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How to Think About Alternatives with JPMorgan's Alternative Asset Management CIO Paul Zummo · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
• 0:11
  Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
• 0:17
  Speaker 2: On the latest Masters in Business podcast, I sit down
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  Speaker 2: with Paul Zumo. He's chief investment officer at JP Morgan's
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  Speaker 2: alternative Asset Management. He co founded this group back in
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  Speaker 2: nineteen ninety four with essentially pocket change. It now runs
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  Speaker 2: over thirty five billion dollars in assets for institutions and
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  Speaker 2: high net worth investors at JP Morgan. Really just a
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  Speaker 2: fascinating concept of everything about how to stand up a
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  Speaker 2: division within a large company, how to think about alternatives,
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  Speaker 2: how to recognize when an industry may be average, but
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  Speaker 2: the best players in that industry generate significant alpha. I
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  Speaker 2: thought this was fascinating, and I think you will also
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  Speaker 2: with no further ado, JP Morgan's Paul Zumo, Paul Zumo,
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  Speaker 2: Welcome to Bloomberg.
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  Speaker 3: Thanks for having me. Great to be here.
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  Speaker 2: I'm so excited about this because I just fell in
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  Speaker 2: love with your thirty pearls of wisdom. We'll get to
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  Speaker 2: that later. Let's start with your background. Sure, bachelors from
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  Speaker 2: Sunny Albany and then an MBA from New York University.
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  Speaker 4: What was the original career plan.
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  Speaker 3: Sure.
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  Speaker 5: So yeah, when I was young, I was always into
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  Speaker 5: always into investments, or at least intrigued by investments, but
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  Speaker 5: also into technology as well, like arguably to the extent
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  Speaker 5: we have a gift in life. It was probably technology,
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  Speaker 5: but the technology was so early stage I didn't exactly
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  Speaker 5: know what it was.
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  Speaker 3: So I wound up.
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  Speaker 5: I wound up pursuing obviously the investments side, but kind
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  Speaker 5: of use that technology from time to time, especially as
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  Speaker 5: we were.
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  Speaker 3: Building a group.
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  Speaker 5: But originally I really wanted to get into equity research,
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  Speaker 5: and not that I knew exactly what it was, but
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  Speaker 5: it was the most like tangible and aligned with who
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  Speaker 5: I am in terms of, you know, problem solving and
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  Speaker 5: analytics and things like that, and wound up instead falling
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  Speaker 5: into the hedge fund.
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  Speaker 3: World and doing what I do today's hedge fund.
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  Speaker 5: Solutions, which actually has a lot of elements in a
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  Speaker 5: sense of what equity research is. Again, you know, your
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  Speaker 5: your problem solving at its core and doing analytical work.
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  Speaker 2: You get the Chartered Financial Analyst designation and you start
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  Speaker 2: at Chase as an analyst.
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  Speaker 4: What sort of work were you doing there?
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  Speaker 3: Yeah? Sot.
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  Speaker 5: Out of school, I was in a pension Fune consulting group.
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  Speaker 5: And so really what you're doing is a couple of things.
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  Speaker 5: I mean, one performance measurement across client accounts and you
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  Speaker 5: know also you're doing some some research stock rather manager
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  Speaker 5: selection on a traditional side. But I think what was
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  Speaker 5: hopeful about it is it kind of gave you a
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  Speaker 5: really good purview of all different asset classes and all
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  Speaker 5: different styles of management. And I remember in an early
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  Speaker 5: days really appreciating like this the importance of stylistic differences.
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  Speaker 3: And equities as an example.
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  Speaker 5: This was again early days, but like recognizing you know,
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  Speaker 5: small cup world versus small cup value and a drastic differences.
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  Speaker 5: But it really it really just set the stage to
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  Speaker 5: understand the industry and styles and types and approaches at
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  Speaker 5: at a much deeper level.
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  Speaker 2: So you were a manager of retirement plans at the
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  Speaker 2: inter Public Group. Tell us a little bit about that.
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  Speaker 5: Yeah, So after Chase, I spent about two years at
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  Speaker 5: Chase and then went to the Anti Public Group. So
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  Speaker 5: this is a plan sponsor and maybe a somewhat unusual
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  Speaker 5: move at that stage in my career. And what attracted
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  Speaker 5: me to it was they were at a point where
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  Speaker 5: they were so again this is an advertising agency. But
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  Speaker 5: I worked in the Pension Funk Group and they were
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  Speaker 5: they were looking to revise their asset a location materially,
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  Speaker 5: so you know, changed the whole ass allocation, change the
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  Speaker 5: manager lineup, and importantly they didn't have a consultant, so
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  Speaker 5: they were doing an in house So they were affording me,
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  Speaker 5: i mean, not solely, but awarding me a lot of
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  Speaker 5: responsibility to help restructure the whole plan terminate managers, on
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  Speaker 5: board managers. What year was that, So I was nineteen
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  Speaker 5: ninety two to nineteen ninety four, and interesting, I'm curious
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  Speaker 5: what led them to say, hey, we're just gonna well
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  Speaker 5: that was over, yeah, I mean that was before I mean,
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  Speaker 5: that was the kind of a decision I had already
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  Speaker 5: been made, you know, and they were changing, you know again,
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  Speaker 5: changing their rest location and looking at the whole manager holistically.
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  Speaker 5: And interestingly, that's when I first got involved in hedge funds,
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  Speaker 5: or at least first med hedge funds. So this is again,
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  Speaker 5: you know, early days, right nineteen nineteen ninety everybody was
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  Speaker 5: producing back then, right well then, yeah, I mean then
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  Speaker 5: it was, that's true, but it was so unknown, you know.
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  Speaker 5: So I met with a number of kind of market
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  Speaker 5: neutral equity managers, a couple of long short matages, and
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  Speaker 5: then importantly David Askin so if you know, David asking
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  Speaker 5: for those that don't know, was one of the really
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  Speaker 5: the first hedge fund for lack of a better word
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  Speaker 5: blow ups where it was a mortgage backed derivative manager
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  Speaker 5: and you know, obviously a quirky ish market and and
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  Speaker 5: and wound up having significant problems. So it was you know,
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  Speaker 5: we did not invest with them, but it was really
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  Speaker 5: a very you know, valuable early kind of lesson from
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  Speaker 5: a due diligence standpoint that you know, obviously we didn't
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  Speaker 5: pay for us all all the better, but it really,
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  Speaker 5: like i know, maybe tells you two things. I mean, one,
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  Speaker 5: if you don't completely understand something, and admittedly at age
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  Speaker 5: twenty four I didn't at the time, then you know,
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  Speaker 5: still way don't put money there, and then just have
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  Speaker 5: the courage to say to say no, you know, there's
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  Speaker 5: there's a lot of choices out there and you need
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  Speaker 5: to be disciplined and walk away.
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  Speaker 3: But we did invest in an equi market neutral fund
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  Speaker 3: and again that was nineteen ninety three.
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  Speaker 2: So that's the initial exposure to hedge funds. How did
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  Speaker 2: you go from there to JP Morgan. Yeah, so this
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  Speaker 2: is probably another you know, never burn your bridges, which
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  Speaker 2: which I'll come to.
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  Speaker 5: So I had, as I mentioned, I'd worked at Chase
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  Speaker 5: once before, and at the time, I was looking to
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  Speaker 5: lead because once you restructure the plan, there's only so
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  Speaker 5: much to do, especially when you when you're young.
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  Speaker 3: So it was ready, you know, it was ready to
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  Speaker 3: do something.
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  Speaker 2: Do you literally put yourself out of a job through
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  Speaker 2: the restructuring process.
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  Speaker 5: Well, I mean I could have stayed, but then you're
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  Speaker 5: just you know, you're just overseeing the investments as opposed
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  Speaker 5: to active it's a little less interesting. And so any
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  Speaker 5: any case, I was interviewing at a hedge fund Solutions,
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  Speaker 5: a fund of funds out of Long Island, and you know,
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  Speaker 5: really like the guys, a couple of great guys that
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  Speaker 5: were there. But at the end of the day, I
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  Speaker 5: decided I didn't want to go. You know, I didn't
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  Speaker 5: want to reverse commune because I was living in a
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  Speaker 5: city and when I go out to Long Island. So
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  Speaker 5: I wound up not pursuing it. But the relevance of
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  Speaker 5: that is that what would become my boss. Joel Katsman
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  Speaker 5: was distributing that fund of funds, and he was a Chase,
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  Speaker 5: So when it came time to do a reference check
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  Speaker 5: on me, they asked Joel to do a reference check
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  Speaker 5: with me because he was at Chase.
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  Speaker 3: I used to work at Chase, and the reference.
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  Speaker 5: Check I assume was good, But it turned out I
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  Speaker 5: didn't pursue it any further, and Joel, who was distributing
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  Speaker 5: the fund of funds at the time, got the idea of,
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  Speaker 5: you know what, rather than distributing it, maybe we should
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  Speaker 5: start this up anew and if you want to work
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  Speaker 5: in a city, why don't you come work for me.
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  Speaker 2: So you're at Chase, which even back in the early
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  Speaker 2: nineties is still a very large bank. This seems very entrepreneurial,
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  Speaker 2: very startup. Like, what was it like building this division
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  Speaker 2: inside a giant money center bank?
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  Speaker 5: Yeah, no, it was great, you know, I mean, you know,
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  Speaker 5: bear in mind it was a different world back then
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  Speaker 5: in many ways, not only from an investment standpoint, but
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  Speaker 5: like what it takes to launch a new business. So yeah,
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  Speaker 5: we launched with a whopping seven point four million dollars,
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  Speaker 5: which is, you know, which is unusual at least walking
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  Speaker 5: around pocket money. And I'd say, yeah, maybe a couple
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  Speaker 5: of days. So like from an investment standpoint, it was
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  Speaker 5: the perfect time to start. You had, you know, Orange
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  Speaker 5: County issues, you had, you had rates going up, you
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  Speaker 5: had well David Askin, as I mentioned before, you had dislocation,
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  Speaker 5: and that created opportunities. The problem was, you know, not
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  Speaker 5: many people knew about hedge funds, and I'd say three
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  Speaker 5: quarters of the people that did had a negative view.
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  Speaker 3: So even in the early nineties.
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  Speaker 2: Because my bias is that the golden era of hedge
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  Speaker 2: funds was from the early nineties right up to the
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  Speaker 2: financial crisis, there's been far more challenging period post financial
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  Speaker 2: crisis for alpha Generating the nineties, it seemed like everybody
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  Speaker 2: was making money.
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  Speaker 3: Well, so two things.
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  Speaker 5: I mean, maybe we'll get to those points later about
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  Speaker 5: about different different cycles. But again from an investment standpoint,
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  Speaker 5: there were people were making money. There's no quot us
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  Speaker 5: about I think the public's view, and partially like what
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  Speaker 5: had often been written in the press was the negative
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  Speaker 5: side of you know, hedgehunds going after this currency or
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  Speaker 5: that currency, and I think the perception was one of
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  Speaker 5: you know, I either it was negative or just a
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  Speaker 5: lack of understanding. So a lot of what we did
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  Speaker 5: early days was just educationally, like we would write newsletters
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  Speaker 5: internally and educate people on alternatives. But eventually, you know,
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  Speaker 5: eventually you put it together and performance kind of speaks
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  Speaker 5: for itself, and you you know, you build it, you
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  Speaker 5: build it over time. But it was great from an
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  Speaker 5: entrepreneur entrepreneurial standpoint. This kind of goes back to my
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  Speaker 5: tech side as well. I mean, one, building infrastructure broadly
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  Speaker 5: in process, but you know, early days building technology as well,
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  Speaker 5: Like there was no per track, which is something people
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  Speaker 5: use like, so you know, we and I kind of
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  Speaker 5: built it all, you know, so built a research database,
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  Speaker 5: built a built a system to analyze returns, and yeah,
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  Speaker 5: that was that was great.
