Martin Shkreli breaks down the Situational Awareness collapse: leverage math, margin calls, and Ken Griffin's shadow banking role

Speaker 1: I believe he's here. How are doing, Martin? Good to see you again. Hey, I'm doing great. How are you? So perfect.

Speaker 2: Perfect.

Speaker 3: How's your last Take us through it. Twenty four hours. What's last twenty four hours been like for you? It's it's been interesting. I do invest myself. So, it's been a it's been a probably one of the craziest months, in Wall Street history. Mhmm. Was I talking to some friends last night about long term capital management, Amaranth, other famous liquidity driven blowups. Mhmm. And this is up there. And, it's just a really crazy thing. We had heard rumors, sort of mid last week and then they really started crystallizing, last night, and this morning obviously sort of a fait accompli. And I actually think they did a wonderful job of of keeping it relatively quiet. I think some players were already positioning, say, early in the week, Monday, Tuesday, looking to do what my old boss, Cramer, used to call, you know, shooting against a fund. So if you know know somebody has to liquidate, the best thing for you to do unfortunately sadly Darwinian is to go sell all the positions you have in common then go start shorting everything they have. Yeah. And it accelerates the sort of downfall as quickly as you can. And this is a very common practice when these things you know, happen. Certainly not something I I had overlap positions with them, so certainly not something I would do, but no wide number of funds that were shorting all of these stocks hoping to cause a panic and a crash. How do you trace back the start of this correction?

Speaker 1: Is it the war? Is it oil? Is it jitters around open source or just hyperscaler CapEx? There's so many different narratives around why the AI infrastructure trade, the bottleneck trade might be weakening. At the same time, it feels like there's some really solid progress and the models are progressing along, like, pretty, like, as expected. Yeah. Yeah. You have the labs having

Speaker 2: some of the best months in business history of any companies ever. Yeah. But then all the infrastructure correcting.

Speaker 3: Yeah. None of that stuff matters. You know, the only thing that matters is is the propensity of the buyer and seller to buy yourself. Mhmm. And what you had happened was the smart guys get in early, start buying Mhmm. See the prices go up, buy some more, and then less smart guys take take note and say, I wanna do that. I wanna be up 400 this year too. Mhmm. Guys like me started buying right near the top. It's just like, hey. This is great. I love memory. I love bottom line. And and and then but but the weakest hands are buying at the top. So they're also the first to sell. Sure. First to panic. Yeah. And it just creates this like, you know, every bubble sort of the same. You have this euphoria, this peak, and then, you know, everyone sort of panics at once. You The fundamentals basically don't make a difference. I think they sort of drive the marginal buyer and seller but the 80 or 90% of the assets shareholders don't change hands. It's that 5% of the margin that's deciding the price and if that 5% is in the state where they're they're levered up three x or four x as we heard south is was a four x levered fund which is that's a lot of leverage. Know, a 25% drawdown takes you out of business. Interestingly, we heard that three firms were bidding on the assets. So Jane Street, Millennium and Citadel were sort of brought in and closed circle sort of late Friday to bid on the remains of of the firm. And we got offered a look at a $100,000,000 of anthropic stock, which we were puzzled puzzled by. You know, sometimes you see these SPVs sort of interest comes across, you know, here and there, and we thought that was interesting. I sort of raised my eyebrow and was like, is that Leopold? It's because, you know, sometimes when you wanna sell $4,000,000,000 or something, you don't come out and say you wanna sell $4,000,000,000. Yeah. You come out and you say I wanna you wanna sell a $100,000,000 of it. And usually a guy who wants to buy a 100 is enough to buy 500 or more. Yeah. And you sort of fill them out and say, here's a 100. Okay. Do you want five by any chance? And then, you know, your eyebrow starts to raise a little bit that, you know, maybe he's got even more. Now, of course, this is a really odd situation. So I I we we heard Millennium did put in a bid. Citadel's bid was better. You know, I think Ken wants to be the guy that everyone goes to when they're in trouble. And that's the you know, Buffett is getting older. This is not the kind of stuff Buffett wants to do anyway. Mhmm. But, you know, Citadel did this in the Amaranth deal. You know, when Amaranth blew up, natural gas futures, I think Citadel took that portfolio and virtually every blow up in finance

Speaker 2: comes to rest it. Enron Enron where they just raided all the talent.

