transcript: steve kuhn – life after hedge funds (ep.85) · opportunities for people that knew and...

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Transcript: Steve Kuhn – Life After Hedge Funds (EP.85) Published Date: February 4, 2019 Length: 54 min Web page: capitalallocatorspodcast.com/kuhn Steve Kuhn is a retired hedge fund manager. He spent two decades in the industry, specializing in mortgage-backed securities at Cargill, Citadel, Goldman Sachs, and Pine River. In his last stint in the business until his retirement in 2016, Steve was a Partner and Portfolio Manager at then $14 billion Pine River Capital Management and was one of the hedge fund industry’s most widely known fixed income traders. Our conversation covers parlaying a passion for playing games into a two-decade Wall Street career, spending time productively when your investing specialty is out of favor, stepping away from the money game, presenting the evidence-based case for active manager alpha, talking the state of the hedge fund industry, managing his own money, engaging in philanthropy, and proposing the IDEAL immigration model. Edited by: Rev.com

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Capital Allocators Podcast EP.85 Steve Kuhn

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Media Links The Spring - The charity: water story IDEAL immigration Tyler Cowen, Stubborn Attachments

Ted: 00:05 Hello. I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting capitalallocatorspodcast.com.

Ted: 00:32 My guest on today's show is Steve Kuhn, a retired hedge fund manager. He spent two decades in the industry, specializing in mortgage-backed securities at Cargill, Citadel Goldman Sachs and Pine River. In his last stint in his business until his retirement in 2016, Steve was a partner and portfolio manager at then $14 billion Pine River Capital Management, and was one of the hedge fund industry's most widely known fixed income traders.

Ted: 01:03 Our conversation covers parlaying a passion for playing games into a two decade Wall Street career, spending time productively when your investing specialty is out of favor, stepping away from the money game, presenting the evidence-based case for active manager alpha, talking the state of the hedge fund industry, managing his own money, engaging in philanthropy and proposing the ideal immigration model.

Ted: 01:31 Before we get going, if you'd like to receive an email from me once a month, with just a few great things I've read and listened to over the month, sign up for the mailing list at capitalallocatorspodcast.com. The library of transcripts of all the podcast episodes is also available with the premium subscription. Please enjoy my conversation with Steve Kuhn.

Ted: 01:58 Steve, great to see you.

Steve: 02:00 Thank you Ted. I'm honored to be here.

Ted: 02:02 Well, let's start with your full story. Take me back as far as you want, we'll just go from there.

https://www.youtube.com/watch?v=UE9UvT5ujyg

https://www.idealimmigration.us/

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Steve: 02:09 Sure. Grew up in Minnesota. I had two amazing parents who loved me and were kind enough to follow my obsessions, which was board games. I was obsessed with board games as a kid.

Ted: 02:19 Any particular games?

Steve: 02:20 Yeah name it. Any strategy game, chess, Stratego, I would torture my poor parents and my poor older brother. Wake them up at five o'clock in the morning to play, and they were kind enough to nurture that. My parents would take me to chess tournaments and always loved playing games, and decided that I wanted to figure out a way to do that for a living, so I went to Harvard, studied actually game theory, part of economics at Harvard, I studied under Professor Schelling, who ended up winning Nobel for his work on game theory, and then I thought what can I do in life that's most like playing a game, and happens to pay you money to do it? I thought that was Wall Street.

Steve: 03:00 I had about a 20 year Wall Street career. Worked at Goldman Sachs, worked at a number of other hedge funds, worked at Citadel for while, and then had a really nice run, starting in 2008, at Pine River Capital. I was a mortgage-backed security expert for my career, and obviously 2008, 2009 were incredible opportunities for people that knew and understood that market. There were huge mistakes in the market, huge irrationalities, and over the next six years at Pine River, we returned an average return of investors of, I think it was 34%, their annualized return. Then decided that I wanted to do some other things in life.

Ted: 03:40 Let's go back before we'll go forward to the other things in life, which will be fun to talk about. What was it like at the very beginning of your career, when you were learning to mortgage market?

Steve: 03:50 It was great. A unique situation came to me early in my career. I went to Harvard, you think that that's going to open every door for you. I happened to graduate in 1991, was the biggest recession, probably since what happened in 2008, it was a really tough time to get a job. I had been offered a job by a firm back in my town in Minneapolis, a financial firm, all lined up, all set, I was happy, and then the recession hot and they said, "We have a hiring freeze," and well they were actually not going to really








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bring you on, so my first job out of Harvard was delivering pizzas for Dominoes, which was not exactly-

Ted: 04:25 Wait now, where did you do that?

Steve: 04:26 I went back to go have the job, and about a week before I was about to start, they said, "We're not actually going to do this," which was disappointing. I still remember when I filled out the application for the Dominoes job. They had last place of education, I put Harvard on there, and the manager of the Dominoes said, "Yeah, that's really funny." He thought I was being a smart Alec, let's put it that way.

Ted: 04:46 Did you learn anything delivering pizzas?

Steve: 04:48 Well it's funny, the next job I got was at a regional firm in Minneapolis called Piper Jaffray, and when I interviewed there, they asked me, "Why do you think you'd be good at this job? What about your previous work experience?" I said, "I was the best Dominoes delivery driver in the whole county," and they thought that was a hilarious answer. I guess it ended up helping me get the next job.

Ted: 05:07 Walk me through that beginning of your career, how you earned.

Steve: 05:10 I love it. I love the business. I guess it feels like playing a game, and Piper Jaffray, it wasn't Goldman Sachs, it was a regional firm, a smaller firm, but that meant that I got to do a lot of things very quickly and got to see a lot of different opportunities, and it was a great place for me. I was working in mortgage-backed securities there, as an analyst, just the dawn of, the beginning of the MBS, the mortgage-backed security analytics market.

