Latest / Masters in Business / Andrew Beer on the Hedge Fund Industry (Podcast)

Transcript

Andrew Beer on the Hedge Fund Industry (Podcast) · Masters in Business

• 0:02
  Speaker 1: Vias is Masters in Business with Barry Ridholts on Boomberg Radio.
• 0:07
  Speaker 1: This week on the podcast, I have a special guest.
• 0:09
  Speaker 1: His name is Andrew Beer. He has really a fascinating
• 0:13
  Speaker 1: background and career in finance. He's a managing member at
• 0:17
  Speaker 1: Dynamic Beta Investments, which is one of the oldest firms
• 0:21
  Speaker 1: doing liquid alternatives. Really quite fascinating. Their goal is to
• 0:27
  Speaker 1: roll out things that look like hedge funds, but with
• 0:31
  Speaker 1: full transparency, liquidity, and none of the high fees it
• 0:35
  Speaker 1: It's really a fascinating space, sort of bringing the philosophy
• 0:39
  Speaker 1: of Jack Bogel to the hedge fund space. If you're
• 0:42
  Speaker 1: at all interested in liquid alts or managed futures, or
• 0:46
  Speaker 1: want to learn how these things work, I think you'll
• 0:48
  Speaker 1: find this to be a fascinating and wonky conversation. So,
• 0:52
  Speaker 1: with no further ado, my conversation with Dynamic Beta's Andrew Beer.
• 0:59
  Speaker 1: Vias is men Steers in Business with Barry Ridholts on
• 1:02
  Speaker 1: Bloomberg Radio. My special guest this week is Andrew Beer.
• 1:07
  Speaker 1: He is a managing member at Dynamic Beta Investments, one
• 1:11
  Speaker 1: of the older firms in the liquid ault space. Their
• 1:15
  Speaker 1: goal is to deliver hedge fund like returns, but with
• 1:19
  Speaker 1: reasonable fees and daily liquidly UH their long short hedge
• 1:24
  Speaker 1: funny t F was up for the year in while
• 1:28
  Speaker 1: their managed futures fund was flat. Andrew Beer, Welcome to Bloomberg.
• 1:34
  Speaker 1: Thank you, Barry. It's a pleasure to be on the
• 1:35
  Speaker 1: call today. So let's start with your background. How did
• 1:38
  Speaker 1: you find your way to the investment management industry? So,
• 1:43
  Speaker 1: I it wasn't clear. I guess um. I started as
• 1:46
  Speaker 1: an em and a banker in the early UH and
• 1:49
  Speaker 1: back then, if you were an energetic young m and
• 1:52
  Speaker 1: a banker, you wanted to go into the aldo business.
• 1:54
  Speaker 1: That's where all the kind of same and glory was.
• 1:57
  Speaker 1: And so I went back to business school. One of
• 2:00
  Speaker 1: my second year of business school, I I got a
• 2:01
  Speaker 1: job at one of the LBO firms, a very well
• 2:05
  Speaker 1: respected firm in Boston run by guy named Tom Lee.
• 2:08
  Speaker 1: And in my so I was kind of in my
• 2:10
  Speaker 1: second year of business school and thinking about where I
• 2:12
  Speaker 1: was going to go in that industry, and I heard
• 2:14
  Speaker 1: about the secretive investment firm bow Post that had been
• 2:17
  Speaker 1: started by some Harvard Business School professors and was hiring.
• 2:21
  Speaker 1: So I applied. And I don't think I knew what
• 2:24
  Speaker 1: a hedge fund was but I really really like it.
• 2:25
  Speaker 1: I'd get focusing on these weird niche investment opportunities. So
• 2:30
  Speaker 1: instead of going into the LBO business or possibly doing
• 2:33
  Speaker 1: a PhD, I became a hedge fun guy. And you know,
• 2:36
  Speaker 1: twenty six years later, I'm I'm stuck in that role.
• 2:39
  Speaker 1: So let's stay with bout post for a minute. It's
• 2:41
  Speaker 1: run by Seth Clarman, a legendary investor. His book Margin
• 2:46
  Speaker 1: of Safety was published years ago and then went out
• 2:49
  Speaker 1: of print. Copies go for some crazy two thousand dollars
• 2:53
  Speaker 1: a copy on Amazon. What was it like working with
• 2:58
  Speaker 1: a legend like Seth Clarman? So it was, I mean,
• 3:01
  Speaker 1: it says it's extraordinary. I mean he is. He is
• 3:04
  Speaker 1: absolutely brilliant. And I think the interesting thing about Seth,
• 3:07
  Speaker 1: which is uh, is that Seth was a value investor,
• 3:11
  Speaker 1: probably from the day that he was born. It wasn't
• 3:13
  Speaker 1: something it wasn't a study that he read about. It
• 3:15
  Speaker 1: wasn't an academic paper that that resonated with him. Um.
• 3:19
  Speaker 1: He just thought of things in terms of value. Uh.
• 3:22
  Speaker 1: And but I think it's it's really important to note
• 3:24
  Speaker 1: that this was in the early stages of the industry.
• 3:27
  Speaker 1: The hedge fund industry was really a cottage industry back then.
• 3:30
  Speaker 1: Just to put it in perspective, bow Post had two
• 3:33
  Speaker 1: percent of the assets then that it has today, and
• 3:36
  Speaker 1: it was still considered one of the ten largest hedge funds. Um. So,
• 3:40
  Speaker 1: so what you can do with six million versus one
• 3:43
  Speaker 1: point eight million is very very different. And then you know,
• 3:45
  Speaker 1: and then a lot of these markets that people invest
• 3:48
  Speaker 1: in today were also in their infancy um so um.
• 3:53
  Speaker 1: You know, so he really was. It was an extraordinary
• 3:55
  Speaker 1: learning experience, and I think I think there are probably
• 3:58
  Speaker 1: three big things that I learned from Seth. And I
• 4:01
  Speaker 1: think the first was you should try to get the
• 4:03
  Speaker 1: area right um. In other words, it's much better to
• 4:06
  Speaker 1: find a dirt cheap area and spend your time then
• 4:10
  Speaker 1: then spend your time trying to find the best idea
• 4:13
  Speaker 1: in an expensive one. Um. And then I think the
• 4:17
  Speaker 1: second is that that things should be cheap for a reason. Uh.
• 4:21
  Speaker 1: And there's a certain humility in that. I think Seth
• 4:23
  Speaker 1: never thought that he could look at some big, large
• 4:26
  Speaker 1: cap stock that everybody else was looking at and think
• 4:28
  Speaker 1: he had a meaningful advantage. But if he could see
• 4:30
  Speaker 1: banks unloading real estate assets or UM, you know, because
• 4:35
  Speaker 1: they had a certain regulatory requirement where they had to
• 4:37
  Speaker 1: get rid of them. Well, that gave you a reason
• 4:39
  Speaker 1: why something might be selling it a discount. And I
• 4:41
  Speaker 1: think the third point is that risk isn't a statistic um.
• 4:45
  Speaker 1: That there are a lot of qualitative and other judgments
• 4:47
  Speaker 1: that go into thinking about the riskiness of an asset.
• 4:50
  Speaker 1: So the whole idea of margin of safety UM is
• 4:53
  Speaker 1: really embedded in in this kind of complex, multidimensional thinking.
• 4:57
  Speaker 1: And in part it was that UM, I think in
• 5:00
  Speaker 1: in more recent years, as I've thought about those years,
• 5:02
  Speaker 1: I think it's one of the reasons that concluded that value,
• 5:05
  Speaker 1: the value factor per se was really missing something. But
• 5:09
  Speaker 1: that's part of a much larger discussion. I think, well,
• 5:11
  Speaker 1: we're definitely gonna get to the value factor a little later,
• 5:14
  Speaker 1: you know. Your your comment about bow Post having two
• 5:18
  Speaker 1: of the assets in the hedge fund space reminds me
• 5:22
  Speaker 1: of a comment that Jim Chano's famously made. He said
• 5:26
  Speaker 1: thirty years ago when he was launching his funds, Uh,
• 5:30
  Speaker 1: there were a hundred hedge funds, they all created Alpha.
• 5:33
  Speaker 1: Today there's over ten thousand hedge funds. But it seems
• 5:36
  Speaker 1: like it's still those hundred hedge funds that are creating alpha.
• 5:40
  Speaker 1: Is that an overstatement or is there some truth to that?
• 5:44
  Speaker 1: So I think the hardest thing about hedge funds is
• 5:47
  Speaker 1: um is we're always looking at who is doing well today,
• 5:52
  Speaker 1: and people have a natural bias to assume that's going
• 5:54
  Speaker 1: to continue. UM. And so if you go back in time,
• 5:58
  Speaker 1: it's a little bit like the mutual fund industry. I remember,
• 6:00
  Speaker 1: back when I was at Bell Post, I was talking
• 6:02
  Speaker 1: to Guide Fidelity and he said, you know, we started
• 6:04
  Speaker 1: twelve new mutual funds every year, and we killed six
• 6:07
  Speaker 1: of them by June, and by the end of the year,
• 6:10
  Speaker 1: we've got three great performers. Um. The hedgehoan industry isn't
• 6:14
  Speaker 1: quite like that, But when you do look at hedge
• 6:15
  Speaker 1: funds today, people tend to focus on those hundreds that
• 6:18
  Speaker 1: have done well. What was interesting about was that as
• 6:23
  Speaker 1: as much as you repressed about guys, you know, having
• 6:26
  Speaker 1: historically good years, there are plenty of guys who had
• 6:29
  Speaker 1: middling years and and and you know plenty of guys
• 6:32
  Speaker 1: who at awful years and so um. You know. So
• 6:35
  Speaker 1: the hedgewood industry as a whole, I think had a
• 6:38
  Speaker 1: difficult but not nearly as bad as as it was
• 6:42
  Speaker 1: portrayed in the press. So let's talk about that, because
• 6:47
  Speaker 1: the reputation, especially since the Great Financial Crisis, was the
• 6:52
  Speaker 1: performance has been lacking. That the joke is come for
• 6:56
  Speaker 1: the high fee, stay for the under performance. Do you
• 6:59
  Speaker 1: think that's too hard or is that there for certainly
• 7:03
  Speaker 1: the bottom half of the hedge fund community, if not
• 7:06
  Speaker 1: more so. Here's an interesting it's interesting statistic that if
• 7:10
  Speaker 1: you could pick the top quartile of hedge funds in advance,
• 7:13
  Speaker 1: you'd be up thirty percent a year with no down years.
• 7:16
  Speaker 1: No one would care about fees, right, It's it's a
• 7:19
  Speaker 1: little bit. It's a little bit like saying, I mean,
• 7:21
  Speaker 1: the hedge fund industry is even probably more so than
• 7:24
  Speaker 1: the mutual fund industry today, is replete with this idea
• 7:28
  Speaker 1: that you know, we're going to find the guy who's
• 7:30
  Speaker 1: going to go up. Um. In reality, people found find
• 7:33
  Speaker 1: the guy who went up and so, but that issue
• 7:36
  Speaker 1: aside um, uh. There. The disappointment about hedge funds in
• 7:40
  Speaker 1: the Tents comes from three areas. The first is that
• 7:45
  Speaker 1: as that two thousand and eight was quite bad um,
• 7:48
  Speaker 1: and it wasn't just that hedge funds went down more
• 7:50
  Speaker 1: than expected, but that made off blew up large parts
• 7:54
  Speaker 1: of the business, and there was widespread suspension of capital
• 7:58
  Speaker 1: for investors who wanted to get out. Uh. So you know,
• 8:01
  Speaker 1: this was a It was about as bad as it
• 8:04
  Speaker 1: could have been from a pr perspective for hedge funds UM.
• 8:07
  Speaker 1: And it was also in in in stark contrast to
• 8:10
  Speaker 1: the previous bear market, where hedge funds uh, you know,
• 8:14
  Speaker 1: actually made money during the bear market, something quite extraordinary. UM.
• 8:18
  Speaker 1: But the second issue in the two thousand tens is
• 8:20
  Speaker 1: that easy things did better um in the two thousand tens.
