Interview: Dan Rasmussen
Hedge Funds, the Private Equity bubble, and profiting from panic
Photo: Dan Rasmussen / Verdad Advisors
Dan Rasmussen is an American hedge fund manager and the founder of Verdad Advisors, which manages over $1 billion in assets. He is the author of American Uprising and The Humble Investor.
What follows is a transcript of our conversation, which took place on July 31, 2025. The transcript has been edited for length and clarity.
The Education of a Hedge Fund Manager
CB: I thought we'd start with your education. You passed through some of the great institutions—Harvard, Bridgewater, Stanford Business School. At Harvard, you studied history. What is the purpose of studying history?
DR: This is my approach to investing as well—it’s the idea that one can learn from history, which seems like such a basic concept. But we're all time-limited by our own experience. And so, what you're trying to do is extend your experience, to take in the accumulated wisdom of a longer history. And so, you start to see how things have worked or not worked in the past.
One of the breakthroughs in connecting the dots here is Philip Tetlock’s work. Philip Tetlock is an expert on forecasting, and what he finds is that there are different methods of forecasting. One method is just to use your mind, analyze the situation, and make a forecast. He basically finds that that method is no better than random chance at forecasting events. If you're applying that method, you're not going to win.
What he finds to be the best method is what he calls base rates, or historical probabilities. So you might say, “What are the odds that the United States is going to go to war next year?” The expert might say, “Oh, well, let's study all the conflicts going on. Could we go to war with Russia?”
The historical probability—or base rate—person says, “Well, how many years has the U.S. been in existence? Of those, how many were we not at war? And of those, how many did we go to war?” And so, you're going to come up with something like, “Hey, I think it's a 3% chance—and a 97% chance that we don't go to war.”
Then, from there, you modify that statistic up or down based on your clinical judgment. What you're trying to do as an investor is make forecasts. You're trying to bet on future outcomes and how they're going to look different—or the same—and I think the best way to do that is to study history. Try to learn what those historical probabilities are, and train your mind to recognize the relative probability or improbability of certain outcomes. For example: how many times after a socialist president has come into power in Latin America have subsequent equity returns been good in that country? Zero, right? You can just start to learn some of the lessons of history and bound your own hubris, and also recognize that the world is probabilistic.
And I think one element of writing history that's very important conceptually for investing is this idea that history is contingent. There were alternative histories that could have happened. We had these branches, where we could have gone this way or that way. Your job when writing history is to step back into that moment and say, “Hey, the reason people did this is because they were worried about that. If this event hadn't happened, the likely outcome would have been this.”
And then you start to say, “Now, me as an investor—I'm sitting at this point, holding both of these alternative futures in my head, and knowing that the future is equally as contingent as the past.”
So I think there's a recognition there that we don't live in some sort of teleologically predestined universe, but rather one full of chance and contingencies. I think that makes you a better investor to start thinking in that way.
CB: I understand you rowed crew for some years. What kind of life lessons did you take away from rowing?
DR: I think rowing is a sort of simple, brutish sport that just involves sustained effort over time and has a relatively linear correlation between effort and results.
If you think about the business world or investing, one of the key things is just to work hard and keep pushing, keep pulling on the oar. Even if it's not all that interesting when you're in the trenches, that process leads to good outcomes.
I think there's also sort of a humbling impact. Rowing is a humbling sport. You're doing this simple, routine motion over and over again. It's the process that matters. And I think that's a very good lesson for investors.
CB: Do you have a reading list for investment literature that's informed your thinking and judgment?
DR: In terms of business, I think Philip Tetlock’s Expert Political Judgment is just such a seminal work in terms of thinking about forecasting, and thinking about how to predict the future. Because, again, investing is about betting on forecasts, and so you've got to be a student of forecasts and forecasting methodologies in order — I think — to be a good investor.
I'm also an entrepreneur, and I think there are some really interesting books about entrepreneurship as well. The Lean Startup is another great one. The Lean Startup is a wonderful book on building businesses, and one of the lessons of it — when it relates to entrepreneurship — is you've got to experiment.
