WEBVTT

NOTE Sentence-level transcript of https://www.youtube.com/watch?v=y2dyD6slKxE

NOTE One cue per sentence. Cue ids are the line anchors on /transcripts/y2dyD6slKxE.html. A cue ends where the next begins, or 2 s after its last word.

s1
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[music]

s2
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I am the founder and former CIO of Candlestick Capital Management, a long-short equity hedge fund based in Greenwich, Connecticut.

s3
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Before founding Candlestick, I was a partner and portfolio manager at Surveyor Capital, which is a division of Citadel.

s4
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Very cool.

s5
00:00:32.800 --> 00:00:33.840
Thanks, Jack.

s6
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So, the reason we did this this way is we've had this conversation before, and I think this is one of the most enlightening folks to chat with, given that Jack has spent his career

s7
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picking stocks in an environment that's changing more than it ever was before.

s8
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So, we'll treat this really as a as a fireside chat.

s9
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So, Jack, paint the picture for us.

s10
00:00:53.120 --> 00:00:57.840
What does fundamental investing look like in the age of AI, say 5 years from now?

s11
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Well, it's it's hard to say.

s12
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Like, long-term stock picking, I don't believe it's really going to change much at all.

s13
00:01:06.240 --> 00:01:13.400
There's always been a mosaic, and there's always been alpha creation by finding a divergent view.

s14
00:01:13.400 --> 00:01:16.360
So, that isn't going to change at all.

s15
00:01:16.360 --> 00:01:18.520
I think that that still will stay the same.

s16
00:01:18.520 --> 00:01:30.520
Now, how people synthesize all of the information and where table stakes go to and to learn in terms of like what everybody has, and then how you synthesize that data

s17
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is going to change completely.

s18
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The roles the traditional roles of say a portfolio manager or an analyst are going to be completely thrown upon their heads, and I still think it's like too early to say what that's all going to look like

s19
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as these tools are just so new, especially to the users.

s20
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You got a lot of people doing a a few things, but I it's just not clear to me that it's like we're there and oh my gosh, it's going to be these new things.

s21
00:02:01.092 --> 00:02:10.292
Like we have we have a bunch of other things to kind of talk about, but um I think it's going to be super fascinating to to to watch how it all plays out.

s22
00:02:10.292 --> 00:02:11.372
Very cool.

s23
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So, at Citadel, you had 18 people covering 400 stocks, and at Candlestick, you had 30 stock pickers.

s24
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Could one great analyst cover all 400 by 2030?

s25
00:02:21.372 --> 00:02:26.292
So, the biggest issue is is is humans are still the bottleneck.

s26
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I mean, like at the end of the day, uh you have to get the information into your head.

s27
00:02:33.612 --> 00:02:38.972
So, it's really all about sort of how man and machine can work together.

s28
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Um investment management is a time management exercise.

s29
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What I mean by that, if I spent all of my time working on one stock, that'd be great.

s30
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I'd probably know better than anyone else in the world, but like if there wasn't anything to do in that stock, I'd be kind of there there isn't much to do.

s31
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Well, if I do two, well, then I have half as much time, and and so forth until I go.

s32
00:03:04.012 --> 00:03:12.292
So, you start getting diminishing returns on how much time you could spend on any particular stock.

s33
00:03:12.292 --> 00:03:15.812
So, you know, what can AI do?

s34
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Can AI help me cover more names?

s35
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Perhaps.

s36
00:03:19.772 --> 00:03:38.252
Um maybe it allows me to raise the table stakes on what I just kind of like have as a general knowledge, um because that work used to take me hours to prepare to get me ready for what it was, and now maybe the, you know, an AI program can, you know, help me prepare a lot of that

s37
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work in 5 minutes, where it would used to take me 6 to 8 hours.

s38
00:03:42.332 --> 00:03:45.132
Um So, that allows me to do other things.

s39
00:03:45.132 --> 00:03:53.972
Again, like it's a very competitive industry, so it's not like if I get rid of all these people, or if I have like five analysts, whereas before I had 30,

s40
00:03:53.972 --> 00:04:04.014
um yeah, maybe those people can do more, but now all of a sudden this opens up other time this opens up time that I could spend doing either more proprietary

s41
00:04:04.014 --> 00:04:13.054
research, channel checks, more sort of like industry backdrop work because again, like you're going to need to find these divergent views.

