Flying High in Bird Heaven: MSTR, PSUS, ETF

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I'm going to Utah

for two days and then I'll be back on Friday. So I'm excited.
Exciting stuff. Going to a corporate holiday party.
That'll be fun. You're going to a corporate holiday party? Yes.

I was going to say, what have some listeners at the corporate holiday party, but of course, we're going to air this on Friday after the party is over. Yeah, that's true.
So, and I'll be back by then.

It's my husband's company's corporate holiday party, so I'm excited to go to it. That sounds pretty good.
It's a two-day holiday party in Utah.

It's on a Wednesday night, which is a little bit difficult, but that means I'm going to fly out Tuesday night, come back Thursday night, and I would have taken Friday off, except Invesco is holding a proxy vote for QQQ, and I want to cover it really bad.

So, you know, it's just love of the game.

Got to come back to that proxy vote. Yeah, I wish I was kidding.
I actually, I am psyched for the proxy vote. Are they holding an in-person meeting? Are you going to it?

They are, but I'm not going to go to it. It would be a little intense.
When I was a young M ⁇ A lawyer, I went to the shareholder vote for some merger that we did. Yeah.
And it was really sweet.

Like individual shareholders stood up to be like, I just want to thank management for all the work they've done and good job selling the company. It was like in Maine.

Like I flew to the shareholder meeting, not to do anything, just to watch a shareholder meeting. I'm really glad I did it.
Now I've seen a shareholder meeting.

You can't really appreciate a shareholder meeting until you've been to one. That's true.
I would be so down, except, you know, I have to cover it for the print side.

I don't think that I could get a TV camera in there, which might justify me going there in person. It's not good television.

It's not good television necessarily, especially if the meeting is adjourned. It's exciting per se.
If the meeting is adjourned again, what are we going to do with the camera?

I do think that it would be like, it would be nice to just sort of have like five minutes

footage of the empty room to be like, well, this meeting was adjourned. I don't know, it's like C-SPAN or something.
Famously good TV. Yeah.

But it is easier to be at your setup when you're covering a live event. I would have been very surprised had you said you were going to the in-person shareholder meeting.
God. Maybe next time.

If the meeting gets adjourned again, yeah, once in your life, a shareholder meeting, it's fun.

Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion. And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

I feel like we were here for like the early stages of the micro strategy trade, now the strategy trade.

And now we're like kind of here for kind of, kind of, kind of the end of the micro-strategy trade. Wow.
I was going to say careful. Careful.
Are you

the end the end? But like there's been a completion of the narrative arc in that strategy. It's called strategy, officially.
Yes, thank you. Strategy is now kind of trading at

pretty close to its net asset value. And the whole strategy trade of being we will sell $1 of Bitcoin for $2 on the stock exchange doesn't work anymore.

And they're kind of trying to figure out what's next.

Yeah. Yeah.
I mean, we're not at one yet. And we're certainly not below one yet.
But boy, what a collapse. Below one is, you know, certainly where some of the strategy skeptics have seen it going.

And I think we're a ways away from below one. They're like 1.15 today.
But, you know, it's not you anymore. The bloom is a little off the rose.
I don't know.

Yeah, let's time this and say we're recording on a Tuesday just in case it goes below one. If it rallies right, then like, whatever.
I'm all wrong. We haven't seen the end of anything.
Never mind.

It's interesting. So the CEO of Strategy, Fong Lee, he made waves last week.

He said on a different podcast, not this one, that if the MNAP does go below one, that selling Bitcoin is an outside of the realm of possibility. That was on Friday.

On Monday of this week, I believe it was, that they announced that they're building up a $1.4 billion

dollar reserve, which is pretty amazing. It's such a funny phrase.

It is. But it's also amazing because you think about it, in the same way that we started talking about the strategy trade early, and now we're sort of seeing it full circle.

You think back to when Michael Saylor first announced in 2020 that they were going to be buying Bitcoin.

It was all about the debasement of the dollar and they were worried about their dollar reserves basically being a melting ice cube.

Now you fast forward five years plus and they're back to buying dollars.

No, I completely disagree.

I do not believe that when they announced the strategy, it was about the debasement of the dollar or that they were seriously sitting there thinking, oh no, if we hold dollars in our corporate treasury, they'll become worthless and we won't be a real company.

Like, I don't believe that at all. I understand they said it.

I just like, this is a capital market strategy where, like, people wanted Bitcoin and they're like, we're going to give the people what they want.

I do not believe that they believed that the dollar was going to be worthless.

But, secondly, whatever they were doing five years ago, like, you know, they needed cash for corporate purposes, blah, blah, blah, whatever.

