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Mike Rockefeller on Launching a New Hedge Fund · Masters in Business

0:02
Speaker 1: This is Master's in Business with very rid Holds on
0:06
Speaker 1: Bloomberg Radio.
0:09
Speaker 2: This week on the podcast, I have an extra special guest.
0:12
Speaker 2: Mike Rockefeller of Woodline Partners launched what was one of
0:17
Speaker 2: the hottest new hedge funds in a long time twenty nineteen.
0:20
Speaker 2: He came out of the gate having previously worked at Citadel,
0:25
Speaker 2: raising about two billion dollars in the new funds. Since then,
0:29
Speaker 2: it's grown to about seven billion dollars. And they are
0:33
Speaker 2: not the typical hedge fund. They run a very specific
0:38
Speaker 2: sector focused type of fund. There are about thirteen different
0:42
Speaker 2: portfolio managers, each focused on a different sub sector. It's
0:49
Speaker 2: beta neutral, market neutral. They run long short across each
0:52
Speaker 2: of these and they've put up some pretty impressive numbers
0:56
Speaker 2: over the past couple of years. It's always interesting to
1:00
Speaker 2: speak to a fund manager in the midst of one
1:03
Speaker 2: of the craziest macro periods of the markets that we've
1:08
Speaker 2: seen and god knows how long who doesn't factor in
1:13
Speaker 2: macro events or the overall market because their market neutral
1:18
Speaker 2: and hedged, and when they look at a sector, they
1:21
Speaker 2: want to be long the very best stocks at the
1:24
Speaker 2: best valuations they can and short the worst stocks at
1:28
Speaker 2: the worst valuations. It's a fascinating strategy and it's one
1:32
Speaker 2: that's been very successful. With no further ado my conversation
1:36
Speaker 2: with Woodline Partners, Mike Rockefeller.
1:40
Speaker 1: Thanks for having me, Berry, looking forward to the conversation
1:42
Speaker 1: same here.
1:42
Speaker 2: In fact, we had a conversation at an Emerging Manager's
1:46
Speaker 2: panel back at Bloomberg invest earlier this year, and I
1:51
Speaker 2: thought you would be great for Masters in Business. So
1:54
Speaker 2: let's dive into your background. How did you get here?
1:57
Speaker 2: Tell us a little bit about the early days of
2:00
Speaker 2: your career.
2:01
Speaker 1: Sure, so I was a neuroscience major in undergrad so
2:06
Speaker 1: I had no intention of being an investment Yeah, it's
2:10
Speaker 1: you know, a study of the brain and spinal cord.
2:13
Speaker 1: Pretty specific, and you know, I just I love biology.
2:16
Speaker 1: You know, the human body is so complex and will
2:19
Speaker 1: never quite understand it. But I had this really unique
2:23
Speaker 1: experience in between my junior and senior year of college.
2:28
Speaker 1: I got an internship at a investment fund in Baltimore.
2:33
Speaker 1: And this was two thousand and two at the time,
2:35
Speaker 1: so they were not offering paid internships because the market
2:39
Speaker 1: was still recovering from the tech bubble crash. But the
2:43
Speaker 1: chief investment officer offered me an unpaid internship. And he said,
2:48
Speaker 1: and this is what was interesting, that I could live
2:50
Speaker 1: with him and his family for the summer.
2:52
Speaker 2: So I.
2:54
Speaker 1: Know, I know it's a big risk, but I did.
2:58
Speaker 1: I went down there and I spent the summer. And
3:01
Speaker 1: you know, I love sports, Barry, and you know, I
3:03
Speaker 1: think they teach you so much about life. I was
3:05
Speaker 1: not good enough to be a pro athlete, but I
3:07
Speaker 1: was amazed how many similarities there were to investing and
3:12
Speaker 1: being an athlete. You know, the competition, the practice, the
3:16
Speaker 1: hard work, the score and the occasional randomness. Yes, yeah,
3:21
Speaker 1: and you know, except in investing, the market is your competitor,
3:26
Speaker 1: and your ability to understand businesses and what's priced into
3:29
Speaker 1: a stock better than your peers is how you win.
