We are pleased to present you with a 10-minute video excerpt from a new, 58-minute interview featuring Hedgeye CEO Keith McCullough. He was recently interviewed by our friends from financial media company Real Vision.
Real Vision co-founder Raoul Pal recently sat down with Keith to discuss, ‘A New Model to Manage Macro Risk.’ During this in-depth conversation, Keith and Raoul cover the investing waterfront discussing everything from what’s driving our current market calls right now to the future of financial market analysis.
The first 10-minutes of the interview are transcribed below. It covers the genesis of the Hedgeye Macro process as well as why Hedgeye was founded 10-year ago.
(“I started to think through, ‘What could I do that would actually change the world a lot more than me just having another big P&L,’” CEO Keith McCullough says.)
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Raoul Pal: Keith, great to finally get you here at Real Vision. We've had so many people trying to introduce us, get us together, and I've been following you for a long time on Twitter and other things and thinking, you know, this is a guy we need to get in. And so finally, thank you for coming to join us now.
Keith McCullough: Thanks for having me in.
Pal: Thank you. So look, tell people a little bit about the background, and what you do now, and then more importantly, how you came into the business.
McCullough: So now I have a company called Hedgeye that's 10 years old. But when I started in this business, I started like many other analysts on Wall Street, I got a job as a hedge fund analyst. I didn't know what I was doing at first, but I started to figure it out bit by bit. I worked with a guy named John Dawson as he was breaking up with a guy named Art Sandberg. And I cut my chops as a buy side analyst. Then they gave me my own book, probably too early back then. We didn't have factor exposures then, when I started as an analyst back in 2000.
So, to back up even a bit further, I started in the traditional Wall Street investment banking program. I couldn't stand that. After a year, I went to the buy side and then eventually became a portfolio manager. I had my own fund and I was running a global consumer portfolio.
That's how I got into global macro.
I got tired of modeling companies in a way that couldn't tell me what the forward outlook was from a macro perspective because that's of course what analysts would always get wrong. I would get it wrong too, and I didn't like being wrong. So I started to build a global macro overlay to actually analyze companies from a bottom up perspective, which was easier or more helpful with global companies like Nike for example.
But it all started with just being an analyst.
And now today as a macro strategist, all my macro calls are born out of that same analytical process. We're almost 20 years later. I've really just applied most of my fundamental learnings as a bottom up analyst to my top down view. Like this whole rate of change process that we built.
Pal: That process of bottoms up and top down was kind of the Tiger Management approach. People like that. Some people have done it really well because there's a lot of top down information in the granular data and the bottoms up stuff. A lot of people don't look at it that way.
So is that what you did? You kind of try to marry the two together?
McCullough: Again, you always start with the fact that you don't know what you're doing and you're trying to find a better path of getting it more accurate more often. I just fundamentally couldn't understand why people weren't applying a repeatable process from a macro perspective to signal things like what is the dollar’s impact going to be?
Again, to use an example, what is the dollar impact going to be on Nike's quarter? What happens if the global growth rate is decelerating? How might that impact Nike's European business?
It was just the logical conclusion that you should have a rate of change macro process and overlay the bottom-up company research. As a result, then I started working with many more bottom up analysts. I let them do that because that's a full-time job.
I mean there's plenty of hedge funds today that believe that's all you have to do. It's been a great learning experience seeing what everybody else in the hedge fund industry does. It’s kind of like being in the other team's dressing room, so to speak, because now I'm the sell side guy or whatever you want to call me and I get to learn what they're doing and try to help them augment their process with mine. It's been a great voyage in that regard.
You learn so much faster when you see what other people are doing and you can back test it. And because my goal of course is to be right, I had no problem borrowing other people's best practices.
Pal: One of the things I found that was my epiphany moment was back in the late nineties when you suddenly realize that looking at the chart of GDP, it goes up and down. It's cyclical. And when you look at every single analyst, they assume linear demand, let's call it, in which case they don't ever look at the macro or how the global demand situation is driven by the business cycle. The changes in performance of say Nike are related to the dollar or interest rates that companies borrow at. And I had the same epiphany. It's like, really? I mean this was really the realization that 80 percent of all returns come out of macro.
McCullough: Particularly at the turns. So I liken it to one gigantic sine curve that can have the amplitude and longevity of anything. There's no fixed point. But people who are modeling things bottom up, don't quite like that. They want it to be linear. That's the opportunity.
I like to think that if you have an apolitical and data driven view, you can really be data dependent. The answer is staring you right there in the face.
But a lot of people, when they do macro, they do it one of many ways. Now, obviously there are many different strategies, but the big difference I see is a lot of people say this is what the data should look like or could look like or the outlook could or should look like.
Whereas we’ve built plenty of mathematical tools that are more modern than anything you might have seen before in terms of macro hedge fund managers. I’m of course talking about predictive tracking algorithms. It's not a guess anymore. We use Nowcasts to read what the market is telling you about what is right there.
You have to trade what's in front of you, as opposed to what you might want to see. And I think that was a great learning experience.
Pal: Yeah, I mean, I think most of what I do is a function of my own mistakes. I always say every time you think your shit smells of roses, you're going to get your face rubbed in it. And it's true. It is all about failing. I mean anybody who doesn't understand that failure, repeated failure, but losing less than you make in the upside is the whole investing game. Learning from why you're failing is the icing on the cake.
So once you start figuring this out, what made you leave traditional Wall Street and set up your own shop? Talk me through that whole process.
McCullough: I got fired—that's the best way to start. So you start from a real safe place of not being able to go back and do your job. I was at Carlyle. I had my own hedge fund probably at too early of an age. I went to Magnetar Capital and rolled that into a big book there and started to learn, ‘Oh, what are these factor exposures?’ I mean, Magnetar had this proprietary system that was very early to factor exposures in those days. And I give them a lot of credit for that. I had no idea what it was that they were doing until I finally lived inside of that.
So Carlyle asked me to come basically run long short for them before everything imploded. It was the fastest loss of capital certainly that I've ever seen. The credit team lost a significant amount of capital in a very short period of time.
It's kind of a classic. Like you said, I thought it smelled like roses when I got hired by Carlyle. I thought this is the best job possible and you're a young partner at one of the biggest private equity firms on Earth that's going to fund their first hedge fund.
Pal: It's a no brainer.
McCullough: And then, six months later, I'm carrying a box with my notebooks out the door and my son's going to be born the week after that. It was a pretty jarring experience. I mean, one reason why I started my own firm is that I had a noncompete, so I couldn't go back.
And the second reason is that after a couple of weeks I was thinking, ‘I kind of liked not working for anybody but myself.’ And that's when I started to think through, ‘Okay, what is it that I could do that could actually change the world a lot more than me just having another big P&L?
Pal: What year was this?
McCullough: This was in late 2007. And I had started Hedgeye with an explicit market view that was much different than Wall Street’s. That was the beginning of making an early and big bear market call. It was a call that I thought people should be paying attention to, not just for the sake of making the call. It was the same process I'd used for the first part of my career.
The opportunity that became Hedgeye was the idea that being in print or as I like to say, timestamped with accountability, and using modern technologies could help improve investing.