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00:00Sculptor capitals. Jimmy Levine says his hedge fund was well positioned for the pandemic. We essentially took our net equity exposure to zero. He says the chance to trade the greatest margin call in history is probably over for stocks. But there's plenty of opportunity left in credit. These asset classes are offering more return than they do 90 percent of the time. Historically Levine has spent his whole career at sculpture. Now he's getting ready to become CEO. This is my front row interview with sculptor Capitals. Jimi live in Jimi. This pandemic presented some extraordinary trading opportunities for hedge funds. How did you respond . We essentially took our net equity exposure to zero ahead of what went on in March and further to that we cut our gross risk our leverage all all the different components of risk in the portfolio. We essentially took to minimal levels historically low levels ahead of time. What we did not do was go effectively infinitely short . And believe me I've tossed and turned plenty on . If we had the insight to take all risk to zero what would what would have been even better would to have been to go the the other direction entirely. But we reduce risk dramatically. And then as March came on and it happened slowly. Really the first couple of weeks of March while dramatic were in a way what I'll call a traditional sell off meaning stocks went down. Bonds went down. High yield bonds went down. Risk assets were moving lower and they moved well or lowered dramatically and quickly . But there wasn't a full what I'll call seizure of the financial system or the financial plumbing until mid-March. In mid-March is really what began that period of what I'll call the global margin call where whether it was in the right market the mortgage market the non agency mortgage market the investment grade bond market the high yield bond market. There was just a total seizure of the flow of money. Ultimately that's what then B got what was sort of defines the next stage of this market experience which was the government response. So things got so bad so quickly in the middle of March that the government not just the US government but around the world particularly in the US stepped in with a a package of responses which were as dramatic as fast and as unprecedented as that selloff which precipitated it. To me this has to be one of the most unloved rallies of all time. Why. What wasn't there to like when the S & P 500 was up 45 percent from the March low . I think realistically it's it's two things. Number one it's historically confusing. And if you look at what's happened in a historical context this has been fairly unusual. The other . And there's probably a more sophisticated way of saying this is effectively sour grapes. Meaning investors of all sizes and types spend their lifetimes waiting for these once in a generation dislocations. And this one came and went so fast at least part of it came and went so fast that it probably was not participated in. To the extent that active managers would have liked. And thereby there was some frustration with it . But I think on the former point which is that it came and went so quickly there there's all this talk about how the rally is the most historically strong rally ever the fastest rally ever. It's asset classes and risk assets are rallying well before there's any material improvement in joblessness or the economy . But what I think is getting left out of that conversation is the exact same thing happened on the way in. So there are charts galore for from almost every publishing research house which show effectively that the scale of this sell off was faster deeper sharper and broader than any sell off in history. You know a lot. There's been a lot of analogize into the financial crisis where effectively two and a half years of price declines across all the world's asset classes happened to the same degree here in about two and a half weeks. And that was very surprising. Now it makes sense because this pandemic came out of nowhere in a big picture sense and the rally has been just as fast. So yes this rally has been has been incredible. But the sell off on the way in was equally incredible from a historical context . Does that mean that it's over. And what I mean by over is that the rally that happened happened and there isn't that much more runway left . So we have this conversation a lot with our constituents I say . If the question is did I miss it. The answer you need to first break that into two parts. If the question is did we miss or did one miss. We were thankfully in a position to take pretty good advantage. But did one miss buying the bottom of the greatest margin call in history . Our answer to that is yes. That margin call and I'm calling it a margin call. It was only in part a margin call but it was this total lack of balance sheet or capital in the world for a very brief period of time. The opportunity to buy the bottom of that whether that was in a high yield bond not agency mortgage security a stock or anything else that is gone it may come back. I don't necessarily think it will. I think the amount of government support in the system in so many different ways is likely to take that type of margin call off the table for at least this episode. Never is a long time. So so many more things will happen until the end of time. But in this episode. Did one miss the margin call. Yes. Now the economy is in a very troubled place. Frankly the world is in a very troubled place. The market is across all asset classes . The markets are incredibly volatile. The performance within asset classes is incredibly disperse. There will be a likely tremendous number of defaults corporate and otherwise. And so if the question is has the opportunity to generate good returns by taking an opportunistic approach across all asset classes around the world. The answer to that is no that has not been missed. I think that's going to be