The Derivative - Blissfully Buying BB Bonds with Greg Obenshain of Verdad Capital

Episode Date: September 23, 2021

In this episode, we're stepping away from our ordinary world of futures and options to find out why boring old corporate bonds aren't all that boring after all. Join our conversation with Greg Obenshain, Partner and Director of Credit at Verdad Advisers, as he and Jeff discuss just what running a high yield bond investments portfolio is like. Greg shares the complexities of accessing and organizing the needed data to run a quantitative model on bonds (think no central exchange nor shared order book, etc.), how he racks 'em and stacks 'em, and why there should always be a fundamental lens on quant outputs at the end of the day. He gives some real-world examples talking about the bonds of Netflix, Crocs, and Oil& Gas companies; and why there's a sweet spot between BBB and B-rated bonds. Speaking of ratings, we ask Greg how his custom quant model assigns his own ratings, how and why those differ from the ratings agencies, and why multi-billion firms don't model this area of the high yield market similarly (he says it's not sexy enough). We finish the chat touching base on some topical bond/rates areas, such as Evergrande's potential default, the debt ceiling, yield farming, private credit, private equity's big debt appetite, and more. You'll also find some nuggets on duration, stripping out Treasury yields, and what both retail and institutional investors typically get wrong when considering holding bonds in a portfolio. Enjoy the chat! Chapters: 00:00-02:47 = Intro 02:48-07:27 = London Tea, a Midwest Twang, and Dartmouth Green 07:28-20:50 = Becoming a Quant, Finding Verdad, and Racking and Stacking 20:51-41:24 = Finding Growth vs Getting Paid for Default Risk 41:25-56:15 = Cash in and Cash Out, and Record Tight High Yield Spreads 56:16-01:09:10 = High Yield Risk, Private Credit, and what everyone gets wrong about Bonds 01:09:11-01:14:02 =Favorites Follow along with Greg on Twitter @GregObenshain and learn more about Verdad Advisers at verdadcap.com Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2,  or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. At the core of what I'm doing is I'm saying, well, I can take all the financial data and the trend data in the financials and rack and stack every company and set them up. I can stack them one on top of the other. This one is better than this one. This one's better of the other. This one is better than this one.

This one's better than this one. This one's better than this one. The way I actually do it is by assigning a rating to them that is not an agency rating, just my own rating, right? And then comparing that to where the market actually trades those bonds, right? I can look at a bond and say, well, this is trading, and there's some complexities in this, right? Because bonds have different maturities, they have different coupons. So you need to fix all that quantitatively.

But you can look at a bond and say, it's trading here in the market. And that implies the market thinks it's rated like this. But my model actually says it's much better than that, or much worse than that. And I want to look at this, I'm a long lonely, so I want to look at the stuff that's much better. And then I'm applying some other filters to try to catch some of the mistakes that happen, like deteriorating financials, equity getting pummeled for some reason, and I don't know what's going on

to try to filter out some of the risks. And that's basically what I'm doing. But I'm quantitatively ranking every single bond in the universe and then looking at where it trends. Hello, we're digging into the crazy world of credit and business and bonds on this week's episode. Okay. Okay. I lied. It's not all that crazy. It is bonds after all, but applying a quant approach to which high yield non-investment grade bonds put in a portfolio is crazy interesting, at least to me. And we've got one of the pioneers in that space to talk through it with us.

Today's guest is Greg Obenshain, whose career in the credit world has spanned an almost internship at Enron to running a billion dollar book at at Apollo Group. Now it's partner and head of the credit fund at Verdad Cap. So welcome, Greg. We were just talking offline how you grew up in Chicago briefly. Spent two years in Chicago in high school and then went back there for business school. All right. And so where were you coming from and then where'd you go to before your brief Chicago stint? I grew up in London for a while, for five years, before I came back to Chicago for two, and then went to Dartmouth for undergrad, and then moved down to D.C., went to Boston, and then back at Northwestern, before coming back out to the East Coast.

Nice, so you do have a little Midwest twang, it sounds like, instead of a London accent. I'm the most Midwestern guy you'll ever meet who grew up in London. Nice. And where'd you grow up in? Lincoln Park? Yeah, Lincoln Park. And we just went to high school at Latin briefly, where a couple of my siblings and some friends went. So shout out to the Romans.

You play any sports there? Ran cross country, swam, and then played a very embarrassing season of JV basketball. There you go. That's like me. I was on the JV golf team as a senior in high school down in Florida. Everyone was too good for that. Same story. Exactly.

It was the era of the Bulls. Yeah. It's a great time to be in chicago um and so where are you now that's the uh we were where are you now in connecticut yeah i'm up in connecticut i'm in the northwest corner of connecticut um uh and uh verdad is actually located out of boston so i'll go there more than a while. And my wife works part-time out of New York. So we are remote to both places. Perfect. And that was in existence pre-COVID or that's been a COVID thing? That was, it started pre-COVID and then COVID made it a lot easier. Yeah. So we were in New York and then decided to stay up in Connecticut. So Northwestern Connecticut. So what are you closest to? Town of Litchfield.

Okay. But like what big city? Hartford? We'd be west of Hartford. Yeah. There's another city called Torrington in between. And then we're west of that. There's really nothing that close.

That sounds good. You know, Ben Hunt, you on the farm life with him? I'm north of Ben Hunt. I know where he is. I don't know him personally, but he's down in Westport. You guys should trade some farming notes. So, Little Morrissey, we're back to Northwestern. Dartmouth undergrad.

I tried to get in there and they said no. I was either not smart enough or not good enough at football or both. But how was that? I always wanted to go to dartmouth i visited lovely town it's uh i tell everybody it's the best school in the world i'm yeah i'm abashed about it uh great time you know it's hard to be stressed out when you can look up to see the mountains and the appalachian trail goes through through your main street so i loved it i rode up there there crew and it was,

I was outdoors every afternoon on the river. Pretty hard, pretty hard to beat. Yeah. I hear you. I never knew that Appalachian trail goes is part of it's on main street. Yep. That's right down main street. Can't be too much longer on the trail once you get to there, right? Yeah. How much further North does it go? It goes, it goes, it goes a ways up into Maine, up to Katahdin. I've never done it, but it ends goes it goes a ways up in the main up to katahdin i've never done it but it ends up at katahdin up in maine all right bucket list hike hike parts i've hiked parts of it but uh like two mile parts of it not not anything significant

so how did verdad come around give us us the story. So you left college? Sure. Yeah, I actually went to, I was a consultant after college. I wasn't in finance, never applied to be a banker, never had any interest in doing investment banking. So it's a question of how I got into this. And then went back to business school and was actually interested in energy. And I was the only guy applying to Enron as it blew up because I had a subsidiary called, well, it was Zond and then it became Enron Wind. And three days before I got my offer letter for my internship, it became GE Wind Energy. So my business school internship was under the wind turbines 100 miles north of la um and uh because i wanted to renew back maybe

before before everybody else i wanted to do renewable energy this is very early days and then ended up going into ge's leadership program out of um out of business school and as part of that process, got into the GE's Energy Financial Services Group. And that's sort of how I launched my finance career. I'd actually studied for and passed all three levels of the CFA during that time, even though I wasn't technically in finance.