Steve: 05:38 The Yield Book. If you're a mortgage person from that era, this was the first machine that could actually calculate an option adjusted spread. This was like magic. I thought this was the coolest thing. In, I think it was 1994, I was the number one user of the Yield Book that didn't work at Salomon Brothers. I was the number one user, and this was back when we had limited amounts of computing power, again, revealing our age here, that that was something we had to think about. They only allocated a certain number of calculation units to every user, and literally three times a week, I was begging for more. I need









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more calc units, so I would call the help desk. After about a month, everybody at the help desk knew my voice. I would say, "Hello," and they would go, "Calc units. You need more calc units," and I went, "Yeah, I could use some calc units."

Steve: 06:26 I loved it, it was all-engrossing for me, and it was like playing a game for real money. I got to meet some really interesting characters during that time. Mike Vranos, I don't know if you know Mike, but at Ellington. I met him when he was still at Kidder, and saw the desk there, they would play these games of picking mass Olympiad problems and solving them on the desk when they were bored. Yeah, it was a unique culture, unique time, and I loved every minute of it.

Ted: 06:51 How long did you stay?

Steve: 06:53 I stayed at Piper for a few years, then I went to Cargill, then I went to Citadel, and after that, went to Goldman Sachs for a little while. I took what was the first strange turn in my career, I took three years off from Goldman and went and lived in Beijing.

Ted: 07:09 Really?

Steve: 07:10 Yeah.

Ted: 07:11 Talk to me about that decision process before you went, and then what that experience was like.

Steve: 07:16 There are times in the markets where things are incredibly interesting. There's a lot of volatility, and your ability to add value, to add alpha, is very high, and there are other times when markets are dull, spreads aren't moving very much, markets are not very volatile. 2005 was the latter. I didn't feel like I could come to work and make a ton of alpha for our investors. That was challenging because the years before that had been very active and very interesting, and one was able to add a lot of value. I was a little bit down by that, it wasn't as exciting, and here was a rising China, which I was just incredibly fascinated by, and I just wanted to go.

Steve: 08:00 I ended up telling Goldman, "I'm going to go and do this." They ended up giving me a job in China because they didn't want me to leave. They liked me and I did some work, working for the China subsidiary of Goldman at that time, but that was not that










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many hours. It was a few hours a week, and I had the rest of my time, I was teaching students there. I was teaching students at Tsinghua University and Peking University, or Beida as they say. The rough equivalent is Beida is the Harvard and Tsinghua is the MIT of China.

Steve: 08:32 It's a very hierarchical college system in China. Basically everyone in the country takes a test in their senior year, it's called the Gaokao, and the highest scores go to either Tsinghua or Beida. It's clear. Very rarely would a student have the score sufficient to get into those schools and not go there. They're one and one A in terms of who is the top school. I think I should remember this, I think there's 38 provinces in China, and the top score from each province on this test, this Gaokao test, is almost like a mini celebrity. Every year, Tsinghua and Beida find over who got more of the 38. I'm going prestige battle for them. These students are unbelievable.

Steve: 09:17 By the way, the Gaokao test has, if I remember, six components. There's Chinese language, Chinese history, chemistry, physics, math and English. If you got a high enough score in the competitive environment of the China education system to get in, your score on the English test has to be high. There's no way. Basically every student on these campus speaks at least passable English. It's funny though, they use the most interesting words because it's really a vocabulary test, it's not a verbal test the Gaokao, so they have the most interesting and unique English vocabularies. You hear words that are perfect, they're appropriate, but something nobody would actually say.

Ted: 09:58 Do you remember any examples?

Steve: 10:00 I don't remember off the top of my head, but it was like reading poetry when they would write something. You'd be like that is a really interesting ... It makes sense, but no one else would say it that way.

Steve: 10:10 These students were amazing, and I was teaching students from both of them. I had, at one point, about 60 students, and I was teaching them about financial markets, about what hedge funds were, about how markets work, how you can find edge, how you can find alpha, and a lot of those students went on to work at Wall Street firms or hedge funds. I sometimes wonder what's the total amount of alpha generated by the people that I taught.







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Ted: 10:35 Are you still in touch with a lot of them?

Steve: 10:37 Well one of them was a partner with me at Prime River. One of the most talented thinkers and traders I've ever met. Brilliant. It's got to be in the billions, because [inaudible 00:10:46] students have worked at all the name brand hedge funds, students that I've taught during that time have worked at all of them.

Ted: 10:51 That educational system, you described it as hierarchical, how did you think about the complexities of what that means for educational opportunity and the growth of the population compared to the US system?

Steve: 11:10 In some ways there's things to be admired in the Chinese educational system. It's pretty pure, the scores are your scores, and not a lot of behind the scenes manipulation that'll allow you to get a student in. It's not going to be based on you're a great athlete, it's not going to be based on whether your parents can write a big check, it's pretty pure.

Ted: 11:32 Your score's your score when you take the test, but given the importance of that, you can imagine some socioeconomic striating of who gets the right preparation to take the test.

Steve: 11:42 That's absolutely right. I think that's true. There are students from all over the country at the two schools, but yeah, that's true. There's no doubt about that.

Ted: 11:49 What does it look like in terms of homogeneity or heterogeneity of the student population? Given that there's really one factor determining where they go to school.

Steve: 11:58 Well, they're all brilliant. This test is a two day long test. It makes the SAT test look very small compared to what they do. Students often faint going into it because it's that important. This one test, in many ways, determines your fate. If you get a very high score, you go to Tsinghua or Beida, if you get a next level score, you got to go to a not quite as prestigious university, but it's still a great university, you get a low enough score, you don't get to go to college. It is crunch time. Everything's on the line for that test.