• 8:23
  Speaker 1: Sort that in the two thousands we had essentially a
• 8:26
  Speaker 1: lost decade for US equities. You know, the SMP was
• 8:28
  Speaker 1: down over the decade, NASAC was down something and in
• 8:33
  Speaker 1: the two thousand tents, just by owning large cap us
• 8:36
  Speaker 1: and tech, I mean that pretty much destroyed everything else. Um.
• 8:40
  Speaker 1: And then the last is that is that fees are
• 8:42
  Speaker 1: too high. And this is something I've written a lot about,
• 8:45
  Speaker 1: but basically, when somebody's earning three or four percent and
• 8:49
  Speaker 1: they're taking half of every dollar that they make, um Uh,
• 8:54
  Speaker 1: people get more frustrated with that over time. And so
• 8:57
  Speaker 1: it's it's sort of it's sort of a combination of factors,
• 8:59
  Speaker 1: and they're of psychological reasons. Um why But I think
• 9:03
  Speaker 1: actually the most interesting thing is that look a lot better.
• 9:06
  Speaker 1: That discussion of fees kind of leads me to a
• 9:10
  Speaker 1: different place, which is there have been some fairly innovative
• 9:14
  Speaker 1: new concepts in fees, not just the compression, but but
• 9:20
  Speaker 1: things like pivot fees where there's a participation to the
• 9:26
  Speaker 1: upside only if the fund is beating its benchmark, and
• 9:30
  Speaker 1: there's even a giveback if the fund is underperforming it's benchmark.
• 9:34
  Speaker 1: What what do you think that looks like in the future?
• 9:38
  Speaker 1: Are we going to see some innovation around traditionally higher
• 9:42
  Speaker 1: hedge fund fees? So? Um, I think it's going to
• 9:47
  Speaker 1: be mixed. I think a lot of the industry. Um.
• 9:50
  Speaker 1: You know, one of the one of the reasons there
• 9:53
  Speaker 1: there are a couple of reasons that hedge fund fees
• 9:54
  Speaker 1: have remained so high. Um. The the stark reality is
• 9:59
  Speaker 1: that most people who allocate two hedge funds, it's not
• 10:02
  Speaker 1: their money, so they really don't care. At the end
• 10:04
  Speaker 1: of the day, you know, they're they're investing in a
• 10:07
  Speaker 1: hedge fund because I mean, if you read the Financial Times,
• 10:10
  Speaker 1: or um or Bloombergs had some very good articles recently
• 10:13
  Speaker 1: on hedge funds that have gone up a hundred percent.
• 10:16
  Speaker 1: People will be lining up at the door and completely
• 10:18
  Speaker 1: in different defeats because it's much easier for people to say, UM,
• 10:23
  Speaker 1: you know, I don't care about fees as long as
• 10:25
  Speaker 1: my net returns are high. The problem is is when
• 10:28
  Speaker 1: you've got twenty guys and you're paying away six out
• 10:32
  Speaker 1: of every ten dollars that they make in fees, and
• 10:35
  Speaker 1: you look back over three or five years and um
• 10:39
  Speaker 1: uh and hedge funds have the hedge fund managers have
• 10:42
  Speaker 1: made billions of dollars and clients really happened. And there
• 10:45
  Speaker 1: was one article recently a better firm called Brevan Howard,
• 10:47
  Speaker 1: which is by all accounts run by Kindaman Alan Howard,
• 10:51
  Speaker 1: who's one of the greats of the hedge fund industry.
• 10:53
  Speaker 1: UM and those articles are talking about the fact that
• 10:56
  Speaker 1: his funds had historically good year. What they don't mention
• 11:01
  Speaker 1: is that when he had thirty billion dollars in assets,
• 11:03
  Speaker 1: they went through a five year period of time where
• 11:05
  Speaker 1: by my estimate, management made two to three billion dollars
• 11:09
  Speaker 1: while clients lost money. UM so, so fees are are
• 11:13
  Speaker 1: a real perpetual issue in terms of fulcrum fees and
• 11:16
  Speaker 1: things like that. I doubt most hetch ones will do it.
• 11:18
  Speaker 1: I think you'll have a bifurcation of products where some
• 11:21
  Speaker 1: will be expensive, um, some will be worth it, a
• 11:25
  Speaker 1: lot won't be worth it, and then you'll have a
• 11:28
  Speaker 1: suite of lower cost options for allocators to pick from.
• 11:32
  Speaker 1: Quite quite fascinating, So let's talk about this area. It's
• 11:35
  Speaker 1: quite fascinating. When did liquid alternatives begin to take off?
• 11:41
  Speaker 1: What does the space look like today? So it's a
• 11:43
  Speaker 1: it's a great question, and I think I think the
• 11:46
  Speaker 1: backdrop of liquid alts, You know, why do people care
• 11:48
  Speaker 1: about liquid als in the first place, basically comes down
• 11:51
  Speaker 1: to two things. The first is that the whole wealth
• 11:54
  Speaker 1: management industry has evolved tour trying to push clients into
• 11:59
  Speaker 1: model portfolios, and model portfolios by by definition, have diversification
• 12:04
  Speaker 1: between stocks, bonds, and hopefully other things. And so you know,
• 12:08
  Speaker 1: when you're building a model portfolio and you can include
• 12:12
  Speaker 1: a lot of different asset classes um in general, your
• 12:16
  Speaker 1: risk goes down and you get a smoother return profile
• 12:19
  Speaker 1: if you add in things that have diversification benefits. And
• 12:23
  Speaker 1: you know, the analog for this, or the precedent for
• 12:25
  Speaker 1: this is in the institutional space, where a corporate pension
• 12:29
  Speaker 1: plan forty years ago may have had one or two
• 12:32
  Speaker 1: asset classes in it, and today it might have thirty
• 12:34
  Speaker 1: or forty. So you know what liquid also are really
• 12:37
  Speaker 1: designed to do, or to bring hedge fund like strategies
• 12:40
  Speaker 1: that have proven diversification benefits, but make them available to
• 12:43
  Speaker 1: investors who can't meet the high minimums, don't have the
• 12:46
  Speaker 1: ability to, aren't a credited investors, um uh, can't bear
• 12:51
  Speaker 1: the i liquidity of investing in these products. Um. The
• 12:56
  Speaker 1: real liquid al market really took off in my mind
• 12:59
  Speaker 1: around two thousan and twelve, and that was when Fidelity
• 13:03
  Speaker 1: gave money to a hedge fund firm called Harden to
• 13:06
  Speaker 1: create a multi manager mutual fund and a lot of
• 13:10
  Speaker 1: people thought this was going to be the resurgence of
• 13:13
  Speaker 1: the fund of hedge fund industry, which had gotten battered
• 13:16
  Speaker 1: during the Great Financial Crisis, and um and it launched
• 13:20
  Speaker 1: this whole wave of alternative multi manager funds that were
• 13:25
  Speaker 1: designed to give you index plus like exposure to the
• 13:29
  Speaker 1: hedge fund space. So they have you know, a couple
• 13:31
  Speaker 1: of equity long short guys, a couple of credit guys,
• 13:33
  Speaker 1: a couple of macro guys, etcetera. And and what it
• 13:36
  Speaker 1: really did is it turned the attention of asset managers
• 13:39
  Speaker 1: to this area when they looked across the world and
• 13:41
  Speaker 1: they said, look at all these target date funds out there,
• 13:43
  Speaker 1: you know, look at all these e t F based
• 13:45
  Speaker 1: model portfolios. These things are are are in our minds,
• 13:50
  Speaker 1: under diversified because they don't have exposure to the same
• 13:53
  Speaker 1: kinds of strategies that a big pension plan might have.
• 13:57
  Speaker 1: And so it really kicked off this arms race among
• 13:59
  Speaker 1: fund nigment companies. And there were forty or fifty of
• 14:01
  Speaker 1: these funds that were launched within the next couple of
• 14:03
  Speaker 1: years and they were um and then and then since then,
• 14:08
  Speaker 1: there's really been this wave of wave after wave of
• 14:11
  Speaker 1: new products that have been launched. And so now there
• 14:14
  Speaker 1: are hundreds of products out there, but um, you know.
• 14:17
  Speaker 1: But it's one of the things we've written about is
• 14:19
  Speaker 1: is that we think actually the products are are uh,
• 14:26
  Speaker 1: shouldn't be shouldn't have investors, product should be shut down
• 14:30
  Speaker 1: because they don't do what they were originally designed to do.
• 14:33
  Speaker 1: So let's talk a little bit about both of those things.
• 14:36
  Speaker 1: What are these products designed to do. Is it simply
• 14:41
  Speaker 1: we're going to capture a premium that your stocks and
• 14:43
  Speaker 1: bonds aren't and give you daily liquidly. Is that the
• 14:47
  Speaker 1: concept behind hedge fund replication et s, so hedge fund replications.
• 14:53
  Speaker 1: So I think one change is that people generally don't
• 14:56
  Speaker 1: think of hedge funds as a single massive strategy um
• 15:00
  Speaker 1: and just to go back to the definition of hedge funds,
• 15:02
  Speaker 1: I mean hedge funds, there are dozens and dozens of
• 15:05
  Speaker 1: different kinds of substrategies of hedge funds um. The the
• 15:10
  Speaker 1: the common theme in hedge funds, which which I think
• 15:13
  Speaker 1: is very important but but can be lost in some
• 15:16
  Speaker 1: of this, is that in general hedge funds are a
• 15:18
  Speaker 1: lot more flexible than mutual funds or et f so
• 15:21
  Speaker 1: they're equivalent. So a guy who was a you know,
• 15:25
  Speaker 1: invested primarily in tech stocks at the end of two
• 15:27
  Speaker 1: thousand nineteen might be heavily invested in emerging market stocks
• 15:31
  Speaker 1: today and he doesn't have allocators, you know, wondering why
• 15:33
  Speaker 1: he burst out of his his strategy bucket. And the
• 15:36
  Speaker 1: other thing of the hedge funds no style boxes. I mean,
• 15:39
  Speaker 1: the institutions have tried to put style boxes on it,
• 15:42
  Speaker 1: but which has actually been negative for the industry. But
• 15:45
  Speaker 1: but it's nothing like what you see in the mutual
• 15:47
  Speaker 1: fund space. And the other is that these guys generally
• 15:50
  Speaker 1: have their own money on the line. So I don't
• 15:54
  Speaker 1: know many mutual funds where you've got the mutual fund
• 15:57
  Speaker 1: manager as a billion dollars his own capital sitting alongside you.
• 16:01
  Speaker 1: And that enforces a particular intellectual honesty in it that
• 16:05
  Speaker 1: if they think, uh, if they've just made a killing
• 16:08
  Speaker 1: on you know, having owned Apple and Amazon over the
• 16:12
  Speaker 1: past five years and they're taking profits, it doesn't mean
• 16:16
  Speaker 1: that they have to turn around and go into Maderna
• 16:18
  Speaker 1: or Teslas they think those stocks are overpriced, Um, they can.
• 16:21
  Speaker 1: They can go to different areas and find cheaper opportunities
• 16:25
  Speaker 1: and so um. So you know, I think when people
• 16:29
  Speaker 1: are looking at these strategies and thinking about as a
• 16:32
  Speaker 1: portfolio perspective in the wealth management space, you start with
• 16:34
  Speaker 1: the idea that there are specific strategies equity long short,
• 16:38
  Speaker 1: you know, managed futures, um, uh, certain other strategies that
• 16:43
  Speaker 1: can be building blocks into portfolio, and you can look
• 16:46
  Speaker 1: at the very very long term returns of these strategies
• 16:49
  Speaker 1: put them into your asset allocation model and make a
• 16:51
  Speaker 1: determination as to how much diversification benefit they provide and
• 16:55
  Speaker 1: whether they should be in your portfolios. And so I
• 16:57
  Speaker 1: think I think when the liquid alternative space, their move
• 17:00
  Speaker 1: being away from some of these broad strategies that that
• 17:04
  Speaker 1: that cover the whole universe to strategy specific building blocks,
• 17:10
  Speaker 1: and that's what we really focused our time. So who
• 17:13
  Speaker 1: are the owners of these liquid alls? Who are the allocators?