with us as the global economy is likely to move in. These fits and starts as we all figure out how to most safely and responsibly respond to the virus . Jimmy you're an acute observer of markets. How do you explain the rise of David Day Trader Global. So . I follow it a little bit. One is hard not to exist on social media or anywhere and not do not see a lot of that. And it has actually been relevant in certain investment areas particularly on the distressed side because some of these bankrupt companies are having some really unusual things happen in their security. So certainly paying attention to what I've seen is attributed to which is logical to me. But we haven't done this research . Proprietary li is free trading makes a big difference. So the fact that a lot of the retail trading products are now free to use the fact that rates are so low and margin is so available again kind of Greece's the machine so to speak and the last one which is hard to prove . But it's certainly logical. The way it's described is with sports betting being non-existent because sports are largely not taking place in casinos being largely closed or limited. It's perhaps providing an outlet for a desire to speculate . So . You trade credit. You trade opportunities opportunistically in your hedge fund have these trading patterns that have been . Altered let's say by the presence of this retail money cost you something you know. Did you. Did you have a position in Hertz that was screwed up as a result of the fact that day traders are messing around in that stock and perhaps giving the company a value that doesn't make sense. You know if Hertz is bankrupt . So it doesn't affect us directly in that way . But it did create some I guess noteworthy effects that . Frankly ended up going away before they really had a chance to set any precedent. But if you look at a situation like the one you mentioned where there is a substantial amount of debt outstanding of all flavors CBS corporate secured unsecured etc. there was a moment in time where the company was going to finance its exit from bankruptcy through an equity offering which is at least in that way fairly unusual . That would have conceivably been in part at least a significant tailwind to your typical distressed credit investor to have Capital Junior in the capital structure come into to finance a company in that way . I think while that garnered a huge amount of attention . The system ended up doing its job in the intervening period and the notion of that offering seems to have gone by the wayside. So I think it generated a lot of press a lot of talk was sort of an interesting distraction for a period of time but we don't expect that to have a sustainable impact on how the reorganization and distressed business works . If there are a lot of people out there who missed the great reflation in U.S. equities over the past call it three months Jimmy yet . You say there are lots of other opportunities for people to take advantage of over say the next year or 18 months. What are those things. What are those opportunities. Where is money going to be made . So I think we can start with what we'll call spread asset classes versus equities and we'll talk about equities. Second spread asset classes. That's corporate credit loans and bonds . It's structured credit which means mortgages and yellows and things like that. It means convertible bond arbitrage all these different areas where investors are effectively receiving some form of spread or carry or return in exchange for holding some type of risk. And what I'm constantly saying internally and externally is for all spread asset classes the most simple the most exotic those spreads are materially tighter than they were on March 20 third and materially wider than they were on January 1st. So if you think about historically these are great areas to try to generate a good return in their less efficient markets. They can be opaque. They can be less liquid. They can be more technical or process driven. If it tends to historically be a great place to make a return. Well today we're at historically wide levels oftentimes multiples of the typical level of spread or return one gets in these asset classes. So yeah if you compare it to the bottom of the margin call it's going to look quite expensive if you compare it to decades and decades of historical levels. The opportunity set in whether that's convertible bond arbitrage high yield bonds not agency mortgages these asset classes are offering more return than they do 90 percent of the time historically. Well this new pandemic era be a renaissance for hedge funds . I think every era is described as both the death of hedge funds and a renaissance of hedge funds depending on on which side of the table one set. I think . Periods of time where significant capital is destroyed or money is lost or volatility hits records. That certainly helps to shine a bright light on the value proposition at least of our type of business. Our type of business is set up to say we are going to try to grind out a slow steady solid return over an extended period of time without the type of volatility you get from owning equities. You're trying to generate an annual return five to seven points higher than Limbaugh grinding it out as you say. Does that stated goal imply . That the 20 percent years you've had in the past and the 30 percent years that Stan Druckenmiller had year after year after year are simply a bygone era . It's not going to be a slow and steady line. And when I think about what we're trying to achieve we're trying to achieve in in the multi strategy hedge fund area. I'll call it an equity like risk premium which is going to have for the world huge ups and downs but smooth out to a number over multiple cycles. We're trying to achieve a multi cycle equity like risk premium without the multi cycle equity like volatility. And I think that that goal sometimes will do better and sometimes we'll do worse and so will everybody else. But