I had to wait two years to get the designation because I didn't have the work experience required, but I had passed all the tests and then ended up going to a firm down in New York called Stone Tower Capital, which got acquired by Apollo. And at Apollo, I ran high yield, performing high yield for Apollo for four years. And that was the background. How big was Apollo at the time and how big have they grown to? Oh, it was very large at the time. And I was Apollo at the time and how big have they grown to? Oh, it was, it was, it was very large at the time.

And I don't remember the exact numbers, but I would imagine well over a billion of bonds at Apollo. And, and I, I, I had, you know, I did that for 10 years, a combination of Stone Tower and Apollo. My background is really is a fundamental credit analyst. And I should tell the listeners that I'm now almost fully quantitative. So that shift from almost fully fundamental, looking at reading indentures, looking at bonds, and then to a almost purely quantitative approach, at least on the screening.

The inkling of the idea came when I was working at Stone Tower and Apollo, but I left Apollo to go chase the dream of building a fully quantitative approach to investing in fixed income because I thought it was very difficult to do. You need to build your own databases. While everybody in the equity world

is used to be able to pull down a bunch of data on a company and see both the stock price and the financials together, that's virtually impossible to do for bonds. Or any individual company, you can pull down the credit metrics and the bond price, but to do it over time for every company and do it systematically, you have to build your own database. And so I really set out on a quixotic quest to see if I could do that. I thought I could, and I could. It took a while. It was a little, of course, harder and longer than I thought.

And I was out pitching the idea to many different firms, trying to figure out what iteration of the product I wanted to create when I met Dan at Verdad Advisors. And he had nothing to do with credit, but had a very similar view of the world and a very similar approach, leading with quant and then doing the fundamental work at the end. So it was sort of a quantum mental approach. And I called him and said, let's start a, let's start a bond fund together and go into the, for that umbrella and do that. And so that's what I've been doing for the last over two years now. And so he, he sought you out or you sought him out or a little bit of both.

We did not seek each other out. We met as, as people said we should talk to each other. I had, I don't think either of us thought anything would come of it. It was purely a networking call and because I thought the same way. Well, you should always take those calls, right? Even though as painful as they seem to be sometimes. Yeah, no, it was, and it ended up and, you know, and it was a few months later when I finally called him back and sort of said, hang on a second. It sounds like we're doing sort of the same thing. Let's do something together. But first it was just,

I thought what he was doing was really interesting and he thought what I was doing was very interesting. So a few things to unpack there and we can get more into it, but it's always strikes me that's amazing that you had to build your own database, right? There's many, well, you tell me,

are there many multiples of bond volume over stock volume, especially in these smaller size companies, but the data's just not there, right? You'd think with all the bond trading that there is, there would be copious amounts of data. Yeah, there's lots of data. And well, I mean, just to give everybody sort of a sense of how this world works, because it's really different, right? Let's just take Netflix, because Netflix has bonds, right? Everybody knows the equity, but they have bonds as well. They've raised a lot of debt to fund the content and they started in high yield, right? So they were a high yield issuer and they were rated in the middle of high yield. So they traded, the bonds were, it was fairly relatively expensive debt, not that expensive,

right? They'd have several, call it $500 to $1 billion issues that are outstanding. They're all bought by institutional investors for the most part. And those trade in million-dollar lots. And they might not trade every day. So if you look at a price chart of bonds based on trades, yeah, there's a lot of flat lines in there with jiggles up and down. It looks a lot different than a stock price chart because in equities, you have a centralized repository of bid and asks from all the brokers. So there's the best bid, best offer. So stock prices, even if not a lot of trading, you can see the quoted price going up and down by the second.

Bonds, that doesn't exist. There is no best bid, best offer database. And so the only thing you have are trades. So you look at historical price data based on trades, or you based on it based on an aggregation of broker quotes. And literally that means you call Morgan Stanley and say, where are you on this bond? Or they actually send out emails, still emails on Bloomberg, right? It's getting a little better. It's getting a lot better actually, but that's still how this market trades. You're buying million. I mean, if you want to

think about how this market works, you're buying million dollar lots on the phone. That is the old way of doing it. And slowly we're getting towards an electronic market, but we still don't have that centralized. Sorry, I got you off. Just what are the reasons for that? Is it a moneymaker for Wall Street so they're not incented to kind of centralize it? Or no one has the money to disrupt it? Yeah, there's been a lot of people who've tried to disrupt it. And I think a huge obstacle is that nobody's mandated that centralized pricing service.

But it's just, and I think it does benefit a lot of people to keep it the way it is, specifically people who trade a lot of bonds. And also it's a very, it actually works, honestly, works fine for the big players, right? And the high frequency can't,

it's too large lot sizes for them to come in. So it actually, it works well for some people. So, but as a result, you haven't had the investment in, or the, or the, there hasn't been the demand for that sort of quantitative data set that I, yeah, it's, it's coming. It's, it's here now. I'm'm saying this and that's probably a statement that's three years old. There now is a lot of demand for quantitative, quantum everything, but it's been very hard to do in high yield and the dispersion of returns are lower in fixed income. So you're talking about adding two to 3% alpha, not? Not 10 to 12 in your back tests. So it doesn't get people as excited, right?

And I think especially equity quants who try to come into the fixed income world, it's hard. You can't do as much and the returns are lower. So it's kept people out, which is good for me. But it's a tough space to penetrate. And so the folks at Verdad were doing similar stuff, but just on the equity side. And you said, hey, let's put this together and see what we can do. Yeah. Verdad, its DNA is small cap value. And they've done a great job. Quantitative? Yes, quantitative.

Yeah. Quantitative. but we're really a quantum mental firm. So we run all that, we spend a lot of time building our models, but then we actually look at what we're buying. So it's not fully, and you can't, in both places where we trade, you can't just go in and buy everything on the wire, right? Small cap equity, you do need to actually pay attention to what you're buying and how you're buying it and not moving markets. And the same thing is true in fixed income and high yield. And so specifically, I trade high yield, sub-investment grade bonds, but at the very top end. So guys like Charter Communications, Netflix, people you've heard of very often. Crocs has high yield bonds. I just got in trouble on twitter the other day i was like

look at this stock that this thing that hasn't been cool since 2012 and everyone's like what are you talking about this is the coolest it's it's back in spades i'm like all right i've done they've done it they've done a great job um they've moved they've moved beyond the clog apparently yeah well everyone's like it's the physical equivalent of nfts like you can put a skin on your shoe and make it cool i'm like all right i still don't get it but never if they're making money i'm happy yeah so to me how do you how do you square that of like the model shoots out netflix netflix vol is crazy or like what what would it take for you to be like, we're passing on the fundamental side versus what the model spits out? Yeah. So sometimes it's just thing.

