alternative, right? If the music sounds great, you don’t need alternative music. When the music is all crap, Nirvana comes along, right? And so I think the experience that investors had was, prove to me I need something else. And it hasn’t really been — particularly with fixed income, right, when you think about the experience of the last six years or so, where high duration fixed income has not been great at all. That’s 40% of your traditional portfolio, right? That just stopped working overnight. And so that catalyzed a lot more inquiry into diversified sources of private market income, private returns, and so forth.

The other issue that slowed the adoption curve is on the operational infrastructure side. And it’s something that the likes of Lawrence at iCapital and Matt at CAIS had been solving for, but it was really clunky in the early days. You had double layers of fees, you had feeder funds, you had high loads, K-1s. K-1s, nightmare. It’s just not something that the individual investor and their advisors wanted to embrace, understandably, because you had to fill out by hand a sub doc for every single investor.

And so both the market backdrop changing and morphing and opening up people’s minds, as well as access and operational infrastructure — and we’ll get to this, but education, which we’re clumsily getting our way to, educating on these strategies, how they work, these structures, how to embrace them, how to incorporate them into portfolios — that took time. It just took time for the whole industry to get there. And I feel like we’re finally at the point where we’re arriving. But as I said earlier, I still look at this adoption and penetration from these investors as very early.

BARRY RITHOLTZ  00:33:03
How much of an accelerant was 2022 with the — what was it, 550 basis points of rate hikes? If you’re long duration, well, that’s going to really leave a mark. What did that year do to acceptance of alternatives from that wealth channel?

MIKE KELLY  00:33:23
So, two things. One was positive and one was more of a challenge. The positive side of things was that with the backup of duration, of long yields, that began to challenge the traditional fixed income side of the portfolio. So if you think about the traditional fixed income portfolio — I think about credit, fixed income risk in three ways: liquidity, credit risk, and duration. And so most people had very long duration, highly liquid, low credit risk investments in treasuries and agency bonds and mortgage securities, municipal securities, that began to fail them and not provide the ballast against equities it had been. And it didn’t provide the income, because duration was working against you. So that was a positive force for, let’s find something else.

The negative force was going from zero to 5%. People went from not earning anything on their cash and needing to deploy it to make any money, to, oh wait a minute, I haven’t made money on my cash in a long time. 5% sounds pretty good.

BARRY RITHOLTZ  00:34:28
Money market five and change was great. It was especially—

MIKE KELLY  00:34:32
When you hadn’t had that for a long time. Yeah, for sure. And so you began to see some hoarding of cash balances that only began to be deployed as the Fed started to cut those rates again.

BARRY RITHOLTZ  00:34:45
I would imagine the inverted yield curve around that time was problematic also. Why do I want to tie up money if liquid money market is yielding even more?

MIKE KELLY  00:34:54
Most definitely.

BARRY RITHOLTZ  00:34:55
Really interesting. So you’ve described the current environment as having created a new investing imperative — focus, research, flexibility to change course, conviction. Tell us about what you see as the modern investing imperative around alternatives.

MIKE KELLY  00:35:18
Right. So we all know about the decline in the number of publicly traded companies. If we were coming out of college, it was 9,000; today, barely 4,000. Both the number of private companies and the size of private companies has exploded. And the opportunity to invest in these private companies has increased dramatically, as well as the access and the availability, and those companies taking advantage of access to private equity and direct lending sources of financing.

And that allows for a much broader palette for investors to build portfolios with, by accessing those companies. And I would say, Barry, increasingly, in order to get diversification — to build diversification — you do have to look outside of public stocks and bonds. The stock market is becoming less and less representative of the total economy than it used to be. It’s very concentrated right now in AI infrastructure, in the Mag Seven and the buildout there.

And you have a myriad number of private companies of small to midsize and some larger size that provide you access to what’s really driving the US economy. We call that the middle market. And the middle market is a couple hundred thousand plus companies that drive the US economy that are not publicly traded. We define the middle market as companies of a billion dollars of enterprise value and down, so sort of lower and core middle market. And these are businesses that frankly are fast growing. They’re a fragmented ecosystem, they’re hard to find. But if you can navigate and invest directly in these businesses, or lend to these businesses, it’s a very attractive access for investors.

BARRY RITHOLTZ  00:37:10
So let’s talk a little bit about that. I like to step back and take the 30,000-foot view to kind of get a sense of how this evolved. My general sense was you had a lot of consolidation with big money center banks following the financial crisis, even the decade leading up to it, and it felt like much of Wall Street, much of the giant banks, just kept moving up market and left these huge swaths of billion-dollar companies behind. Because let’s be honest, what’s a billion-dollar company? It’s small change to them, right? Is that what created the opening for all of this private credit, real estate financing, private debt? There’s this whole world that used to be traditional banks. Explain that transition a little bit.

MIKE KELLY  00:38:01
So, as I spoke about earlier, I started my career at Salomon in FIG banking, and we would talk about merging banks, and we had these old CDs that you would take with bank information and merge the banking world and pitch banks on why they should consolidate. Well, they did, throughout the eighties, nineties, and two thousands. The banking world became much more consolidated into these four mega banks that hoovered up a number of regional banks. So this is a confluence of factors — that was one factor. The great financial crisis and Dodd-Frank and risk capital rules was another big factor, of driving higher capital requirements for banks and their activities.

You also had banks increasingly looking towards generating fee income versus making loans on their balance sheet. In other words, they wanted to be in the moving business, not the storage business, because that’s what their publicly traded shareholders were valuing. And so they answered that call. And so increasingly they began to step back from those lending activities, particularly to midsize private companies and real estate activities.

And that allowed for asset management companies — who, I would estimate, have very attractive asset-liability matches within their lending activities — to step into that opportunity and provide that financing capital through closed-end funds, through BDCs, through different structures, to be able to lend and provide access to the individual investor to generate income off those lending activities. And so I think all of those things provided the opening, and it’s been a market share shift from the banking system to the direct lending and asset management world in private lending.

BARRY RITHOLTZ  00:39:57
Really interesting. Last question on the evolution of Future Standard. You’ve served roles both as chief investment officer and CEO, co-CEO. As CIO, you think about generating returns. As a CEO, you have to think about everything else — people, infrastructure, clients, culture, systems, right? How do you integrate those two very different sets of responsibilities?

MIKE KELLY  00:40:29
Right. So in terms of thinking about the role, overseeing the investment teams and investment strategies is a big part of what I do as chief investment officer. I like to use the analogy of — I like to be the Rick Rubin in the room of really talented professionals, provide an environment by which they can do their best work, and then get the hell out of the way. And so you have to identify the talent, you help to work and develop them, you have to work with their process, how and why they make decisions as individuals and teams of individuals, make sure that their priorities align with our clients and the firm overall, give them all the resources that they need to do their job — and increasingly their more sophisticated resource requests, like around AI deployment and things of that nature — and then get out of their way, allow them to do their best work.

And, as you pointed out, designing incentives, designing culture, reinforcing behavior is a big part of all of that. So that’s one big part of my job. Also interfacing with clients, both private wealth clients and institutional clients; strategy for the firm, internal strategy; corporate development, but also M&A and new deployment of acquisition of different strategies and products; and launching new products and new extensions of existing products is a big part of my role. And then reinforcing the culture overall of what we’re trying to build.

BARRY RITHOLTZ  00:42:01
And you mentioned earlier that the firm was selling into the broker-dealer networks. That seems to have evolved into more of RIA networks. Even the big shops like UBS and Morgan Stanley have kind of pivoted away from transactions to more fees. How has that transition affected who you’re selling products to?

MIKE KELLY  00:42:31
So over the last 15-plus years, there has been an evolution and a broadening of the types of platforms that have been embracing private market strategies, alternative investment strategies. There’s the wirehouses, so the big four names — Morgan Stanley, UBS, Merrill Lynch, Wells Fargo. There are the large RIAs like Rockefeller and Cerity that are building out their capabilities for independent advisors and growing quite tremendously. And then you have the independent broker-dealer channel, the LPLs of the world.

And so there’s an ecosystem of wealth platforms just here in the US that oversee 300,000 financial advisors and brokers in the United States. And all of those channels are increasingly embracing and hosting onto their platforms access to these types of strategies, through various phases of development within those platforms. I would say there’s a real spectrum of adoption.

When I started at what was then Franklin Square, talking to a big wirehouse like Morgan Stanley, they would tell you that a very small group of their advisors were doing the vast majority of alternatives business. Now, across 15,000-plus advisors, there’s a much broader and wider democratization of adoption of alternatives across theirs and other people’s platforms. But there are still a lot of individual investors and advisors who are still at 0% allocated to something other than a stock, bond, or cash. And that evolution is — that’s why I think we’re still in the very early innings.

BARRY RITHOLTZ  00:44:17
Really, really interesting. Coming up, we continue our conversation with Mike Kelly, president and Chief Investment Officer of Future Standard, discussing the state of alternatives today. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

BARRY RITHOLTZ  00:44:48
I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest today is Mike Kelly. He is president and Chief Investment Officer of Future Standard. They are a $90 billion alternative platform focusing on private credit, private equity, real estate, infrastructure, and multi-asset strategies.

So it’s hard not to look at private credit today and not think this is becoming a juggernaut. Is that a sign of maturity, or is this just a lot of capital chasing not a lot of loans?

MIKE KELLY  00:45:23
So I’d start by saying that there is a misconception that private credit generally is becoming a bubble. And I consider myself a student of history and calamities, and I try to think about — if you look at the build of what we call private credit, the asset management’s direct lending to private companies, matching up against various situations in the past where we had true bubbles, you had an outgrowth of capital versus the economic driver of activity. We don’t have that today.

If you actually add up the pockets of what we really call private credit — which is not just direct lending, but high yield strategies, broadly syndicated loans and bank C&I loans, that’s private credit provision — it’s grown lockstep with the economy. The economy had gone from 12, 13 trillion before the great financial crisis. It’s 30 trillion today. And so it’s grown in lockstep. It’s just the market share has shifted to direct lenders and asset management away from banks, high yield, and broadly syndicated loans.

And so the opportunity in private credit is not outgrowing the underlying opportunities. These private companies are availing themselves of this private form of financing from asset management companies, and there’s a lot more of these private companies demanding this capital. So there is a balance between the supply and demand of this capital for the opportunity.

Now, having said that, in this search for yield that we talked about, there was an outgrowth of evergreen strategies and selling to the private wealth community, particularly within private credit strategies, in this demand for income. And we did see an explosion in a concentration, in crowdedness, in particular funds and pockets of large-cap lending that did result in very tight spreads, covenants being loosened, an increase in pay-in-kind, or PIK, over cash financing. And we also saw a concentration of lending to software companies. As rates were being cut and distributions were being cut within BDCs and private credit, we began to see that, coupled with the concerns about software exposure, begin to result in some redemptions. And that is where a lot of the headlines have been focused on private credit and negative sentiment around private credit, trying to get out of these structures when they’re having difficulty doing so.

I think the backdrop, though, is private credit is still a very valuable and value-enhancing component for most portfolios to generate income, despite some of the indigestion and negative headlines that have been developing.

BARRY RITHOLTZ  00:48:23
Let’s talk about those redemptions, because they always crack me up. We saw this a couple of years ago with BREIT and BCRED, which is — which part of five-year lockup is confusing to you? I don’t understand. And for the listener, a lot of these illiquid alternatives have a tiny gate, a 5% gate, which is really there as an accommodation when — I call it the widows and orphans clause, right? If the surgeon is hit by a bus and he leaves behind wife and kids, they perhaps shouldn’t be in an illiquid alternative in those circumstances.

But given that, let’s talk a little bit about the illiquidity premium, which some people look at as a bug but I think as a feature of this sort of investment. Tell us a little bit about how you think about illiquidity, and how do you communicate illiquidity or liquidity issues to potential investors?