Steve: 12:30 If you go to a high school in China, and I don't care whether that's in Beijing or in Shanghai, or if it's in the smallest rural











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village, the test books have pictures of the gates of Tsinghua and Beida on them. It's the equivalent of getting your son or daughter into a pro sports league. Getting into those schools, that's the prestige level for a parent. When we talk about the future of tech supremacy or the future of economic supremacy, when you see that, you see that we're going to be challenged. We're going to have to think what advantages our society have, and we have tremendous advantages that China doesn't have, but we have to maximize those advantages is we want to compete economically or strategically in the world, against China. They have some advantages and we have other ones, but we have to think carefully about how to maximize ours.

Ted: 13:18 After you had this run at Pine River, how do you decide when to step away?

Steve: 13:23 There were a lot of forces that led me to that decision, but I had a rising force of wanting to do good in the world. Some of this was spiritually based, and I made that clear at the time, but I think I'd always been a humanitarian and thinking about how can I take the skills I have and think about how can I help the most people or maximize good with that? I think it's a different game.

Steve: 13:49 The game I played out of college was how can I make money or find something I enjoy while doing that? Then I decided that at some point, I wanted to play a different game. I wanted to play the what can I do to make the world better game if you will.

Ted: 14:03 You mentioned a couple of different triggering events, and one of them was probably some number that you felt like you were conf financially. What was it that crystallized that moment or that time? Why not two years before or two years later?

Steve: 14:18 I had a bit of a spiritual awakening. It wasn't new that I cared about the world. I was a contributor to, while at Pine River, both me and the firm were great supporters of Robin Hood. We were supporters of a group called Charity Water, which your listeners may know about. It's a unbelievable charity that provides clean water to people all over the world. That wasn't new, but I think it was a rising sense of it's time to think about this more clearly. That's what I've spent the last five years doing, and the last four months, I've got a new mission related to that, which maybe we'll talk about a little later.







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Ted: 14:56 Before we turn to that, let's talk hedge funds. What's your take on hedge funds today? It's a broad category, but [inaudible 00:15:03] it however you want.

Steve: 15:04 Sure. Well here's one thing I say to people about the industry in general, is we've had almost the perfect academically designed test, whether there's alpha in the market or not, so there's ongoing debate of whether those markets are efficient or not. That perfect test has a name, it's called Millennium. Millennium is a hedge fund that hires lots of smaller groups of people to come in and manage some part of their capital. They have a large pool of capital, I think it's 35 billion more or less, and they'll give a new manager a chance if they believe that they have potential to be someone who can make money at alpha, and maybe start then with $100,000,000 and see how they do. If they do well it grows, if they do poorly it shrinks, or maybe it's taken away. It's basically a generic algorithm to see if there's alpha or not.

Steve: 15:58 That would be the perfect experiment to see if markets are efficient or not. If that doesn't work, that's evidence that markets are pretty inefficient, if it does work, that's pretty strong evidence that that works. They've been doing this for I don't even know how many years now. It's in decades, not in single digit years, with hundreds of different groups onboard, and it would be impossible statistically to think that that's random at this point, let's put it that way. They continue to do well.

Ted: 16:27 That's net of fees.

Steve: 16:29 Nettable, and not small fees.

Ted: 16:30 Not small fees.

Steve: 16:32 Mazel tov, it's going to be good for them. I just don't see how that's really a debate anymore. Anyone who would take a fair look at just simply their track record alone. Markets are not efficient. There's a lot of views that are negative about hedge funds, but let's think about what hedge funds, in theory, are trying to do. They're trying to find mistakes in markets and correct them, and I think that's actually a pro-social idea.

Steve: 16:57 If we only had index funds, and I love index funds, I think for most investors that a great idea, that's what most folks should










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do. I don't disagree with the logic of the ETF and index fund industry, I don't disagree with it at all, but in the absence of somebody looking for mistakes in markets, markets aren't efficient and we don't allocate capital efficiently. We need somebody to do that. Hopefully those people do it well, that's what we should want as a society. Whether hedge funds get paid too well for that or well enough, I'll eave that debate to others, but the idea that somebody's out there doing that is a good thing.

Steve: 17:36 It seems to me that the search for alpha is, in some ways it surprises me that there isn't more resources spent on it. Sometimes you'll see a New York Times article about Walmart's practices in Mexico. They were doing something illegal in Mexico, I don't remember the exact details, but this was a few years ago. This is a smart reporter, presumably well paid for that industry, which is less well paid than the financial industry, probably making $100,000 or maybe somewhere in that range, and that day that that article came out, I think Walmart's market cap change changed by something like $30 billion. Someone who's dedicated to doing research on this company can move the company's value that much, and has a salary that's a very small fraction of that. Doesn't that mean that there's not enough people trying to police the markets?

Ted: 18:25 Well that's a contrary view if you look at the data of how many people are running around doing it.

Steve: 18:31 There are certainly people who do that, but relative to how big the markets are, okay, there's two pieces of evidence, one is articles like that can change market caps by that much, so in other words, no one else had done any research on Walmart's practices in Mexico that were dubious at that time, so that's evidence, and then the evidence of that Millennium's track record. But obviously, if there were enough people in some abstract economic sense, then Millennium's track record wouldn't be possible.

Ted: 19:01 You were at the early stages of technology call it, or quantitative analysis in the mortgage market, and that's clearly dramatically accelerated in the last couple years. What's your take on the importance of data and technology?






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Steve: 19:17 Technology has a way of bifurcating things. Some people go extremely deep into something and their technology is very high, so you have the Renaissances of the world who are obviously most brilliant minds on the planet, and they're paying a game at a very different level than even most hedge funds frankly. Then I think yeah have other people who are literally doing the boots on the ground understanding of how the companies work. Not just equities, but where technology scale is not necessarily the most important thing. They can still create a lot of value in terms of their investors, but I don't think it's because they have the fastest super computer.