And I tell this to my team all the time: we're going to have a lot of ideas. Some portion of those ideas will be good, and some portion of the good ideas will work. But you don't know until you find some way to experiment and get feedback.
Future Nihilism and the Power of Base Rates
CB: At what point did you decide to build this hedge fund (Verdad Advisers), and how did you formulate the original idea?
DR: I think that what I took away from Bridgewater, that I thought was very valuable, is this idea that investment strategies should be tested across history. You want to take an idea and see how it would have worked across a long historical time period, and that's going to inform you about how likely the insight is to break future returns.
And Bridgewater is entirely geared to that — very long data sets and backtesting environments and ways for you to test ideas and try to understand these causal mechanisms of action and reaction. That was a formative intellectual experience for me. When I went to Bain Capital — you know, the job of private equity, in large part, is analyzing individual businesses and making forecasts of what they're going to do in the future, and that's almost entirely done in a clinical way.
During my early years in private equity, I attempted that methodology. And then I came to the conclusion that I didn't think that clinical approach to creating this kind of cash flow model — which is widespread practice throughout the fundamental active management world — I'm just not sure it works. I'm just not sure anyone can predict those things that are key inputs into a discounted cash flow model. And Tetlock would suggest that using clinical judgment isn't a good way to do it.
And when you start to look at base rates — which are the next natural place to look — what you find is quite interesting. There are some seminal papers, which I’ve since replicated, which demonstrate that revenue and earnings growth are not persistent. So people often say, “I want to find a company that's growing 10% or 20%.” Right? You can find a company that has grown 20%, or has grown 10%, but because there's no persistence of growth, that does not mean anything. It has no predictive power for whether it's going to grow 10% or 20% next year or the year after.
And so one of the fundamental flaws with this DCF model is they're taking this clinical approach. They're basically taking historical trends in revenue or earnings growth and forecasting those into the future without understanding that there's this fundamental disconnect between the past and the future. There is no trend. History, in terms of financial statements, doesn't trend. It follows, rather, a random walk.
And I think that's sort of a fundamental insight that I had. It gave me an argument about investing — but it also made me a horrible employee. I think I was probably one of the worst employees Bain Capital ever had, because I didn't think that the job I was supposed to be doing was something that I thought would work. And so I would often refuse to do it or cause problems. And looking back, if I had an employee like me, I would fire me immediately — because I was just so difficult.
I thought to myself, “Well, gee, maybe I'm just a terrible employee. And if I am a terrible employee, maybe my only option is to go start something of my own.” And that was what I did. After Bain Capital, I went to Stanford and started this business. The idea, embracing this idea of base rates, was to say, “Well, let's look at history to learn what would have been the best predictors of future return.”
And I think the key one, in my view, is value — that if you believe the future is unpredictable, that a variety of alternative futures can unfold, then paying the lowest price relative to today's earnings possible is, in some sense, the best bet. Because the world is going to be surprising, and you'll be more likely to be surprised to the upside.
Now, there are layers to doing that. Obviously, you want to understand some basics of business quality. There's a whole set of intellectual inquiries that flow from that logic. But I call this idea “future nihilism”: if you knew that predicting the future was entirely impossible, what would you do? What actions would you take if you thought the future was completely incomprehensible, that the glass that we look through is completely glazed over with black paint?
And I think one of the implications of future nihilism for investing is, of course, value investing.
There's another great study by my colleague, Sam Hanson, about the Greek shipping industry. What he finds is that when shipping rates are really high, Greek ship owners run their DCF models and they say, “Wow, if I built a bunch of new ships, I could make a huge amount of money. The ROI on building new ships looks fantastic at these shipping rates.”
So they go to the South Korean shipyards and they order some new ships. And then three years later, the ships arrive. They take three years to build. And they call their captains and they say, “Well, how are we doing with these new ships?”
And they say, “Well, Captain, there's a problem. The shipping rates have collapsed.”
And they say, “Well, why have shipping rates collapsed?”
They say, “Well, there's a lot of new inventory on the market.”
And they say, “Why is there a lot of new inventory on the market?”