Speaker 3: Yeah. They wanted to do an Enron as well. I I think, yeah, they just sort of Ken is a very smart guy. He sort of shows up and says, how can I be a partner to the Goldman's and the Bank of America's when they need to get out of a really risky position? They basically take over the book, Right? So if you I'll give you sort of an example and you're asking the question. So let's say, you know, you're at 45,000,000,000, you know, sort of try to trace this back, and you're you're, you know, 10,000,000,000 of that is in anthropic from what we understood. So you have $30,000,000,000 of cash in your bank account and running forex levered means you have a 120,000,000,000 gross market value. Oh. So if your GMV drops, I don't know, 25%, that doesn't sound so bad at a 120,000,000,000. Maybe that's Yeah. You know, I don't know, 30,000,000,000. So you're down to 90,000,000,000, but that's not your equity. So your equity drops from 35,000,000,000 to 5,000,000,000. Yeah. And no no prime broker is gonna let you keep 90,000,000,000 of gross market value because once you dip your equity below zero, it's their loss, not yours. And they're not gonna lose a penny after Arkegos and after these other kind of blowups, and that's not their job. And they kinda have the right to take over your portfolio Mhmm. Which is is sort of, you know, something I hope nobody ever asked to experience, but they basically call you in and say, listen. These You are our assets now. We're gonna decide what their disposition's gonna be. And the rumor is over the weekend, he contacted about 10 parties to place Anthropic in an effort to shore up liquidity, selling the Anthropic stake for for allegedly that the offer was at 1,100,000,000,000 equivalent market cap, which you know, I think roughly where it's trading. And you know, it's unclear whether that was sold or half of it was sold is what we reported that half of it was sold. It's still a little unclear who bought that, what's happening exactly, but that's the best we've got. And then you know when it came to the public you know book it does sound like you know the buyer of that book basically got a from what we were told a 3 to $4,000,000,000 insta markup. So, yeah, they basically now have to work them they have to work out of of 3 to 4,000,000,000. Yeah. More than 3 to 4,000,000,000. Quite a lot more. But in essence, if they work out of these positions without disrupting the market, they they'll print at 3 to 4,000,000,000 on the trade which you know is unusual and interesting trade but you know really exciting. One of the parties reached out to me last night one of these three parties interestingly after my reporting and they said that in essence, at sum and substance, yes, Leopold flew a little too close to the sun and your numbers are a little off. I asked what direction and they wouldn't confirm or deny. I received a lot of pushback on the reporting to your point privately and publicly that it's not so bad and that he's only down 30%. 30% you can live with, but also if Anthropic hasn't changed its mark, that means you were down 60 in the public book. And if you're forex levered, you know, that means you're sort of down 15 on the public book, which sounds too good to be true. If you're trading these stocks, they were down like 15% a day. Yeah. So

Speaker 2: we've also heard the other other AI funds are are hurting, maybe not as as much as in trouble, but but certainly hurting as well. Where does the fund go? Yeah. He gives some good he gives some good cover to all the funds that were effectively copy trading him. Oh, sure. Maybe even being more risk on and later to these positions because they were they're naturally just late if you're trying to copy trade someone and you're you're Trying to catch up. You know? Yeah. You're trying to catch up based on the situation. Yeah. More leverage. You're you're you're coming into these trades way later. Do you do you recall, like, how did you process Ryan Jacob in in around the year 2000? Because you were at Kramer's firm, I believe, you joined maybe right before the Ryan Internet Fund started collapsing?

Speaker 3: Yeah. There's also the Ameren Fund. There was a fund in the sixties called the Manhattan Fund that Warren Buffett criticized for being the go go kind of fund was run by a guy named Gerald Tsai. And so like every generation you've seen the memes about Kathy, know, every generation has it, you know, the guy that believes in that cycle and it goes balls to the walls on that cycle. And look, I have a lot of respect for somebody who's willing to do that. Used to tell a friend who kind of did the same thing. He followed this trade, he was very early. So he had sort of Leopold like numbers and he sort of did hedge at at what sounds like close to the top. So sort of a miracle trader, best trader I know. And I joked with him. I said, know, if Leopold sells at the top and turns short, like, I will absolutely adulate him as the greatest of all time. It's just that, you know, usually when you're so spellbound by that narrative of whatever happening, in this case AGI Mhmm. You know, there are people out there that say, look, AGI's here slash coming. When it comes, the entirety of finance is not relevant anymore. Yeah. You know, we might as well just run it up and and kind of see the end of days this way. And, of course, to some guy sitting on a trading desk at Goldman Sachs, you're like, these people are fucking nuts. You know? It's just the stock market. No big deal.