MIKE KELLY  00:49:27
Well, I’d start by saying investing is all about trade-offs. There’s no right or wrong, no black or white. Alternatives aren’t better than traditional forms of investing. There’s just trade-offs. And the trade-offs within private market strategies and the structures that offer them is that you have the advantages of the potential for enhanced return through an illiquidity premium, or enhanced diversification from your public holdings. The trade-off of that is these are illiquid strategies, they are complex, and they are higher fees than public market strategies, ETFs and indices and things of that nature. And so you have to balance those before determining whether or not the trade-offs make sense for you, for your clients, for an institution, what have you.

And I really mentioned the illiquid part of it because these strategies are illiquid. Evergreen structures as wrappers around these illiquid underlying strategies did not make an illiquid private asset class liquid. It was just an access point. It provides its own advantages of continuous compounding and no capital calls and 1099s and so forth. But it didn’t turn an illiquid asset class into liquid. I never understood the term “semi-liquid,” which implies half liquid, which it’s not. These are not half-liquid private investments.

And so that, as a backdrop — a lot of it comes down to managing the expectations of what the trade-offs are. Going back to the advantages, you are providing capital, and in our case at Future Standard, we’re providing capital to a very fragmented ecosystem. We cherry-pick a handful of the best middle market, midsize private businesses, and we provide them with capital either through equity capital or through loans that we make to these companies. These companies are not massive in size and they can’t dictate final terms. And so we can lend to them at very advantageous prices that work for them, because they’re growing businesses. They need capital to grow, to acquire new businesses, to fund their operations. And so they’re not going to negotiate to the final basis point on spread. So we can provide a very attractive form of financing to them and pass along that income to individual investors for the private wealth community.

And so it works for both sides. And that form of income does come with an expectation of higher returns than what you’ll be able to replicate in the sort of mega-cap market or in the public fixed income market.

BARRY RITHOLTZ  00:52:12
Makes a lot of sense. Back in the day, this was thought of as an institutional product and a family office product. It began migrating downstream to ultra-high-net-worth and then high-net-worth. Now the question is, is this going to be marketed to mass affluent, 401(k)s, things like that? Who do you see as appropriate buyers of a variety of private credit products?

MIKE KELLY  00:52:42
So, we’ll start by saying, one of the reasons that at Future Standard we like working with advisors is nobody has a better finger on the pulse of suitability than the advisor to their clients. They will know, for their client base, risk preferences, liquidity preferences, their ability to understand these strategies and have them incorporated into their portfolio. We say that if you are going to allocate to a private market strategy like the ones we offer, if you’re not looking to allocate for at least the next four or five years or beyond, don’t make the allocation. If you need the liquidity in the next few years, there’s no guarantee — to our earlier point — that you’ll be availed of that liquidity.

And so the determination of suitability is at the advisor level, and I think that’s where it sits. You could make the argument that this should be relegated to those with net worth or income of a certain bracket or level. The regulators have their policies on that. But when it gets a little bit fuzzy, where someone is accredited but may or may not be suitable, I think the advisor is most positioned to be able to — and we would rather have fewer but more suitable investors as our client base than more and less suitable investors as our client base.

You asked the question about retirement accounts. I think there’s been a lot of headlines written about the big numbers that are being thrown around, 12 to 15 trillion of DC 401(k) plans. This, in my view, should be among the least controversial of places to think about incorporating less liquid private market strategies.

BARRY RITHOLTZ  00:54:27
Because you’re not tapping it for years—

MIKE KELLY  00:54:28
Or decades. You don’t need it for decades, right? Usually, for a young person in the retirement account, I think about my little brother, who’s a schoolteacher in Queens, and if he has a 30-year horizon or a 20-year horizon, why shouldn’t he have some allocation incorporated in, say, a target date fund, to long duration investments that might pick up an illiquidity premium if he doesn’t need the capital for a very long time?

BARRY RITHOLTZ  00:54:56
And that’s a couple hundred basis points over treasury easily. That’s the assumption.

MIKE KELLY  00:54:59
Easily. And also, let’s face it, a lot of the best investors in the world are still occupied in this world we call alternatives. And so why not avail yourself of the best investment minds and teams and firms that are out there and their capability sets? And so I do think there will be incorporation of private market strategies into retirement plans, into DC 401(k) plans. I think it’s going to be a much longer evolution than maybe some would like. It will also only be a subset of the 12 to 15 trillion out there, because you have to get the plan sponsors comfortable, right? And other constituents and players up to speed and comfortable with the risks and the fees and the liabilities and so forth. And so it’s going to be a small allocation, say 15% of a target date fund, and that’s going to be a subset of all of the capital out there.

So in the end, it’s an opportunity long term. It will be something that people can elect to have or not have. In the QDIA, it may be a qualified default; they may elect in, or so forth. That will evolve over time. But I do think the headlines are getting a little bit ahead of themselves, that there’s this wave of trillions of dollars that are about to go into alternatives.

BARRY RITHOLTZ  00:56:19
So you mentioned 60/40 earlier. I’m kind of hearing, hey, 60/40 is going to be changing over the next decade to something that’s maybe 60/25/15. Is that sort of a reasonable number set?

MIKE KELLY  00:56:35
So this will now get into my view on portfolios and portfolio allocation generally, which — I have a view that doesn’t match up with those numbers.

BARRY RITHOLTZ  00:56:47
Can I, before you say something — I always get into trouble when I say this, but hey, if you’re 20, 30, 40 and you have a reasonable risk tolerance, what the hell do you need bonds for, right? Like, people don’t like hearing that. But 60/40 — how about 90/10, if you have a 50-year time horizon? You just have to not mess it up at the worst possible moment. Where are you going with your pushback to 60/40?

MIKE KELLY  00:57:17
So, even though I’ve used the term “alternatives” throughout the discussion here, I don’t really like it. I think there’s a point in the future where we won’t call these strategies alternatives.

BARRY RITHOLTZ  00:57:30
Because they’re not all the same. There’s a broad dispersion of risk and returns there.

MIKE KELLY  00:57:36
That’s exactly right. And to use that other analogy, when everyone’s wearing a Nirvana T-shirt, it’s no longer alternative music, right? And let’s face it, there’s a much broader embrace of the strategies. Although it’s early, 88% of advisors surveyed have indicated that they plan to allocate capital for their clients to private market strategies. So this is not a niche embrace, this is a broad embrace, and so it’s becoming more mainstream.

And the reason I don’t like the numbers of 60/40 versus 50/30/20 is, when you think about alternatives as just this little peg — like a Trivial Pursuit peg on a circle — it doesn’t match up with how I think about portfolios. So if you think about private equity, private equity rhymes and looks a lot more, from a risk standpoint, like stocks than it does real estate credit.

BARRY RITHOLTZ  00:58:40
It’s right there in the name.

MIKE KELLY  00:58:42
Right. It’s equity, it’s for growth. And yet we relegate private equity into a bucket with things like real estate credit, even though they do very, very different things for your portfolio.

So the way I like to look at it is, there’s a part of your portfolio for growth, and those are all forms of equity, from public stocks and stock indices through to private equity and private company access through to venture capital and other forms of growth equity. You have your income portfolio, and that’s your lower risk, high duration, high liquidity treasuries and agency bonds through to other forms of income like less liquid private credit and other shorter duration, higher credit risk investment strategies. And then you have what I think is probably an introduction of something that we haven’t had to think about since the seventies, with a real asset category — commodities-based and precious metals, raw land and real estate, and things that in a more inflationary world, and a world where you need a more diversification of sources, you probably need. Infrastructure would be another example of that real asset category.

And within each of those three buckets of a portfolio, you have a spectrum of illiquidity and risk profile. And so for each allocator, they will need to determine, within their growth bucket, how much liquidity they need to generate the kind of growth, and how much risk they’re willing to bear into private equity and venture capital to build that growth bucket. And the same thing for their fixed income bucket, with degrees of credit risk, liquidity, duration, and then within their real asset bucket. And so I do believe, even though the world doesn’t really look at it that way, that we will eventually get to that point and no longer talk about the term “alternatives.”

BARRY RITHOLTZ  01:00:42
It’s going to be different types of income-producing properties and growth-producing products. Makes a lot of sense.

You mentioned earlier we saw a big uptick in interest rates, which suddenly is a double-edged sword — you’re getting yield. We now have a new Fed chair who seems to have surprised everybody by being a little bit hawkish, in the current environment of oil prices and tariffs and hopefully the end of war. But how do you think about the role of rates and the Fed? How does that impact the yield-producing portion of the alternative portfolios?

MIKE KELLY  01:01:24
Well, as I said earlier, I do think we’ve exited this golden era that ended roughly five years ago, into a more inflationary, deglobalized, less benign demographic backdrop. It will result in a higher resting heart rate for inflation. I’m not suggesting we’re going back to the seventies by any means, but there’s a dozen or so factors that will keep inflation more elevated, particularly in this deglobalized, localized world of supply chain breakdowns and so forth.

BARRY RITHOLTZ  01:01:54
The post-GFC zero rates — that’s it for our lifetime. Nobody really expects to see that again.

MIKE KELLY  01:02:00
I don’t expect to see that anytime soon, barring—

BARRY RITHOLTZ  01:02:04
A meteor from outer space, right? So what does that mean for the potential for various types of private credit to generate—

MIKE KELLY  01:02:14
Right. In that backdrop, you’re going to have higher rate uncertainty, higher volatility, and a need to look for other forms of income, other forms of floating rate exposure, right? If rates go up, floating rate exposure pays you more. It works against you with high duration investments; you begin to lose money on those. And so it does act as a balance to your traditional fixed income sources.

You will need diversification just generally in the world, given this economic backdrop and the need for obtaining resources and how you build out a diversified portfolio. And so these types of income strategies and private equity strategies and real asset, real estate, and infrastructure strategies are, again, a broader palette to paint from in a different environment than the one in which 60/40 was the perfect answer and a simplified answer of set it and forget it, and be able to have diversified, low volatility outcomes.

And so I do think the role of the Fed is trying to navigate this tug of war between the inflationary forces and perhaps the deflationary forces that AI may introduce to pockets of that economy. And so it’s a tougher job for Kevin Warsh, and he wants to go back potentially to less disclosure, maybe more Alan Greenspan-like communication style, where we have to divine the tea leaves a little bit more, right, and try to anticipate what’s going to happen. And that makes it trickier.

And if you’re building portfolios for the long term, incorporating these strategies in a diversified way, you will have countervailing balance within your portfolio. It won’t matter if the Fed’s going to raise or lower interest rates by 25 or 50 basis points if you’ve built a truly diversified portfolio.

BARRY RITHOLTZ  01:04:09
Makes a lot of sense. You mentioned some of the headline risk, and we’ve had a couple of minor blowups over the past year or so. Some people look at that as the first cockroach — I don’t know if that’s the right metaphor. I’m curious, what data points do you look at to just keep an eye on the health of private credit underwriting?

MIKE KELLY  01:04:32
So when you’re looking at private credit underwriting, you’re looking at default rates versus history. You’re looking at the situations where there are defaults and what losses ensue post those defaults. You’re looking at interest rate coverage ratios — so, the extent to which the businesses that you’re underwriting in a diversified portfolio can cover their interest payments. So you’re watching all of these metrics. You look at the value of the collateral underlying those businesses.

And I would say there is no systemic crisis broad-based within private credit today. We’re not seeing that. There are idiosyncratic stories, and when you have hundreds and hundreds of credits being underwritten, you’re always going to have individual circumstances of companies that are going bad or undertaking — you know, a fraud comes, a normal default rate comes. And it doesn’t, by the way — just because a company defaults doesn’t mean you lose money. I mean, historically, if you had a default rate of two or 3% and you lose half your money on that, you can do the math on how much your actual losses will translate over a period of time against the income that you’re generating in return. And so if you factor in the loss of 50 or a hundred basis points of loss against the ability to generate nine or 10% returns, you can do the math as to what that on a net basis will return for you.

Defaults today are well within historical ranges and are being well managed. Interest rate coverage ratios are well within historical ranges and are in a healthy range today. What we are seeing are pockets of weakness, pockets of vulnerability. And again, over the course of — we haven’t had an economic cycle since the great financial crisis. I don’t even count COVID, because it wasn’t an economic cycle. Even 2022 kind of came and went. It was barely a blip. And yet we’re always going to have some areas that are experiencing some disruption or some indigestion.

