Japan is a different market than what it

was five years ago. So in June of 2021,

yeah, the corporate governance code was

effectively revised. So started to care

more about things like return on equity,

capital allocation, etc. The bottom line

since those changes were enacted is that

the Nikai has outperformed the S&P 500

by about 8% per year. If you look at the

average stock in the Nikai over that

time period, it's up about 9% a year. So

what's made that difference?

Hello and welcome to Other People's

Money. I'm Max Whey and I'm joined today

by Shawn McGould, CEO and CIO of the

Lighthouse Group and alternatives

manager with approximately $19 billion

in assets under management as we record

today. And before we get started, I'd

like to do a quick disclaimer that the

views expressed by Shawn are his own.

They are as of this date of the

recording and they are subject to

change. The discussion is forformational

purposes only, does not constitute

investment advice, and nothing in this

conversation is an offer to sell or a

solicitation of an offer to buy any

security. With that out of the way,

Sean, thank you so much for joining me

today.

>> Thanks, Max. I really appreciate you

being on.

>> All right. Well, alternatives manager,

it's such a broad space these days. Can

we narrow it down a little bit? What

does Lighthouse specialize in?

>> Lighthouse specializes in hedge fund

strategies. So about twothirds of the

risk that we take is uh in equities

around the globe. Uh about uh another

25% is in more event- driven strategies

like merger arbitrage and uh spaxs um

and those sorts of things and uh the

final uh 15% is in macro related

strategies but liquid so real estate

private equity uh venture capital.

>> All right. So my question would be with

all of those different strategies,

what's growing? Where is the investor

demand right now? Hedge funds for the

past decade, people have been talking

about the lack of demand, but really

over the past few years, hedge fund

demand has has very much increased from

institutional investors. Are you seeing

that in from your seat?

>> Definitely there there's more interest

in hedge fund strategies uh now

certainly than there was a couple years

ago. I think a few things have changed.

If you looked at the landscape of

alternative investments a couple years

ago, probably the top of the list was uh

was private credit. Um at that time,

there have been some headlines around

private credit. I think it'll continue

to be a viable asset class. Uh not

everything is caught up in the software

sector in private credit. And I think

there's a renewed interest uh in having

some more hedged approaches in

portfolios

um and having them uh liquid uh in

nature. And I know, you know, one of the

things we'll we'll hit on next will also

be um just the advent of uh Asian

investing and some of the interesting

things that are going on in those

markets. Uh but probably a lot easier to

access throws through liquid strategies

than true uh less liquid strategies and

either private credit, private equity uh

within uh you know both Japan, South

Korea, China.

>> Well, there's liquidity is two things.

It's the liquidity of the underlying

assets, but there's also the liquidity

of of the vehicles. We are seeing gating

on hedge funds jump up. Is it not just

the investments, but also asset lockups?

>> Well, yeah. And just to just to to

quantify that, I mean, most of we really

haven't seen uh gated lockups on I would

say hedge funds. There are terms within

the hedge fund. Uh there are some

offerings within hedge funds that have

longer liquidity. uh to them. But I

think the most recent lockups and gates

have actually referred to uh private

credit where investors couldn't get

their capital out. Those are private

loans being made to companies,

individuals, whatever it is. Uh the

markets that we trade in are generally

all listed uh markets from an equity

perspective, bond perspective, um or

their currencies, commodities that are

traded on uh exchanges. Um I think the

one thing is that if people ask for

liquidity and uh the markets were

trading very poorly the cost of that

liquidity is quite high. It's probably

the wrong time to redeem. Uh and if you

go back to a time period like 2008 uh

you know certainly saw that um where

that occurred. So matching up uh you

know redemption rights uh with liquidity

and asset prices all those things you

know some of those things are in the

control of the investors but uh more of

the gating that's happened recently has

been in private credit.

>> Yeah. Well the the hedge in hedge fund

is also a key word to examine a little

bit. There are many hedge funds out

there that have uh market exposure that

can fluctuate from you know leveraged

long to to leveraged short.

>> Yeah. No, makes a a very good point. We

tend to be much more on the neutral side

uh particularly as it relates to equity

long short investing.

>> Okay. And and so that that lower market

exposure, it it is funny because in in

years like 2022, the the outperformance

of of market neutral strategies is very

pronounced, but we've had some absolute

rippers in the US equity markets more

recently outside of the US. And that is

that is increasing investor interest in

looking beyond uh US borders for

exposure. Um, but you know, especially

if you are somebody who hangs out uh

around financial Twitter, every year the

the multi the multistrat market neutral

hedge fund returns come out and you see

uh chirping from the peanut gallery

about who would who would uh who would

want this when the S&P did this and and

I think you know institutional investors

do not really think that way. And so I'd

be interested in hearing your

perspective on the role of more hedged

strategies in these bull market

environments that we find ourselves in

these days.

>> Yeah, I I think uh Max, there are there

are a a number of institutional

investors around the the globe that are

really trying to meet liabilities. So

they are trying to match up uh

liabilities with returns and some of

them can't take the absolute risk of uh

putting all of their assets into the

equity markets. So if you had 100% in

the equity markets and they did like

they did for the last 5 years,

everyone's going to be fine. You're

going to meet those uh uh liabilities

that you have and and life goes on. For

others uh they need to be a little bit

more prudent. And when you look at the

choice between um hedge funds, if you go

back to the co time period or other time

periods after the global financial

crisis when interest rates are literally

zero and you have inflation and you've

got negative real returns, um I think

hedge funds can play a very large role

in a portfolio uh by having some sort of

risk level between that of uh equities

and and traditional bond investments.