• 17:16
  Speaker 1: Is it foundations? Institutional investors are a s. Who are
• 17:21
  Speaker 1: the buyers of these It's a good question. I have
• 17:23
  Speaker 1: to say, I don't know the granular data. I suspect
• 17:26
  Speaker 1: most of it is is ori as and wealth management
• 17:29
  Speaker 1: firms that institutions who particularly those who don't have liquidity constraints,
• 17:34
  Speaker 1: tend to like hedge actual hedge funds more than they
• 17:38
  Speaker 1: like liquid alternatives. I would say five years ago I
• 17:41
  Speaker 1: saw some consulting firms building liquid alts efforts, and that
• 17:44
  Speaker 1: seems to have somewhat died out. I guess there are
• 17:46
  Speaker 1: there are two big problems with liquid aults. The first
• 17:49
  Speaker 1: is that a lot of hedge fund strategies. When you
• 17:52
  Speaker 1: take a guy who's been earning eight percent per annum
• 17:56
  Speaker 1: in his hedge fund and you ask him to do
• 17:58
  Speaker 1: the same thing in a mutual and uh, you often
• 18:01
  Speaker 1: end up with three, four or five. So so you
• 18:04
  Speaker 1: lose a lot of performance on the top just based
• 18:06
  Speaker 1: on on the constraints. And that was the problem with
• 18:08
  Speaker 1: Fidelity its original investments is and this is something I
• 18:12
  Speaker 1: think we were one of the few people who realized
• 18:14
  Speaker 1: it pretty early on, is that they were losing four
• 18:17
  Speaker 1: to five basis points of pre few returns just by
• 18:20
  Speaker 1: asking these guys to do what they were doing within
• 18:22
  Speaker 1: a mutual fund constraint UM. So broadly across the industry,
• 18:27
  Speaker 1: Liquid Alts and willsher has good data on this, but
• 18:29
  Speaker 1: broadly across the industry, will Liquid also under performed by
• 18:32
  Speaker 1: twohundred basis points. And that doesn't mean hedge funds were
• 18:35
  Speaker 1: doing ten and these guys were doing eight. It means
• 18:37
  Speaker 1: hedge ones were doing five and these guys were doing three. UM.
• 18:41
  Speaker 1: And the other issue with single manager risk and you know,
• 18:45
  Speaker 1: the of the products are simply single manager funds that
• 18:51
  Speaker 1: have been poorted into into a mutual fund. And the
• 18:56
  Speaker 1: problem with that from a diversification perspective is that hedge
• 18:59
  Speaker 1: funds strategies like equity long short as a strategy can
• 19:04
  Speaker 1: provide or miniatutures as a strategy can provide valuable diversication benefits,
• 19:09
  Speaker 1: but x y Z manager within that space generally does not.
• 19:14
  Speaker 1: And and the analog that we use is that if
• 19:17
  Speaker 1: you know, if you like, many people today are saying
• 19:20
  Speaker 1: US markets has gotten very expensive relative to say, emerging markets,
• 19:25
  Speaker 1: and we want to move to emerging We want to
• 19:27
  Speaker 1: add exposure to emerging markets. You don't pick a stock
• 19:30
  Speaker 1: in emerging markets and call it a day. But that
• 19:33
  Speaker 1: whole idea of saying we like equity long short and
• 19:36
  Speaker 1: we're going to give it to Bob is a terrible,
• 19:39
  Speaker 1: terrible idea because Bob, like every other guy in the space,
• 19:42
  Speaker 1: no matter what kind of a terror he's been on,
• 19:45
  Speaker 1: he is going to blow up on you in the
• 19:46
  Speaker 1: next couple of years. Mean reversion is a cruel mistress
• 19:49
  Speaker 1: to say the least you mention managed futures as a
• 19:53
  Speaker 1: form of liquid alts. I have to confess I have
• 19:57
  Speaker 1: never seen the attraction to this. It feels like the
• 20:01
  Speaker 1: and I tend to think of this as the commodity traders,
• 20:04
  Speaker 1: even though that's not fair. The rock star commodity traders
• 20:08
  Speaker 1: tend to trade their own portfolios and everybody else tries
• 20:13
  Speaker 1: to raise outside capital. Convince me I'm completely wrong about that. Sure,
• 20:18
  Speaker 1: so you're not, I would say, Um, you're not at
• 20:22
  Speaker 1: all completely wrong. The there are two great benefits of
• 20:28
  Speaker 1: managed tutures in the context of a larger portfolio. And
• 20:32
  Speaker 1: let's take a step back and talk about what manner
• 20:34
  Speaker 1: tutures is, right, So manor tutres, it's called futures because
• 20:38
  Speaker 1: these guys go along and short futures contracts, and it's
• 20:40
  Speaker 1: managed because they're not doing it in a passive way. Um. So, really,
• 20:44
  Speaker 1: what it means if you walk onto uh, you know,
• 20:47
  Speaker 1: walk into the office of a man of tutres hedge fund,
• 20:50
  Speaker 1: You've got a bunch of guys with computers who are
• 20:53
  Speaker 1: trying to identify in general, trying to identify trends and
• 20:57
  Speaker 1: momentum among different markets. So if gold has been going up,
• 21:00
  Speaker 1: is it is it likely to continue going up? If
• 21:03
  Speaker 1: ten your treasury yields have been rising, should they be
• 21:06
  Speaker 1: shorting um the ten year treasury um? And then you know,
• 21:12
  Speaker 1: and then and then the art and the science of
• 21:14
  Speaker 1: it is figuring out which markets do you want to
• 21:16
  Speaker 1: be long and short? When do you rebalance, etcetera. So
• 21:18
  Speaker 1: that's where you get into the whole managed side of it. UM. Historically,
• 21:22
  Speaker 1: manitutors have had two very very powerful benefits relative to
• 21:27
  Speaker 1: UH for for a diverse fied portfolio, particularly of stocks
• 21:32
  Speaker 1: and bonds. The first is they tend to have zero
• 21:34
  Speaker 1: correlation to both over time UM and although I will
• 21:39
  Speaker 1: tell you that because they are long and short different
• 21:41
  Speaker 1: things at different times, the correlations will go up and
• 21:43
  Speaker 1: down over time. So it's not something like you're buying
• 21:47
  Speaker 1: I don't know, like a private debt instrument that you
• 21:48
  Speaker 1: don't mark to market. It does go up and down.
• 21:51
  Speaker 1: And the second is that they've tended to do very
• 21:53
  Speaker 1: well in the worst equity markets. So they were up
• 21:56
  Speaker 1: fifteen in two thousand and then continue to to do
• 22:01
  Speaker 1: well in in um UH during that bear market, and
• 22:05
  Speaker 1: then they were up in two thousand eight and then
• 22:10
  Speaker 1: did well in two thousand fourteen UM. So the and
• 22:16
  Speaker 1: that's great, right because you know, even if you have
• 22:19
  Speaker 1: a small FEP of two percent allocation to manage futures
• 22:21
  Speaker 1: in in your standing with a client in the beginning
• 22:24
  Speaker 1: of two thousand nine, and you have this you know,
• 22:28
  Speaker 1: small beacon of green in the sea of red, you
• 22:30
  Speaker 1: look like a hero. UM. The two issues with mannered futures,
• 22:35
  Speaker 1: which are very very real, is that first, managed tuture's
• 22:40
  Speaker 1: fees and expenses are still ridiculously high, and by that
• 22:44
  Speaker 1: I mean even in a big hitch fund product. But
• 22:48
  Speaker 1: at time eight dollar gets back to clients, it's been
• 22:52
  Speaker 1: after something like five basis points in fees and expenses.
• 22:56
  Speaker 1: And in the nineteen eighties and the early nineteen nineties,
• 22:59
  Speaker 1: when you know, these strategies were completely esoteric and nobody
• 23:02
  Speaker 1: knew how to do these things, this is one of
• 23:04
  Speaker 1: the most expensive areas in the in the hedge fund space,
• 23:09
  Speaker 1: I mean manager Bloomberg had an article that showed that
• 23:13
  Speaker 1: one fund was charging about ten for an um UH
• 23:17
  Speaker 1: and so fees have come down a lot, but not
• 23:20
  Speaker 1: nearly as much as they should have UM and so
• 23:23
  Speaker 1: as returns have come down as markets have become more efficient,
• 23:25
  Speaker 1: it means that basically, for the past five years, every
• 23:28
  Speaker 1: dollar these guys have made has gone to them and
• 23:30
  Speaker 1: their counterparties, not to clients UM. And then the second
• 23:34
  Speaker 1: is single manager risk. Right, So now you have an
• 23:36
  Speaker 1: area that's attractive but that on average has been earning
• 23:41
  Speaker 1: zero and you want to add to its space because
• 23:44
  Speaker 1: you believe in the long term diverstication benefits. What do
• 23:47
  Speaker 1: you do. You find the one guy who killed it
• 23:49
  Speaker 1: over the past two years. Right, And the problem in
• 23:53
  Speaker 1: the manage futures is the second problem is what we
• 23:55
  Speaker 1: call single manager risk. When a guy outperforms everybody else
• 23:59
  Speaker 1: I in our fifteen percent a year for two or
• 24:01
  Speaker 1: three years. It's luck, not skills that they happen to
• 24:05
  Speaker 1: be overweight treasuries in March, and they happen to be
• 24:08
  Speaker 1: long gold at the time the gold took off. And
• 24:11
  Speaker 1: so what happens again and again in this space is
• 24:14
  Speaker 1: that people say I want managed futures, I give it
• 24:16
  Speaker 1: to this guy, and then he blows up on me.
• 24:20
  Speaker 1: And you know, the poster child for this is a Qure,
• 24:23
  Speaker 1: which did something phenomenally positive for the UH managed futures
• 24:28
  Speaker 1: mutual fund space in two thousand ten when they launched
• 24:31
  Speaker 1: what was a at that point a remarkably low cost
• 24:34
  Speaker 1: product of a hundred and twenty one basis points um.
• 24:37
  Speaker 1: But they went through a good period and they became
• 24:39
  Speaker 1: the default allocation in everybody's portfolio. So you'd have guys
• 24:43
  Speaker 1: who would have a diversified portfolio and then five with
• 24:46
  Speaker 1: a q r UM for their managed Future sleeve, and
• 24:50
  Speaker 1: that fund went to fourteen and a half billion in assets.
• 24:54
  Speaker 1: And then like every managed sutures fund that's been on
• 24:57
  Speaker 1: a hot streak, it underperformed by over the next year
• 25:00
  Speaker 1: two and now it's lost its assets. So so our
• 25:05
  Speaker 1: approach to it was really, we've got to solve If
• 25:08
  Speaker 1: we want the two first benefits, you've got to solve
• 25:11
  Speaker 1: those two issues. And the best way that we found
• 25:14
  Speaker 1: to solve it is you replicate. So you basically imitation
• 25:19
  Speaker 1: is the greatest form of flattery. You replicate twenty of
• 25:23
  Speaker 1: the largest managators hedge funds, but you replicate what they're
• 25:26
  Speaker 1: doing the four fees, so if they're long gold, by
• 25:32
  Speaker 1: will go along gold. And but we don't have a
• 25:37
  Speaker 1: hundred basis points of treating costs. We don't have three
• 25:40
  Speaker 1: basis points and fees. So we get you back to
• 25:44
  Speaker 1: what these strategies can do before fees and and and
• 25:47
  Speaker 1: pass those diversification benefits back to clients. Last question on
• 25:52
  Speaker 1: this space, when you reference these sort of esoteric areas
• 25:58
  Speaker 1: the academics would have us eve they're really outperforming. Part
• 26:03
  Speaker 1: of it, as you mentioned, was luck. Part of it
• 26:06
  Speaker 1: is just inefficiencies in these lesser thinner markets, lesser traded
• 26:11
  Speaker 1: thinner markets that when everybody eventually piles into those inefficiencies,
• 26:17
  Speaker 1: eventually get arbitraged away. What what are your thoughts on
• 26:20
  Speaker 1: on some of the academic criticisms of this. So I
• 26:24
  Speaker 1: think there's a huge problem with academic finance in general. Um.