Steve: 19:58 I think there are people that are going down that path, the Renaissances of the world, the Citadels of the world, and they can make money doing that, but I think there's still a need for people who just understand stories and the world and people.

Ted: 20:10 What do you think hedge funds look like five or 10 years from now?

Steve: 20:13 One thing that I have told you was it's become more difficult to launch a hedge fund now than probably ever, in the wake of the 2008 financial crisis. I think that means as of now, the big market leader, as in the big brands, like the Millenniums of the world, have a pretty big edge because the person who wants to raise a $100,000,000 fund has a very difficult time doing that themselves, but Millennium says, "I've got a check for you," and they have a pretty big edge in finding that talent.

Steve: 20:45 I think there would be ways you could change that and make it easier for people. Some of these would be the idea of a tech incubator for hedge funds. Someone that would give you advice on how to hit a lawyer that can do your documents relatively cheaply because they'll do it repeated times, someone that could help you with staffing of your compliance, someone that could provide a third party marketing for you. I think that would be a great business.

Ted: 21:10 Why do you think it hasn't been done successfully?

Steve: 21:13 Obviously from your history, I'm not exactly breaking 100% new ground with this idea. Protégé Partners and others, SkyBridge started as an incubator. My motto's a little bit different in that I think I'm just providing the infrastructure. I think you could









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have, related to that entity, you could have a group of investors that would invest in the things that this incubator found, but I think it would be a separate ... I also think that the need now is higher than even it was when SkyBridge was doing.

Ted: 21:43 Are you doing something with this?

Steve: 21:44 I've talked about doing it. again, we're going to talk later about what I'm obsessed with now, and that obsession is blocking, at least stalled an effort to do something with this. If I could only think of someone that has the experience in this and an audience that could really help make it happen, that would make it more interesting, if I knew anybody like that.

Ted: 22:05 If you pull the thread on that a little bit further, you said earlier that it's harder to start a hedge fund than ever before, and so sure, there are some infrastructure tools, there are some things that you could scale that one person can't, but there is a gap of capital that goes into that space. Partially because there's a perception that who needs the next hedge fund?

Steve: 22:30 I think there's a solution to that too. I think, by the way, the biggest thing you'd be helping the new funds with is marketing, and helping them tell their story, because a new hedge fund manager, they have to have a great first year in terms of their performance, and they have to raise money. There's only so many hours in the day, and investors want to meet the leader, whoever that is. Whoever he or she is. They want to meet that person, and if that means getting on an airplane, that means you're not sitting in front of your screens that day. It dones work.

Steve: 23:00 If they could say, "This is our third party marketing person," and they have the right incentives and they're aligned, this goes to the secret sauce of how I want this idea to work, I think that would make their chance of success in the first year go way up, and that would be a game changer. That's the essence of what really is the value add for the funds that would work with this entity.

Ted: 23:23 How do you manage your own capital today?

Steve: 23:25 It's funny, I don't look at screen basically ever. I don't watch CMBC or Bloomberg TV. I love the folks there, so I don't watch you anymore, but I'm sure you're still doing great work. But it's









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just not a part of my daily life anymore. I'm thinking about other things. I have a couple of companies. Actually, probably 10% of my net worth is in one stock, because I think it's that mispriced. A friend of mine is obsessed with it and he has convinced me that its expected to value probably one fifth the true value of the company.

Ted: 24:01 Do you want to tell the story?

Steve: 24:03 How does this work? Do I get sued if I ...

Ted: 24:05 No.

Steve: 24:06 Do I have to answer ... Does any of this ...

Ted: 24:07 We're going to have a formal disclaimer. What Steve is about to say is not investment advice. He's not managing money for anybody anymore, except for maybe his family, so take this with a grain of salt, but here goes, the big pitch.

Steve: 24:19 It's a small cap, so no accusations. I own the stock, it's called Kindred Biosciences. KIN is the ticker, KIN, and they're an animal pharmaceutical company. Here's the general pitch for animal pharmaceuticals, animal drugs are only worth one tenth what human drugs are worth, but they cost one 100th to develop. That's the math. They have a new drug out called Mirataz, which is helpful for, I know this sounds weird, cats who have lost their appetite. You wouldn't believe that that's a problem, apparently it's a pretty big problem, and Mirataz is a drug you can literally just swab into their ears, and this fixes the problem.

Steve: 25:01 It's already launched, there's incredible uptake already by ... That drug alone, I think is worth more than the value of the company, in terms of its potential to make money, and they have 20 more drugs in the pipeline, including some that are already through several stages of trials.

Ted: 25:16 Well funded?

Steve: 25:17 More than enough funding. They got cash in the bank. To me, this looks like a really cheap option struck below what the value of the company already is, and that seems like a good trade. It's a small company, nobody follows it, that's why it can be-

Ted: 25:33 What's the market cap?












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Steve: 25:34 500,000,000. It doesn't get a lot of attention. I think the end game is some of the other drugs get developed, Mirataz continues to grow the market share, and somebody buys them for more than 500,000,000 hopefully.

Ted: 25:48 You used to run risk-controlled mortgage strategies, and now you have 10% of your capital ...

Steve: 25:56 Yeah, it doesn't make any sense.

Ted: 25:57 In an animal ...

Steve: 25:57 It's not logical. There's no logic.

Ted: 25:57 Have you thought about the whole pie for your own capital?

Steve: 26:00 I've done some investing in local companies in Austin, I've also done some venture capital type stuff. I actually just invested with a group called NextGen Venture Partners, part of Brown Advisory, who I think do a great job. I've done some of my own companies, some of which I have really high hopes for. I was a early investor in a company called Vemo Education, which I think is brilliant. I hope that's going to really work.