that goal is as desirable today and as achievable today as it ever has been . Let's talk about credit for a moment. You've got about five billion dollars under management an opportunistic credit . Tens of billions of dollars more are being raised by other investors . For credit opportunities effectively the same thing. How is anybody going to make any money Jimmy if there's so much competition. And furthermore . If the Fed . Is effectively backstopping the corporate bond market No way this ties back to the earlier part of the discussion which is the greatest one of the greatest credit investing opportunities in history is the one that came and went before anyone had time to raise all those funds. And in a way those are related points . If the world had billions and billions and tens of billions of dollars of risk capital to deploy in March well then pricing wouldn't have done what it did in March. And so I think the key again for us whether it's in those credit funds or in those multi strategy funds is being able to be that liquidity provider when it matters. I think as it relates to capital that's continues to be raised. Back to the other part of the earlier discussion. This is gonna be going on for a long time. There will be defaults. There will be stops and starts. Today I use this example. A lot of pre covered the U.S. high yield market at least for a moment traded something like three hundred and fifty basis points over over risk free. So the average high yield bond was three fifty over and at that time and this had been going on up and down for the last several years. At that point in time there was plenty of capital being raised that were called activation funds and the activation funds needed to be activated upon some event. And that event was typically something like high yield going to 700 over 750 over . Because at that moment in time if high yield everybody thought ever got to 750 over well then that's got to be an unbelievable opportunity to deploy capital and credit opportunistically . That's where it is today. The U.S. high yield market today depending on which banks index you want to use is something in the zone of 700. So here we are today where the market is trading at the level that people said. I only hope it goes there so that the fund can activate and I can I can participate in this opportunism. It's trading there today. So again I think it's both. I think there is going to be a there is and continues to be a terrific moneymaking possible moneymaking opportunity in credit . But it certainly won't look like the March 20 third lows . Jimmy. Anyone familiar with the sculptor name knows at least a bit about the firm's history under its old name Octave. It's unusual for a hedge fund to have endured as much infighting as your firm has. Not to mention an acrimonious departure with its founder and CEO. What was that like having been through this for a long time. And not just me but I'd say importantly . Our partners our colleagues our employees our counter parties and probably most importantly our investors. I think at this point we're just happy to say that it's over . We're happy to for frankly the first time in a while be able to turn our attention exclusively to what we can achieve in the future. I think we have to start with an unbelievable heartfelt thanks to to all the people in that network who said I want to continue to believe in this team . Notwithstanding some of these issues. But now it's time for us to really move forward. I'll call it unshackled without some of those distractions without some of those handcuffs into really focus on what we as a team can accomplish for our investors . Well you're here. And so are all the other people who chose to stay . But there's still a relevant question to be asked. And that is this. When Danny OK decided to part ways with what was then OK . Ziff it was widely expected that you were going to become the CEO but you didn't at least not yet. That's going to happen . People do wonder why you didn't leave and start your own fun . Why do you chose to stay . It's certainly something I contemplated at that time I'd be be unrealistic for me to say the thought didn't cross my mind . But. We have and I think this is unique and it's not just about what it's like to go to work every day. I think it's what helps create the return stream. That's that's so unique that we've been able to deliver. We have this incredible team that has been together for basically our whole careers. And look it's not every single person and it's not every single person's whole career. But if you start at the top of the investment organization and you move down one layer to layer three layer it's primarily people who like me came to this place when we were fresh out of school or fresh out of a first job and then developed together over 10 or 15 years. And that's incredibly hard to replicate. And it's incredibly hard to to build that trust that camaraderie that history and that loyalty. And when you take that and combine it with the fact that we had a similarly long tenured client base who said I want to keep backing you it's pretty hard to want to do that whether selfishly or altruistically . And probably a little bit of both. You have a great team and you have investors that want to back that team. It's a pretty that's a pretty nice thing to have in our business . All publicly traded asset managers struggle to find the balance between growth and performance. How do you reconcile the two . If a firm is too focused on growth they're not going to end up doing what they need to do in order to actually grow. So just focus on performance and doing it in a high integrity transparent quality. Be patient and the capital will follow . And there's a level at which. There is enough capital there's always going to be new things to do. But we need a size our capital to our ability to generate the returns that we think our investor base has signed up for . One of the four businesses you're in is structured credit