Martin Shkreli Breaks Down the Collapse of Situational Awareness | Edited Transcript
A professionally copyedited transcript on leverage, forced liquidation, Anthropic liquidity, distressed portfolio sales, prime-broker economics, and the Kelly criterion.
CHAPTER TIMESTAMPS
00:00 Forced liquidation and funds shorting a distressed portfolio
01:36 Why marginal buyers and leverage can overwhelm AI fundamentals
03:33 The Anthropic stake and clues that a much larger sale was underway
05:06 How four-times leverage turns a 25% drawdown into near insolvency
09:05 Bubble analogies, FTX history, and why concentrated narratives repeat
11:41 Carry clawbacks, inexperienced managers, and private-market exposure
13:50 Contagion across AI funds and hedge funds as shadow banks
15:58 Whether Situational Awareness can continue after liquidation
20:01 How Wall Street actually unloads a portfolio too large for the market
26:19 Why Citadel can buy distressed books and hold through further pressure
29:59 Whether Leopold can rebuild in venture after the blowup
33:23 Insider reporting, market relationships, and when not to publish
36:32 Prime-broker economics and why banks encourage leverage until risk flips
40:08 Position sizing, the Kelly criterion, and why an edge still goes bust when overbet
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Full video:
Martin Shkreli joins TBPN to explain the collapse of Leopold Aschenbrenner’s AI-focused hedge fund, including forced liquidation, leverage, Anthropic liquidity, distressed portfolio sales, and position sizing.
TRANSCRIPT
[00:00–01:36]
TBPN Hosts: Let’s bring in Martin Shkreli to break it down for us. I believe he’s here. How are you doing, Martin? Good to see you again.
Martin Shkreli: Hey, guys. I’m doing great. How are you?
TBPN Hosts: Perfect. All right. Take us through it: how have the last 24 hours been for you?
Martin Shkreli: It has been interesting. I invest myself, so it has probably been one of the craziest months in Wall Street history. I was talking to some friends last night about Long-Term Capital Management, Amaranth, other famous liquidity-driven blowups. And this is up there. And yeah, it’s just a really crazy thing. We had heard rumors, sort of mid last week, and then they really started crystallizing, last night. And this morning, obviously, sort of a fait accompli. And I actually think they did a wonderful job of keeping it relatively quiet. I think some players were already positioning, say, early in the week, Monday, Tuesday, looking to do what my old boss, Cramer, used to call, shooting against a fund. So if you know somebody has to liquidate, the best thing for you to do, unfortunately, sadly, Darwinian, is to go sell all the positions you have in common and then go start shorting everything they have. And it accelerates the sort of downfall as quickly as you can. And this is a very common practice when these things happen. Certainly not something I had overlap positions with them, so certainly not something I would do, but I know a wide number of funds that were shorting all these stocks hoping to cause a panic and a crash.
[01:36–03:33]
TBPN Hosts: How do you trace back the start of this correction? Is it the war? Is it oil? Is it jitters around open source or just hyperscaler CapEx? There’s so many different narratives around why the AI infrastructure trade, the bottleneck trade might be weakening. At the same time, it feels like there’s some really solid progress and the models are progressing along, like, pretty, like, as expected.
Martin Shkreli: Yeah. You have the labs having some of the best months in business history of any companies ever. But then all the infrastructure correcting. Yeah. None of that stuff matters. You know? The only thing that matters is the propensity of the buyer and seller to buy or sell. And what you had happened was the smart guys get in early, start buying See the prices go up, buy some more. And then less smart guys take note and say, I want to do that. I want to be up 400% this year too. Guys like me started buying right near the top. Was just like, hey. This is great. I love memory. I love the bottom line. And then but the weakest hands are buying at the top. So they’re also the first to sell. First to panic. And it just creates this like every bubble sort of the same. Have this euphoria, this peak and then everyone sort of panics at once. The fundamentals basically don’t make a difference. I think today they sort of drive the marginal buyer and seller, but the 80 or 90% of the assets, shareholders don’t change hands. It’s that 5% of the margin that’s deciding the price and if that 5% is in the state where they’re they’re levered up three-times, or four-times levered, as we heard Situational Awareness was, which is that’s a lot of leverage. a 25% drawdown takes you out of business.