And I think they're useful uh in an

institutional setting to help match

liabilities, to help smooth out return

streams, uh to reduce correlation. Um

all of those things because in a in a

perfect portfolio,

um if you had, you know, 50 things that

had a correlation of zero to each other,

but all had positive expected returns,

you would create just a money machine

that's very consistent um and stable

across all different types of

environments. And certainly that's an

all-weather uh stable vehicle that's

going to have low correlation to uh

traditional assets. And again, not

everyone can just take pure uh equity

risk because at times in the equity

markets there's going to be draw downs

between you know 20 and 40% and and you

don't know how long they're going to

last uh and and you need to make sure

that your mission is accomplished on uh

uh you know from an institutional

perspective or even from a personal

perspective.

>> Yeah. Well, let's talk about the

weather. What is the weather like right

now in the market for for an all-weather

investor?

>> Uh the the weather it makes it difficult

on the short side when you have uh

markets that have uh melted up in in

some cases and you have uh this push

into um AI, you have push into uh

hardware, uh you've push into optics, uh

things like that, and it's just

unrelenting. Um the flip side of that is

outside of some of those areas that are

more momentum based uh there's still

opportunities for stock selection. So

when you look at the average return of a

stock in major markets uh compared to an

index return and the average stock has

underperformed uh massively. So if you

put together a long short portfolio

between the performers and the

underperformers uh it's you know um you

have the opportunity to produce a stable

return stream. So that's really what's

happened. you've had a big bifurcation

uh in some of the indices um and a few

stocks driving uh the returns massively

but outside of that it's been a much

more balanced market and that creates a

very good opportunity set and within the

macro space having the new

administration come in particularly in

the US uh changing policies globally in

a number of different areas whether it

was tariffs whether it's defense uh

whether it's uh you know the conflict

with uh Iran that's going on now other

things that are happening. It's provided

a very fertile backdrop um uh for more

macro type of trading because things are

trading every day. They could trade uh

you know with one comment from from an

official. Um we've seen over the past

couple weeks back and forth are we going

to get an agreement? Not going to agree.

Some of the terms of that were just

released uh last night. Uh so that

creates other trading opportunities. And

then finally within the more um

opportunistic investment space um you

have this resurgence of M&A activity you

have this resurgence of equity capital

market activity. Uh so when you see

SpaceX uh the offering that happened

last week when you look at uh Google's

offering the week before these are

record issuances and they need to be

absorbed uh into the market and again

they create dislocation in some places.

some people have to sell things in order

to buy those. Uh both of these uh have

gone up in value since they were issued.

So this equity capital market activity

is also presenting uh you know some

opportunities. So uh the backdrop is uh

is pretty good right now. Mix.

>> Yeah. And I'm interested in your view on

equity issuance. You know, I don't know

if we go so far as to call it last

cycle, but certainly 2021, we got a slew

of of new companies on the market. With

the benefit of hindsight, we can say

many of them were relatively uh

lowquality companies. Um not profitable.

Well, look, some of the the companies,

SpaceX in particular, that we're talking

about um are not profitable, but they're

very different in terms of what we saw

coming to market the last time these

types of of bull market spirits were

were around. And so, I I'm really

interested in how you're thinking about,

as you said, Google tapping the market,

SpaceX tapping the market. We've got

confidential S1s from Anthropic and Open

AI. Now, um whether they're going to to

race after seeing the success of of a

SpaceX IPO still remains to be seen, but

um certainly they're thinking about

coming to market. Um what does that

signal to you and and how do you think

about the differences between the

issuance we're seeing now versus prior

cycles? I think when you go back to 2020

2021 after uh COVID it was much more of

a of a spack cycle. So you were taking

uh private companies um in different

areas of uh mainly of technology. There

were a few spacks that were done outside

of that. Uh they weren't profitable.

They weren't scaled. Some of them uh

really didn't have revenue um but needed

to to raise capital and spacks were an

efficient way to do it. Uh I think the

spaxs in in a lot of cases uh did not

work out uh particularly well. There

have been a few success stories there.

The the difference with some of the

companies coming public today um is that

they do have revenue. Um they may not be

profitable uh but they do have revenue

and they are going for uh much more

growth. Uh they're in newer areas that

are developing. So, uh, Anthropic and

and, uh, uh, OpenAI and groups like that

and these companies have been around,

but they haven't been around all that

long. Um, but they are generating

revenue. Uh, people are excited about

the path forward for these companies.

I'm sure not not everyone is going to be

a winner, and not everyone will justify

probably these valuations or or the

capex that's happening. Uh, but right

now, the capital markets are open for

these types of ideas. uh money is

flowing not only here but uh in other

parts of the world as well and it's a

very good time if you have a big idea

that needs capital. It's probably been a

better time never been a better time to

go get that capital. It might be easier

now to go get hundred million or a

billion than it is to go get 10 million

for a project to the point that people

have so much that they're trying to put

to work a $10 million project just

doesn't move the needle for the time

it's going to take to underwrite that

that sort of risk.

>> Yeah. and and again you wonder where all

this you know all the capital comes from

Max and and what's being generated and

you know we can certainly uh you know

talk about that but certainly the asset

prices themselves as they've appreciated

over time uh you know there's just been

more capital to uh to deploy.

So the other thing I would say about

these these new companies, they're not

the also rans, right? The last time

around you had a lot of we're the next

Tesla, you know, there were five

electric vehicle companies. These are

the leaders in the space. I mean, does

that change the feeling that that you

have about this equity issuance that not

only are they they the leaders in the

space, but also that the money is going

towards something that we know what it's

going towards. If you take say like uh a

GameStop, which the the stock goes up,

they're able to to issue shares on the

market, they have cash, it it puts the

company in a better position, but we

don't actually really know what that

money is eventually going to go to. You

know, Google is saying, "We're investing

in more data centers. This is the bet.