Speaker 2: You given given that Leopold had had been at FTX right up until the the the the fall, did you think that maybe as as risk on as he was, like, maybe he was like, you know what? I just I can't go through that again. He wasn't necessarily he wasn't necessarily directly tied to any of this sort of nefarious activity at FTX, but he did have to viscerally experience it and and I believe resigned the day of the collapse and Yeah. I would I just would have expected to not, like, run it yeah. To run it back, like, so quickly. You would you would expect even, like, you know Yeah. Go and do it have a normal, you know, great career for a decade, whatever, then maybe come back to leverage and be like, I'm ready to dance again. But

Speaker 3: There's a lot of questions. Like, one question is what's his carry? You know, when a lot of firms in the hedge fund industry, believe it or not, they have clawback provisions for carry. Like high high watermark provisions. Right? So you have to clear something? Sure. Everyone has a high watermark, but what's increasingly happened is a is a is a carry provision where you have to return the 2 and 20 you earned if you have a severe drawdown Yeah. Which, you know, could actually end up being a tough situation. Now as you guys know, the fellow is getting getting married this weekend as well Yeah. Which is, you know, a little bit of tragedy with a a little bit of triumph mixed in. But, obviously, you know,

Speaker 2: when this But does every how common are those clawback clauses? Because you have to imagine in this fundraiser, you had, like, massive, massive leverage. You know?

Speaker 3: Like, demand was very high. Demand was very high. That feels like a turn The numbers were so good. Yeah. It's a more institutional thing, and I and it you know, speaking of which, you know, obviously, the guy basically had no no experience. And again, you know, in times like this, nobody wants to to great dance and I'm not doing that. But I had some institutional friends, one of the biggest fund of funds in New York, for example, who passed on Leopold basically laughed at him and said, you know, there's no way I could invest in this and of course you know he goes on this tear you know makes like 20 x or whatever it was since inception and does fantastic and he feels sort of sheepish but ultimately you know somewhat vindicated after all of this. So you did have a manager that had no experience, kind of a long only or extremely long biased, starts through privates, which for many hedge funds is kind of the death knell. You you know, you know, when when hedge funds put on their VC cap and try to try to do what what those guys do, it it it often doesn't end well. And that that goes back like, you know, fifty years basically of hedge fund history. And very few people have been able to do both. And the other thing I'd point out is we're gonna see July numbers very soon here from from quite a lot of hedge funds that I think we're in the same trade. Sure. And so this this is not just Leopold's 100,000,000,000 gross. It's like that times maybe five or 10. Sure. And the mark while the market's liquid but that's a lot of downward pressure in a few weeks and you know it's amazing to see this all compressed in a month whereas like the .com bubble took three or four years to like patiently go up and patiently go down. You know seeing that compress instantly is interesting. What's gonna happen next is really gonna be fascinating. There's some theory out there that you know that we see all time highs again now that all this liquidity is out. And there's other theories there that we actually were just having this nice big downtrend and that this liquidity pop will fade and will be back down further and further. You know nobody knows what will happen but it's certainly while you're right that, know, the Anthropix and OpenAI's are are having record business results, so is Microsoft and Google and Meta for that matter. There's still, I think, some more discerning questions about is or is this CapEx investment worth it? Sure. You know, they've awarded met Microsoft for being prudent. They they punished Meta and Google for not being prudent. Mhmm. So one wonders what what the future will bring there. But, yeah, I not as crazy as things have gotten on Wall Street in in many years, probably at least since FTX and certainly crazier than the sort of Tiger Softbank venture boom of '21. And then you know really since then the await insanity. So it's it's it's quite a spectacle and I think you know no matter how much people want to learn the lesson of leverage over and over and over again we all seem to repeat it and you know it is what it is. But I think that the Jane Jane Citadel Millennium kind of like entire hedge fund complex sort of becoming this like shadow bank is quite interesting. You know in that like these guys are are sort of there to normally the banks would sort of take this on the chin but now that there's other folks who are like you know Jane was an LP for example reportedly was not interested in bidding which is fascinating. May have taken the anthropic however really unclear. We're going to learn more obviously as some days go on here but it's it's an unprecedented time and, you know, really an insane story that may just get more insane as we learn more. Is there a world where the fund continues?

Speaker 1: Because I'm just hearing the numbers and it's like, you know, for up at 45,000,000,000. The actual money into the fund was maybe 5,000,000,000 or something if you sell the positions. Right. Right. Right. There's a world where you wind up with, like, 10,000,000,000 in a bank account, and the LPs are like, well, we gave you 5.