Right now you have software, which is an issue that AI is disrupting, but you have to sort through that. And healthcare services — there are some labor and reimbursement issues that have hit certain healthcare companies. Within software, no one knows. No one knows what the true impact of AI is going to be on software. My view is most companies will be fine and adapt and evolve their business models. There will be a subset of those companies that will be truly disrupted and where your collateral will not be worth very much.

But again, if you look at a mega-cap or large-cap lent private credit portfolio and you said 20% is allocated to software, and you thought 15% of that was going to have disruption and trouble, so now you’re relegating this down to about 3% of your portfolio — and even if that all went to zero and there was no collateral value and no recovery on any of those, that’s going to ensue over the next three to five years — three points of loss. So assume a straight-line amortization of those losses: about a point a year, or less than a point a year, off of a portfolio that generates 9%, 10%. So instead of nine or 10, it’s eight or nine, if all of that gets disrupted as expected.

In other words, this is not a catastrophe. This is a normal course of business with a pocket of sector weakness. I think that the private credit industry is still healthy. It still provides very attractive general returns. And this is all assumptions-based, and assumptions can change.

BARRY RITHOLTZ  01:08:08
And of course, of course.

MIKE KELLY  01:08:08
But as I look at the fundamental health of the private credit business, it’s still very much intact.

BARRY RITHOLTZ  01:08:18
Really, really interesting. I have one or two more questions before we get to our favorites. And I have to ask you, a 30,000-foot view: step back and look at the private credit landscape three years, five years, 10 years from now. What does it look like in terms of ongoing growth? How much do you think this is going to penetrate into the wealth channels? What does the industry look like out a couple of years?

MIKE KELLY  01:08:50
So when we talk about private credit — and often when you read about private credit in the press, it seems like one monolithic category — within private credit there are a Baskin-Robbins series of flavors that all get defined as private credit. And so you have senior credit, junior debt, mezz; you have CLOs; you have sponsored, non-sponsored, opportunistic credit; you have asset-backed finance; you have royalties and so forth. And so there are many different forms of credit to private entities and companies that we call private credit.

My expectation is those flavors will develop, they will begin to grow in size. The demands for that capital by those companies and entities will increase. We’re seeing the growth of insurance capital and an investment grade — most of what we call private credit is non-investment grade, but there’s the investment grade demand for private capital for these companies that is exploding in size. And Marc talks about that at Apollo. And there is all of this that’s developing over time, and I expect that to continue.

And then on the demand side, I expect that private wealth will continue to demand income. They will continue to struggle with traditional forms of fixed income and high duration assets. If my view on the macro world transpires as I think it will, they will continue to need to search for income through different sources. That’s both corporate income and real estate income and other forms of asset-backed income. And so that supply and demand will continue to grow lockstep with one another. And we will have a much larger ecosystem of what we call private credit in the future.

BARRY RITHOLTZ  01:10:51
So you were a trustee at the Stanford Graduate School of Business. You’re currently a trustee of the Tiger Foundation, as well as a board member at the Spotlight Foundation. Tell us a little bit about the work you do with these foundations.

MIKE KELLY  01:11:06
Yeah. So one of the things that Julian Robertson imparted on all of us at Tiger from a young age was, give back as much as you can as early as you can. Don’t wait until you’re about to die. And so I joined the Tiger Foundation probably over 20 years ago, which was Julian’s foundation at Tiger Management that funds not-for-profit initiatives in New York City to fight poverty. And have been doing that now — the Tiger Foundation’s been around at least 25 years or more. And so that’s been an exciting legacy for Julian and for all of us that worked together at Tiger. And I’m a trustee on that and work hand in hand with the other trustees in undertaking funding those initiatives.

The Spotlight Foundation was a group of Stanford Business School friends of ours. After we graduated, we decided to memorialize our friendship through a foundation that would fund not-for-profit entrepreneurs that were funding education initiatives — seeing how important education was in all of our lives personally, wanting to impact those people that didn’t have the same advantages and opportunities that we had. And so we fund a lot of education initiatives, particularly in less advantaged communities, and we fund the entrepreneurs, the ones who are doing earlier stage startups that could become the next KIPP charter schools of the world. Or we’ve funded the Seattle Girls School to bring science initiatives to girls within the inner city Seattle community. And so that’s something that is very near and dear to my heart.

BARRY RITHOLTZ  01:12:57
Sounds really interesting. All right, let’s jump to our favorite questions we ask all of our guests, starting with: tell us about your mentors who helped shape your career.

MIKE KELLY  01:13:09
Yeah. Well, I’ve had various mentors over time. Certainly would put Lee and Julian in that category — not as a personal mentorship, but more as individuals I observed and admired as investors. But also, when you’re looking at someone like Julian, how philanthropic he was and giving, and the way he treated people — I really admired that about him.

There was another individual who’s a mentor to me to this day, Gil Caffray. Gil was a partner at Tiger. He was my partner at FrontPoint as we built that firm. And Gil is an incredible human being. He’s smart and he has the highest integrity. He always treated everyone with respect. He was a direct individual — or is a direct individual — but he was never emotional. He just showed you how to treat clients with respect, how to treat your coworkers with respect. And it’s just somebody who mentored me personally and who I try to emulate every day.

BARRY RITHOLTZ  01:14:26
Really, really good answer. Let’s talk about books. What are some of your favorites? What are you reading currently?

MIKE KELLY  01:14:34
Book I’m reading currently, London Falling, by Patrick Radden Keefe, who wrote Empire of Pain and Say Nothing. He’s an incredible investigative journalist, writing this wild story, a true story, about a boy and a family within London in the eighties, nineties, and in the backdrop of London undergoing the changes it had. It is a fascinating piece of work. It’s one of the best books I’ve read, and I try to read a lot. In the last five years, I’ve really enjoyed that.

Best book all time, I would say, Man’s Search for Meaning. I read it in high school.

BARRY RITHOLTZ  01:15:17
Viktor—

MIKE KELLY  01:15:18
Viktor Frankl. I read it in high school, I reread it every year. It’s amazing that Viktor had the ability to have the mind frame he had through the horrors he faced, and how that mindset and your ability to attach meaning to what goes on in your life — you can’t control what happens to you, but you can control how you respond to it. I love all things stoicism.

BARRY RITHOLTZ  01:15:49
I was going to say, classic Marcus—

MIKE KELLY  01:15:52
Aurelius. Yeah, sure. But Viktor Frankl’s writing — I still have the torn pages of my high school copy with my pen marks. And I reread it every year. It’s an amazing book.

BARRY RITHOLTZ  01:16:06
Really, really interesting. What are you streaming these days? Tell us what sort of podcasts or Netflix, Amazon Prime you’re watching.

MIKE KELLY  01:16:15
So my wife and I love documentaries. We are watching The Dark Wizard right now, about Dean Potter, who was an extreme climber and extreme athlete. I love watching depictions of obsessive personalities. I think probably because I see some of that in myself, but I like watching people who are in other fields. So whether they’re athletes or extreme athletes or musicians or chefs, like Jiro Dreams of Sushi. The Bear is coming back out. The Last Dance — I love Kobe Bryant and Michael Jordan. Just people who pour themselves into what they do, because I always learn something about how they think about the world and pour themselves into what they do, as it applies to what I do and what I love to do. And so it’s one of the reasons I love watching some of these documentaries.

BARRY RITHOLTZ  01:17:17
So I have a couple of things I have to share with you. Have you ever read the book Endurance, about the Shackleton journey?

MIKE KELLY  01:17:17
Oh, absolutely.

BARRY RITHOLTZ  01:17:17
It reads like it’s fiction. It’s just — so, one of the best. And I’m drawing a blank. I think it was called Open, Andre Agassi’s—

MIKE KELLY  01:17:35
Also one of the best sports biographies, or autobiographies—

BARRY RITHOLTZ  01:17:37
Ever written. It’s just really, really interesting. And then I have to slip over to music, because you mentioned Nirvana twice, you mentioned Rick Rubin. You’re a big music fan, I assume. What genres? What ponds do you fish in?

MIKE KELLY  01:17:54
When I was younger, I was really into heavy metal. I still am — Rush and heavy metal and bands like that. And I played bass in a band. And nowadays it’s really — I’ll listen to Miles Davis, I’ll listen to Burning Spear and reggae, I’ll listen to Radiohead. I just finished Michael McDonald’s autobiography.

BARRY RITHOLTZ  01:18:26
I know what you’re about to say. Did you see — it’s on HBO — the Yacht Rock—

MIKE KELLY  01:18:31
Yacht documentary, or something they called it. It was—

BARRY RITHOLTZ  01:18:34
It’s just a yacht rock documentary.

MIKE KELLY  01:18:36
I love yacht music, yacht rock.

BARRY RITHOLTZ  01:18:38
It was so surprisingly good. I’m a big Steely Dan fan, so I expected to hate it. And there’s a brilliant line where he gets Donald Fagen on the phone and he’s just like—

MIKE KELLY  01:18:50
And he hated the fact that he called him yacht rock and he hung up on him, right? But like in the Michael McDonald autobiography, he talks about Steely Dan and their process. They were super obsessive. Every note counted. They would do take after take after take. It was very sort of Beatles, Beach Boys, right? For certain musicians — Miles Davis probably — who were just so intense about the process of creating music. And I love seeing that and I love learning from that.

BARRY RITHOLTZ  01:19:21
So there’s a YouTube series, or it’s a series that ended up on YouTube, called Classic Albums, and the making of Steely Dan’s Aja is insane. But they also give you a little history and show you — hey, you like my old solo? Here’s the 43 different guitar solos before they — and then they didn’t just take one, they patched 12 together. It’s pretty amazing. I think it’s called Classic Albums, and you could find a bunch of other stuff. But I thought the Steely Dan stuff was really—

MIKE KELLY  01:19:57
Oh yeah.

BARRY RITHOLTZ  01:19:57
Really interesting.

MIKE KELLY  01:19:57
The solo on “Kid Charlemagne.”

BARRY RITHOLTZ  01:19:59
It catches you every time. And I have a couple of years on you, but I’ll make you a tiny little bit jealous. I was in — I want to say high school — I saw Black Sabbath at Madison Square Garden, and this unknown band opened for them named Van Halen.

MIKE KELLY  01:20:16
Oh gosh.

BARRY RITHOLTZ  01:20:16
And it was insane. I’m not exaggerating.

MIKE KELLY  01:20:19
You did make me jealous just then.

BARRY RITHOLTZ  01:20:20
Is this what every concert is supposed to be like? I want to say I was 14, something like that.

MIKE KELLY  01:20:26
Wow.

BARRY RITHOLTZ  01:20:26
Head blown. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either alternative investments, private credit, what have you?

MIKE KELLY  01:20:44
So, in my view — and I have two young sons, well, 20 and 17, and it’s kind of the advice that I’ve given them — I believe the greatest definition or criteria of success going forward is going to be adaptation. So learn to adapt. Everything is being disrupted. Jobs are being disrupted, not replaced. They’re being disrupted. Careers, the world, your ability to try and fail and get up again. As the Japanese say, rise eight, fall seven. You’re actually supposed to put yourself out there and be resilient and adapt. And you’re going to need to. I think in the future that’s a really important mindset to have in the world we’re entering into and that is going to transpire.

Obsess about what you do as much as you can. Read everything you can get your hands on. Network to whatever extent you can. Meet people, put yourself out there, and do it in person. Don’t do it over Zoom. Get out there and immerse yourself in whatever it is that you’re doing.

And then finally, I would say, be the man or woman in the arena. I think there’s an over-fixation on likes and the comment section. Forget the comment section, forget the number of likes you have. Put yourself in the arena. There are always going to be weak critics sitting in the stands throwing rocks at you. Ignore them.