We need money to do that." The same

thing with a lot of these other

companies. the the money is going

towards projects versus um just a

company taking advantage of a of a

short-term pop in the stock price. To to

what extent um you know does knowing

where the money is going and sort of

believing in the trend make you feel

more comfortable about the issuance?

Yeah, I think something like a GameStop

when they issue, you know, stock uh when

the share price spiked up is is more of

a financing activity and you want to

take that cash put on the balance sheet

and and find uses for it. Uh like you

said, Max, I I agree these companies

have capex plans that they need to uh

fund and are trying to optimize their

own um balance sheets and their own

financing costs to go do so. So, it's

much clearer what they are trying to

achieve with the capital. Now what the

market's job is is to figure out whether

these projects will have a good return

on that uh on the capital um and capital

allocation for these companies becomes

absolutely critical. But uh yeah it

definitely seems like it's kind of an

arms race to make sure you're a leader

in these spaces and right now you need a

massive amount of capital to do that.

Now there are a lot of other companies

that are you know being developed and

spending time that hopefully um improve

uh what needs to be done. there's the

efficiencies of the data centers

themselves or uh how large language

models are trained and the training cost

for those and the training cost for

tokens all those things are all being

worked on but I think it's it's very

much just the beginning of that cycle of

even the optimization of some of these

things so um you know it's hard to

predict exactly who will be the the

winners but if you need lots of scale uh

to be put in the game you know again

these companies right now are at the

forefront of being able to do that and

certainly have a uh a head start.

>> Where is Lighthouse in its adoption and

optimization of AI into the investment

process as well as as more of the back

office operations uh anthropic when they

launched their cloud for finance they

said that the the financial industry is

the number two fastest adopter behind

high-tech firms. Yeah, I think that in

in each functional area of our uh you

know of our business, we continue to try

and find ways to use uh the tools that

have been built um and continue to pick

up uh operational efficiencies. One one

of the things within the the financial

space is also you do want humans with

these machines. You're talking about

real money. Um you're talking about real

compliance issues uh that go along with

that. you're talking about common sense

that needs to be used as well and not

that machines can't reconcile equity

trading uh and do other things but when

you're looking at money movement there

has to be uh certain controls put in

place and all of these things I think

will will speed up our processes and

make us more productive um and more

efficient uh but I am not a believer

that all human beings go away um I think

the human beings will be be put into uh

higher use cases uh that maybe had

someone who would look at uh 10

different accounts now could look at 20

different accounts uh as efficiently as

before. Um but there is still going to

be uh a need for for humans. But these

tools um are increasing productivity.

They're also increasing creativity. So

you can ask lots of different questions.

Um you can ask those questions quicker,

get feedback quicker. And the one thing

again you really have to look at from a

pure investing perspective is just the

data quality mix and make sure that you

know what you're looking at and the data

that's being input um in any of these

tools is uh is accurate and I would say

that data quality uh is still a big

issue.

>> How is it affecting the generalist

versus the specialist? Would you say

that the impact is greater and that the

generalist is able to go deeper than

they were before or is that that the

specialist is going even deeper and the

expectations for coverage and

understanding and expertise the bar is

just going higher and higher with you

and your competitors. I still believe in

the specialist model. Um, and I think

having a specialist that studied a

particular industry or a particular set

of stocks for a long period of time um

has an advantage over the generalist.

The generalist can certainly get up to

speed uh very quickly in a certain area.

Uh but they may not know all the nuances

of the industry. They may not know of

some regulatory changes that are coming.

They may not know of of particular

supply chain issues. uh you know with a

with a certain company or or a certain

product. So I think that these tools

will continue uh to help someone who is

very specialized they can help the

specialist get a broad view very quickly

and then again they can use their

knowledge um to dig in a lot deeper uh

than a generalist would really know

where to go. uh max. So I think that

specialists can use these tools and

really hone in on on what are the most

important things that might drive a a

particular flat price. It it's been

really interesting watching markets

digest everything that's happening with

AI. And one of the more nuanced trends

that I think people are starting to

understand is X-US outperformance and

particularly emerging markets. Uh EM and

and really exus started to outperform

post tariff tantrum. There were

narratives that oh this is the rest of

the world repatriating capital dumping

the dollar. Um if you look at the actual

investment flows that's that's not

really the story. Um and then and then

if you look even further under the hood,

you know, you have countries like

Taiwan, Korea with incredible exposure

to the AI capex buildout, um that are

really leading the way. And and it does

seem like it's AI all the way down when

when you look at all of these different

themes, it is. And so I I'm interested

in in how you're thinking about the way

that this AI trade seems to be infusing

itself into not just these high-tech US

firms but all over the world.

>> If I can, I'd like to overlay that on

top of two markets in particular. one is

Japan and one is Korea and just go

through because I think there's two

things that have happened in these

markets in particular

um that that might be interesting to

explore a little bit more on top of the

AI uh top of the AI that's happened but

in both markets there have been big

regulatory changes uh that have occurred

that I think have set this up um to to

kind of happen the way way it has but if

you look at Japan first So in June of

2021, yeah, the corporate governance

code um was effectively revised. So uh

started to care more about things like

uh return on equity, capital allocation,

etc. March of 2023 that accelerated. So

you have the Tokyo Stock Exchange uh

really put forward those rules,

companies start to adopt them, look at

them. Um all of those things start to

happen. So you have this bigger impact

on shareholder returns, capital

allocation, all of those things. In 2024

in Japan, also the new Nissa um

guidelines were released. So NISA

account, think of it in the US as a

401k, some a a tax advantage savings

account. Um, when you look at that, that

started to encourage households in Japan

to start to take money out of deposits,

um, like a Japan Post bank that were

earning zero and start to put them in

the in the stock market. If you look at

the Nissa accounts, they were about 14

million in 2023. They're now 28 million.