They say, “Well, it turns out that at the same time we ordered our new ships, all the other ship captains ordered their new ships — and so they all arrived at the same time and created a glut.”
Sam Hanson calls this “competition neglect.” And I think what's great about it is — if you think about markets — we're competing in a marketplace. For every stock you're buying, someone is selling it. In theory, investing isn't about analysis, it's about meta-analysis. It's not what you think; it's what you think relative to what everyone else thinks.
And so there's this concept of competition neglect, which exists in markets as well. You do your analysis and say, “Well, this is a great stock.” You say, “Well, but maybe everyone else knew it was a great stock — and so now the price is higher.” So what you really want to do is just find the places where everyone's pessimistic. Because, at least in markets, that optimism or pessimism is really all about future cash flows — which are inherently unpredictable.
And so if you think about being, you know, future-nihilistic — what you want to do today is find the place where everyone else is most pessimistic. Because that's the place where a random walk is going to be most rewarded.
Building a Contrarian Firm
CB: How do you hire for talent and compatibility, and what kind of qualities are you looking for — both when you built up your team originally, and as you've continued to bring in junior analysts and that sort of thing?
DR: Yeah, that's a great question. First and foremost is intellectual rigor.
I think, second, we probably over-index on competitive athletes — people that have done sports in the past — because I think it brings a team spirit. It also brings an ability to understand that failure is part of eventual success. Right? No one wins 100% of the games. You're gonna lose games, and you learn from them and you move on, right? And I think that's very important in business.
And third, I think a really important one is the ability to write. If you can't write clearly, you can't think clearly, and it's the easiest way to understand whether someone's a clear thinker. And I think that's very important to collaboration as well, right? People need to be able to communicate clearly. If they're not communicating their ideas clearly, you can't understand them, your clients can't understand them, and you're not anywhere.
And so I think a lot of the way I approach thinking about new hires is looking for each of those things: Are there signs of brilliance? Is there a sign that this person is a team player? And then third, can they write and communicate clearly?
A lot of what we're doing these days — it's quantitative. It's building software, it's running models. And yet, still, that ability to write is so seminal. Because even if you are writing code all day, you still need to tell someone what that code does, and how to use it, and what the point of it is, and how you determined to build it that way — and those are all jobs which require good writing.
CB: Now, when you're going to potential investors, how do you sell somebody who's considering placing a large amount of money with you? How do you convince them of your strategies, and what's your process with regard to fundraising?
DR: Yeah, so we have, not a unique approach, but an unusual one — which is that our approach to fundraising is simply to write about what we do. We write about what we do, and then if people agree with what we've written, they call us. That's how we fundraise. That's it. That's all we do.
And I think our view is that the internet enables this sort of matching process. Everybody has specific tastes in what they want — a specific type of investing style that resonates with them, and your return profile, size of firm, whatever that might be.
And your challenge, as someone who is raising money or building a firm, is to match — to say, “Well, we're exactly that thing that you want. We're not a fit for everybody, but we're a fit for you.”
I think what's great about writing and being vocal about what we do — and being willing to be controversial, and to highlight the points where we differ and disagree with everybody else — is that those are actually the places where that matching happens most efficiently, where you find people who say, “Yes, I have that contrarian view too. I'm one of the 1 in 100 people who thinks that maybe now is a good time to invest in Europe, even though everybody thinks that Europe is a complete basket case.” Or, “Japan is an interesting place to invest, even though Japanese markets have gone nowhere for 25 years.” Or whatever that contrarian idea is that you're coming up with — writing enables you to match to the people that share it.
Private Equity’s Grand Delusion
CB: What do you think are the biggest, most widely held consensuses on Wall Street today that are incorrect?
DR: The single biggest one is this huge bubble in private markets, which is, I think, bigger than most people understand. There's probably, call it, $2 trillion of private equity and another $3 trillion or so of private credit. Those markets now are bigger than the small-cap equity market and the high-yield bond market, respectively.
That lending, and those private equity investments — if there are 2,000 small-cap companies, there are about 12,000 private equity-backed companies that are also the recipients of these private credit loans. And so you do the math, and you basically realize that these are very, very small companies.