• 26:29
  Speaker 1: The first problem is that most academic finance guys are
• 26:33
  Speaker 1: also practitioners. So this whole notion that academic finances some
• 26:38
  Speaker 1: objective assessment of these markets, um uh is often clouded
• 26:43
  Speaker 1: by the fact that you know, these guys have another
• 26:46
  Speaker 1: paper where they're trying to sell you something. Um the um.
• 26:50
  Speaker 1: But but but this notion that markets get more efficient
• 26:54
  Speaker 1: over time is absolutely true. Um. And I think you know,
• 26:58
  Speaker 1: my criticism of the value factor is that, you know,
• 27:02
  Speaker 1: what Fauma identified in nineteen was that these cheap, beaten
• 27:08
  Speaker 1: up stocks, we're cheap and they were built to stay
• 27:13
  Speaker 1: that way. I mean, think think about what it was
• 27:16
  Speaker 1: like for Warren Buffett in the nineteen sixties to find
• 27:19
  Speaker 1: a stock like Berkshire Hathaway. He had to pick up
• 27:24
  Speaker 1: the phone, probably a rotary phone at that point, you know,
• 27:27
  Speaker 1: call information wherever this company was located, have them mail
• 27:32
  Speaker 1: annual reports to him. He gets them two months later,
• 27:34
  Speaker 1: he's calculating by hand the market cap. You know, he may.
• 27:39
  Speaker 1: I mean, it's just it's just the level of information
• 27:42
  Speaker 1: of just trying to get information on these companies was
• 27:45
  Speaker 1: was was incredibly difficult, and there was no glory in that.
• 27:49
  Speaker 1: You know, this wasn't uh An m and a banker
• 27:52
  Speaker 1: being you know, kind of showing up on the cover
• 27:55
  Speaker 1: of Forbes. These guys were poiling in basements, in his case,
• 28:00
  Speaker 1: in an attic. And so you know, now today you
• 28:04
  Speaker 1: can pull up carefully curate, curated financial information on every
• 28:09
  Speaker 1: publicly traded stock UM, you can screen them, you can
• 28:13
  Speaker 1: run analytics on it. It is the world has changed
• 28:16
  Speaker 1: and the world has become more efficient, and there are
• 28:18
  Speaker 1: you know, I think one of the things that I've
• 28:20
  Speaker 1: been asked to do was write a book on this
• 28:22
  Speaker 1: UM and just to use examples of kinds of things
• 28:26
  Speaker 1: that people are doing thirty years ago that if you
• 28:28
  Speaker 1: could go back thirty years ago, you would say, by everything,
• 28:32
  Speaker 1: it's like, forget about whether you're paying eight cents and
• 28:36
  Speaker 1: and farallon you know is paying seventy eight and some
• 28:39
  Speaker 1: other guy in Soros is, you know, is willing to
• 28:42
  Speaker 1: pay a D two just by everything because the world
• 28:46
  Speaker 1: has become much more difficult for active managers. Venture capitalist
• 28:51
  Speaker 1: Mark Andresen said something very similar. Go back and look
• 28:55
  Speaker 1: at at all the original investments they made in these
• 28:59
  Speaker 1: pre public companies. Would would it have mattered if they
• 29:01
  Speaker 1: paid twice as much for Facebook? Although admittedly there's a
• 29:05
  Speaker 1: touch of survivorship bias in that. Let's talk a little
• 29:09
  Speaker 1: bit about the approach dynamic beta takes. What is unique
• 29:14
  Speaker 1: about it. How do you guys go about replicating all
• 29:19
  Speaker 1: of those single manager firms. So what we do a
• 29:22
  Speaker 1: thing called hedge fund replications, and replication is a terrible
• 29:26
  Speaker 1: term because it's I think a lot of people here
• 29:29
  Speaker 1: and they think of mediocrity. But let me frame it
• 29:33
  Speaker 1: in a slightly different way. If the only way that
• 29:38
  Speaker 1: you today could invest in the five hundred stocks in
• 29:41
  Speaker 1: the S and P was by investing with active managers
• 29:45
  Speaker 1: who charged three hundred basis points, and someone came along
• 29:48
  Speaker 1: and said, we can directly access four to five hundred
• 29:55
  Speaker 1: of those stocks and we'll charge you a hundred basis
• 29:57
  Speaker 1: points for it, it would be a pretty clear decision
• 30:02
  Speaker 1: that the latter is not only likely to give you
• 30:05
  Speaker 1: the benefits of investing in the SMP five, but it's
• 30:09
  Speaker 1: probably gonna do a lot better than those active managers.
• 30:13
  Speaker 1: And so what hedge fund replication basically is is it's
• 30:17
  Speaker 1: using models to try to understand how hedge funds are
• 30:21
  Speaker 1: position today across equities, rates, currencies, commodities, and then copy
• 30:27
  Speaker 1: their asset allocation in a low cost form. And so
• 30:31
  Speaker 1: on our side, we really pioneered this idea. And by
• 30:34
  Speaker 1: the way that the whole concept of hedge fund replication
• 30:36
  Speaker 1: has been around since the mid two thousand's and it's
• 30:39
  Speaker 1: really the only area of the liquid old space that
• 30:42
  Speaker 1: has worked consistently and reliably. And it's not just us.
• 30:46
  Speaker 1: I mean, the way you would analyze this is you
• 30:47
  Speaker 1: would you would look at what we've done, but also
• 30:49
  Speaker 1: look at at other firms who've been in the space,
• 30:52
  Speaker 1: um and um, and it's it's But what sort of
• 30:56
  Speaker 1: remarkable about about this whole concept is that you don't
• 31:00
  Speaker 1: just do as well as hedge funds. You tend to
• 31:02
  Speaker 1: do better. And the reason you do better is entirely
• 31:05
  Speaker 1: through cutting out fees. Before the crisis in this space,
• 31:08
  Speaker 1: people generally thought if we can create something that does
• 31:11
  Speaker 1: just as well as this leading hedge fund index, but
• 31:15
  Speaker 1: offers daily liquidity and low fees. We're gonna be heroes, right,
• 31:18
  Speaker 1: this is gonna be We're gonna be the John Bogels
• 31:21
  Speaker 1: of of the alternative investment industry. And remarkably, they did
• 31:25
  Speaker 1: it right, and we did it and so but after
• 31:29
  Speaker 1: the crisis, we said, maybe we can even do better,
• 31:31
  Speaker 1: because when we're seeing this portfolio of hedge funds delivering
• 31:35
  Speaker 1: six percent per anum, maybe they're really doing ten be
• 31:38
  Speaker 1: four fees. And if we can replicate eight or nine
• 31:41
  Speaker 1: or even ten of the ten and charge less, it
• 31:45
  Speaker 1: won't just be like an index product, it will be
• 31:47
  Speaker 1: an index plus product and um. And so I think
• 31:51
  Speaker 1: I think we're now known as the only firm at
• 31:54
  Speaker 1: least that I'm aware of, that has been able to
• 31:57
  Speaker 1: consistently outperform portfolios of hedge funds, so similar to what
• 32:01
  Speaker 1: you would think of fund of funds would do, but
• 32:04
  Speaker 1: with better draw down characteristics, low fees and daily liquidity.
• 32:08
  Speaker 1: And so in two thousand eighteen, UM, a fast growing
• 32:13
  Speaker 1: French institutional investor called i AM Global Partner was doing
• 32:17
  Speaker 1: this multi year analysis of the liquid dolt space and said,
• 32:20
  Speaker 1: you know, we think these guys have the best mouse trap,
• 32:22
  Speaker 1: but they don't have any products that are available to
• 32:25
  Speaker 1: a broader range of investors. And that's when they partnered
• 32:28
  Speaker 1: up with us and then launched these two ETFs around
• 32:30
  Speaker 1: existing strategies. In two is the plan to eventually become
• 32:35
  Speaker 1: the vanguard of the alternative space. Are you guys going
• 32:38
  Speaker 1: to roll out more products or are you going to
• 32:41
  Speaker 1: stay focused on just a handful of products. We've been very,
• 32:46
  Speaker 1: very focused on what we do, and I expect us
• 32:48
  Speaker 1: to continue to be narrowly focused. Um, there are only
• 32:51
  Speaker 1: certain strategies for which this works incredibly well. In the
• 32:54
  Speaker 1: mannered future space. Uh, we've basically found a way to
• 32:58
  Speaker 1: outperform la large hedge funds by four basis points brandom
• 33:02
  Speaker 1: with less risk. So if you're deciding how do you
• 33:05
  Speaker 1: want to get exposure to manage features, this should be
• 33:08
  Speaker 1: the obvious choice. We run into all sorts of agency
• 33:12
  Speaker 1: and behavioral issues in that you know, for the same
• 33:15
  Speaker 1: reason that that that allocators fought paths of investing for years,
• 33:19
  Speaker 1: But that's that's changing and we'll we'll continue to change.
• 33:22
  Speaker 1: But you know, in our case, I think actually and
• 33:24
  Speaker 1: going back to think about seth uh. One of the
• 33:28
  Speaker 1: best things you can do and asset management is decide
• 33:31
  Speaker 1: what not to do. And so when you ask the
• 33:34
  Speaker 1: questions about the history of the liquid all space, every
• 33:37
  Speaker 1: time there was a new wave of products, we try
• 33:39
  Speaker 1: to look at it with an open mind and say, hey,
• 33:42
  Speaker 1: maybe this does something better than what we're doing, Maybe
• 33:45
  Speaker 1: we should do this instead. And every time we concluded
• 33:48
  Speaker 1: that these were products that we're being you know, that
• 33:50
  Speaker 1: look great on paper, that wouldn't work in practice. And
• 33:53
  Speaker 1: I think we've been write six out or six times
• 33:54
  Speaker 1: on that. So it's possible that we would introduce new products,
• 33:58
  Speaker 1: but I don't expect to do it broadly. Our goal
• 34:01
  Speaker 1: right now is that for anybody who's managing a diversified
• 34:06
  Speaker 1: portfolio who thinks that and we can help to make
• 34:09
  Speaker 1: the argument who thinks that hedge fund type strategies and
• 34:12
  Speaker 1: then in this mean I mean specifically equity long short
• 34:14
  Speaker 1: and managed futures um has a role in their portfolios.
• 34:19
  Speaker 1: The argument that we would make is that the way
• 34:22
  Speaker 1: that we do it is more predictable, more reliable, has
• 34:27
  Speaker 1: tends to outperform over time. And therefore, if you're thinking
• 34:31
  Speaker 1: in five or ten year increments in terms of how
• 34:34
  Speaker 1: your clients you know, are going to end up viewing
• 34:36
  Speaker 1: this portfolio and how you're going to be this portfolio.
• 34:39
  Speaker 1: We should become the default allocation. So let's talk about
• 34:42
  Speaker 1: one of the e t F in the space that
• 34:44
  Speaker 1: you guys manage, the long shorthead strategy to dB H
• 34:49
  Speaker 1: had a great year was up. Tell us how that
• 34:55
  Speaker 1: sort of e t F is constructed, what goes into
• 34:59
  Speaker 1: that and who do you think that's appropriate for. So
• 35:02
  Speaker 1: that's a strategy that we It's based on a strategy
• 35:05
  Speaker 1: we originally developed in two thousand twelve, which is that
• 35:08
  Speaker 1: we we look at forty of the largest equity long
• 35:11
  Speaker 1: shortage funds and diversified across a lot of different strategies
• 35:15
  Speaker 1: fundamental value, fundamental growth, UM, emerging markets, sector specialists, etcetera.