So one one anecdote of that is one of

our colleagues in uh in Japan uh his

in-laws are are rice farmers and prior

to these new regulations they had never

invested in securities in the securities

market. What what changed their attitude

towards doing it was really two things.

one the the Nissa account reforms and

then two for the first time in 30 years

you had people realize that hold on

there is inflation if I leave my money

sitting in a Japan Post account at zero

I'm actually having negative after a

actually having negative real returns

and that started to encourage uh more

retail investors to put money um into uh

into the markets and so also So, April

of 2025, uh, certain Japanese companies

were starting to require to disclose

their accounts in English as well. So,

you're you're broadening this appeal to

a retail investor base in the US. You're

saying, retail investors, we want your

capital here from Japan. You're saying

to the corporates, you need to act

better than you have in the past and

focus on shareholder returns and return

on equity. Uh, all of those sorts of

things. and you're telling the Japanese

corporate community, you need to publish

some of these statements uh in English

so that a broader set of people uh has

the opportunity to invest in it. If you

look at those changes starting in

January of uh of 2021, the Nikai was

around 28,000. It's now at 69,000. You

look at the S&P was 4,200. The S&P now

about 7,500. The bottom line since those

changes were enacted is that the Niki's

outperformed the S&P 500 by about 8% per

year. But Max, going back to your point,

if you look at the average stock in the

Nikai over that time period, it's up

about 9% a year. So what's made that

difference? It it's the AI stocks. So

it's the AI supply chain um within Japan

that's really driven the outperformance

of that index um compared to that. But

you had also the background of the

changes going on in Japan that I think

accelerated this uh this trend. Um if we

switch over to Korea uh which has been a

huge beneficiary a little bit different

January of 2024 they have their

corporate value up program modeled after

uh Japan is technically implemented in

now February same thing make uh capital

allocation decisions improve shareholder

returns address low price to book

companies all of those things um 2025 uh

you had a uh a new regulatory uh

pronouncement in Korea where the board

of directors for the first time really

had to look at all shareholders. So, I

had to take into account minority

shareholder rights. Uh May of 2026, you

have a a program uh that allows Korean

investors to repatriate uh capital um

100% relief on capital gains taxes

through May of 2026. It scales down from

there. Um and then uh now you also have

this rise of um kind of levered ETF

trading really only in two stocks. Um so

if we look at that the bottom line of

the Cosby so again these regulatory

changes encouraging retail investors

telling corporates to act better

attracting foreign capital um all of

those things Cosby since January of uh

2024 up about 234%

uh S&P up about 63% two stocks that

accounting for 60% of the Cosby and

that's uh you know Sam Samsung and SK

highix um the average Cosby stock over

that time period up about uh 50 to 80%.

Which is still huge but again some of

this is AI specific and then some of it

is regulatory specific of what's

happening.

>> So what is an example of of the type of

behavior you would see from a

corporation in Japan or Korea that that

the market was really punishing them for

before these reforms. the companies in

Japan were not necessarily being run for

the benefit of the shareholders. They

were being run for either

sustainability, keep management in its

place, um in some cases tax reasons, uh

not valuing uh assets properly, all of

those things. So the behavior completely

changed um because of the listing

requirements, the Tokyo Stock Exchange,

the government wanting to get retail

participation in. um all of these things

uh really started to to take shape and

if you look at the amount of volume

being traded on the Tokyo stock exchange

today compared to even three or four

years ago it's about 5x so the

participation is greater so it's created

more liquidity in the in the market more

participation hopefully uh some better

uh you would hope this would lead to

some better price discovery maybe not

max and some of the smaller cap names in

Japan really aren't covered from a

research perspective um all of those

things but you really changed the

behavior to be focused um more on

um shareholder returns um also the cross

shareholdings in Japan both in Japan and

in Korea but mainly in Japan are

starting to be unwound and that's

leading to an M&A cycle um in Japan so

you're unwinding a system that had

really been put in place over a period

of about 30 years uh in Japan and and

the results over the past 5 years um

have been rewarding to uh to

shareholders.

>> And when you say the cross holdings,

that would be one company own shares in

another publicly traded company. And if

you add it all up and you say what is an

ad asset value uh you know discounted

hold codes for those familiar

essentially

>> correct discounted hold codes and you

start to break those up and see where

each of these parts trades on their own

and shareholders can decide well I want

to invest in this part of the you know

electrical manufacturer but I don't want

this uh other old part of the the

electrical manufacturing conglomerate.

those choices, those capital allocation

allowing management to be a little bit

more dynamic um I think has helped those

situations. Uh it's a little bit

different Max we're talking about win or

take all the companies need to get

bigger to survive but I don't think the

hold co structure uh was working that

well within Japan and breaking it up I

think is freeing up some of uh uh the

companies to pursue uh their own paths

different objectives growth rates all of

those things. So um while the US share

count was shrinking uh the number of

shares in China, Japan, Korea, the

listings is increasing. So it's

interesting to see you know more supply

uh you know over in Asia and less supply

uh in the US at least of company names

that are publicly traded.

>> It's interesting to see maximizing

shareholder value take stake in Asia. I

mean in the US obviously it's been it it

has been the dominant force in corporate

governance for for a long time even to

the point that we had a brief period

where buybacks were sort of the enemy

you had planes falling out of the sky

from Boeing uh GE people have said uh

perhaps could have could have done more

reinvestment and and less focus on

short-term maximization of shareholder

value and so you know what do you think

the right balance is and do you think

they're going to find that in in Asian

markets.