Ted: 26:25 What's the concept?

Steve: 26:26 When I first describe it to people, they think it's idiotic, and then if I spend three minutes explaining why it's not idiotic, they usually come around. They do something called income sharing agreements, and the idea is you're selling some of your future income for money today, to go to school, which sounds terrible I know, it's indentured servitude, I get how that doesn't sound great, but let's take one use case for this.

Steve: 26:53 You might now about these computer coding academies, Galvanize, General Assembly et cetera, and typically it's a three month very intensive course to learn something in computer programming, where it could be how to build a website, it could be any number of things. People typically pay anywhere from 25 to $30,000, it's a three month intensive course, it's 12 hours a day, six days a week, and the pitch is you go into this with a $40,000 job and you come out with a $100,000 job. Companies are so desperately in need of various computer skills, we can train you intensely for three months, and then you can have this job, but it's expensive.












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Steve: 27:33 Now here's a pitch for one of those companies. They could say, "Instead of you paying 25,000, we'll take 10% of your increase in income for the next five years, and it's free." If you in fact go from 40,000, to 100,000, we'll take $6000 a year for the next five years, and that's how we get paid.

Ted: 27:53 That's a good model.

Steve: 27:53 It seems like not only is it a good model for the firms who hire Vemo, because they gain market share, but it actually is opening up that opportunity to people of lesser means. I think it's democratic, it's leveling the field, and if you understand what the use cases are, I think it really is great. It's great for the world. In a sense, these companies have skin in the game, to take something from our friend Nassim Taleb. If they're not adding value to the students, they don't get paid. If they take a person making $40,000 a year and only make $40,000 a year after their class, they should suffer from that. That seems to be a better model for how education should work.

Steve: 28:34 By the way, this isn't limited necessarily to computer training, it could be for welding, it could be for plumbing, it could be for any number of industries where it takes an investment of time and money to upgrade your skills. It doesn't just have to be limited to technology.

Ted: 28:50 You've done some direct venture investments, which is not what you did in the past. You've done concentrated investing in small cap animal healthcare companies, which is not what you've done in the past.

Steve: 28:59 Also true.

Ted: 29:00 How do you think about risk today?

Steve: 29:01 Then I have some things in very safe things. Municipal bonds. They're great if they're work. I spend most of my time thinking about charity and philanthropy. I'm on five different charity boards, and if these things work out and Vemo makes me a lot of money, which knock on wood, I'm hoping that happens, it's probably not going to change my life that much. It's great, but it means that the things I care about will benefit. I'm taking risk in some sense, for the things that I'm trying to fund. Again, that makes the game more fun for me. That makes it more relevant, that makes it more impactful.










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Ted: 29:38 Just before we turn to the philanthropic side, are there things that you purposely won't invest in, based on your knowledge and experience?

Steve: 29:47 My first reaction is no, because I feel like I'm a contrarian, and any time you'd say, "I wouldn't do this no matter what," it doesn't ever feel like the right answer. Whether it'd be things like maybe I had a moral concern, like I wouldn't invest in something because I think that that industry or that company is doing something, that I would consider.

Ted: 30:05 All right, so how about in today's markets? Are there areas that you purposely aren't investing in?

Steve: 30:10 I would say no. I generally just don't think that way. Maybe I'm inspired by your Annie Duke podcast. Basically you take in as many ideas as possible and you try very carefully not to dispose of idea or to rule out things based on abstract categories. That's what makes for a good contrarian investor, is you don't do that.

Ted: 30:31 Do you have any investments in index fund?

Steve: 30:34 Yeah. Again, I think it's perfectly fair and logical thing to do. I'm not against index funds. By the way, even most people investing in hedge funds, the way it is not and with how complicated it is in taxes and everything else, I think it's not for everybody. Another problem that I think it would be better solved is if there was a structure that people can invest in hedge funds that were more user friendly. Right now it isn't, and to some degree, intentionally. That's the goal of the laws, but I think that.

Ted: 31:04 All right, so let's turn to the passion projects. You can go from the one you mentioned is the current passion or where you started, but let's dive in.

Steve: 31:13 I'm on the boards and supporters of a number of different charities. I've been on the board of the Andy Roddick Foundation in Austin Texas for the last five years.

Ted: 31:22 What does this foundation do?

Steve: 31:23 Does after school and out of school time, so after school and summer activities for kids in east Austin, which is the area of town that's not as well off financially. Andy and his wife Brooklyn Decker are awesome, the kids love them. They have












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after school programs which are mostly educational, math and stem and reading, but they also have this great summer program where the kids get week-long exposures to different sports, different ideas, they'll do chess and they'll bring in chess teachers for a week, and these kids have so much fun with it.

Steve: 31:55 Andy and Brooklyn are amazing. The support in Austin for the Andy Roddick Foundation is immense. It's just been a real joy to be a part of it. The organization has grown my, I don't know, a factor of 20 or 30 in the five years that I've been on the board. I'm not at all claiming that coincidentally with me being on the board and other amazing people being on the board, the organization's growing. The love for it in Austin is off the chart, so that's been amazing.

Steve: 32:23 I am a member of a board of a charity actually based here in New York, I became a member of the board before I left New York, called the Immigrant Justice Core. What they do is they provide pro bono legal advice to people who have immigration challenges, and we're going to talk more about immigration because that's my passion project, but a lot of people don't know is if you come here with an immigration challenge, if you're claiming asylum or what have um because you're not a citizen, you are not guaranteed a lawyer. There have been cases, if you watch the show [inaudible 00:32:52] Tonight, there have been cases of four-year-olds having to represent themselves in court.