Speaker 3: Keep going. Yeah. Get back in the game. You know? I hope I hope that's the case for the LPs who are awesome, for the Yeah. Fund manager who obviously got quite a lot of whiplash. Mhmm. But, know, at the end of the day, you know, there's there's this concept on the street as as you guys know like once there's blood in the water like these positions have go to zero. Like we'll send Micron to $5 you know just to liquidate this guy at three. Right? That's you know, the craziest thing is like that's that's the nature of of Wall Street when this happens and there's a guy that has to sell a 100,000,000,000, you'll have a trillion dollars in front of him just like, you know, let's let's see this guy cry uncle. And it's the saddest kinda most Machiavellian thing but like he had he sort of had to blow up. You know there's no other ending sadly. Yeah. Because of the leverage level it's just like one slight you know I remember my old my old boss was a Tiger Tiger portfolio manager reminded me of the 2,000 era where there's this very slight change in tone from one optical component supplier and that's like him and his partner from Soros just decided to go like as as short as they could. That's because they knew ultimately these vulnerable hands were sort of sitting there after the easy part of the bubble was over. You have this like, okay. Well, what's what's next? Things have to get a lot crazier. You saw Dwarkash's tweet. Yeah. Things like that would have to sort of happen for there to be enough second derivative for somebody to just be surprised. Yeah. You know, everyone knows AI is in this boom. Everyone knows chips are in this boom. Yeah. Yeah. What could possibly shock you to the upside? Not much. So if you hear any little like, you know, we're not gonna spend as much, the whole shit hits the fan and every it's just too heavy. So I I I actually wonder if we're we're, you know, if we're not in for a longer, more protracted decline. Things feel great today. You know you have this huge boom this relief rally and a lot of the froth is out of the system. But you know what next. You know I don't know that you know a patient and calm market is going to emerge because you had these hyperscalers and the big companies they FOMO too. They FOMO just as hard as Leopold did. Right? If not harder. Yeah. So this isn't just him. It's the whole world collectively saying, fuck. I gotta I gotta go all in in AI. And it's it's and who who had the guts, you know, other than one man, Tim Cook in the back saying, not me. Do nothing. Know? Yeah. Yeah. No. Really, was Tim Cook.

Speaker 2: Yeah. The the the funny thing, you know, we we had been joking We were joking in, like, q four when, you know, they're prior to, like, coding agents really starting to rip, you know, OpenAI revenue growth had, like, slowed a little bit and, like, there's some jitters and and lot a of this stuff wasn't public at the time, but you could tell some of the kind of crossover

Speaker 3: types were like getting a little nervous, right? They kind of expected something And maybe the DAU numbers Yeah, yeah. You know, it really plateaued.

Speaker 2: And then we And then there was a correction. Like, there was, like, briefly, you know, a period. It was probably, eight weeks. It was, okay. Like And then it started ripping again. And we were taking, like, sort of a a bit of a a joking, like, victory lapping, like, cool, like, AI corrected, you know. Bubble pops. Bubble pops. We're able to build back sustainably.

Speaker 1: We're good from here on out. It's smooth sailing. No. I I completely agree. I think

Speaker 3: unexpected thing is it would be if we saw brand new all time highs Mhmm. For the entire thing. I think almost everyone on Wall Street is skeptical this will happen, which means is it has a chance of having take off the bullet. So you're saying there's a chance. I love it. Can you can you give me a little bit more insider baseball on what it takes to unwind a big position

Speaker 1: as a shareholder? Because a lot of people who are not inside the hedge fund world are sort of maybe confused around, okay. Yeah. You own $50,000,000 of a $1,000,000,000 chip stock. Can't you just dump that on retail? Can't you just, like, sell market sell that on E*TRADE or Robinhood? And in fact, it's much more complicated when you're at this level. Even though it's public markets, there's not just a big button. Can you walk us through what it actually takes to, like Yeah. Sell a big position when you're at that level?