>> I I think it's much more balanced today

than what it was uh previously. I think

minority shareholder rates are much more

respected in uh in both of those markets

as well. So I think they needed to be

rebalanced and I think what you've seen

is a rerating in those markets, more

trading, uh all of those things that you

kind of want in markets. you want

liquidity, you want price discovery, uh

you want good corporate governance, um

all of those things. So th those have

been unleashed in the US. Um it's

definitely been uh more more of a free

market. Like I said, sometimes becomes a

little bit unbalanced and that's a

really tough job of of any management

company is capital allocation and what's

the time frame that you're going to

allocate that capital over. So if you

have if you're in the landline telephone

business, how much capital do you want

to reinvest in that business? It's it's

a necessary business, but is it a growth

business? You know, probably not. So

different decisions there than in the

frontier technology like producing new

LLMs or things like that. Um I think the

capital allocation, you know, decisions

are completely different and companies

at different life cycles uh need to

evaluate that. But that's the role of

management and it's also the role of the

board of directors uh to make sure that

that's uh occurring. Some companies are

going to do it really well and thrive

max and others are are are not going to

do it well and are going to fail. But it

needs to be um it needs to be a more

balanced approach in the US because of

some of the stock options and how

they're granted and the short-term

nature of them. Maybe it got a little

bit lopsided.

um you know certainly that can be

corrected but uh but yeah it's a

balancing act all the time.

>> Now we talked about the index level

returns in in Japan in Korea but as you

said before you you take a much more

neutral approach. So as investors that

are focusing more on on trying to find

alpha in markets that have have these

tailwinds they're going up. What do the

alpha opportunities look like? I mean

you did allude to the dispersion in

returns between the markets and the

average stock. Clearly that lends itself

to the idea of long short alpha.

>> Yes. So there there's always winners and

losers in in every market. And if you

look at even the range of an individual

stock on a yearly basis, it could be

30%. So at one point of the year it

could be fairly expensive, another point

of the year could be reasonably priced.

If if you are looking at these

securities and particularly relative to

other securities in the same sector, so

you are a health care expert and you're

looking at how uh these stocks trade

relative to each other, there are going

to be points in time within within a

year or within a cycle um where

something is undervalued uh or

overvalued relative to something else.

That that's where the opportunity is. So

if if suddenly every stock traded like

the index max, it's really really

difficult. But that never happens. It's

very very rare that you have that. And

that's that's one of the arguments for

why indexing actually works for uh for

investors is because it's so hard to

pick what those winners are. Remember,

we're not picking the winner of the

index. We're picking relative. So we're

we're saying this company is going to

outperform this company. And that's

that's the job of portfolio managers. Um

it's very different than saying which

are going to be the absolute winning

stocks with the within the index this

year. And that's why I think indexation

uh you know has has worked. I think it

can be taken to dangerous extremes. As

long as there's dispersion in the

underlying stocks beneath that and

particularly at the at the sector level

where specialists really focus, there's

an opportunity for alpha.

>> Yeah, that was my next question. to what

extent are you trying to stay factor

neutral within sectors and you know you

could in theory construct a market

neutral portfolio that is very very long

the AI factor and and on its face it

looks like you're you're market neutral

on on an index level but you're really

exposed to a one particular or a small

basket of factors

>> yeah ex exactly and AI is a big factor

now and interestingly these factors

change over time but two of the most

common factors s would be momentum. So

something that's going up continues to

go up or something that's going down

continues to go down. Um and value.

Something something that's cheap and

going up is really what you want to own.

Something that's expensive and going

down is something you you want to short.

Um you have these other exogenous

factors that come into the market. So if

we go back to co uh a lot of securities

firm put together baskets you know stay

at home versus return to work or you

have a Republican versus Democrat basket

in the US. Um no you absolutely have to

look at uh an AI uh factor and basket of

stocks and it changes Max because so

many companies have been caught up in

AI. Who's the ultimate winner of AI? So

is it going to be Anthropic? Is it

SpaceX? Is it these different companies

or is it the sleepy manufacturer who can

adopt these models to speed up

production to speed up engineering to do

all those things? So, everyone's gotten

caught up in this. So, it's a little bit

harder to differentiate, you know, uh,

you know, just dayto-day where the AI

wave is taking hold, but absolutely you

have to track these factors. So um no we

would not recommend a a market neutral

portfolio you know is long AI and short

uh you know sleepy industrial companies

um that's a that's a very very different

type of uh portfolio but in the

industrial space having some industrial

companies that maybe are a little bit

more sleepy and then those that are on

the cutting edge of trying to implement

AI into their uh into their workflow and

improving productivity those sorts of

things are fine you're within the same

sector And again, there can be winners

and losers within sectors, but

monitoring those factors is not um it's

not a one time you just set the factor

and forget it. There's some factors that

are persistent over time, momentum,

value, quality, things like that. But

there are other factors that change with

the with the narrative. So today it's

AI. A few days ago had to, you know,

really track the war factor as well. Um

those sorts of things. Maybe, you know,

if we finally have a resolution, that

factor will start to fade in the

background, but energy earlier this year

was one. Tariffs was one. Um, so these

factors continue to uh show up and yes,

we have to make sure we try and balance

the portfolio out to these uh to these

factors on the long and short side.

>> Yeah, you alluded to the sort of

classical uh you know, you Chicago FMA

French value factors, but then there are

these more thematic ones. I've always

been I've been fascinated over the past

few years because when a a theme first

comes it it's perceived as alpha, right?

The idea that you're picking AI winners

within the technology sector, okay,

that's that's alpha within technology,

but then very quickly it becomes

understood by the market, it gets sort

of bucketed and basketed and that thing

that was alpha 3 months ago is now

viewed as as factor beta and it feels

like it's happening faster. the the

speed at which these things are being

identified, bucketed, factorized, and

then going from alpha to beta.

>> Is my am I crazy? Is is that happening

faster? Is it happening more regularly?