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  Speaker 3: It was a lot, a lot of fun.
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  Speaker 2: So today it looks like the industry is much better known.
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  Speaker 2: There's been a giant movement to try try and democratize
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  Speaker 2: access to all sorts of alternatives, from edge funds to
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  Speaker 2: private credit, private equity, real assets. What do you think
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  Speaker 2: led to this massive interest in alternatives. It's not like
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  Speaker 2: it's been a terrible equity market for the past fifteen years.
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  Speaker 4: It's been great.
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  Speaker 3: So yeah, two things.
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  Speaker 5: I mean, i'd say, even let's go back early days,
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  Speaker 5: like part of the vision this is really you know
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  Speaker 5: Joel's vision first and foremost. That was that alternatives were
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  Speaker 5: going to become mainstream, which you know, sitting back and
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  Speaker 5: hedge funds, we're going to become mainstream eventually. And then
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  Speaker 5: you know, back in nineteen ninety four, that was a
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  Speaker 5: novel concept. You know, it was just this little thing
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  Speaker 5: off to the side. And look, we've more or less
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  Speaker 5: kind of arrived at that, right, So I think the
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  Speaker 5: vision is true. And then the second part is, well,
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  Speaker 5: why not retail investors? Right, And if you think about
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  Speaker 5: twenty twenty two and you think about rising stock bond correlations,
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  Speaker 5: you know there's so many investors, many of them more
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  Speaker 5: retail oriented or you know, high networth oriented, that just
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  Speaker 5: don't have alternatives or enough alternatives in a portfolios. So yeah,
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  Speaker 5: that's led to the democratization and you know launch of
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  Speaker 5: interval funds and tender off of funds, which is I
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  Speaker 5: think really interesting. So it's giving those investors access to
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  Speaker 5: alternatives which are really valuable.
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  Speaker 3: In overall portfolio contexts.
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  Speaker 5: And so it's about building yeah, I mean, yeah, just
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  Speaker 5: to respond, like, sure, equity markets are going up today,
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  Speaker 5: but they didn't in twenty twenty two, And I think
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  Speaker 5: the takeaway is that you need to build a more
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  Speaker 5: resilient portfolio rather than just look at these things in isolation.
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  Speaker 2: So you start with barely seven million dollars, today you
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  Speaker 2: have over thirty five billion dollars that you're directly overseeing.
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  Speaker 2: JP Morgan Chase is giant with trillions of dollars. It
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  Speaker 2: sounds like there's a whole lot more headroom for alternatives
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  Speaker 2: at JP Morgan to continue growing.
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  Speaker 4: Like where do you see this going?
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  Speaker 3: Yeah?
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  Speaker 5: I mean, you know, alternatives are definitely the fastest growing
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  Speaker 5: or one of the fastest growing areas within and not
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  Speaker 5: not just hedgehunds, but more broadly and as a tremendous
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  Speaker 5: amount of support for it. So yeah, like I think,
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  Speaker 5: you know, for us and for other alternatives, we're going
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  Speaker 5: to you know, continue to build, continue to launch your product,
• 12:33
  Speaker 5: continue to you know, get get a larger reach into
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  Speaker 5: you know, into other client types and and geographies.
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  Speaker 3: So yeah, the future is extremely exciting.
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  Speaker 2: So I mentioned earlier thirty pearls of wisdom for thirty years.
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  Speaker 2: I want to dive into that in a moment. I
• 12:53
  Speaker 2: have to start with one quote that kind of quote
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  Speaker 2: my eye and we talk about this all the time.
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  Speaker 4: Culture is king.
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  Speaker 2: The road to failure is paved with poor cultures. Explain
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  Speaker 2: what led you to that conclusion.
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  Speaker 5: Well, experience, I mean you, I don't know, I mean
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  Speaker 5: hedge funts fail for and succeed for different reasons. But
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  Speaker 5: culture is definitely at the heart of many of it.
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  Speaker 5: And I'd say more importantly, like sometimes people ask what
• 13:22
  Speaker 5: are you know? What's like? What do you think about
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  Speaker 5: most as your takeaway? Haven't been doing over thirty years?
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  Speaker 5: Like for us, it's for me it's culture. Like the
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  Speaker 5: culture that we've built as an organization has been spectacular
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  Speaker 5: and clearly a differentiator.
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  Speaker 2: Is that what's kept you with JP Morgan Chase for
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  Speaker 2: thirty years? That's kind of rare these days most people
• 13:43
  Speaker 2: don't stay at one shop almost their entire career.
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  Speaker 3: Yeah, it's a couple of things. I mean culture and
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  Speaker 3: the team.
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  Speaker 5: You know, it's like a family for sure, and we
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  Speaker 5: make each other better, We challenge each other respectfully, We
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  Speaker 5: really enjoy each other this company and appreciate our differences.
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  Speaker 5: So yeah, that that's been that's been great. Leadership of
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  Speaker 5: Jamie is unparalleled. So Jamie, Jamie diamonds. Oh, I've heard
• 14:12
  Speaker 5: of him. Remind me to tell you a funny story
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  Speaker 5: about him later. And then lastly, like you know, the
• 14:18
  Speaker 5: job itself allows you obviously to meet with some of
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  Speaker 5: the you know, best investment minds in the world, right,
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  Speaker 5: which is just such a privilege. And then to be
• 14:29
  Speaker 5: able to like dig in deep on so many different
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  Speaker 5: asset classes, so many different geographies you're constantly learning.
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  Speaker 3: So those those three things for sure.
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  Speaker 2: I mentioned you're not exactly very public facing, you're a
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  Speaker 2: little below the radar, but you publish these really interesting things.
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  Speaker 2: And one of my favorite pieces you wrote was thirty
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  Speaker 2: Pearls of Wisdom from our last thirty years. We don't
• 14:54
  Speaker 2: have time to go through all thirty, but I picked
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  Speaker 2: a few that they're just so simple and yet some insightful,
• 15:04
  Speaker 2: and we tend to overlook things like this. This one
• 15:08
  Speaker 2: just jumped out. Don't buy the portfolio by the process.
• 15:13
  Speaker 2: Stories change positions are fleeting, but a robust investment process
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  Speaker 2: should endure. Like that just sums up so much in
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  Speaker 2: two sentences. Tell us about that.
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  Speaker 3: Yeah, No, it's definitely one of my favorites as well.
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  Speaker 5: I mean, it applies to like all different types of hedgehunds,
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  Speaker 5: but I'd say especially discretionary macro. Right, So you're interviewing
• 15:34
  Speaker 5: discretionary macro manager and the vast majority of more are
• 15:36
  Speaker 5: very smart, they tell a very good story, they have
• 15:39
  Speaker 5: great views, but it doesn't necessarily.
• 15:41
  Speaker 3: Mean they were a money maker, right.
• 15:42
  Speaker 5: And again I think sometimes people make the mistake of
• 15:47
  Speaker 5: agreeing with a view, agreeing with the manager, getting you know,
• 15:51
  Speaker 5: seduced by someone having insight. And obviously it's really important,
• 15:56
  Speaker 5: but again it doesn't necessarily speak to the profit. And
• 16:00
  Speaker 5: especially in something like discretetion y macro where it's it's
• 16:03
  Speaker 5: not a high sharp strategy, it tends to be more
• 16:06
  Speaker 5: volatile strategy. And if you don't develop that conviction, and again,
• 16:10
  Speaker 5: first and foremost in the process, you can get shaken
• 16:12
  Speaker 5: from you know, from that idea. Right, the ideas change,
• 16:17
  Speaker 5: the process should endure. So really really important.
• 16:21
  Speaker 2: For sure, have the courage to make mistakes, mitigate unnecessary risk,
• 16:26
  Speaker 2: but take calculated bets.
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  Speaker 4: Again, two simple sentences. So much involved in that.
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  Speaker 2: Yeah, I find a lot of people in our business
• 16:33
  Speaker 2: don't like to admit mistakes.
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  Speaker 3: Yeah, I think it's.
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  Speaker 5: It's it's something not the admitting mistakes so much, but
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  Speaker 5: the courage to make mistakes.
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  Speaker 4: When I think about the risk of calculator, but.
• 16:45
  Speaker 5: When I think about like things that I've done better
• 16:48
  Speaker 5: over the years, that is definitely one of them that
• 16:50
  Speaker 5: comes to mind. Where I've given myself more freedom to
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  Speaker 5: to to make mistakes and to maybe size and lean
• 16:57
  Speaker 5: into themes or high conviction managers to a greater degree
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  Speaker 5: as well, where I think, you know, maybe there's a
• 17:05
  Speaker 5: perfectionist in many of many of us, and sometimes the
• 17:09
  Speaker 5: flip side of that or the problem with that is
• 17:11
  Speaker 5: you're become too conservative. Right So now, yeah, if you
• 17:15
  Speaker 5: make a mistake, you need to figure it out quickly
• 17:18
  Speaker 5: and change course. But allowing yourself to maybe make mistakes
• 17:22
  Speaker 5: is definitely helpful.
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  Speaker 2: Coming up, we continue our conversation with Paul Zumo, chief
• 17:28
  Speaker 2: investment Officer at JP Morgan Alternative Asset Management, discussing thirty
• 17:34
  Speaker 2: pearls of wisdom from our last thirty years.
• 17:38
  Speaker 4: I'm Barry Ritolts.
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  Speaker 2: You're listening to Masters in Business on Bloomberg Radio.
• 18:05
  Speaker 4: I'm Barry Redults.
• 18:06
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
• 18:09
  Speaker 2: extra special guest today is Paul Zumo. He is chief
• 18:12
  Speaker 2: investment officer at JP Morgan Alternative Asset Manager, helping to
• 18:17
  Speaker 2: oversee thirty five billion dollars in external hedge fund assets.
• 18:22
  Speaker 2: He's also chair of the Alternative Asset Management Investment Committee.
• 18:27
  Speaker 2: He co founded the group back in nineteen ninety four.
• 18:30
  Speaker 2: I really like this. Don't be afraid to run into fires.
• 18:34
  Speaker 2: Some of the greatest investment opportunities and manager access are
• 18:38
  Speaker 2: sourced during this location.
• 18:40
  Speaker 4: Tell us about running into fires.
• 18:43
  Speaker 3: Yeah, so this, you know, is obviously really important.
• 18:48
  Speaker 5: Like I love behavioral issues and behavioral finance, and like
• 18:52
  Speaker 5: the challenges.
• 18:53
  Speaker 3: That come to that.
• 18:53
  Speaker 5: Of course, we're all wired, you know, inappropriately from an
• 18:57
  Speaker 5: investment standpoint, and that where you know, we wired to
• 19:00
  Speaker 5: avoid pain, which is why many people make the wrong
• 19:04
  Speaker 5: decisions during you know, periods of crisis or periods of
• 19:07
  Speaker 5: heightened volatility. I think some managers do a great job,
• 19:11
  Speaker 5: you know, I wrote it about you know, I guess
• 19:13
  Speaker 5: the manager had in mind was David Temper, you know,
• 19:16
  Speaker 5: like runs into fires all the time, you know, Yeah,
• 19:18
  Speaker 5: I mean it's got you know, let's so these days,
• 19:21
  Speaker 5: but certainly certainly over his moved.
• 19:23
  Speaker 4: To Florida kind of chilled out a little bit, but
• 19:25
  Speaker 4: he you.
• 19:26
  Speaker 5: Know, like he always again, having watched things play out
• 19:29
  Speaker 5: over thirty years, I always thought he did.
• 19:31
  Speaker 3: You know, he's done a really good job.
