Hedge Fund Superstar Pete Muller Discusses Finance, Music, and Philanthropy
On May 25, Montecito resident Pete Muller held an album release party on the rooftop of the Kimpton Canary Hotel for Spaces, his recently released album recorded with his band The Kindred Spirits. Throngs of his fans turned out, along with supporters of the nonprofit One805, which Muller introduced to his fans. Some guests, including myself, came out to see the secretive hedge fund superstar who turns out to be a very talented musician. In a rare interview, Muller shared some morsels of info on his hedge fund and discussed music and philanthropy.
In 1992, Muller joined Morgan Stanley, where he formed the wildly successful group Process Driven Trading (PDT), which used quantitative models to manage an investment portfolio. In 2013, because of the Volker Rule, he went out on his own, forming the hedge fund PDT Partners. According to Pensions & Investments, PDT has $8 billion in assets under management. This level of assets wouldn’t be so remarkable for a hedge fund, except that the majority of its assets are internal. By 2020, all external investors in its main fund, the Partners Fund, had been fully redeemed. Since then, the fund only invests the money of employees, former employees, and Muller. Two smaller funds, the Mosaic Fund and the Element Fund, have internal and external investors.
When asked about PDT’s recent performance, Muller murmured, with a humble laugh, “We do okay; we do more than okay.” The karma of his interactions with investors, Muller relates, is paramount. He wants investors to say, “It was a great ride, and we wish we could keep going, but we understand.” SEC rules prohibit disclosure of hedge fund returns, but according to an undisclosed source, PDT gets Bernie Madoff returns without being a Ponzi scheme.
A 2016 Forbes article, which contains about the only interview Muller has given on his finance career, stated that Muller was Morgan Stanley’s “super-secret weapon,” who quietly brought in big earnings each year. Asked about the lack of interviews, Muller related that when he was building his group, they figured out some secrets and didn’t want anybody to know about them. Publicity was never needed to get clients, Muller concedes: “We are lucky that way.” When he went out on his own, he took his 80-person staff with him, but his new firm needed more PhDs, and with his obscurity, he had some difficulty recruiting top PhD talent. So he agreed to the Forbes article for a recruitment tool, which worked brilliantly, and then he went back to secrecy.
For the past few years, a big focus for Muller has been trying to figure out who is going to succeed him, noting that in the hedge fund industry, it has been very hard for a fund to continue its success once the founder steps down. Fortunately, he shares, he has a team of amazing people who are very smart and love what they do.
Muller does not fit the Wall Street stereotype at all — he’s exceedingly kind, warm, happy, casual, and relaxed. And he is much more interested in talking about his music than his hedge fund. He describes the music as “Americana with a rock soul vibe.” Spaces, his fifth album of original songs, is a splendid and varied collection of tunes. According to Muller, it “balances head and heart in equal measure, as it wrestles with questions of love, connection, purpose, and identity.” In the songwriting process, Muller shared that he goes as deep as possible in probing his feelings, and this depth is palpable in these songs.
With his band, The Kindred Souls, a quartet of four voices and four instruments creates an amazing sound. The music can be found on Spotify and other places, but catch them live if you can to fully experience these gems of songs and witness the pure joy that music brings to Muller and the band. Spaces was produced by Rob Mathes (Bruce Springsteen, Elvis Costello, Elton John, Aretha Franklin, Sting), who, Muller relates, did some great arranging with strings and horns and pushed him in some fantastic ways.
Songs from previous albums have gotten some good radio play, and just before the pandemic, Muller was doing 50 shows a year on tour — a level he hopes to get back to — as he loves playing in quiet listening rooms. The otherwise modest Muller shares that the hard part is getting people in the seats — typically, once people hear him and the band play, he says, they say, “Wow, come back. We want to hear more.”
Muller writes songs, he shares, because sitting down at the piano is the best way he’s found to figure out what he is feeling and to express those feelings. When he first started writing, he felt that it was the only way to process a relationship breakup. Figuring out what one is really feeling inside, according to Muller, is the most important challenge for all of us.
Songwriting has helped Muller with relationships, with being a dad, and with running his company. If you go through life not aware of your emotions or ignoring them, Muller relates, they will end up hijacking your brain. Through music, he gets in touch with what is going on inside before that can happen.
When he started songwriting, he confesses with a chuckle, he thought, “Oh, my heart is broken — that has never happened to anyone before.” He has since grown as an artist, having learned to write songs that connect with people. It takes work — inspiration, Muller shares, is for amateurs. You need to write even if you don’t have the full inspiration. So in 2000, he started writing songs, and the next year he began hosting a songwriting circle, where every week, he would cook dinner, others would bring wine, and everyone brought a new song. Muller credits five years of this regimen with really helping him grow as a writer.