3:33
Speaker 1: So what was really amazing about that internship was was
3:36
Speaker 1: actually how Eric, the chief investment officer, practiced. So what
3:42
Speaker 1: I mean by that is that in the morning, he
3:44
Speaker 1: would wake up early, and I saw how he prepared
3:47
Speaker 1: for the day. On weekends, I saw how he would
3:49
Speaker 1: prepare for the next week. I remember walking into his
3:52
Speaker 1: living room on Saturday mornings and there'd be newspapers and
3:56
Speaker 1: research reports and articles all over his living room. And
4:01
Speaker 1: he said this is where it happens, you know, the learning.
4:05
Speaker 1: So I was hooked. I said, this is this is
4:08
Speaker 1: what I want my career to be. And I was
4:11
Speaker 1: fortunate because I was twenty one years old at the time,
4:15
Speaker 1: and from that moment, every step that I took was
4:21
Speaker 1: to get to where I am right now, you know,
4:24
Speaker 1: sitting with you Berry and and you know, investing and
4:28
Speaker 1: being a part of a great investment firm.
4:31
Speaker 2: So you start at the healthcare group as an analyst
4:34
Speaker 2: in City in the early two thousands. Obviously the background
4:38
Speaker 2: in neuro had to help.
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Speaker 1: Yeah, So after my experience in Baltimore, I wanted to
4:42
Speaker 1: pivot to finance and came back to school and applied
4:45
Speaker 1: to every major investment bank. That did not go so well.
4:50
Speaker 1: No one called me back. It was late in the process.
4:53
Speaker 1: Most most of the kids that were going into banking
4:56
Speaker 1: at that time already had their jobs, and I didn't
4:59
Speaker 1: have a back around that banks wanted. I had never
5:01
Speaker 1: taken an account in our finance class. But finally City
5:06
Speaker 1: did call me back and invited me to interview, and
5:09
Speaker 1: I had four different interviews there and didn't get any
5:13
Speaker 1: of the jobs. And so I went throughout my senior
5:17
Speaker 1: year and didn't know exactly what I was going to do.
5:20
Speaker 1: And fortunately, at the end of the year a couple
5:24
Speaker 1: spots opened up, one in the healthcare division of the
5:28
Speaker 1: investment bank, and they invited me in. I interview and
5:32
Speaker 1: I got the job.
5:33
Speaker 2: What was a job like?
5:35
Speaker 1: Well, a couple weeks before I joined banking, someone gave
5:39
Speaker 1: me a book called Monkey Business. Have you read that?
5:41
Speaker 2: I have not.
5:43
Speaker 1: So that book is about bankers at DLJ in the nineties,
5:47
Speaker 1: you know, Premier investment bank, and it talks about how
5:53
Speaker 1: they worked eighteen hour days, slept under their desk, endless
5:58
Speaker 1: pitch books every weekend. And I thought to myself, there's
6:02
Speaker 1: no way it could be like this anymore. That was
6:04
Speaker 1: back then, and I have to tell you, Barry, it
6:07
Speaker 1: was exactly like that. It was brutal. But I was
6:11
Speaker 1: so grateful because I knew my life could have been different,
6:15
Speaker 1: and so I was so happy to be there. I
6:17
Speaker 1: learned a lot of skills, and probably the most important
6:21
Speaker 1: skill that I learned was the basic principle of double
6:24
Speaker 1: and triple checking your work and if you ever make
6:27
Speaker 1: a mistake, don't ever make it again.
6:30
Speaker 2: Huh. Really interesting. So you go from City, eventually to
6:34
Speaker 2: Millennium and Morgan Stanley. Tell us about what you did
6:37
Speaker 2: at those shops.
6:39
Speaker 1: So in two thousand and four I joined Morgan Stanley
6:41
Speaker 1: Equity Research. That was great. They had a star studded
6:46
Speaker 1: cast of research analysts Byron Ween who sadly crossed away
6:50
Speaker 1: recently he had retired, but he was still active, Henry
6:55
Speaker 1: McVay who's now at KKR. He was the US strategist.