It's usually something the model can't see. Right. You know, there's, there's many different models. Some, some, some are mental models, some are, some are quantitative models and the quantitative models can see what it can see. It can see what the historic numbers are. It can see how those stack up relative to everybody else, and've got five comps that they're looking at that are in the same industry. And my models are doing this over a thousand comps and doing it. So they're just going to be better at relative value based on numbers that it can observe. But if the company just announced an acquisition or the company just said, guess what? We're going to lever up to buy back our stock and we're going to be good at seven times leverage. My model can't see that, right?

So it can see the stock price is going up because they're about to do a huge dividend. That's good, usually, right? And it looks like historic leverage is low. So my model is like, this looks amazing. What a great buy. And of course you read the transcript and realize that that's probably not what you want to be doing.

So that's a good example of where, you know, you need to have, you still need the human element. Yeah. And that's where I spent 10 years doing it. So I have to go all the way to like, I don't believe in the business. Where do you draw the line in terms of? Yeah, I don't view myself as being I think the numbers tell me more about, you know, my favorite, my favorite set of analytical judgments is the management team and judging the management team. And I am relatively certain that somebody who spent most of their career on Wall Street has no business judging how somebody could run a shoe company, for example. The historic numbers tell you how they've done, if they've been there, probably a lot better than your judgment talking to the management team and making some snap judgment about them.

So I'm very dismissive of that in general. But where I do think you can really understand what a team is saying is when they describe their strategy. And if they can describe it distinctly and it foots with what you're seeing in the numbers, that's a very good thing. And so you can understand why things are happening when the numbers and the narrative align. But I think where you get into a lot of trouble and where people tend to get in a lot of trouble is when the narrative is really exciting, but the numbers haven't been backing it up. And so I'm a big fan of reading. One of my favorite things to read, ironically,

is just the letter to shareholders. I like to read the earnings call transcripts to understand what's happening. And then you learn stuff that you then can put into your models. So doing fundamental underwriting teaches you how can put into your models. So, you know, doing fundamental underwriting teaches you how to improve your quantitative models. And let's go back and kind of the 30,000 foot view of what the quantitative models are doing. Like you said, ranking, stacking, doing that, but what are they trying to pick up? What's the universe you start with? What do you end up with? Yeah. So there's about a thousand

companies that I look at. There's actually more companies in debt than there is equity. And so you have a huge, huge universe. I tend to look, and that thousand just really refers to those companies that are either at the bottom end of investment grade, and for your listeners, investment grade is GE, IBM, big, big companies that are very unlikely to go default anytime in the next five years. Whereas high yield, traditionally called junk bonds, always a Wall Street Journal article on high yield about how dangerous it is, really has two components to it. The very low end, which is stuff that is probably going to go bankrupt, and the high end, which is stuff that is just not large enough to be investment grade yet, but generally are pretty good companies. Can you give examples on both sides? What's some of that junk that you would actually consider junk? Junk. I mean, a lot of the oil and gas companies, even prior to the oil and gas crisis, just never converted, made money.

I don't want to say specific names, but there's very often, you know, these are companies that generally have, the way I think about it is this. If you can look at a company's return on capital. They spend a dollar, how much do they get back? There are a lot of companies that spend a dollar and get 85 cents back. That's generally a bad thing over time. Not sustainable. But there's also a lot of... And that's the very low end of high. That's the guys that something has to change and something has to get better for them to get out of that predicament, or they need to restructure their debt and reinvest in the business or get acquired something. Then there's the guys in the middle and they make maybe three or four or maybe two to 3% on their investment

capital and they pay 7% on their bonds. So their cost of capital is above their return on capital. And that's not a great thing either, but that can last a lot longer. And again, they're really tied to the cycle. If things are going well, they're going to do really well. And if things are going badly, they're going to do really bad. And then there's the top end of high yield where they're not large enough to be an investment grade. They might be a one product company. Crocs is actually a terrific example. Crocs is a company that's executing very well, but is in high yield because it is a single product company. And it's got, it's had, I will quote the Moody's report, it's had very erratic EBITDA. Actually, I don't see that, but they said that, so I'm quoting them. It's a useful example, right?

So that's a good example of a company that's at the higher end of high yield, that has a very good business, that's doing very well, but they aren't investment grade. So those would be the examples. And investing at the very top end of that is really, I think it's the highest, it is historically the highest returning part of high yield in all of corporate credit. But it's also got a really nice characteristic for somebody like me, is that most of those companies put out public financials. So I take those public, and it's good now getting to your question finally, sorry. Are they all publicly traded?

Not all of them are publicly traded. So you can have public financials and be a private company. And so I take those financials and I take the bond trading levels, I take the equity trading levels. And at the core of what I'm doing is I'm saying, well, I can take all the financial data and the trend data in the financials and rack and stack every company and set them up. I can stack them one on top of the other. This one is better than this one. This one's better than this one. This one's better than this one. The way I actually do it is by assigning a rating to them that is not an agency rating, just my own rating. And then comparing that to where the market actually trades those bonds. I can look at a

bond and say, well, this is trading and there's some complexities in this because bonds have different maturities, they have different coupons. So you need to fix all that quantitatively. But you can look at a bond and say, it's trading here in the market. And that implies the market thinks it's rated like this. But my model actually says it's much better than that or much worse than that. And I only look at this, I'm a long lonely, so I only look at the stuff that's much better. And then I'm applying some other filters to try to catch some of the mistakes that happen like deteriorating financials, equity getting pummeled for some reason and I don't know what's going on to try to filter out some of the risks and that's basically what I'm doing but I'm quantitatively

ranking every single bond in the universe and then looking at where it trades. And let me, so you're coming up with a rating. So my brain automatically goes to like your triple B or double B, but you're saying more of a score of, and then how does that- You know what, in your brain, think Greg's agency rating is double B. The market seems to be trading it at a single B and the agency say it's triple B. And I have all three of those numbers and they compare exactly like that. And then, but how does that work out in terms of, but maybe the market's pricing it in, you know, or you're saying, no, the market's pricing it over here. I'm pricing it here. It'd be vice versa, I guess, right. It'd be more cheaply priced than the ratings, the public ratings are having it be. But how does that tie

in with the yield and whatnot, right? So in theory, the yield and the price and the duration and all the rest are all tied into that puzzle. Yeah. So here's some bond lingo for all your listeners. But you look at, you know, one of the tricks to doing this really well is when you go look at a bond that's got a 4% yield, you say, eh, it's 4%. Okay, fine. What does that mean? Well, the first thing you got to do is strip out what you'd get if you just bought treasuries of the same maturity. And maturity isn't the right word.