In the past few years, his songwriting has come in bursts, aided by Zoom sessions with other songwriters who commit to writing a song each week for five to seven weeks. Deadlines work for Muller.
Running an insanely successful hedge fund would be a demanding, full-time job for most people, leaving insufficient time for a musical career, but Muller loves working and creating and shares that he is not very good about having a lazy day. The creative process gives him energy, especially, he relates, if it is lifting up and inspiring others.
The nature of his hedge fund business enables him to be gone for weeks at a time to do his songwriting and touring. The way PDT Partners engages with markets, according to Muller, is much more like a research lab than a hedge fund. A team of nearly 40 super-smart PhDs spend a lot of time looking at data and building models to help predict the future prices of different financial assets. Unlike at the start of the business, now he doesn’t need to oversee the operation on a daily basis.
The music and finance sides of his life, Muller maintains, balance each other. The joy and success that he has found in music has improved his ability to be a good leader at PDT. Muller attributes an earlier, difficult time in his life to the absence of music. While at Morgan Stanley in the 1990s, Muller relates that he was making more money than he ever dreamed he would, but he was really unhappy, in part because of a relationship ending.
After a sabbatical in 1999, he returned, working a few days a week, under an agreement that allowed for a gradual phase out from the business and time for music. In that earlier, unhappy period, Muller had stopped playing music, which had made him lose balance. He resolved that going forward, music and finance would coexist. He began hosting the songwriting circle, put out a couple of albums, got married, and, in 2007, moved to Santa Barbara.
The phase out at PDT never happened — in 2006, he was back full-time, but since 2007, he has been running the company mostly from Santa Barbara, where he can balance work, family, music, and surfing.
Just as with his hedge fund, Muller is modest about his philanthropy. The hedge fund gave him enough money to do whatever he wants, he concedes, and it turns out in life, if one can give back in a way that affects people positively and empowers them, he reflects, it makes one feel really good. So he tries to do that wherever he can.
Muller explains that “you don’t want to give because you have been guilted into giving. Ideally, you give because you realize it just makes you feel good.” It doesn’t just happen. One evolves to that state of having enough and begins to think about his fellow man.
Muller realized that when you give with your full heart, without expecting credit or recognition, “There is no better feeling in the world.” He concedes that you “cannot force someone to do that — you cannot guilt them into that — you just have to eventually learn that, ‘Oh, wow, that felt good. Let me do that again.’”
His first foray into philanthropy was with the Robin Hood Foundation (RHF) in New York many years ago. Invited to an event he couldn’t afford, he bought into the after-party for a still significant sum, liked what he learned, and got really involved. Later, when he had achieved a lot of success, he shared that “I started going, ‘Wow, this is fantastic. Let me give you more and more money,’” and it felt good and led him to think about other places where he could make a difference.
RHF was a pioneer in comparing charities based on effectiveness metrics. Muller, understandably, along with his wife, Jillian Muller, are fans of organizations that use metrics and data to measure results. For example, for a job-training program, RHF would look at the return to investment based on the increased future earnings of the participants.
With philanthropy, Muller thinks a lot about the importance of not decreasing people’s motivation. You don’t want create a welfare-type system that takes away capitalism’s ability to motivate people to work and be proud that they can make it on their own Muller maintains. At the same time, he adds, you want to provide a safety net. “There’s a tricky dance there in terms of how to think about that.”
Among the dozens of charities Muller supports is One805, which funds equipment for first-responder agencies across the county. Muller lived through the Thomas Fire and 1/9 Debris Flow, the latter of which caused significant damage to his Montecito estate. Seeing the incredibly motivated and hardworking first responders work for days without sleep to save our community was inspiring, he relates, and he is thrilled to be in a position to help them buy new equipment through One805.
On the cultural side, Muller founded the Live Music Society. Small music clubs are wonderful, he thinks, both for aspiring musicians and for communities, as they create both harmony and cultural diversity. As he toured with his band pre-pandemic, he discovered that many of these clubs were just breaking even. With the Live Music Society (LMS), Muller intended to find clubs that were doing things right and help them be better, but when COVID hit, the focus shifted to finding the ones that could make it and helping them survive. LMS has since saved a number of clubs. Locally, LMS made a grant to SOhO, where Muller and the band have performed several times.
Muller and The Kindred Spirits, whose members do not live locally, have no scheduled shows in Santa Barbara, but in the fall, Muller will do some solo/duo gigs at Local in Montecito. Check out videos of songs from the new album, The Other Side, here as well as Tin Palace here. For more on Muller’s music, go to petemuller.com. For more info on One805, go to one805.org.
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