6:58
Speaker 1: Katie Huberty, who's still there now, was a young, up
7:01
Speaker 1: and coming tech analyst. And I worked for Jamie Rubin,
7:05
Speaker 1: who was a top pharma analyst. And it was great
7:08
Speaker 1: preparation for the buyside, you know, writing research reports, doing
7:11
Speaker 1: the same kind of work that you would do as
7:12
Speaker 1: an investor, except you're making recommendations instead of on the
7:16
Speaker 1: buy side, you're actually putting those dollars to work and
7:19
Speaker 1: structure in portfolio.
7:20
Speaker 2: So now let's talk a little bit about the buy side.
7:23
Speaker 2: Your next stop is Millennium. What was it like there?
7:27
Speaker 1: So in early two thousand and eight, Millennium was looking
7:31
Speaker 1: for an analyst at one of their funds out in
7:33
Speaker 1: San Francisco, and I jumped at the opportunity. I had
7:38
Speaker 1: never been to San Francisco.
7:39
Speaker 2: You're working in New York.
7:40
Speaker 1: I was working in New York and I jumped on
7:43
Speaker 1: a plane and moved to San Francisco. That was my shot,
7:46
Speaker 1: you know, So I was I was in.
7:50
Speaker 2: Two thousand and eight, the start of the Great Financial Crisis.
7:53
Speaker 2: What was it like being at Millennium as everything kind
7:57
Speaker 2: of melted down?
7:59
Speaker 1: So Millennium employees a market neutral equity strategy long short
8:04
Speaker 1: in other words, exactly. And when I joined, I frankly
8:07
Speaker 1: didn't appreciate the power of that type of investing. And
8:11
Speaker 1: then the fall of two thousand and eight came and
8:14
Speaker 1: I learned the power of that type of investing. And
8:18
Speaker 1: to the credit of the portfolio manager that I was
8:20
Speaker 1: working with, Josh Fisher, we were actually up that year.
8:23
Speaker 2: Wow, that's pretty that's pretty impressive. So your next stop
8:27
Speaker 2: is Citadel in twenty eleven and you spend six years there.
8:30
Speaker 2: Citadel also, like Millennium, has a fantastic reputation. What was
8:35
Speaker 2: your Citadel experience like?
8:37
Speaker 1: So, during my time at Millennium, as my appreciation for
8:41
Speaker 1: proper portfolio construction started to grow, I had heard that
8:45
Speaker 1: Citadel was a pioneer in this type of investing. So
8:49
Speaker 1: in twenty ten when they were looking for someone to
8:52
Speaker 1: start their healthcare team in San Francisco, I jumped at
8:55
Speaker 1: the opportunity. Citadel didn't jump as quickly as I did.
9:00
Speaker 1: That was an eleven month interview process, Yeah, including in
9:05
Speaker 1: all day what you would consider FBI like interview where
9:09
Speaker 1: they dig through every piece of your background. It was
9:12
Speaker 1: very intense, but fortunately Ken Griffin took a shot on
9:16
Speaker 1: me in what turned out to be a life changing
9:19
Speaker 1: opportunity to build a business. And by the way, everything
9:23
Speaker 1: that I had heard on the outside about the quality
9:26
Speaker 1: of people at Citadel and the investment process that they employ,
9:29
Speaker 1: it was all true. Wow.
9:30
Speaker 2: So that had to be a fun experience. Had to
9:33
Speaker 2: be a tough decision to make to leave a shop
9:37
Speaker 2: like Citadel.
9:38
Speaker 1: It was. My partners and I were incredibly fortunate to
9:42
Speaker 1: grow up at Citadel. It was there that we learned
9:45
Speaker 1: a unique and differentiated approach to portfolio construction and investing
9:50
Speaker 1: where the output was an uncorrelated alpha return stream.
9:56
Speaker 2: What made you decide to say, hey, we really need
9:58
Speaker 2: to do this as a stands alone outside of a
10:02
Speaker 2: big complex fund like Citadel.