Speaker 3: Yeah. There's there's a lot that goes into it interestingly. So the first is you have this advertisement system. So if you sell into the into the market, you can try that. And those that's called selling into the screens. The screens are the numbers on your screen. Anybody could buy and sell Robinhood, whatever. So you don't normally do that if you if you can help it. Selling on screens is at least somewhat quiet. You can just sort of trickle out. There's always this conspiracy that as I'm selling on the screens, there's some guy who's can see my screen. And he's like, oh, this guy's got a VWAP market order to sell 10,000,000 shares. That's like you know, I'm gonna tell somebody. And that knowledge would be very, very powerful. And there's even some even crazier conspiracies out there that quants could actually use different all kinds of insane ideas around what they can do to sort of sniff out that this is happening. So there's people that are scared of that. Then you can pick up the phone and this is the way you'd normally do it and you'd you call Goldman and you say, listen, I need to sell five, you know, 5,000,000 shares of of Microsoft or something like that. And they say, you know, should we take it or do we find a guy that wants to take it? Mhmm. And they'll sort of try to decide. Now Microsoft is easy. If you're trying to sell share in AI, a neo cloud in Australia that nobody wants, that's a tough one. Yeah. And you own, like, ten days of volume. So if you try to hit the screens, have ten days of volume. You would you would have to be the entire volume for ten days before you'd be out. You'd probably take the stock down 50% or more. Yeah. You don't wanna do that. So you try to you know do this advertisement process you know and you basically can post in the stock market that you are a seller of a stock and you can post that your four digit what's called market maker ID and so Goldman's is GSCO. So GSCO would be a seller of say you know Nevious which was one of its positions. And so you'd call up, you'd say, okay Goldman, I'm a client too of Goldman. You know what do you got on Nevious? And the guy would say, we got a pretty big seller here. You know and say how big? You know, half 1,000,000 shares and he's like a lot bigger. You know and so you'd say, okay. Because they have to advertise that you know they're working your order. So they have to sort of tell people that there's a seller. They're they kind of are trying to be coy about how big but they're not gonna waste somebody's time either. So the guy who's heard that there's a big seller, well, might turn around. He's not supposed to do this. He sort of might turn around and say, you know, there's a huge seller of nebious out there and I'm just a little baby fish. Maybe I could short 50,000 shares and get in front of this guy. If you're an actual interested buyer, you might also still be nervous because you'd say, if he's really got a ton of size, I might have to be judicious about how I step in. If you combine that with the pressure in the market and you add it all up, and then usually what you do is you'd have to say, oh, I know a guy that works there, and let's see if he's returning calls. And when you hit up the guy and he's not on Bloomberg, he's hard to reach, it's like, well, it sounds like it could be them selling. So it's not too many people that own that many shares of that security. So you look at the holders list and you're like, who could it be selling 10,000,000 shares? So you call Fidelity and they say, no, we're not selling. You call the next guy, no, we're not selling. Next guy is an ETF, next guy is an index fund. You know, it's gotta be him, you know? And so if it's them and they're there's there and then you start noticing all of their positions are down, it gets really hard. So ultimately the bank decides because you might say I don't want to sell. The bank says I don't care what you want. We're selling regardless. And Goldman Sachs is not in the business of holding AI stocks. We're gonna sell at any price we can because our board would rather know for sure that we're down a billion and just take the rip the band aid off than to wonder if we could lose 50. And so it's Goldman's position that we're just gonna just cut cut this cut the arm off right now before it metastasizes. And so they'll do a fire sale and of course Goldman's smarts are gonna reach out to a guy like Citadel or somebody else to place it carefully. But selling the whole portfolio in one shot was a very smart move. Now again, we've heard the discount could have been as as big as you know, 20 to 50%, which is, you know, mouthwatering discount to buy, you know, some quality companies at. Yeah. But to end it and have finality, what was really to answer the question finally, what you really needed to do is the buyer of these stocks has to have the liquidity to hold them for five years and do nothing. Because the market, guys like me and to a very small extent, and guys too much bigger will sit there and say, I don't think you can hold this. And they'll start shorting it and shorting it and shorting and trying to make you cry uncle. Kyosha in Japan, one of Leopold's holdings also online, is trading at three times earnings. You know, they basically force you're you're forcing the guy to to really, you know, to sell. And if you're gonna hold the stock, you have to make sure that you can hold it until it's two times earnings or one times earnings. And the only player big enough and more powerful enough to to sort of hold a $100,000,000,000 and not blink is somebody like a Citadel. And even still, some keep the rumors out there, they're the people who are gonna try to thrash your Citadel, which I wouldn't advise, know, but something like that where, you know, maybe they'll have now have to suffer the same contagion. So it's a very crazy time in the markets and and I don't think we've seen everything yet because I do think there are some large tech funds that have had the same trade on. I do think liquidation is over, thankfully. Mhmm. But I do think that there are some funds that are about to be found out to be down 30% or down 40% or something. Through the mind of Ken Griffin,

Speaker 1: like, a couple weeks ago. There's this rumor that he was sort of, like, pushing or signaling that there might be a rate hike. But what I'm interested in is if you suspect that there's going to be a fire sale on x, y, and z companies, is there a world where you build the hedges before you acquire those assets? Or is that two four d chess? Because that if they if they wind up acquiring these for 50%, 20% off, but they already have offsets, then they sort of come in market neutral. Is that possible?