The dollar reserve today is a very different situation, which is that in the intervening five years, they've raised billions and billions of dollars of

fixed-income securities, some of it like very low-coupon convertible bonds, but a lot of it, it very high coupon preferred stock they've been doing a lot of like fixed income 10 preferreds

there was this period where they were not trading at a huge premium so issuing stock to buy bitcoin was not super accretive but bitcoin was still going up and so if you issue a preferred stock at 10 to buy bitcoin that's going up at like 20 a year then that's an accretive trade and so they did a lot of that trade

But when Bitcoin is going down, that's not an accretive trade because you're still paying the 10% interest and you're paying the 10% interest forever.

And the the other thing that's happening is you have to pay the interest in cash. Yes.
It's a preferred stock so they can turn off the interest, but that's a bad look.

But so basically they've incurred like hundreds of millions of dollars a quarter of, they call it dividends, but essentially interest expense on the money they borrowed to buy Bitcoin.

And where do you get the money to pay that?

It's always been a concern.

And the answer has been kind of if you sell a lot of stock every quarter, and you use most of that stock to buy Bitcoin in an accretive way, and you use some of the stock to pay interest on your debt, debt, then, like, yeah, whatever, it's fine, right?

But, like, once

that trade stops working and you still need to pay that interest, then you're kind of in a situation that strategy is in, which is you just sell a billion dollars worth of stock to pay the dividends on your preferred stock, which is not like a great situation.

No, you don't love that, right?

You don't love that. No.
For reasons. One reason is people use use the P word when you do that.
Oh. I would not personally use the P word here.

You know, there is something Ponzi-like about selling stock to raise money to pay the 10% return that you promised previous investors, right?

I don't think that I would not personally use the Ponzi word about this trade because there's a lot going on here. It's all pretty transparent.
It's fine.

But, you know, some people email me to be like,

you know, it's not

great. No, it doesn't feel good to raise money from new investors to pay off your existing investors.

We actually spoke to the CEO of Strategy on Tuesday on Bloomberg Television, Fongley, and we did ask, I mean, would you ever suspend the dividends?

And he basically said what you said, that that would create a lot of fear, a lot of uncertainty, a lot of doubt, FUD, perhaps.

But he did also say, I mean, I asked him, you know, how would you prioritize suspending the dividend versus selling Bitcoin?

And he said that basically the idea is that they're creating this reserve and they're going to build this reserve in perpetuity. Maybe they'll revisit it in a decade or so in hopes of pushing out.

Yeah. Building a buffer so that they'll have enough to cover their interest and dividend payments until 2028.

And then I guess we'll see, you know, where we are actually in 2028, which will be interesting.

Right. I mean, like, to me, their calculation is fairly straightforward, right? If they trade at like a premium, even a small premium to their net asset value, then

they should sell stock at a premium to net asset value to

handle all of their problems, including paying dividends on the preferred, right? Cutting off dividends on the preferred is a terrible situation. It like kind of ends the trade.

It like makes you no longer able to access capital markets in the way they want to, right? That's your last choice, right?

But your first choice is like, if the stock is trading at a premium, you sell stock. If the stock is trading at a discount, you sell Bitcoin.
You know, you sell Bitcoin. You don't love it.

You were planning to hold the Bitcoin forever, but you did a great trade selling all this stock at a premium.

And now you get to do the reverse trade, which is buying the stock at a discount by selling Bitcoin. I don't know.
Yeah.

They might take a different view from me, but like, if it were me and my stock was trading at a discount to net asset value, I'd be selling Bitcoin and buying stock. Yeah.

I mean, we'll see how this evolves. I do think it's an interesting moment where you're really reminded that Michael Saylor is not the CEO.
He hasn't been the CEO for several years now. He's excited.

I'm reminded because you booked the CEO on TV. I know, but also, I mean, listen,

can you imagine Michael Saylor saying we might have to sell Bitcoin? I cannot. I cannot.

I guess you're right. Yeah.
Thank you.

I think I am right in this situation. Right.
Like, if you're a true believer, then you're like, I'm in the business of buying Bitcoin. I never selling it.

If you're just like the other 200 digital asset treasury companies, you're like, I'm in the business of doing a lucrative arbitrage trade.

And if my stock is trading at twice the value of my Bitcoin, I'm selling stock. And if it's trading at half the value of my Bitcoin, I'm selling Bitcoin.
Should we talk about MSCI?

Oh, yeah, we should. I asked him about that.
So MSCI, I wrote a newsletter on this because I also have a newsletter. It's called ETF HANA.
I included your newsletter on it.