BARRY RITHOLTZ  01:22:29
That’s the famous quote from — was it Theodore Roosevelt? Teddy, right. The man in the arena. And our final question: what do you know about the world of alternative investments and private credit today that might have been helpful when you were first getting started, 30 or so years ago?

MIKE KELLY  01:22:48
So when I was starting out in the business, I viewed the markets as this giant puzzle that needed to be solved. And I like puzzles. So I thought, all right, I’ll take all of the classes and read all of the books on cracking the code and quantitative finance and derivative math and all of these things. And yes, over the years, I’ve used those.

But if I could go back and do it all over again, I would have taken far more psychology and philosophy classes and maybe fewer classes on building DCF models. Because as I think about my career and how it’s evolved, and my daily interactions, and even observing the markets, it’s far more driven by behavior than it is by math. At least the world I’ve occupied — I don’t work at Rentec. But it’s irrationality and incentives and behavior, for better or worse, that creates opportunities, that creates management challenges, what have you. But I would have studied more of the psychology and philosophy.

BARRY RITHOLTZ  01:23:59
Really, really interesting answer. Thank you, Mike, for being so generous with your time. We have been speaking with Mike Kelly, president and Chief Investment Officer at Future Standard.

If you enjoy this conversation, well, check out any of the 649 we’ve done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. I would be remiss if I didn’t thank our crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio.

~~~

The post MiB: Mike Kelly, President and CIO, Future Standard appeared first on The Big Picture.

• World’s Biggest Hedge Fund Teaches the Wealthy How to Slash Taxes to Zero: Cliff Asness’s AQR supercharged tax-loss harvesting into a business that erases IRS bills for the wealthiest — and built the firm along the way. (Bloomberg)

• For Iran, Trump’s Reversal on Escalation Shows Who Has the Upper Hand: By expanding the arena of fighting in the region, experts say, Tehran sent a warning about the dangers of a widening war. Erika Solomon on how Tehran, by expanding the arena of fighting across the region, sent a deliberate warning about the dangers of a widening war. By expanding the arena of fighting in the region, experts say, Tehran sent a warning about the dangers of a widening war. (New York Times) see also Why Is the U.S. Running So Low on Weapons? Allies that depend on U.S. military equipment need a Plan B. Phillips Payson O’Brien on an armaments crisis after only a few months of fighting a regional power. Since hostilities with Tehran began February 28, the U.S. has reportedly burned through two-thirds of its Patriot interceptors and more than a third of its THAAD stock.  (The Atlantic)

• America Is Great at Creating Stock Market Bubbles—and Shrugging Them Off: Boom-bust cycles now happen in the blink of an eye; the memory-chip bubble inflated and popped almost unnoticed. One day the bust will be the big one, but so far the pullback in AI names has been nearly offset by gains elsewhere. One day the bust will be the big one, but for now the pullback in AI-related stocks has been almost completely offset by gains elsewhere (Wall Street Journal)

• Why Everything Feels Like Gambling: Joe Pompliano on one line in Robinhood’s Q2: the platform built on “democratizing finance for all” now earns more transaction revenue from prediction markets than from equity trading. (Huddle Up)

• Chinese VC firms rush to raise funds after three-year drought: Managers capitalise on investors’ desire to ‘hedge’ against US market bets. Eleanor Olcott reports that firms are seeking an estimated $35 billion across at least 60 new dollar-denominated funds, including about 40 VC funds, after three years of record-low fundraising. (Financial Times)

• How China Won the Iran War: Trump has shattered American power, and Beijing is picking up the pieces. The disintegration of U.S. power was well underway before Trump started his war on Iran, but the pace of decline has accelerated sharply since the magnitude of our defeat started becoming apparent. (Paul Krugman)

• New York Fires Warning Shot With List of Potential Pied-à-Terre Tax Targets: City releases list of celebrities, business executives who could be subject to Zohran Mamdani’s new tax. Mayor defended rollout, saying his administration was providing transparency to New Yorkers (Wall Street Journal)

• obligatory one month without social media on my phone substack essay (contrarian edition):  I’m going to boldly go on the record here and say that I think the majority of this content has become so grossly exaggerated and emotionally overwrought that it may even actively deter people from logging off. (This does not mean I’m going to say that being on your phone is good, actually. Being on your phone is, in fact, bad for your brain and for society.)  (the late review)

• No, You Don’t Want to Time Travel: Douglas Giles on why it may be for the best that it’s impossible. If time travel worked the way fiction imagines, we would be inundated by visitors from every other era. (Douglas Giles)

• The Anti-IMAX Populist Backlash: Read Max on The Odyssey‘s marketing campaign and the strange consumer revolt it touched off. (Read Max)

Video of the day: Why were The Beatles rejected by most record companies?

Be sure to check out our Masters in Business interview this weekend with Som Seif, founder/CEO of Purpose Unlimited, a Toronto-based asset manager launched in 2012. He grew his first firm, Claymore Investments to $8B in assets by creating 34  ETFs in Canada over 6 years, including the creation of the first bitcoin ETF, establishing it as Canada’s leader in low-cost exchange-traded funds. Claymore was sold to BlackRock in 2012. He co-founded Wealthsimple that year, which became the default investing app for a generation of Canadians. His current wealth management firm, Purpose, was founded at the end of 2012, and manages $31 billion in ETFs, mutual funds, alternatives, private assets, and digital assets. Som was named to Canada’s Top 40 Under 40 in 2011.

The Impending, Inescapable Deluge of A.I.

Source: New York Times

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The transcript from this week’s, MiB: Som Seif, Purpose Unlimited, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube (video), YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

~~~

MASTERS IN BUSINESS Guest: Som Seif, Founder & CEO, Purpose Unlimited
Host: Barry Ritholtz  •  Bloomberg Radio

Transcript

ANNOUNCER (00:00:02): Bloomberg Audio Studios. Podcasts. Radio. News.

BARRY RITHOLTZ (00:00:08): This week on the podcast, yet another banger. Som Seif is founder and CEO of Purpose Unlimited. One of their holdings is Purpose Investments — about $40 billion Canadian. He is a serial entrepreneur and financial innovator. He created the world’s first Bitcoin ETF in Canada, long before the US came up with one. He built one of the larger ETF firms in Canada, sold it to BlackRock — on and on the conversation goes, about all these fascinating things. I thought the conversation was really, really intriguing, and I think you will also. With no further ado, my conversation with Purpose Investments’ Som Seif.

Som Seif, welcome to Bloomberg.

SOM SEIF (00:01:04): Oh, Barry, it’s great to be here. And thank you for that kind introduction.

BARRY RITHOLTZ (00:01:07): So I’m kind of fascinated by your background, your career, the whole multiple innovations, serial entrepreneurship. But let’s roll back to the early days. You wanted to be an architect, and then you went for a bachelor’s in industrial and systems engineering from the University of Toronto. What was the original career plan?

SOM SEIF (00:01:31): Yeah, I mean, since as long as I can remember, architecture was my key goal, and that fundamentally was something that just inspired me. I loved the mix of the creative side of my brain and the — call it systems and structural, mathematical — side of my brain, and bringing them together. Design was always something exciting. The interesting thing was, now you’re faced with this decision: you apply to school for architecture and for engineering. And I went and spoke to a couple of architects, and every single one of them said, “This is a stupid career choice. You won’t be doing anything that you think you’ll be doing. It’ll be grunt work. You won’t enjoy it, and there’s no money in it.” And I, of course, said, whoa, what am I signing up for? So I said, okay, I’m gonna go do engineering with the idea that maybe I’ll switch. And fundamentally, that was not gonna happen.

I was in first year of engineering and said, okay, what is my second choice? What else? And I really loved the concept of strategy and finance. I didn’t know anything about finance, and hadn’t been learning anything about it, but I got excited about investment banking and things like that. And so ultimately, I decided that was the path I was gonna pursue. And coming out of an engineering degree, I ended up — luckily, just the timing, really uniquely, at the end of 1998 — getting an opportunity to join the biggest bank in Canada, RBC, in their investment banking division. So engineering was a really interesting path towards it. At the time, the tech bubble was happening, and I guess someone in investment banking said, hey, we need more engineers in here to tell us how to think. And the learning curve was pretty amazing, in terms of starting with nothing and basically learning on the go.

BARRY RITHOLTZ (00:03:24): So you spent six years at RBC helping them build out their structured products group. Tell us about that experience. What did you learn?

SOM SEIF (00:03:32): So, investment banking is one of the amazing early learning experiences, and I’ve always been in pursuit of learning and, call it, pushing myself to certain limits. Investment banking today is very hard. Investment banking 25 years ago was even harder. As a young analyst, a young individual, you’re ultimately working on amazing things, but at the same time, you’re working like a dog — 80- to 100-hour weeks. That said, there is no better place as a 22-year-old, 23-year-old, 25-year-old to ultimately have immersive learning. So it was amazing for me when I went into it.

It’s funny — as a young individual, I was an immigrant to Canada. My family was a good middle-class family, but we didn’t have stuff. So I always dreamed about this idea of all the riches and gold and things like that. And one of the things that excited me about investment banking was this idea of, hey, you’re gonna make lots of money. And the interesting thing was, during the tenure, the first few years, you start making good money for a young individual, and then you kind of realize, wait a minute, this isn’t actually motivating me. I remember succinctly: I came home — I was 25 years old, it was three in the morning, or two in the morning — and I just sat down and kind of wept, because I said, I’m working like a dog, and I’m pursuing this goal, but I’m not happy. And I had to actually go through a deep-rooted perspective of, okay, what is the thing that actually drives me? What is the thing that actually motivates me to wake up on Monday morning and skip to work, because I’m still enjoying what I’m doing? And what I realized was that the thing I was actually in pursuit of was the idea of seeing my ideas progress — seeing the things that I was doing have real, tangible outcomes.

And I go back to that principle of, what was it that excited me about architecture or design? It was this very simple principle: when you build something or you design something, you can actually see it in front of you afterwards. So I actually correlate that really specifically to what was my intrinsic motivation. At that point, I just said, look, I’m still learning. I’m having an amazing time, but am I going to ultimately achieve what I want here? And I said, I won’t. So I kind of gave myself a put, I call it. I was 25 years old, and I said, okay, I am still here learning, I’m gonna build my networks, I’m gonna do all this stuff — but if I am in seat on my 30th birthday, I’m going to resign on that day. And that kind of woke up my mind to what else is out there. And over the next number of years, I started thinking about what was going to be the next thing for me. And that ultimately came when I was 28 and started Claymore.

BARRY RITHOLTZ (00:06:18): So let’s talk about Claymore. You launched this in 2005. Globally, ETFs were a thing, but not the giant thing they are today. They certainly were a tiny niche product in Canada back then. What did you see that all the other banks and all the other finance bros completely missed?

SOM SEIF (00:06:37): So you’re absolutely right. In Canada specifically, there were 14 ETFs listed on the Toronto Stock Exchange, basically all by Barclays iUnits — at the time, iShares. And in the United States, of course, ETFs were starting to become popular, specifically in the institutional crowd and retail crowd — firms like WisdomTree had just entered the business, and players like that. So it was not an area that was logical or, call it, clear. That said, I had the benefit that I’d actually covered asset management firms globally during my time at RBC, and I’d gotten the opportunity to cover Barclays and got to know the leadership of the organization, helped them raise some capital — but more importantly, I supported and understood what they were doing on the indexing and ETF side. And it got me really excited. I started to see the trends.

But what I struggled with was the fundamental principle of passive indexing. I really did. I actually love the principles of what indexing did. And at the time, ETFs were deemed as indexing, right? That was the concept — anything you did outside of pure indexing was a no-no. The industry players would say, “Well, this isn’t an index.” So I got really excited about the idea of what an ETF does: it’s low cost, a great product in terms of wrapper and structure, a transparent discipline in its approach, using an index. However, I just hated the fundamental principle of what market-cap indexing did, which is basically buy high and sell low, right? So around the time that I left RBC to start Claymore, I had actually read a research paper — it just serendipitously came out around the same time, in 2004 — by Rob Arnott and Jason Hsu, and we’ll spend some time on Rob, who’s a really important person in my life. And they had published this article around non-market-cap-weighted indexes —

BARRY RITHOLTZ (00:08:37): Smart beta.