Speaker 3: I don't think so. So I'm familiar with the Citadel's performance for this month, which is surprisingly up. So I think they're probably one of the only hedge funds in the world that's up this month. Yeah. It's up. They were actually small. Very small. They were actually hedged is what you're saying. Yes. Have a diverse platform of different businesses, a guy trading weather, a guy trading rates, a guy trading stocks, know, about a thousand guys trading stocks. And they have a computer fund, know, called Citadel Securities that that is a market maker that trades a good chunk of the volume of every instrument in the world. And ultimately I think that the prime brokers, the Goldman's and Bank of America's, they do so much business with Citadel and they've done this before where they know who to go to just the same way the US government went to Warren Buffett when they wanted to shore up Goldman. Yeah. They know that the right person to call is Ken and he is really going out of his way to make himself the guy to call. Yeah. And I think that is a great brand because you may not need to be that guy more than once every decade but look once a decade to make a free 5,000,000,000 or 10,000,000,000 is a great great guy be and you know it's sort of like he becomes a dependable trusted partner to these banks and if he wants something from the banks he's helped them because without him they might have had to sell that at a negative number. In fact some people think I don't think this is what happened but some people actually think the equity in Leopold's prime brokerage accounts went negative. Okay. Which I think is you know something that again gold the Goldman's and Bank of America's try to stop you before you get Sure. But you know they also don't want to sell like I said share an AI which is an illiquid tough to sell security. Sure. You know they'll sell out your Micron very fast or you'll sell it out before then. But if you're left holding this bag of like a liquid crap Mhmm. That you'd have sixty days of volume to get out of, it's pretty tough to to sit there and and tell your prime broker, don't worry. Mhmm. Which is why again, I think he needed cash. Probably somebody on Monday or Tuesday tapped them on the shoulder and said, your margin's looking a little thin, know, can you can add, you know, a couple billion here or more? And things happened so quickly that there was just no time. And, yeah, it's I think I think Citadel learned about this at the eleventh hour as every as you're supposed to. You know the firm didn't leak out that they were hurting. They didn't have to my knowledge daily performance. In fact from what I'm told situational awareness as a young hedge fund was not so great with communication not surprising especially with what monthly and quarterly letters could have been more timely on some of those. So it's small group of a couple of guys. So I don't think that this was the same You where rewind

Speaker 2: what was it? Only a month ago that the or Thirteen f was late. Thirteen f was, like, late and everyone was pushing, like Like, sold everything. Work out did he work out some kind of deal to get it, you know, keep it confidential? But it it sounded like you just, like, didn't get around to it. They had other priorities maybe.

Speaker 3: Do you think you Yeah. Mentioned

Speaker 2: Do you think you can rebuild a career as a venture investor? Because, like, in venture, you're just you're just, like, gig along always. Like, it's, like, you know, of the few

Speaker 3: forms of investing where it's just so hard to get out of position. Well, that's the thing. Mean, why become a hedge fund manager? This is the I I have a friend who wants to start. I have a friend who wants to start a hedge fund. I told this is the most painful, horrible business in the world. Why do this? And if you start a newsletter business that makes a 100,000,000 a year, even 50,000,000 a year of revenue, you've done better than almost every hedge fund in the Yeah. Like, you do not wanna do this job. And the reason you know, the the reason people do it, and I did it too, and I would never do it again, is it's the sexiest thing in the You think you're know, the glory is is incredible. Yeah. You're the master of the universe. And I had friends of wanting to quit really high profile jobs to be a hedge fund. I was just like you're out of your mind. You don't know what it what this job is. It's waking up at three a. Checking Korean stock prices and you know waking up back up at six you know wondering what's what's happening in the world stuff like this and there's absolutely no productive thing you're doing you know you're providing capital. You know other than that you know you're really playing this high stakes crazy poker game and you know it's certainly fun and interesting but when it's painful and raw you know I hope he'll do something you know he's a brilliant person. Really people like that. I mean look Peter Thiel had a hedge fund that didn't quite have this level of liquidation or anything like that but it had a rough last few years and you know, Thiel was able to obviously not only continue his venture investing efforts, creating one of the biggest funds of all time, one of the most successful funds of all time, investing personally doing amazing. Also, getting back into macro trading with Thiel Macro, which supposedly has done well. So I do think there is this like period of a few years that that you know he can reset and take the learnings, take whatever talent and skill and certainly genius that nobody denies that he's a brilliant guy and rebuild. I I don't think it's the end at all and I hope he's keeping like that even temperament about this because, you know, I I I think a lot of people respect him quite a lot 100%. No matter how this turned out, you know Yep. He'll be back and and successful. But it is a little bit of a humiliation thing that I think most people on Twitter and other places are sort of saying well the market tends to humble you and this is like an extremely humbling moment from being you know just two months separated from the biggest hedge fund on planet earth and most successful to being forced to sort of liquidate. That is quite a rapid sort of, you know, reversal.