So what private equity and private credit — this whole private asset boom — is, is the idea that these very, very small companies, these 12,000 tiny companies, can bear this massive equity and credit burden and do so without creating some sort of systematic wave of bankruptcies. Because too many assets, too much equity, too much credit has been put on the backs of these companies — companies that actually generate relatively small amounts of profit relative to what Meta or Amazon or Microsoft might generate.
One of the challenges here is that private markets, because they're private, the pricing mechanism is stale. You get feedback from the mark, or the NAV, from the manager, rather than from some market price. And I think the lack of market pricing has led people to underestimate the risk involved, because the whole asset class is effectively able to hide the problems, to advertise the winners.
In recent years — really, the last year or so — what you've seen is that the private markets, essentially private equity, the distributions have collapsed. So it used to be, you put money in, you got money back. Now, you put money in, and no money comes out. I think that drop in distributions is a very, very, very big warning sign for investors. Because if they're not getting money back, it probably means that what they're valuing the assets at is not a market price. Otherwise, they'd be clearing those transactions.
What you are likely to see is that the whole asset class is overvalued. It's worth substantially less in aggregate than people thought it was worth. And as that is discovered, one of the challenges is that the private asset bubble, like every other bubble, is fueled by new money coming in. If more money comes in this year than last year, all the sins from last year are wiped away.
But when the money stops coming in — which, by the way, it stopped two years ago — so the fundraising has been down for three years in a row. As that fundraising dries up, the ability to exit those deals to a sponsor that's bigger than you goes down. The exits dry up even more. And as the exits dry up, the returns look worse, and the fundraising gets worse, and the exits get worse.
And so it's this compounding cycle that played out to the favor of private assets for years and years, and has now become a headwind. What was a tailwind has become a headwind. And I think we're in the early days of a great reckoning. I think the firms that over-invested in private equity and private credit are going to suffer major reputational damage for missing the obvious systemic risk of this asset class.
The Endowment Herd
CB: How did the consensus form around this asset class? You wrote in your book a little bit about David Swensen and the Yale endowment in the 1980s, but since then, why is it that all these endowments and pension funds have congregated around these two asset classes?
DR: Private equity is really the crown jewel. Markets always go through fads, right? The 1990s was venture. Everyone wanted to be in tech and startups, right? And that boomed, and then busted. The 2000s were about emerging markets — right? “We need to invest in capitalism, the rise of the rest,” you know — Chimerica, et cetera, et cetera. And then that boomed, and then was a bust.
I would say hedge funds were also a boom-bust in the 2000s. Everyone wanted to be in market-neutral hedge funds, because the market went sideways for 10 years. And so, if you were able to go up when the market was flat — wow, you're a hero. And so there was a huge boom-bust in hedge funds, as people bought into them. And then, when the market started doing well and they did less well, it was like, “Why am I paying these fees to not do as well as the market?”
And then the 2010s have really been the boom of private markets — for private equity especially. I think the narrative was built around the pre-2010 performance, which was quite good. So the performance from, call it, 1980 to 2010 was excellent. So people said, “Well, I can get better-than-the-market returns.”
I think the next element of it was this faith in Yale and Harvard — right? The best institutions, “the smartest people in the room.” This is what they're doing — right? “Let’s copy this. Copy the experts.” The sort of Obama-era faith in technocracy. These forces all picked up and, I think, gave rise to this private asset bubble.
And I think the other thing was probably the pressure of index funds. It became harder to argue that one could add value in public markets, given the pervasive knowledge of index funds that was spreading on the internet. And so people started to say, “Well, ah yes, but you know, there's no index fund for private equity — so pay me big fees to go and do that for you.”
You can't underestimate the impact of the index fund threat to the active management industry — and the way that so many intermediaries and advisors rushed to private markets as a way of justifying their existence once they'd given up the argument against passive index funds.
CB: You wrote in your book about the survey you did of roughly 900 PE deals that you studied based on the publicly available information, and you noted there were maybe 10,000 or 12,000 that you didn't have the information to factor into your study.