s42
00:04:13.054 --> 00:04:20.094
So, it's like if I do the exact same thing I was doing before and it's like, "Hey, wow, I can get my work done in 2 hours."

s43
00:04:20.094 --> 00:04:30.734
Well, someone else is going to be still working 16 hours a day trying to find like that extra thing that's going to that that that's going to make you money.

s44
00:04:30.734 --> 00:04:45.414
Because, you know, just doing this stuff is is obviously like what we used to pay an analyst to do, you know, a year or two ago is not what we're going to be paying an analyst to be doing, you know, in a year.

s45
00:04:45.414 --> 00:04:45.854
Very cool.

s46
00:04:45.854 --> 00:04:53.134
And on that, what's What is something today that a junior analyst does that you think will be absurd if they're still doing in 5 years?

s47
00:04:53.134 --> 00:04:54.054
Well, it's funny.

s48
00:04:54.054 --> 00:04:57.654
Like it's like, "Oh, you're you're not going to be reading 10-Ks.

s49
00:04:57.654 --> 00:05:00.334
You're not going to be reading, you know, transcripts."

s50
00:05:00.334 --> 00:05:02.014
I actually don't believe that to be true.

s51
00:05:02.014 --> 00:05:04.578
Like if you're truly close

s52
00:05:04.578 --> 00:05:04.894
[snorts]

s53
00:05:04.894 --> 00:05:09.934
to a name, you're going to still need to like process a lot of that information.

s54
00:05:09.934 --> 00:05:20.134
Now, you might be able to get like summarized versions that can cut down the time it takes you to do those things, but you still need to get that information sort of into your head.

s55
00:05:20.134 --> 00:05:26.254
Like we used to have a lot of analysts that would be going through a lot of like sort of like big data and things like that.

s56
00:05:26.254 --> 00:05:35.374
I definitely think that that can sort of be outsourced and that'll be super easy to you know, I would be surprised if if a lot of these guys aren't necessarily doing that stuff.

s57
00:05:35.374 --> 00:05:49.774
But what I believe the AI is going to do or the agent or whoever it is is going to be pushing you in the right direction to work on the right names.

s58
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Like I said, this is time management.

s59
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It's all about how do I know to work on the right things?

s60
00:05:54.694 --> 00:06:01.814
And that's where the winners are going to is going to be is is the people who can figure out how to use these tools to get you to spend

s61
00:06:01.814 --> 00:06:02.234
the right amount

s62
00:06:02.234 --> 00:06:02.454
[snorts]

s63
00:06:02.454 --> 00:06:08.015
of time working on potentially finding like a divergent view.

s64
00:06:08.015 --> 00:06:08.895
Very cool.

s65
00:06:08.895 --> 00:06:15.095
And on that big data side, so analysts spend a huge portion of the week finding, clearing, and checking data.

s66
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Cleaning and checking data.

s67
00:06:16.535 --> 00:06:20.535
When that goes away, do they get smarter or just busier?

s68
00:06:20.535 --> 00:06:22.524
I I like

s69
00:06:22.524 --> 00:06:23.095
[laughter]

s70
00:06:23.095 --> 00:06:24.255
like anything.

s71
00:06:24.255 --> 00:06:28.055
Well, now that we have extra time, we'll be looking for more data.

s72
00:06:28.055 --> 00:06:30.135
We want more information.

s73
00:06:30.135 --> 00:06:33.095
Uh I need to be doing more proprietary research calls.

s74
00:06:33.095 --> 00:06:34.935
I need to be doing more industry builds.

s75
00:06:34.935 --> 00:06:37.055
I need to be doing more and more things.

s76
00:06:37.055 --> 00:06:41.975
And it's just going to raise the bar on the amount of work that everybody's doing.

s77
00:06:41.975 --> 00:06:47.175
And so, when everybody's doing all the exact same things, that just becomes the table stakes.

s78
00:06:47.175 --> 00:06:48.735
It's like it's just automatic.

s79
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I have to have it.

s80
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I can't I you know, I I I'm not a I'm not competing.

s81
00:06:54.015 --> 00:07:00.975
And then it's all about finding that next layer of information um about how there's going to be a divergent view.

s82
00:07:00.975 --> 00:07:02.015
It's like that's that's it.