• 35:21
  Speaker 1: And we analyze how those guys have been making money
• 35:25
  Speaker 1: the four feets and our goal and what our research
• 35:29
  Speaker 1: has basically shown is that UM that the way these
• 35:33
  Speaker 1: guys primarily generate alpha over time is by getting is
• 35:39
  Speaker 1: through better asset allocation. And and this goes all the
• 35:42
  Speaker 1: way back to you know what I mentioned about about
• 35:44
  Speaker 1: Seth Klarman and this whole idea of get the area
• 35:48
  Speaker 1: right if you look at you know, for instance, over
• 35:50
  Speaker 1: the past twenty years in the equity long short space,
• 35:53
  Speaker 1: they preserved capital and made money in two thousands through
• 35:57
  Speaker 1: two thousand too, not because they picked a particular stock
• 36:00
  Speaker 1: and short at a particular stock, but they were very
• 36:03
  Speaker 1: long small cap value stocks and very short large cap
• 36:08
  Speaker 1: growth stocks at the time the markets fell apart, I mean.
• 36:11
  Speaker 1: But then by the mid two thousands they had pivoted
• 36:13
  Speaker 1: into emerging markets and they rode the brick wave and
• 36:16
  Speaker 1: that was on the long side entirely. And interestingly in
• 36:19
  Speaker 1: the two thousand tens, they did get the markets right.
• 36:23
  Speaker 1: They were went into US quality stocks in two thousand
• 36:26
  Speaker 1: twelve before those stocks took off, and then ultimately embraced
• 36:29
  Speaker 1: tech stocks towards the end of the decade. The problem
• 36:32
  Speaker 1: with the Ladder two was that they don't have that
• 36:35
  Speaker 1: much of an edge in terms of picking which tech
• 36:37
  Speaker 1: stock is going to take off. So when you compare
• 36:41
  Speaker 1: them to the NASDAC or or or particularly two, or
• 36:44
  Speaker 1: to the SMB five fight or, they don't look as good.
• 36:46
  Speaker 1: So what we try to do is basically figure out
• 36:49
  Speaker 1: you know, if you if you if you could look
• 36:52
  Speaker 1: through each of these guys portfolios today and see exactly
• 36:54
  Speaker 1: how much they were long and short every single stock.
• 36:58
  Speaker 1: How much could we group into the s, how much
• 37:01
  Speaker 1: can we group into small cap stocks, mid cap stocks,
• 37:04
  Speaker 1: emerging markets, you know, non us developed into those major buckets.
• 37:09
  Speaker 1: And if we get that right, then that ends up
• 37:12
  Speaker 1: explaining their preview returns. So how do you that information?
• 37:17
  Speaker 1: How could you tell what these private and not very
• 37:21
  Speaker 1: transparent funds are doing in order to replicate what the
• 37:26
  Speaker 1: broad industry is doing. So the way that you can
• 37:30
  Speaker 1: do it most reliably is actually by analyzing recent performance.
• 37:35
  Speaker 1: So looking at thirteen filings doesn't doesn't give you much
• 37:39
  Speaker 1: valuable information, believe it or not. Um Uh, you know,
• 37:42
  Speaker 1: even reading prime brokers reports isn't terribly helpful. The way
• 37:46
  Speaker 1: to do it most reliably is you simply run a
• 37:49
  Speaker 1: what's called the multi factor regression against recent performance. And
• 37:53
  Speaker 1: to be very clear, this does not work with a
• 37:56
  Speaker 1: particular hedge fund. Doesn't work terribly well with a particular
• 37:59
  Speaker 1: hedge fund because they will change what they do faster
• 38:03
  Speaker 1: than than than the models can pick up. But in
• 38:07
  Speaker 1: the case of a pool of forty of these guys,
• 38:09
  Speaker 1: um it's a little bit like do you ever read
• 38:12
  Speaker 1: Jim Sirwicki's The Wisdom of Crowds? So it's basically that idea.
• 38:17
  Speaker 1: It's that it's that you know, whether one guy is
• 38:19
  Speaker 1: long or short, a particular stock or a particular area
• 38:22
  Speaker 1: is much less important than than you know than these guys,
• 38:26
  Speaker 1: they're they're collective wisdom. You're looking more or less it
• 38:29
  Speaker 1: quarterly returns for the group and reverse engineering what they're
• 38:33
  Speaker 1: doing based on how broader asset classes are performing. What
• 38:37
  Speaker 1: would have gotten them to their quarterly numbers? Is that
• 38:41
  Speaker 1: ballpark exactly with the with the with the one correction
• 38:44
  Speaker 1: that it's monthly not quarterly. So you look at you
• 38:46
  Speaker 1: look at the past fourteen months of data. Is the
• 38:48
  Speaker 1: way that we do it. And so so if you
• 38:51
  Speaker 1: take a year like last year, um, you know, the
• 38:54
  Speaker 1: equity long short space overall was up seventeen and a half,
• 38:58
  Speaker 1: let's say, so, really a remarkably good year for hedge
• 39:01
  Speaker 1: funds in that equity long short guys were up as
• 39:03
  Speaker 1: much as the SMP but with you know a half
• 39:07
  Speaker 1: of the risk. But pre see they were up twenty
• 39:10
  Speaker 1: three or twenty four. So so our goal is can
• 39:13
  Speaker 1: we get all twenty three or twenty four only charge
• 39:17
  Speaker 1: basis points in an ETF and get all that x so. So,
• 39:21
  Speaker 1: so hedge funds overall maybe did five hundred basis points
• 39:24
  Speaker 1: of alpha. We get closer to a thousand. That's quite fascinating.
• 39:28
  Speaker 1: You have previously written that we are on the cusp
• 39:32
  Speaker 1: of a new golden age for hedge funds. Explain. So
• 39:36
  Speaker 1: the first thing that I would say is that is
• 39:38
  Speaker 1: that just in terms of my my my credibility in
• 39:41
  Speaker 1: terms of writing that article. I've been a very well
• 39:44
  Speaker 1: known critic of hedge funds in many circumstances. So this
• 39:48
  Speaker 1: is not somebody who is dogmatically pitching a party line. Uh.
• 39:52
  Speaker 1: In fact, my friends used to say, if my car
• 39:54
  Speaker 1: broke down in GreenEDGE or Mayfair, I should lock the
• 39:57
  Speaker 1: doors and call hots to rescue. Um. So the the
• 40:01
  Speaker 1: But but we saw something really interesting last year in
• 40:04
  Speaker 1: that about mid year in our portfolios we started to
• 40:08
  Speaker 1: see what ultimately became the value and E M pivot
• 40:12
  Speaker 1: and hedge funds got a lot of things right last year.
• 40:15
  Speaker 1: So the first thing they did right, so they and
• 40:17
  Speaker 1: by the way to understand positioning, they went in with
• 40:19
  Speaker 1: the tech bias um into two thousand twenty. Overall, some
• 40:24
  Speaker 1: some firms were you know, we're long airline stocks and
• 40:26
  Speaker 1: got run over. But but overall the industry had had
• 40:29
  Speaker 1: had somewhat of a tech bias, And it kind of
• 40:31
  Speaker 1: blows up the academic notion that hedge funds are always
• 40:34
  Speaker 1: long value, because in fact, what we've seen is that
• 40:36
  Speaker 1: what hedge funds do as much more dynamic and changes
• 40:38
  Speaker 1: over time. But um, but then they didn't. They didn't
• 40:41
  Speaker 1: cut risk in the draw down, and as we started
• 40:45
  Speaker 1: coming back uh in the second quarter, they bought into
• 40:49
  Speaker 1: the recovery. They bought into the availability of the vaccine
• 40:53
  Speaker 1: at some point, and and and the depth and of
• 40:57
  Speaker 1: the fiscal and monetary stimulus. So they were adding risk
• 41:01
  Speaker 1: as the market came back. And then really interestingly, we
• 41:04
  Speaker 1: started to see a pivot where tech stocks um. Whereas
• 41:09
  Speaker 1: they increased risk, they weren't adding more to tech stocks,
• 41:13
  Speaker 1: they were taking it and adding it to emerging markets
• 41:16
  Speaker 1: and small cap stocks and non US developed and so
• 41:19
  Speaker 1: a lot of quant value investors have been waiting for
• 41:22
  Speaker 1: this rotation into value to happen for years and and
• 41:26
  Speaker 1: and we think it happens in a slightly different way,
• 41:28
  Speaker 1: which is that if you're a hedge fund, you know,
• 41:31
  Speaker 1: as I mentioned, that's had a tech stock that's tripled
• 41:34
  Speaker 1: over the past three years and has just gone up
• 41:36
  Speaker 1: you know in the second quarter. A prudent investor will
• 41:40
  Speaker 1: take profits on it, and then where do you put it.
• 41:43
  Speaker 1: You don't have to go back into tech stocks. So
• 41:45
  Speaker 1: they started to look for cheaper areas. And so because
• 41:49
  Speaker 1: of that, I think what you've seen is that hedge
• 41:51
  Speaker 1: funds and this whole idea of asset allocation, the opportunity
• 41:54
  Speaker 1: set for them in the looks great because back in
• 41:58
  Speaker 1: two thousand sixteen or two and seventeen, people were starting
• 42:01
  Speaker 1: to say the US looks expensive relative to emerging markets.
• 42:04
  Speaker 1: And then the US took off and emerging markets didn't,
• 42:06
  Speaker 1: and then it was you know that small cap stocks
• 42:09
  Speaker 1: might look cheap, and you know, then you had more
• 42:12
  Speaker 1: years of of US large cap dominating. And so you know,
• 42:16
  Speaker 1: this this evaluation rubber band has been stretching and stretching,
• 42:20
  Speaker 1: and we've seen hedge funds pivoting into it. And so
• 42:24
  Speaker 1: when if you're the reason this is really important is
• 42:27
  Speaker 1: if you have a portfolio today, like most wealth managment
• 42:31
  Speaker 1: portfolio that is heavily biased towards US large cap stocks
• 42:35
  Speaker 1: and fixed income instruments, you have a really big problem.
• 42:38
  Speaker 1: I mean, US large cap stocks are historically expensive, and
• 42:41
  Speaker 1: fixed income instruments the expected returns are close to zero,
• 42:45
  Speaker 1: So so you know, how can you add something that
• 42:49
  Speaker 1: does better? And I think what we're seeing is the
• 42:52
  Speaker 1: opportunity set for hedge funds now because these valuation disparities
• 42:56
  Speaker 1: are so wide and they have the flexibility to really
• 42:59
  Speaker 1: take advantage of it. They have a clear role in
• 43:02
  Speaker 1: investors portfolios over the next ten years. So that's a
• 43:04
  Speaker 1: really interesting observation. The US has certainly been much pricier
• 43:09
  Speaker 1: than overseas and emerging markets for way over a decade,
• 43:14
  Speaker 1: and you could say the same is truth for growth
• 43:17
  Speaker 1: over value in large cap over small cap. What sort
• 43:20
  Speaker 1: of persistency might hedge funds have in these spaces. Do
• 43:25
  Speaker 1: you find generally they're willing to ride out that rotation
• 43:31
  Speaker 1: for a long period of time or or does it
• 43:34
  Speaker 1: you mentioned a decade? The reputation is a little bit
• 43:38
  Speaker 1: of the flavor of the month sort of thing, and
• 43:40
  Speaker 1: whatever next shiny object comes along is going to draw
• 43:43
  Speaker 1: their attention again. I I always have to say, is
• 43:47
  Speaker 1: that an exaggeration or does it not apply to everybody.
• 43:50
  Speaker 1: Is in an overstatement or is there some truth to that?