>> No, I think we we've had uh more of

these types of factor baskets that we

have to look at. I would say since

since probably COVID and after it's

definitely accelerated um because I

think people realize you can put these

unique baskets together to make sure to

test um some sort of hypothesis that's

happening within uh within the market.

Another example, Max of where AI can be

really beneficial. You say, okay, within

the S&P 500, it used to be called

principal components analysis analysis.

Now, you just unleash uh, you know, a

trained AI model and say, okay, find

find what the factors are, find what the

principal components are that are

driving the market, test that against my

portfolio, um, and see what exposure I

have. At the end of the day, the

portfolios have to have exposure to

something. um you just want to make sure

it's not overexposed to uh to one type

of factor. And certainly if your view is

I've got a company within the AI space

that really has something and it's going

to grow at 50% a year and it's priced uh

you know cheaply to that even though it

has that AI factor, you're still going

to hold that stock long. Um, and you're

going to find some things to balance out

with on the short side. Uh, that if

there's a big correction in the market

or let's say someone tomorrow discovers

in LM or some mechanism for for

tokenization that only takes 10% of the

energy power, you know, of today's

models. Well, that's going to shift

everything uh like in a classic economic

sense, and you want to be hedged from

that. But but the leading companies may

still be a winner in that scenario. But

you just want don't want to take the

overall, you know, AI risk of that. But

Max, yeah, it's constantly changing. And

I would say in my career, yeah, it's

never been faster. Um, how some of these

factors accelerate and come in and out

of a portfolio.

>> Yeah. And to your point, right, you do

need to to take some exposure. A

riskless portfolio produces no return,

right? This is the business of of risk

takingaking. Um and so I I guess my

question would be what what are the

risks that you look out there out there

right now that that you say yeah these

are the the places that we we want to

have exposure you know we want it to be

riskmanaged market neutral as much as

possible. Um you know we talked about

Asia XUS I mean do you view it through

that lens? Is it is it that simple that

you say yeah I I want to be exposed to

Asia you know in this market neutral way

or are you going further under the hood

and saying you know these are even the

subtrends within Asia and XUS markets

that you want to be in

>> Max we we want to be exposed to almost

any source of alpha on a global basis so

it's a little bit different than just a

pure long only investor you know seeking

a theme or or trying to play that theme.

Generally, when you see these types of

of themes, it leads to greater

volatility within that theme. It leads

to um in some cases greater dispersion

of stock prices. So, it is an area um to

look. But we really want to find markets

uh where where um alpha is possible. So,

um, if a market is liquid, um, and it

has, uh, good financial information, uh,

the rules of governance are good, uh,

all of those things, it's a place that

we want to be invested in. When you

start to see changes in a market like

Japan, regulatory changes, um, that

might be a clue that there's going to be

an increase in volume. So the amount of

capital you can deploy in these

strategies, if you looked at Japan 6

years ago, the amount of capital you can

deploy in these markets now is much much

higher. But there are constraints um uh

in each market and it really depends on

the liquidity

um the volatility of those markets. One

of the reason that that Asian markets

are very interesting is the individual

stocks tend to have more volatility than

in either the US or European markets. So

you don't need as much leverage in those

markets to generate uh similar types of

returns. Uh so that's very interesting.

But we really um invest across um all

the geographies um different time frames

in different markets. Max,

>> it's interesting. You talk about

liquidity, seeing volumes pick up,

seeing more investors come into a space.

You often talk to sometimes smaller

portfolio managers running more capacity

constrained strategies and they say,

"Well, we go where nobody else is

fishing, right?" And and that's all well

and good and perhaps they can produce

strong returns in their niche, you know,

at a at a more limited scale. But when

you get into firms of your size, it does

start to be about where can we put

capital to work, especially when you're

dealing with institutional investors who

have just so much capital. We talked

about how it's it's easier to raise a

hundred million or a billion dollars

than it is to raise 10 million. I mean,

in many ways, the same thing is true in

the asset management business and it it

feels counterintuitive. So, I I'd love

to dive into that a little bit more

about how when as markets get more

mature, more eyeballs, more

participants, you look at that and and

see that as as a an a place you want to

go into. Well, I think that that the

liquidity um allows you to have a larger

uh allocation um to those markets. And

again, the when we're looking at a pair

of securities, if you look at the

combination

of securities you could put on, Max,

it's factorial. It's not just, you know,

there's only six pairs of of stocks you

can put on. If there's, you know, 2,000

stocks in a in a particular market that

are liquid, tradable, all those things,

um it's it's exponential the number of

pairs you can put on and you have to

model each of those pairs. So that's why

uh liquidity is is important. If you're

a fundamental small cap investor, um

it's a different process that you're

going after. You may want a big

information edge and you may have to sit

there long only in the stock. I wouldn't

want to short a large a lot of small cap

stocks because if you have to cover that

short position, you could get a short

squeeze. There may not be any sellers.

There are some attributes on the short

side um that that can produce very uh

non-asymmetric returns. So, um you know,

focusing where we do fits the the style

of investing. However, I believe in in

in different styles of investing. I, you

know, choose to focus my time and effort

and on what I've worked on for the past

30 years. But I can understand someone's

argument saying these companies are not

followed that are small cap. There's no

research on them. Um, they're

undervalued and uh, you know, I'm going

to buy shares in them and hope they grow

or show others uh, uh, you know, that

they're undervalued and they buy in as

well. But that's a different investment

process than than us looking for uh,

securities both long and short. And I

want to talk about maybe um less

well-known sources of alpha that that

you are looking at right now. Long short

alpha well understood for for for many

decades now. The current environment you

know we've got implied correlations

about as low as they've ever been in

many ways a stock picker's dream a

relative trader's dream. But you have so

many different strategies. What are some

of the newer ones that h are not as well

understood by by participants in the

market?

