Transcript: Dominique Mielle



The transcript from this week’s, MiB: Dominique Mielle, Damsel in Distressed, is below.

You can stream and download our full conversation, including any podcast extras, on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.


ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, my extra special guest is Dominique Mielle. She is an author and former hedge fund trader, specializing in distressed assets. She was a partner and a portfolio manager at Canyon Capital, a firm that runs currently about $25 billion.

Her book, “Damsel in Distressed: My Life in the Golden Age of Hedge Funds”, is really a fascinating read. I know I want to have a guest on with a book. I usually say nice things about the book, and I don’t do that if I don’t mean it. But I really had fun reading this. It’s very witty and charming, and revealing about an industry in a way that most books on hedge funds simply are not. I found it to be a very pleasant read, and I think you will also. And I found this to be a fascinating conversation, which I expect you will as well.

With no further ado, my interview with Dominique Mielle, author of “Damsel in Distressed”.

First of all, before we get started, I very much enjoyed the book. You have a very wicked sense of humor, which comes through in the pages, starting with the title, “Damsel in Distressed”. What made you decide to write a memoir about your decades in the hedge fund industry?

DOMINIQUE MIELLE, AUTHOR, “DAMSEL IN DISTRESSED”: Well, it started with an article that I wrote as a hobby about my experience as a woman at Lehman Brothers, and it was picked up by Business Insider, and I realized a couple things. One was that I really enjoyed writing. And two was that I had never really taken time to think about the lack of women in the business, and that there really wasn’t a voice to tell the story of female investors. And so that’s when I thought, you know, there might be a hole in the market.

RITHOLTZ: Identifying an inefficiency, so to speak.

MIELLE: So to speak, except that there’s really no money in writing a book.

RITHOLTZ: Well, it’s best described as a branding exercise and a way to sort of get things off your chest. But let’s roll back a little bit. You get an MBA at Stanford. How did you end up in finance? Was that where you plan to go? Because a lot of the Stanford MBA graduates tend to find their way into technology, not finance.

MIELLE: Right. Well, by the time I got to Stanford, I pretty much knew I wanted to be in finance, but where I started was at Lehman Brothers in New York before Stanford, and that was serendipity really. I wanted a job that would take me away from Paris. I wanted to see the world, and whether it was investment banking, or basket weaving really had absolutely no bearing on my decision.

So I ended up as an investment banker which, you know, like every analyst, I hated after a few years, and so the MBA was sort of a way out of that job, branching into hopefully what I thought were better pastures, but still in finance.

RITHOLTZ: What did you do with Lehman Brothers that you grew to hate? Were you just a spreadsheet jockey and that was it?

MIELLE: Of course, I was and it was particularly ruthless because I was in a group called FIG, Financial Institutions Group. At that time, there were still a lot of savings and loan institution, thrifts, lots of mergers. So what I did, basically, was model the mergers of any combination you could think of. I mean, I remember it got so bad that there was a spreadsheet with all the different institutions vertically and horizontally, and I had to model them in each square.

RITHOLTZ: Sounds tedious.

MIELLE: And I thought, what happens to the diagonal? Do they merge with themselves?


MIELLE: You want me to model that, too? But that was kind of, you know, almost mindless brute force job that I was doing.

RITHOLTZ: So you do win a couple of accolades at Stanford when you’re getting your MBA. What brought you to the attention of Canyon Partners? How did you find your way there?

MIELLE: Well, first I sort of zoomed in on the fact that I wanted to work for a hedge fund, that I wanted to go to the buy side, that was first, and that has sort of really brought to me through a couple of classes that were incredibly illuminating when taught by Bill Sharpe and one by Darrell Duffie, both exceptional minds. So I sort of narrowed down finance to buy side, buy side to hedge funds, hedge funds to something that had to do with junk bonds because I was a great admirer of Michael Milken. I had read books about him, and so I thought that seems a very interesting mix of finance, but also strategy.

RITHOLTZ: You describe what we now call junk bonds, we used to call high yield, what we now call distressed investing, we used to call vulture investing. And then you write the only difference between stressed and distressed bonds was the immediacy of the bankruptcy. Tell us a little bit about what it was like to wade into the world of distressed investing for bonds?

MIELLE: Well, I mean, it was a fairly new asset class. I think, you know, it’s not until probably Farallon came into existence, that it became a real asset class in itself, that stressed and distressed was a category that was thought as investable. But it was very tiny. I mean, I think there were, you know, probably $15 billion in assets in total —


MIELLE: — of hedge funds investing in distressed at that time in the mid ‘90s. And so if you compare that to today, if you remember Oaktree raised $15 billion fund in 2020, on its own. So the magnitude is not even comparable. So it was a starting industry, very much sort of a venture capital type of business.

RITHOLTZ: Right. New asset class for this type of investing as well.

MIELLE: Right.

RITHOLTZ: So I like this quote of yours, which is, “Stock owners own a call option on the value of a company. Bond holders have sold a put option. One is long volatility, the other is short, and consequently, are at odds in times of changing volatility.” Explain why bondholders have sold a put option.

MIELLE: Because if the value of the business of the company falls below the par amount of the bond, then the bondholders are going to repossess the company. It’s as simple as that.

RITHOLTZ: So I got you.

MIELLE: The equity guys give you the keys and it’s yours to run. And anything above the par value of the total debt on the capital structure belongs to the equity guys. And so there were a lot of cases where it’s really interesting how this sort of game of strategy, this game of risk starts with a sudden change in volatility. It can be a bankruptcy, but it also can be an M&A event. It can be an LBO.

It can be even a change in regulation or in market, where suddenly volatility picks up and the interest of bondholders and shareholders are at odds. And that’s really what made the job absolutely thrilling. I’m less of a business lover. I invest less because I’m interested in what widgets a company does, and more in the capital structure and how to position yourself, what the other guy is going to do at the bond level or senior secured level, and how to position yourself to make money. That’s the thrill to me.

RITHOLTZ: So you’re looking at the various paper that’s available. Here’s the downside risk and equity, and for it to work out, the company has to turn itself around and a miracle has to happen. The bonds aren’t worthless, but they’re definitely not trading at par. But they fallen so far that, hey, it gives us a callable option on the company if they do go into bankruptcy. So let’s get long this debt, which is trading at a fraction of what it was issued for. Is that more or less correct?