• 43:53
  Speaker 1: So the core of what hedge funds do is to
• 43:55
  Speaker 1: get these multi year trends right. The attention often is
• 44:00
  Speaker 1: two short term shifts. So, for instance, hedge funds are
• 44:03
  Speaker 1: have been short the US dollar. You know, the general
• 44:07
  Speaker 1: view among hedge funds is that um, other parts of
• 44:11
  Speaker 1: the world are recovering faster than the US. The FED
• 44:14
  Speaker 1: is likely to let the economy run on hot, which
• 44:18
  Speaker 1: could be more inflationary for the U S and other
• 44:20
  Speaker 1: parts of the world. But you know, what we've seen
• 44:23
  Speaker 1: over the past five years is is that that you know,
• 44:25
  Speaker 1: and that view leads them to want to own more
• 44:28
  Speaker 1: emerging markets over time. If something materially broke down that view, UM,
• 44:34
  Speaker 1: if the FED announced tomorrow that they were going to
• 44:37
  Speaker 1: hike rates, then you would then you would see a
• 44:39
  Speaker 1: shift and a change, and that's what you want hedge
• 44:40
  Speaker 1: funds to do. But you know, again, I think that
• 44:43
  Speaker 1: always the the the issue with looking at hedge funds
• 44:46
  Speaker 1: is is it's the difference between you know, the individual
• 44:50
  Speaker 1: data point, the anecdote that's being circulated versus what's happening
• 44:54
  Speaker 1: more broadly in the industry, and so I wouldn't expect
• 44:57
  Speaker 1: if hedge funds are long emerging mar because they're buying
• 45:00
  Speaker 1: emerging markets today. I wouldn't guarantee you that they would
• 45:03
  Speaker 1: be long in five years, but these tend to be
• 45:06
  Speaker 1: pretty stable and persistent. Um. But I think the other
• 45:10
  Speaker 1: thing that's that's you know, so when you think about that,
• 45:12
  Speaker 1: that grates with how a lot of people think about
• 45:15
  Speaker 1: hedge funds and that they want to hear something special
• 45:18
  Speaker 1: about this stock or that stock, or some particular trade
• 45:20
  Speaker 1: that nobody's thought about. But the competitive advantage of hedge
• 45:24
  Speaker 1: funds is that when they like a market and they
• 45:26
  Speaker 1: see an opportunity, they can go big. And so back
• 45:29
  Speaker 1: to that example that I used in the mid two
• 45:32
  Speaker 1: thousand's when I first started looking at this space and
• 45:34
  Speaker 1: whether this idea would work, it showed that hedge funds
• 45:38
  Speaker 1: on average had about a thirty five percent long position
• 45:40
  Speaker 1: and emerging markets. But you would never see you would
• 45:44
  Speaker 1: never walk into a wealth manager in the US who
• 45:46
  Speaker 1: likes or even a pension fund who is very optimistic
• 45:50
  Speaker 1: about emerging markets and see a thirty five percent emerging
• 45:53
  Speaker 1: markets position. You might see they if they love it,
• 45:55
  Speaker 1: they go from four to six. And so that flexibility
• 45:58
  Speaker 1: is very, very powerful over time, because you know, over
• 46:03
  Speaker 1: the period that I've described in the mid two thousand's,
• 46:05
  Speaker 1: emerging markets outperformed the SMP by thirty pc a year.
• 46:09
  Speaker 1: So acid allocation was giving hedge funds a thousand basis
• 46:13
  Speaker 1: points of alpha year. It didn't matter what you owned
• 46:16
  Speaker 1: an emerging markets, it's that you you picked the right area.
• 46:20
  Speaker 1: And so I think what we have over the next
• 46:22
  Speaker 1: decade again is, you know, is the easy money in
• 46:25
  Speaker 1: the SMP has been made. The easy money in the
• 46:28
  Speaker 1: nattack has been made and couldn't go on for two years.
• 46:30
  Speaker 1: Of course it could, but looking back ten years from now,
• 46:34
  Speaker 1: it is hard to see. I think it's statistically impossible
• 46:37
  Speaker 1: to see the SMP putting up another decade with annual returns.
• 46:41
  Speaker 1: It makes a lot of sense historically you should start
• 46:44
  Speaker 1: to see some mean reversion. You have referenced the second
• 46:49
  Speaker 1: holy grail of hedge funds. I always think of the
• 46:53
  Speaker 1: first holy grail as alpha. What's the second holy grail?
• 46:57
  Speaker 1: So let me let me first start with it with
• 46:58
  Speaker 1: the term alpha. So pete to use alpha in a
• 47:00
  Speaker 1: lot of different ways. Um, The interesting thing about going
• 47:03
  Speaker 1: back to the nines. Nobody talked in terms of alpha.
• 47:06
  Speaker 1: I mean alpha was a concept that was applied to
• 47:10
  Speaker 1: hedge funds by institutional allocators who are trying to justify
• 47:14
  Speaker 1: an allocation UM. And it is statistically problematic um because
• 47:19
  Speaker 1: it all depends on what you're comparing one return stream
• 47:21
  Speaker 1: to another UM. But but the basic idea of the
• 47:25
  Speaker 1: first holy grail of hedge funds back in the mid
• 47:28
  Speaker 1: two thousand's was what I described. Can you find Seth
• 47:31
  Speaker 1: Carman in two when he's just hired to build and
• 47:34
  Speaker 1: run Bell Post, you know, can you find George Soros
• 47:36
  Speaker 1: and Julian robertson the nineteen seventies, Can you find I
• 47:39
  Speaker 1: don't know, you know, even today Christiam Way when when
• 47:42
  Speaker 1: he launched Higher Global um but um but and and
• 47:47
  Speaker 1: that's what the business lives in breathes on that that
• 47:51
  Speaker 1: you know that if you if you try to identify
• 47:54
  Speaker 1: a guy today, he's going to continue to put up
• 47:57
  Speaker 1: or he's not going to continue to put up spectacular numbers,
• 47:59
  Speaker 1: or or he is, you know, so smart and so
• 48:02
  Speaker 1: capable that that's exactly what he's going to do over
• 48:04
  Speaker 1: the next ten years. The reality is that's nearly impossible. UM.
• 48:08
  Speaker 1: And if you could do it, you know, you should
• 48:10
  Speaker 1: give all your money to three guys, go home and
• 48:13
  Speaker 1: come back in ten years. UM. So the second only
• 48:16
  Speaker 1: grail was was we like the divers ocation benefits of
• 48:19
  Speaker 1: the broad of the industry broadly, but god, it's frustrating
• 48:23
  Speaker 1: to pay these high fees. You know. It's it's difficult
• 48:26
  Speaker 1: to invest in something that's a liquid where sometimes we
• 48:29
  Speaker 1: don't get our money back at exactly the wrong time. UM.
• 48:32
  Speaker 1: You know, these things blow up with frustrating frequency. So
• 48:36
  Speaker 1: if you could deliver the performance of hedge funds broadly
• 48:41
  Speaker 1: but with low fee's, daily liquidity, better downside characteristics, transparency,
• 48:46
  Speaker 1: that this should have a role in every single hedge
• 48:49
  Speaker 1: fund portfolio that you don't then necessarily have to just
• 48:53
  Speaker 1: pick ten or fifteen different liquid hedge funds. You could
• 48:57
  Speaker 1: have of your assets in this liquid, low cost vehicle
• 49:03
  Speaker 1: and and then pick and shoots how you how you
• 49:05
  Speaker 1: invest UM. So it makes it makes all of hedge
• 49:08
  Speaker 1: fund investing UM not just more efficient, but also it
• 49:12
  Speaker 1: tends to um. It actually tends to improve returns and
• 49:17
  Speaker 1: improve performance over time. And so you know, if this
• 49:20
  Speaker 1: had been embraced by institutional investors back in in in
• 49:23
  Speaker 1: two thousand's uh, in the sorry or in the two
• 49:26
  Speaker 1: thousand ten you know, they would have saved hundreds of
• 49:30
  Speaker 1: billions of dollars in fees over the next decade. Um.
• 49:33
  Speaker 1: But but the whole concept of it runs into the
• 49:37
  Speaker 1: same issues that the active versus passive debate has has
• 49:40
  Speaker 1: been dealing with in in you know, the rest of
• 49:42
  Speaker 1: the asset managed industry for thirty years. So you touch
• 49:46
  Speaker 1: upon two things that I have to ask before we
• 49:49
  Speaker 1: get to my favorite questions. One is that active passive debate. Again,
• 49:57
  Speaker 1: going back to the academics, you would think that as
• 50:00
  Speaker 1: more people become passive, that should create inefficiencies that make
• 50:05
  Speaker 1: it easier for the stock pickers to make it easier
• 50:08
  Speaker 1: for the active players. Do you think that is accurate?
• 50:12
  Speaker 1: And why have we seen so many active managers fail
• 50:16
  Speaker 1: to adjust to the money flows into passive. It's a
• 50:21
  Speaker 1: great question, right, does does passive make active more difficult? Um?
• 50:26
  Speaker 1: And I will tell you that I honestly do not
• 50:28
  Speaker 1: do not know the answer to it. In theory, you
• 50:31
  Speaker 1: are correct, right, I mean hedge funds should be out
• 50:33
  Speaker 1: there saying here's this stock, it's undervalued because it's not
• 50:38
  Speaker 1: included in this index, um, And all we have to
• 50:41
  Speaker 1: do is by it is by it today and wait,
• 50:44
  Speaker 1: and you know this big dumb elephant of an investor
• 50:47
  Speaker 1: is going to come up and buy of the assets
• 50:49
  Speaker 1: in one day of the float in one day. UM.
• 50:53
  Speaker 1: I think that you know, there are a lot of
• 50:55
  Speaker 1: um uh, there are a lot of myths about hedge
• 50:59
  Speaker 1: fund um that that have been perpetuated for a long
• 51:03
  Speaker 1: time because there I would say they're convenient myths. UM.
• 51:06
  Speaker 1: One that I've heard repeatedly that I've been asked about
• 51:09
  Speaker 1: is is, oh, hedge funds aren't making money today because
• 51:12
  Speaker 1: because the markets aren't volatile enough. Um. That I haven't
• 51:16
  Speaker 1: seen any good data that actually supports the contention that
• 51:18
  Speaker 1: a normally more volatile market is necessarily good for hedge funds. UM.
• 51:24
  Speaker 1: What I do think, though, you can say is that
• 51:26
  Speaker 1: when when markets trend aggressively over some period of time,
• 51:31
  Speaker 1: that hedge funds can be very good on at at
• 51:34
  Speaker 1: at jumping in and capitalizing on those trends, whether it's
• 51:37
  Speaker 1: managed futures or other areas. Um. So um you know. So,
• 51:42
  Speaker 1: I think I think passive is has has been a
• 51:46
  Speaker 1: little bit of a buggy man that people have put
• 51:48
  Speaker 1: up there. UM. But again, I, you know, I will
• 51:52
  Speaker 1: admit that I don't have a strong conclusion on this,
• 51:55
  Speaker 1: and maybe tomorrow somebody will show me something that that
• 51:58
  Speaker 1: is dispositive, but I haven't seen it. And early in
• 52:00
  Speaker 1: your career you were pretty heavily involved in the Comaliti
• 52:04
  Speaker 1: space and the Greater China region. Do you still track
• 52:08
  Speaker 1: China closely and do you have anything particular to say
• 52:12
  Speaker 1: about what's been going on over there lately? I don't, UM,
• 52:17
  Speaker 1: I would say, my so, my experience with China was
• 52:20
  Speaker 1: that around two thousand UM I had these these came
• 52:24
  Speaker 1: up with these two macro themes. One was that commodities
• 52:26
  Speaker 1: would become much more important than they had been in years,
• 52:28
  Speaker 1: and the other was that the Greater China region really
• 52:31
  Speaker 1: specifically China was going to become an important areavaset management
• 52:35
  Speaker 1: and so I you know, within a couple of years,
• 52:37
  Speaker 1: I'd started to hedge funds in completely different businesses UM
• 52:41
  Speaker 1: with guys to to to capitalize on both of those. Um.
• 52:46
  Speaker 1: I would say, the experience that we that that we
• 52:48
  Speaker 1: had with China was that, uh, capitalism in China is done,
• 52:54
  Speaker 1: or at least back then was done. With a different
• 52:56
  Speaker 1: set of rules um. And that that you know, the
• 53:00
  Speaker 1: idea of sporting UM, standards of of of conduct as
• 53:07
  Speaker 1: it relates to two Chinese business activities often meant that
• 53:14
  Speaker 1: the guy who had those standards was somehow the guy
• 53:17
  Speaker 1: who walked out of the room with no money. Um.