Yes, you did in your newsletter. I wrote in your newsletter.
Yeah, it's very interesting. It's an Ouroboros of newsletters.

But MSCI, in mid-October, for context, I guess no one really noticed it until J.P. Morgan pointed it out in a research note.

But MSCI said that it was looking at whether or not digital asset treasury companies' DATs, if you will, look more like investment funds than traditional companies. And they proposed.

I have an answer to that question.

They proposed excluding DATs from their indices. The decision is coming in January, I believe, but obviously that would be bad news bearers for strategy and all these DATs.

Yeah, right.

There are various rationales for a DAT, but surely one of them is like

there is some audience of stock investors who can buy corporate stocks. but can't buy crypto directly or even crypto ETFs.
And so one thing you are doing is appealing to that audience.

And who is that audience? I mean, it is to some extent boomer retail investors who like don't want to open a crypto account or even deal with ETFs, right?

It is to some extent like fundamental long-only equity investors like Capital Group, which is a big shareholder of strategy, who

like the trade and would feel weird buying a Bitcoin ETF, but like getting crypto exposure through strategy. And then it is to a very large extent passive equity investors who will buy the index.

And if you cut out that, then you lose a lot of demand for digital asset treasury stock.

And maybe you take that last leg down from a small premium to net asset value to, you know, a small discount to net asset value. Maybe.

Yeah. Well, the fun thing is that, you know, this decision point is coming up in January.
I'm curious to see a situation where MSCI says that, okay, strategy is an investment fund.

We can't have it in our index. But then you think about the NASDAQ 100.
They went through this whole thing when they added strategy to the NASDAQ 100 and they landed on the side of this is a company.

This is an operating company. So you could have a situation where MSCI is treating strategy one way and NASDAQ is treating it another.

Yeah, a couple points there. One, like there's like 10,000 dats.
And like,

they're all investment funds. And maybe strategy is the biggest exception.

maybe like strategy has a real business like a software business that is at this point a teeny tiny fraction of the size of its pot of bitcoin but like yeah it's a business you know you get to like you know what you're and every dat has some fig leaf like that but strategies is probably bigger than most the other thing i'll say is like when nasdaq made this decision it was trading at a premium and bitcoin is going up right and so like these are sort of like decisions influenced by real world politics right where like if you are an index provider, one thing that happens is like there are index funds and just other like, you know, benchmarked investors who go to you and are like, I want to own strategy.

It keeps going up. And so then you put it in your index, right? Whereas MSCI is looking at it in a different context where it's been going down.
And they're like, well, you know, get out of the index.

Which is, you know, it's badly cyclical in that, you know.

You make the index funds buy it when it's going up and then you make them sell it when it's gone down. But, you know, it's still, there's some of that

element to it.

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All right, let's try to say it.

So we're going to talk about...

We're going to talk about Bill Ackman, the man. We need to talk about Bill Ackman the bird a little bit.

Unfortunately, my good friend Bill Ackman the Bird passed away in the last couple months. I haven't been telling you, our dear podcast audience, because it's been very difficult for me.

I knew that when we took in friend of the show, Bill Ackman, that it was going to be touch and go. And unfortunately, he did pass.
But

I'm really happy for the time that we spent with him.

I think that, you know, the months that he did spend with me and my parents, you know, he was on this earth for a little bit longer than he would have been.

And it's very painful, but it was a beautiful couple of months. And he came to us right after my pony Batman had passed.
And certainly he was a wonderful bit of joy. So

that's why we've been a little bit mum on Mr. Bird, but he is flying high in bird heaven.

I'm sorry for your loss. Thank you.
I do

worry.

that someone who hasn't listened to previous episodes will be very confused about how Bill Ackman came into your and your family's life for a few months.

And I want to be clear, Katie rescued a bird, and on the podcast, we jokingly named the bird friend of the show Bill Ackman, but it was not the actual hedgehog manager, Bill Ackman, it was just the bird.

I really didn't want to talk about it, but like even last week, I was interviewing this guy from Vanguard, and he said, there's three guys on my desk who want me to ask you about friend of the show Bill Ackman.

And I was like, oh yeah, he's a bird. So people are like, reach out to me and ask about him.
So

it's weird to talk about the man without talking about the bird. Without mentioning the bird.

All right. So Bill Ackman, Bill Ackman, the hedge fund manager, he's at it again.
He's really like, he really has got it in his head that he wants to do a closed down fund in the U.S.

that trends at a premium.

And he hasn't created that, not yet, but he's working on it. Yeah, he does.
So Bloomberg News reported that he's aiming to raise $5 billion

for his U.S.-listed closed-end funds. Listeners of this podcast will remember that he tried this a few months ago, maybe a year ago, over a year ago at this point, actually.