MIELLE: That’s correct. And it can be a lot more complicated than that. Of course, it can be a simple capital structure like PG&E in bankruptcy, which had one layer of equity and one layer of bonds. And it can be very complicated like Puerto Rico that had 19 different debt issues by different entities with different terms. So not only can you be long one bond, you can be long and short two bonds. You can be long different maturities. You can be long claim insurance, insurance claims. That’s the English and French.

RITHOLTZ: Right. Insurance claims meaning?

MIELLE: Meaning the insurance owns a claim against PG&E and that they want to sell it and get the cash immediately. And they sell it to bond post at a discount to what they’re entitled to. That can be a trade. So there are, you know, infinite ways to position yourself in this sort of Game of Throne type.

RITHOLTZ: Right. You said all the cursing and none of the sex of Game of Thrones, which I found amusing.

MIELLE: Not that I’ve witnessed, but you know —

RITHOLTZ: Lots of cursing.

MIELLE: Lots of cursing.

RITHOLTZ: So you were very actively involved in the restructuring of the airlines post 9/11. What about what happened with a lot of banks during the financial crisis? I guess other than Lehman Brothers, most of them were either rescued or absorbed into another entity. So there really wasn’t a whole lot of restructuring and distressed assets afterwards, or was there? Tell us about that period.

MIELLE: After 2008?

RITHOLTZ: 2008, ’09. Yeah.

MIELLE: So financial institutions were not my industry to cover. But, of course, Lehman was a huge restructuring and bankruptcy liquidation —

RITHOLTZ: Sill going on today, right?

MIELLE: Yeah, that kept —

RITHOLTZ: Which is crazy.

MIELLE: Exactly. That kept my colleagues occupied and making a lot of money. By ’08 and ’09, look, there were bankruptcies everywhere in every industry from retail to telecom. The great bonanza of late ’08 and ’09 is that there were companies that were not stressed at all. It’s just the bonds were trading horribly, just because liquidity was gone for the market. So it was a pretty different situation from 2001, where the whole dot-com bust, but more importantly, the telecom implosion. That’s when all the wireless cable, some wireline companies went bankrupt, names that maybe your listeners today wouldn’t recognize.

RITHOLTZ: Global Crossing.

MIELLE: Global Crossing.

RITHOLTZ: Metromedia Fiber. We watched Nortel and Lucent. Like, are those companies really going to go belly up it? It was —

MIELLE: Sure did.

RITHOLTZ: It was really fascinating.

MIELLE: Yes. So all those don’t even exist anymore. And these were real bankruptcies, led by a supply-demand imbalance, too much leverage and not enough demand for the products. And the demand was sort of tardy to come. So those companies restructured or liquidated. But it was not a liquidity issue. ’08 was purely a liquidity issue, so the formidable trades were to buy companies that were actually very viable the way they were. And bonds were trading at huge discounts because there were no buyers anymore.

RITHOLTZ: Really interesting. So you retire in 2018. And two years later, the pandemic strikes. A lot of companies crashed and recovered. But we’ve been still watching the fallout here, three years later. Do you ever look at that landscape and say, hey, if I was on the desk, we’d be buying this, that and the other because this is just a temporary stress, or I wouldn’t touch that, that’s going to hell in a handbasket?

MIELLE: I do less of that and more thinking about the business of hedge funds in general. So in other words, I’m less interested in bond-picking at this point, and more interested in what’s going on. For example, you talk about the 2020 distressed cycle, and it’s interesting to me that it was so short, so shallow.


MIELLE: Right? We had about five months of —

RITHOLTZ: Right. Blink and you miss it.

MIELLE: Exactly. And that is, of course, due to the Fed intervention. But if you think about it, QE is a relatively novel tool. It wasn’t invented in ’08, but certainly, before that, it hadn’t been used so massively, so widely, so systematically. And so, you know, since ’08, the Fed has consistently used QE to rescue the bond market and with bigger and bigger purchases in more asset classes.

And so what that’s done is a couple things. One is the period of time where you have distressed bonds available has shortened, right? It was a few months in 20, 25 months. Before that, 2016, the energy crisis, same. Before that, if you remember the taper tantrum in the summer of ‘11, I think, also a few months. So short, you got to be positioned and ready and have the cash.

And second, it’s shallow in the sense that the biggest distressed companies are very small, historically. If you think of the biggest bankruptcy in 2020 was Hertz. That’s only $25 billion in assets.


MIELLE: Right? Compare that to the Lehman Brothers at $600 billion. Compare that to the period of ’01 where we had corporate malfeasance. You’ll remember Enron, Conseco, WorldCom.

RITHOLTZ: WorldCom. Right.

MIELLE: Exactly.

RITHOLTZ: One after another.

MIELLE: But those were $100 billion cases. So there were just a ton of distressed, and therefore returns were easier to come by. It’s a lot harder when you’ve got, you know, a few $20 billion distressed situations to pick from. And meanwhile, the giant of distressed have raised funds —

RITHOLTZ: right.

MIELLE: — that are alone $15 billion.

RITHOLTZ: Right. So fewer targets and a lot more funds doing the same thing?

MIELLE: Correct.

RITHOLTZ: Really very interesting. So let’s talk a little bit about those early days. You mentioned in the book Canyon Capital took a chance on you. First, why do you say that? And then second, how did you get a foot in the door? How did you start with them?

MIELLE: Why do I say that? Because I’m a foreigner and I’m a woman. And I was —

RITHOLTZ: Lots of foreigners and women out in Silicon Valley. You were at Stanford, so it wasn’t — and they’re in L.A. So maybe it’s rarer in Chicago, in New York and Boston, but it’s not completely foreign. Although this was — what year did you start at Canyon?

MIELLE: ‘98.

RITHOLTZ: All right. So a little different world then than today?

MIELLE: Different and similar at the same time. If you’re talking about female representation in hedge funds, it’s very similar. There’s been nano steps.


MIELLE: But it’s nowhere near what you would expect for an industry that’s grown so much, and that’s become so institutionalized, and that’s something we may want to talk about later. But they took a chance because, look, hiring a woman was exceptional. It wasn’t the typical profile, it still isn’t. And on top of that, hiring a foreigner was an additional hurdle. And a French person, which they probably didn’t realize at that time, but you know, made me probably a raging socialist compared to the average —


MIELLE: — hedge fund political mind.