It's actually, we call it duration, the average life of the bond. Well, so it's trading at 200 or 300 basis points, which is 3% over that. And then let's look at where everything else is trading in that range. So we'll take out the treasuries. Now we've got that pure credit spread. That's what I'm getting paid for the risk of default over time. So I'm getting 3% extra over treasuries to own this thing. Is that enough? And that's what I'm actually using to compare. Is that spread, not the yield itself? And the reason I'm using the spread is that the yield will increase as you go out over time. So an

eight-year bond will have a higher underlying treasury rate than a four-year bond. So that's what I'm doing. Now, in saying that, in credit, there's this interesting concept that, well, in treasuries, right? In government bonds, everybody knows that if rates go up, the bond goes down. Fine. And rising rates are bad for treasuries. Yes, absolutely. And you buy treasuries, and I've written a lot about this. You buy treasuries because when inflation expectations fall short, when growth expectations fall short, and both of those expected growth and inflation numbers go down, treasury rates go down, treasuries go up. And so it's a beautiful asset class. It just is. I don't do that. I don't play in that asset class.

I play in an asset class that is linked to treasuries in some way because they're a fixed income instrument, but the primary driver is that credit spread. So when growth expectations go down, that's also bad for credit spreads. They go up, which is bad for the bond. When interest rates go up because growth expectations are going up, spreads go down. And actually the more important part of the pricing drivers in what I do is I spread. That wins out every time. So if rates go down 50 basis points, treasury rates, my spread might go up 70 or might go up 75, right? And that's bad. But if rates go up 50 and my spread might go down 75, those are extreme examples, but that's how that works. And so that's why I strip

out the treasury part and just look at that credit spread, because that's the primary driver. And all of that comes back to the odds of this company defaulting on the bond. Yeah. And actually, it's so funny because when you're in credit, I think you're supposed to have a negative outlook on the world. But I have a very positive outlook on my portfolio, right? By the same token, you're getting paid for the probability default, but I am trying to find companies that are getting portfolio, right? It's by the same token, you're getting paid for the

probability default, but I am trying to find companies that are getting better, right? I want those companies that have been paying down their debt going up in rating, or they're doing something else that you can't see as easily, right? They're doing something like they're buying more assets, but they're increasing their assets faster than they're increasing their debt, right? Because they're actually really profitable. So they're delevering the business, even though the actual quantum of debt isn't changing, right? And so what I'm playing for is not, I'm avoiding those things that I think are going to get downgraded and do worse, but I'm also actively trying to find those companies that are getting

better. That will get upgraded. That upgrade. So it's almost an equity-like kind of analysis. And here's the cool thing about it is if I'm terrified of duration in treasuries, because if rates go up, my bonds go down, I'm really excited about duration in credit spread products because if I'm for the product, for the ones that are getting better, because if they get better, that spread goes down. And if you have a longer bond, that bond goes up more. Right.

And so that's how you, that's, that's the world of credit that you're really thinking about that credit, credit spread. And so, and that's the way, and that's really what my models are doing. I am targeting companies that are getting better. Which is super interesting. I always think of it as like high yield, the risk of default, all of that jazz, but you're saying, I'm just trying to identify good companies that are going to keep growing. And the risk of default is rather, would you consider the risk of defaults the same across that whole bucket? No, I'm de-risking my portfolio, right?

That's what I'm doing. I'm taking stuff that's actually doing really well, right? So I'm actually taking lower risk. And so it's great. I think it's a way to de-risk your portfolio and avoid that default risk for which you're getting paid for in the first place. But in theory, they each have some unknown absolute number of their risk of default, right? Yep. Yep. And so how does this differentiate, you know, doesn't Citadel or whomever have a row full of quants that are analyzing the same stuff?

How do you feel you're differentiating from some of the big shops that have infinitely more computing power and can analyze all this stuff. Yeah. There's been a, there's something really interesting, I think, and it's thematic that's gone on. A lot of people got into, a lot of people have credit hedge funds, long short credit, right? And the idea there is that, I is that it's really been sold to pension funds who have a 60-40 portfolio. They don't really want treasuries to be 40 percent of the portfolio. Right. So they're going to these other products that promise bond like returns, really. Right. Bond like downside, bond like risk and hedge funds on the equity side were really a solution for that.

And then that sort of bled over into the credit side, long short credit. I'm not a huge fan of long short credit because credit is a positive expected return asset over time that already has low drawdowns if done well. And so I'm not sure what you gain other than increased trading costs, which then, but also allows you to do increased fees and gives you access to the prime brokers at the bank. So there's a lot of other benefits, right? Because you're really profitable with the banks. But I do long only credit and the way I take down the downside is by focusing on that upper end of, of Hyatt. Right. And so I'm very, very different. I'm closer to a traditional long only manager who've been, who also have things like this as well. But I mean,

I would like to think I do it better. I'm wholly, I mean, I'm wholly quantitatively focused and we're very, and we're very unique in that we focus. We've taken the universe and shrunk it down to that part of the corporate credit universe that really does well. So it's a very focused strategy. There's no reason why people can't do it. And I'm sure there are people out there who do versions of this. Well, the easy answer is it's not a big enough opportunity for some of the largest shops. Yeah. It's not a big enough opportunity and also it's not sexy. So the easiest way to raise money

is to promise high yields. And the easiest way to promise high yields is to show high yields. And that's lower quality credit. That's private credit. That's all these other things. And go into that. But the truth of fixed income investing is that your return increases with your yield, the coupon on your bond, up until a point. So if you go down in quality, you generally make more money in BBB bonds than the grade above that, which is A bonds. And you generally make more money in BBB bonds than you make in BBB bonds, which is the grade above BBB. And you generally make less money in single B bonds, which yield more than the double B bonds because the risk catches up with you, right? You get your downgrade bad event happening things start to happen in the single

B territory and really get bad as you get into sort of the lower end of high yield. And so you see, and I've written about this a lot, if you just do a buy and hold strategy, and you go and you just buy a bunch of double Bs, you buy a bunch of single Bs, and you buy a bunch of triple Cs, right? Your worst performance is actually going to be in that single B category where you got paid a little bit more and then took on a whole lot more risk. And so you didn't get paid as much, but your face yield was really good.

So when you went out to market to people, you were offering 7% or 8%, not 5% or 6%. And that's the hard thing. It's hard to see. It's hard to sell. It's hard to do. But it is the winning strategy is to actually take a lot less risk. We had a blog post once called, but for the yield, right? And it was like the MLPs, the yield, but the yield, you're like, yeah, they're down 72% this year, but that 10% yield

is really saving you. But wouldn't that be self-correcting, right? Like anyone can run those stats or see that, right? That's not part of your unique data set, right? That's just out there for everyone to see or no? Yeah, it's less out there for people to see than you think. I mean, actually going and you have to have access. So now on Fred, you can go actually run this data yourself. You go on Fred, you can pull the B of A, double B index, B index, and triple C index. You can see the results.

And so this is, you go, don't take my word for it. You can go run this. It's not what you see in marketing materials. I think it's interesting. Things that work, work because they're a little bit counterintuitive. So just take small cap value, which we do in the other part of our business, right? The mechanism of action for value is that you're buying companies and they actually get worse over time, but they had such low multiples that their multiples actually did better. And actually you had a very good return. So they did less badly than you would expect. That's a very difficult thing to invest in. That's actually why doing a quantitatively really helps. In my world, it's buy the thing that's promising to pay you less.