s83
00:07:02.015 --> 00:07:03.655
That's part of the mosaic.

s84
00:07:03.655 --> 00:07:07.455
And it's not like you're just finding this one data point, and that data point's going to be the thing.

s85
00:07:07.455 --> 00:07:15.415
The investment mosaic is all about finding three or four sort of data points that all sort of are lining up that aren't necessarily coming from the same place.

s86
00:07:15.415 --> 00:07:21.695
And that's generally, I think the widely accepted view of how alpha is is is created.

s87
00:07:21.695 --> 00:07:22.655
Very cool.

s88
00:07:22.655 --> 00:07:24.215
You have a pretty interesting background.

s89
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You started off as a CPA.

s90
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Would you ever sign off on a number a model produced without seeing where it came from?

s91
00:07:31.295 --> 00:07:32.455
No, no, no. Absolutely not.

s92
00:07:32.455 --> 00:07:40.735
I mean, that's like actually the most exciting thing about what's going on at Kepler is just our ability to, you know, audit every single number.

s93
00:07:40.735 --> 00:07:54.735
And, you know, when these tools start running amok and you you Whenever we made mistakes, cuz we had humans entering these things, it was very rare, but like the most important thing for us is that we got the numbers right.

s94
00:07:54.735 --> 00:07:56.855
But still, mistakes were made from time to time.

s95
00:07:56.855 --> 00:08:02.175
And like, you know, millions of dollars could be lost off of a single sort of like data entry mistake.

s96
00:08:02.175 --> 00:08:12.337
Um It's funny like I there's no way we're going to let AI, you know, tell us exactly what to do, run trading algorithms, all these kinds of things, if you can't trust

s97
00:08:12.337 --> 00:08:16.217
the information cuz then all of a sudden it could start it could run a muck it could be anything.

s98
00:08:16.217 --> 00:08:31.697
Like the the the accuracy of the numbers and your ability to audit it um is is absolutely the most important part of this entire process of being able to sort of like trust some of these things and

s99
00:08:31.697 --> 00:08:44.377
you know, I know a lot of people that are using these tools today and so they'll ask, you know, Claude or somebody to to build help them build a model and stuff and then they still have to go through and audit the numbers to make sure that that they're all there.

s100
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So it's like are we really

s101
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[snorts]

s102
00:08:46.137 --> 00:08:48.217
saving that much time by automating this?

s103
00:08:48.217 --> 00:08:57.937
It's it's I think everybody assumes oh it'll get better it'll get better but again like when you know you can actually audit everything it's I think that's going to be just a a huge

s104
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important factor.

s105
00:08:58.817 --> 00:09:00.777
It's it seems obvious

s106
00:09:00.777 --> 00:09:01.297
Yeah.

s107
00:09:01.297 --> 00:09:05.297
and easy but uh it's apparently according according to the

s108
00:09:05.297 --> 00:09:07.897
No, it's not so.

s109
00:09:08.377 --> 00:09:08.697
Awesome.

s110
00:09:08.697 --> 00:09:12.097
So for a lot of the AI companies here, Jack is the buyer.

s111
00:09:12.097 --> 00:09:15.697
So like this is the person you convince at hedge funds to buy software.

s112
00:09:15.697 --> 00:09:21.217
And so I'm curious, what part of your investment process would you refuse to let an AI vendor see?

s113
00:09:21.217 --> 00:09:35.017
So I'm the wrong guy to ask this question because like this is not my like security of of data and you know, like this is a total CTO question and so I have

s114
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a great CTO and like he's the guy who would let handle it and and he would sort of like be telling us.

s115
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I would be very nervous about any sort of internal um data.

s116
00:09:45.257 --> 00:09:54.377
Like listen, you you don't want anything to get out as long as you can kind of I don't even know what the terminology is I'll sound like an idiot in front of all you engineers but like,

s117
00:09:54.377 --> 00:09:57.057
you know, I don't want my stuff to go there.

s118
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Like

s119
00:09:57.366 --> 00:09:57.817
[laughter]

s120
00:09:57.817 --> 00:09:59.857
you tell me whatever that's called.

s121
00:09:59.857 --> 00:10:01.217
Data security isolation.

s122
00:10:01.217 --> 00:10:02.097
Yeah, exactly.