RITHOLTZ: Right. Even California.

MIELLE: Yes, sir. Yeah.

RITHOLTZ: Well, you were in Orange County, so that was a little —

MIELLE: No. We were in Beverly Hills.

RITHOLTZ: Oh, okay. Well —

MIELLE: But the —

RITHOLTZ: — the same —

MIELLE: Exactly.

RITHOLTZ: — politically.

MIELLE: It’s interesting you say that because Canyon has since moved to Dallas, Texas.

RITHOLTZ: There you go.

MIELLE: There you go.

RITHOLTZ: That makes a lot of sense.

MIELLE: Exactly.

RITHOLTZ: You cite in the book a study that says, men over trade so much that it reduces their risk-adjusted returns by 2.6 percent. So first, is this just cockiness, excess self-confidence by male traders versus female traders? What accounts for the difference between the two in your experience working on the trading desk? And how has this gap persisted for so many decades?

MIELLE: So, first of all, it’s not one study. There’s now been four studies.

RITHOLTZ: It’s mutual funds. It’s hedge funds. It’s private equity.

MIELLE: Correct.

RITHOLTZ: It’s everywhere.

MIELLE: They’re across the board. And the reason those studies exist is they’re trying to answer the question, are men better investors than women? Because if it were the case, then you would understand why there’s a preponderance of men in the investing jobs. And it turns out not to be the case.


MIELLE: Not because you can answer that men are smarter or not as smart as women, but strictly because the friction of overtrading costs a lot. And so why do they overtrade? The studies don’t say and I wouldn’t venture —

RITHOLTZ: We know what the answer is. Come on.

MIELLE: — a reason that you may have alluded to.

RITHOLTZ: What does your instinct tell you? Let me mansplain gender inequality, too.

MIELLE: Please.

RITHOLTZ: No. But in all seriousness, the broad stereotype about men is, hey, we’re idiots. We go anywhere when we shouldn’t, and we do it with such bravado and such a surfeit of whether it’s earned or unearned self-confidence that it leads us into trouble, or am I just engaging in pop psychology there?

MIELLE: No. I think that’s right. The study you’re citing is actually called boys will be boys, overconfidence in trading.

RITHOLTZ: There you go.

MIELLE: So there you go. But it’s interesting that you really can pinpoint the difference in return because there’s this sort of impatient or overzealousness in trading your portfolio. Whereas, standing still and second guessing yourself and really doing quiet studying and reading would produce better returns, which is what women in those studies generally tend to do. So, look, my point is very far from saying women are better investors than men. That’s sort of a –

RITHOLTZ: No, the –

MIELLE: — generalization that I wouldn’t make.

RITHOLTZ: But the study does suggest —

MIELLE: Okay. The studies do say that.

RITHOLTZ: — behaviorally, men have certain behavioral flaws —

MIELLE: Correct.

RITHOLTZ: — that leads to a difference in outcome.

MIELLE: Correct. At the very least, I would take those studies and say, look, having more women in your investment teams in hedge funds is not a matter of fairness or equity. Who cares on Wall Street?

RITHOLTZ: It’s alpha.

MIELLE: It is money.

RITHOLTZ: Yeah. That’s really —

MIELLE: It really is alpha. It’s a matter of making better decisions and being more profitable.

RITHOLTZ: So it’s kind of interesting about the impact of overtrading. A couple of more bullet points from the book I found fascinating, over the past 15 years, 9 percent of existing hedge funds close every year. Now, the first question is, is that due to a high watermark, and they have to close and reopen in order to be able to get incentive fees, or is something else going on?

MIELLE: It’s a pretty unstable business.


MIELLE: Oh, it is, especially when you’re small, meaning sub $1 billion. You have a lot —

RITHOLTZ: The emerging manager category?

MIELLE: Exactly. The survival rate of an emerging manager is low. There are a ton of expenses, and they’re getting higher with compliance and marketing and reporting and investor relationship, et cetera. And you typically have one anchor investor, may be two, three if you’re lucky, but you’re really living month to month. And that’s great fun when you start. That was the great adventure of Canyon in ’98, for me. But it’s also, you know, every month is make or break.


MIELLE: You have a terrible couple of months, your anchor investor pulls his or her money, and you’re done.


MIELLE: Or you, you know, have a few star traders and analysts who quit. Very hard.

RITHOLTZ: So you mentioned John Meriwether who was discussed as having bad luck for being in charge of Long-Term Capital Management, which spectacularly blew up the same year you began at Canyon. But I didn’t realize this, he subsequently opened and closed a couple of more hedge funds. I don’t know if he was in three or four old told, all of which didn’t succeed. So was this a lack of skill, or was this just bad luck? That’s three strikes is kind of – that’s three strikes and you’re out in the U.S.

MIELLE: Kind of. I don’t want to speak ill of the guy who I greatly admired. He’s obviously in the book of Michael Lewis who you’ve —


MIELLE: — interviewed. But that’s the thing. Even the guy you think of so highly, you know, after three hedge funds open and close, you got to wonder if there’s some risk management issue there.

RITHOLTZ: Yeah. You look at “Liar’s Poker” and it describes him as this larger than life character, and then you read “When Genius Failed” and not so great.

MIELLE: Exactly. And again, that is the thrill of this industry, is that a hero today and a loser tomorrow.

RITHOLTZ: Amazing. So let’s go to your work as a trader. One of the things that struck me as very self-aware and insightful was you got very, quote, “comfortable being uncomfortable.” So let’s talk a little bit about, first, what do you mean by being uncomfortable? And second, how did you recognize, hey, this is uncomfortable for most people, but I’m okay with it?

MIELLE: Oh, from many different situations where, you know, being French, I grew up with a different culture, different habits, and different —

RITHOLTZ: You’re an outsider in the U.S.

MIELLE: I was at that time. I like to think, you know, after 30 years in this country, I’m a little bit better acclimatized to —


MIELLE: — how the people live in this beautiful country. But I still do feel somewhat foreign in this country. And frankly, when I go back to France, I feel equally foreign because I’m not really French either. But, look, I think it is an important quality to be an investor because ours is an industry or a business of conviction, in the face of facts that are sometimes very damning, sometimes very contradictory. Especially if you’re thinking about investing in distressed, you’re going to buy a company that is not doing well —


MIELLE: — where all the signs are telling you this is not going in the right direction, either the left side of the balance sheet, the assets, you have to fix something, or it’s the right side with the capital structure. But something is awry in this situation. And to most people, it would be a sign that you shouldn’t touch it. And you have to feel comfortable being in the minority. That’s probably true for every investor who’s a bit of a contrarian. It’s very uncomfortable to be in the minority, and with conviction, say, I’m going to buy this company. That’s the right thing. There’s something that I see that others don’t.

