Chris Hentemann, Founder and CIO, 400 Capital Management

Chris Hentemann (0:00)

But what we do like is we recognize that Power is in huge demand. Power's got some old school technology, not new technology, that has, let's call it depreciation schedules and secondary markets, and most importantly, alternative uses beyond whether it works around the data center or not, that I think we tend to like, and it's in demand. There's good bid for it, there's good price support for the asset. We can identify the asset, we can lend against it.

And for some reason, if it doesn't go through, it's an asset that can be transferred or has an alternative use.

Dean Curnutt (0:35)

Hello, this is Dean Curnutt, and welcome to The Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry.

I'm joined today by Chris Hentemann. He is the founder and chief investment officer of 400 Capital Management, a hedge fund focused on delivering returns uncorrelated to equity markets, credit markets, and focused on asset-based credit. Chris, it is a pleasure to have you on The Alpha Exchange today.

Chris Hentemann (1:13)

Yeah, Dean, thanks a lot for inviting me.

Dean Curnutt (1:16)

I'm glad to finally have the opportunity to sit down with you directly. You've been generous enough to speak at my Macro Mind Symposiums. You spoke in 2021, 2024, so you lent your time and your insights to that project. It's just going to be a lot of fun to sit down and really dive into your investment process and what 400 Capital Management does. You and I are old colleagues from our B of A days, and we share something else in common, which is we launched our respective firms in the teeth of the financial crisis. And that's really where I wanted to start. So 400 Capital Management was launched in October 2008, amidst chaos.

So you were running Structure Products at Bank of America. That's where we were colleagues for a number of years. Tell us, just go all the way back and just tell us a little bit about what your game plan was. You were in a senior leadership position at B of A, but just tell us a little bit about the thought process behind founding 400 Capital.

Chris Hentemann (2:19)

I appreciate the introduction. If you don't mind, it kind of was always in my DNA since I got in the business in 1990 I started at First Boston in 1990, I worked at Salomon Brothers, and then I joined B of A in 1996

I'd always been in a trading role, which I always felt was very entrepreneurial. Here's some capital, here's a seat. Your job is to make some money, build some expertise and an edge, and you're effectively working for the house. Being in the mortgage asset-based structure product business, it was incredibly creative, it was growing, and I happen to have just a very unique seat. I feel like I was very lucky to just develop the beginning or the front end of my career.

It's such a dynamic space. Where you and I cross over at B of A, it was right in the late 90s and early 2000s. There are a number of things going on. You can't really put your finger on a single thing, but I always like to, the analogy I like to make is really going back to what I studied when I got in the business, which was this idea that this guy had in the 80s, which was to make loans to subprime companies. The guy's name was Mike Milken, and he basically had this idea of the jug bot. And effectively, what he realizes is that you can come up with terms and financings in the capital market that can actually extend capital into that sleeve of corporate borrower, and that's fine. And it went through a credit cycle, and we all, I think, generally know that cycle. And you can look today and you can see remnants of basically where that all started with great firms, like Oaktree and Apollo, and you've got a lot of incredibly successful, high-yield, innovative corporate credit platforms, and they've all evolved into alternative asset management. My career went through really the structure finance side, which was financing consumers. And so the advantage we had at B of A was we were really connecting capital markets to really the commercial and the consumer lending aspects of the bank. And that's the evolution that was going on, but all that was mostly funded and warehoused on bank balance sheets up until about the late 90s and early 2000s, and then securitization really took off. And just like anything, like high-yield went through its cycle in the late 80s for anybody who studied that history, and it went through its inflection, and there was this firm called Drexel Barnum, and Drexel Barnum didn't last through a major correction. And those cycles actually repeated themselves around consumer credit in the 2000s. And I was sitting at B of A, and you could kind of see some of the things that were going on. The competition was growing, the amount of leverage and capital that was available, and the lack of discipline and oversight was all there. I can't say I could forecast it, but what I realized that there was gonna be some form of a correction. There were just things that were just for the seat I was in, from what we were doing, the detail that we had, you could kind of see that there were just compromises. It's all embedded in the big short. Everybody's aware of that. We all kind of could see it.