• 53:20
  Speaker 1: And and clearly there's a lot more government intervention in
• 53:23
  Speaker 1: the economy. I remember a guy at one of the
• 53:24
  Speaker 1: private equity firms who had investments in China basically saying
• 53:27
  Speaker 1: that you know, he was talking about how the government
• 53:30
  Speaker 1: would let them have two out of one out of
• 53:33
  Speaker 1: three or two out of three investments would make money,
• 53:35
  Speaker 1: and if the third one is making money, then have
• 53:37
  Speaker 1: to somehow give it back. Um. So um. I've spoken
• 53:42
  Speaker 1: to some people recently about China who have continued to
• 53:44
  Speaker 1: do business there and and those those concerns, concerns are
• 53:47
  Speaker 1: still out there, but at a granular level, I'm not
• 53:49
  Speaker 1: I'm not close to it today. Quite interesting. I know
• 53:52
  Speaker 1: I only have you for a limited amount of time,
• 53:55
  Speaker 1: so so let's jump to our favorite questions that we
• 53:58
  Speaker 1: ask all of our guests. Tell us what you're streaming
• 54:01
  Speaker 1: these days, what's keeping you entertained during a Lockdown either Netflix,
• 54:06
  Speaker 1: Amazon Prime podcast. What what are you keeping busy with?
• 54:10
  Speaker 1: So this is going to be the most depressingly boring
• 54:12
  Speaker 1: answer for you, I'm sure everyone, but um My dad
• 54:16
  Speaker 1: is eighty six years old and he's a lifelong opera fan,
• 54:20
  Speaker 1: and he lives in New York and last year, at
• 54:23
  Speaker 1: this time, he was going to the opera three times
• 54:25
  Speaker 1: a week and I was trying to join him there.
• 54:28
  Speaker 1: He obviously can't go to the opera this year. UM,
• 54:30
  Speaker 1: So I've been streaming operas on Amazon Prime to either
• 54:34
  Speaker 1: watch with him or or talk to him about. Um
• 54:36
  Speaker 1: I do get another things as well, but it's not
• 54:39
  Speaker 1: it hasn't been a priority for me. That's not boring.
• 54:42
  Speaker 1: Opera is kind of interesting. Even if you're not an
• 54:44
  Speaker 1: opera buff. It's still, you know, not running the television.
• 54:48
  Speaker 1: The poor guy used to take me when I was
• 54:49
  Speaker 1: young and and I would fall asleep. I'd have, you know,
• 54:52
  Speaker 1: a big lunch and then fall asleep every time. So
• 54:54
  Speaker 1: I think in my in my fifties, i'm I'm, I've
• 54:59
  Speaker 1: had sort of a renewed interest in it, and it's
• 55:01
  Speaker 1: it's wonderful to be able to share it with him.
• 55:03
  Speaker 1: Tell us about your early mentors who helped to shape
• 55:07
  Speaker 1: your career. So I think the earliest one is uh
• 55:12
  Speaker 1: is my late uncle Amo hotn Um. It's h o
• 55:16
  Speaker 1: u g h t o n um he Uh. He
• 55:19
  Speaker 1: was this really extraordinary guy who unfortunately passed away earlier
• 55:22
  Speaker 1: this year at age three. But he had run a
• 55:25
  Speaker 1: company called Corning Glass, which was a business that his
• 55:30
  Speaker 1: slash my family started back in the eighteen fifties. But
• 55:33
  Speaker 1: then he went to Washington and my first job was
• 55:36
  Speaker 1: working for him as he was a young congressman. And
• 55:40
  Speaker 1: you know, I hope people listening to this will go
• 55:42
  Speaker 1: read his obituary because if there was ever an example
• 55:45
  Speaker 1: of somebody that we need in Washington today, it's him. Uh.
• 55:48
  Speaker 1: He went to Washington, he served as a congressman, He
• 55:50
  Speaker 1: tried to be bi partisan, he was friends with people
• 55:54
  Speaker 1: across the aisle. Um. He really I think set the
• 55:56
  Speaker 1: standard um and and he I think just taught me
• 56:01
  Speaker 1: ultimately just a level of decency in business. Um Uh.
• 56:06
  Speaker 1: You know, ultimately you are responsible for for for conduct
• 56:10
  Speaker 1: and it's not always about just making money. Um. And
• 56:13
  Speaker 1: I think you know, I think another guy is is
• 56:14
  Speaker 1: Jim Wolfinson, who was when I was gave me my
• 56:18
  Speaker 1: first job as an m and a investment banker, and
• 56:21
  Speaker 1: then he later went on to run the World Bank.
• 56:23
  Speaker 1: But he was just he was just an extraordinary guy.
• 56:25
  Speaker 1: And in his you know, when I knew him back then,
• 56:28
  Speaker 1: he just had this um, this energy in terms of
• 56:33
  Speaker 1: wanting to learn. He picked up the cello when he
• 56:35
  Speaker 1: was forty or something and was performing with Yo Yo
• 56:39
  Speaker 1: ma um within within ten years. Just just just extraordinary,
• 56:44
  Speaker 1: And I think there was something about he had. He
• 56:46
  Speaker 1: had almost a Warren Buffett like um enthusiasm for things. UM.
• 56:52
  Speaker 1: I had the pleasure of actually visiting with Buffett in
• 56:56
  Speaker 1: two thousand sixteen on on election day, believe it or not.
• 57:00
  Speaker 1: We were talking about value investing and seth and and
• 57:03
  Speaker 1: and all these things, and you know, and the guy,
• 57:06
  Speaker 1: at whatever age he was, was just still bouncing off
• 57:08
  Speaker 1: his share with enthusiasm of talking about things. And I
• 57:10
  Speaker 1: think there's something really inspiring about that. UM. And then
• 57:15
  Speaker 1: I think, you know, I think the one who's who's
• 57:16
  Speaker 1: not an early mentor, but I think one of the
• 57:18
  Speaker 1: people I do admire at most in the industry today
• 57:20
  Speaker 1: or you know, over the past couple of decades is
• 57:22
  Speaker 1: John Bogel, because he was right. You know, he was right,
• 57:26
  Speaker 1: and he stuck to his guns in the face of
• 57:29
  Speaker 1: withering criticism and gale force hat wins and um, you know,
• 57:33
  Speaker 1: I think I was as I was thinking about this,
• 57:35
  Speaker 1: I wanted to see if I could there are there
• 57:38
  Speaker 1: are two quotes that I thought, I is it okay
• 57:40
  Speaker 1: with you if I if I share two quotes, but
• 57:41
  Speaker 1: I think are just sort of fascinating, really active in passivate.
• 57:44
  Speaker 1: So if you so. John Bogel, part of what he
• 57:46
  Speaker 1: was influenced by was was Nobel lawyer at Paul Samuelson's
• 57:49
  Speaker 1: whole idea of index funds and investing in the market.
• 57:53
  Speaker 1: And what Paul Samuelson said about John Bogel in the
• 57:55
  Speaker 1: first index fund was quote this Vogel invention along with
• 58:00
  Speaker 1: the invention of the wheel, the alphabet Gudenberg printing right,
• 58:03
  Speaker 1: And so it was basically, look how extraordinary this index
• 58:07
  Speaker 1: fund is. And I remember in the I think because
• 58:12
  Speaker 1: the late nine nineties early two thousand's, one of the
• 58:14
  Speaker 1: luminaries of the LBO industry was had this great quote
• 58:19
  Speaker 1: which said, after the wheel, God's greatest invention was to
• 58:23
  Speaker 1: carry and that to me, those two quotes summarized to
• 58:27
  Speaker 1: be the whole active and passive debate. Is the role
• 58:30
  Speaker 1: of asset managers to put their clients first and try
• 58:35
  Speaker 1: to get as much money as they can reasonably get
• 58:38
  Speaker 1: back to their investors, or is it to maximize the
• 58:42
  Speaker 1: profits of an asset management industry? And uh uh, you
• 58:46
  Speaker 1: know I've gost fourty years, I've cast my lot with
• 58:49
  Speaker 1: with Bogel. That's funny. You know you referenced the Financial
• 58:53
  Speaker 1: Times earlier. They were the first ones who had the
• 58:58
  Speaker 1: quote out that a hedge funds is a system by
• 59:02
  Speaker 1: which a savvy manager transfers wealth from naive investors to himself.
• 59:07
  Speaker 1: And I certainly think Bogel understood that, as did the
• 59:13
  Speaker 1: person who was talking about the carry. Let's go to
• 59:16
  Speaker 1: everybody's favorite question. Tell us about what you're reading these days?
• 59:21
  Speaker 1: Are what are some of your favorite books? So? Um? So,
• 59:24
  Speaker 1: my my favorite books keep changing. UM. I go through
• 59:27
  Speaker 1: phases where I got kind of obsessed with a particular
• 59:29
  Speaker 1: topic and then kind of move on. UM. The one
• 59:33
  Speaker 1: one book that I keep going back to um and
• 59:36
  Speaker 1: it has a lot to do with the hedge fund industry,
• 59:38
  Speaker 1: although it has nothing to do with the hedge fund industry,
• 59:41
  Speaker 1: which is a book that believe it or not was
• 59:42
  Speaker 1: written in nineteen sixty two by again, I'm Thomas Kotten,
• 59:45
  Speaker 1: and it's called the Structure of Scientific Revolutions. And what
• 59:49
  Speaker 1: he basically identified was that, um, that you know that
• 59:55
  Speaker 1: that that progress, in his case, scientific progress doesn't just
• 59:59
  Speaker 1: happen in the sort of gradual way that most people
• 1:00:02
  Speaker 1: who have been you have an existing paradigm, and most
• 1:00:06
  Speaker 1: people who have been been been brought up in that paradigm,
• 1:00:09
  Speaker 1: They've been trained in it. They want to believe in
• 1:00:11
  Speaker 1: the paradigm. The self selected into the paradigm, and they
• 1:00:14
  Speaker 1: will not abandon the paradigm until there was something new
• 1:00:17
  Speaker 1: that has established that they can safely hop over to,
• 1:00:21
  Speaker 1: and that's where they had fund industry is today. So
• 1:00:23
  Speaker 1: I go back and I keep reading this because because
• 1:00:25
  Speaker 1: every year that you know, I still face these these
• 1:00:29
  Speaker 1: headwinds in the industry. Um uh. But but we see
• 1:00:33
  Speaker 1: them abating and we see more and more people buying
• 1:00:35
  Speaker 1: into it. But I keep going back and reading it
• 1:00:37
  Speaker 1: because I want to make sure that I'm not, you know,
• 1:00:38
  Speaker 1: completely insane. Um. And then the other thing I did also,
• 1:00:41
  Speaker 1: and I would encourage people to go back and read
• 1:00:43
  Speaker 1: books they read twenty years ago, particularly about business, because
• 1:00:48
  Speaker 1: you see what a different world it was. And I
• 1:00:52
  Speaker 1: recently reread so I do have a copy of Staff's
• 1:00:55
  Speaker 1: Margin of Safety that he gave me when I joined UM.
• 1:00:58
  Speaker 1: And and you know, when you hear what he was
• 1:01:01
  Speaker 1: writing about UM and the kinds of things, the kind
• 1:01:05
  Speaker 1: of opportunities that he uses examples, it is so clear
• 1:01:09
  Speaker 1: that no hedge fund with any meaningful assets could do
• 1:01:12
  Speaker 1: any of those things today. And if an opportunity like
• 1:01:15
  Speaker 1: that came about, you know, it would be seventy sophisticated
• 1:01:19
  Speaker 1: hedge funds competing for for for each trade opportunity, each
• 1:01:25
  Speaker 1: investment opportunity. UM. So I do think that that. You know,
• 1:01:28
  Speaker 1: there's another quote that I love. Um My, my great
• 1:01:31
  Speaker 1: grandfather was very good friends with this guy named George
• 1:01:33
  Speaker 1: Santayana who famously said those who forget history are doomed
• 1:01:38
  Speaker 1: to repeat it. And and you know, I think, in
• 1:01:41
  Speaker 1: the case of people who are in the asset management industry,
• 1:01:44
  Speaker 1: five years ago is not history. Three years ago is
• 1:01:47
  Speaker 1: not history. If you want to understand why quant based
• 1:01:50
  Speaker 1: investment strategies are disappointing you today, you've got to go
• 1:01:54
  Speaker 1: back and look at the nine nineties. You know and
• 1:01:56
  Speaker 1: even better. Yet look at what they were saying in
• 1:01:58
  Speaker 1: the nineties about the nineteen of these and um, and
• 1:02:02
  Speaker 1: there's not enough of that the industry. Yeah, Ray Dalio
• 1:02:05
  Speaker 1: has been a big His new book is all about that.