RITHOLTZ: There’s safety in numbers.

MIELLE: Correct.

RITHOLTZ: When you’re with the crowd, you’re not going to get your head cut off. You may not outperform, but at least you can hide amongst the middle of the pack.

MIELLE: Correct. And now we’ve gone full circle, Barry, to what we were talking about just a second ago. If you have 10 white guys from Harvard, what are the odds that one of them will be completely outside the sort of —


MIELLE: — think tank that is, you know, this team. If you, again, want to be uncomfortable, if you want to be outside the box, you probably need people who look different, who think different, who were raised differently. And I’m not just talking about women. I’m talking about minorities.

RITHOLTZ: So you talk about a couple of really interesting things in the book relative to that, one of which is, it’s really more implied than anything, what’s changed in the U.S. since the ‘80s regarding economic mobility, that there used to be a huge ability to move up, or at least be in a better situation than your parents were. And the data implies that from the 1980s forward, that kind of stopped. Tell us about how you saw this lack of diversity and the lack of economic mobility. What is your perspective as someone who grew up in France, coming to United States and seeing, hey, I thought there was a lot more mobility here, or at least there used to be.

MIELLE: Yeah. Look, I’m not saying that France is much better. But over the last 30 or 40 years, probably 40 years since the Reagan years, if you look at the wealth and the income distribution in this country, it really has sort of gelled at the top.

RITHOLTZ: Right, very much so. Not just the 1 percent, but the 0.1 and the 0.01percent.

MIELLE: Correct. You know, the 1 percent probably controls 80 percent of the wealth in this country, and that’s something that most Americans are not aware of. If you ask them to describe their country, they’ll describe a country of which wealth structure resembles Norway, right?

RITHOLTZ: Right. And we’re no way —

MIELLE: We’re not in Norway.


MIELLE: But there was a lot more movement, upward movement, you know, back in the ‘60s and in the ‘70s. There were marriages between the boss and the secretary. There were jobs that allowed people to move up. Strangely, you know, finance is still one of those jobs that could take people from a very modest background, if you think about George Soros. This is a guy who had nothing when he moved to —

RITHOLTZ: Was an emigrant from Hungary, came here, more or less, analyst, right?

MIELLE: Correct. And so, I do recognize that finance and particularly investing in hedge funds has this immense potential for social mobility. But generally speaking, our society is pretty frozen in that really desperate classes of people,

RITHOLTZ: There’s a quote in the book, “The idea we’re all equal, and the hard-working and smarter people naturally come out ahead is simply the child’s statement of a person, most likely an upper middle class, Caucasian male.”

MIELLE: Right.

RITHOLTZ: That’s really very telling. But one of the things I’ve learned doing this and speaking to a lot of wildly successful people, men and women, is how often the concept of luck comes up. Like, very successful people, with a little bit of self-awareness, seem to recognize, hey, you know, this could have just gone a little differently and we’re not having a conversation because I’m not, you know, running a successful business. How important is the role of luck in people’s success, be it whether they’re born in this country or elsewhere, whether the born male or female, or just in their day to day life, how significant is luck?



MIELLE: Huge. 80 percent.

RITHOLTZ: Really? Wow.

MIELLE: I think so.


MIELLE: And it’s all a matter of how wide your definition of luck is. If you’re thinking very specifically that I win the lottery, did I meet somebody who offered me a job at Canyon or, you know, another is successful, then you could say, well, no, I’m not lucky. I worked really hard. But if you look at luck in the much broader context of I was born in a free, wealthy country, France, to parents who were both educated and value education, not particularly wealthy but middle class, upper middle class, right? I was born white. Yes, a woman, which, you know, came with some difficulties in the field that I chose, but I would say incredible luck, right?

MIELLE: Yeah, absolutely.

MIELLE: And then the biggest luck of it all, is I joined Canyon in the ‘90s and there was a tsunami that literally lifted all waves of hedge funds from ‘90 to 2008 and even beyond. No offense to Canyon, but their growth is very much a beta phenomenon that happened to Farallon to Citadel, to Omega, I mean, you name it.

RITHOLTZ: Going on the list. Right.

MIELLE: Exactly.

RITHOLTZ: It’s funny because I was discussing luck earlier today, with someone who said, you know, if you started as a bond trader, you were lucky to begin your career in the early part of a 30-year bull market in bonds, to which I said, well, at that time, you didn’t know it was going to last 30 years. You have to be able to conceptualize that. And the takeaway is luck is great to have, but it’s not a durable edge. It won’t persist. Even if you happen to be in the midst of the greatest bond bull market, you have to be long. You can’t be on the other side of it.

RITHOLTZ: That’s true. So luck is the starting point, and then you got to stick with it.

RITHOLTZ: There’s a quote you have at the end of one of the chapters on endurance and resilience, and I’m going to throw the quote at you and let you comment on it. The woman that Canyon Partners hired was not a good girl who chose to get along with people as her seminal virtue. I was a girl who was good at seeing what she wanted, and convinced deep down she could get it. Tell us a little bit about that.

MIELLE: That these are my qualities. You know, I’m resilient. I’m, you know, in between a dog and a donkey. I’m persistent. I get the bone and I just keep it.

RITHOLTZ: Stubborn as a mule?

MIELLE: And by the way, Barry, I do think these are huge qualities for investors; resilience, the ability to lose money on a daily basis and get back into it and make up for it. That’s an amazing lesson in life, right, to take failure and losses as business as usual. It’s just the flip side of a winning trade. And you know because you’ve interviewed so many of those amazingly successful investors, that the image of them never having a losing trade is a fallacy.

RITHOLTZ: It’s all about what you do with failure that determines whether or not you succeeded.

MIELLE: And it’s also the average. Do you win on average more than you lose? But you are going to lose. I don’t know a single investor who doesn’t lose money —

RITHOLTZ: Regularly.