[03:33–05:06]
Martin Shkreli: Interestingly, we heard that three firms were bidding on the assets. Jane Street, Millennium, and Citadel were sort of brought in and closed circle sort of late Friday to bid on the remains of the firm. And we got offered a look at a $100 million of Anthropic stock, which we were puzzled by. sometimes you see these SPVs sort of interest comes across, here and there, and we thought that was interesting. I sort of raised my eyebrows like, is that Leopold? It’s because, sometimes when you want to sell $4 billion or something, you don’t come out and say you want to sell $4 billion. You come out and you say, sell $100 million of it. And usually a guy who wants to buy $100 million is enough to buy 500 or more. And you sort of fill them out and say, here’s $100 million. Okay. Do you want $500 million, by any chance? And then, your eyebrow starts to raise a little bit that, maybe he’s got even more. Now, of course, this is a really odd situation. We heard Millennium did put in a bid. Citadel’s bid was better. I think Ken wants to be the guy that everyone goes to when they’re in trouble. And that’s the Buffett is getting older. This is not the kind of stuff Buffett wants to do anyway. But Citadel did this in the Amaranth deal. when Amaranth blew up natural gas futures, I think Citadel took that portfolio and virtually every blow up in finance Enron, where they wanted to acquire the talent.
[05:06–09:05]
Martin Shkreli: They wanted to do it Enron as well. Think they just sort of Ken is a very smart guy, sort of shows up and says how can I be a partner to the Goldman’s and the Bank of America’s when they need to get out of a really risky position? They basically take over the book, If you I’ll give you an example and you’re asking the question. Let’s say you’re at $45 billion and $10 billion of that is in Anthropic from what we understood. So you have $30 billion of cash in your bank account and running four-times levered means you have $120 billion gross market value. Oh. So if your gross market value drops, I don’t know, 25%, that doesn’t sound so bad at $120 billion. Maybe that’s I don’t know, $30 billion. So you’re down to $90 billion, but that’s not your equity. Your equity drops from $35 billion to $5 billion. And no prime broker is going to let you keep $90 billion of gross market value because once you dip your equity below zero, it’s their loss, not yours. And they’re not going to lose a penny after Archegos and other blowups like it. That’s not their job. They kind of have the right to take over your portfolio Which is sort of, something I hope nobody ever asked to experience. But they basically call you in and say, listen. You These are our assets now. We’re going to decide what their disposition’s going to be. And the rumor is over the weekend, he contacted about 10 parties to place Anthropic in an effort to shore up liquidity, selling the Anthropic stake for allegedly, the offer was at $1.1 trillion equivalent market capitalization, which, is I think roughly where it’s trading. And it’s unclear whether that was sold or half of it was sold is what we reported that half of it was sold. It’s still a little unclear who bought that, what’s happening exactly, but that’s the best we’ve got. And then when it came to the public book, it does sound like buyer of that book basically got a, from what we were told, $3 billion to $4 billion insta markup. So yeah, they basically now have to work them they have to work out of $3 billion to $4 billion. Yeah. More than $3 billion to $4 billion, quite a lot more. But in essence, if they work out of these positions without disrupting the market, they’ll print at $3 billion to $4 billion on the trade Which, is unusual and interesting trade, but, really exciting. One of the parties reached out to me last night, one of these three parties, interestingly, after my reporting, and they said that, in essence, it’s on the substance, yes, Leopold flew a little too close to the sun and your numbers are a little off. I asked what direction and they wouldn’t confirm or deny. I received a lot of pushback on the reporting to your point, privately and publicly that it’s not so bad. And that, he’s only down 30%. 30% you can kind of live with. But also, if Anthropic hasn’t changed its mark, that means you were down 60 in the public book. And if you’re four-times levered, that means you’re sort of down 15 on the public book Sure. Which sounds too good to be true. If you’re trading these stocks, they were down like 15% a day. So we’ve also heard the other AI funds are hurting, maybe not as much as in trouble, but certainly hurting as well.
TBPN Hosts: Where does the fund go from?
Martin Shkreli: He gives some good he gives some good cover to all the funds that were effectively copy trading him. Oh, sure. Maybe even being more risk on and later to these positions because they were they’re naturally just late if you’re trying to copy trade someone and you’re you’re Have to catch up.
TBPN Hosts: You’re trying
[09:05–11:41]
Martin Shkreli: to catch up based Yeah. More leverage. You’re you’re you’re coming into these trades way later. Do you do you recall, like, how did you process Ryan Jacob in around the year 2000?
TBPN Hosts: Because you were at Cramer’s firm, I believe you joined maybe right before the Ryan Internet Fund started collapsing?