And it's just a really hard thing to do. And if you are an analyst at a credit shop, you do not make your career by going in and pounding the table on double B bonds. You make your career by going in and pounding the table on the B bonds, right? You make your career by going in and pounding the table on the thing that's trading at 13%, right? And if that thing works, it's going, it's not only you getting the 13%, but the yield is tightening it into 7%. And you're getting a three, you're getting 15% on top of your coupon, right? So you're making 20 something, 30% on that bond. That's how you make your career. And you can, those exist. That is absolutely a strategy that exists and it can work. The problem is that it comes also with a 30% negative return, right? And so you get both

of those. And your base rate of success is you better be, you're starting off with a losing base rate. And so that's, but you're starting off with a losing base rate. And so that's, but you're starting off with a higher yield that's much easier to sell. So I think that that is sort of the world we live in. And so the way that we view fixed income is to do it right. You got to think about fixed income's main advantage. Its main advantage is that it's got a known return stream and it's a contract. They have to pay you back. So you don't go to fixed income and try to make equity returns. That's not its purpose. You go to equity to try to make equity returns. You don't go to fixed income to protect yourself from inflation. That's not its job. It's not what it does. You go to commodities or you go to high quality equities, you go somewhere else to protect yourself from inflation. You go to fixed income because in that bucket of safe

money that you have, it provides you a better return with a better drawdown structure. And so when you think about fixed income, it's highest and best uses as a, almost as a cash alternative. And it's not much riskier than cash, but it's your safe bucket. It's your safer bucket. It's the stuff that you want to not draw down a lot and you want to feel good about. So you can either reallocate out of it in bad times or allocate into it when things are really good and you're just a little bit nervous, but that's what it does. I mean, listen, if you buy a bond that doesn't default, even if it goes up and down, it's still paying you the same amount at the end at the promise coupon. That's your only game. And so that's how we view fixed income. You have to use it to its highest and best use, which is as an income generator that actually

pays you back. And you don't want to do is go and all of a sudden add some point of interest that you're going to not get paid back. And that's interesting because I don't think most people think of high yield as safe and we might even get into trouble for saying it on here but compliance people it's not safe it has a ton of risk let's be clear but you're saying it's structurally right it's different structurally

so you should treat it as such instead of most people are perhaps treating high yield as equity replacement right you're saying no treat it more as bond replacement it's it's really hard to look at say a uh look at a crocs right you can buy the crocs equity or you can buy their bonds and i i will look at and there's incorrect which is a wonderful example to to use on this right um and by the way these bonds unfortunately i'm talking about crocs and the bonds are 144a which means that retail investors can't buy them, which is, again, really a frustrating thing about the debt market. Because about what I'm about to tell you. So if you look at Crocs, the market cap is 9.5 billion, and there's 745 million of debt out there. So that's, are you taking more risk in the equity? It's very clear you're taking

more risk in the equity. Your valuation is 5 billion versus the value of the company at 745 million. So that's what we're talking about. Now that's an extreme example. Most cases, the stuff that I'm investing in is about three times, the enterprise value is three times the level of the debt, roughly, or two to three times. So two to three times the level of the debt, roughly, or two to three times. So two to three times the level of the debt. So people want to think about what it means to be at the top end of high yield, it's that. If you're at the bottom of a high end of high yield, that's much closer to one, 1.5, 1.75. So that gives you a relative sense for investors. And investment grade is, or it doesn't matter.

Yeah. I mean, I'm trying to think of a bond right now, but yeah, it's, it's probably gonna be three or four. It's going to be very, very high Crocs is just because of scale. Cause it's smaller. It's not in investment grade and other reasons. So the, man, I think that that's a, that's sort of how to think, think about it. And so when you think about, when I say it's primary advantages, it's going to get paid before the equity. So you own the company before the equity does. And they have to pay you a coupon and they have to pay you back.

Right? That's that's that's superpower. We mentioned the oil and gas companies were talking. We mentioned Netflix. To me, you couldn't have two different types of business, right? The oil and gas need tons of capital, tons of equipment. They got to put all that to work and then they're trying to get that small return. Netflix could add 50 million subscribers without any additional capital. They might be a bad example because they're spending billions on the content, but you have these new world companies that have subscription services and they can just add users without having to build a

factory or build capital. So do you find yourself moving more towards those types of companies that are capital needy? I mean, to be clear, Netflix is a huge capital consumer, right? Yeah. And I care about how a company consumes capital, whether it's through debt or whether it's through equity raises, right? To me, it's actually, I care about the business itself, right? So one of the things I do is to look at just the total dollars in the door. Where did they get money?

They got it from sales last year. They got it from equity. They got it from a loan. I don't care where they got it, but that's the pool. That's what they got. And then what did they do with that the next year? And I'm actually, unlike most debt guys, if they grew sales faster than they took on capital, because they actually reinvested in the business. And Amazon's a great example of this. Netflix is actually a great example of this. They grew their top line faster than they grew their assets, right? It's a good thing.

Because sales and gross profit are the raw material that makes profit, right? That makes net profit. If you grow those and you have, and there's some reasonable assumption that you can actually then convert that eventually into profit, that's okay. The management can make that decision. That's a very profitable decision. So I do look at that. I think there are some oil and gas companies that actually do that very well and did that very well prior to the downturn. Now they got hit by the commodity

prices, but they didn't go bankrupt. They were very good stewards of capital. There were a few and far between, but I owned a few of those in 2014, 15, and they did fine. And you could see it in their numbers before 2014, 15, because they just had very high returns on invested capital. That's not the only, in oil and gas, that happens to be a very good metric. They also, when you went and dug into their financials and the footnotes, they actually told you, there's the last footnote in oil and gas financials is actually the one you care about. Might as well throw away the whole other thing.

Just look at the last footnote. And they talk, it's actually the finding and development costs for oil and gas. And they go through what they did for barrel. And you can actually get a really good sense of where, if they're making money or not. So yeah, a little indifferent between new economy and old economy. I care much more about how much money they're putting in and how much they can add.

Now, it happens in a lot of the new economy companies are doing very well at that, right? But they're still spending a lot. This idea that there's not capital, it's not called capital investment. They're still investing a ton in marketing, in content for Netflix. Netflix for a long time would pick it without spending its growth. Yeah, it was like, you're spending what? Yeah, I don't think it's different. Actually, I don't get it too tied up in these debates of what are assets versus, I tend to strip it down to cash in, cash out.