Speaker 2: Also just imagining what the fund looks like in two or three years if you just survive, Right? I can you know, he you know, there there was a clip that was circulating yesterday from his, you know, appearance on Dork Kesh where he's like, oh, there's obviously like a 100 x, you know, left Yeah. Before AGI. Right? So, like, he was like up, you know, 20 x or whatever thinking, like, I got I got so much room to run, but I just couldn't stay in the game.

Speaker 3: I gotta say extrapolating Yes. Is always a risk. I gotta yeah.

Speaker 2: I gotta say it felt like a felt like a huge moment for you and your business just because everyone, the whole finance world was learning about this situation from your posts. Mhmm. Sure a lot of people were glued to your terminal, and it felt like a a changing of the guard because, again, you're getting pushback. You're getting some pushback, but then two hours later, was like Financial Times and Bloomberg and Wall Street Journal. They're all kind of clearly, they needed a couple hours to like run it down. But you got to it first and yeah, I was I was quite impressed. Thank

Speaker 3: you. Yeah. I mean, I I think that, you know, we've talked about this in the past. I mean, there is a change in the guard. There you guys helped change the guard Mhmm. In your space. And I think that, you know, the folks at the journal, the folks at Bloomberg, folks at these other companies, they're fantastic reporters, but they're not active or former players. And, you know, we will hear we will always hear things before them Mhmm. Because especially on the street because that's just

Speaker 2: Well, the crazy the craziest thing is you you actually waited until it was, like, over effectively to to share, right? Like you had been hearing about this There's a lot that we sit on that Yeah. Yeah. And we've been in that position like hundreds of times where it's not appropriate to share anything. And sometimes you're sitting there being like, I'm really surprised that like Legacy Media hasn't picked up on this story. It feels like it's just common knowledge and there's definitely a time and place to just not say anything and let something work its way through the system. Yeah.

Speaker 3: I mean, to give the devil their due, the information is also quite good at, you know, this type of thing. And they are particularly good at at scoops on OpenAI. Yeah. But the which I still haven't unraveled how how but they're obviously very good reporters. But a reporter at a place like that and Tri Media, they generally don't care about burning bridges and resources or contacts. So they want that news out yesterday. You know, I do care and it also is a conflict of interest because I don't want to hurt somebody that's given me good information and betray their confidence because I have to keep the confidence of these folks if I want to keep talking to them. But I also in the case of this situation as the carnage is unfolding you know there's sort of the balancing the need for everyone to know with the need for you know protecting friendships and relationships. You have to make that judgment call each time and I hope that our customers understand that there will be things that we know before others we can't disclose because we want to protect folks in particular friends. Bloomberg, Wall Street Journal, they'll never do that. They're always going to serve their customer who is the reader. We can't necessarily do that. You probably know things about a litany like you said hundreds of times different fundraisers going on different things like that and you have to we have to all keep our lives closed because you know that will be the last time we hear about a fundraise and I think that this was a situation where it's sort of merited discussion. It was going to happen momentarily anyway. I in fact to your point the thing that got me to publish was my friend saying everyone is hearing this now. Once that happened I said all right well you know, it's time to let I can let the cat out the bag. It's gonna about to be let out anyway. So Yeah. I have

Speaker 1: two more quick questions if you have a minute. One is just about how leverage works at a hedge fund. I think, you know, again, from the retail perspective, from the much smaller player, you might know that you can go to a, you know, a brokerage and get a little bit of leverage. But what does the process look like as you're scaling into the tens of billions of leverage? At certain point, you have to go to all of the banks, certain banks. Who's actually like, what is that process to get

Speaker 2: leverage at that scale actually look like? And, also, let's let's appreciate for the for a moment that I feel like just a month ago, the West Coast broadly was taking this insane victory lap being like the West Coast is eating Wall Street. Like Yeah. The best and biggest hedge fund is no longer on the East Coast. Like, we just have everything now, finance and technology, and then just deeply humbled within the span of thirty days. And it turns out, turns out you guys over there, you know a thing or two, and here we are asking you, so how would one go about getting So

Speaker 3: one of the things that I think is not well understood is the prime broker make a spread on I think the somewhat understood is they make they make their business to make a spread on financing. Mhmm. So if you go to prime broker and say I'm never gonna use leverage. Never? And they say I'm never gonna use leverage and I'm never gonna really trade a lot with your firm. They're just gonna sit there and say like we'll still take the assets because we can re hypothecate them and blend them to the guys that are going to take leverage but in general that's not a great customer. So if they're making a 1% spread which actually would be is relatively huge amount and you're borrowing forex, you're actually giving them 400 basis points of free money which is sort of fantastic. In fact, their borrowing costs are probably less than so far. So they may be getting as much as 600 or 800 bps of free money on huge amounts of capital. So leverage is the best friend to a prime broker. Now the risk guy is sitting there saying, well, wait a second. You know, I I I love lending, but I don't like lending to concentrate portfolios. I don't like lending to short sellers. You know, short sellers can can get big, big, big, you know, leaps in their portfolios like GameStop, for example. So the most that along can lose is a 100% but if a forex lover the most long can lose is 25%. So there's sort of this mix of things you have to think about. I think the getting into the privates is usually like for me a lot of really bad sign for almost every fund because it's as tantalizing as private companies are. There is a whole group of people on the West Coast who are much better at that than the guys in the East Coast. Of course, are funds now like Altimeter and Co2 and others that are doing both and doing both. Yeah. And what made that what made

