00:26:46 · Alex Altmann, Tracy Alloway
[00:26:46] S1: And there's definitely kind of almost like an echo chamber within that certain ecosystem. You think about the rooms that people are sitting in. So my suspicion is that it's not going to be these set of results. And that may be we have to wait till the new year that we get some kind of potential temperament of the enthusiasm. But Google kind of set this all off again for the next wave because on the CapEx side, it was actually the last set of results where they said it's going to be, I forget the exact wording they used, but they were talking about CapEx being significantly higher. And that got everyone enthused once again and got them all G'd up. [00:27:29] S0: Well, Oracle just said at its investor day that it was going to limit its additional fundraising to, I think, $ 20 billion through May. So we might be getting close to that. But again, the reaction so far is this is a good thing and the build-out can continue as long as people are raising a reasonable amount of capital, I guess. [00:27:49] S1: Yeah. And that kind of goes back to maybe just a slightly more holistic market view, which is This almost S & P does nothing because what's good for hyperscalers will be bad for memory. So you just get this constant violent rotation. And I call it like a knife fight in a phone booth, you know, for all these funds that have to run long, short portfolios.
00:27:49 · Alex Altmann, Joe Weisenthal, Tracy Alloway
[00:27:49] S1: Yeah. And that kind of goes back to maybe just a slightly more holistic market view, which is This almost S & P does nothing because what's good for hyperscalers will be bad for memory. So you just get this constant violent rotation. And I call it like a knife fight in a phone booth, you know, for all these funds that have to run long, short portfolios. [00:28:10] S2: It's a nightmare. I'm glad you asked this because this is a question that I wanted to ask you. So it's like we look at the core weaves and there's this anxiety and we see all the volatility. We're seeing volatility everywhere except our measures of volatility. So if we look at realized volatility, it's pretty low. If we look at the VIX, it's not that high. Can you explain why it is that there's all this anxiety about certain parts of the most important trade in the entire world? And yet, when we actually look at the way we measure volatility, it looks very benign. [00:28:41] S1: Yeah, I've been asked, this is probably the most asked question that I get in some way, shape, or form. And there's two parts to the answer, right? There's a structural part. And then there's a really technical part. [00:28:53] S2: Yeah, let's hear it. [00:28:54] S0: All right.
00:28:54 · Tracy Alloway, Alex Altmann
[00:28:54] S0: All right. [00:28:54] S1: So the structural part has got to do with the fact with the way that money is deployed these days. So obviously, equities are meant to be a long-only product, really. But in this day and age, they're not. We've got 2020, the AUM deployed in multi-manager funds was about $ 300 billion. And today, it's in excess of a trillion dollars. And if you think about the leverage- This is the pod shop, seriously. [00:29:21] S0: Yeah. [00:29:21] S1: I mean, not, not just pods, but obviously let's just think about like that sort of ilk. [00:29:26] S0: Yeah.
00:29:26 · Alex Altmann
[00:29:26] S1: And it makes perfect sense, right? Because if you, especially in a higher interest rate environment, high interest rate environment is perfect if you're running a long short strategy, because I deploy money on my gross long side and on my growth short side. And actually I'm not really deploying. I'm deploying units of risk, but the actual capital being deployed is really only what I'm actually posting as margin on my long and my short member. I can leverage that too, through the prime prime businesses. So actually what I'm doing is I'm taking a large chunk of capital and I can put that into say a high interest bearing, a high interest instrument. Mm-hmm clip a very nice coupon. And then I try and generate alpha on that gross capital deployed. That's the business model. And it's for the most part, a very good business model, right? The problem is, is that you've effectively tripled more than tripled the AUM plus obviously leverage. And the number of securities you can trade has stayed roughly the same or actually shrunk over time. So that creates crowding out. So how do I how do I organize or how do I mitigate that crowding out effect? Well, I've got all kinds of cool risk parameters. So, you know, Barra, I'm sure you've heard, or Axioma, just, you know, all these different style factors, quality, value, size, growth, you know, all these different things. You would have heard us talk about them quite a lot. They've become ubiquitous and obviously funds spend an inordinate amount of time and computing power trying to neutralize those factors. So that's cool. And you try and isolate the idiosyncratic risk of whatever you're trying to get. Now, The problem is, is that at the end of the day, everyone's still doing this, which means all you're creating is different kinds of crowding. And so that's why the volatility isn't showing up so much at an index level, right? Because ultimately a lot of this AUM is kind of index agnostic, so to speak. And you're seeing the violent factor rotations happening because ultimately you've got a huge amount of crowding sitting there. The one thing that leads me into sort of the technical aspect, which is the one thing that I think a lot of funds have not yet been able to solve is the AI factor, right?
00:31:33 · Joe Weisenthal, Tracy Alloway, Alex Altmann
[00:31:33] S2: Because you could be. [00:31:34] S0: Everything either is or isn't AI now. [00:31:36] S2: Right, exactly. [00:31:37] S1: And this is a problem, right? It's dawned on me recently because I've been asked a series of questions by investors specifically along the lines of, have you managed to map the AI factor? And the answer is no. Because the AI factor is changing all of the time. The betas are changing all of the time. Remember the beginning of the year, you had a lot of people that wanted to be short software. Now software is trading close to 12 month highs. And so the idea of being short software, it was part of the AI factor. And now is it so much? Well, not necessarily unclear. So because the narrative is shifting, the factor of AI is shifting too. And that in turn complicates the ability to funds to actually try and hedge that. And the bottom line is, is you're either long AI or you're short AI, right? And let's face it, the past three years, being short AI probably hasn't been a particularly lucrative trade. [00:32:27] S2: By the way, Tracy, in the time that Alex was giving us, that Alty was giving us this great answer. [00:32:33] S0: You sorted out your entire weekend schedule using ChatGPT.
00:32:33 · Tracy Alloway, Joe Weisenthal, Alex Altmann
[00:32:33] S0: You sorted out your entire weekend schedule using ChatGPT. [00:32:36] S2: No, in that time, we just got earnings from Alphabet and Microsoft. And it's very interesting. Alphabet down 7.9%, revenue X-TAC misses estimates. Microsoft jumped 6.4% after Q1 cloud revenue tops estimate. So you get two gigantic stocks. They both have very violent reactions. But if you're the indexed investor on net, looks like it all kind of washes out. [00:32:59] S0: Yeah, it does indeed. [00:33:00] S2: But man, some of these, like these numbers are incredible. Microsoft Q1 Azure Revenue X, Azure. This is their cloud platform. Azure. What's your guess? You're not looking at a terminal the way I am. What do you think it got? This is fun. [00:33:15] S1: The bokeh was, I think, 47% growth. [00:33:20] S2: Yeah, man, you're really good at your job. So the official estimate that we had collated at Bloomberg was 44.8%. They hit 48%. 48% growth for these gigantic companies. That's a good number. [00:33:29] S1: That's unbelievable. [00:33:35] S2: Cloud revenue at Google was $ 30 billion. I'm not seeing what the growth number was. [00:33:41] S0: But these are unreal.