And initially, I think his target was as much as $25 billion.

So, you know, the valuation a little bit... less ambitious this time around.

And he's also trying to sweeten it a bit by giving investors in the fund some shares in Pershing Square Capital, the hedge fund that he's also trying to IPO. Yeah.

The problem that he ran into is that it's really important that you sell shares of a closed-end fund at a premium to net asset value of a new one because

that's how you raise the net asset value. Right.
You can't sell them at a premium to net asset value. And he

thought that he would solve that problem by just telling everyone that he was amazing and therefore they should buy shares at a premium to net asset value because he would compound their money much faster than other alternatives would.

And that didn't work. So he's trying something else, which is, you know, the obvious solution is like you give people a sweetener.

Basically like Bill Ackman has to kick in some value to make the shares worth more than what people pay for them. But like still, you know, people pay more than what goes into the pot.

And so that's the plan, which is basically like, if you do the IPO of the closed-end fund at the same time you do the IPO of the management company, which seems to be kind of the plan, then you have a management company, which is worth $10 billion was a number that in their last round.

And you give, you know, 10% of the management company to the investors in the closed-end fund, like, ooh, they got a nice billion-dollar sweetener. And then they're willing to.

buy shares in the closed-end fund and the math all works. Right.

And then, you know, the next day, like, you separate the sweetener and maybe the closed-end fund trades at a discount to net asset value. But yeah, it's a problem for other types.
Yeah.

Or maybe it trades at a premium, right? Maybe like it was hard to bootstrap this, but once it gets going, everyone will be like, oh, wow, he really is good at managing our money.

And the thing will trade at a premium. Doesn't happen a lot.
Yeah. And I mean, he has the hard fact that you think about his European listed closed-end funds.

Sure, there's not a ton of precedent for him to trade. Yeah, it's trading at a 25% discount right now.
Sure. And there are reasons, there are distinctions, but yeah, you know.

Yeah, it's a similar idea. So I was going to say, I thought you were going to say the obvious solution here is to just launch this in an ETF.
That seems

where my mind wants to go. Tell me why that doesn't make sense.

Bill Aichman has a good investing track record, but like the best thing he did was he was early to permanent capital for hedge fund managers.

I have written a lot that the important job of a hedge fund manager is not to pick the stocks that go up, but to continue managing a hedge fund.

And Bill Aichman, by launching a closed-down fund in Europe, has given himself permanent capital in a way that like allows him to be patient and not worry about making, you know, it's the best possible setup for a hedge fund manager.

ETF is just not that. It's just not permanent capital.
Like it doesn't solve any of the problems he wants to address. Yeah.
I hear what you're saying. Can I say one more thing about ETFs?

Okay, I'm just going to borrow some logic from Bloomberg Intelligence. They wrote a note about this saying Ackman tries again at a closed-end fund.
I hear your point on permanent capital.

They make the point that, okay, you raise capital once at IPO, and then you typically struggle to grow beyond that initial capital.

Whereas there's plenty of examples at this point of like big names coming into the ETF wrapper and raising billions of dollars.

And if you're so confident that you are such a good hedge fund manager, why not launch in the ETF and just hope that that capital doesn't leave because they're so satisfied with your performance?

I just think that, like,

if you plan to do long-term investing that requires you to

commit to hold stakes for a long time or like buy private companies, you can't do concentrated long-term investing in the form of an ETF. I understand people do some of it, but

it's not the right vehicle. I think I disagree on that point, but it's okay.

You do have an ETF. I do.

Can we talk about Howard Hughes?

When the closed-in fund didn't work, when he couldn't launch this $25 billion close-in fund, Phil Highman was like, we're going to team up with with Howard Hughes.

Howard Hughes is already a public company. He was a big shareholder.
He bought more shares. He's the chairman now of Howard Hughes.

And he was like, in his mind, like a closed-end fund is like, it's going to be Berkshire Hathaway, right? It's not going to be a fund.

It's going to be a company that buys companies or buys stakes in companies or invests. And he is going to invest people's money, much like Warren Buffett does, in the form of a public company.

And he realized after the closed-end fund didn't work that like he should just do it in the form of an existing public company. Yeah.

One of my readers suggested Herbalife, which is a great suggestion.

A little deep cut, Bill Ackman joke. But he's like, oh, no, I have Howard Hughes right here.
Howard Hughes is like a real estate company.

You can pivot that to being a general purpose investment company. And so he owns like, you know, Pershing owns like 47% of it.
He's the chairman.