Martin Shkreli: Yeah. There’s also the Manhattan Fund. There was a fund in the sixties called the Manhattan Fund that Warren Buffett criticized for being the go-go fund. It was run by a guy named Gerald Tsai. And so, like, every generation, you’ve seen the memes about Cathie Wood. every generation has it, the guy that believes in that cycle and it goes balls to the walls on that cycle. And look, I have a lot of respect for somebody who’s who’s willing to do that. I used to tell a friend who kind of did the same thing. He followed this trade, but he was very early. So he had sort of Leopold like numbers and he sort of did hedge it at what sounds like close to the top. So sort of a miracle trader, best trader I know. And I joked with him. I said, Leopold sells at the top and turns short, like, I will absolutely adulate him as the greatest of all time. It’s just that, usually when you’re so spellbound by that narrative of whatever happening, in this case AGI, know, there are people out there that say, look, AGI’s here coming when it comes, the entirety of finance is not relevant anymore. Yeah. we might as well just run it up and kind of see the end of days this way. And of course, to some guy sitting on a trading desk at Goldman Sachs, you’re like, these people are fucking nuts. It’s just the stock market. good deal. So you given that Leopold had been at FTX right up until the fall, did you think that maybe as risk on as he was, like, maybe he was like, what? I just I can’t go through that again. He wasn’t necessarily he wasn’t necessarily directly tied to any of this sort of nefarious activity at FTX, but he did have to viscerally experience it and I believe resigned the day of the collapse and I would just was Yeah. To run it back like so quickly. You would you would expect even like, Go and do it, have a normal, great career for a decade whatever, then maybe come back to leverage and be like, I’m ready to dance again. But
[11:41–13:50]
Martin Shkreli: There’s a lot of questions. Like, one question is what’s his carry? when a lot of firms in the hedge fund industry, believe it or not, they have clawback provisions for carry.
TBPN Hosts: Like high watermark provisions. Right? So you have to clear something?
Martin Shkreli: Sure. Has a high watermark, but what’s increasingly happened is a is a is a carry provision where you have to return the 2 and 20 you earned if you have a severe drawdown Yeah. Which, could actually end up being a tough situation. Now as you guys know, the fellow is getting married this weekend as well Yeah. Which is, a little bit of tragedy with a little bit of triumph mixed in. But obviously, when this time How common are those clawback clauses? Because you have to imagine in this fund raise, he had, like, massive leverage,.
TBPN Hosts: Like, demand was very high. Demand was very high. That feels like a turn The numbers were so good. Yeah.
Martin Shkreli: It’s a more institutional thing, and I and it speaking of which, obviously, the guy basically had no experience. And again, in times like this, nobody wants to grave dance, and I’m not doing that. But I had some institutional friends, one of the biggest fund of funds in New York, for example, who passed on Leopold, basically laughed at him and said, there’s no way I could invest in this. And of course, he goes on this tear makes like 20 x or whatever it was since inception Yeah. And does fantastic and he feels sort of sheepish, but ultimately, somewhat vindicated after all of this. So you did have a manager that had no experience, kind of a long only or extremely long biased, starts through privates, which for many hedge funds is kind of the death knell. You when hedge funds put on their VC cap and try to do what those guys do, it often doesn’t end well. And that goes back, like, fifty years basically of hedge fund history, and very few people have been able to do both. And the other thing I’d point out is we’re going to see July numbers very soon here from quite a lot of hedge funds that I think were in the same trade. And so this is not just Leopold’s $100 billion gross. It’s like that times maybe five or 10.
[13:50–15:58]
Martin Shkreli: And the mark well, the market’s liquid, but that’s a lot of downward pressure in a few weeks. And it’s amazing to see this all compressed in a month whereas, like, the dot-com bubble took three or four years to, like, patiently go up and patiently go down. seeing that compress instantly is interesting. What’s going to happen next is really going to be fascinating. There’s some theory out there that we see all time highs again now that all this liquidity is out. And there’s other theories there that we actually were just having this nice big downtrend and that this liquidity pop will fade and will be back down further and further. nobody knows what’ll happen, but it’s certainly well, you’re right that, the Anthropic and OpenAI are having record business results, so is Microsoft and Google and Meta for that matter. There’s still, I think, some more discerning questions about is or is this CapEx investment worth it? Sure. they’ve rewarded Microsoft for being prudent. They punished Meta and Google for not being prudent. So one wonders what the future will bring there. But yeah, I out as crazy as things have gotten on Wall Street in many years, probably at least since FTX. And certainly crazier than the sort of Tiger Softbank venture boom of ‘21. And then, really since then, the AI insanity. So it’s it’s it’s quite a spectacle, and I think, no matter how much people want to learn the lesson of leverage over and over and over again, we all seem to repeat it, and, know, it is what it is. But I think that the Jane the Jane Citadel Millennium kind of like entire hedge fund complex sort of becoming this like shadow bank is quite interesting.
TBPN Hosts: That’s interesting.
Martin Shkreli: in that, like, these guys are sort of there to normally, the banks would sort of take this on the chin, but now that there’s other folks who are like, Jane was an LP, for example, in the bond and reportedly was not interested in bidding, which is fascinating. May have taken the Anthropic, however. Really unclear. We’re going to learn more, obviously, as some days go on here, but it’s, it’s an unprecedented time and, really an insane story that, may just get more insane as we learn more.