MIELLE: — regularly.

RITHOLTZ: Someone once said it’s not how often you lose, but it’s how big your losses are, which is really interesting.

MIELLE: Correct. It’s you need to —

RITHOLTZ: I know I’m stealing that quote from somebody.

MIELLE: Somebody’s very smart for sure.


MIELLE: It’s the probability and the severity of your loss, but sticking with it is, you know, what it takes.

RITHOLTZ: Endurance and resilience. Let’s talk a little bit about the peak we’ve seen in hedge funds. For a lot of funds, the early 2000 saw a lot of opportunity in the distressed market and in other spaces. Why was the pre financial crisis decade so lucrative for hedge funds?

MIELLE: I don’t think it’s any different from any industry starting out, right? We talk about an S-curve for most industries, and there’s a very rapid expansion when you start with a good idea, and few people going after a very large pot, especially for distressed when you think of the 2001, 2002 periods. I think if I recall correctly, there were some 600 bankrupt companies in one year. Some —

RITHOLTZ: Lots of work.

MIELLE: Lots of work, lots of gold to mine, and the industry was very small. So it was a lot easier to make good returns and we indeed did produce amazing double digit, 20 percent return on the regular basis.

RITHOLTZ: Right. So you have the dot-com implosion. You have the telecom sector going belly up. You have the airline industry in total distress post 9/11. What else was going on? I mean, that seems like that’s a lot, just those three areas.

MIELLE: And in between, corporate malfeasance was rampant. We talked about that.

RITHOLTZ: How does that affect distressed bond investing? Do people just dump, they have certain requirements?

MIELLE: Well, those companies went bankrupt. And so that was more assets —

RITHOLTZ: Such as WorldCom, Enron.

MIELLE: Enron, Conseco, Tyco, all these —

RITHOLTZ: Tyco. That’s right. I forgot Tyco.

MIELLE: — were huge companies that —


MIELLE: — produced, you know, bad financials, and as a consequence —

RITHOLTZ: Accounting malfeasance —

MIELLE: — accounting —

RITHOLTZ: — earnings fraud, you go down the list. That was before we got to the analyst scandal and the IPO spinning, and there was a ton of stuff that basically made Main Street look at Wall Street and saying, why am I even giving you any money? You guys can’t, you know, stay —

MIELLE: Correct.

RITHOLTZ: — out of jail.

MIELLE: That was before SOX. That was shortly after Reg FD. It’s hard to believe, but there was a time when companies disclosed different facts to different people.

RITHOLTZ: Selectively. Right. Very selective.

MIELLE: I mean, I think any investor today would gasp at the idea that a company could tell you and me about their earnings next month, and not to them.

RITHOLTZ: It’s amazing. And there have been other hedge fund managers who’ve written tell-all books from the ‘90s. And you go through these books and you’re, like, none of this stuff could happen today. All of their alpha is illegal today.

MIELLE: Exactly.

RITHOLTZ: The whole concept of whisper numbers, which we still use the phrase, but it doesn’t really exist anymore.

MIELLE: It doesn’t. And so a lot of the competitive advantages that hedge funds really capitalized on early on have been regulated away or competed away.

RITHOLTZ: So let me share a quote with you from Jim Chanos, who runs Kynikos Partners. And he said when he started in the late ‘80s, early ‘90s, there were a couple hundred hedge funds and they all generated alpha, and it was, you know, a few billion dollars. It wasn’t a lot of money. Today, it’s $3 trillion 11,000 hedge funds, but it’s still the same 500 generating alpha. Is that an exaggeration or is there more than a little truth to that?

MIELLE: I actually don’t know that they’re the same funds generating alpha. The numbers are correct. When I started, there were 2,000 hedge funds, managing maybe $300 billion or 11,000 or so.

RITHOLTZ: And now, it’s a 100x.

MIELLE: Correct. What I do know is that there’s a handful or actually a bit more than a handful that are still in business today and that have become the market, right? From Apollo to Citadel to Oaktree, these are the mammoth of hedge funds. So is he talking about that? There’s a handful of guys who started early and have become huge and are still at it, and still racking funds from investors? That’s true. But they’re not producing alpha. If you look at their returns, you know, they’re not outperforming the market, at least not systematically. And that was really the promise of hedge funds.

RITHOLTZ: Well, you mentioned in the book size is the enemy of performance. Was at an issue before the financial crisis, or has so much money flowed into the space that it’s become self-defeating. And all these formally high performers are now just so big, they’re very happy collecting the management fee and the performance fee matters less. By the way, you show the math in the book very, very easily and understandable for those who may not be as mathy, which is basically a giant fund collecting 2 percent is much better than a smaller fund that’s killing it, but they’re not starting out with a lot of assets.

MIELLE: No, that’s totally true. That is exactly what’s happening. Size is the enemy of outperformance. And if you think about it in very simple terms, those funds have become the market. How could they outperform the market? They are so big that —

RITHOLTZ: They are the market.

MIELLE: — they are the market. So that’s one thing. The second is that, yes, they’re very happy collecting fees because that is the business they’re in. The business they’re in now is not to outperform the market, it’s to collect funds. And there are studies that show that the incentive is about what they call hoarding funds. So you know, their hoard funds, not hedge funds.

RITHOLTZ: I have that question, 2 and 20 hoard funds is not about performance, it’s about more assets under management, which raises the question, why should investors pay such large fees for beta? Shouldn’t the incentive fee beyond alpha alone? In other words, I go buy an S&P 500 fund for 3 bps. Why do I need to give you in 2 and 20. I’ll tell you what, I’ll give you 20 on anything you beat the SPX with and that seems reasonable. I’m surprised that hasn’t really caught on yet amongst endowments and foundations.

MIELLE: Well, to be fair, there is pressure on fees. So I think at this point, there are very few hedge funds able to charge still 2 percent and 20. The —

RITHOLTZ: It’s 1 and 15. It’s 1 in —

MIELLE: It’s 1 and 15. But it’s really coming down. So there is the awareness from institutional investors that fees are too high. But I can think of a couple reasons of why that’s going on. And the main one is that it used to be that hedge funds were populated with risk-tolerant investors. It’s not the case anymore. It’s mostly institutional investors who are advised by third-party brokers —

RITHOLTZ: Consultants.

MIELLE: –or consultants.