Steve: 32:58 There's going to be a major show on, probably be out on HBO by the time this actually airs, called Ice Box, about a young immigrant going through the legal system in his own, and the craziness that that is. To me, that's not what due process is. It's not about ourselves as a country. The phrase that one judge said, this was actually aired on last week's John Oliver Show is sometimes we are doing death penalty cases in traffic court, and that doesn't seem like that's our best selves, so this is a amazing organization that was funded by Judge Robert Katzmann here in New York, which saw this appalling situation and tried to fix it, so super proud to be a founding board member of that organization.

Steve: 33:41 Actually had coffee this morning with Scott Harrison from Charity Water, and one of the great storytellers in philanthropy and with a cause that's unbelievable, providing clean water to






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everyone on the planet. Scott is amazing. I'm a member of what they call the Well. It's a group of people that donate to the charity to cover all their costs of administering, so that other donors who donate to charity water, 100% goes directly to the projects. I am suer happy to be part of that.

Steve: 34:12 Last but not least, me and the executive director of my foundation, the ASK foundation, Diana Greenfield, have started a youth choir in Austin called the Young Voices of Austin. We have kids from all over the city singing together. It's modeled after the Young People's Chorus of New York City, which if you have listeners in New York, and you ever have a chance to go see the Young People's Choirs, you would be a fool not to. They are unbelievable. They performed when the Pop came to the 9/11 memorial. They are off the charts. Life changing to see the Young People's Chorus perform.

Ted: 34:46 How did you get involved? Were you a singer?

Steve: 34:49 Well it's funny. It happened because one if the investors in my hedge fund was on the board and said, "You have to come to this gala this year." When he said that, "I really want you to come to this kids' youth choir," I'm like boy, that's the last thing I want to do on a Tuesday night when I've been working my tail off, but he's an investor, he's a friend, I said yes. Literally three minutes into it, I'm like, "This is the best thing I've ever seen," and eventually I was a board member of that when I lived in New York. That's how inspired I was. It's that amazing. I did not want to go, three minutes after being there, I was like, "This is amazing."

Steve: 35:29 Now we're trying, with Diana's help, we're in year two, and I think the Young People's Chorus just celebrated their 25th anniversary I believe. I should know that, but I'm pretty sure that's right. We're not quite as big or we're don't quite have the same organization that they've built, but that's our goal. But it's already great. The impact we have already had on the children's lives is unbelievable. You can, again, you see it in their faces, so super happy about that. That's some of the things I do, and then-

Ted: 35:56 That's the portfolio, and so now here's the concentrated position.







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Steve: 35:59 This is the, yeah, the Kindred Biosciences of my philanthropy portfolio. I already mentioned the IJC and immigration, and my feelings on that, and immigration is a topic that not only affects New York heart, when I talk about IJC, I'm mostly talking about my heart, and cheering for the underdog is a recurring theme in things that I support, but it also appeals to my head.

Steve: 36:23 The economic impact from immigration is massive. If we had a smarter immigration policy, I think we could boost our GDP by another 3% a year. We've had 4% JDP now, I think we can get to seven. I think we can uniquely do that in America because we have an immigration story that's a part of our past, true to our ideals. The most talented, hard working, amazing, ambitious people in the world want to come here, we're foolish not to let them and not to embrace them, especially if they want to follow the rules, if they want to pay taxes, if they want to be law-abiding. I think we could let in amazingly talented people who are law-abiding, and use some of the money that we gain from that process to actually strengthen our borders, and I think that's the compromise that's out there politically.

Steve: 37:21 I think there's a huge win-win policy that makes America stronger, it makes our economy stronger, makes us safer, helps us compete against China when it comes to technology, and then it makes the millions of people who are here undocumented, who are just working every day, and makes their lives better because A, they can sleep at night, it means that they can now travel back to their home countries if there's a wedding or a funeral or a holiday, or any other family gathering, it makes that possible.

Steve: 37:57 They can start paying taxes. Some of them do now even though they're illegal, which is a crazy system, but the IRS allows you to pay taxes even if you're undocumented. It's vastly better for the immigrants lives, and then the final impact is the greatest anti-poverty program in the world would be increased immigration, in terms of remittances. Our official aid to Honduras is something around $400,000,000, remittances are five or six billion. I think in this proposal, that would double again, and if we want to solve global poverty issues, immigration's the best way to do it.

Steve: 38:36 A professor at George Mason University, well there's a couple, there's Brian Caplan and Alex Tabarrok who have done a lot of







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work on this, and Tabarrok wrote that this is the greatest anti-poverty program in the world, and we do it by the way, not at a cost to us, at negative cost. We gain from it. This is America first and the world first. It's not either or. My passion project is me and a group of folks in Austin, some of my nest friends, have formed 501(c)(3), a (c)(4) and a pack around a mass of immigration reform proposal that we call the IDEAL immigration proposal. Ideal stands for Immigration Designed to Enhance American Lives. The IDEAL immigration proposal. You can read about it on idealimmigration.us, our whole policy of how it works, and I'm happy to talk about the details. We don't have to, but you get the flavor of it I hope.

Ted: 39:35 Yeah. What you've done so far, for me, is take a controversial, hotly contested topic and make it sound like oh, that sounds like a really good solution. What do you do as a single, retired hedge fund manager with some resources, to okay, you've created this, there's a policy, how do you make an impact?

Steve: 40:03 Yeah, good question. I'm trying to figure that out myself, with the help of, like I say, I great group of people in Austin. We've probably been at this for about four months, created a website, which is step one. I'm working with some really talented filmmakers to do a short film, and my goal is to do something along the lines of what Charity Water sis in their video called The Spring. If you haven't seen the Charity Water video, The Spring, go watch it. If you don't cry and open your checkbook after watching that video, I'll be surprised. It's amazing. That's another reason I met with Scott Harrison this morning is get his advice, how do I tell the story? How do I open people's heads and hearts to this possibility? So working on the video.