• 19:33
  Speaker 5: But and again, like this is something I think we've
• 19:35
  Speaker 5: done a better job at over time as well when
• 19:38
  Speaker 5: I think about, you know, the crisis is nineteen ninety eight,
• 19:41
  Speaker 5: two thousand and eight, twenty twenty. Like you know, as
• 19:45
  Speaker 5: I say, many of these things rhyme, and you've seen
• 19:48
  Speaker 5: it before, like you know, you know what it feels
• 19:51
  Speaker 5: like kind of coming out of it and going in
• 19:52
  Speaker 5: and if you're playing appropriate defense, like you should afford
• 19:55
  Speaker 5: yourself the opportunity to really lean into where you think
• 19:58
  Speaker 5: there is dislocation, especially a technical oriented dislocation.
• 20:01
  Speaker 3: So yeah, it's critically important.
• 20:03
  Speaker 5: Mean, that's where you make outsize returns during those inflection points.
• 20:07
  Speaker 2: So let's talk about outsized returns. Success can be a
• 20:11
  Speaker 2: dangerous achievement. Complacency distractions and misalignments can be silent killers.
• 20:18
  Speaker 3: Yeah, so.
• 20:21
  Speaker 5: I guess you could come at that one from a
• 20:22
  Speaker 5: couple of different ways, but one of one of which
• 20:26
  Speaker 5: the most important, is like when you find success, sometimes
• 20:29
  Speaker 5: people you know, the firm grows, the number of analysts grow,
• 20:32
  Speaker 5: the complexity of business grows and the portfolio manager you know,
• 20:37
  Speaker 5: goes from managing portfolios to managing people.
• 20:41
  Speaker 3: And yeah, like I've seen that movie so many times.
• 20:43
  Speaker 4: Like maybe they have that skill set, maybe they don't.
• 20:45
  Speaker 5: And maybe they don't and that's probably not where you
• 20:47
  Speaker 5: want them to spend their time, you know. So I think,
• 20:49
  Speaker 5: like if you think about the hedge Funt Graveyard and
• 20:52
  Speaker 5: like what the issues have been over the like that
• 20:55
  Speaker 5: there's a big.
• 20:57
  Speaker 3: Area that kind of has that footprint, if you will.
• 21:01
  Speaker 5: So yeah, people, you know, the stario portfolio manager no
• 21:05
  Speaker 5: longer spending the appropriate time on a portfolio managing people
• 21:08
  Speaker 5: getting distracted or the second piece of it is just
• 21:12
  Speaker 5: quite frankly, making too much money.
• 21:13
  Speaker 3: Right. So you know, when I when I've bought the third.
• 21:16
  Speaker 5: Yacht, it's that that's time to leave, you know, it's
• 21:21
  Speaker 5: time to leave after before the first yacht.
• 21:23
  Speaker 2: But the first time I heard that has to be
• 21:25
  Speaker 2: like twenty twenty five years ago. Hey, when your fund
• 21:28
  Speaker 2: manager buys a forty foot or a fifty foot boat,
• 21:31
  Speaker 2: it's time to move on.
• 21:33
  Speaker 5: Yeah, I mean it's more than app but yes, you
• 21:35
  Speaker 5: have to you have to watch the personal lifestyle at
• 21:39
  Speaker 5: times as well, and it make sure people are focused.
• 21:41
  Speaker 1: Now.
• 21:42
  Speaker 5: You know, there are people that are billion as and
• 21:45
  Speaker 5: they're still in the office seventy hours a week, right,
• 21:48
  Speaker 5: and it's it's just an eight They don't they couldn't
• 21:50
  Speaker 5: do anything but that. But yeah, you have to, you know,
• 21:54
  Speaker 5: you have to understand what.
• 21:56
  Speaker 3: What am I buying? And maybe a change.
• 22:00
  Speaker 5: Right, so maybe that star portfolio matage is built out
• 22:02
  Speaker 5: enough of a team and you're not buying anyone singularly,
• 22:06
  Speaker 5: you're buying something broader and that process earlier. But but yeah,
• 22:12
  Speaker 5: it's it's it's a risk for sure, and it's and
• 22:14
  Speaker 5: it's an area where many of successful hedge funds have
• 22:17
  Speaker 5: kind of either become, you know, potentially mediocre or have
• 22:20
  Speaker 5: had challenges because they've taken our eye off the ball
• 22:23
  Speaker 5: in one way or another.
• 22:24
  Speaker 2: Huh, really really interesting. I love this one. The opposite
• 22:27
  Speaker 2: of long is in short. Great short sellers are wired differently.
• 22:32
  Speaker 2: Don't expect success on the long side to necessarily translate
• 22:37
  Speaker 2: to a successful short book. First, I love the quote. Second,
• 22:41
  Speaker 2: are there really getting short sellers left? I think this
• 22:44
  Speaker 2: last run feels like it they steamrolled over everybody.
• 22:47
  Speaker 3: So yeah, maybe a couple of things.
• 22:49
  Speaker 5: So I mean, just on the quote itself, I have
• 22:52
  Speaker 5: to like, of all the lessons learned and all the
• 22:55
  Speaker 5: mistakes we've seen people make, that that one has probably
• 22:59
  Speaker 5: right at the top or certainly right toward the top.
• 23:01
  Speaker 5: Like the opposite of a long is definitely not a short,
• 23:05
  Speaker 5: and you know sometimes people will suggest it is. I mean,
• 23:08
  Speaker 5: the math is different, risk management is different, like the
• 23:12
  Speaker 5: timing is different, and like I would even say, like
• 23:16
  Speaker 5: successful shorting is about risk management first and stock picking second.
• 23:20
  Speaker 3: And you see that.
• 23:21
  Speaker 5: I mean you've seen that when he you know, nineteen
• 23:23
  Speaker 5: ninety nine when the internet is blowing is you know,
• 23:27
  Speaker 5: go nuts. You see that in the meme stocks. You
• 23:30
  Speaker 5: see that today with quantum computing and some of the
• 23:33
  Speaker 5: AI names. Again it's risk management first, stock picking second.
• 23:38
  Speaker 5: Timing is timing, and sizing is just critically critically important.
• 23:44
  Speaker 2: God, I was gonna say, I have a buddy who
• 23:46
  Speaker 2: used to run ahead fun trading desk, and he always
• 23:49
  Speaker 2: used to say, the opposite of.
• 23:50
  Speaker 4: Love is in hate.
• 23:51
  Speaker 2: The opposite of love is in difference. There you go,
• 23:54
  Speaker 2: and it's the same basic kind And he was talking
• 23:56
  Speaker 2: about stocks, but it's the same sort of thing.
• 24:00
  Speaker 4: They're not mirror images, are.
• 24:01
  Speaker 3: They no, definitely not.
• 24:03
  Speaker 2: Are there any short sellers around? I know, like one
• 24:05
  Speaker 2: thirty thirties have become popular. Yeah, and a lot of
• 24:08
  Speaker 2: quants approach it that way.
• 24:10
  Speaker 5: So maybe there's two, you know, two different aspects of it.
• 24:12
  Speaker 5: So there are successful and good short sellers out there.
• 24:16
  Speaker 5: I'd say there there are you know, less that are
• 24:18
  Speaker 5: dedicated short cells. So from nineteen ninety five to two
• 24:21
  Speaker 5: thousand and eight, we use dedicated short sellers and short
• 24:24
  Speaker 5: bias managers, and it was really interesting and actually a
• 24:27
  Speaker 5: tremendous source of overall alpha. After two thousand and eight,
• 24:31
  Speaker 5: we no longer use dedicated short cells and short bias managers.
• 24:34
  Speaker 5: So I don't follow the space nearly as much. But
• 24:38
  Speaker 5: there are you know, there are certainly good ones within
• 24:40
  Speaker 5: long short equities, you know, maybe you know, I'm sure
• 24:44
  Speaker 5: there is someone a standalone basis.
• 24:45
  Speaker 3: It's a very difficult business model.
• 24:48
  Speaker 5: And one of the interesting things in short sell which
• 24:51
  Speaker 5: I think people don't you know, I don't know, I've
• 24:52
  Speaker 5: never heard it spoken about before. Is you know this
• 24:56
  Speaker 5: again this is dated, but when you looked at it
• 25:00
  Speaker 5: and let's say pre two thousand and eight, where they
• 25:01
  Speaker 5: were probably I don't know, I don't know, there's you know,
• 25:06
  Speaker 5: certainly a few dozen dedicated short cells and short bias managers.
• 25:10
  Speaker 5: I want to say, like forty percent of them women really,
• 25:14
  Speaker 5: which which people don't that's fascinating, you know, so Charlotte Us,
• 25:17
  Speaker 5: Stephanie Ross, Dina Galante, like all these you know, very
• 25:21
  Speaker 5: successful short cells and in an industry that was more
• 25:25
  Speaker 5: male dominated.
• 25:26
  Speaker 3: It always struck me as just really interesting.
• 25:29
  Speaker 5: That in that segment that you know, an overwhelming amount
• 25:33
  Speaker 5: at least on a percentage basis maybe you know, maybe
• 25:36
  Speaker 5: it wasn't great than fifty percent, but like.
• 25:38
  Speaker 2: But compared to the rest it was, it was outsized.
• 25:41
  Speaker 5: You know.
• 25:42
  Speaker 3: It's just it's just interesting.
• 25:43
  Speaker 2: There have been a number of academic studies that say
• 25:47
  Speaker 2: female fund managers outperform their male counterparts by anywhere between
• 25:52
  Speaker 2: fifteen one hundred basis points. And it's always you know,
• 25:56
  Speaker 2: the joke is testosterone poisoning, but it's fast learning to hear.
• 26:00
  Speaker 2: I'm curious as to why female short sellers. Is it
• 26:07
  Speaker 2: an objectivity, is it just a different approach.
• 26:10
  Speaker 4: It's kind of really intriguing.
• 26:12
  Speaker 5: Yeah, well, my wife would probably say it's it's because
• 26:15
  Speaker 5: they don't have the egos of the men right the poison.
• 26:18
  Speaker 2: Yeah, absolutely, if it doesn't work out, they cover it
• 26:21
  Speaker 2: and move on.
• 26:22
  Speaker 5: Yeah, you know, I think there's probably you know, of
• 26:24
  Speaker 5: course there's great examples of both. But you know, again,
• 26:28
  Speaker 5: risk management and discipline is definitely is definitely the key
• 26:32
  Speaker 5: toest successful short selling soles.
• 26:34
  Speaker 3: That has to be something about.
• 26:36
  Speaker 2: Let's let's go with another bullet point that speaks directly
• 26:39
  Speaker 2: to that. I love this one. Avoid casinos. Black isn't
• 26:44
  Speaker 2: on a roll and red isn't due Very few managers
• 26:48
  Speaker 2: add value over time through timing the market, even if
• 26:51
  Speaker 2: it sometimes look like looks like it. Don't reward a
• 26:54
  Speaker 2: manager for gambling. Again, so much insight in two sentences
• 27:00
  Speaker 2: explain how you reach this conclusion, which I just think
• 27:04
  Speaker 2: is brilliant.
• 27:05
  Speaker 5: Yeah. So I give credit to Chris Marshall on the team.
• 27:08
  Speaker 5: I think he's the one that came up with that quote.
• 27:11
  Speaker 5: But it really, again is the observation that the vast
• 27:15
  Speaker 5: majority of managers are are the vast majority of them
• 27:19
  Speaker 5: good stock pickers, but bad portfolio managers, and serve the
• 27:24
  Speaker 5: skills and timing decisions. You know, the vast majority of
• 27:28
  Speaker 5: managers are are subtracting value from the portfolio matag.
• 27:32
  Speaker 2: Really the you're gonna say top quartile, top death style,
• 27:36
  Speaker 2: Where where's the alpha coming from?
