Invest Like the Best with Patrick O'Shaughnessy
00:49:04 · Dan Loeb
[00:49:04] S2: We actually started an insurance company, De Novo, in 2010. We were backed by myself, Kelso, and Pine Brook, and we started a Bermuda based reinsurance company. And the thesis there when we started was we have an executive that will do these reinsurance deals, we will invest the float all in third point and in treasury, so sort of a barbell, and we can defer taxes, get leverage on our capital. Greenlight Re at the time was trading at a 140% of book value. I thought this would be the future, we'll just keep raising money for this vehicle. The problem was that the reinsurance business took a sharp turn for the worse. And we had some good years at third point, but we were like scrambling to offset the losses from the insurance company. About three years ago, I said, well, we had the right idea, but we had the wrong insurance vehicle. We were doing PNC insurance. We really should have just done plain vanilla annuities. Problem is the annuity business, though, can invest in the hedge fund, it can only do credit. So a few years ago, we started a reinsurance company. We've done two things since then. We merged our reinsurance company into a closed end fund that we had in The UK, Third Point Offshore Investors. We reincorporated that business from Guernsey to Cayman, and we repurposed it from a closed end investor in my hedge fund into an insurance company. Still has some of the investment in the hedge fund, but it now owns our reinsurance company. That company will then be in a position to do more reinsurance deals, issue primary annuities, And then third point manages the money in private credit, structured credit, whole loan mortgages, some direct lending in real estate, some investment grade corporate debt and private investment grade. But we also put the equity of that business in things like the junior tranches of structured financings, but we'll also be using it for growth equity investments.
00:51:17 · Patrick O'Shaughnessy, Dan Loeb
[00:51:17] S0: What's the hardest investment lesson that you've ever learned? [00:51:20] S2: I would have to say our investment in FTX. It looked great. The company was growing fast. We could verify it all on the blockchain. We felt like we had some good company on the cap table with us. We did. Turned out that it wasn't what we thought it was and it was painful because, you know, I think in general, one of the amazing things about our capitalist system and that venture backed companies have this incredible ability to go out and raise capital for interesting ideas. Most people are good actors with good intentions. We've rarely had any kind of mishap. Doesn't mean that you don't do very careful due diligence. I will say that now our due diligence process, we definitely like check bank balances and do like the most basic due diligence that probably would have turned stuff up on this. If he hadn't ended up being a crook or very sloppy, the venture investments he made would have [00:52:18] S0: It's like the best venture investor
00:52:18 · Patrick O'Shaughnessy, Dan Loeb
[00:52:18] S0: It's like the best venture investor [00:52:19] S2: of this Cursor, Anthropic, Solano, everything he did, I mean, the guy had a great nose for value. So that was probably the toughest. The mistake that we made within the last two years, we obviously were looking for and we've taken some great shorts and things that are being disrupted by AI. But where we've made the mistake is thinking that companies that were controversial, but we thought we knew better, that AI wasn't really going to affect this part of the info services business, or these guys had proprietary information. That's where we've made some mistakes. There probably will be a shakeout there where there will be some phoenixes that rise from the ashes, but that's been the investment lesson of the last year or so. [00:53:06] S0: How do you guide your team through this? You've got a bunch of extremely smart, ambitious, I'm sure hungry analysts, investors, etc. What do you tell them going into this crazy uncertainty?
00:53:06 · Patrick O'Shaughnessy, Dan Loeb
[00:53:06] S0: How do you guide your team through this? You've got a bunch of extremely smart, ambitious, I'm sure hungry analysts, investors, etc. What do you tell them going into this crazy uncertainty? [00:53:18] S2: First of all, we all have to just start using it. The only way to get good is this is just to use it. And we have people at different levels. We have some experts that we have brought on that are native computer scientists that are coming at this as expert AI people who are working on specific projects, they're coaching the team, but we're also encouraging everyone to use AI. We do hire system integrators. We have a system integrator working with us. But I'm obsessive about continual improvement, both the individual level and organizationally. The Claude really enables you to be an individual self improver. It makes you very autonomous. It'll give you back whatever you put into it. You put a lot of time and energy and effort into it. So I'm encouraging everyone to do that. And I think collectively, we're all sharing best practices and some people are running agents overnight and using tons and tons of tokens. Other people are probably more like me just using it more for queries and things, but we're all very involved with it. [00:54:28] S0: Where do you feel like you're in the firm's view is the most different from your peers these days? You're close with lots of the great investors of this era that run firms like this one. Everyone's trying to do the best they can. Where do you feel the most out by yourself or distinctive in how you view the world?
00:54:28 · Patrick O'Shaughnessy, Dan Loeb
[00:54:28] S0: Where do you feel like you're in the firm's view is the most different from your peers these days? You're close with lots of the great investors of this era that run firms like this one. Everyone's trying to do the best they can. Where do you feel the most out by yourself or distinctive in how you view the world? [00:54:45] S2: I think we're maybe less pessimistic that there's going to be some kind of apocalypse from AI. I'm still pretty optimistic that it will create opportunities and create jobs and create net jobs. Obviously, it'll lose in some places, gain in other places. The differentiator for us is that we can always default into credit investing. We haven't been in a scenario where we had like a real credit cycle, but I'm very comfortable investing in incredibly stressed times. We really haven't had any since 2020. So going back to like COVID, the thing that we got really right, because we had a good year that year, but it wasn't because we piled into stocks, piled into IG credit. Answering the question a little bit differently, having that credit arsenal in our back pocket. [00:55:32] S0: Why do you suppose more places don't do that? It seems like it would be an obvious thing to provide an advantage, have more options for expressing a view.
00:55:32 · Patrick O'Shaughnessy, Dan Loeb
[00:55:32] S0: Why do you suppose more places don't do that? It seems like it would be an obvious thing to provide an advantage, have more options for expressing a view. [00:55:40] S2: It's so different. I grew up in credit, I worked on a trading desk, you don't just electronically trade bonds, you have to have relationships with these firms. Part of the reason for expanding into the CLO business is that we had the high yield market, trillion and a half dollar market, pretty well wired. We were sort of dabbling in the broadly syndicated loan market, is another trillion and a half dollars, But we also have eyes on a $6,000,000,000,000 structured credit market. But these are not markets that lend themselves to tourism. When the opportunities really come up, we're already there with the relationships and the understanding the companies. [00:56:21] S0: What makes a great analyst today in any way that's distinctive from what made a great analyst twenty years ago?