SOM SEIF (00:08:38): Yes. And I read this article — I’m an engineer, so I love these technical things — and I just got excited. Basically, a couple months later, I reached out, and we went down and spent time with Rob in Pasadena. I remember Rob was a pretty big deal, but he took the time — he spent half a day with me — and I walked out of that office just having clarity on the future of what I was going to build, and more importantly, the future of where the industry opportunity was. And that was the principal starting point of the vision for building Claymore, and the future of what I felt was going to be a really amazing thing around indexing. And of course, we launched the first public investment fund on fundamental indexing, the RAFI indexes.

BARRY RITHOLTZ (00:09:31): Huh, really interesting. So you grow this to 34 ETFs and a couple of closed-end funds, and about $8 billion Canadian, I think — or $6 billion US. What was the hardest part of building that sort of asset manager, considering all the other products were giant bank-owned?

SOM SEIF (00:09:53): Well, Canada, of course, has many structural — I mean, it’s an amazing region for opportunity in financial services. That said, it is also highly concentrated, with the big banks and the control that they have with their distribution. So it’s a very challenging market for independents, as you can imagine. That said, I go back to the period: we had a really amazing product — no one knew what it was. I remember we’d go out in 2005, 2006, 2007, and we’d sit down and talk to advisors across the country. I’d walk into a room, and I’d have a sign-in sheet with name and email. But then I’d ask the question, “How many of you use ETFs?” And back then, it was one out of 10 who would say yes. Most people were like, “What’s an ETF?” — “It’s what, EFTs?” This was the time, right?

But I fundamentally believed what we were doing was important. And we grew — in Canada, of course; remember, we’re about one-tenth the size of the American market, so $8 billion aggregate would be like $80 billion in that timeframe. We actually, in the first couple years, grew to about a billion dollars. At the beginning of ’08, we got to about $800 million, which is a great, great outcome early on, from nothing. And then the real thing happened in 2008, and it was a really great wake-up call and, call it, learning for me. We went through 2008, and every single month in ’08, we grew positive — we had net positive sales. I think we were, despite —

BARRY RITHOLTZ (00:11:22): The ongoing carnage —

SOM SEIF (00:11:23): Well, despite the market environment. And in September and October specifically, we had positive net sales, and I think we were the only firm in the country that had that. The principle was that disruption was critical for us at a time when we were trying to build a challenger idea and tell a really strong narrative. We needed the complacency of our investor base — the advisor community, the institutions — to wake up and say, “Hey, wait a minute, what should I be thinking about next?” And that was a really important point. So we ended up in 2008 growing from $800 million to $1.1 billion, despite the headwind of the markets. And then in 2009, we went from $1.1 billion to $4.4 billion.

BARRY RITHOLTZ (00:12:04): Wow.

SOM SEIF (00:12:04): So, just an accelerant coming out of the financial crisis. The next year, we went from $4.4 billion to $5.7 billion, and then to $6.8 billion. And then ultimately, two months later, when we closed the deal with BlackRock to sell it, it was $8 billion. And the momentum was just so unbelievably strong. And the reason was because when the financial crisis occurred, people left the market and they were going to cash. And then, when they were re-entering the market, they were asking themselves, “Now what? Where do I go? What are the best investment vehicles?” And all of a sudden, ETFs became something that they were learning about, understanding, and we were right there. And it was amazing.

At the same time, we also saw the acceleration towards the trends that were happening in advice — the movement towards discretionary portfolio management. The historical mindset towards commission-oriented, new-issue-type business became challenged because of the market, and the banks and the broker-dealers wanted more stability. So advisors started to transition their practices towards more discretionary investment processes and model portfolios. And ETFs, of course, fit extremely well in this. We’ve of course seen the RIA movement coming out of that. And those were an amazing backdrop of trends that just drove the market and, in parallel, the ETF industry alongside of it. It’s been an unbelievable number of years for everyone.

BARRY RITHOLTZ (00:13:27): Really interesting. So the sale to BlackRock — what motivated the exit? What was the process like? And how hard was it to let go of this thing that you had built?

SOM SEIF (00:13:39): Very hard. So my financial partner in the, call it, latter years was a firm called Guggenheim Partners —

BARRY RITHOLTZ (00:13:50): Oh, sure.

SOM SEIF (00:13:51): An amazing partner, an organization I worked really well with, and I’m really proud of the relationship we built there. And the interesting thing was, of course, I had sort of approached them and said, “Let me buy you out.” They’d had a great outcome, and it was a wonderful outcome, but we just sort of couldn’t get to a price that made sense. So we decided to go through a process, and I, at the time, felt, okay, we’ll run a process, but I’m gonna also be a buyer in the process. And we agreed to that. At the end of the day, though, the process was very robust. BlackRock was a leading partner in that. And I remember pivoting multiple times, as the price kept going up, on who my partner was gonna be to finance my buyout. And then at the end — I remember, in December of 2011, it was my daughter’s birthday, and I was on the phone with one of my strategic partners around the purchase. We were having a conversation about strategy, execution plan. And I got off the phone, I walked down to my wife, and I said, “I’m holding on too much. The price has gotten well above what my target price was. I’m being too emotional. I think the right thing to do is to sell.” So I called the bankers, and I said, “I’ll put my name behind the BlackRock bid.” I flew down to New York on January 2nd. We spent a few days in a room negotiating the purchase and sale agreement. And we announced the deal, I think, on January 11th, and closed the deal on March 2nd.

And that was — it was a really difficult period for me. I had a chip on my shoulder. I built this thing — you used the words “serial entrepreneur” earlier, and I’ve actually never believed I’m a serial entrepreneur. I don’t build businesses to build businesses. I build businesses because I truly love what I do. I’m in pursuit of really building things that have endurance, have great value to our customers, that really think about changing the industry. And so this was a moment where I felt like something was being ripped out of me. And so I had a chip on my shoulder. We closed the transaction, and I said, I need to take the time. I actually ended up building the business plan for what I was gonna do next — which ultimately was Purpose — within 30 days. But I said to myself, if I start today, I’m going to fail, because I’m not doing it for the right motivation. I’m doing it for the wrong reasons — I wanna do it because I’m in pursuit of getting back in the business. So I ended up consulting for the regulator for a couple weeks, and then I ultimately went with my wife for three months overseas, to Southeast Asia. And I detached. Back then, we had BlackBerrys — I probably still have a BlackBerry; people famously know I love BlackBerrys — but I had a BlackBerry, and I turned it off, and no one could get ahold of me. We went throughout Southeast Asia, and it was the greatest thing. And I said to myself, if I come back and I have the energy and excitement around this business plan, then I’m gonna do it. And of course, we came back, and once we landed in North America, you get all the texts and all the news, and my energy just started to really powerfully go up. And I said, okay, let’s go. And I registered Purpose and started the business plan.

BARRY RITHOLTZ (00:16:50): So we’re gonna talk in a little bit about why I think you’re a serial entrepreneur. But you said something that I’m kind of fascinated by, and it requires a degree of self-awareness that many people in our industry sometimes don’t have — I don’t wanna say always don’t have; we all have blind spots. You said you became aware that you were too emotional, too self-involved — you were holding on too tightly. How did you come to that realization? Listeners are bored of hearing me talk about my early days on a trading desk, but I became very aware that, oh, this is just way too much fun — you’re trading for the dopamine hit, not for P&L. You either have to become more disciplined or shift your career. What was that insight that led you to say, oh, I’m gripping this way too tightly?

SOM SEIF (00:17:53): So I think self-reflection is one of the great virtues that we all should have. It’s one of the things I think often people don’t have enough of. And I actually think it’s something that requires anchoring, sort of early on, to the kind of goals and the things that matter to you, so you’re disciplined around what you’re self-reflecting around. And it’s hard — as humans, we’re not trained, our mental state is not trained this way. So it’s just something that I feel very confident in my ability to do — constantly be asking myself: Am I on the right track? Am I doing the right things? Am I pursuing the right goals? Am I going to achieve the things that I want to achieve on the path I’m on? I think it’s a critical learning, and the growth mindset that comes with that curiosity and willingness to be vulnerable is critical as a human. So this is, I think, a really important thing.

And I think our industry can always use that, because I love the financial services industry — one, because it starts with a really amazing mission. We are here in service of individuals, to help them ultimately achieve their outcomes, their goals. I mean, it is such an unbelievably high-mission industry, and we don’t do enough to talk about that. Instead, we talk too much about ourselves. We’re self-centered. We talk about, “Hey, let me tell you about me — and now that I’m done talking about me, let me talk to you more about me.” And you go to someone’s website — it’s always about me, me, me. It’s never about the customer. And so there’s this amazing opportunity as an industry to step back, reflect, and say: Why are we here? What’s the actual job that we are here to do? And it is ultimately in service of individuals and their outcomes, a hundred percent. And we complicate that so much. And so I think self-reflection on that, as an industry, is a big opportunity, and those who get it are those who stand out and differentiate more than anybody else.

BARRY RITHOLTZ (00:19:43): Huh, really, really fascinating. Coming up, we continue our conversation with Som Seif, founder and CEO of Purpose Investments, discussing financial innovation. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.

I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. I’m speaking with Som Seif. He is the founder and CEO of Purpose Investments. So we were talking earlier — you sold Claymore to BlackRock, and instead of taking a couple of years off, a month or two later, you essentially start Purpose, as well as co-founding Wealthsimple. So many people take a breather after an exit. Why go straight back in? And why two companies at once?

SOM SEIF (00:20:35): So, as I said earlier, I had a very clear eye on what I wanted to do next. I was really excited about where the industry was going, what we were doing, the momentum we were seeing. And it felt like now I had this amazing gift: I was blessed with a blank piece of paper. And when you have a blank piece of paper — oftentimes businesses wanna keep evolving, but you have to kind of deal with your legacy and technical debts and things like that. So I felt, blank piece of paper — I get to decide how I would start from scratch. And so I had this great energy, but I looked at both the continued evolution of the modernization of investment management, and I also saw a bigger-picture opportunity in wealth management. I said the opportunity is not just, “Let’s build asset management products.”

Because when I started Claymore, I came at it from a technical engineering perspective. And I said, when I look at all the billboards, and I look at all the advertising, all it says is, “Hey, we beat the market. We did this.” And I said, okay, well, the job to be done is to beat the markets — and I thought that’s what we were supposed to do. So I was in pursuit of building a product and a business that ultimately solved for helping people beat the markets. What I realized — and one of my great stories around this — was that the first product we launched was the Canadian RAFI Fundamental Index fund. And we launched that, and it was amazing. But it hit its five-year numbers in 2010, early 2011 — and of course, at five years, you start to see a real track record. And at the time, it was the number two Canadian equity fund. It beat every active fund and the main index — it outperformed by 200 basis points. And that’s a great accolade, of course, in our industry — that’s what you’re really excited about. And I felt, wait a minute, I actually don’t know if we actually did anything, because it went down in 2008 just like the main index — 35%, or whatever it was. And I also looked at the journey. I said, if someone had bought it on day one, when we launched it, and held it all through those five years, they would’ve received that return. But the reality of human nature was that they were buying it at different times. When they got fearful, they were selling it. And their return was very different than the fund’s return. And I asked myself, did we actually change the industry? Did we do anything? Yes, we did something great — technically, the product was excellent; we were moving the needle on how the industry operates — but we weren’t changing the way the client and the customer were experiencing what we did.