[15:58–20:01]
TBPN Hosts: Is there a world where the fund continues? Because I’m just hearing the numbers, and it’s, like, for up at $45 billion. The actual money into the fund was maybe $5 billion or something if you sell the positions. Right. There’s a world where you wind up with, like, $10 billion in a bank account, and the LPs are like, well, we gave you 5. Keep going. Yeah. Get back in the game.
Martin Shkreli: ? I hope I hope that’s the case for the LPs who are awesome, for the Yeah. Fund manager who obviously got quite a lot of whiplash. But know, at the end of the day, there’s there’s this concept on the street as you guys know, like, once there’s blood in the water, like, these positions would go to zero. Like, we’ll send Micron to $5, just to liquidate this guy at three. Right? Like, that’s, the craziest thing is, like, that’s that’s the nature of Wall Street when this happens and there’s a guy that has to sell $100 billion, you’ll have a trillion dollars in front of him just like, let’s let’s see this guy cry uncle. And it’s the saddest kind of most Machiavellian thing, but, like, he had he sort of had to blow up. There’s no other ending, sadly. Yeah. Because of the leverage level, it’s just, one slight I remember my old my old boss was a Tiger portfolio manager, reminded me of the 2000 era where there’s this very slight change in tone from one optical component supplier, and that’s like him and his partner from Soros just decided to go like as short as they could. This is because they knew, ultimately, these vulnerable hands were sort of sitting there after the easy part of the bubble was over. You have this, like, okay. What’s what’s next? Things have to get a lot crazier. You saw Dwarkesh’s tweet. Yeah. Things like that would have to sort of happen for there to be enough second derivative for somebody to be surprised. Yeah. everyone knows AI is in this boom. Everyone knows chips are in this boom. Yeah. What could possibly shock you to the upside? Not much. So if you hear any little, like, we’re not going to spend as much, the whole shit hits the fan and every it’s just too heavy. So I actually wonder if we’re we’re, if we’re not in for a longer, more protracted decline. Things feel great today. we have this huge boom, this relief rally, and a lot of the froth is out of the system. But what next? I don’t know that, a patient and calm market is going to emerge because you had the hyperscalers and the big companies, they FOMO too. They FOMO just as hard as Leopold did. Right? If not harder. So this isn’t just him. It’s the whole world collectively saying, fuck. I gotta I gotta go all in AI. And it’s it’s and who had the guts, other than one man, Tim Cook, in the back saying, not me. Do nothing. what mean? Yeah. No. It really was Tim Cook. Yeah. The funny thing, we we had been joking, we were joking in, like, q four when, they’re prior to, like, coding agents really starting to rip, OpenAI revenue growth had, like, slowed a little bit and, like, there’s some jitters and a lot of this stuff wasn’t, public at the time, but you could tell some of the kind of crossover types were like getting a little nervous. Right? They kind of expected DAU numbers Yeah. Yeah. Really plateaued.
TBPN Hosts: And then we And then there was a correction. Like, there was, like, briefly, for a period. It was probably, eight weeks. It was, like, okay, like, and then it started ripping again. And we were taking, like, a sort of a bit of a joking, like, victory lapping, like, cool, like, AI corrected,. Bubble pop. Bubble pop. We’re able to build back sustainably. We’re good from here on out. It’s smooth sailing. No. I completely agree.
Martin Shkreli: I think the most unexpected thing is it would be if we saw brand new all time highs for the entire thing. I think almost everyone on Wall Street is skeptical this will happen which means is it has a chance of It becomes a bullet. So you’re saying there’s a chance.
[20:01–22:11]
TBPN Hosts: I love it. Can you can you give me a little bit more insider baseball on what it takes to unwind a big position as a shareholder? Because a lot of people who are not inside the hedge fund world are sort of maybe confused around, okay, yeah, you own $50 million of a $1 billion chip stock. Can’t you just dump that on retail? Can’t you just like, sell market-sell that on E*Trade or Robinhood? And in fact, it’s much more complicated when you’re at this level. Even though it’s public markets, there’s not just a big button. Can you walk us through what it actually takes to, like Yeah. Sell a big position when you’re at that level?