• 27:37
  Speaker 5: I mean the alpha is coming from like if if
• 27:39
  Speaker 5: you look at let's put this, if you look at
• 27:42
  Speaker 5: fundamental long short equities that live within the pods and
• 27:45
  Speaker 5: you look at alpha generation with them on you know,
• 27:49
  Speaker 5: turnal leverage or whatever you want to say, and then
• 27:51
  Speaker 5: you look at the standalone long short universe and the
• 27:54
  Speaker 5: alpha that's generated. There there's a disconnect, right, And it's
• 27:58
  Speaker 5: not because they're not good stock pick is The disconnect,
• 28:01
  Speaker 5: I think is because the portfolio management, you know, bad
• 28:06
  Speaker 5: portfolio management or sub poorer portfolio management is subtracting value
• 28:11
  Speaker 5: from their stock picking. So maybe they're adding you know,
• 28:14
  Speaker 5: five percent of out front of stock picking and it's
• 28:16
  Speaker 5: decaying and that by three percent from.
• 28:19
  Speaker 3: From portfolio management decisions. And I just think it's it's difficult.
• 28:23
  Speaker 5: And you know that there's been tremendous factor moves in
• 28:27
  Speaker 5: the last number of years.
• 28:29
  Speaker 3: There's also issues.
• 28:30
  Speaker 5: When you're operating on a standalone basis, Like there's business
• 28:33
  Speaker 5: considerations rightly or wrongly. Right, So if someone's operating in
• 28:36
  Speaker 5: a ten boll and markets are going down and they're
• 28:40
  Speaker 5: you know, in a hole by eight percent. Now are
• 28:42
  Speaker 5: they acting differently from a you know, they should be
• 28:45
  Speaker 5: buying a lot more because the markets are down and
• 28:47
  Speaker 5: things look interesting, But are they?
• 28:49
  Speaker 3: Are they things playing scared?
• 28:51
  Speaker 5: You know? And I think it's again it's not It's
• 28:54
  Speaker 5: not everybody for sure, and there's some that do it well.
• 28:57
  Speaker 5: I just think it is very challenging to do.
• 29:00
  Speaker 2: You know.
• 29:00
  Speaker 5: It's it's much easier to find good stock pickers that
• 29:04
  Speaker 5: are adding alpha than it is for someone to consistently
• 29:08
  Speaker 5: be able to make you know, I don't.
• 29:11
  Speaker 3: Know, contrarying or or correct portfolio magic.
• 29:15
  Speaker 2: Well. See, the old joke is the crowd is right
• 29:17
  Speaker 2: most of the time. So if you're if you're constantly
• 29:20
  Speaker 2: finding the crowd, you're on the wrong side of the trend.
• 29:22
  Speaker 3: Yeah, you go.
• 29:23
  Speaker 2: Last one and again another another brilliant one. Dinosaurs go extinct.
• 29:29
  Speaker 2: Innovation must be constant.
• 29:31
  Speaker 5: Yeah, And this is for you know, this is for
• 29:33
  Speaker 5: hedge funds as well as us. And you know, part
• 29:36
  Speaker 5: of it relates to the managers themselves, part of relates
• 29:39
  Speaker 5: to strategies, and again part of part of it is
• 29:41
  Speaker 5: business model. But when I think about you know, I
• 29:44
  Speaker 5: think about strategies that we used to invest in in
• 29:47
  Speaker 5: nineteen ninety five where you can make a lot of money,
• 29:49
  Speaker 5: like sig merger arbitrage, you know, like merger obtrage again
• 29:52
  Speaker 5: you could you can make double jus at returns. It
• 29:54
  Speaker 5: was less competitive. Plus you need mergers and.
• 29:58
  Speaker 3: Well you have that that helps for sure.
• 30:00
  Speaker 5: But now like the strategy, I mean, there are some
• 30:02
  Speaker 5: very successful people that do it on a standalone basis.
• 30:05
  Speaker 5: Usually they do it with credit or other events. But like,
• 30:08
  Speaker 5: it's a much more difficult place to make money. It's
• 30:10
  Speaker 5: it's become largely commoditized. When it becomes interesting, there's a
• 30:14
  Speaker 5: swarm of money that will kind of go into it.
• 30:16
  Speaker 5: Isn't that true for every which is why you need
• 30:19
  Speaker 5: well eventually, which is why you need to innovate. You
• 30:22
  Speaker 5: need to you know, so let's take you know, machine
• 30:24
  Speaker 5: learning quant right, Like machine learning quant start investing ten
• 30:28
  Speaker 5: years ago, like that was novel and and you know
• 30:32
  Speaker 5: today it's obviously gaining a lot momentum.
• 30:35
  Speaker 3: People understand it more.
• 30:37
  Speaker 5: But you have to kind of continue to reinvent, like
• 30:40
  Speaker 5: from our perspective, need to continue to do look after
• 30:44
  Speaker 5: different strategies, different types of managers to find kind of
• 30:47
  Speaker 5: high alpha. And then from a manager's standpoint again, let's
• 30:50
  Speaker 5: think about quant again. The managers need to read, reinvent themselves,
• 30:56
  Speaker 5: and refine themselves from an alpha standpoint. So like alpha's
• 30:59
  Speaker 5: de kay, you know, yesterday's alpha's tomorrow's beta, right, and
• 31:07
  Speaker 5: you know a lot of what has made them successful
• 31:09
  Speaker 5: from an alpha standpoint is going to decay. So if
• 31:11
  Speaker 5: you don't, you know, maybe it's fifteen to twenty percent
• 31:14
  Speaker 5: is going to decay and be irrelevant each year.
• 31:17
  Speaker 3: So you need to constantly kind of reinvent yourself.
• 31:19
  Speaker 2: So when you start putting together the next thirty over
• 31:22
  Speaker 2: the next thirty years, yesterday's alpha is tomorrow's beta.
• 31:26
  Speaker 4: That's number thirty one for me.
• 31:28
  Speaker 3: There you go, that's the right.
• 31:29
  Speaker 2: So let's talk about what's going on today. Hedge funds
• 31:33
  Speaker 2: have had to adapt to a very challenging era, certainly
• 31:37
  Speaker 2: since the financial crisis. I've heard financial repression and all
• 31:43
  Speaker 2: sorts of reasons for why some funds have been underperforming.
• 31:50
  Speaker 2: Less volatility, increased dispersion, inequity returns.
• 31:55
  Speaker 4: What's going on in the world of hedge funds today.
• 31:58
  Speaker 3: So, yeah, the last.
• 32:00
  Speaker 5: Five years especially have been a great time for hedge funds.
• 32:03
  Speaker 5: So let me, let me, let me maybe frame it.
• 32:06
  Speaker 5: And actually we just came out with a paper called
• 32:08
  Speaker 5: Hedge Funds and the end of the Alpha Winter, And
• 32:11
  Speaker 5: I should do a shout out for Emmy Hodges who
• 32:13
  Speaker 5: did a great job on on putting the piece together.
• 32:17
  Speaker 5: But maybe just taking a step back there, there were
• 32:20
  Speaker 5: we identify kind of three big picture variables that really
• 32:23
  Speaker 5: drive excess return and hedge funds.
• 32:26
  Speaker 3: So one of them is volatility.
• 32:27
  Speaker 5: Everything else you if you want vol higher, that creates dislocation,
• 32:31
  Speaker 5: sloppy trading. You know, it's opportunity. It's the fuel, the
• 32:35
  Speaker 5: fuel of what drives alpha.
• 32:36
  Speaker 1: Right.
• 32:37
  Speaker 5: The second is dispersion, So equity dispersion first and foremost,
• 32:41
  Speaker 5: but why the dispersion as well, so we'll winners and losers,
• 32:45
  Speaker 5: you know, obviously if you're a stock picker, that's hopeful.
• 32:48
  Speaker 5: And the third is is rates being higher than two percent,
• 32:52
  Speaker 5: And higher rates.
• 32:54
  Speaker 3: Help in a number of ways, but both kind of mechanically.
• 32:57
  Speaker 5: If you obviously, if you have floating rate debt's hopeful.
• 33:00
  Speaker 3: High rates.
• 33:01
  Speaker 5: But also again we've seen this like in a period
• 33:04
  Speaker 5: of rising inflation, rates are going higher. That's going to
• 33:06
  Speaker 5: fuel increase volatility, so it's a little circular, right, but
• 33:10
  Speaker 5: elevated volatility or at least normal volatility, elevated dispersion, and
• 33:15
  Speaker 5: rates that are graded than two percent. When you have
• 33:18
  Speaker 5: those three elements, so even two of those three variables
• 33:22
  Speaker 5: kind of as a tailwind rather than a headwind, alpha
• 33:25
  Speaker 5: generation is really really strong. So what we've done is,
• 33:29
  Speaker 5: like we looked at three different periods. The first starting
• 33:34
  Speaker 5: with two thousand ish, kind of a ten year period.
• 33:39
  Speaker 5: You know, I forgot exact percentage, but like a large
• 33:41
  Speaker 5: percentage at a time, two of those three variables were.
• 33:44
  Speaker 3: At your back.
• 33:44
  Speaker 5: They were helpful, and you saw excess return that was
• 33:48
  Speaker 5: very very high.
• 33:49
  Speaker 3: The middle period, which is the alpha winter had tens.
• 33:52
  Speaker 4: Is that what we're talking about essentially.
• 33:54
  Speaker 5: Yeah, two thousand and ten, right, the middle period, this
• 34:00
  Speaker 5: is I think you know nine ish or you know,
• 34:02
  Speaker 5: eight nine year period, which admittedly is quite long, was
• 34:06
  Speaker 5: one that where you saw a lot of central bank intervention,
• 34:09
  Speaker 5: where those variables were generally you.
• 34:11
  Speaker 3: Know, depressed.
• 34:11
  Speaker 5: You could think about twenty seventeen realized well being really low.
• 34:15
  Speaker 5: Obviously we had rates of zero for a chunk of
• 34:18
  Speaker 5: that period as well. That was difficult to generate alpha,
• 34:22
  Speaker 5: not only for hedge fronts but broadly, and that's kind of.
• 34:24
  Speaker 3: The alpha winter.
• 34:25
  Speaker 5: We would suggest that that period is abnormal. And you know,
• 34:30
  Speaker 5: even if rates go down, even if all comes down like,
• 34:32
  Speaker 5: you're not likely to go back to a period that's
• 34:35
  Speaker 5: so dominated by that period of central bank intervention. And
• 34:40
  Speaker 5: you know, most importantly the PostScript to that is, for
• 34:43
  Speaker 5: the last five ish years, you've gone back to kind
• 34:46
  Speaker 5: of the good old days of alpha generation. Right, So
• 34:49
  Speaker 5: the last five years you've had volatility that's you know,
• 34:52
  Speaker 5: generally normal or higher, dispersion that's really high, and rates
• 34:58
  Speaker 5: that are are combinative as well, and excess return in
• 35:02
  Speaker 5: alpha has resumed and looks very much like what it
• 35:06
  Speaker 5: looked like twenty years ago versus that kind of middle
• 35:09
  Speaker 5: alpha winter period.
• 35:10
  Speaker 2: So the past five years have been really interesting. Twenty
• 35:13
  Speaker 2: twenty two obviously, stocks and bonds down double digits. That
• 35:17
  Speaker 2: seems to happen once every forty years or so. Ye,
• 35:20
  Speaker 2: what about twenty twenty five. What sort of role is
• 35:24
  Speaker 2: the globalization and shifting trade policies playing in shaping hedge
• 35:30
  Speaker 2: fund returns?