s123
00:10:02.097 --> 00:10:08.337
So I would want to make sure all of that um you know, is is is very critical.

s124
00:10:08.337 --> 00:10:19.698
And I mean I think to like where we're going is like so much of like what needs to happen first is I I think you know, Venu and I have been calling it like almost like this is like 1.0.

s125
00:10:19.698 --> 00:10:22.138
Is it's like we're working on the automation part.

s126
00:10:22.138 --> 00:10:23.618
We're going to get all these tools in there.

s127
00:10:23.618 --> 00:10:25.938
We're going to have all the data sort of built up.

s128
00:10:25.938 --> 00:10:35.338
But then we can actually like really start doing interesting things and we can use the tools to help the analyst to say, "Here's where you should be spending your time.

s129
00:10:35.338 --> 00:10:37.338
This is where it gets more interesting."

s130
00:10:37.338 --> 00:10:43.578
Um because again, it's all about It's Look, investment management isn't about doing earnings previews.

s131
00:10:43.578 --> 00:10:45.418
It's not about building DCFs.

s132
00:10:45.418 --> 00:10:46.378
It's not about that.

s133
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It's making money.

s134
00:10:47.978 --> 00:10:51.018
And so, you to make money, you need divergent views.

s135
00:10:51.018 --> 00:10:56.978
And to find divergent views, these are tools that help you identify those types of things, but they're not the output.

s136
00:10:56.978 --> 00:11:00.218
Um so, that's going to be like the real critical thing.

s137
00:11:00.218 --> 00:11:05.258
So, anything, you know, that you you feel like becomes proprietary in in your way of making money.

s138
00:11:05.258 --> 00:11:11.778
Now, one of the hardest things in investment management is you know, competitive moats.

s139
00:11:11.778 --> 00:11:15.938
Um like finding some sort of arbitrage.

s140
00:11:15.938 --> 00:11:17.538
They generally last pretty short.

s141
00:11:17.538 --> 00:11:21.938
You know, it's all very smart people, motivated, highly compensated.

s142
00:11:21.938 --> 00:11:29.418
And when someone else is making a ton of money, other people sort of figure it out and arbitrage gone.

s143
00:11:29.418 --> 00:11:29.722
Very

s144
00:11:29.722 --> 00:11:29.738
[snorts]

s145
00:11:29.738 --> 00:11:30.378
cool.

s146
00:11:30.378 --> 00:11:36.658
Once every fund has the same models, does edge come from better data, better questions, or better judgment?

s147
00:11:36.658 --> 00:11:37.498
I think all of it.

s148
00:11:37.498 --> 00:11:43.298
I mean, like it it's everyone is ultimately going to have all of the same information.

s149
00:11:43.298 --> 00:11:51.938
So, it's all going to be about how you prompt it, how fast you're able to sort of like, you know, combine man versus machine.

s150
00:11:51.938 --> 00:12:00.778
Like the way that we used to always think about is like we did this enormous amount of work that I think can actually be automated now.

s151
00:12:00.778 --> 00:12:04.418
Um that it didn't tell us, "Hey, go buy this stock."

s152
00:12:04.418 --> 00:12:09.458
It said, "Hey, this is something you should go spend a lot of time on.

s153
00:12:09.458 --> 00:12:13.819
This is a project where you need to go and like really educate yourself.

s154
00:12:13.819 --> 00:12:18.379
And that's when you go and you find something because not everybody is looking at that.

s155
00:12:18.379 --> 00:12:24.179
Everybody else is looking at all this other stuff and everybody has that sort of thing, but you're looking for that sort of needle.

s156
00:12:24.179 --> 00:12:34.259
You're saying like this might be interesting and if I can get myself if I can get more conviction around this and if this happens, we're going to make a lot of money.

s157
00:12:34.259 --> 00:12:35.339
And so that was it.

s158
00:12:35.339 --> 00:12:37.259
That was the purpose of all of the field work.

s159
00:12:37.259 --> 00:12:39.699
And so like what's going to happen is all those types of things.

s160
00:12:39.699 --> 00:12:49.299
And so it's going to be about how people utilize the tools to really identify these types of things that we can become special projects.

s161
00:12:49.299 --> 00:12:51.899
If AI can just do it, then I don't know.