Martin Shkreli: Yeah. There’s there’s a lot that goes into it interestingly. So the first is you have this advertisement system. So if you sell into the into the market, you can try that. And those that’s called selling into the screens. The screens are the numbers on your screen. Anybody could buy and sell Robinhood, whatever. So you don’t normally do that if you if you can help it. Selling on screens is at least somewhat quiet. You can just sort of trickle out. There’s always this conspiracy that as I’m selling on the screens, there’s some guy who’s can see my screen. And he’s like, this guy’s got a VWAP market order to sell 10,000,000 shares. That’s like I’m going to tell somebody. And that knowledge would be very powerful. And there’s even some even crazier conspiracies out there that quants could actually use different all kinds of insane ideas around what they can do to sniff out that this is happening. So there’s people that are scared of that. Then you can pick up the phone and this is the way you’d normally do it, and you call Goldman and you say, Listen, I need to sell 5,000,000 shares of Microsoft or something like that. They say, Should we take it or do we find a guy that wants to take it? They’ll try to decide. Now, Microsoft sees, if you’re trying to sell a share in AI, a Neo Cloud in Australia that nobody wants, that’s a tough one. And you own like ten days of volume. So if you try to hit the screens, have ten days of volume. You would have to be the entire volume for ten days before you’d be out.
[22:11–25:43]
Martin Shkreli: You’d probably take the stock down 50% or more, and you don’t want to do that. So you try to, do this advertisement process, and you basically can post in the stock market that you are a seller of a stock, and you can post that your four digit, what’s called market maker ID. So Goldman’s is GSCO. So GSCO would be a seller of say, Nebius, which was one of its positions. And so you’d call up, you’d say, okay, Goldman, I’m a client too of Goldman. What do you got on Nebius? And the guy would say, listen, we got a pretty big seller here. And say, how big? 500,000 shares? And he’s like, a lot bigger. And so you’d say, okay. Because they have to advertise that they’re working your order. So they have to tell people that there’s a seller. They are trying to be coy about how big, but they’re not going to waste somebody’s time either. So the guy who’s heard that there’s a big seller, well, he might turn around. He’s not supposed to do this. He sort of might turn around and say, there’s a huge seller of nebious out there and I’m just a little baby fish. Maybe I could short 50,000 shares and get in front of this guy. If you’re an actual interested buyer, you might also still be nervous because you’d say, well, if he’s really got a ton of size, I might have to be judicious about how I step in. And so if you combine that with the pressure in the market and you add it all up, and then usually what you do is you’d have to say, oh, I know a guy that works there, and let’s see if he’s returning calls. When you hit up the guy and he’s not on Bloomberg, he’s hard to reach, it’s like, well, it sounds like it could be them selling. So it’s not too many people that own that many shares of that security. You look at the holders list and you’re sort of like, who could it be selling 10,000,000 shares? So you call Fidelity and they say, no, we’re not selling. You call the next guy, no, we’re not selling. Next guy is an ETF, next guy is an index fund. It’s got to be him. So if it’s them and then you start noticing all of their positions are down, it gets really hard. So ultimately, the bank decides because you might say, I don’t want to sell. The bank says, don’t care what you want. We’re we’re selling regardless. And Goldman Sachs is not in the business of holding AI stocks. we’re going to sell at any price we can because our board would rather know for sure that we’re down a billion and just take the rip the Band Aid off than to wonder if we could lose 50. And so it’s Goldman’s position that we’re just going to just cut this cut the arm off right now before it metastasizes. And so they’ll do a fire sale. Course, Goldman Sachs isn’t going to reach out to a guy like Citadel or somebody else to place it carefully, but selling the whole portfolio in one shot was a very smart move. Now, again, we’ve the discount could have been as big as, 20 to 50%, which is, mouthwatering discount to buy, some quality companies at. But to end it and have finality, what was really to answer the question finally, what you really needed to do is the buyer of these stocks has to have the liquidity to hold them for five years and do nothing. Because the market, guys like me and to a very small extent, and guys too much bigger will sit there and say, I don’t think you can hold this. And they’ll start shorting it and shorting it and shorting it and trying to make you cry uncle. Kioxia in Japan, one of Leopold’s holdings, also online, is trading at three times earnings. they basically force you’re forcing the guy to really, to sell. And if you’re going to hold the stock, have to make sure that you can hold it until it’s two times earnings or one times earnings.
[25:43–29:59]
Martin Shkreli: And the only player big enough and more powerful enough to sort of hold a $100 billion and not blink is somebody like a Citadel. And even still, some keep the rumors out there, they’re the people who are going to try to crush your Citadel, which I wouldn’t advise, but something like that where, maybe they’ll have now have to suffer the same contagion. So it’s a very crazy time in the markets, and I don’t think we’ve seen everything yet because I do think there are some large tech funds that have had the same trade on. I do think liquidation is over, thankfully. But I do think that there are some funds that are about to be found out to be down 30% or down 40% or so.
TBPN Hosts: Take me through the mind of Ken Griffin, like, couple weeks ago. There’s this rumor that he was sort of, like, pushing or signaling that there might be a rate hike. But what I’m interested in is if you suspect that there’s going to be a fire sale on x, y, and z companies, is there a world where you build the hedges before you acquire those assets? Or is that two four d chess? Because that if they if they wind up acquiring these for 50%, 20% off, but they already have offsets, then they sort of come in market neutral. Is that possible?