• 35:30
  Speaker 5: Yeah, I mean, obviously you have a lot of different
• 35:34
  Speaker 5: so you know, it's a lot of strategies, a lot
• 35:35
  Speaker 5: of different substrides. So it's very difficult to talk about
• 35:38
  Speaker 5: the whole hedge fund industry as one thing. But like
• 35:41
  Speaker 5: when I think about excess return, you know, all the
• 35:43
  Speaker 5: things that you mentioned are generally good for hedge funds, right,
• 35:46
  Speaker 5: So in the rest of the world is getting worried
• 35:48
  Speaker 5: like that is again the fuel of.
• 35:50
  Speaker 3: What drives hedge fund returns.
• 35:52
  Speaker 2: Right.
• 35:52
  Speaker 3: So when you see when you see.
• 35:55
  Speaker 5: You know, rising rising voll and, that's that's going to
• 35:58
  Speaker 5: be good from Cisco arbatrage is going to be good
• 36:00
  Speaker 5: generally for balanced stock pickers. It's going to be good
• 36:03
  Speaker 5: for discretion a macro managers. When you see deglobalization and
• 36:07
  Speaker 5: some of the trends that come out of that, whether
• 36:10
  Speaker 5: it's on shuring, whether you see some of the moves
• 36:13
  Speaker 5: in you know, in gold and like that, that's good
• 36:17
  Speaker 5: from a trend file and standpoint.
• 36:19
  Speaker 3: It's good for discrettion a macro managers.
• 36:21
  Speaker 5: When you see Japan right increasing rates the US decreasing rates,
• 36:27
  Speaker 5: that's hopeful because it's two bets to scratch my macro
• 36:30
  Speaker 5: managers the place. It's not just like everyone operating in
• 36:33
  Speaker 5: the same way. So those things are good. I mean
• 36:37
  Speaker 5: generally because it gives people more of a palette to,
• 36:40
  Speaker 5: you know, an alpha palette to which to choose from
• 36:43
  Speaker 5: place more bets, diversify more and also heightened volatility and
• 36:48
  Speaker 5: heightened uncertainty is going to be positive for the vast
• 36:51
  Speaker 5: majority of strategies, especially from an excess return alpha standpoint.
• 36:55
  Speaker 4: So you mentioned Japan.
• 36:56
  Speaker 2: I'm curious what regions around the world are attracted the
• 37:00
  Speaker 2: most new capital. We've seen Europe suddenly catch a bid,
• 37:03
  Speaker 2: you know, obviously, Japan has been doing well, the rest
• 37:06
  Speaker 2: of Asia, in the Middle East, and even the US.
• 37:10
  Speaker 2: You know, what what areas are attracting new capital and
• 37:12
  Speaker 2: what's driving that trend?
• 37:13
  Speaker 5: Yeah, I mean, what are the areas that we're most
• 37:15
  Speaker 5: excited about for sure and have been leaning in for
• 37:17
  Speaker 5: the last three years.
• 37:18
  Speaker 3: Is Japanese corporate governance.
• 37:19
  Speaker 5: Now, interestingly, if you look at dollar flows into Japan,
• 37:23
  Speaker 5: it's actually not I mean, it is positive, but it's
• 37:26
  Speaker 5: kind of modest in a grand scheme of things, which
• 37:28
  Speaker 5: kind of shocks me honestly, and like, I don't I
• 37:31
  Speaker 5: don't mind because we're playing events first and foremost, but
• 37:35
  Speaker 5: you really haven't seen that many dollar flows in which,
• 37:37
  Speaker 5: again is unusual given like everyone in the world and
• 37:40
  Speaker 5: in every way, shape or form, is probably underway Japan
• 37:43
  Speaker 5: and it's and it's obviously inexpensive, but most importantly you
• 37:46
  Speaker 5: have a material, dramatic catalyst that's driving value through through Japan.
• 37:53
  Speaker 3: And yeah, we're excited about it.
• 37:54
  Speaker 5: I mean, corporate corporate governance has been talked about in
• 37:57
  Speaker 5: Japan for decades.
• 37:58
  Speaker 3: The reality is until you.
• 38:01
  Speaker 5: Know, Abe had his third Arrow and you've you know,
• 38:04
  Speaker 5: which really set off a number of regulatory and policy
• 38:07
  Speaker 5: changes and importantly, like cross shareholder relationships started to unwind,
• 38:14
  Speaker 5: that really set the stage for increased corporate governance. So
• 38:17
  Speaker 5: it's you know, we we again, we've been there for
• 38:19
  Speaker 5: three years. I think we're maybe halfway through what needs
• 38:23
  Speaker 5: to be done and and there's still a very very
• 38:26
  Speaker 5: fertile opportunity set.
• 38:27
  Speaker 3: So that's that. That's one.
• 38:30
  Speaker 5: The other thing I would point out is just the
• 38:32
  Speaker 5: Middle East. Now, obviously, you know, it's not it's not
• 38:35
  Speaker 5: to say that there's a lot of money from an
• 38:37
  Speaker 5: investment standpoint going into the Middle East, but it just
• 38:41
  Speaker 5: come back from a you know, a week long trip
• 38:44
  Speaker 5: in the Middle East and you know, got there maybe
• 38:46
  Speaker 5: eighteen months prior, and it's really exciting what's going on.
• 38:49
  Speaker 5: I mean, clearly there's a lot of interest from an
• 38:51
  Speaker 5: investment standpoint in hedge funds and alternatives in the Middle East.
• 38:54
  Speaker 2: There's no question about is this because all the sovereign
• 38:56
  Speaker 2: wealth funds located in Pata and Arab Emirates and down
• 39:03
  Speaker 2: the list.
• 39:03
  Speaker 5: It's coming it's certainly coming from from them, but it's
• 39:06
  Speaker 5: brought it's broader as well. I mean, it's it's family
• 39:09
  Speaker 5: office money in addition to the sovereigns, and they're interested
• 39:13
  Speaker 5: in alternatives or interested in hedge funds, local.
• 39:16
  Speaker 2: Family office or europe and American family office in the middle.
• 39:20
  Speaker 3: All of the above, you know.
• 39:21
  Speaker 5: I mean there's also been rich is a maybe to
• 39:24
  Speaker 5: tie together one other part. I mean, there's also been
• 39:26
  Speaker 5: a lot of movement of people of hedge funds setting
• 39:29
  Speaker 5: up businesses in Dubai and Abu Dhabi and people moving
• 39:32
  Speaker 5: there with wealth and in turn they become you know,
• 39:35
  Speaker 5: potential investors in alternatives. So that's definitely a prominent story
• 39:40
  Speaker 5: as well, the number of people that are setting up
• 39:42
  Speaker 5: in the region or open up offices.
• 39:45
  Speaker 2: So when we used to talk about New York, London, Tokyo,
• 39:49
  Speaker 2: Hong Kong as centers.
• 39:51
  Speaker 4: Do you put Abu, Dhabi or Dubai in that list as.
• 39:54
  Speaker 5: Actually it's you know, for the larger for the larger
• 39:57
  Speaker 5: hedge funds, for sure, I think it's becoming you know,
• 40:00
  Speaker 5: the vast majority of them or.
• 40:02
  Speaker 3: Opening offices or have offices in regions.
• 40:05
  Speaker 5: So it is definitely an area that is attracting a
• 40:08
  Speaker 5: lot of a lot of interest. And then from an
• 40:11
  Speaker 5: investment standpoint, you know, again it's a much smaller market,
• 40:14
  Speaker 5: but there I think that you know, the policy changes
• 40:18
  Speaker 5: and regulatory changes which allow foreign ownership and a derivative
• 40:22
  Speaker 5: market starting is encouraging as well. It's early days, and
• 40:25
  Speaker 5: again it's not you know, the breadth and depth of
• 40:28
  Speaker 5: the market still needs to improve, but again it's exciting
• 40:31
  Speaker 5: for that standpoint as well.
• 40:32
  Speaker 4: Really kind of intriguing.
• 40:34
  Speaker 2: What are hedge funds thinking about with assets like crypto
• 40:38
  Speaker 2: or gold? How are they dealing with What are some
• 40:41
  Speaker 2: of the biggest winners past couple of years.
• 40:44
  Speaker 5: So you've seen I mean on golden and pressures, but
• 40:47
  Speaker 5: I mean discretion macro managers have you know, many have
• 40:50
  Speaker 5: had that bet on It's been a very successful bet
• 40:53
  Speaker 5: and theme given you.
• 40:55
  Speaker 3: Know, concerns on inflation and debt levels, so you know,
• 41:00
  Speaker 3: you can you continue to see that that theme in
• 41:03
  Speaker 3: people's portfolios. Crypto is a little more you know, interesting
• 41:07
  Speaker 3: and specific.
• 41:08
  Speaker 5: Some managers, again mostly discretion and macro managers have invested
• 41:12
  Speaker 5: in crypto mostly you know, mostly big bigcoin or eth
• 41:16
  Speaker 5: more from that inflationary, you know, debt standpoint, although others
• 41:22
  Speaker 5: have from other standpoint as well, from a you know,
• 41:24
  Speaker 5: from like a trend Fhong standpoint on futures.
• 41:27
  Speaker 3: People have done it a bid on statistical arbitrary side.
• 41:31
  Speaker 5: Some people play from like a cash future standpoint, from
• 41:34
  Speaker 5: an ORB standpoint as well, but it's still small, at
• 41:38
  Speaker 5: least let's say, the traditional hedge funds investing in crypto.
• 41:41
  Speaker 3: It's still small.
• 41:43
  Speaker 5: That being said, obviously you have a large number of
• 41:45
  Speaker 5: like dedicated crypto funds that are trading both directionally as
• 41:50
  Speaker 5: well as as as well as in the ORB side
• 41:52
  Speaker 5: as well.
• 41:52
  Speaker 2: Coming up, we continue our conversation with Paul Zumo, chief
• 41:55
  Speaker 2: investment officer at JP Morgan Alternative Asset Management, just the
• 42:00
  Speaker 2: state of hedge fund investing today.
• 42:03
  Speaker 4: I'm Barry Ridults.
• 42:04
  Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
• 42:23
  Speaker 2: Barry Redults. You're listening to Masters in Business on Bloomberg Radio.
• 42:27
  Speaker 2: My extra special guest today is Paul Zumo. He is
• 42:30
  Speaker 2: Chief investment officer at JP Morgan, Alternative Asset Manager, helping
• 42:35
  Speaker 2: to oversee thirty five billion dollars in external hedge fund assets.
• 42:40
  Speaker 2: He's also chair of the Alternative Asset Management Investment Committee.
• 42:45
  Speaker 2: He co founded the group back in nineteen ninety four.
• 42:48
  Speaker 2: So what styles and hedge fund worlds are doing well
• 42:51
  Speaker 2: in twenty twenty five. I've noticed over the past few
• 42:54
  Speaker 2: years emerging managers have made some consistent gains. Quants have
• 42:59
  Speaker 2: done well well, some of the multi strats have done well.
• 43:01
  Speaker 2: What what are you seeing in in the rest of
• 43:04
  Speaker 2: the field, some of which, even in this high volatility,
• 43:08
  Speaker 2: high alpha market, have been struggling.
• 43:11
  Speaker 5: Yeah, I'd say so we we look at pivotal path
• 43:14
  Speaker 5: as you know, their industry's first and foremost. I think
• 43:17
  Speaker 5: it's they're the they're very very good quality industries and
• 43:20
  Speaker 5: I think paints a very good picture.
• 43:22
  Speaker 3: And that's kind of what I have in mind.
• 43:24
  Speaker 5: So like when you when you look at it, you'd
• 43:26
  Speaker 5: find that most strategies and substrategies.
• 43:29
  Speaker 3: Have done pretty well this year in the grand scheme
• 43:30
  Speaker 3: of things.
• 43:31
  Speaker 2: You know.
• 43:31
  Speaker 5: The one exception to that is is ctias, which have struggled.
• 43:35
  Speaker 4: Even with gold running away and.