To paraphrase Donald Rumsfeld — what are the known unknowns in this study? What kind of information would you expect to find in that much larger data set that you were not able to evaluate?
DR: Yeah, there's a huge opacity in the private markets right? Because they're private, so we don't know.
And I think my view is that the companies that we're able to study are probably the bigger and more successful ones. And I think that my sort of “known unknown” is likely that the ones that are below the surface are the worst — the bigger offenders — and where more of the problems lie.
CB: Given that approximately 60% of endowments lie in alternative assets, most of which is Private Equity, what kind of impact does that have if your theory proves accurate and we're in for a real reckoning with the asset class?
DR: I think endowed institutions are the worst offenders. And so the sort of foundation–university complex... it turns out that all the people who work at these places think exactly the same way. They have a shocking degree of homogeneity in their perspectives on the world. So it’s no surprise that they’ve all herded into the same assets and the same asset allocation. There aren't these outliers anymore. Where are the cowboys making totally different decisions? They all agree!
And consensus is the death knell of good investment decisions. I mean, the Stanford economist Mordecai Kurz says the thing we have to worry most about is correlated beliefs. Because correlated beliefs drive systematic mispricing. And isn’t it obvious that we have correlated beliefs? They even call it the endowment model! Like, the fact that there's even a model is a problem.
And the bigger problem, right, is that the model is bad. The model is: shove as much money as possible into private assets — illiquid private assets — at very high fees. When those private assets, I think quite clearly, have become sort of the biggest consensus trade of all time.
I think what you're going to see — and I think Elise Stefanik recently floated this idea — is requiring institutions to mark their private assets not to the NAV value, or the accounting value that the funds themselves provide, but rather to the most recent secondary transaction.
So this is a little complicated, but I'll explain that. Let’s say you're invested in a fund, and that fund says it's worth $100. Current accounting rules allow Harvard or Yale to carry that at $100. Now, let's say Yale and Harvard both own it, and Yale sells that thing for $50.
Harvard doesn't have to take into account Yale’s sale in their valuation of the asset — so they can still, the next day, value it at $100, even though Yale sold it yesterday for $50.
Even more strangely, by the way — the secondary firm, the firm that bought that stake at $50, can immediately mark it up at $100 on their balance sheet. And so if you are an investor in these secondary private equity funds, as the fund deploys, you get immediate markups. And so your returns in the first two or three years always look fantastic, because you're buying a bunch of things at 50 cents on the dollar that you can immediately mark up to one — and only later do you find out whether they're actually worth one, or whether they're worth closer to 50 cents, what you paid for them.
But I think that one of the immediate things that you're seeing with these endowed institutions — their liquidity has dried up. So those 40% of assets that were supposed to distribute, you know, 12% of the endowment a year in terms of money, are now distributing 4%.
So there's this gap in terms of what they're able to get back in terms of cash. They're illiquid. At the same time, this endowment tax is being put into place, and so it's creating this huge liquidity pressure on these endowments.
Even worse — imagine the marks are off by 20%, right? And so there’s an 8% funding gap. Like — they thought they had $50 billion, and it turns out they actually have $46 billion. Well, those numbers are big enough to make a difference for most of these endowed institutions.
And maybe it's even worse than 80 cents on the dollar. Maybe it's 70 cents on the dollar. We don't know. We don’t know how bad the fallout from this is going to be yet.
The U.S. Index Trap
CB: When you look at examples of challenging consensus in your own investment strategies, one that comes to mind is the concentration of investment in U.S. equities versus international equities. Now, you argue for geographic diversification — and I was wondering if you could break down your logic there, especially since, as you point out, international equities have been seriously underperforming the U.S. market.
DR: Yeah, so, I think obviously the U.S. weight in the global benchmarks is reaching the highest it's ever been — and probably some of the highest a single country has ever been in the international benchmarks.
And the way it got there is by remarkably good performance — both fundamental performance (we have some of the best companies in the world that are growing the fastest), and by changes in valuation, as everybody decided that the U.S. was the safest place to put money.
