It’s a sweltering July 2019 day in New York when I arrive at a café and — anxiously — note that its front windows are flung open to the sidewalk. The pandemic is still far in the future, and there’s nothing ennobling yet about dining outside during a heat wave.
I’m a few minutes early to meet Rishi Ganti. I ask the waiter what I already know. “Is the air conditioning working?” It’s hot as hell, and no one working in this Soho coffee bar would forget to turn on the air. Sitting as close to the open windows as possible but already sweating in black jeans, I’m irritated when he confirms that the AC is on the fritz.
Ganti — who for years invested money for the principals of quant shop Two Sigma, just a few blocks from here — soon arrives and is noticeably unperturbed by the heat. I assure him we don’t have to find a different place, even as my mind rushes back to our previous conversations, which have gone on for hours.
That’s because Ganti, a math savant who has a Ph.D. and a law degree from Harvard, is on a mission. He wants to remind people about what they already know: that the central questions about markets and asset management have been answered.
In 2016, a year after founding investment firm Orthogon Partners, Ganti started putting capital into assets that are actually untraded — not just niche assets such as music royalties and aircraft leases — the same thing he did at Two Sigma. That means Orthogon has to discover the assets before it can capitalize on them.
Up until now, I’ve found Ganti to be a passionate — yet even-keeled — guide to the industry’s ills.
This time, however, he is fiery in his criticisms. I can see he would relish blowing things up a bit. Whether it’s the heat or the fact that he’s in the middle of one of his quarterly five-day quasi-fasts, I get to see him uncorked.
He says things have to change.
Ganti’s convinced that much of the brainpower running finance is being wasted.
The world is out of whack.
People need to do something else, like find cures for horrible diseases, write new songs, or create art.
Ganti is indisputably one of those people with a lot of financial brainpower. He has studied all things quant, including time series analysis, stochastic processes, Bayesian inference, and signal extraction. He also speaks six languages professionally, earned two black belts in Taekwondo, has been a competitive Latin ballroom dancer, and was a top debater in high school.
But early on he had what he calls a come-to-Jesus moment and abandoned all professional quantitative pursuits, including computer languages. No one needs special empirical skills to invest outside markets.
Not that many people in finance have come-to-Jesus moments. So I ask him more about it. Ganti says there is a magical place — or “undiscovered country,” as he will call it in a later conversation — for investing. He says he had his first epiphany around 2000, when he was in graduate school and he saw that markets were already doing a great job. He didn’t want to just be some actor in them.
He describes a talk he did for a group of traditional investors in liquid markets — the opposite of the magical place. I later looked it up on YouTube: In the video, Ganti, in a measured voice, tells the audience that there’s “a place where isolating alpha is not a stochastic process. Where you’re not subject to the whims or caprices of markets. Regulators might even invite you into this place, not police your every action.”
The digital Ganti says, “At some point the off-ramp to this place gets skipped.” Forgetting everything they learned in Economics 101, everyone instead runs headlong to compete in organized financial markets.
Back in sweltering Soho, the real Ganti, who is into longevity hacks and says I should consider eating, not drinking, matcha tea, gets a little starry-eyed about finance. There’s one time in the life cycle of an asset — its discovery — when something beautiful happens in markets, he explains. Then he shifts to a sitcom from the 1960s to make his point.
“If you are the Beverly Hillbillies, and you shoot the ground and out comes a bubbling crude, that family is going to Beverly Hills, because they created something out of nothing,” Ganti says. “It was ultimately a protean creative act: They introduced oil into the world where it wasn’t. You can make art, you can discover a drug or a cure. That is the major source of value creation. That is new.”
He goes on: “Like Botticelli’s Venus rising from the sea — that’s when an asset is created.” That’s the magical place. After that you’re primarily making bankers and long-short equity managers rich and stressing people out as they seek to shave pennies off of trades, and to do everything they can to buy an asset from somebody for a little bit less than it’s actually worth. Maybe their trading counterparty took his eye off the ball over the weekend or is scared to death because a new virus forced the U.S. into lockdown.
Ganti first encountered assets that went for a price that had little or maybe even nothing to do with their value, because of tax or regulatory reasons or other constraints, during four years at J.P. Morgan. After spending another four years at alternatives firm HBK doing non-market transactions, he went on to hone those skills in an unlikely place. In 2008, Two Sigma founders John Overdeck and David Siegel were making so much money off algorithmic investments, exploiting small market inefficiencies, that they wanted to try something new. Sources say they hired Ganti primarily because they all clicked intellectually. Unlike most investors in illiquid assets, Ganti is a scientist trained in empirical methods.
Eric O’Brien and Clay Mitchell, now partners in Fall Line Capital, which invests in agriculture and ag technology, were both undergraduates at Harvard when Ganti was a graduate student. O’Brien says Ganti is the real thing, even if he’s a little awkward at times. O’Brien laughs at my matcha tea story, telling me he and Ganti frequently swap wellness recipes and ideas. “All of that is genuine curiosity about what makes things tick, though,” he says.