And that's the cleanest way you can get a look at a company over time. And what you find when you do that, and that's a very fixed income background thing to do, right? But that's the way when your entire career, because I actually remember I didn't start, I've looked across the high yield spectrum my entire career. As a fundamental analyst, I looked at stuff that went bankrupt. I looked at stuff that was bankrupt. So I have a much broader, and the way you'd spot the business that was failing was the cash in cash out. And that was ultimately the test. And that's why when they say fixed income analysis, catch these things before equity analysts is because they aren't looking at the narrative necessarily because they don't benefit

from the narrative. They don't benefit from the growth. They benefit from cash in and cash out. And if they're looking at a company and saying, okay, they've got these growth projections, but look at the amount of capital that's going to take. And they're going to take that from me. No, thanks. Yeah. Which is always the narrative of like, watch the bonds, the bond guys know best, which seems to be a little, yeah. Right. That seemed to be debunked over the last year, but and do you ever consider, are there any like interest rate hedges or hedges with the equity in the company? No, I don't do a lot of that. So we run as a firm, when we hedge, we don't hedge, we diversify. We go into different assets to do... We have a multi-strat fund that has commodities for inflation, that has growth equities for the kind of risk-off periods.

It has small value for risk-on, right? We do that. So we allocate across asset classes, but it's an offensive strategy, right? I think it reflects, it's to go and try to go where the returns will be the best. Within this particular, my strategy, I'm very pure, fixed. I am making money by delivering coupon or an improvement in credit quality.

And that is what I do, pure and simple every day. And you didn't say return a principal at the end, right? Just the coupon and upgrade. And then you're usually out by the- I'm usually out. I tend to, one of the frustrating things about management bonds is the companies keep paying me back. So I'll have a great investment and then they'll pay me back. They'll call the bond, which is good because they usually call the bond before I own it. But it's our tender for it, technically. But, you know, it's a, or a tender for it technically. Um, but I do have this frustrating thing that equity guys don't have, which is my bonds go away. Um, so, um, and I have to find some, find something else I'm really excited about. Um, so, but yeah, no, that's it. I mean, and, and yes, I, I do get paid at the end, but very often, um, what actually, what actually ended up happening is the bonds fall down, um, my list over time. And, uh, I, I would say that my primary function is to buy from the

top of my list. And then to the extent I need to clear room at the top of the list, I'll sell stuff that's gone to the very bottom, but otherwise I'll just hold it over time because holding bonds is a great thing to do. Yeah. They literally pay you to hold them. They pay me to hold them. And it seems like maybe because you didn't come from that quant background, right? That you would have, if you were pure quant, came out of some financial engineering program, it seems like you would have gone direct into the long short, right? Like sell those bottom half in your rankings, buy the top half. Yeah.

You're sort of netting out the credit risk and everything. Yeah. Yeah. I mean, actually and everything. Have you modeled that? Yes. Actually, in a lot of quantitative strategies, the alpha is driven by the short side. I'm just not owning it, which is not... even when I, the returns aren't, I think, first of all, it's very illiquid. It's hard. It's difficult to shorten credit. There's mechanical issues with it. I also just think it's a, it's once you add on the cost of shorting, it's not a particularly attractive strategy in my opinion. And then there's plenty of people who can disagree with me and probably do it really well. But I, I is too short. It's a lot easier to get paid to own good companies. And for what I'm trying to achieve for my investors in this fund, it's not something I gone to that. I probably would have been misled or maybe focused on a lot of things that I don't think are that important.

Like one of the easier strategies is looking at bonds within a company and just picking the bond that's cheapest within the company, right? Because you're going to get a little extra for the same risk. You got to trade a lot to do that. Equity is not there. My view of the world is no focus on finding those companies that are just getting better over time from a credit perspective. It doesn't mean they actually necessarily have to get much better from an equity perspective, right? So it's a little bit different than equity. But from a credit, they're just getting better over time. And one of the best ways to do that is just by any part of the company, any part of the capital structure in that company,

the debt capital structure. That's interesting though. So in your universe that goes into the top of the model, is it each company's individual bonds or just the company? It is each company's individual bonds. We do also model in some of our machine learning. We model it at a company level just to make the data easier and the results are very similar. But typically and almost always the bonds cluster. So if the

company's cheap, all the bonds are cheap. You rarely get, you might get one or two bonds that are anomalous. And certainly those ones are, I mean, I do effectively choose bonds because there are some that come further up my list than others, but I mean, it's numbered. There's a thousand bonds. They'll be number 54, 59, and 62, right? They'll be right in the same range. Yeah. And then let's talk for a minute on, right, I don't even know where high yield spreads are, but they're, I thought near record lows, right? Tight, very tight. We call it tight. Yes.

So near record lows on high yield, we're at the zero bound on seemingly all treasuries around the world, government bonds. Like how do you, tons of people are out there. I've mentioned a few times on this part of like, right. It's the, the cliche is a return-free risk. So right. How do you approach the bonds overall at the zero bound or at these super tight credit spreads? Yeah. So I think the answer is you're not, I'm certainly not going down in risk. Right. I mean, I think, and now you're, you're at tights. So, uh, we we've looked a lot at this, right? We're, we're in an environment right now, which is typically associated with, um, you know,

tight spreads usually means pretty decent growth. Um, it, if inflation's going to happen, it typically happens when it starts when, when spreads are tight, right? Um, because the economy is actually inflation tends to happen when the economy is also doing really well. And so, you know, if you're in an environment where spreads can't go any tighter, I think some people sort of say, well, then why bother with high yield? Right. And I actually think that's sort of the, if you think about what you're trying to achieve and what I just talked about, that might be the time that high yield is what I do is the most, or investment is the most, is more attractive, right? And I'll tell you why.

And the answer is, we say, don't shoot the messenger, right? Spreads are telling you there's a lot, not a lot of return in the market overall, right? It's not just, high yield does not exist in isolation. You don't have stocks at PEs of five and spreads at record tights. No, you have stocks at PEs of five and spreads at record wide. They're really attractive, right? Then you have stocks at PEs of 30 and spreads are really tight, right? That's how the world works.

Everything's core. You don't get environments where spreads are really wide and stocks are super expensive at the same time. You don't get environments where stocks are super cheap and bonds are really expensive. Everything is correlated. And so what you want. Taking contractual returns in times of high valuations is not a bad thing. You might still take losses, but they're going to look a lot better than the losses you're going to take in something that's high flying.

And so I think what spreads are telling you right now is that expected returns overall are low. And that is what they are telling you. And you have to think about it in, in, in that, in that way. But I will tell you this is it's, I'd much rather be investing with spread or five or 600. You make more money. So they are, they are low. And how do you square that with like the, the bot, this is where we're saying.

The bond market has kind of been wrong, right? Because they're saying this is a low return environment, yet you're getting 50, 60% returns owning the equity side. So yeah. Well, yeah. And which has been incredible, right? The bonds were totally right in the beginning. And then there's just been this huge run.

I think we're in, you know, we're in an environment where valuations across of everything are very high. And whether I don't have an opinion on which way it goes. Yeah. I mean, I certainly, I find that it's easier to sort of stick to your knitting on that. I mean, I think, but I think when you look at the market environment right now, and you look at people are saying, we don't, we have no, is it sort of an inflationary crack up? Is it a deflationary boom? I don't know.