It still says in its 10Q, you know, we're going to have a strategy of becoming a diversified holding company. I don't really understand

what the distinction is between Howard Hughes and the new closed down fund, right? He will now have, let's say, three publicly traded permanent capital vehicles where he can put investments.

You know, the European Fund, the Close Down Fund, and Howard Hughes. And I don't know, pick one, you know.
And Howard Hughes, I was reading their most recent earnings call just for fun.

They're getting close to announcing their next acquisition, you know, with Bill Ackman at the helm. So we'll see.
I hope it's Fannie Mae. Oh, that would be great.

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Speaking of ETFs.

Yes, thank you.

Speaking of ETFs, Goldman Sachs, I helped break the news this week that Goldman Sachs is going to pay $2 billion for ETF issuer Innovator Capital, one of the first movers in buffer ETFs, an area that you know and love, Matt.

I do love a buffer ETF.

I've written about buffer ETFs, like the buffer ETF, which is where effectively you like take people's money, you buy like a treasury strip, and then you have like a little extra money, and you use that to buy call options on a stock index.

And so then you've given people upside in the stock stock index with no downside. And you're like, ooh, it's a magic trick.
That's like a classic piece of derivative structuring, you know, magic.

It's a classic building block of like the structured notes business at an investment bank. And it is now, you know, Innovator and others have ETFized it.

We're now like, if instead of buying a structured note from a bank or like building your own options product, you can buy an ETF.

And Goldman looked at that and said, we want to be in the business of providing those ETFs, which is like

an obviously great business for Goldman in a couple of ways. One, like, the structured note business is like

great, you know, and like there are people in the lab cooking up structured notes to make a lot of money. And like, you can scale it more with an ETF than you could with it with the structured notes.

Yeah.

And then also, like, I wrote this, I don't know how true this is in the case of the buffer ETF, but in general, structured notes are a place for a bank's volatility desk to lay off some volatility.

volatility.

If all of your hedge fund clients are buying like Korean stock call options, then you might like package a structured note that allows your retail clients to sell you Korean stock call options because then you can like offset some of that risk.

And stereotypically, the audiences for structured notes are like more willing to listen to the story that the bank tells than like, you know, the hedge funds who come to the bank for a trade.

And so the structured notes was this is a nice like risk sync and

doing that in an ETF maybe also right like if you're golden you're constantly coming up with and I should say disclosure I was an equity derivative structure at Golden I had no idea if you're Golden you're constantly coming up with ideas for like how to you know sell weird volatility products to people and with an ETF business you've like massively increased the audience of people you can sell weird volatility products to yeah so a couple of notes here buffer ETFs obviously have some vocal critics friend of the show Cliff Astnis for example has been very

yeah as a former derivative structure, like he's just right.

Instead of buying some weird buffers around your stock exposure, just buy less stock. It's a better trade.
It doesn't involve paying huge fees to Goldman.

This is a standard critique of structured notes. It's frankly a standard critique of all Equity Derivatives.
And it's a perfectly valid critique of ETFs, but buffer ETFs.

I do find it interesting from an ETF angle that Goldman has its own buffered ETFs. This is a product that they've already launched.

They launched three earlier this year, received really little traction.

The fact that they went out and decided to buy an entire other firm for $2 billion versus trying to, you know, really put the Goldman muscle and distribution might behind their own products is super interesting.

Another detail I also love in here is that... The folks who founded Innovator, Bruce Bond and John Southard, this is the second time that they've founded an ETF company and then sold it.

Their first experience was with PowerShares 20 years ago. At this point, they sold it to Invesco.
Bonds tried to retire for a little bit. It didn't work.
He came back and founded Innovator.

They're pulling him back in. They're pulling him back in.
Well, him and his palms.

You know the appeal of ETFs. You can't walk away from ETFs.
I get it. Hearing him tell it, it was John Southard who came across the idea of, you know, structured products are huge.

We should put them in etfs and that's what they did they founded innovator in 2017 they launched their first buffered products in 2018 and now they're selling to goldman for two billion dollars bruce bond has at least 50 stake in innovator so you now have a new etf billionaire which is super cool it's a great story Heartwarming story.

Okay.

We should put structured products in ETFs. I mean, right.
I can't fault that. That's like the thought I wish I would have.
I know. I know.
That's the thing.

You think about all the upstarts that are in the ETF industry right now. It's so easy to launch an ETF and it feels like everyone in.

This is the blueprint, I have to imagine, for a lot of them. This is like the lottery ticket that they're hoping to find.
Good for them.

And that was the Money Stuff podcast. I'm Matt Levine.
And I'm Katie Greyfeld. You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

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