Martin Shkreli: I don’t think so I’m familiar with the Citadel’s performance, for this month, which is surprisingly up. So I think they’re probably one of the only hedge funds in the world that’s up this month. Yeah. It’s up So they were actually very They were actually hedged is what you’re saying. Yes. They have a diverse platform of different businesses, a guy trading weather, a guy trading rates, a guy trading stocks, about a thousand guys trading stocks. And they have a computer fund, called Citadel Securities that is a market maker that trades a good chunk of the volume of every instrument in the world. And ultimately, I think that the prime brokers, the Goldman’s and Bank of America’s, they do so much business with Citadel, and they’ve done this before where they know who to go to just the same way the US government went to Warren Buffett when they wanted to shore up Goldman. Yeah. They know that the right person to call is Ken, and he is really going out of his way to make himself the guy to call. And I think that is a great brand because you may not need to be that guy more than once every decade, but look, once a decade to make a free $5 billion or $10 billion is a great free copy. And it’s it’s sort of like he becomes a dependable trusted partner to these banks. And if he wants something for the banks, he’s helped them. Because without him, they might have had to sell that at a negative number. In fact, some people think, I don’t think this is what happened, but some people actually think the equity in Leopold’s prime brokerage accounts went negative Which I think is, something that, again, gold the Goldmans and Bank of America’s try to stop you before you get there. But they also don’t want to sell, like I said, share an AI, which is an illiquid tough to sell security. they’ll sell out your Micron very fast or you’ll sell it out before then. But if you’re left holding this bag of, like, illiquid assets That you’d have sixty days of volume to get out of, it’s pretty tough to sit there and tell your prime broker, don’t worry. Which is why, again, I think he needed cash. Probably somebody on Monday or Tuesday tapped him on the shoulder and said, your margin’s looking a little thin. Can you can you add, a couple billion here or more? And things happened so quickly that there was just no time. And yeah, it’s I think I think Citadel learned about this at the eleventh hour Yep. As every as you’re supposed to. the firm didn’t leak out that they were hurting. They didn’t have, to my knowledge, daily performance. In fact, from what I’m told, situational awareness as a young hedge fund was not so great with communication, not surprising, especially with what monthly and quarterly letters. Could have been more timely on some of those. So it’s a small group of a couple of guys, so I don’t think that this was the same You rewind what? Was it only a month ago that the or 13 f was late.
TBPN Hosts: 13 f was like late and everyone was Right. Like sold everything. Did some he work kind of deal Yeah. To get it, keep it confidential? But it sounded like you just like didn’t get around to it. They had other priorities maybe. Do you think mentioned the
[29:59–33:23]
TBPN Hosts: Do you think you can rebuild a career as a venture investor? Because, like, in venture, you’re just you’re you’re just, long-duration by design. Like, it’s, like, one of the few forms of investing where it’s just so hard to get out of position.
Martin Shkreli: That’s the thing. Mean, why become a hedge fund manager? This is the I have a friend who wants to start I have a friend who wants to start a hedge fund. I told him this is the most painful, horrible business in the world. Why do this? And I if you start a newsletter business that makes $100 million,000,000 a year, even 50,000,000 a year of revenue, you’ve done better than almost every hedge fund on the planet. Yeah. Like, you do not want to do this job. And the reason, the reason people do it, and I did it too, I would never do it again, is it’s one of the most glamorous jobs in the world. You think you’re the glory is incredible. You’re the master of the universe. And I had friends wanting to quit really high profile jobs to be a hedge fund. I was just like, you’re you’re out of your mind. You don’t know what it what this job is. It’s waking up at 3AM checking Korean stock prices and, waking up back up at six, wondering what’s what’s happening in the world, stuff like this. And there’s actually no productive thing you’re doing. You’re providing capital. But other than that, you’re really playing this high stakes crazy poker game. And it’s it’s certainly fun and interesting. But when it’s painful and raw I hope he’ll he’ll do something he’s a brilliant person. Brilliant people like that. look. Peter Thiel had a hedge fund that Clarium. Didn’t quite have this level of liquidation or anything like that, but it had a rough last few years. And Thiel was able to, obviously, not only continue his venture investing efforts, creating one of the biggest funds of all time, one of the most successful funds of all time, investing personally doing amazing, also getting back into macro trading with Thiel Macro, which supposedly has done well. So I do think there is this, like, period of a few years that, he can reset and take the learnings, take whatever talent and skill, and certainly genius that nobody denies that he’s a brilliant guy and rebuild. I don’t think it’s the end at all. And I hope he’s keeping like that even temperament about this because, I think a lot of people respect him quite a lot 100%. No matter how this turned out, Yep. He’ll be back and successful. But it is a little bit of a humiliation thing that I think most people on Twitter or in other places are sort of saying, well, market tends to humble you. And this is like an extremely humbling moment from being, just two months separated from the biggest hedge fund on planet Earth and most successful to being forced to sort of liquidate. That is quite a rapid sort of, reversal.