Speaker 2: it so tempting obviously for Leopold that just how close he is to like he couldn't be closer to Anthropic and it's a company that over the last six months has had a 100 x the demand relative to the allocation. Right? So it just felt like, you know, and and I I don't know. Who who knows what the what the structure on those investments look like? But it's like, if you're gonna break your rule and do privates, like, then that's the company to do it with. But then you still get into a situation where you're like, wow, I really wish this was more liquid.

Speaker 3: Yeah. Can't press the sell button.

Speaker 2: Give us an update be before you leave on on Korea broadly because, you know, a lot of people are commenting on on on just how similar Leopold's approach is to Korean retail. I don't know how true that is, but I can imagine like it's, there's blood in the water over there and the whole country is probably in shambles.

Speaker 3: Yeah. I think so. I I made a Cali criterion calculator and, like, a little portfolio simulator tool that, you know, basically and poll trader Joe said this a while back, and I had a problem with this. Every single trader out there makes makes one seems to make the same mistake over and over again, which is their position size is probably two to 10 x more than it should be. And if you actually you know? So it sounds nuts. Right? Yeah. But if you actually run the simulator and we ours Kelly dot Kelly so Kelly was a a guy at Bell Labs. He was a member of the technical staff. He's original. Oh, oh, gee. And what's yes. And and so Kelly came up with the proof called famously the Kelly criterion, which gamblers use mostly was a gambler thing before a financing, and it it proves the optimal bet size and the optimal bet size is your edge subtracted by the reciprocal of it. So if you have 55% edge your optimal bet size 10%. That's still quite volatile for folks and so people do half Kelly or quarter Kelly. Most most folks don't actually don't have an edge when they trade but if they did have an edge they're trading as if they had four x or five x Kelly edge which is interestingly like you might sound okay well that just sounds swashbuckling and like guy takes a lot of risk. No. If you run the simulator you will go to zero each time And the simulator is a really cool tool that shows you even with a sixty forty edge on every trade you make, you'll go bust if you bet if you over bet. If you over And it's it's an eye opener. We might say who has a sixty forty edge in the stock market? Nobody has sixty forty edge. But you will absolutely go bust if you don't size correctly. And it's something that I've had to learn very painfully, very, you know, over over the years that I'm almost always overbetting. And I think every fund is is sort of the same and certainly every retailer is the same. And it's just sort of a weird variance math game that very few people actually map out and say, can I simulate portfolio and just to see what is the sort of the right thing to do in most cases? And in fact, I I had a after I left the Tiger Club I worked at, I worked in the briefly in the in the office of a guy who worked at at SAC Capital, now called Point seventy two for years. And he was one of the best managers. He's a quiet guy nobody's ever heard of, kind of retired. But I got to watch him before I set up my own hedge fund and did the exact opposite, way overbet on everything. I got to sit with this guy for a few few months, and I was astounded. So what I found is that know, he was managing, I don't know, 3 or 400,000,000 of his own basically. He almost never used the capital. You know, 90% of the capital was his cash, and he would just make these tiny trades. And the guy had almost never had a down I think his record is he never had a down quarter in twenty twenty something years of trading. And he had, like, 30% returns, which is great. And the guy just kind of, you know, just did these little little nibbles, and he never lost money. And it was it's an incredible thing. And then, of course, the second I get the chance to get some capital, I'm 8x leverage to do, which I don't get. You know, and it's just like, you know, it's the dumbest thing in the world, you know, and and you live and you learn. Psychology.

Speaker 1: Psychology. Well, thanks so much for coming on the show and breaking Thank you, guys. This is always a great time. Yeah. Looking forward to Yeah. Resting the here. Have a great week. Have a great weekend. We'll talk to you soon. Cheers, Marty. Goodbye. Let me tell you about Codex. Codex is a powerful workspace for getting work done with AI agents. Whether you're writing code, analyzing data, creating content, or automating business workflows, Codex helps you move projects forward from start to finish. We have a couple guests coming in soon. But first,