• 1:02:08
  Speaker 1: Unprecedented doesn't mean it's never occurred. It's just never occurred
• 1:02:12
  Speaker 1: in your lifetime. And if you go back through history,
• 1:02:15
  Speaker 1: most of the things that seem to surprise us have
• 1:02:17
  Speaker 1: happened time and time again after everybody forgets about the
• 1:02:22
  Speaker 1: previous time. Absolutely, I mean, you know, because Mark Twain
• 1:02:26
  Speaker 1: said history doesn't repeat itself. It at rhymes. Um. I
• 1:02:29
  Speaker 1: think you can often find examples and sometimes and sometimes
• 1:02:32
  Speaker 1: they're alarming examples. And if you look at the political
• 1:02:34
  Speaker 1: situation today, you can point to very alarming, deserving examples
• 1:02:40
  Speaker 1: where you had, you not established democracies, but democracies that
• 1:02:44
  Speaker 1: were under threat in some way. And you can see
• 1:02:47
  Speaker 1: the same kinds of you know, politicized debate around it.
• 1:02:51
  Speaker 1: And um uh you know, I think it would do
• 1:02:54
  Speaker 1: us a lot of good too, uh, focus on on
• 1:02:58
  Speaker 1: on historical precedents and think about what they mean to do.
• 1:03:02
  Speaker 1: Let's talk about the sort of advice you might give
• 1:03:04
  Speaker 1: to a recent college grad who was interested in either
• 1:03:09
  Speaker 1: hedge funds or liquid alts. What what sort of career
• 1:03:12
  Speaker 1: advice would you give them? So I think the the
• 1:03:15
  Speaker 1: I guess I would start with, um uh, the statement
• 1:03:21
  Speaker 1: that you want to find an area of broadly that's
• 1:03:23
  Speaker 1: likely to grow over the next twenty years. UM. And
• 1:03:26
  Speaker 1: that probably has something to do with technology. UM. So.
• 1:03:31
  Speaker 1: I mean, you know, one of the things I think
• 1:03:32
  Speaker 1: is so incredibly sad about the coronavirus crisis is that
• 1:03:37
  Speaker 1: you've had people whose lives were built around retail businesses
• 1:03:41
  Speaker 1: that were built around um, movie theater chains that were
• 1:03:45
  Speaker 1: built around things that are probably never coming back in
• 1:03:49
  Speaker 1: the same way that they were twenty or thirty years
• 1:03:51
  Speaker 1: ago when they made that decision. So maybe this is
• 1:03:53
  Speaker 1: kind of a shadow of you know, Seth's original thing
• 1:03:56
  Speaker 1: that find the right area. So if you're going to
• 1:03:58
  Speaker 1: the active management this street, have conversations with people about
• 1:04:01
  Speaker 1: what do they expect to be big and new, and
• 1:04:04
  Speaker 1: maybe that's crypto. You know, I don't I'm not a
• 1:04:07
  Speaker 1: I don't know an awful lot about crypto, but but
• 1:04:10
  Speaker 1: I think you can point to it and say, crypto
• 1:04:12
  Speaker 1: in twenty years or ten years is going to be
• 1:04:14
  Speaker 1: bigger in some way, shape or form. Interestingly, the and
• 1:04:18
  Speaker 1: I said, the only way you're gonna be able to
• 1:04:19
  Speaker 1: figure that out is by doing a day to day
• 1:04:22
  Speaker 1: One of the most interesting pieces of business advice I
• 1:04:24
  Speaker 1: got was was ironically from from Mark Cuban in twenty
• 1:04:30
  Speaker 1: two thousand one or two thousand two, UM, when I
• 1:04:33
  Speaker 1: met with him and we're talking about the future of
• 1:04:36
  Speaker 1: UH what. I said, what you know, how are you
• 1:04:38
  Speaker 1: investing your money today? And he said that he was
• 1:04:39
  Speaker 1: gonna willing to spend the hundred million dollars is money
• 1:04:42
  Speaker 1: to invest in high definition television. And I asked him
• 1:04:46
  Speaker 1: what that meant, and he said, I have no idea,
• 1:04:48
  Speaker 1: I said. He said. It could be producing, it could
• 1:04:51
  Speaker 1: be better pipes into the homes, it could be all
• 1:04:54
  Speaker 1: the different things that But what I can tell you
• 1:04:55
  Speaker 1: with certainty is that ten years from now, people are
• 1:04:58
  Speaker 1: gonna want much better quality than the grainy TV that
• 1:05:02
  Speaker 1: they have today. And and the only way that I'm
• 1:05:06
  Speaker 1: going to know where the real opportunities are is by
• 1:05:09
  Speaker 1: by doing it every day. It's not an academic exercise,
• 1:05:12
  Speaker 1: and so I think when people are going into it,
• 1:05:14
  Speaker 1: they should have that that that view of trying to
• 1:05:17
  Speaker 1: think about what's going on around them and how it's changing,
• 1:05:20
  Speaker 1: because if they're entrepreneurial, that's where they're going to see
• 1:05:22
  Speaker 1: the opportunities. If not by writing a business plan, you know,
• 1:05:25
  Speaker 1: by pulling down Wikipedia. And I think that you don't.
• 1:05:28
  Speaker 1: Alongside that, I would stay flexible. You know, it's not
• 1:05:32
  Speaker 1: it's it's um, it's not clear at at age twenty
• 1:05:35
  Speaker 1: five or twenty seven or however old you are. UM,
• 1:05:38
  Speaker 1: it's not clear where the opportunities are going to be.
• 1:05:40
  Speaker 1: We know that things will look very different in five
• 1:05:43
  Speaker 1: or ten years, and so you know, keep financial flexibility,
• 1:05:46
  Speaker 1: keep yourself on your balls, balls of your feet so
• 1:05:49
  Speaker 1: you can pivot as necessary. Quite interesting, and our final question,
• 1:05:53
  Speaker 1: what do you know about the world investing today? You
• 1:05:56
  Speaker 1: wish you knew twenty five years or so ago when
• 1:06:00
  Speaker 1: you were first starting out. So I wish that I
• 1:06:02
  Speaker 1: had understood how institutionalization of the alternatives business would play out. UM.
• 1:06:10
  Speaker 1: So you know, we started this by talking about whether
• 1:06:12
  Speaker 1: I was going to go into the LBO business or
• 1:06:15
  Speaker 1: go into the hedge fund business. And my in one
• 1:06:20
  Speaker 1: of in a shockingly bad conclusion, I thought the LBO
• 1:06:23
  Speaker 1: business had probably seen its best days because the things
• 1:06:26
  Speaker 1: that had made LBOs these profit generating machines, was a
• 1:06:31
  Speaker 1: function of the nine eighties. It was a junk bond market.
• 1:06:35
  Speaker 1: You could buy things with you know, five percent equity
• 1:06:38
  Speaker 1: down and you go buy a reasonable company with it.
• 1:06:40
  Speaker 1: Because of distortions in the junk bond market. You had
• 1:06:44
  Speaker 1: terribly won companies with inactive boards that you could take
• 1:06:47
  Speaker 1: over and clean up and and double their cash flow.
• 1:06:50
  Speaker 1: And you had um uh, you know, companies had gone
• 1:06:54
  Speaker 1: through conglomerization phases in the seventies and eighties, and we're
• 1:06:58
  Speaker 1: selling off subsidiaries because you know x y Z hedge fund. Baron,
• 1:07:03
  Speaker 1: I mean LBO Baron had dinner with the CEO and
• 1:07:05
  Speaker 1: convinced them to sell it at six times cash flow.
• 1:07:07
  Speaker 1: I mean, it was all of these things were you
• 1:07:11
  Speaker 1: know that made LBOs in the ninet eighties. It's really
• 1:07:14
  Speaker 1: really these great investments, um huge, huge, huge access returns
• 1:07:19
  Speaker 1: what I didn't see. And by the way, when I
• 1:07:21
  Speaker 1: was looking at this, you know KKR had bought r
• 1:07:24
  Speaker 1: j R Nibisco and that it turned into kind of
• 1:07:25
  Speaker 1: a fiasco and people thought, no one's ever gonna be
• 1:07:27
  Speaker 1: able to raise a five billion dollar fund again. Today
• 1:07:31
  Speaker 1: What I didn't understand was that institutions and consultants around
• 1:07:35
  Speaker 1: institutions UM once that they had their own reasons for
• 1:07:40
  Speaker 1: having these new asset class categories. So once they labeled
• 1:07:44
  Speaker 1: LBO slash Private Equity and Asset Allocation UM, it was
• 1:07:49
  Speaker 1: the first movers into that ended up getting new clients
• 1:07:53
  Speaker 1: because they could say, we have special access, we know
• 1:07:55
  Speaker 1: how they invest in this area, and their business would
• 1:07:57
  Speaker 1: grow and then somebody else would look at them and say,
• 1:08:00
  Speaker 1: oh my god, look at that. They just won that
• 1:08:01
  Speaker 1: new client. And it seems to be in part because
• 1:08:04
  Speaker 1: they know how to get invested in l b O
• 1:08:06
  Speaker 1: s and we don't have that capabilities. Let's hire some
• 1:08:07
  Speaker 1: people to do it. And this whole process builds on itself.
• 1:08:11
  Speaker 1: And so now you have you know and and so
• 1:08:16
  Speaker 1: you know, now this is why you have thirty billion
• 1:08:18
  Speaker 1: dollar hedge funds, which people would have said was for
• 1:08:20
  Speaker 1: posterous years ago, or people routinely raising ten or twenty
• 1:08:24
  Speaker 1: billion dollar private equity funds and so UM. So I
• 1:08:29
  Speaker 1: think if I'd known, if I'd understood that, I think
• 1:08:32
  Speaker 1: there would have been different ways that I would have
• 1:08:34
  Speaker 1: managed some of my businesses. But you know, next life
• 1:08:38
  Speaker 1: Thank you Andrew for being so generous with your time.
• 1:08:41
  Speaker 1: We have been speaking with Andrew Beer, managing member at
• 1:08:45
  Speaker 1: Dynamic Beta Investments. If you enjoy this conversation, well be
• 1:08:50
  Speaker 1: sure and check out any of our previous I don't
• 1:08:53
  Speaker 1: know three nine such prior conversations. You can find those
• 1:08:58
  Speaker 1: at iTunes, Spotify, wherever you feed your podcast fix. We
• 1:09:02
  Speaker 1: love your comments, feedback and suggestions right to us at
• 1:09:07
  Speaker 1: m IB podcast at Bloomberg dot net. Give us a
• 1:09:10
  Speaker 1: review on Apple iTunes. You can sign up from my
• 1:09:13
  Speaker 1: daily reads at Rid Halts dot com. Check out my
• 1:09:17
  Speaker 1: weekly column at Bloomberg dot com slash Opinion. Follow me
• 1:09:21
  Speaker 1: on Twitter at rit Halts. I would be remiss if
• 1:09:25
  Speaker 1: I did not thank the crack staff that helps put
• 1:09:27
  Speaker 1: these conversations together each week. Reggie Brazil is my audio engineer,
• 1:09:33
  Speaker 1: Michael Boyle is my producer. Tracy Walsh is our project manager.
• 1:09:37
  Speaker 1: Michael Batnick is my head of research. I'm Barry Ridults.
• 1:09:42
  Speaker 1: You've been listening to Master's Business on Bloomberg Radio.