And so that informed me. And at the same time — I told you Guggenheim was our partner — they had been working on the wealth part of their business with Danny Kahneman. And I had this wonderful gift, again, of the opportunity to learn and understand how Danny was brought in to help them understand how to help billionaires and wealthy families — call it patriarchs and matriarchs — understand the transition from wealth creation to wealth management. And it was so powerful, and the principles of what Danny talked about really resonated with me. I became a student of behavioral science, and that became really paramount to my view of what a modern asset management firm needs to think about — which is not just beat the markets, but develop investment products that actually have outcomes and goal orientation towards them. How do you help advisors and investors ultimately communicate together and work collaboratively around the actual goal the customers are asking us to do — which is help them meet their goals? And so I just felt the asset management industry and the wealth industry both could ultimately optimize around that. And that was what Purpose’s mission was gonna be around: outcome-oriented, modern investment management, optimizing for all the inputs in how we manage money — not being active, not being passive. And then second is, how do we help restructure the way wealth management could ultimately be oriented towards the customer journey, as opposed to, “Hey, we’re just gonna give you a 60/40 portfolio”?

BARRY RITHOLTZ (00:24:23): Huh, really, really fascinating. Tell us a little bit about Wealthsimple, which I described earlier as the default investing app for a young generation of Canadians. What did you see, before apps like Robinhood were big and successful, that was a thing that young people wanted?

SOM SEIF (00:24:44): Yeah. So the principal insight that I sort of had was, if you looked at the way that the industry was operating, one of the big negatives was that, because the industry made so much money — the margins were so good — we actually relied, in a lazy way, on what we call average economics. So what does that mean? Where do you see that? It comes out as: “On average, I like to run money for bigger customers. On average, my bigger customers make me more money. And on average, my smaller customers don’t make me money.” And how does that show up? Smaller customers get treated poorly, get high fees, get relegated to low-quality services, and larger investors ultimately get all the value — and people were gravitating towards, hey, minimums and big fees and big services for high net worth and ultra high net worth. And I just felt that was stupid.

The only economics class I took in engineering was something called ABC economics — and what that is, is actually activity-based cost economics. So, the idea of unit economics. And I said, what we need to understand in this industry is — I actually disagree that small accounts don’t make you money. I just think that the systems, the principles, the infrastructure of the industry are poorly designed to serve smaller clients. And so what I felt my whole wealth model was, was: How do we restructure the infrastructure of the industry? How do we think about it from a unit-economics perspective, using technology and structure and pipes that would ultimately allow for that? And then what you do is bifurcate the value for the different segments of customers — from early-stage customers, to mass affluent, all the way to ultra high net worth — based on a service-level offering. And the service-level offering would change and increase based on the needs of those customers. So that was the principle. And I said, at the earliest stage — if you’re 20 years old, 25 years old — this is the most amazing period to build for. But the industry was treating them awfully. So I said, let’s go build this.

And so we started with the technology, the infrastructure. And what Wealthsimple has done is really unbelievable. It has become, in Canada, the most competitive platform in financial services against the big six Canadian banks. Canada has never seen anything like this before. And it all is rooted in serving customers where they need us to serve them — right when they’re getting started, or along the earliest stage of their journey — and then helping them compound not only their wealth, but also the overall financial experience, as they grow from 25 to 30, 35, 40. It has been an amazing experience. And today, Wealthsimple — I think we run about $150 billion, but we are doing more in net deposits than the biggest bank in Canada, RBC. That is an unbelievable statistic, and I’m proud of what that team and what the organization are doing to challenge the industry and change the way Canadians are served.

BARRY RITHOLTZ (00:27:37): So let’s stay with Wealthsimple a minute, because initially, I assumed this was kind of a Robinhood-like app, with free trading and gamification, and, you know, up to but not quite sports betting — that sort of “Hey, this isn’t gonna get anybody to their goals; it’s fun, entertaining stuff during the lockdown of the pandemic.” Tell us about Wealthsimple in terms of the differences with an app like Robinhood.

SOM SEIF (00:28:07): Yeah. So the starting point, actually, is you start with the customer where they need you the most, right? When you’re 25 or 30, you’re either just getting started — you might have $5,000, $10,000, $20,000, $30,000 — and the principle of it is you want to help them ultimately get going, building a discipline, a structure. So we have the managed-money programs, where you open an account very simply and clearly, you basically build your portfolio, and your portfolio is basically a glide path on the markets. And then you surround that with the types of services and solutions — so direct trading accounts, cash management, credit cards, all the crypto, things like that, that are really important.

So my principle is, there’s always a view of tension around these things. I come at it from a different view, which is: these are things that people are going to be in pursuit of. And what you want as an organization is not to duck your head in the sand at any stage. If you’re an advisor saying, “Hey, I don’t do crypto,” it’s actually a wrong message, because your customers are going to be in pursuit of it. We know that 60, 70% of high-net-worth individuals have a direct account, and many of them are curious and engaged in buying interesting areas like that. So I think an advisor firm — or any firm, a financial services firm — has to find a way to balance the foundations of what is good long-term, call it disciplined, investing, along with satiating the needs and the desires of what an individual wants, so that they don’t turn their head to “I need something different.” And that actually comes from the mindset of: find a safe and secure way to do those types of things on behalf of the customers, and educate them, and size it effectively. So, for example, Wealthsimple recently got approval to do prediction markets, and this is a really high-tension area — people have a binary view of this. And my view is, if customers are going to be doing it, you want them to do it with you, in a safe and secure way, rather than to do it elsewhere. And that’s how you have to ultimately be building. But at the same time, the whole business is oriented around helping someone where they need it the most around their financial journey, so they can ultimately achieve their goals. That’s it.

BARRY RITHOLTZ (00:30:14): So, this discussion about whether or not you’re a serial entrepreneur — I have to click through a bunch of things that you’ve built that are fascinating, starting with the world’s first spot Bitcoin ETF, back in 2021, years before the US approved one. It crossed a billion dollars in the first month. How did you get the Canadian regulators to approve this? How’d you make them comfortable three years before the SEC was comfortable?

SOM SEIF (00:30:48): So first off, I have had a deep thesis on crypto for a long time, and that’s the starting point — I wasn’t doing it because, “Hey, cool idea du jour — let’s launch this and throw something against the wall.” In 2016, just like most people, I’d been asked about Bitcoin, and I was like, I don’t know, it looks like a sort of scammy thing. And then I sort of self-reflected and said, wait a minute, people are actually asking my opinion on this. I should go and do some research. So I spent the time learning and understanding the space. Actually, the best way to do that is make an investment. And over the next 12 months, I just became this student of what was happening. And what really excited me was, of course, Ethereum, which is this, call it, sister technology that was really around taking what Bitcoin had done and really expanding the capabilities of it around smart contracts and all the rest. And so I got very excited about that.

And so what I said was, we’re so early in this — the infrastructure’s not there; the fraud risks, all of it, for investors are gonna be so high. So I actually launched the first publicly traded vehicle on Ethereum, called Ether Capital. I partnered with a group of people, and I said, we’re gonna raise the money, we’re gonna buy Ether on the balance sheet, effectively — we’ve seen these now become more popular in the last number of years, but it was the first one, and we did this in 2018. And I’ll tell you, it was an amazing thing. And my message was, we’re gonna find a safe and secure way for people to co-invest alongside of us on this really great journey, because of the asymmetric opportunity of this bet. That informed me on so much. And we used to do self-custody in that corporation, all the rest of it. And then, at some point, we started to see the infrastructure change, and that’s when we went into the regulator and said, look, there’s an opportunity here. The infrastructure’s changing around how you can custody and fit this into a liquid ETF structure. We worked with them for nine months and ultimately got them comfortable.

And this is a really important principle that I believe: as a registrant, as a money manager, we have great ideas, great innovation, and as long as our ideas are aligned with where the regulator wants the future to go, it’s really important to engage with the regulator and have that dual relationship — that idea of helping them, educating them on where we need to get to. And so that was the kind of work we’ve done all throughout my career. And we did that on crypto, and frankly, we’re really excited that we got the opportunity to launch it. And that model, what we did, actually ultimately informed the series of products that launched in the US a couple years later, on how ultimately to structure ETFs in the crypto space. And of course, the industry has grown, and we’ve moved an asset from the fringe all the way to the core — which is what ultimately my thesis was, in a deep way.

BARRY RITHOLTZ (00:33:34): And Ether Capital today is in what structure?

SOM SEIF (00:33:37): We actually converted it from that corporation to an ETF, once that was available. And again, there, we built staking into it — and those things weren’t available in an ETF form, or, call it, doable, until they were. And when they were, we ultimately moved to the most efficient vehicle, which is the ETF structure.

BARRY RITHOLTZ (00:33:54): Let’s talk about the Longevity Pension Fund, launched in 2021 — the world’s first income-for-life mutual fund, which uses longevity risk pooling to pay lifetime income, like a defined-benefit pension. Investors include Allianz and OMERS. How is this different from what, in the US, we think of as traditional annuities?

SOM SEIF (00:34:20): So, first off, this was my original thesis on Purpose, which was: the industry was all solving for the accumulation phase — let’s build investment products to, call it, solve for how do we save money — but no one was really solving, within the asset management industry, around the challenges of decumulation. And it was kind of left to the insurers, with the annuities, and with defined-benefit pensions and such. And I just felt there was this gap there that was really critical, and you need to deeply understand the principles of how longevity and structure and all the rest of it were gonna be critical in there. And so I asked the team — I said, we need to solve for decumulation. And we were in pursuit of it; we were spending a lot of time working on it. Ultimately, we came across a structure, and I just got really excited. And on the principles, we had to go to the regulator again and say, there are some exemptions we need to make this work.

If I step back for a moment: the greatest financial product ever created in our business — in the financial industry — is the defined-benefit pension plan. And frankly, if you go back to what that represented, it was such an amazing bargain. You join a company; the company says, we will, in an institutional way, organize to have a savings program alongside of your career. And it will not only solve for your savings needs while you’re working, but once you retire, it will also solve for your income longevity for as long as you live — and in some cases, your spouse’s. If you think about the journey of a customer, it is the most unbelievably comforting and principled thing that we’ve done. And the industry has done everything over the last 40 years to break that down —

BARRY RITHOLTZ (00:36:03): Kill it, yeah.

SOM SEIF (00:36:04): — with the concept of, “Hey, we’re giving you choice.” And that has been so bad for people. So I always believed that we needed to bring the system back. If every Canadian or every American had access to a defined-benefit pension fund, 95% of them would be unbelievably better off. The reality is, it’s not good for the industry — the fragmentation allows for agency to increase. And so what I’ve always said is, how do we bring this back into the structure? And so the Longevity Pension Fund was designed around: How do we build a pension plan for all? How do we do that in a mutual fund structure, which is accessible? The annuity structure — of course, it works similarly. The problem is it has this structure where you have to go off-book for an advisor, so advisors don’t really like them. Investors have to ultimately go through an insurance structure, and it’s individualized. Whereas the defined-benefit pension plan is a pool. And so, when you get longevity risk pooling like that, which is done in a defined-benefit pension plan — why couldn’t you do that in a mutual fund? And that was our principle. And so we designed that. It’s the first fund to really incorporate longevity risk pooling — so, putting lives together with a mutual goal of: I’m putting money to work to ultimately solve for my lifetime comfort, that I’m gonna have income for life, and if I die early, I’m ultimately supporting the cohort, but I’m getting what I needed from it.

BARRY RITHOLTZ (00:37:26): So I want to click through four other innovative products, but I don’t wanna spend all week on it. Let’s click through these four quickly, starting with cash-management ETFs.

SOM SEIF (00:37:38): Yeah. So cash is something that, of course, everybody needs access to. So we had launched the first money-market ETF when I was running Claymore. When I came back with Purpose, we saw the movement — deposit rates were much higher than money markets. So we actually went in — the unique thing we did there was we went and built an ETF that linked to a deposit account, not to a security. So it’s actually one of the first of its kind. And that was a hugely important thing back in 2014, and of course, the cash-management industry has grown dramatically. We haven’t seen this in the United States yet — so we haven’t seen deposit-based cash ETFs. We’ve seen money-market-based ETFs, but we haven’t seen deposit-based. So it’s based on the buck — the value doesn’t fluctuate, it increases — and it goes right into the bank deposits of several banks, and you get, therefore, a higher rate. So we were really, really proud of that innovation. And it goes to show the kind of first-principles mindset that our organization always thinks about, which is solving problems. Because many advisors moving to discretionary were saying, “I wanna bulk-trade cash, but my organization isn’t making it easy.”