>> I I think one thing that's not as well

understood and again it's not going to

be unique just to to our firm. I think

it's unique across the industry is that

you know regulatory changes can really

drive uh stock prices and and if you're

heavily focused on regulations within an

industry and you can look at the utility

industry how it used to trade you can

look at oil and gas uh before OPEC kind

of disintegrated or fracking or things

like that and these changes are seismic

changes within industries but unless

you're following them and the nuances

that these occur reimburse ment rates

from insurance companies within that. Um

how pharma companies or biotech

companies are are funding themselves. Um

all of these things are you know taxes

tax incentives that change depreciation

tax incentives that you know change uh

drug discovery. All of these things are

nuances that, you know, to someone that

isn't an expert in these areas, looking

at these companies, how they're

structured, how they operate, you know,

in a regulated environment,

um I think you can miss those. Uh you

know, a typical investor is not going to

be aware of some of these changes

immediately or what's being proposed.

So, um that's one source of alpha that I

just don't think people look at enough.

And you know we just we spoke about two

examples of countries that changed

regulations and yes AI has had a big

impact uh particularly in Korea um but

still it's a completely it's a different

market than what it was three years ago.

Japan is a different market than what it

was uh 5 years ago. Um Japan has

inflation now. Um they just had their

their vote yesterday you know on

interest rates. Um so these things you

you have to stay up with to understand

how they are going to you know impact uh

you know securities within these markets

how they're traded retail participation

within these markets so understanding

you know or retail is retail money flows

is that a big driver of performance and

then retail money flow can can change as

well in Japan it's more buy and hold now

before it was a contrary indicator now

it's much more stable so these things

change over time. Those are all sources

of

you know of alpha. Um data um can be a

source of alpha but it gets arbitrageed

away max fairly quickly. So if you have

a data provider that comes out with some

new data set and then suddenly they

start selling it to all your competitors

it's not an advantage. You kind of need

it. Um so originally when credit card

data came out uh you know that was a bit

of an advantage uh for people. I think

it's harder to get a pure data

advantage. But I think the one thing uh

that firms have, they all have their own

individual data, how they've collected

it, how they look at it, use it. Um I

think those are sources of advantage. Uh

uh you know, as well, we've been

collecting, you know, hedge fund data

for uh you know, well over 20 years now.

Um and I think that's uh that helps give

us insights that, you know, over that

long of a time period, but you know,

it's constantly evolving. um you know

what people are uh what people are

looking at and the hedge fund industry

has evolved uh over time um as far as uh

you know information um you know from

from corporates how that's disseminated

um like I talked about the change in in

Japan you would have needed someone uh

you know who spoke or read Japan to

translate uh some of these things you

know this would have been years ago

there's been translation software for a

long period of time but um some of this

is going to come down to the creativity

and the tools that you you know you

apply to it discover uh to discover

alpha but I I certainly don't think

there's just one information source edge

uh that's out there.

>> Yeah. I mean if you would have uh had a

time machine do you think 10 years ago

you would have believed that we'd be

maximizing shareholder value in Japan

and the BOJ would be hiking rates? I do

believe despite you know maybe some of

the flaws of capitalism mix there

there's not a better system out there

and and sometimes it gets taken to uh

excesses and those excesses need to be

corrected and and the market's a good

force to to do that. So I think some of

these are countries realizing that you

need to attract capital and investment

um if you want to continue to be

productive. So I think some of these

changes were inevitable. Could have

predicted the time frame, you know,

probably not. Um but you did have more

stagnation in Japan for a period of

close to 30 years. Um you you might have

thought some of these changes would have

happened sooner, you know, rather than

later uh and how that's impacting

uh you know um you know the the

individuals that live in these companies

or companies that have ideas. Just

imagine capital formation. And if you

have a great idea in Korea now, you

you've got capital formation or in

Japan, it's much easier to go get that.

When prices were stagnant and no one was

interested in the market, no one was

really looking at it. Now, you know,

you're a Japanese corporate that needs

capital and you have a great idea and

the the the human capital to go deploy

that idea. It's great. There's never

been a better time if you have an idea

to go get capital and to execute that

globally. And I think that's a great

thing for for for everyone.

>> So there's the regulation that's that's

happening or that's happened that that

has changed markets or or maybe isn't

understood, but there's also regulatory

risk and certainly as we look at AI,

there is looming regulatory risk there.

H how do you think about these um known

unknowns where where there is going to

be a regulatory change? It's going to

happen. The the frameworks are being

worked out as we speak. we don't know

where it's going to land. How do you

think about that given the role that

that regulation you you think is going

to play on markets moving forward?

>> Yeah, Max and a good example just going

back to Korea many times they've they've

banned short selling. So, they've

improved the rules, they've improved the

disclosure, so hopefully it's more per

permanent uh that they'll allow, you

know, short selling in a market like

that, which is important for us to to

execute a strategy uh in a market like

that. But but they do change and there

are the known unknowns and that's why

mix we really can't predict them. So

we've got to be balanced within

industries and countries. So we really

don't want to take a big country bet

that you know this is going to happen.

So we're going to go long Japan short

the US. That that's not what we that's

not what we do. Um and there there will

be regulatory changes and maybe in some

cases they you know there's more

stability that comes out of them or you

know some sort of known playing field

that makes it easier to analyze um you

know some of these situations but yeah

definitely Max

there will be changes coming and that's

why we believe we really can't predict

exactly what those changes are going to

be so being hedged towards them is

important at the beginning, but then

being able to react very quickly and

decide how these R changes are going to

impact the players in that space um and

take advantage of that. Um that's

important but absolutely regulations

will keep coming. It's a new technology.