In a separate conversation, Mitchell notes that no one without unbridled curiosity and energy could do the work of discovering new assets. Mitchell, who lived upstairs from Ganti at Harvard, says he would watch a constant flow of students come to Ganti with questions about high-level stats, math, chemistry, or biology, or with an essay to write, and he would coach them.
O’Brien, who spent most of his career in early-stage venture, and Mitchell, a farmer who studied biomedical engineering, run a firm that invests in farmland and agricultural technology. “Whenever Clay and I have a big, hairy problem to solve, we will channel Rishi or outright call him. He has so much raw intellectual horsepower, like a chess player who can think of all the available moves and come up with the optimal one,” O’Brien says.
Unfortunately, I have to introduce at least one word of jargon into this story: alpha. Every active manager’s raison d’être is to create alpha, a risk-less profit. Most people in finance define it more loosely: as the return on an investment that can’t be explained by factors of risk. That’s the entire 40- or 50-year history of asset management.
In his YouTube talk and in every conversation we’ve had, Ganti asks, “What is the purpose of a financial market?” His answer: “It’s to eliminate alpha.” Once you have a few people bidding for any asset, whether a car, a house, a stock, or a private equity or venture capital stake, the price gets driven up to and often past the fair value of it. The intent of a market then is to push alpha — the difference between fair value and price — to zero.
I’ve written other stories arguing that alpha is dead or declining or mysteriously disappearing. It’s alive in this one. But after Jed Clampett discovers Texas tea on his property, its alpha can’t be created or destroyed. It can only be traded around.
“Computer programs that trade sweet crude 24 hours a day are playing a zero-sum game,” Ganti says. “If your program reports to you at the end of day that you made money, it was because other investors lost money. You’re not making money off oil, you’re making money off your trading counterparties.”
A large percentage — maybe even the majority — of hedge fund, private equity, and other asset managers and investors probably don’t care why they made the money. But it matters for a lot of reasons. Ganti argues that asset managers all want to generate alpha, but they’re making it really hard on themselves. (He actually prefers the term “abnormal return” to describe what most people call alpha. That’s because alpha is only suggestive of skill; it can’t be proved. Abnormal return is the portion of return seemingly not explainable by risk.)
Investors, Ganti says, “have located themselves in the most hostile environment to do it in. Isn’t that weird? If you want to be a citrus farmer and grow lemons and oranges, would you go to the Gobi Desert or the Sahara or Death Valley or the Arctic tundra? Those would all be terrible places to ply your trade. But if you’re here to generate alpha and you’re putting yourself in a financial market, you’re putting yourself in the most hostile environment possible for you to achieve your aim. How did that happen? The answer is this: The second you decided that a screen, this Captain Kirk–like interface, would be your way of working, you decided to enter a particular world — a world that would work to deny you what you want to have.”
Ganti makes it sound easy to go off the grid.
Mitchell, his friend from Harvard, says anybody going after esoteric investments has to have the stamina and endurance to find opportunities, investigate unfamiliar and complex administrative and legal structures, and develop specialized expertise on potential investments that might not even work out. What’s more, many of the opportunities are small. An entire portfolio will be made up of many different investments that all require a lot of labor. By definition, there’s no investment banker who does any groundwork and puts together term sheets or simplifies anything for anybody.
Many of these deals in esoterics are in international markets, because the U.S. has been endlessly combed over by a massive financial industry. Although investors don’t have to speak French to invest in stocks in France, language and culture are a formidable barrier when trying to discover assets. Although Fall Line’s strategy is similar to Ganti’s, it’s much more focused. Mitchell says he knows where in the landscape to search.
“The regulatory and legal structures could have complexity and require specialized knowledge. The economics and math can be difficult to model. That’s, of course, why they haven’t been modeled yet.” These investment opportunities have never been securitized or packaged, he says, so people don’t know how to approach them. “Then the opportunities may not last. They’re ephemeral and one-off. There’s not that much of a pattern. I don’t think it’s a huge growing asset class that’s available,” notes Mitchell.
The bulk of his own firm’s capital is from Ivy League endowments that want to invest in things that computers can’t do. They figure if the alpha isn’t gone yet, it’ll be gone soon. They’re right, he says. “For us it’ll be a long time before the alpha vanishes, but Rishi is even further out there. For his investments the data doesn’t exist, the models don’t exist. He’s protected from quants doing it. There’s value he is unlocking, and creating some kind of efficiencies. He’s having some kind of positive effect.”
Allow me to back up.
When I first met Ganti, in 2018, he went on about how hard the “invisible hand” is working to tell people in finance that they should go do something else. Finance’s law of physics is learned in Econ 101. It’s the Theory of Competition: Competition eliminates profits, and perfect competition eliminates profits perfectly. Ganti, who quotes that approximately ten times in each of our meetings, says people entering finance conveniently forget it the minute they step into their first job at Goldman or Blackstone. Whether it’s securities traded on a screen or private equity deals being paraded around, the invisible hand is squeezing out alpha on purpose.