• 43:38
  Speaker 5: CTAs got heard in in April where they were very
• 43:42
  Speaker 5: very long equities and yet you know, Liberation Day and
• 43:46
  Speaker 5: markets correct a lot. So you saw you know a
• 43:49
  Speaker 5: bit of a retrenchment in CTIA's performance in April that
• 43:53
  Speaker 5: get hit pretty hard, and they've been trying to like
• 43:56
  Speaker 5: piece it together and they and they have the last
• 43:58
  Speaker 5: couple of months have been have been stronger.
• 44:01
  Speaker 2: To be fair, it's very challenging to follow a trend
• 44:04
  Speaker 2: when the trends is dependent on the whims.
• 44:07
  Speaker 4: Of one person.
• 44:08
  Speaker 5: That that is true for you, right, doesn't show up
• 44:11
  Speaker 5: what the good news is, most other strategies actually are
• 44:14
  Speaker 5: doing quite well. Right, So if you look at across
• 44:16
  Speaker 5: relative value, as you mentioned quant the multi strip pause,
• 44:19
  Speaker 5: convertible bond arbitrage has been good with strong issuance discretion.
• 44:25
  Speaker 3: Macro as we talked about some of the themes.
• 44:27
  Speaker 5: Whether it's you know, whether it's gold or you know
• 44:30
  Speaker 5: or rates themes has done well as well. You might say, okay, well,
• 44:35
  Speaker 5: the markets are up but it's not just beta, it's alpha.
• 44:38
  Speaker 5: So a couple of people have come up with you know,
• 44:41
  Speaker 5: if you if you look at the alpha generation this year,
• 44:43
  Speaker 5: it's about five percent five and a half percent in
• 44:45
  Speaker 5: long short which is quite healthy. And even you know,
• 44:49
  Speaker 5: Merger Arbertrage events done well. You know, credit's done fine.
• 44:52
  Speaker 5: So I'd say it's been a good year overall, with
• 44:55
  Speaker 5: most strategies generating you know, strong kind of single mid
• 45:00
  Speaker 5: single digit to high single digit returns or high single
• 45:03
  Speaker 5: digit returns, and you know, overall, definitely good year for
• 45:06
  Speaker 5: the industry.
• 45:07
  Speaker 2: So we've seen the rise of multi strategy managers over
• 45:11
  Speaker 2: the past few years and there have been a number
• 45:13
  Speaker 2: of very large multistrats and uh it seems to be
• 45:17
  Speaker 2: a direction a lot of funds are heading. How has
• 45:20
  Speaker 2: that changed competition within the industry or is there more
• 45:24
  Speaker 2: collaboration within a multi strategy shop amongst all the different pods.
• 45:29
  Speaker 4: How is that playing out?
• 45:30
  Speaker 3: Uh?
• 45:31
  Speaker 5: Well, I think collaboration amongst themselves, I think I think
• 45:35
  Speaker 5: there's a proble.
• 45:35
  Speaker 2: I'm assuming they're not competing, They're not collaborating with the
• 45:38
  Speaker 2: fund across the street.
• 45:40
  Speaker 4: It's all internal, right.
• 45:42
  Speaker 3: I'm sorry.
• 45:42
  Speaker 5: Collaboration for the pods pots or within the pods.
• 45:46
  Speaker 2: Collaboration within a multi strat from Hey, here's the macro,
• 45:50
  Speaker 2: here's the long short, here's the quant group, here's the
• 45:54
  Speaker 2: trend group.
• 45:55
  Speaker 5: What are we are we seeing that cross polinization across
• 45:58
  Speaker 5: across teams? I think it's depends in the model, you know,
• 46:01
  Speaker 5: like if you if you look at the pods. Obviously
• 46:03
  Speaker 5: there's some prominent ones out there. They differ materially from
• 46:06
  Speaker 5: the strategies that they pursue, They differ materially from the
• 46:09
  Speaker 5: culture that they pursue. They know, they just different. The
• 46:14
  Speaker 5: risk management approaches is different. So it really depends. There
• 46:19
  Speaker 5: are some managers where you know, whether they are benefiting
• 46:23
  Speaker 5: from maybe cross polarization, you know, across teams or a
• 46:29
  Speaker 5: cent a book that's maybe drawing upon best ideas. So,
• 46:33
  Speaker 5: but it's really going to differ kind of pod to
• 46:35
  Speaker 5: pod based on the style and how they how they operate.
• 46:38
  Speaker 4: Fair enough, let's talk about risk management.
• 46:42
  Speaker 2: There were obviously some lessons learned this year in April,
• 46:45
  Speaker 2: and plenty of lessons learned in twenty twenty two. What
• 46:48
  Speaker 2: do you think are going to be the most impactful
• 46:50
  Speaker 2: lessons for managers looking forward?
• 46:54
  Speaker 5: Looking forward, I mean things you're worried about today is
• 46:57
  Speaker 5: just complacency, you know. I mean, mark time you have
• 47:00
  Speaker 5: markets going up for you know, for for a while, inevitably,
• 47:04
  Speaker 5: complacency develops in some way, shape or form. So we're
• 47:07
  Speaker 5: certainly being you know, front footed and having discussions whereas
• 47:12
  Speaker 5: that and whether it's credit or equity markets, and like
• 47:14
  Speaker 5: how do we or or specific areas with.
• 47:17
  Speaker 3: Hedge fronts and how do we guard against that a
• 47:18
  Speaker 3: little bit.
• 47:19
  Speaker 5: But I think some of the events last year, like
• 47:21
  Speaker 5: we're talking about, you know, Liberation Day or maybe a
• 47:23
  Speaker 5: deep Seek event and some managers being you know.
• 47:26
  Speaker 2: God was Deep Seek twenty twenty five, It seems like
• 47:29
  Speaker 2: decade years now, maybe it was, you know, it was
• 47:32
  Speaker 2: January this year, and then everybody's minds.
• 47:36
  Speaker 5: I mean, I think it really underscores a couple of things.
• 47:39
  Speaker 5: I mean one, risk management first and foremost right, And
• 47:42
  Speaker 5: it's certainly, you know, certainly on Liberation Day, I think
• 47:45
  Speaker 5: a lot of people were caught off balance in their
• 47:49
  Speaker 5: books and then again oftentimes kind of retrench after that
• 47:52
  Speaker 5: lock and losses. It's not a great recipe. So like
• 47:56
  Speaker 5: sizing positions and sizing risk across areas you know, in
• 48:01
  Speaker 5: which people investor are obviously always critically important. And then
• 48:04
  Speaker 5: on deep see a cliok ai is extremely exciting. It
• 48:08
  Speaker 5: creates tremendous opportunities. But going back to what we're saying
• 48:11
  Speaker 5: about short selling before, it also creates tremendous risk and
• 48:15
  Speaker 5: you know, risk of just being one sided bet but
• 48:17
  Speaker 5: also a risk of again operating in a long short
• 48:20
  Speaker 5: fashion and getting thinking about like offsetting risks and basis
• 48:25
  Speaker 5: and sizing so thoi things are critically important.
• 48:31
  Speaker 2: So, speaking of AI, I just overheard pull tutor Jones
• 48:36
  Speaker 2: speaking to somebody on Bloomberg saying, you know, maybe AI
• 48:42
  Speaker 2: might be developing into a small bubble, but it's not
• 48:45
  Speaker 2: a giant headache. How are you looking at all this
• 48:48
  Speaker 2: bubble chatter, high valuation, concentrated markets. This seems to be
• 48:54
  Speaker 2: part of the wall of worry that markets are climbing.
• 48:58
  Speaker 4: What's your perspective on this?
• 48:59
  Speaker 3: I mean, Paul said it, it must be right, so you
• 49:02
  Speaker 3: could do worse. Yeah, that's right, that's right.
• 49:07
  Speaker 5: I mean, look, is it a bubbles And obviously it's real,
• 49:11
  Speaker 5: it's going to be impactful, it's you know.
• 49:13
  Speaker 3: It's going to be enormously important.
• 49:14
  Speaker 5: It's going to reshape how we do so many, so
• 49:17
  Speaker 5: many things.
• 49:18
  Speaker 3: For sure?
• 49:19
  Speaker 5: Is there excess in certain areas related to it? There
• 49:22
  Speaker 5: has to be for sure. Again, I think it comes
• 49:26
  Speaker 5: down to risk management first and form. You know, assuming
• 49:29
  Speaker 5: you want to set up a balanced book, it comes
• 49:30
  Speaker 5: down to risk management first and foremost, and if you don't,
• 49:34
  Speaker 5: if you just want to play it from a thematic standpoint, Again,
• 49:36
  Speaker 5: it also comes down to risk managers from a sizing standpoint.
• 49:39
  Speaker 5: You need to size it to be able to handle
• 49:41
  Speaker 5: the inherent volatility of it.
• 49:44
  Speaker 3: But is it rich, Well, of course it's rich. Is
• 49:47
  Speaker 3: it a bubble? I don't know.
• 49:49
  Speaker 5: I'm not the best one to say, but it certainly
• 49:52
  Speaker 5: is real.
• 49:52
  Speaker 3: It's certainly going to revolutionize and change our lives.
• 49:56
  Speaker 2: Every time someone asked me about it, I like to
• 49:58
  Speaker 2: remind them Greenspan's irrational, a zuberant speech was ninety six.
• 50:03
  Speaker 2: You still have a long way to go before that
• 50:06
  Speaker 2: really became a bubble.
• 50:07
  Speaker 5: But also, look look at you know, we're talking about
• 50:10
  Speaker 5: you know, dot com, right, So I mean as a
• 50:13
  Speaker 5: little bit of your you know, your model and your playbook, right,
• 50:17
  Speaker 5: So I mean obviously Amazon came out of that, but
• 50:19
  Speaker 5: there's a lot you know, pets dot Com, you know,
• 50:22
  Speaker 5: dating myself, but you know, and.
• 50:24
  Speaker 2: I have Star Network on my desk.
• 50:28
  Speaker 5: You know, like, really it's gonna be when, it's gonna
• 50:30
  Speaker 5: be winners and losers and and it is extremely important,
• 50:34
  Speaker 5: extremely powerful, but it's not gonna lift all boats at
• 50:38
  Speaker 5: all times.
• 50:38
  Speaker 3: So you need to be selective and you need to
• 50:40
  Speaker 3: size it right.
• 50:41
  Speaker 2: Huh makes great sense. Last question before we get to
• 50:44
  Speaker 2: our favorite questions. What do you think hedge fund managers
• 50:48
  Speaker 2: investors are not talking about.
• 50:51
  Speaker 4: But really should be.
• 50:52
  Speaker 2: What what topics assets policies are getting overlooked but shouldn't.
• 50:59
  Speaker 5: Well, I mentioned compcency a little bit just because where
• 51:01
  Speaker 5: we are in a cycle. But maybe if it's okay
• 51:03
  Speaker 5: taking a different direction to say like it's more of
• 51:06
  Speaker 5: a misnomer about the hedge fund industry, which is if
• 51:09
  Speaker 5: that's okay, it's a little little different. So like one
• 51:13
  Speaker 5: thing I would say, that's that's frustrating. I think a
• 51:15
  Speaker 5: lot of people get wrong is they look at the
• 51:17
  Speaker 5: hedge fund industry as an asset class. And what I
• 51:20
  Speaker 5: mean by that is if you have an asset class,
• 51:23
  Speaker 5: then you know, everything in an asset class should be
• 51:26
  Speaker 5: more or less you know, highly correlated to each other.
• 51:29
  Speaker 3: Right, it's the same. It's the same thing.
• 51:31
  Speaker 5: And if you take the ten thousand or so hedge
• 51:33
  Speaker 5: funds that are out there, the correlation across correlation pairwise
• 51:37
  Speaker 5: correlation is is something like.