BARRY RITHOLTZ (00:38:46): You have to sweep it in from the custodian at night. It really should be capable of being automated and maximizing yield without increasing risk. But there are just a million impediments in the way.

SOM SEIF (00:39:00): “I sell QQQs, and I want to go into cash in my rebalance of my model — my administrative assistant has to go and do it basically account by account.” Now, with the ETF, you’re able to go from QQQs to cash, and then back to QQQs, or whatever you were doing, in just a simple, single trade.

BARRY RITHOLTZ (00:39:18): Let’s talk about option-based income products. I’ve never been a fan of this as a brokerage product. It just felt like there was so much cost, so much commission built into it. When you’re dealing with relatively tight margins, it’s a challenge as a retail investor to derive any value out of it — real value. It’s certainly great for generating fees. How do you manage an option-based income product that works for the retail investor?

SOM SEIF (00:39:50): So let’s start with the principle of why, right? I believe that options and derivatives actually play a really important role in the management of portfolios and return streams. So it goes back to that principle of: Can you design outcomes, and the trade-offs that come with options? Because that’s ultimately what you’re doing, whether it’s call options or put options. And so, for an investment return stream that you’re designing, options can be really powerful. That said — to your point — they’re high-friction for an advisor, very hard to execute across your business; and two, for individuals, it’s very hard and very expensive: the spreads and the costs and the sizing. But what option structures are really designed for is ETFs and institutional money management, in a great way, because you can do really amazing programs at scale.

So we’ve been doing these for 25 years — back when I was at RBC, we used to help firms build them; at Claymore, I built them; and then at Purpose, we’ve done it. And I find that they are so perfectly designed for the structural outcome that you want to ultimately create and manipulate in your return stream. But they do come with trade-offs. I’ll give you a great example. One of the first things, starting in my career, in talking to advisors — the thing that the old-school advisor would say is, “Oh, I write put options or call options for a couple of my clients on their large names, but I can’t do it for all my clients.” And I’d say, “Why do you do that?” “Well, because I’m owning this stock, and if I’m gonna own it for the next 10 years, why not generate some income along the way?” And that was a really important mindset that people had — but they couldn’t do it across their business. And I said, well, if I own a name like a JPMorgan, and I’m gonna own it — I love JPMorgan — the actual optimal way to own JPMorgan is to have 80% long JPMorgan and a 20% covered-call overlay on JPMorgan, so that you’re generating the long-term beta of JPMorgan, plus you’re generating some ongoing return from the option income as volatility is there, and you’re taking advantage of the volatility to generate return stream. And that’s the best way, optimally, from a risk-adjusted basis, to generally own most stocks. So how do you do that? And so you design something called Yield Shares, which was designed specifically around the single-name stocks that people most love, and then you write options against them to generate the option income, so that it complements a long-only position in the stock.

BARRY RITHOLTZ (00:42:07): How do you avoid getting called away when the stock has a sudden surge? And the problem isn’t merely, hey, you can always go out and re-buy it — but now you have a giant capital gains hit you have to pay when the stock gets called.

SOM SEIF (00:42:21): So, one thing in Canada is we don’t actually have the difference between short- and long-term capital gains. So it’s a really nice thing — you can buy and sell something in a day and ultimately get capital gains treatment at the lowest rate. Our rate is a little higher, but still —

BARRY RITHOLTZ (00:42:35): We’re 23% short-term, 30% long-term.

SOM SEIF (00:42:37): So our long-term is 25, 27%. The principal mindset, though, is this is what institutional programs are really great at. You don’t write one option on one strike price on one position — you stack them. So you might have —

BARRY RITHOLTZ (00:42:52): It’s a whole matrix — different strikes, different dates.

SOM SEIF (00:42:55): Exactly. And then, with technology today, you can optimize all the structural elements of: Do you roll it for tax efficiency? Do you ultimately buy it back? Where along the curve and option do you basically roll the capital into at any point? So you’re constantly in this, call it, aging of your portfolio overlay, which is really important. That’s what institutional money management needs to do. If you’re just singularly buying one option on one strike, that’s actually a very low-quality execution.

BARRY RITHOLTZ (00:43:21): Yeah, we used to see a lot of that on the brokerage side. So the single-stock Yield Shares — how many different versions of this are there? Or are they all tossed into one ETF?

SOM SEIF (00:43:30): No, we have single names. So I think we might be at like 20-something — 25? I don’t know the exact number, but it’s north of 20 Canadian and US names, and they’ve been very popular — they’ve been very popular with both advisors and direct investors.

BARRY RITHOLTZ (00:43:46): Huh, really interesting. Coming up, we continue our conversation with Som Seif, CEO and founder of Purpose Investments, discussing why he built Purpose Unlimited. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.

I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra-special guest this week is Som Seif. He is the founder and CEO of Purpose Unlimited, which also owns Purpose Investments. He has founded and sold a variety of different companies over the past — let’s call it 20, almost 25 years. So Purpose is now about $31, $32 billion Canadian — or about $22 billion US — across ETFs, cash, alternatives, private assets, et cetera. Tell us the problem that Purpose is trying to solve for your clients.

SOM SEIF (00:44:45): Sure. So, in total, Purpose actually runs around $40 billion now.

BARRY RITHOLTZ (00:44:48): $40 billion?

SOM SEIF (00:44:50): Yeah, on the platform. So, on the asset management side, just over $30 billion, and on the wealth side, now just around $10 billion, and growing quite fast. And the principal mindset has always been — so, on the asset management side — let’s build a modernization of investment management, and products and services to meet clients where they need to be. How do we help advisors and investors build more resilient portfolios? Not just long-only equities and long-only bonds, but how do you optimize for the types of return streams that support a world where potentially bonds aren’t your protective asset? How do you optimize for the types of return streams that ultimately are designed around an outcome, as opposed to just a return of a beta? And so those are the first start. And we have the inputs of — we care about not only the quality of the investment products that we manufacture, but also the, call it, artisan quality of our investment input: the team, the capabilities, the process for investment strategy, using both quantitative methods and active methods in each of the different categories.

I think the second component was, then, we have this big picture that goes back to this system. I use the reference to the defined-benefit pension plan as a phenomenal product — how do we redesign the way advice and investment management work together on ultimately achieving a client’s goal? And so we’ve designed this whole infrastructure around wealth management to support, one, the movement towards independent wealth management. So, as you know, in the United States, you’ve seen the US RIA segment; Canada has a nascent segment there, and we saw this really important movement towards — and a need for — that. So we built the infrastructure to support a movement towards independent wealth management, but then also the services and the tools and the capabilities over and above that, to support advisors in basically driving their businesses towards more planning-based, portfolio-outcome-oriented investment management and wealth management and experiences — as opposed to, “I pick better stocks than the next guy; I’m better at delivering better returns” — more around, how do we help customers ultimately achieve their goals? And so we’ve built all of this technology and systems around that outcome.

BARRY RITHOLTZ (00:46:54): So I like the idea of emphasizing outcomes over benchmarks, but we have half a century, maybe longer, of organizing portfolios around those benchmarks and trying to beat the index. Explain what’s wrong with that approach.

SOM SEIF (00:47:13): Well, it goes back to the behavioral science part — that’s first. And second was, it’s also a structural thing. If you go back to the last 10 years or so, when I looked at the space, I felt that the industry had become a little bit complacent towards this idea that the, call it, best and optimal portfolio was a 60/40 portfolio. And the reason was, if you actually panned yourself out and looked at the returns of the 60/40 portfolio going back 100, 110 years — which we did the research on — it actually only met its long-term goal of 7% in five of, call it, 11 or so decades. And this was a couple years ago that we did that research. And of those five, three of them were in the period of 1980 to 2020. And so I felt that that had created this bias — an anchoring bias — in, call it, the industry.

You know, Barry, the one thing you realize about our industry is that very few people have a historical experience beyond 1980. Most people’s career spans are from 1980 onwards. And so you get biased towards what you know, what you see. What do you see when interest rates go up? They pretty rapidly go back down. When you look at any three- or four-year cycle, the 60/40 portfolio generally was giving you positive returns. And so that meant, hey, that’s an optimal way to invest. I looked at it and said, wait a minute — if you actually look at periods where interest rates not just go up a little bit and then come back down, but actually go up and stay up, how does that affect bond portfolios? How does that affect the overall balanced portfolio? And so I said that we needed to be prepared for that. And that was the starting point.

The second note was this behavioral component. And I just said, look, at the end of the day, we’ve kind of lost touch with what the customer is actually asking us to do. And the customer wakes up and says, “Look, what I care about is, I want to know that when I wake up, I’m going to be okay — and you need to be in the business of serving me on helping me solve that question: Am I going to be okay?” And like a pension plan, you should have a liability — a goal — and you should have an input, which is your portfolio: your savings program and your portfolio, all designed around, are you going to be okay? And I felt that the idea that we should wake up and say, “Hey, we’re here to beat the S&P 500,” or “We’re here to beat some benchmark,” was a silly concept. All that matters to a customer is: Am I going to be okay? And everything we do every day should be in service of that. And so that’s how I always looked at it. And the principle of the design of an investment firm should be around the kinds of programs and asset strategies that help an advisor build better portfolios to answer the question of “Am I going to be okay?” with their customers.

BARRY RITHOLTZ (00:49:56): So I have so many different ways to go with this that I’m very enthusiastic about. Maybe we’ll put a pin in the whole idea of out-of-sample testing, because everybody is so framed by — it’s not just their own hindsight bias, but the recency bias of what they just experienced. It has such a big issue. But let’s stick with the concept of behavioral finance and the 60/40. I have gotten a lot of pushback for saying, if you’re in your twenties, thirties, forties, do you really need bonds? If you are not gonna retire for — well, a 20-something-year-old may not retire for 50 years. Yeah, there’s some emotional salve from some ballast that’s uncorrelated and doesn’t have the volatility of equities. But if I go back in time — forget what the market did — if I was 20 today, I wouldn’t own a single bond. And if I was 75 today, I would own a whole lot more tax-free munis. So it raises the question: 60/40 — does that make sense for — forget the 20-year-old — for anybody under 50?

SOM SEIF (00:51:10): It’s actually a really important question. And in many cases, the answer is no, we don’t need bonds. And the reality of it is that, if you look at the last five, six years, bonds wouldn’t have done you any good. And so, especially if you’re in an environment like we’re in right now — where the greatest risk right now to a portfolio oftentimes is the volatility, the uncertainty, and interest rates and inflation. Well, this was logical in 2018, 2019, when interest rates —

BARRY RITHOLTZ (00:51:37): Went to zero, right?

SOM SEIF (00:51:38): Right.

BARRY RITHOLTZ (00:51:38): You go from 1980 to 2020 — 40 years of bond appreciation.

SOM SEIF (00:51:42): Phenomenal. Yeah. I mean, that was the —

BARRY RITHOLTZ (00:51:43): That’s a unique era.

SOM SEIF (00:51:45): But the thing that was the big driving force was the movement between the seventies to the eighties, when interest rates spiked into the teens. That was the thing that set up, of course, the next 40 years of declining interest rates. And so you have to step back and have that context. It’s just like timing the market. The reality is that, if you had bought in the mid-seventies, you would’ve had a horrible experience with that portfolio structure.

BARRY RITHOLTZ (00:52:08): There’s pre- and post-Paul Volcker. And that’s the defining element.

