In season five of billions, Axelrod wants to become a bank.
He's trying to get a license.
He has to take down a community bank.
It's all hard work.
And that's because of Chuck, of course,
but it could be a blessing in disguise.
Action works.
They think they're going to be protected by the government while continuing their hedge
fund activities because they bought a bank.
It's a dream.
It's not a reality.
They're ignoring what happened after 2008.
Banking today means compliant, compliant with the supervision of the federal reserve, the
treasury, the OCC, the FDI, see, without being bailed out.
If it doesn't turn out.
Okay.
In a previous video, we saw the limitations in terms of what ax capital could do with
a bank.
I think ACS is not thinking clearly.
But we can save him by showing him a better solution.
So what could you do instead?
He loves to invest.
He no longer loves being a hedge fund manager with a hassle and scrutiny.
There is a simple solution.
Okay.
This is what George shores did in 2011, when he closed his quantum.
Or BlueCrest in 2015 at the time, it was one of the world's largest headphones at the time,
it was one of the world's largest hedge funds.
If you follow billions, you may know that Bobby Axel road is inspired by Steve Cohen,
a hedge fund manager in 2013, his firm say pleaded guilty to insider trading and had
to pay a big fine.
You have to stop managing outside money for two years.
And only recently started a new company where clients can invest point 72.
These managers didn't stop investing.
They carried on as a private firm or family office, a few years later, we found Michael
Platt who couldn't stop himself from boasting to a taxi driver in a video that became viral.
So actually real, it could be doing the same close down, manage your own money.
So what are the benefits of this setup compared to a fund structure where you get client funds,
management fees, performance fees.
Why did you get a hundred percent of the upside?
There's a lot less scrutiny.
You don't have to find clients and stress about redemptions risk.
You don't have to find clients or stress about redemption risk.
It's very doable, but it also means shrinking the activity, avoiding the public eye and
kind of admitting defeat against his hand.
Do you think it works with access personality?
I don't clearly he's motivated by his intaglio list.
It's not enough to be right.
He needs to win.
So what can we advise to keep the full upside while changing the nature of the business?
Point 72 operate as a typical hedge fund and venture capital business.
So we want to get away from these models.
On the other hand, there's Warren buffet.
He's a legend, but really not an inspiration for axle rod, but he's the one that will help
us find a solution.
Warren Buffett's started his career as an investment manager for about 12 years.
He was very successful at it and getting fees.
And then he closed the company and returned the money to investors, but he had already
taken control of a company called Berkshire afterwards.
The company is known for today and it's not classified as an investment company.
The name actually comes from a textile business, which is a bit confusing.
But buffet transformed it into a conglomerate and you can see the foundation of his business
empire at the bottom of the page here, the only company listed on the homepage is Geico
and insurance company.
Insurance is pretty straightforward.
So why is it so precious to buffet?
Well, insurance companies collect premiums and they have to pay out some of it later,
depending on what happens to the customers.
It creates what we call a flow.
There are premiums flowing in claims flowing out daily, but in aggregate, the float has
a very long duration and the cost of the float is equivalent to the underlied.
The cost of the float is the underwriting loss of the insurance business.
So if it stays below the cost of board, Then the float can provide a very cheap source
of funds.
It can actually be negative if the insurance business turns a profit.
So with insurance float, you can have permanent capital with a negative interest rate
For buffet.
This is not just a great investment.
It is the key to his success.
According to some research
it looks like the majority of his out-performance as an investor comes from his use of float
permanent capital with a negative interest rate those applied to his excellent stock
picking skills.
and that explains largely Buffet's performance.
This looks like a good idea that can work well for someone like ax that can really manage
risk and have great benefits for the company.
But that's just the theory until we see how it can be applied and combined with a hedge
fund.
Buffet started it, but we actually can find many hedge.
That are already using the strategy.
David Einhard and Dan Leb of serious point are two recent examples, but they're both
having a, quite a hard time right now.
So maybe they're not the best examples to follow the reference that will peak for our
friend.
The reference that we will pick for our friend, Bobby is Apollo global management, a massive
listed alternative investment fund that started as a private equity firm.
And they seem to be doing really well.
So how did they get into the insurance business?
Like the rest of the industry?
They were in trouble after the global financial crisis, it was hard to impossible to raise
funds.
So Apollo started buying liabilities and eventually set up an insurance business.
I think the annuities provided a polo with a float.
This in the background is a quirky ad for a thin.
It doesn't make any sense to me.
But anyway,
on top of the float, I thin was listed as a separate business and it kept a minority
stake, but with significant control.
The listed insurance company kept paying a large chunk of fees.
It's like a double D portfolio it IPO and independent business and kept receiving big
fees.
So if I can make a recommendation to ax, that will be it.
Stop thinking about the bank, set up an insurance company.
Do like a polo to start.
You don't need to ask permission from anyone.
Just start buying an annuity is from other insurance, for example, and it's an exciting
time to get started.
It means that people will send you their money as premium for risk they're unwilling or unable
to bear their pets, their home, their life, their business.
They don't care about how you do it.
You can invest in anything you want and you can see a theme has an unusual portfolio.
You can put complex derivatives, short strategies, illiquid private equity.
There's no restriction when there were so many winners.
And it's been really good for Apollo.
You can see its growth compared to its competitors, perhaps not so good for a theme, which is
3d flat.
In fact, to finish the story, there were complaints from other shareholders that Apollo was extracting
too many fees at a theme, and there was a conflict of interest to stop that conflict
there, to merge the two companies this year and simplify the voting structure.
So normal double-dipping but still the permanent capital.
In fact, the structure looks a bit more like Beck, Shar attaway
So here's a summary of my pitch to ax, comparing bank and insurance.
For axe it's also about moving to a different league.
Moving away from the world of traditional hedge funds, like Steve Cohen and Point 72
and closer to giants like Apollo
It's about transforming into a global alternative investment manager, powered by permanent capital
from an insurance float, covering the whole spectrum of alternatives with a diversified
funding base.
In order to get there, he needs to follow the inspiration of Buffett even if it's not
his style.
But with the funding Buffett and the skills of steve cohen, he could crush the competition.
Season 5 is starting again on September 5, I am excited about it and I hope they can
stop that banking nonsense and that for Season 6 Axe will innovate in the right way.
Thanks for watching and subscribing.
Check out the links for a course on alternative investing, a discord community where we can
chat, a podcast and all the sources used in this video.