I actually, I don't have an opinion. I think, find that difficult, but I think that's when I say, you know, you have buckets to do different things, right? This is not your inflationary bucket. This is not what this does, right? This is not your growth bucket. It's not what it does. This is your protect your assets bucket. And so I think for what I do in this, that's what I focus on. Protect them or generate a yield? And generate a yield, but it's a contractual return asset. So that's what it does. The nature of what it does doesn't change based on where the spreads are. It does change your expected returns. of those bonds up, yields down. Yep. Any part of that company they want. So it's not as clear that there's a 80 PE in the bonds, right? I mean, it may be clear to you, but from looking from afar,

it's hard to see that. Yeah, and the high-yield spread is a really excellent way to look at. The way you should think about high-yield spreads is risk tolerance in the market. How much risk are people willing to take, right? When spreads are low, they're not demanding a lot of risk compensation for taking risk. So they're not compensated for taking risk.

That's what it's telling. You got any thoughts on what's going on with Evergrande? We're recording on the 21st here. Yesterday, big sell off the market, kind of bounced back but does that proof that in china at least like the high yield and the reach for risk got a little out of hand that's a that's a realist i'm gonna i'm gonna spare everybody my thoughts regurgitated from twitter threads on on everything i don't know i don't really, it's not my area of expertise. It is real estate though. I mean, remember that you could talk about high yield, but that is fundamentally a

real estate issue. And we've seen, that's a different kind of bubble than I usually deal with. Yeah. Which is interesting though, right? If you have high yield on top of different, right? We talked about oil and gas, high yield on top of real estate, high yield on top of a commodity play. So how do you view those different things of what am I getting with the business and what additional risks are there in the business? Yeah. I mean, commodities are sort of my background because I started off in energy. And so I am deeply familiar with the cyclicality of commodities. And yeah, there is more risk investing in those bonds. Generally, what you see is those kinds of business carry lower leverage, right? They carry less debt because of the cyclicality and

the market won't give it to them. When the market gives cyclical businesses lots of leverage, you can get issues like that, but sometimes not. I mean, it's not always. But yeah, that's certainly something that I do. It's interesting that it's very hard to model because the timeline is so different and it's so episodic. Right. And then sort of tied in there, I guess not with real estate, but so tons of capital available for these huge private equity firms that plow it back in, add leverage to the firms they're doing, spice them up, resell them. Any feelings on that? Is that getting bubblish? Do you care what's going on in those private companies? Yeah, we've written a lot about this. And so what's really interesting is that if you want to talk about opaque markets, private credit and private equity are very opaque.

Yeah. The debt trades among, you know, certainly it's not a retail product. And you can't. So what I do in high yield bonds. And by the way, so my background is this private, is leveraged loans as well. So I used to, as an analyst, I fed loans into collateralized loan obligations.

Okay, so I know this world very, very well. They could be great deals, but there's no universal database of private loan financial information. We don't know what it looks like. Now, the CLO structure where a lot of the lower, I would call them lower risk loans are put, is actually a very strong structure. I'm not one of these people out pounding the drum that that's going to blow up.

I think it's actually a very well-structured industry with analysts looking at the credit and doing real work. And you're saying there, I'm loaning my neighborhood private equity firm $5 million to go buy this business. I've actually analyzed the business. Yeah. And I'm taking that loan and putting it into a structured product that I'm then selling on to insurance companies.

It's not worth going into the details of that. But there's real work, real analysis. These are not ninja loans to unworthy borrowers in the mortgage crisis, right? This is people who believe they're going to get their money back. I think private, but I think like any competitive business, and this is now especially true of private credit, where they've started to go out and do loans directly to the private equity companies and hold the loans. And they're effectively hold the loans themselves. You know, it's competitive business, right?

You're going to tend towards taking too much risk for a little, too little compensation. And by the way, private equity is a very competitive business. And you're going to tend towards overpaying and putting too much leverage on a deal to win the deal. It is a very diverse set of investors in private equity. It's a very diverse, maybe less so diverse set of investors in private credit.

So I don't want to be out there painting the entire, both industries to one brush, but I would say that I think they're both very competitive with, you know, and you can see where leverage would get too high and pricing would get too low. Now, how does that play out over time? If you're going to trouble, you know, these are private funds that might be 10 year funds, right? So it just plays out in lower returns.

Right. Maybe wash you, which was on Twitter yesterday where they're 65% year over year return on their endowment only makes 45%. Right. Maybe WashU, which was on Twitter yesterday, where their 65% year-over-year return on their endowment only makes 45%. Right. Right. And so, well, I don't think the returns in the private credit are 65%. Exactly. Or also I chose very poorly. Yeah. Their whole endowment. Yeah. Yeah. Sorry, go ahead. No. And so I think that that is a very difficult to track part of the market right now with a lot of competition. And there seems to be a magical demand for private credit that didn't exist a few years ago. And I think it's a product that very much is in vogue. And what's really interesting about allocators, right, is that their list of where they'll go invest is sort of private equity, hedge fund, and then for a credit allocation, private credit, right? There's no public bonds.

There's no treasury, right? And so you go to look on the mandates page. Bloomberg has a mandates page. You go to look at it. And there's literally not a click box for normal credit, right? That doesn't exist. It's just private credit or distressed or distressed. And so I find that really telling.

Let's just quickly define private credit for the listeners. Yeah, so private credit. So private credit. Yeah, yeah. You want to go? Yeah, private credit is, let's say I am a large lender, right? I'm a private lender. I'll do like Ares. I didn't work at Ares, so I'll use Ares because Ares is a good example. Somebody's done this for a long time. He works there. He might listen to this episode. Hey, Doug. Yeah. So, so Ares, who has done middle market and private lending for many, many years, right.

We'll go out and you are a private business. That's not public. You run a chain of physical therapy shops, right. And you want to take out a loan at two times EBITDA or five times EBITDA, whatever it is. You could go to a bank or you go to these private lenders and the private lenders would lend you the money, but it actually just act in the same way that a bank would. Now you're a private equity firm now, right?

And you do buyouts and you want ease of close and ease of transaction, right? So you don't want to go to a bank and then it's going to sell it onto a bunch of people, right? You have to go through the whole roadshow and advertise your deal with everybody it is. You go to a big private lender who can write a $100 million loan. You can get a $200 million, $500 million loan from one place and close it. That's sort of the promise of private. Yeah. On a Sunday night. On a Sunday night. I actually did a deal on a Sunday night.

I know myself. And then I think Aries is actually owned by like Toronto teachers pension or something. Right. So it's actually like an investor loaning their own money. Yeah. So it's, and by the way, their own money. Yeah. And by the way, a lot of these private lenders are owned by private equity now. So it's a whole ecosystem. And yeah.

Just so not to be confused, for a second, I was thinking peer-to-peer credit. That's a whole other ball of wax. A whole other ball of wax. What thoughts on that? I have no thoughts on peer-to-peer and I haven't really dug into it as much.