• 51:38
  Speaker 3: Point point two or point twenty.
• 51:40
  Speaker 4: Five near one.
• 51:41
  Speaker 5: It's nowhere near one, right, So what you really have
• 51:44
  Speaker 5: is a collection of strategies, a collection of substrategies. Importantly,
• 51:48
  Speaker 5: the characteristics of those strategies are just vastly different from
• 51:52
  Speaker 5: each other in many cases, and the way you use
• 51:56
  Speaker 5: them and a portfolio.
• 51:57
  Speaker 3: Is vastly different.
• 51:58
  Speaker 5: So when people think about the hedgephone industry and they're
• 52:02
  Speaker 5: looking at like a hedge fund benchmark, which is or
• 52:05
  Speaker 5: you know, like ten thousand funds cobbled together, oftentimes they
• 52:11
  Speaker 5: look at it and they're like, well, I don't know
• 52:12
  Speaker 5: what to make of this.
• 52:13
  Speaker 3: It has an.
• 52:13
  Speaker 5: Okay return and an okay volatility with okay characteristics. Maybe
• 52:18
  Speaker 5: I don't need it. And it's the right conclusion to
• 52:21
  Speaker 5: the wrong answer, right and and oh, I'm sorry, the
• 52:26
  Speaker 5: right conclusion for the wrong question, right, And like again,
• 52:31
  Speaker 5: the observation is correct, But really the question is can
• 52:34
  Speaker 5: I look at subsets of this industry that are deeply valuable,
• 52:39
  Speaker 5: rather than just looking at the whole thing as a whole.
• 52:42
  Speaker 5: And we would strongly suggest that if people are just
• 52:45
  Speaker 5: looking at the aggregate industry, they're missing the point that
• 52:50
  Speaker 5: beneath that there are strategies and substrategies and certainly managers
• 52:56
  Speaker 5: that are add an enormous, enormous value that's being overlooked by,
• 53:00
  Speaker 5: you know, someone who's plugging the average into an optimizer.
• 53:04
  Speaker 2: I'm so glad you said that, because over the course
• 53:07
  Speaker 2: of twenty five thirty years, I've watched the hedge fund
• 53:11
  Speaker 2: industry change so dramatically, and my own views on it
• 53:15
  Speaker 2: have evolved. It's very easy to look at a broad
• 53:18
  Speaker 2: index and say, gee, this is expensive and doesn't generate
• 53:22
  Speaker 2: great returns. But again, depending on what you want to
• 53:25
  Speaker 2: draw the line, top quartile, top decile, when you look
• 53:28
  Speaker 2: at the top performing funds, there is genuine alpha generation.
• 53:32
  Speaker 3: Yeah, for sure.
• 53:33
  Speaker 5: And interestingly, like if we would have met, you know,
• 53:36
  Speaker 5: twenty five years ago, fifteen years ago, like I would
• 53:38
  Speaker 5: have said the same thing is that, Like I'm not
• 53:41
  Speaker 5: here to say the hedge fund industry as a whole
• 53:45
  Speaker 5: is such a tremendous value proposition Like that was never
• 53:49
  Speaker 5: the thesis.
• 53:50
  Speaker 2: You know.
• 53:50
  Speaker 3: The thesis is more.
• 53:52
  Speaker 5: Are there one hundred or two hundred managers out there
• 53:54
  Speaker 5: that are adding enormous value? Yes, and you know ken
• 53:59
  Speaker 5: through great due diligence. I can myself and other people
• 54:03
  Speaker 5: find them if they if they spend a time and
• 54:05
  Speaker 5: do a great job.
• 54:05
  Speaker 3: Yes.
• 54:06
  Speaker 5: And is that tremendously value in portfolios, yes, you know,
• 54:09
  Speaker 5: but it's not about the hedge fund industry as a whole,
• 54:14
  Speaker 5: and the averages are gonna knock the lights out.
• 54:18
  Speaker 2: Jim Jim Chanos has this quota of He says, you know,
• 54:23
  Speaker 2: when he started out in the late eighties early nineties,
• 54:26
  Speaker 2: there were a couple of hundred hedge funds and the
• 54:28
  Speaker 2: all generated alpha. Today there's eleven thousand hedge funds and
• 54:31
  Speaker 2: it's the same two hundred hedge funds generating alpha. Which
• 54:34
  Speaker 2: do you know, there's a lot of truth to Sturgeon's law.
• 54:37
  Speaker 2: There's a lot of truth to ninety percent of everything's
• 54:40
  Speaker 2: not great.
• 54:41
  Speaker 3: Yeah, yeah, I don't know if it's the same two hundred.
• 54:44
  Speaker 2: But he said the same number, not necessarily the same funds.
• 54:48
  Speaker 5: They come and go, yeah, Look, it's it's an industry
• 54:51
  Speaker 5: and an asset class and a fee structure that attracts
• 54:56
  Speaker 5: a lot of people. But and you know, and and
• 55:00
  Speaker 5: many of them deserve that fee structure, and many of
• 55:02
  Speaker 5: them are are great. But yeah, you know, obviously you
• 55:06
  Speaker 5: need to be selective.
• 55:08
  Speaker 4: Absolutely.
• 55:08
  Speaker 2: All right, let's jump to our favorite questions that we
• 55:11
  Speaker 2: ask all of our guests, starting with tell us about
• 55:14
  Speaker 2: your mentors who helped shape your career.
• 55:18
  Speaker 3: Sure, I think so to to come to mind.
• 55:21
  Speaker 5: I mean, if I go back, really, you know, back
• 55:24
  Speaker 5: to high school, and I'm forgetting I'm forgetting his name.
• 55:27
  Speaker 3: It's my wrestling coach.
• 55:28
  Speaker 4: I swear to god, I knew you to say that.
• 55:30
  Speaker 5: Is my Yes, my wrestling coach who was my economics professor.
• 55:34
  Speaker 5: And this is when I first started getting interested in
• 55:38
  Speaker 5: in investments and started reading you know, uh, I don't know,
• 55:44
  Speaker 5: some of like the classic books from from way way back.
• 55:47
  Speaker 5: When one I'm in street stockture, you know, and he
• 55:52
  Speaker 5: was the one I kind of encourage and we actually
• 55:53
  Speaker 5: played this game at the end of the year, which
• 55:55
  Speaker 5: was like a stock market game, and I actually found
• 55:57
  Speaker 5: an arbitrage and we've made more money than anyone had
• 56:00
  Speaker 5: ever made, you know, And he's like, you know, that's
• 56:03
  Speaker 5: kind of like real life finance, you should you know,
• 56:05
  Speaker 5: if it's that interesting, you should exploit. So I credit
• 56:09
  Speaker 5: him for kind of pushing helping push me in that direction.
• 56:13
  Speaker 5: And then from a career standpoint, I mentioned Joel Katzman,
• 56:17
  Speaker 5: who you know, hired me to you know, start to
• 56:20
  Speaker 5: visit with him, and yeah, here was really instrumental.
• 56:22
  Speaker 3: I mean one of the things.
• 56:24
  Speaker 5: I don't think we spend as much time, but like,
• 56:27
  Speaker 5: skepticism is really important. I'm a deeply skeptical person. I
• 56:31
  Speaker 5: think it helps you navigate things. It's one of the
• 56:33
  Speaker 5: pearls of wisdom.
• 56:35
  Speaker 2: Be a skeptic approach due diligence from the perspective where
• 56:38
  Speaker 2: does this break?
• 56:39
  Speaker 3: What does it break?
• 56:40
  Speaker 5: Yeah, and I mean it's like approaching due diligence. I
• 56:43
  Speaker 5: give an analogy of like thinking about a balance sheet
• 56:45
  Speaker 5: where people again behavioral biases you. You you know, too
• 56:50
  Speaker 5: many people say, approach it from the asset side?
• 56:52
  Speaker 3: How much can I make? What's the story?
• 56:55
  Speaker 5: You need to approach it from the liability side, like
• 56:57
  Speaker 5: what can go wrong with this manager?
• 56:58
  Speaker 3: What can go wrong with the strategy?
• 57:00
  Speaker 5: As a break, and then turn to the assets side
• 57:02
  Speaker 5: and effectively say, am I getting compensated for that, right,
• 57:06
  Speaker 5: and you could teach people some of that, but part
• 57:09
  Speaker 5: of it has to be innate as well, like you
• 57:11
  Speaker 5: need to be innate skeptic maybe so any case, Joel.
• 57:15
  Speaker 5: You know, Joel, I think shared my skepticism for sure.
• 57:18
  Speaker 5: He certainly taught me a lot about the business and
• 57:21
  Speaker 5: you know, running a business.
• 57:23
  Speaker 3: So yeah, you know, props of Joel. Let's talk about books.
• 57:28
  Speaker 4: Since you mentioned some books, what are some of your favorites.
• 57:30
  Speaker 4: What are you reading currently?
• 57:32
  Speaker 3: Yeah? So books.
• 57:33
  Speaker 5: So I have a so we investment around one hundred
• 57:35
  Speaker 5: and twenty hedge funds, and that's what you read. Vast
• 57:38
  Speaker 5: majority of what I'm reading is their letters, their research,
• 57:42
  Speaker 5: you know, my my analyst research, and that's the very
• 57:46
  Speaker 5: you know, it's a vast majority. And then like Michael
• 57:48
  Speaker 5: Simblest does great work, really really good work. So I
• 57:53
  Speaker 5: have to say that's consuming the vast majority of my time. Last,
• 57:56
  Speaker 5: the only thing that stands out there is a book.
• 58:00
  Speaker 3: What is it?
• 58:01
  Speaker 5: Speak like Churchill and Stand like Lincoln that my old
• 58:04
  Speaker 5: boss Jamie Kramer, gave it to me. It's about public speaking,
• 58:08
  Speaker 5: which actually really really good, andsightful like easy easy read books.
• 58:11
  Speaker 2: Speak like Churchill stand like Lincoln.
• 58:14
  Speaker 5: Yeah, and it's a real, real easy read to you know,
• 58:17
  Speaker 5: just some like reinforcing some good lessons of public speaking.
• 58:24
  Speaker 2: You mentioned Michael Semblist, so I consume his regular output.
• 58:31
  Speaker 2: And then the JP Morgan Quarterly Guide to the Markets
• 58:36
  Speaker 2: is just a spectacular, spectacular resource, really really fine.
• 58:41
  Speaker 4: It amazing. Let's let's talk about what's keeping you entertained
• 58:44
  Speaker 4: these days.
• 58:44
  Speaker 2: Are you watching or listening to anything well interesting like Netflix?
• 58:49
  Speaker 3: And you know, so, uh yeah, well I.
• 58:53
  Speaker 5: About five and a half year old, and so she's
• 58:56
  Speaker 5: she's dominating the Netflix account.
• 59:00
  Speaker 3: Usually it's a K pop Demon Hunters.
• 59:03
  Speaker 4: That's the number one thing like that.
• 59:05
  Speaker 3: That's kind of said, I don't know if you know
• 59:06
  Speaker 3: what that is.
• 59:07
  Speaker 2: Every time I'm searching for anything, I put it on
• 59:11
  Speaker 2: for thirty seconds and my wife is.
• 59:13
  Speaker 4: What are we watching? Can you take this?
• 59:14
  Speaker 5: Yeah? So, unfortunately it's it's a little it's it's a
• 59:18
  Speaker 5: little too much of K pop Demon Hunters. But you know,
• 59:21
  Speaker 5: away from away from work, I like wine, So it's
• 59:26
  Speaker 5: probably some podcasts or or related to wine, just to
• 59:31
  Speaker 5: when I'm not reading the you know the right, you know,
• 59:34
  Speaker 5: it's so, but there's a there's a great one called
• 59:36
  Speaker 5: Wine with Jimmy, which is uh wine with if you
• 59:40
  Speaker 5: want to do a deep dive on Yeah.