Steve: 40:45 I've hired a lobbyist group in DC to help get me in front of people on this. I'm reaching out to all of my friends, former colleagues, and I'm basically telling them that "Yeah, I'm calling in every favor," and I need to get in front of politicians, I need to get in front of thought leaders, I need to get in front of public intellectuals and make the case. I've met with a number of politicians already, and the diversity, where they are in the political spectrum is very wide, and they all like it. I'm not just [inaudible 00:41:20], I met with a number of different politicians, and they've offered me wonderful advice on who's important and who needs to be influenced.





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Steve: 41:28 I have a strategy. There's a lot of work between now and then, and I feel like the clock is ticking, because I think if all the years when this is possible, 2019 is the year for massive immigration reform. Let me make that case in a number of different ways. First of all, what typically happens in many presidencies, not just the Trump presidency, is president comes in, he ran with a certain appeal to his or her base, and is true to that base for the first two years, and then they learn that they lost the middle in being true to their base, and they lose the mid-terms. This is not the first time this has happened. This is a recurring pattern.

Steve: 42:12 Then what do you do? They do what they call in politics, triangulation. You move to the middle and you move hard because you want to get reelected in two years. If you look at a lot of the major policy changes we've had in American history, happens in the third year of a first term of a president. I think President Trump has already signaled, not just with words, but also with one action already, that he's willing to meet in the middle and do bipartisan projects. He says it, and I know a lot of people don't give a lot of credibility to the president always on things that he says, but he already this sentencing reform and prison reform measure, which was something that was a bipartisan goal for a long time. I don't think it was a coincidence that he signed that now. I think he is signaling that he's open to bipartisan things.

Steve: 43:01 We got awfully close to a pretty big immigration reform in 2013. I think the cards are in place to do it in 2019, and things like this don't happen at even numbers because of the way our actions work. When everybody's running for president in 2020, nobody steps out of line. You get things done in odd number years, big things, and you really get them done in the third year of a first term of a president.

Steve: 43:24 I won't go into more detail on why I think this is the magic [inaudible 00:43:28], but I do. I think it's a very logical reason. Most people I can convince in five minutes if they'll give me an airing on it, and so I saw this forming a few months ago and thought 2019 is the third year term, this could be a magical time. The impact that the IDEAL immigration proposal would have on America is huge, the impact on the millions of people who are here who are law-abiding and working in the restaurants and the agriculture is huge. It also offers a path for longer term visa, so it's both a short-term guest worker program






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and a long-term program all together. It also affords asylum reform, the things I talked about with IJC, where we have more judges, more courts, and actually hire lawyers for people.

Steve: 44:15 My proposal raises about $70 billion a years in asking employers to pay fees for these visas. For 1% of that, 700,000,000, probably actually less than that, but let's just say 1% of the money that this proposal itself raises, we could have a whole new court system and lawyers for everybody. That would mean the backlog that we have now, which is measured in 300,000 cases, we could catch up and everybody could get due process.

Steve: 44:44 Let me back up one more thing. let me tell you what asylum is, what our obligations are. The US and 144 other countries signed the UN Commission on refugees in 1951, and that happened after World War II because Jewish people who were fleeing Germany were sent back. They weren't granted asylum and many of them ended up dying in the Holocaust. The world said, "We're not going to do that again," so the rule is, that we signed on to, again, and almost every other country did, is if a person comes and they have a credible fear that if they're sent back to their country, they'll be hurt or killed, you can't send them back. You have to harbor them until such time that the conditions in that country changes, and they would be safe to return. We agreed to that. Being true to that is supporting the rule of law.

Steve: 45:32 Again, in situations where we don't provide a lawyer to even very small children who don't understand the system, we are, in some ways, being maybe true to the letter of the law, but certainly not true to the spirit of what we signed. It doesn't cost that much money for us to be better. It costs about 1% of the money that I raise in this proposal to do it, and by the way, yeah get that money back because it reduces detention times. Detention's really expensive. Not only is it inhumane to detain people and separate families, and all these other issues that we talk about, but it's costly. We can be better on both, and it doesn't cost that much money. This is such an easy problem to solve, it really is, and then people hear it, when they give it a fair hearing, a lot of people say, "Yeah, why aren't we doing that?"

Steve: 46:18 Here's another fun argument I like to make with people. Let's imagine China could do this. They were capable of bringing 2,000,000 minds from all over the world to come there, pay






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them money to do it, pay taxes in that country, and build their tech industry and build their medical industry, and all the other things that we do. We would hate that. Yeah, we would say, "This is a existential threat to our country." We'd be up in arms. But they don't have the right culture, they don't have the right history to do that. We do. We have this amazing advantage that we're not taking advantage of.

Steve: 46:53 As of now, we have sometimes some of the most smartest students in the world come here to our universities. Sometimes they're given financial aid, and then they want to come and work here and pay taxes here for some period of time, either for their life, and that's almost impossible. To me, that's the opposite of logic. That doesn't really make any sense.

Ted: 47:13 What do you think the bottlenecks are in the adoption of this?

Steve: 47:15 I've always been just a ridiculous optimist, and both of those words are often appropriate. I really do believe that things can change, and sometimes that proves to be ... I certainly haven't been right about things I'm optimistic about before, I've been wrong, I think this can happen. I look at who the key players are and what their incentives are, and I honestly think this is a win for both sides. When I say both sides, both the Democrats and Republicans. It's also just, beyond that, it's a win for America, it's a win for the people who are here undocumented now, it's a win for people that would come in this proposal, it's a win for their home countries in that they would have remittances that they would be able to send back, money they'd be able to send back to these countries. I talked to Scott Harrison today, I'm encouraging him to help me spread this message, so I think it's all very logical. It's difficult.