TBPN Hosts: Also, just imagining what the fund looks like in two or three years if you just survive. Right? I can he there was a clip that was circulating yesterday from his, appearance under our cash where he’s like, oh, there’s obviously, like, $100 million x, left Yeah. Before AGI. Right? So like, he was, like, up, 20 x or whatever thinking, like, I got I got so much room to run, but I just couldn’t stay in the game. I gotta say extrapolating Yes.
Martin Shkreli: Is always a risk.
TBPN Hosts: I gotta I gotta say it felt like a felt like a huge moment for you and your business just because everyone, the whole finance world was learning about this situation from your post.
[33:23–36:32]
TBPN Hosts: I’m sure a lot of people were glued to your terminal. And it felt like a changing of the guard because, again, you’re getting pushback. You’re getting some pushback, but then two hours later, it was like Financial Times and Bloomberg and Wall Street Journal. They’re all kind of clearly, they needed a couple hours to, like, run it down. But you got to it first and, yeah, I was I was quite impressed. Thank you. I think that, we’ve talked about this in the past. there is a change in the guard. There you guys helped change the guard In your space. And I think that, the folks at the journal, the folks at Bloomberg, folks at these other companies, they’re fantastic reporters, but they’re not active or former players. And we will hear we will always hear things before them Because especially on the street, because that’s just Well, the crazy the craziest thing is you actually waited until it was, like, over effectively to share. Right? Like you had been hearing about this There’s a lot we sit on that Yeah.
Martin Shkreli: You don’t want to share that. You know, we’ve been in that position like Hundreds of times where it’s not appropriate to share anything. And sometimes you’re sitting there being like, I’m really surprised that like legacy media hasn’t picked up on this story. It feels like it’s just common knowledge and there’s there’s a definitely a time and place to just not say anything and let something work its way through the system. I to give the devil their due, the information is also quite good at, this type of thing. And they are particularly good at scoops on OpenAI. But the which I still haven’t unraveled how, but they’re obviously very good reporters. But a rep a reporter at a place like that in traditional media, they generally don’t care about burning bridges and resources or contacts. So they want that news out yesterday. I do care. And it also is a conflict of interest because I don’t want to hurt somebody that’s given me good information and betray their confidence because I have to keep the confidence of these folks if I want to keep talking to them. But I also in the case of this situation, as the carnage is unfolding, there’s sort of a the balancing the need for everyone to know with the need for, protecting friendships and relationships, you have to make that judgment call each time. And I hope that our customers understand that there will be things that we know before others that we can’t disclose because we want to protect folks and protect our friends. Bloomberg, Wall Street Journal, they’ll never do that. They’re always going to serve their customer who is the reader. We can’t necessarily do that. You probably know things about a litany, like you said, hundreds of times, fundraisers going on, different things like that. And we have to all keep our lives closed because that will be the last time we hear about a fundraise. And I think that this was a situation where it sort of merited discussion. It was going to happen momentarily anyway. I in fact, to your to your point, the thing that got me to publish was my friend saying everyone is hearing this now. Once that happened, I said, alright. Well, it’s time to let I can let the cat out of the bag. It’s going to about to be let out anyway. So
[36:32–40:08]
TBPN Hosts: I have two more quick questions if you have a minute. One is just about how leverage works at a hedge fund. I think, again, from the retail perspective, from the much smaller player, you might know that you can go to a brokerage and get a little bit of leverage. But what does the process look like as you’re scaling into the tens of billions of leverage? At certain point, you have to go to all of the banks, certain banks. Who’s actually like, what is that process to get leverage at that scale actually look like? And also, let’s let’s appreciate for them for a moment that I feel like just a month ago, the West Coast broadly was taking a victory lap, saying it was eating Wall Street. Yeah. The best and biggest head fund is no longer on the East Coast. Like, we just have everything now, finance and technology, and then and then just deeply humbled within the span of thirty days. And it turns out turns out you guys over there, you a thing or two, and here we are asking you, so how would one go about getting So one of the things that I think is not well understood is the prime broker Yeah. Make a spread on I think that’s somewhat understood is they make they make their business to make a spread on financing. So if you go to prime broker and say, I’m never going to use leverage. Never?