RITHOLTZ: Right. And those consultants are not paid to take risks.

RITHOLTZ: Right. Nobody is going to get fired by recommending that you put money with Oaktree, right?


MIELLE: That’s the safe thing to recommend.

RITHOLTZ: All be fair, they’ve put up some pretty good numbers lately.

MIELLE: They have. But that is the recommendation you’ll get from every consultant to every family office, you know, because that is the safe thing to do, because those middlemen are paid for safety. So we’ve come to this kind of surprising outcome where people put their money really with the biggest funds and paying for safety rather than outperformance. I have nothing against paying for safety. The question is how much do you pay for that? That’s —

RITHOLTZ: Five bps is my answer, right?

MIELLE: Exactly. The other thing I can think of is that there will always be room for hedge funds in a portfolio allocation for diversification, and that’s a perfectly valid reason to invest in hedge funds. I get that. But again, how much do you pay for diversification? And how good is it? Because lately diversification has not been good from hedge funds.

RITHOLTZ: So every year, institutional investor puts out their rich list, just came out this week, and it’s exactly what you’re talking about. It’s all the giant funds, all the usual names that we usually see. At the top of the list, Ken Griffin, Stephen Cohen, Dave Tapper, Ray Dalio. D.E, Shaw, Jim Simons, that whole list, are all making a billion plus a year, more or less. Ken Griffin had a good year. He had a $4 billion a year. Is it now winner take all in hedge funds? Is it that same fat head, long tail distribution of wealth even amongst the hedge fund community?

MIELLE: Oh, yeah, I think it’s definitely the case that the biggest hedge funds are attracting the most money and the smallest emerging managers are having a very tough time fundraising.

RITHOLTZ: You blame this on the consultants, or am I overstating that?

MIELLE: I don’t blame them because people will act the way they’re incentivized.


MIELLE: And they’re incentivized to advise you to put your money with the safe first, all-in-one shopping, you know, very well staffed compliance-wise, investor relation-wise companies. Those are the big ones, right? That’s what they’re incentivized to do. It’s sort of like think of a mature industry like fashion. You know, you’re not going to buy — why do you buy Gucci sunglasses? It’s not because you see better, it’s because the brand says something that nobody is going to make fun of you for wearing Gucci glasses. It has a certain cachet of quality. It’s probably going to last, and that’s why people — but that’s all marketing, right? That’s —

RITHOLTZ: The old expression used to be nobody gets fired for buying IBM. If you bought an IBM product, it was considered safe. But I don’t really think of investing along those same lines. But then again, I don’t have a family office with a billion dollars in it, so maybe I might think differently, who knows.

MIELLE: And it’s not only the family office. The family offices might be the ones willing to take a bit more risk. But think of the pension plans, think about the school endowments, they really need some safety. And the thought that they could be invested in a lot of emerging managers that go belly up, you know, the year after is not going to fit with their risk profile.

RITHOLTZ: Really quite interesting. Let’s talk a little bit about what seems to be a bit of a reckoning for hedge funds following the financial crisis in ’08,’09, hedge fund performance seemed to change markedly. What happened? Was it simply size, or is there more going on there?

MIELLE: What happened, in a way, that was shocking is hedge funds that were supposedly hedge were down 30, 40 percent.


MIELLE: So where was the hedge in that? And redemptions started flowing, which led to, you know, a huge number of hedge funds closing or putting up their gates. And I think the realization then became, okay, if we want to survive and have a solid business going forward and also really build equity value for fund, we need to be large. We need to offer multiple products. We need to think about structure and think less about evergreen funds where people can go in and out without friction and start thinking about locked-up funds.

So essentially, investment managers became captains of industry, became people who thought about their fund, not just as shuffling money, but as a business with a marketing team, with a strategic team, with different geographic offices, a real business that could offer sort of that one-stop shopping to investors.

RITHOLTZ: That’s a fundamental rethink of the previous business of hedge funds, isn’t it? So that raises the question that seems like they’re professionalizing and institutionalizing hedge funds, but the pre financial crisis outperformance didn’t really seem to follow. Why do we think that is? Is it the Fed? Is it technology, market structure? What is it that changed that led so many funds to no longer perform the way they were?

MIELLE: Well, size is certainly one and I think probably the biggest one. But also, if you think about all those competitive advantages that we had in the beginning, they were taken away from us or competed away. So the information advantage before Reg FD, that was gone. And not only that, Reg FD I think was implemented in 2000, but what happened was that with technology, the information became cheap and available to all of us, retail and institutional investors. It wasn’t the case before. You couldn’t just turn on your computer and have your 10-Ks and 10-Qs on any company —


MIELLE: — and earnings release, you know, webcast on Bloomberg at your fingertip. So there was really an equalization of the information. That took away a competitive advantage. There’s the fact that there were so many more hedge funds. So not only are they bigger, but also it’s a very competitive, mature industry. So that was, you know, the story of performance that was very subdued really.

RITHOLTZ: Some people have blamed dilution of talent, that when there’s a few thousand hedge funds, hey, you could grab a great analyst, a great trader, a great PM. But at 11,000, you’re sort of tapping into the ranks of the B players.

MIELLE: Correct. There was a study on that, that is called, I think, hedge fund, how big is too big? But essentially, they claim that there are two issues. One is if your outperformance is related to an asset class that’s illiquid, when you are too big, you’re going to run out of assets to invest it.

RITHOLTZ: Long-Term Capital Management. Exactly.

MIELLE: Correct. And if you’re trading an asset class that is very liquid, with sort of unlimited supply like the stock market, you’re going to run out of talent. And it’s exactly as you said, when we started with $500 million in assets, you need 10 excellent ideas. When you have $25 billion in assets, you need 200 excellent ideas.


MIELLE: Well, let me tell you, maybe the first 10 are pretty good. The next 150 have the potential to really dilute the excellency of your top 10 investing ideas.

RITHOLTZ: That’s really interesting. Let’s talk a little bit about in vitro wealth creation. You tell a story in the book that the Stanford Alumni Organization asked you for a donation, which you probably make. At the same time, Stanford works out an arrangement with the fund you’re working and they put some money into Canyon. Canyon collects big fees from Stanford, which they then essentially bank for your bonus next year, and then rinse, lather, repeat, just do the same thing over and over again. How real is that sort of thing across the whole industry, all these endowments? And by the way, anybody could go on a certain website and look up every non-for-profit endowment and who their investors are.