s162
00:12:51.899 --> 00:12:53.259
I mean it's you know what I mean?

s163
00:12:53.259 --> 00:12:54.499
What do we need us for?

s164
00:12:54.499 --> 00:13:12.419
So um but I think it's going to be you know a way to use the tools to um to to to figure out where you need to do more research or find something sort of like different to do because there's an unlimited amount of things one can do.

s165
00:13:12.419 --> 00:13:14.179
And so it's like you say, "Oh, we'll just get great.

s166
00:13:14.179 --> 00:13:15.619
AI can do it all."

s167
00:13:15.619 --> 00:13:21.139
And it's like that's not necessarily true cuz it's like we got to find the right things and it's all about identifying those things.

s168
00:13:21.139 --> 00:13:25.899
It's about identifying them fast before everybody else.

s169
00:13:25.899 --> 00:13:26.619
Very cool.

s170
00:13:26.619 --> 00:13:28.179
So you launched a very successful hedge fund.

s171
00:13:28.179 --> 00:13:33.499
If you launch a fund in 2027, what's on your build list versus your buy list?

s172
00:13:33.499 --> 00:13:35.019
Well, I'd obviously buy Kepler.

s173
00:13:35.019 --> 00:13:35.699
I mean that's

s174
00:13:35.699 --> 00:13:36.539
I agree.

s175
00:13:36.539 --> 00:13:36.794
I agree.

s176
00:13:36.794 --> 00:13:38.794
[laughter]

s177
00:13:39.379 --> 00:13:40.724
Um

s178
00:13:40.724 --> 00:13:41.379
[sighs]

s179
00:13:41.379 --> 00:13:42.099
[gasps]

s180
00:13:42.099 --> 00:13:47.019
It So this one is like I'm not sure yet.

s181
00:13:47.019 --> 00:13:57.299
Um I Obviously, I know there's going to be a lot of changes in people's roles.

s182
00:13:57.299 --> 00:13:59.539
I still need senior stock pickers.

s183
00:13:59.539 --> 00:14:10.539
I may not need as many analysts, but I might need other people with different skill sets um that might replace like an analyst type of role.

s184
00:14:10.539 --> 00:14:15.901
Investigative journalists, people who can do like really deep project work.

s185
00:14:15.901 --> 00:14:19.741
Um, you know, maybe different sort of data engineers.

s186
00:14:19.741 --> 00:14:22.501
Like it's I'm not 100% sure what it's going to be.

s187
00:14:22.501 --> 00:14:23.861
It's going to be very different.

s188
00:14:23.861 --> 00:14:32.661
The way that our uh you know, kind of structure was it was a pyramid and it was like we had a ton of analysts presenting a ton of information

s189
00:14:32.661 --> 00:14:33.901
to senior stock pickers.

s190
00:14:33.901 --> 00:14:38.701
Senior stock pickers presented information to a couple of PMs and and the CIO on top.

s191
00:14:38.701 --> 00:14:39.701
And so that was it.

s192
00:14:39.701 --> 00:14:42.341
Like I kind of see it being a little bit more vertical.

s193
00:14:42.341 --> 00:14:46.461
Like I still need all of the I want the the producers.

s194
00:14:46.461 --> 00:14:50.861
I I want the the makers, you know, the people who are really there to make the money.

s195
00:14:50.861 --> 00:14:54.341
It's I don't know if I'm going to need as many of the preparers.

s196
00:14:54.341 --> 00:15:06.861
Um but I also like might want them because I might need more I might be looking for more proprietary information to help me fill you know, feed the beast or feed the machine

s197
00:15:06.861 --> 00:15:14.181
because that's those are going to be things that hopefully allow me to you know, find you know, like these divergent views that I'm looking for.

s198
00:15:14.181 --> 00:15:14.861
Very cool.

s199
00:15:14.861 --> 00:15:17.221
So who in your opinion does AI help more?

s200
00:15:17.221 --> 00:15:22.661
A five-person fund that can act like 50 or a 5,000-person fund that can act like five?

s201
00:15:22.661 --> 00:15:25.861
So it's funny.

s202
00:15:25.861 --> 00:15:37.970
The one thing that everyone needs to like get their heads around is every hedge fund has a different strategy uh whether hedge fund, investment fund, like any anybody who's investing

s203
00:15:37.970 --> 00:15:38.021
[snorts]

s204
00:15:38.021 --> 00:15:39.461
and they have a different mandate.