It's like look at how long crypto uh

regulation took to to be put in place

and uh even within the US who was going

to regulate it was the SEC, CFTC uh you

know who was going to take charge of

that. So um you know as these

technologies emerge uh yeah these

regulations are going to change and and

the markets are going to change.

>> I think crypto is particularly

interesting because I mean it was uh a

big question even coming into this year

or coming into this current regime with

with President Trump who was going to

win had uh the Democrats won. I mean we

would be in a completely different

regulatory regime for crypto almost

certainly extremely hard to predict

that. And it does go back to those ideas

that we talked about earlier about

liquidity and why it's it's so important

and so valuable because you you you

can't avoid these you can't avoid risk

but you also uh need to be aware of of

the swiftness that change can happen,

>> right? And you need liquidity if if for

example you're wrong, you need liquidity

to change your positioning or else

you're stuck with the positioning. So,

um, and and great if your horizon is,

you know, you're a long-term, long only

investor, um, again, that could be your

source of alpha to take advantage of

situations where people need liquidity

and they price things incorrectly. And

for us, it's important to have liquidity

to to be able to risk manage the uh the

portfolio appropriately.

>> I want to shift a little bit to to the

industry, the hedge fund industry, and

particularly the uh the market neutral

multistrategy hedge funds. you know

there is a ton of capital um chasing

these strategies. A lot of people,

especially your uh your single manager

um classic style hedge fund counterparts

have been calling for peak pod chop the

the that there's so much capital chasing

these strategies that it that it can't

possibly you know continue to produce

returns and yet it does it does year

after year produce what it says on the

tin uh for for the investors and so you

know I do wonder what what your view is

on the the capacity that the industry

can take on um you are seeing some firms

starting to to limit their capacity and

increasingly going to external managers

to take to take this new capital because

they can't actually bring people in

house. I mean where do you think the the

industry is going to go for these types

of strategies? I think if you look at,

you know, the the model of kind of

proprietary trading that's existed for,

you know, hundreds of years. If you go

back to the old merchant banks, like you

would have someone specialized in one

area and another area and another area.

Um, when you look at the proprietary

trading desks of investment banks when

they were in their uh heyday, you would

have hundreds of traders on these desks

in very specialized areas. someone

trading rates, someone trading uh you

know equities, someone trading

commodities, someone trading uh gold

currencies, they were all specialists on

these desks since the reforms that

occurred after the global financial

crisis. You've really outsourced those

proprietary trading desks to hedge funds

and to what people call multi-pod shops.

But I've always believed in the way that

I was trained in the in the first hedge

fund that I worked at was you want to

take diversified risk. you don't want to

have one star stock picker um uh you

know within that and as I said at the

beginning of the the podcast really if

you could have a hundred different

return streams that had a correlation

you could predict the correlation of

zero to each other over a long period of

time you'd really want that you'd want

that you'd want to take it you'd want to

lever it up um optimally and that would

produce the the the smoothest return

stream that's out there so it's not that

I don't believe in the single uh PM I

think that they uh you know they can

continue to do yoga job play a part

within a portfolio. Um it's just that

for for a firm like ours, we believe in

diversification across you know

strategies, markets, industries, time

frames, all of those things to produce

the most consistent return. If you're

trying to maximize the return, uh

there's probably some different ways

that you would want to uh want to do

that. And well, when you look at the

model, it's not it's not all that

different than it was on proprietary

trading desks back in the, you know, 80s

and 90s. And and that model has stood

the test of time for for a very very

long period of time. So just like

private credit, you know, it came

outsourced from the banks because they

couldn't do certain types of lending

anymore. I don't think of I think of the

pod shops as really more you know what

we do is more you know just proprietary

trading that's open to uh you know

external investors um but it's not all

that different than the trading that

that occurred on on Wall Street for for

many many years and then going back next

to a regulation discussion was regulated

away and other market participants

picked that up and that's that's really

how I think of it so I don't sit there

and say a single manager is wrong that's

the wrong model. That's what they choose

to do for our particular business. I

think this is the the right model and

it's how we were trained uh to do this

going back a long way. I believe in the

model. The scale of it Max will continue

to be an ongoing uh debate. Um and the

scale of it will be determined by the

liquidity of the markets. And let's say

Max that that the markets um something

came along cut the market volumes in

half. He couldn't deploy the capital. um

you know we need to be cognizant of that

and have a conversation with our clients

about that. Um you know right now it

seems like asset prices are inflating

that almost every government in the

world is running kind of a fiscal

deficit and there's inflation around uh

that's made its way I would say more

into asset prices uh than anything else.

So right now liquidity is good, markets

are expanding. Um all of those things

are favorable uh for some more growth

within within the uh within the space.

>> All right, Sean. Well, we will leave it

right there. Thanks, Max. I really

appreciate it.

>> The views shared in this podcast are

forformational purposes only and should

not be considered investment advice or

an offer or solicitation to buy or sell

any security, fund, or service, nor a

recommendation or endorsement of any

kind. The statements made during this

discussion may include opinions,

forward-looking views, and

characterizations of market conditions

that are inherently uncertain and

subject to change. Actual results and

market outcomes may differ materially

from those discussed. Past performance

is not indicative of future results. Any

references to strategies,

characteristics or potential returns are

provided for illustrative and

educational purposes only. Descriptions

such as stable, low-risk, liquid, or all

weather are qualitative in nature and

reflect general strategy objectives

rather than assurances of performance,

actual liquidity or risk outcomes. All

investments involve risk including the

potential loss of principle. Liquidity,

diversification and risk characteristics

may vary depending upon market

conditions, portfolio construction and

investment vehicle terms. This

discussion does not consider the

specific objectives, financial situation

or needs of any particular investor.