and C yellows and those businesses thrived in the decade after the financial crisis. What's the future for them now . I think it'll be similar on the way out of this recovery . It may take a little a little while longer to get there in the exact shape of it. It is unclear. But that growth in in largely the CFO market but really was just credit creation . There was an incredible amount of credit creation in the decade after the financial crisis. And whenever there is that much credit creation there's going to be structures for that credit to sit inside of get distributed get sliced and diced get owned and ultimately get managed. And so when we think about what's going to happen after this economic cycle should should hopefully growth ever resume and it will at some point again . Who knows exactly when when that growth resumes. I would assume it's likely to come with a fair bit of credit creation as well . Let me jump in there because . Some would say this is an overly simplified analysis but the reason there was so much credit creation after the financial crisis is that there was so much central bank liquidity. Now we have more central bank liquidity than ever before by multiples . Will that translate into more credit creation in multiples. So multiples would be tough to conceive of just not now. We're talking orders of magnitude that are so large but conceptually for sure . What helps to aid the you know what drove a lot of the economic growth post financial crisis was aided by the availability of credit. That availability of credit was aided by low interest rates and and or central bank liquidity. All of that exists as you said not just exist in the same way today but in an even more extreme way today. And so it would certainly not be surprising to see a similar pattern develop. To be clear I don't think that's developing tomorrow at least the sort of Cielo driven part. The the simpler part we don't need to speculate as to whether it's developed because it's already occurred. The the months after the Fed and Treasury intervention into the credit markets I think were the three greatest the three largest investment grade bond issuance months in history. All in a row . Should that not concern us a little bit. We've got to the point in January and February where many people were starting to sound the alarm about the amount of leverage on corporate balance sheets and the amount of leverage in credit markets and the sovereign bond markets together. If we're going to have even more are we not just inflating a bigger bubble to burst when the next downturn comes along . I think a little yes a little no. What I mean by that is . What happened here to the economy was probably almost singularly unique in history meaning the economy was moving along and then subsequently ran into a multi month I'll call it revenue hole . Right. And there's all kinds of different ways to measure you . You'll hear people quote that phenomenon a lot of different ways . But the world wasn't built like say the world companies consumers the high end the low end mall owners lenders whoever it is the world's not built for the zero revenue scenario. And so a certain amount of what happened was the government in a way doing its job which is when something extraordinary happens . The government's the last line of defense. And so you can look at a lot of those dollars whether they're the direct dollars or the indirect dollars as the government filling a revenue hole that otherwise would have cascaded into an even worse outcome for everybody. Now too much of a good thing is is you know can be risky. And so there is talk of moral hazard and there's talk of whether the high yield bond buying part was was necessary and so on. But big picture there was a 10 trillion dollar hole in the economy and the financial markets seized as a result. And so the government in part filled the hole and then did a variety of things to to unglued that seizure . What's the biggest mistake you've ever made personally or professionally . I think we could have done a better job professionally . Mitigating the effects of a lot of that corporate stuff . Now the benefit of hindsight is easy. But . In a way I've gotten to your question in reverse which is just from a professional standpoint . What has been the toughest thing that I've dealt with and it was clearly the regulatory matter and the internal stuff and the fallout from that. And so as I think for myself or for my own future for the future of the firm for talking to peers in similar roles . What can you do to mitigate the impact of those types of events to either stop them before they get worse or prevent them altogether . Jimmy if you had to boil your ambition down to one thing and own only one thing what would that one thing be . Happy investors 30 years later . Because if that happened and . Everything else is very much likely to have worked out well also . So if however many years there is a long time . Notwithstanding the young face I've actually been doing this a while. But . Thirty years from now or some number of years from now looking back and saying that's an outstanding investment track record that means almost everybody in our ecosystem got the thing they wanted. And there's lots of people in the ecosystem and each one or each category wants something different. But likely everybody got most of what they wanted if that's what it looks like looking back. Well you and I will check in with one another in 2050. Jamie thank you very much. Take care. Thank you .

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Sculptor's Levin Discusses Hedge Fund Strategy, Credit, Succession

Sculptor Capital Management Chief Investment Officer Jimmy Levin talks about his hedge fund trading strategy during the Covid-19 pandemic, the appeal of credit markets, and succession at the New York-based firm. He spoke exclusively with Bloomberg's Erik Schatzker on "Front Row." (Source: Bloomberg)

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