And I think the argument that I would make is that the future is unpredictable. We can't bet on U.S. exceptionalism continuing forever. We don't know what could change it. But putting all your eggs in that one basket — especially for the reason that it's done best — is not good logic, right?
You want geographic diversification because it's going to spread your risk. And I think that you could even go further and say that the dominance of the U.S. as a market is almost entirely driven by the large tech stocks. And those large tech stocks, in turn, did indeed grow unbelievably fast, for an unbelievably long time, at unbelievable scale. Unprecedented would be an even better word than unbelievable, right? It was just unprecedented what they did, and it was because of the way the internet enabled this profitable growth at scale.
I think the great challenge facing the U.S. market — probably the single most pivotal question, and it's quite interesting and relates to this idea of competition neglect we were talking about earlier — is that all of these big tech companies that drove U.S. outperformance are massively, massively betting on artificial intelligence.
We're talking about hundreds of billions of dollars that they are all pouring into the same bet. They are buying Nvidia chips to put into data centers and paying these same AI researchers massive amounts of money.
And so, as a result, these large tech companies, which used to be very capital-light, have become extremely capital-intensive — about three times as capital-intensive as the median industrial firm.
And my fear is that this is actually the thing that's going to cause the big problem — that these tech companies were great in part because they were capital-light. Now that they're capital-intensive, are they quite as great as they used to be?
Right? AI might be an amazing technology, but it's not clear that it's an amazing business. Because the costs of AI are very high. Unlike the cost of, say, providing search or providing cloud-based storage — which are very cheap — providing an AI answer to a question is very costly. Building a data center is very costly. The electricity required to run it is very costly.
And so I think the untold or under-addressed story of the rise of AI is the rise in capital intensity of the U.S. large-cap tech universe — which, in turn, I think is likely to be their undoing. Because capital investments depreciate. They always do.
And by the way — is everybody going to win the AI arms race, or is there going to be pockets of over investment? Right? Are some companies going to invest $100 billion in data centers and get zero in return because someone else comes up with a better mousetrap, and that's who people flock to?
So I think that's the biggest risk.
And if you go abroad — you know, the blessing and the curse. The curse of international markets is they don't have an international Google or an international Facebook or Meta or an international Microsoft — right? There's just nothing like that.
The blessing is that you're provided with diversification from that one concentrated bet — which is the bet that you get when you buy the U.S. market index.
Never Let a Crisis Go to Waste
CB: Your fund made, what, 85% annual returns on your COVID strategy, during the last major crisis. So I wanted to ask about crisis investing. When you’re faced with a crisis, how do you think through it? And how do you leverage the opportunity ?
DR: We all know that the greatest opportunities to make money come from crises — right? When everyone else is panicking and forced selling. And my argument is relatively simple: you want to have a prepared mind.
You want to go into the next crisis not thinking, “Oh, I'm gonna panic and think what everyone else is going to think,” but — just as one might be skeptical of market heights and say, “Hey, gee, here are all the things I'm worried about” — at the bottom of a crisis, one should go all in on optimism and say, “You know what? The market is going to recover, and things will be fine, and all these bad scenarios that everyone's convinced are going to happen probably won't happen. So what can I do to make the most money now?”
That's my general view. It’s more valuable to be contrarian when everyone else is panicking, because it can be quite costly to be a contrarian and be bearish when everyone else is bullish — as people have discovered over the last few years. But it almost always pays to be a contrarian optimist when everyone's panicking and pessimistic.
Now, the challenge is — you have to wait for a crisis. We haven’t had one since COVID. But my argument is that investors, to the maximum extent possible, should begin developing their plan. What do we want to do during the next crisis — right? When everyone else is panicking? What do we want to buy? Do we have money to do that? If the market panics, are we prepared?
And I think that that is such a useful conversation for people to have — for everybody to have. For financial advisors to have with their clients, for families to have: “When the market panics, what are we going to do? Do we have a plan? Have we thought this through?”
Because if you are prepared, you can act fast. And if you act fast, you can make unbelievable amounts of money in a crisis, because you can take advantage of forced selling and illiquidity.