SOM SEIF (00:52:12): It’s actually pre and post the economic situation that was happening, that led to an inflationary spike that we ultimately had to address. And that was what you were dealing with. But, to your point, recency bias drove people to believe that this was the optimal way to invest. I think, for an individual, again, it goes back to — okay, yes, equity is a hope-based strategy. Investing is a hope-based strategy. And when you’re in your twenties and thirties and forties — and even potentially, you know, fifties — because I’d say, call it 20 years before retirement, like a pension plan, T-minus-20 years: anything T-minus-20-years-plus, you have a lot of room for hope. Hope is a wonderful thing that you should take advantage of, because ultimately, you want strength and momentum, and you have the time to get it right. But once you get into that T-minus-20 period, that’s the period where you’d better have some structure and discipline in what you’re ultimately achieving to get to T. Because the one good thing is, T can move — that’s the time of retirement. That can move. You could say it’s 65, but if you really need to, and your advisor says, “Hey, it’s a bad time — you need to move to 67,” you can move to 67. And if it’s going really well, we can move it to 63. But T-minus-20 is a really important window where structure and discipline in your portfolio have to be designed. Everything before that — absolutely, you can take as much hope as you want, you can take as much risk as you want, because you haven’t entered that window. That’s how I look at it.

BARRY RITHOLTZ (00:53:31): Huh, really interesting. As someone who’s partial to the math and science half of my brain, I’m curious how you reconcile the rigorous, structured environment of being an engineer — like, there is an internal logic and a set of hard mathematical principles that govern that — how do you reconcile that with the squishy, emotional side of all of Danny Kahneman’s teachings? Which is: hey, this is just how we are built; we weren’t made for this sort of decision-making.

SOM SEIF (00:54:13): Yeah. I think the beauty of when you marry the first-principles — call it linear — kind of thinking around what engineering can do, and then you apply that with the non-linearity of human behaviors, is that it’s actually a phenomenal, call it, mixture of thinking. And that’s what you want. You want those multiple inputs to basically change your mental model of how to design and think. What I love about engineering in general is it is a reverse-engineering mindset. It is going back to the hypothesis, the scientific method, right? Which is: I have an idea of what the answer will be, but I’m going to do everything I can to prove that. So if you apply that to any problem — which is, hey, I’d like to solve for this problem, I have an idea of how to solve it — then you reverse-engineer how to ultimately get there, or you build around the scientific method of it. It’s a wonderful way to approach problem-solving in general.

And then you bring in the inputs. So one of the things we did at Purpose is we’ve actually brought on behavioral scientists to actually support the organization in the way we think about product design, the way we think about marketing, and all those things that we do — because it actually helps influence the mental models and the way that we make decisions. Those are really powerful. So I just believe it goes back to that original comment around the creative mind and the, call it, structured, disciplined mind. I think if you bring those two together, it’s a very powerful mixture to build with.

BARRY RITHOLTZ (00:55:30): Really, really interesting. So we’ve been speaking for an hour, and artificial intelligence has not come up — which I think is a first this year. How do you think about AI from a managerial perspective? How do you think about it from an investment perspective? What do you see as the impact of this going forward? I appreciate the opportunity to ask someone who’s an engineer about this, because essentially, this is software engineering at the highest level.

SOM SEIF (00:56:04): So I’ve never been more excited in my career. I feel a sense of energy in the last nine months, specifically coming into 2026, that I’ve just been excited about, because of what this new technology is enabling us to do. And, more importantly, it’s not just how do we build features, or solve some problems, or create a little bit of incremental productivity. It is about the grassroots — go to first principles — of how should we ultimately design the way we work, the way we optimize our business, in and around a technology re-platforming. It would be no different than in 2000, if you were going through this period when the internet was now becoming real and scalable, and you were sitting there as a retailer or any other business: if you just thought about the historical way to run a business, and I’ve got this new thing — I think you lost. Whereas if you actually said, no, no, I need to redesign the way I work for this new platform — the mobile era, which was a different one: same thing, you need to redesign the way you work. And AI is the same thing.

So we at Purpose have been really deeply embedding it in the way we operate the company. The first thing is, we are effectively driving forward-deployed engineering, data science, and product across the whole organization. We are driving into smaller teams and squads. We are rolling that out across everything. And we are driving the company with this mindset that what a modern organization needs to design around is vulnerability — the ability to have innovation and intelligence moving through the organization constantly, and data flowing, and communication. And this is on top of, of course, leadership strength. In the past, the organization was all driven by leadership strength — how good was the leadership? And my view is, vulnerability and communication are gonna be the things that really drive, and AI enables that in a really amazing way. What that is, is a system of the way you work. So we are doing that in a great way.

At the same time, though, when I look at the industry, we are still stuck in this idea of AI as a feature set. So, “I’m gonna design features” — “Something I used to do that took me an hour, I can do it now in five minutes.” Those are really cool, but that’s no different than what Excel did for us. You know, the accounting industry, you can imagine, was a little nervous when Excel came, but then actually adopted it, and it created great value. But what this actually allows for is a way to change the way we operate. And that’s what I hope the industry really leans into more deeply.

BARRY RITHOLTZ (00:58:34): Huh, really, really fascinating. All right, I only have you for a couple of more minutes. Let’s jump into our favorite questions that we ask all of our guests, starting with: Who are your early mentors who helped shape your career?

SOM SEIF (00:58:48): So I talked about Rob Arnott, and Rob is someone that I care so deeply about. He not only introduced me to his own way of thinking — Rob has a special thing when you spend time with him. Rob is unbelievably intelligent — he can go toe to toe with any Nobel Prize laureate from an academic perspective — but at the same time, he’s actually an excellent communicator and marketer. That’s a very unique, rare combination. And he taught me that in such a deep way. So much of who I am was formed during those years of working alongside and seeing him in motion. So he’s been an amazing person in my life. He also introduced me to his advisory group, which were people like Harry Markowitz, Peter Bernstein, Richard Roll, Keith Ambachtsheer — some of the most amazing deep thinkers, who I got this immersive opportunity to spend time with. That informed so much of my principal thinking at a time when I was very raw and really open to that curiosity. It was exciting.

BARRY RITHOLTZ (00:59:50): Huh, really, really interesting. I have some hilarious Rob Arnott stories that I will share with you off-air. Let’s talk about books. What are some of your favorites? What are you reading right now?

SOM SEIF (01:00:01): So I love books, and autobiographies are one of the things — people always say, learn from failure. I love to talk about learning from success. So, how do you learn from people’s careers and lifetime successes? So some of my favorite books: The Education of an American Dreamer, by Peter G. Peterson — I don’t know if you’ve read that one — a phenomenal, great story about an individual who, of course, ended up co-founding Blackstone later in life, but just an unbelievable journey about an immigrant family — he just did unbelievable things — and the evolution of a career that’s so fascinating. Creativity, Inc. — we were just talking about that.

BARRY RITHOLTZ (01:00:40): I literally just got it delivered two days ago.

SOM SEIF (01:00:44): I love that, because when I finished that book, I said to myself, if I was to ever write a biography about my career, I hope it would sound like this. It was the creativity of what Ed Catmull did — but, more importantly, the relationship, how he explained his partnership with Steve Jobs, and the love he had for Steve, and the way he was so intricate about that. It was just so inspiring for me. I loved it. And then, some of the recent books that have just really inspired me: Unreasonable Hospitality — I think one of the greatest business books —

BARRY RITHOLTZ (01:01:13): Fabulous.

SOM SEIF (01:01:14): One of the best business books that has been written in the last couple years. If you haven’t read it, it’s a critical book. And then I recently finished, a couple years ago, Never Split the Difference, by Chris Voss, and it is unbelievably strong. And in fact, yesterday, we had the team from Chris Voss’s group come in and train our people on how to apply that type of negotiation skill into the daily way we work. It’s an unbelievable way to think about the concept of being comfortable with the word “no.” We are so afraid to hear no in life and in business, but actually allowing no to become something that lets you get to yes is really important. And it’s so counter to all the things that people have learned through the Harvard programs around getting to yes. It’s actually an unbelievable way to think about negotiation and marketing.

BARRY RITHOLTZ (01:02:00): One of the people I work with just recommended that book, Never Split the Difference, and it’s sitting on a pile — I’m holding my hand up this high — and I was like, all right, yeah, I’ll get around to it one day. I’m gonna have to move that up a little higher in the pile. Let’s talk about streaming. What are you either watching or listening to — either Netflix or podcasts or whatever?

SOM SEIF (01:02:23): We have four kids at home, so my wife and I are always trying to find that hour to stream. The one show that has really touched me is the show Shrinking, of course, on Apple TV.

BARRY RITHOLTZ (01:02:34): Delightful.

SOM SEIF (01:02:35): Yeah. And the way that the writer, Brett Goldstein, talks about emotions and communication — it’s just such a touching show. I finish every episode, and I think I’m teary-eyed every single time. That’s been an amazing thing. But my wife and I, we love lots of different shows — we just don’t get to them. We have like seven different series that we are in the middle of watching right now. But we try to find that time, and it’s an important time for both of us.

BARRY RITHOLTZ (01:03:02): You mentioned Unreasonable Hospitality — we just finished the final season of The Bear.

SOM SEIF (01:03:10): Oh, yeah.

BARRY RITHOLTZ (01:03:11): And throughout that show, you can see some of the ideas right from that book on film.

SOM SEIF (01:03:14): You see it in season two — you really see it very much. That’s when it really becomes prevalent. And of course —

BARRY RITHOLTZ (01:03:19): The little hot dogs, and all the stuff they do to go over and above the call of duty. It’s impressive, it really is. 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 financial innovation?

SOM SEIF (01:03:40): So I’d say there’s two answers to this that are important, because you’ve got the tension of what’s happening with AI around this industry. I’ll start with the foundations. This is a wonderful industry to be in, and if you look at the trajectory, financial services as an industry will continue to grow meaningfully. If you’re in the wealth industry, it will double, and the asset management industry is doubling, just in the next 10 years, by virtue of savings and market appreciation. So, as an industry participant, the size of the pie is growing, and continuously — so that’s a really good thing. Two, you’ve got an aging demographic of individuals in this space — advisors are constantly aging — and so there’s a huge opportunity for younger talent to come in. And so that’s an awesome setup to be in the business. The principle I go back to is, it’s an amazing place that has high mission, but I want young people, if I was to come into it, to really focus on: How do I approach this to help the customer truly win? As opposed to the historical mindset of, I’m here to basically manage money and do all these things. And I think there’s a really amazing opportunity to do that in a great way.

If I take the tension of AI — there’s always this question of, what’s it gonna do to the advisor industry or the investment industry? And I look at it as only enabling. If you think about the opportunity for a young person today, this is going to be an unbelievable period. The way I would approach this, though, is to recognize, as a young person, that a career in any financial service — or any career — is not a sort of set of stairs. It actually looks more like a J-curve, and you’re gonna have to go through very difficult periods that look very uncomfortable — where you look like you’re not doing great — to ultimately see this great outcome. And that comes from curiosity, learning, and immersing yourself, to ultimately take risks and do really important things. It’s an unbelievable time right now, I think, for an individual and a young person coming into this space.

BARRY RITHOLTZ (01:05:33): Good answer. And let’s jump to our final question. What do you know about the world of investing, of ETFs, of — again — financial innovation today that might’ve been useful 25 years ago, when you were really ramping up?

SOM SEIF (01:05:47): Well, I think I go back to the constant learning of how behaviors and emotions really drive outcomes. And I wish I’d learned that earlier. I wish I’d kind of been exposed to it. I think the most important thing, though, is this idea of: How do we help truly solve problems along the journey of a customer? How do we put the customer and their moment of need at any point — whether they’re 25, 45, 65 or 85 — and ultimately help them with the types of services and solutions that drive that? If I had had that principle mindset 20-plus years ago, I think I would’ve built even more powerful businesses back then. It’s really fun to do what we’re doing, but I wish we had done this even earlier.

BARRY RITHOLTZ (01:06:33): Som, I am so glad we finally got to do this. We’ve tried to set this up a couple of times, and the dates just kept getting crossed. I’m thrilled you came in to do this. We have been speaking with Som Seif, founder and CEO of Purpose Investments.

If you enjoy this conversation, well, be sure to check out any of the 650 discussions we’ve had over the past 12 years. You can find those at iTunes, Spotify, Bloomberg, YouTube — wherever you get your favorite podcasts. And I would be remiss if I didn’t thank the crack team that helps put these conversations together each week: Alexis Noriega is my video producer; Sean Russo is my researcher; Anna Luke is my podcast producer. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

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