I call Daniel Benjamin, a professor at UCLA’s Anderson School of Management and an expert on behavioral finance, including errors people make in statistical reasoning. He and Ganti knew each other only briefly when Benjamin was an undergrad at Harvard, but the two later became friends after randomly meeting in Las Vegas. I ask him why it’s easy to forget fundamental economic lessons.
“Similar to acting or singing as a career, it’s a superstar field,” Benjamin explains. “A few people have some unique skill and end up being extremely successful. But most people are doing the same thing as everyone else. When you’re enticed by superstardom, it’s easy to forget about the theory of perfect competition driving rents to zero.”
I then reach out to a finance professor at Yale. I ask him about the next thing that Ganti insists on, which finance people generally deny to me.
In financial markets the only person who gets to own an asset is the one who pays the most, defeating all rivals — though most people understand that in highly automated markets, such as those for stock, thousands of bidders will likely drive up the price of Apple or Microsoft to its fair value. What I’m told almost every day by people in private markets, whether venture capital, private equity, or real estate, is that these markets are inefficient, so there’s a lot less competition and a better chance that assets can be had below their fair value.
But in reality it takes as few as two bidders to push up the price of a private loan or a stake in some obscure fintech firm to fair value. “As long as multiple bidders can see an asset, it will be well priced,” says the Yale professor. “Remember, there’s plenty of people involved in the process of selling obscure private bonds or almond trees. There’s also the winner’s curse. That’s when the price you pay goes well beyond the fair value. Because there’s only going to be one person who walks away with the thing being sold. To win you have to keep bidding.”
Notes Ganti, “People are handsomely rewarded for being comparison shoppers, for exploiting small market imperfections — an activity that has tiny social value but huge private compensation.”
In October, I went into Manhattan for the first time since March to visit Ganti, who has two kids — one is three and the other is one — in East Harlem. He had just gotten off a bus after picking up his daughter from preschool. We talk in a common room in his apartment building where the windows are open and the conversation is drowned out every ten minutes by a train going by.
Ganti tells me more about how the invisible hand has guided him to invest over the years.
One easy-to-understand example is charter schools, which are backed by state receivables. The schools couldn’t get funding because banks didn’t know how to categorize them or understand their risks. Orthogon partnered with an existing operating team that had figured out how to finance these schools and built what it calls a platform around them. Charter School Capital is now up and running and has done more than $2 billion in school financings since its founding.
Other assets are much more esoteric. Among other things, Orthogon has funded religious orders in Spain, which are quasi-government arms that give out food, health care, and homeless services to people regardless of their religious affiliations. While these organizations wait for funding from the government, Orthogon provides them with money through a process called factoring — in which a bank or Orthogon buys invoices that are due in the future at a discount.
The asset manager has also financed public works in Mexico and student housing in Spain and supported a utility service for low-income households in Italy. Few asset managers would touch these — not because they pose bigger risks to investors, but because the market doesn’t service these assets well.
Ivan Zinn, a veteran of Highbridge Capital who runs special opportunities and private credit firm Atalaya Capital, met Ganti in 2004, when the two were at HBK. Zinn says Ganti’s ideas are on the extreme end of what many professionals have long tried to do: “Invest where there’s less competition. But these opportunities are hard to find, often small, and really complex. We prefer investments to be repeatable or scalable,” he explains. “Rishi will learn everything he can about charter schools, and then he moves on and learns everything about Iceland. He’s not dramatically different than others philosophically, but he’s willing to do more work per unit of invested capital.”
Zinn adds, “Rishi’s willing to do things the hardest way possible. Can he be rewarded for it? All of us spin our wheels to a certain extent — not every opportunity works out for anybody.”
In East Harlem, I ask Ganti about the larger point of what he’s doing. He’s on a mission — but why? He returns to some ground we’ve already covered, but in a slightly different way.
He says he can’t explain why millions of people who work in what he calls commoditized finance aren’t trying to copy what he’s doing. The rewards for looking at unpriced assets and surfacing them into markets are extraordinary.
The invisible hand is guiding them away from all this, signaling that they should be doing something else.
But the Anderson School’s Benjamin says the broad set of skills that are needed to do something besides take the well-trodden path to equity long-short manager aren’t taught to college students who want to go into finance. There’s a set route to Wall Street. “If it were more mainstream, it would be more mainstream,” he observes.
But the industry keeps pressing repeat on its process. Ganti often repeats a quote from Upton Sinclair: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Still, he says, “we are going to impale ourselves on the idea that competition eliminates profits and perfect competition eliminates profits perfectly. It’s not just stocks, bonds, or currencies. It’s not just finance. It’s journalism. If I can figure out what makes Julie Segal tick and what her tricks are, then I’ll train a robot. Every economic activity in this world becomes less valuable, wonderful, or magical when others can do it too. But investment managers are very skilled in convincing you that this just ain’t so.”
Fifty years ago it would have been the ambition of a child at show-and-tell to say he wanted to grow up to be a stockbroker. “Stocks are trading at tenths of a penny now. That spread used to be the value of the industry,” Ganti notes. This kind of mechanization will continue into all of these handshake-type businesses.
“But Orthogon just jumped ahead of all that,” says Ganti. “The truth is that we begin where the markets end.”