MIELLE: Yeah. I mean, that’s the kind of thinking that made me wildly unpopular with the marketing team at Canyon and sort of —


MIELLE: — you know, them deploring with a sort of socialist French citizen that was even 20 years into being in this country.

RITHOLTZ: Is that socialism, really? I live five minutes from Friends Academy, which is a private school that has like a surprisingly big endowment. And you go through what the endowment is invested in, and there are a few sites that do this because they have to do tax filings. So it’s all available. And what a coincidence, a lot of the funds they invest in are parents of kids who go there, and it’s this really incestuous relationship.

MIELLE: It is.

RITHOLTZ: This isn’t like a one-off example.


RITHOLTZ: There’s a ton of this.

MIELLE: I mean, if you think about it, you know, the people who work in the hedge funds and make a lot of money are typically Harvard, Stanford, the Columbia people.

RITHOLTZ: Yeah, we go down the list.

MIELLE: Exactly.


MIELLE: You go down the list.

RITHOLTZ: Chicago.

MIELLE: Exactly. And those schools have huge endowments that they have to invest. And since, you know, David Swensen at Yale was so instrumental in making allocation to private equity and hedge fund, a real pillar of the portfolio of those endowments. It’s been systematically the case that those school endowments invest in hedge funds where their students are going and getting paid. And so, as you said, look, I’m not saying it’s wrong. Obviously, everything is very transparent and legal, but there’s something that strikes me as not quite right when, you know, this money is sort of recycled, the way —

RITHOLTZ: It’s a little icky.

MIELLE: It’s a little icky.

RITHOLTZ: Right? It just seems like, oh, okay. You know, it just feels like it’s not arm’s length. What I would imagine is, hey, if you’re investing on behalf of the public, you have to have an arm’s length relationship. It can’t be that sort of old boys’ network. But apparently, it’s not illegal. It’s just not pretty.

MIELLE: That’s exactly what it is. I’m not saying that there’s any other way. I don’t have a genius idea to say, you know, those endowments should invest with mutual funds at 5 bps a fee. I just feel like the way you describe it, there’s something that is surprising in the way the world is working.

RITHOLTZ: So there’s a quote in the book that I really, really liked. My conviction is that the job of investing is a highly creative enterprise and that the qualities it requires are imagination, ingenuity and guts. Tell us a little bit about imagination, ingenuity and guts.

MIELLE: Well, I think the stereotype of a good investor is somebody who’s incredibly quick at numbers or, you know, a very ruthless deal-maker. And my experience is that, at least, when you trade and invest in distressed, but probably in every other category, there are other qualities that people don’t talk about enough, and imagination and creativity and being a good listener are some of them.

If you think about what it takes to restructure a company, a lot of negotiations, thinking up a new capital structure, explaining it to other stakeholders, having a vote on that. But it takes a lot of, you know, thinking outside the box and ingenuity to see the potential of a different cap structure, or a different type of assets, selling a business that’s no longer profitable, or closing some stores, or expanding in an area where the company hasn’t been before. That’s all stuff that is just thinking up ideas and scenario that has very little to do with numbers. I’m not saying it doesn’t help to have some ease with numbers, but it’s certainly not the foundation for success, in my mind.

RITHOLTZ: When you’re talking about these highly creative qualities, you also note that men and women possess these qualities in equal measure.

MIELLE: For sure. And that was very much in response to the idea, the concept that men are better at taking risks or they’re more aggressive. And that may be so, but I don’t think risk for the sake of risk is the quality required being a good investor. You know, there’s a famous joke by Fran Lebowitz who say, hey, I’m a smoker. I’m great at taking risk. And you know, we have all smokers in trading rooms, if that was the case. You need to have a return for the risk, and return is the ability to think up a solution. Look, the hedge fund business, we’re in the business of ideas, and ideas are equally distributed between men and women.

RITHOLTZ: All right. I got a couple of curveball questions for you, starting with, it’s not so much a glass ceiling as a quicksand floor. Explain what you mean by that.

MIELLE: I think when I got stuck or I saw other women stuck, it’s not so much that they were hitting their head against some invisible ceiling. It’s that they were sort of pulled down. They just had to and I had to fight so much for what seemed to be much easier to get to for men. Now, of course, it’s just my impression. I was not a man, I was a woman and you could tell me, well, you had the wrong impression. But it was sort of systematic enough for me to think it’s very hard to get up because I have to be so aggressive and fight so much for, you name it, to capital behind my ideas, the business line I want to lead, the extra analyst I need.

RITHOLTZ: So it’s 25 years later since you started at Canyon. In finance, generally, we see women running all sorts of companies and divisions in the world of finance, but as you mentioned, we really haven’t seen the changes take place at the hedge fund sector. Why do you think that is?

MIELLE: Yeah. I mean, hedge funds really do remain a bastion of white men. It is changing some, but —


MIELLE: — slowly. I mean, nano steps and again, certainly not where you would expect them to be for the size and the influence the industry has. I think it takes two things. One is outside push from investors, and we’re definitely seeing that. LPs really do want diversity and they insist and ask questions about it. But the piece that’s still not completely bought in, I think, is internally, I still don’t think hedge fund managers have bought the idea that they’ll make more money with a more diverse investing team.

RITHOLTZ: There’s a ton of research supporting that.

MIELLE: There is.

RITHOLTZ: Really interesting. And something that’s just cracked me up in the book, I’m going to read you a quote and you’re going to have to explain this to me. You walk into the kitchen at Canyon and an imposing handsome man with a killer smile, was pouring himself a cup of coffee in the common kitchen. I said, hello. One of the other analysts visibly excited, asked me, did you see him? Yes, I think it’s fabulous. We’re bringing diversity onto the team. And the other analyst says to you, what are you talking about? That was Magic Johnson. He’s heading the Canyon-Johnson Real Estate joint venture. You’re from France. Still, you don’t recognize Magic Johnson?

MIELLE: No idea. I saw this —

RITHOLTZ: L.A. Lakers. You’re in L.A.

MIELLE: Nothing.

RITHOLTZ: He’s one of the most famous basketball players ever, up there with Michael Jordan. Didn’t mean anything to you?