• 59:42
  Speaker 2: Yeah, I literally just bought the I forgot the name
• 59:48
  Speaker 2: of it. But during Amazon Prime it was on my
• 59:51
  Speaker 2: wish list and it was like ninety eight bucks and
• 59:54
  Speaker 2: it showed up for thirty books, the thirty bucks the
• 59:57
  Speaker 2: atlass gund.
• 59:59
  Speaker 4: Oh yeah, win on the world.
• 1:00:00
  Speaker 3: That's a fat book.
• 1:00:02
  Speaker 2: Fat And I'm like, all right, that's absolutely worth having
• 1:00:04
  Speaker 2: on the on the dry bar.
• 1:00:06
  Speaker 3: Now you have to read it. You look, you look
• 1:00:08
  Speaker 3: look good, look smart.
• 1:00:10
  Speaker 2: It's more of a reference guy. But give us some
• 1:00:13
  Speaker 2: of your favorite wines. If you're not gonna give us
• 1:00:16
  Speaker 2: more books, give us some wines.
• 1:00:17
  Speaker 4: What do you what do you drink?
• 1:00:18
  Speaker 2: What do you like? Well?
• 1:00:19
  Speaker 3: This is I mean, I like I like red more
• 1:00:22
  Speaker 3: than white.
• 1:00:22
  Speaker 5: I like, you know, a I don't know, like a
• 1:00:25
  Speaker 5: barollo so a nice tannic red red wine. So I
• 1:00:32
  Speaker 5: you know, I drink a Barolos temporaneo.
• 1:00:35
  Speaker 2: So we're always looking for a house wine, just like
• 1:00:39
  Speaker 2: something reasonable that you could pop open anytime.
• 1:00:42
  Speaker 4: This this.
• 1:00:45
  Speaker 2: Entray Natali Virgo is about a twenty dollars bottle and
• 1:00:48
  Speaker 2: it drinks like a fifty dollars.
• 1:00:50
  Speaker 3: Nice finding those values. Where's it from Italy? Okay?
• 1:00:54
  Speaker 4: But they only like it's a small winery.
• 1:00:57
  Speaker 2: They make, you know, a few thousand cases you can't
• 1:01:00
  Speaker 2: get like I'll get a case and that's it.
• 1:01:02
  Speaker 4: It's you're done till next year.
• 1:01:04
  Speaker 3: Well we'll swap great value wines.
• 1:01:06
  Speaker 2: After there was another one called Xanthos that was a
• 1:01:11
  Speaker 2: maritage X A. N. T.
• 1:01:12
  Speaker 3: Joe s.
• 1:01:13
  Speaker 2: And the twenty seventeen was spectacular. You can't find any Yeah,
• 1:01:17
  Speaker 2: it was like a fifteen dollars bottle of wine. Drink
• 1:01:19
  Speaker 2: like a fifty dollars bottle of wine. I don't feel
• 1:01:22
  Speaker 2: like I have a palette to go much beyond that.
• 1:01:25
  Speaker 2: Like all right, I appreciate.
• 1:01:27
  Speaker 5: Listen if you could find twenty dollars bottles of wine
• 1:01:29
  Speaker 5: and drink like sixty dollars wine.
• 1:01:30
  Speaker 3: But you know, my I'm forgetting a name. But I
• 1:01:33
  Speaker 3: have a sanchoves like that, which I founded, one of
• 1:01:36
  Speaker 3: the ones. You know, you go to these like.
• 1:01:38
  Speaker 5: Wine tasting events, but you go around and you could
• 1:01:41
  Speaker 5: taste wine. A bunch of it could be blind, but
• 1:01:44
  Speaker 5: this is like a games suckling one. You taste all
• 1:01:47
  Speaker 5: different types of wines and.
• 1:01:49
  Speaker 3: Then you you know, you I don't know.
• 1:01:51
  Speaker 5: For me, I take pictures and the ones I like,
• 1:01:53
  Speaker 5: and then you go back and then you look it
• 1:01:55
  Speaker 5: up and some of them are like one hundred and
• 1:01:56
  Speaker 5: fifty dollars and you're like, oh, I didn't find anything.
• 1:01:58
  Speaker 5: And then you you know, you see one that's like
• 1:02:00
  Speaker 5: twenty bucks, and you're like, all right, maybe I maybe
• 1:02:02
  Speaker 5: I found the jewel.
• 1:02:04
  Speaker 2: Right, it's easy to get disappointed in one hundred and
• 1:02:07
  Speaker 2: fifty dollars.
• 1:02:08
  Speaker 4: Well one it's twenty dollars.
• 1:02:09
  Speaker 3: It's there's a lot of great wine.
• 1:02:11
  Speaker 2: And then you go to Italy and you sit at
• 1:02:13
  Speaker 2: a cafe and you get an eight dollar caref and
• 1:02:15
  Speaker 2: it's thank you fatacular.
• 1:02:17
  Speaker 5: Right.
• 1:02:17
  Speaker 2: It's just so crazy trying to figure figure that out.
• 1:02:21
  Speaker 2: So our final two questions, what sort of advice would
• 1:02:25
  Speaker 2: you give to a recent college grad interest in the
• 1:02:28
  Speaker 2: career in either investing or hedge funds or alternatives.
• 1:02:34
  Speaker 5: Yeah, so, I mean, first, you know, and I guess
• 1:02:36
  Speaker 5: it's it's a cliche, but like the like do what
• 1:02:39
  Speaker 5: you love thing is so real and valuable, but I
• 1:02:43
  Speaker 5: think you have to like find what you love first,
• 1:02:45
  Speaker 5: like when you're when you're twenty years old, I don't
• 1:02:47
  Speaker 5: know that anyone the big world like has a great
• 1:02:50
  Speaker 5: vision on it. I would say, like, trust your instinct,
• 1:02:52
  Speaker 5: you know. So like it's obvious to me today why
• 1:02:56
  Speaker 5: I'm doing what I'm doing. It's like this is I
• 1:02:59
  Speaker 5: don't know. I'm I'm skeptical, I'm structured, I'm creative, I'm
• 1:03:04
  Speaker 5: like curious, Like it makes sense today. It didn't make
• 1:03:08
  Speaker 5: sense completely at the time, but like you follow your instinct.
• 1:03:13
  Speaker 5: You're like, oh, I love to do this, So I'm
• 1:03:15
  Speaker 5: working on the weekend every week because like this really
• 1:03:18
  Speaker 5: intrigues me and it's interesting, and like, you know, I
• 1:03:21
  Speaker 5: don't know, they not pay me and I'm still doing
• 1:03:24
  Speaker 5: this right, So, like I think being true to yourself
• 1:03:26
  Speaker 5: and really exploring, like what makes you happy, what makes you,
• 1:03:30
  Speaker 5: you know, intrigued, what really makes you dive deep on things,
• 1:03:34
  Speaker 5: and then continue to lean in and continue to pursue.
• 1:03:36
  Speaker 3: It and learn learn more and more.
• 1:03:39
  Speaker 5: Maybe the second part of it is just be a
• 1:03:41
  Speaker 5: student of history, so whether you are, so I like baseball,
• 1:03:44
  Speaker 5: and you know, I think like when I was young,
• 1:03:46
  Speaker 5: like how much I learned about the you know, Tay
• 1:03:48
  Speaker 5: Cobs and Tamasio and Ruths and everybody. Like I think
• 1:03:51
  Speaker 5: if you're a baseball player, like you should know the history.
• 1:03:54
  Speaker 5: If you're going into the edgemand industry, like, you should
• 1:03:56
  Speaker 5: know the history. When I say, David Askin, you know
• 1:03:59
  Speaker 5: you should know it. You know, so like take the
• 1:04:02
  Speaker 5: time to understand the history because I mean a number
• 1:04:05
  Speaker 5: of reasons. One it gives you context, but two like
• 1:04:08
  Speaker 5: the mistakes and the opportunity is often you know, often
• 1:04:12
  Speaker 5: rhyme with each other, right, So like, how do you
• 1:04:14
  Speaker 5: like investing in twenty twenty? And watch twenty twenty? Turns
• 1:04:18
  Speaker 5: out it looked a lot like twenty eighteen, two thousand
• 1:04:20
  Speaker 5: and eight, nineteen ninety eight, Like there were elements that
• 1:04:23
  Speaker 5: are very very similar, and being a student of history
• 1:04:27
  Speaker 5: helps you navigate much better in the future.
• 1:04:30
  Speaker 2: To say, the very least final question, what do you
• 1:04:34
  Speaker 2: know about the world of investing in hedge funds today?
• 1:04:37
  Speaker 2: That would have been useful back in nineteen ninety four
• 1:04:40
  Speaker 2: when you were first launching JP Morgan alternative asset.
• 1:04:44
  Speaker 5: Well, I mean there's no Internet, right, so back in
• 1:04:49
  Speaker 5: nineteen ninety five, I mean I don't know. You like,
• 1:04:52
  Speaker 5: we knew a fraction, we knew five percent of what
• 1:04:54
  Speaker 5: we knew today, but it was fifty percent more than
• 1:04:57
  Speaker 5: next person knew, right, So I mean it's all about
• 1:05:02
  Speaker 5: it's all about getting you know, it's all about getting
• 1:05:04
  Speaker 5: an edge and continue to reinvent yourself. I think the
• 1:05:06
  Speaker 5: biggest the biggest lessons learned for you know, for us,
• 1:05:10
  Speaker 5: but for the industry is and what I would have
• 1:05:14
  Speaker 5: taken back if I could, is just the depth of
• 1:05:17
  Speaker 5: understanding on financing. So you know, in financing agreements right
• 1:05:22
  Speaker 5: like prime broken agreements and term and triggers and all
• 1:05:26
  Speaker 5: sorts of things that have caused problems over the years.
• 1:05:30
  Speaker 5: If you could take that one, you know, and it's
• 1:05:32
  Speaker 5: caused a lot of you know, pain historically from time
• 1:05:35
  Speaker 5: to time. And if you had that knowledge and you
• 1:05:37
  Speaker 5: pull that back to nineteen ninety five, wow, you would
• 1:05:41
  Speaker 5: be able to you know, navigate.
• 1:05:43
  Speaker 3: You seamlessly.
• 1:05:45
  Speaker 5: Across the industry in a way that you know was
• 1:05:48
  Speaker 5: much bumpier for everybody along the way.
• 1:05:52
  Speaker 4: Paul, Thank you.
• 1:05:53
  Speaker 2: This has been absolutely fascinating, and thank you for being
• 1:05:56
  Speaker 2: so generous with your time. We have been speaking with
• 1:05:59
  Speaker 2: Paul's he's chief investment officer at JP Morgan Alternative Asset Management.
• 1:06:06
  Speaker 2: If you enjoy this conversation, well, check out any of
• 1:06:08
  Speaker 2: the six hundred we've done over the past twelve years.
• 1:06:11
  Speaker 2: You can find those that Spotify, iTunes, Bloomberg YouTube, wherever
• 1:06:16
  Speaker 2: you find your favorite podcasts, and be sure and check
• 1:06:18
  Speaker 2: out my new book, How Not to Invest The Ideas, numbers,
• 1:06:22
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• 1:06:27
  Speaker 2: wherever you buy your favorite books. I would be remiss
• 1:06:31
  Speaker 2: if I did not thank the Crack team that helps
• 1:06:33
  Speaker 2: put these conversations together each week. Alexis Noriega is my
• 1:06:38
  Speaker 2: video producer. Anna Luke is my regular producer. Sage Bauman
• 1:06:43
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• 1:06:46
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  Speaker 2: Masters in Business on Bloomberg Radio.