Ted: 48:06 How have you applied the knowledge that you gained from managing money to these challenges?

Steve: 48:14 It's very different. I'm learning how DC works a little bit, but by the way, as part of this, I'm planning to move to DC for six months, starting in January. If anybody didn't understand that I'm committed to this, the fact that I would move from Austin to DC in January, I'm really committed to this.

Steve: 48:34 What I bring to this is passion, and I bring some financial resources. I'm hoping other people will join me in that. I'm

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trying to raise money to spread this idea and make this idea go viral, and tell the story more. I bring some financial, I think I bring credibility when it comes to what I think on the economic side, but trust me, there are people who are better economists than me and more trained economists than me, and who have studied immigration policy for a long time. I'd like to say that I don't know what percentage, but it would start with a 90-something percent of economists that would hear this, would agree that this would be hugely beneficial to our country.

Steve: 49:17 One phrase professor at George Mason, Brian Caplan, who says that, "Immigration reform isn't trickle down economics, it's Niagara Falls economics." All the picking debates we have about little differences in tax laws et cetera, they pale in comparison to getting immigration policy right. They're small, this is big.

Ted: 49:38 All right Steve, let's turn to some closing questions. What's your favorite hobby or activity outside of work and family? In your case, we'll say and philanthropy.

Steve: 49:48 Anybody that knows me for the last few years would know that I have a complete addiction to the game of pickleball. For those who don't know what pickleball is, it's the quote, unquote, this is phrase that every pickleball player says, it's the fastest growing sport in the world, or fastest growing sport in America. About 3,000,000 players now, growing at 25% a year, which means it doubles every three years. It is, for lack of a better description, the child of tennis, ping pong and badminton, or I sometimes describe it as miniature tennis. It's amazingly fun to play, it's hand-eye coordination, it's thinking, it's logic. It's almost like chess, you have to think about where to hit the ball, and you work with a partner. It's usually teams, two versus two.

Steve: 50:35 I told you I was on Andy Roddick's charity board, I got Andy Roddick and Andre Agassi to do a charity event playing pickleball last year at my house in Austin, raised some money. Now you're seeing a lot of former tennis players come into the sport. The sport's getting bigger, there's starting to be a little bit more money in terms of tournament winnings. We've seen several people start pickleball themed bars, the top gulf of pickleball. I'm completely addicted.

Steve: 51:02 That's another thing that this immigration passion is ruining, it's my pickleball game is suffering because I'm spending a lot of







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time doing meeting for this. I don't get the chance to play as much as I'd like.

Ted: 51:11 Cool. What's your biggest pet peeve?

Steve: 51:15 That's interesting. My biggest pet peeve is how we debate and think about things in America, and specifically I think ideas are debated based on who has the idea or who proposed it. Again, I'm channeling Annie Duke here again. I feel like I'm the biggest fan in the Annie Duke fan club. I've Annie one time, she probably doesn't remember me, and I met her at a charity poker event and I've been a fan of hers forever. I used to play poker reasonably seriously myself, so I read her book after listening to your podcast, you got me to read the book, and I've probably given it 100 people since then. But she talks about how anti-intellectual that is, and how a clear thinker separates an idea from whoever proposed it, and that's just the opposite of our political culture right now. I think that's a loss. That doesn't allow for as clear thinking.

Ted: 52:05 How about on the investment side, what's your biggest investment pet peeve?

Steve: 52:08 When somebody intelligent says that financial markets are efficient, and anybody who tries to tell you that is impossible. It's both true and not true. For most people, that's great advice, just buy index funds, but specifically when Warren Buffett beats up on hedge funds, well when he beats up on hedge funds, he does it in ways that are both true and not true, and I think he knows that. Yeah, that's a pet peeve.

Ted: 52:33 What reading do you almost never miss?

Steve: 52:36 I read a blog called Marginal Revolution every day, which was actually co-written by Tyler Cowen and Alex Tabarrok at George Mason. I think Tyler Cowen is the most influential living economist. I think he's maybe the most important public intellectual in America today. He does a podcast series, he has his blog, he writes books, he has a whole course of economics that you can take online, he is beyond a polymath and just brilliant. He also just released his book called Stubborn Attachments, which is his statement of his philosophy.

Ted: 53:17 What teaching from your parents has most stayed with you?









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Steve: 53:20 Well I think their support of my silly game addictions and their encouragement for me to believe that things are possible have been the thing that stuck with me the longest.

Ted: 53:30 All right, last one. What life lesson have you learned that you wish you knew a lot earlier in life?

Steve: 53:37 Boy, that's a tough one. I don't have any uniquely brilliant things, but try to make the most of every day. I'm back here in New York, I lived here in New York for multiple years, sometimes I didn't appreciate how good things were then, and try to make sure that I don't make that mistake now. I'm very much enjoying my life now.

Steve: 53:58 I'm loving working on this project, whether I have an impact or not, and who knows? This might be a very foolish lesson that some hedge fund guy goes to Washington and thinks he's going to change things, who knows if that's really a good idea or a really bad one? I don't know, but I'm enjoying it, and I'm trying to make sure I'm in the moment. If I prove to have wasted some of my time and some of my money doing this, if I enjoy the effort, then it's not such a waste. I believe immigration reform, in a big way, can happen this yeah, and I'm just going to enjoy trying to be part of that.

Ted: 54:33 Great. Steve, thanks so much.

Steve: 54:36 Thank you Ted.

Ted: 54:37 Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you like what you heard, please tell a friend, and maybe even write a review on iTunes. You'll help others discover the show and I thank you for it. Have a good one, and see you next time








transcript: steve kuhn – life after hedge funds (ep.85) · opportunities for people that knew and...

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