I think it's difficult. And, but I, you know, I, I'm sort of all for, uh, innovation in the space. So, yeah, that seems like a perfect place for them, right? It's the same thing as companies and you get, uh, maybe individuals or whatnot. Yeah. But a company is, I mean, it's actually a little different because people don't tend to have audited financials. Yeah. Or, or a price past transactions, right? Correct. And I'll keep going with my two more overall bond market questions. This one's not bond market, but yield farming on crypto. Any ideas on that or thoughts? I would just say I've puzzled over some of the articles about it, just out of interest, right?

Because anytime I see, the general rule of thumb is that if treasuries are at 1% and high yields at 4% or 5%, right? And somebody is offering you 9% or 10%, something's different. That's a huge spread. And there has to be either- Some of these are like 60%. You stake this and pull this over here and annualize, right? So that's, I mean, I look at that

and I think equity risk, just from a pure numbers standpoint, right? So- Or counterparty risk. And counterparty risk or something. There's something in there that would make- Now, people make fortunes by identifying these arbitrages, right? Where they say, okay, actually, it isn't as risky as 9% would imply, and therefore, it's great.

The answer is, I don't know, but my risk senses go up when I see a 9% to 10%. Yeah. You're not throwing a bunch of it into the fund regardless. And then lastly, the debt ceiling, any thoughts on that to show? I have a very strong, well, I tend to believe that one of the big investors' mistakes is to conflate political headlines with investment returns. And that includes elections and things like that. And I tend to just stay away. I tend to not opine on that at all. So the answer is I don't know. I'm giving you very boring answers here. Sorry. Yeah. Well, in theory, right. It could make treasuries go up or something,

but it's like when it happens, I'll deal with it if it happens. Yeah. I'll react. Yeah. It seems like political theater mostly. And then I just wanted to ask, generally, what do most, where we're saying most retail can't buy bonds, but what do most normal investors get wrong about bonds? And then what do most institutional investors get wrong about bonds? Yeah, I mean, I think I'll start with retail investors about bonds is that there's a difference between treasuries and corporate fixed income, or fixed income. And that includes, I didn't even put munis in that bucket, and somewhat. And then I'd put structured credit, I'd put BDC, I'd put all this. Anything that is tied to a

riskier asset is something that you should think about as how much risk you have to make, first and foremost, about the risk you're taking in that asset and whether you're going to get paid back. Treasuries are very different. And then they act, actually, they move opposite of almost every asset. And so that needs to be thought about differently in your portfolio. Treasuries have historically acted as a very good counterbalance to your portfolio in a recession. That is what they do really well. That is their purpose. If you're going to own treasuries in your portfolio, that's what they do.

Credit, non-treasury stuff, all the other debt, right, is really about having something that's not as, has historically had as high drawdowns or money losses as equity, right? That's contractual. So you're probably going to get paid. You're very likely to get paid what you're promised. And yeah, and it's, and so, especially for investment grade, right? And not necessarily for something lower rated. And so where you're trying to earn a little bit of extra money in the money that you probably didn't want to put into the riskier assets anyway. So what I'd say is the mistake that investors make is trying to make high returns in something that should be a more defensive asset.

That's why you're using it that way. So what institutional investors get wrong, I think, is they've overlooked the beauty of treasuries and they've overlooked the beauty of corporate credit at times in favor of the shiny new toy of private credit and of, structural credit is actually pretty good um but um you know in favor of other other things and they've tried to run away from doing the boring stuff right in favor of you know the rocket scientists doing long short credit funds

right and i think that's not even a checkbox on the Bloomberg. Come on. Right. Right. So I think that's the mistake is that you don't maybe, maybe just don't even waste your time, you know, do something boring and then move on and spend all your time on the, on the risky stuff. I love it.

Any other final thoughts before we go and do your, some of your favorites to end it up? No, thank you. This has been, it's been really fun. Yeah. Yeah. So my first favorite, favorite Bond guru. I'm going to forget her name and I should have looked it up right before I got on this. There's a, there's a, well, I mean, I, I, I do, I do like God. Like I do like listening to him just cause he's, there's um uh well i mean i i i do i do like god like i do like listening to him just because he's controversial and he also has opinions on on everything and i like people have opinions on everything even if they're yeah even if they're wrong um was that gun luck you

said gun luck yeah i can like yeah and then um there's a woman at um at uh at um oh i'm gonna forget her name give me a second and i'll tell. I'll circle back at the end of the answer. It'll pop into my head. You weren't going to reach all the way back to Bill Gross. I only know two, Bill Gross and Gunlach. Best book on credit. Is it the Pinkity one that I still haven't read that's sitting here staring at me with like, it's... Ante Ammanen's Expected Returns.

His AQR guy, he wrote a book called Expected called expected returns has one of the best credit sections in it uh i think he nailed most of the key themes and credit there it's a big it's a big tome it's more of a reference book but that is a an excellent resource for equity too by the way it's mostly about it's not mostly about bonds at all but they the bond part is excellent nice we'll put that uh we'll look that one up um favorite i was gonna usually we have someone in new york or london so it's gonna ask your favorite restaurant but in in uh litchford what's the name of your town again i'm gonna i'm gonna go new york i'm gonna go at 120th street and uh i think it's i think it's amsterdam masala ethiopian it's great ethiopian you eat with your hands yeah nice um we had a good one over here in chicago on uh

wells street like in old town over there um so favorite chicago bar back when you were around these these parts where you are was it the roscoe pub or i used to love going up there i don't know village tap yeah village tap it was a village tap that's it yeah got it um and were you a northwestern fan or dartmouth football or what did you get converted yeah i've never i've never been a big sports guy so i played sports i didn't do i didn't watch them all right not you're not missing much with uh with northwestern uh and then all our guests as favorite star wars character oh there's um uh you know i i should have known this before i came on and i forgot to do it but um oh man i would have to say i mean i, I have to go to Ewoks. I'm sorry. The Ewoks. All right. I love it.

I used to know that chief guy's name. It'll come to me in a minute, but yeah, all of them collectively, that's not going to go over with the, with the heavy fans here, but I like it. Yeah. People, the hate. I'm pulling it out of my deep darkest memories. So. All right. Well, it's been fun, Greg. Thanks so much. And best of luck there in Western Connecticut.

We'll look you up if I'm ever in that area, which seems unlikely, but maybe if I'm in Albany or something. It's not really patched through here. Yeah. It's kind of Saratoga-ish, kind of close to that. No, no, no. I'm south of, almost up in western mass yeah so i'm up in the um like salisbury areas up here mitchfield kent that area if any of your listeners know where

those places are all right well i'll do a road trip visit ben on his farm and then you up north there great all right great great talking to you. Thank you very much. Thank you. The derivative is brought to you by CME group. CME group is the world's leading and most diverse futures and options exchange. For more information and educational resources about futures and options, visit CME group.com. You've been listening to the derivative links from this episode will be in the

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