s205
00:15:39.461 --> 00:15:50.981
Some people are I am going to turn over my book 9,000 times a year and it's just like day trading and constantly high frequency and some people are like I buy and hold for 5 years.

s206
00:15:50.981 --> 00:15:57.261
And so it's all sort of about like what is your strategy?

s207
00:15:57.261 --> 00:16:01.661
Everyone's going to be able to do more with what they have.

s208
00:16:01.661 --> 00:16:03.141
And so but what's that going to do?

s209
00:16:03.141 --> 00:16:11.901
So if I take a five-person per uh team I would imagine because they only have five people there's slower idea velocity so it's probably going to be a more concentrated

s210
00:16:11.901 --> 00:16:13.741
type of strategy.

s211
00:16:13.741 --> 00:16:23.582
Um if I have more ideas to choose from, then in theory my hit rate should be better.

s212
00:16:23.582 --> 00:16:30.462
So, if I have like, all right, I cover 100 stocks, uh I got to have 20 names in my portfolio, so I'm picking 20%.

s213
00:16:30.462 --> 00:16:36.782
Well, if all of a sudden I'm covering 200 names, then I've got 10% of them needs to be in the 20.

s214
00:16:36.782 --> 00:16:41.062
If I'm covering 400 names, I only 5% are going into that book.

s215
00:16:41.062 --> 00:16:48.622
And so, the chances of me being right, but the research for those 400 has to be just as solid as the research on the 100.

s216
00:16:48.622 --> 00:16:50.422
So, the those are the types of things.

s217
00:16:50.422 --> 00:16:54.622
Now, I'm a 5,000-person firm or whatever, and uh that's a lot of people.

s218
00:16:54.622 --> 00:17:02.662
Um there's obviously there's probably you're a multi-strat, you're you're doing every asset class under the sun, so it's it's very different.

s219
00:17:02.662 --> 00:17:12.622
But again, idea velocity and the number of good ideas you have in your pipeline is paramount for an investment firm.

s220
00:17:12.622 --> 00:17:18.342
Like, when something works, the first thing you want to do is you want to get it out, so you can put something new in that works.

s221
00:17:18.342 --> 00:17:30.142
And so, like when when everything's going perfect, every time something works, I replace it with a new thing, and then I get rid of it, and then I replace that with a new thing, and then we and that's how we, you know, build alpha and build build returns over time.

s222
00:17:30.142 --> 00:17:32.742
Um and that's, you know, what we were trying to do.

s223
00:17:32.742 --> 00:17:34.742
So,

s224
00:17:35.217 --> 00:17:35.422
[sighs]

s225
00:17:35.422 --> 00:17:36.222
Very cool.

s226
00:17:36.222 --> 00:17:44.982
What's an AI idea that everyone in finance is excited about that you think won't work, and the one no one's talking about that you think will work?

s227
00:17:44.982 --> 00:17:48.302
Well, I wish I knew the the thing that nobody's talking about, cuz then I can make some money.

s228
00:17:48.302 --> 00:17:57.542
But um the the thing that everybody's sort of talking about is this no-analyst hedge fund, you know, oh, I'm just going to have all these AI agents.

s229
00:17:57.542 --> 00:18:05.782
What I do believe is that they will be able to replicate a fund that existed a year ago.

s230
00:18:05.782 --> 00:18:11.022
It's just not going to be as good as what today's hedge funds are going to be next year.

s231
00:18:11.022 --> 00:18:17.582
And so, I just don't think it's ever really I don't think you're ever going to really be able to take humans out of the loop.

s232
00:18:17.582 --> 00:18:26.223
Um and when you can take humans out of the loop completely uh on a fundamental and a you know, quantitative funds have taken human out of the loop for for decades.

s233
00:18:26.223 --> 00:18:27.223
So, that's that's nothing new.

s234
00:18:27.223 --> 00:18:35.903
But, from a fundamentals perspective, when you can take the humans out of the loop, then well, then it's just going to be whoever's got the most compute, the most

s235
00:18:35.903 --> 00:18:36.743
the most information.

s236
00:18:36.743 --> 00:18:40.663
So, I just don't think that that's how it's going to go.