MIELLE: Yes. You know, when you’re talking about being comfortable, being uncomfortable, right there, that was an awkward pause. But, no, I didn’t recognize him. I saw this really handsome Black man with —

RITHOLTZ: Killer smile, right?

MIELLE: — killer smile.

RITHOLTZ: Unbelievable.

MIELLE: Can’t argue with that. So I said hello and I was very excited to, you know, have some diversity in the team.

RITHOLTZ: That’s hilarious. That really is funny. Let me move on to my favorite questions that I asked all of my guests, starting with, what is keeping you entertained these days? What are you watching or listening to Netflix, Amazon, podcasts, whatever?

MIELLE: Well, I do watch quite a few French shows. There’s one on Netflix that’s called Standing Up, about stand-up comedians. Standing Up.

RITHOLTZ: In France or here?

MIELLE: In France.

RITHOLTZ: Oh, really?

MIELLE: In France, in French translated, of course. That’s quite funny. I recently binged on Silicon Valley —

RITHOLTZ: So good.

MIELLE: — that I had seen before, but it’s —

RITHOLTZ: So good.

MIELLE: — such a classic. The first time around, I didn’t pay much attention to how the private equity guys are depicted. It’s priceless.

RITHOLTZ: Really? I have to go back and rewatch that.

MIELLE: So spot-on. It’s really spot-on. So those are the two things that I’ve been watching.

RITHOLTZ: So I got a couple of questions to ask you about that. First., we love the Call My Agent! I don’t know if you watch that.

MIELLE: Oh, that’s excellent.

RITHOLTZ: So good. And in fact, we ended up watching Emily in Paris, not because it was good, just because the scenery was just so amazing. Like you could watch it on mute and —

MIELLE: Right. Exactly.

RITHOLTZ: — the architecture, the fashion.

MIELLE: It would probably be a lot better.

RITHOLTZ: Yeah. No. It looked great. Just ignore the plotline. And then if you like Silicon Valley, and this is just to touch more out there, there’s a show on Apple TV called “Mythic Quest”, which is about a game company and it’s the same sort of crazy quirky characters. And I hear it’s only slightly exaggerated. I got the same sense from Silicon Valley. This seems exaggerated and the response was not as much as you would guess.

MIELLE: No. Bill Gates was an advisor to the show.

RITHOLTZ: It’s amazing.

MIELLE: Noted.

RITHOLTZ: We were in Andreessen Horowitz for a podcast actually. And that weekend, I’m watching Silicon Valley and I’m laughing, oh, there is the outside with the waterfall around it. I was like, we were just there. They live literally go into these VC shops and film in it, around it, like all the B-rolls, they’re really amazing.


RITHOLTZ: Anyway, if you like Silicon Valley, see if you like Mythic Quest. It’s a little weird. It’s a little quirky, but it’s very fun.

MIELLE: Noted.

RITHOLTZ: Tell us about your early mentors who helped shape your career.

MIELLE: I don’t know that I’ve had mentors. It’s a relatively new concept. Did you have mentors?

RITHOLTZ: There were people who I put an outsides value on their influence. Some of them knew me, some of them we never spoke. But I could create a list of, hey, these 10 people had an outside impact on how my career developed, some without even their knowledge.

MIELLE: Right. Exactly. When I think of mentor, my definition is somebody who takes a special interest in developing your career. And certainly, that didn’t really exist when I started. Did people have an influence on my career? Obviously, my ex-co-partners, Mitch Julius and Josh Friedman, I mean, I grew up with them. They ran the business. I learned most of what I know from them. And they were interested in my making money for the fund. Were they interested in me, Dominique, having a wonderful career for the sake of my career? No, not particularly. They had a fund to run and money to make and you know, they made sure that I performed.

RITHOLTZ: Let’s talk a little bit about books. You mentioned When Genius Failed and Black Edge in the book. What are some of your favorite books? What are you reading right now?

MIELLE: So my favorite books are not finance books. I’m a huge reader. I read in English and French. I read poetry, play. My favorite books have nothing to do with business. It would be The Little Prince by Saint-Exupery —


MIELLE: — and Kim by Rudyard Kipling. I am reading now a book called “When We Were Orphans” by Ishiguro, I mean, a Japanese face, and so I’m reading Japanese contemporary authors.

RITHOLTZ: That’s a good list. I get emails from people all the time, that tell me most of what they read, they find in recommendations from people like you on the show. So I always ask.

MIELLE: I keep a list of ideas from other people.


MIELLE: You know, I have a long list of books.

RITHOLTZ: What sort of advice would you give to a recent college grad, male or female, who was interested in a career in either hedge funds or distressed assets?

MIELLE: I’m not very good at giving sort of open-ended advice, but I’ll try it and that would be to make sure they go into the field because they love it. Meaning, it sounds —

RITHOLTZ: Don’t just chase the bucks.

MIELLE: That’s what I meant. And I think there were quite a few people that I’ve interviewed in the later years, where, obviously, the money was the main incentive. And it’s not clear to me that you’re going to be resilient enough, if that’s your motivation. And as we spoke, I really think that’s an important quality. If you can’t stick with it, it’s going to be hard to be successful. And sticking with it is what is required. You’re not going to get rich, you know, just a few years.

RITHOLTZ: And our final question, what do you know about the world of investing today you wish you knew 25 or so years ago when you were first getting started?

MIELLE: I think it’s mostly that people who speak with authority, in great assertive tone, don’t always know what they’re talking about. Other than that, nothing because it was a great adventure. It’s sort of a thrill to discover a field, right?


MIELLE: That is really what makes a job so fascinating.

RITHOLTZ: Well, Dominique, thank you for being so generous with your time. I really enjoyed the book and heartily recommend it, “Damsel in Distressed: My Life in the Golden Age of Hedge Funds”, Dominique Mielle.

If you enjoyed this conversation, well, check out any of our previous 487 such discussions we’ve had. You can find those at YouTube, iTunes, Spotify, wherever you find your favorite podcasts. Sign up for our daily reading list at Follow me on Twitter @ritholtz. Follow all of the Bloomberg podcasts on Twitter @podcast.

I would be remiss if I did not thank the crack team that helps put these conversations together each week. Justin Milner is my audio engineer. Atika Valbrun is our project manager. Paris Wald is my producer. Sean Russo is my head of research.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.





Print Friendly, PDF & Email

Posted Under