Martin Shkreli: And they say, I’m never going to use leverage and I’m never going to really trade a lot with your firm. They’re just going to sit there and say, we’ll still take the assets because we can rehypothecate them and blend them to the guys that are going to take leverage. But in general, that’s not a great customer. So if they’re making a 1% spread, which is actually be is relatively huge amount, and you’re borrowing four-times leverage, you’re actually giving them 400 basis points of free money Which is sort of fantastic. In fact, their borrowing costs are probably less than so far. So they may be getting as much as 600 or 800 bps of free money on huge amounts of capital. So leverage is the best friend to a prime broker. Now the risk guy is sitting there saying, well, wait a second. I love lending, but I don’t like lending to concentrate portfolios. I don’t like lending to short sellers. short sellers can get big, big, leaps in their bills, like GameStop, for example. So the most of the long can lose 100%, but if a four-times leverage, the most long can lose 25%. Yeah. So there’s sort of this mix of things you have to think about. I think the getting into the privates is usually, like, for me, lot of really bad sign for almost every fund because it’s as tantalizing as private companies are. There is a whole group of people on the West Coast who are much better at that than the guys in the East Coast. Of course, there are funds now like Altimeter and Coatue and others that are doing both and doing both Yeah.
TBPN Hosts: And what made that what made it so tempting, obviously, for Leopold that just how close he is to like, couldn’t be closer to Anthropic. And it’s a company that over the last six months has had $100 million x the demand relative to the allocation. Right? So it just felt like, and I don’t know. Who knows what the what the structure on those investments look like? But it’s like, if you’re going to break your rule and do privates, like, then that’s the company to do it with. But then you still get into a situation where you’re like, wow. I really wish this was more liquid.
Martin Shkreli: I can’t press the sell button.
[40:08–43:48]
TBPN Hosts: Give us an update be before you leave on Korea broadly because, a lot of people are, commenting on just how similar Leopold’s approach is to Korean retail. I don’t know how true that is, but I can imagine, like, it’s, there’s blood in the water over there, and the whole country is probably in shambles.
Martin Shkreli: I think so. I made a Kelly criterion calculator and, like, a little portfolio simulator tool that, basically and Paul Tudor Jones said this a while back, and I had a problem with this. Every trader seems to make the same mistake over and over again, which is their position size is probably two to 10 x more than it should be. And if you actually? So it sounds nuts. Right? But if you actually run the simulator and we built ours at kelly.kelly. So Kelly was a guy at Bell Labs. He was a member of the technical staff. He was one of the original technical minds at Bell Labs. And so Kelly came up with the proof called famously the Kelly criterion, which gamblers used before it was adopted in finance, and it proves the optimal bet size. And the optimal bet size is the relationship between your edge and the payoff odds. So if you have 55% edge, your optimal bet size is 10%. That’s still quite volatile for folks and so people do half Kelly or quarter Kelly. Most folks don’t actually have an edge when they trade, But if they did have an edge, they’re trading as if they had a four-times or five x Kelly edge, which is interestingly, like, you might sound, okay. Well, that just sounds swashbuckling and, like, that takes a lot of risk. No. If you run the simulator, you will go to zero each time. And the simulator is a really cool tool that shows you even with a 60/40 edge on every trade you make, you’ll go bust if you overbet And it’s it’s an eye opener. We might say, who has a 60/40 edge in the stock market? Nobody has 60/40 edge. But you will absolutely go bust if you don’t size correctly. And it’s something that I’ve had to learn very painfully, very over the years that I’m almost always overbetting. And I think every fund is sort of the same, and certainly every retailer is the same. And it’s just sort of a weird variance math game that very few people actually map out and say, can I simulate a portfolio to see what is the sort of the right thing to do in most cases? And in fact, After I left the Tiger cub where I worked, I briefly worked in the office of a guy who worked at SAC Capital, called Point72 for years, and he was one of the best managers. He’s a quiet guy nobody’s ever heard of, kind of retired. But I got to watch him before I set up my own hedge fund and did the exact opposite, way overbet on everything. I got to sit with this guy for a few months, and I was astounded. So what I found is that, know, he was managing, I don’t know, $300 million or $400 million of his own, basically. He almost never used the capital. 90% of the capital was just cash, and he would just make these tiny trades. And the guy had almost never had a down I think his record is he never had a down quarter in twenty-something years of trading. And he had, like, 30% returns, which is great. And the guy just kind of, just did these little nibbles, and he never lost money. And it was it’s an incredible thing. And then, of course, the second I get the chance to get some capital, I’m using eight-times leverage. And it’s just like, it’s the dumbest thing in the world, and you live and you learn. Psychology. Well, thanks so much for coming on the show and breaking it guys.
TBPN Hosts: This is always a great time. We look forward to seeing where things go from here. Have a great weekend.
Martin Shkreli: We’ll talk to you soon, Marty. Cheers, Marty.
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