10:06
Speaker 1: Yeah. So Woodline was founded by myself, Carl Kraaker our
10:09
Speaker 1: co chief investment officer, Matt Hooker, our chief operating officer,
10:13
Speaker 1: and then a group of us who worked together for
10:16
Speaker 1: many years, and we studied the industry leaders of the
10:20
Speaker 1: past twenty years, and we believed that we could iterate
10:24
Speaker 1: and improve on those learnings and create a durable investment
10:28
Speaker 1: firm that would thrive in the future. And our vision
10:32
Speaker 1: was to create an investment partnership like you'd find with
10:35
Speaker 1: a Wellington or a Capital Group, with the risk management
10:39
Speaker 1: expertise of Citadel, wrapped in a specialist structure at Woodline.
10:44
Speaker 2: So what was it like when you had to tell Ken, Hey,
10:47
Speaker 2: this has been great, but I want to I want
10:51
Speaker 2: to hang my own shingle out. How supportive was he?
10:56
Speaker 1: The whole process was exciting, occult, scary, wonderful, all of
11:04
Speaker 1: those things. And leaving a successful career and starting your
11:09
Speaker 1: own business makes no sense on paper. The chance of
11:13
Speaker 1: failure is so high, and it was a bad decision
11:16
Speaker 1: financially initially, So we had to make a choice between
11:21
Speaker 1: comfort and creation. And I remember reading Jeff Bezos's bio
11:28
Speaker 1: at the time, and it talks about how Jeff was
11:32
Speaker 1: working at d SHAW in the mid nineties, and he
11:34
Speaker 1: had a great job, and he had an idea to
11:37
Speaker 1: start an internet company. So he goes to David Shaw
11:41
Speaker 1: and he tells him about his idea. David Shaw says, Jeff,
11:44
Speaker 1: this is a great idea for someone who doesn't already
11:46
Speaker 1: have a great job. You know, why don't you take
11:49
Speaker 1: the weekend to think about it. So Jeff went home
11:53
Speaker 1: and he applied what he coined as the regret minimization theory. Basically,
11:59
Speaker 1: when he's a eighty years old, what decision is he
12:02
Speaker 1: going to regret less? And he chose out Amazon, which
12:06
Speaker 1: worked out very well for him.
12:08
Speaker 2: Literally threw all the stuff in a car and drove
12:10
Speaker 2: across country that next Monday.
12:12
Speaker 1: Yeah, and it was so inspiring. And obviously Amazon is
12:16
Speaker 1: a different scale, But I will say I asked myself
12:19
Speaker 1: a similar question, which is, do I want to go
12:22
Speaker 1: on this journey even if I never get to where
12:25
Speaker 1: I'm going?
12:26
Speaker 2: Huh? Really really quite fascinating. What was the most surprising
12:30
Speaker 2: thing you learned when you were launching your own firm?
12:33
Speaker 2: What what kind of struck you as Huh? I didn't
12:36
Speaker 2: really expect that to happen.
12:39
Speaker 1: I think how difficult it was to raise money you know,
12:43
Speaker 1: it was it was a rough first few months.
12:46
Speaker 2: Didn't you guys launch with a big chunk of cash though,
12:49
Speaker 2: like two billion dollars.
12:51
Speaker 1: We did, but we had trouble finding investors in the beginning,
12:55
Speaker 1: and we had a lot of people on board who
12:58
Speaker 1: left great jobs who were eyeing on us to get
13:01
Speaker 1: funding and pressure there, a little bit of pressure, yeah,
13:05
Speaker 1: and then you know, it's it's it's a different kind
13:07
Speaker 1: of pressure when you when you're now responsible for so
13:10
Speaker 1: many people. And so we eventually made the decision to
13:14
Speaker 1: fly to the Middle East to meet with a large investor,
13:18
Speaker 1: hoping they would partner with us. And on the flight over,
13:22
Speaker 1: I remember waking up in the middle of the night.
13:24
Speaker 1: I looked up. The whole plane was dark except for
13:27
Speaker 1: one light on in the back of coach, and that
13:29
Speaker 1: was our COO, Matt Hooker, cranking away. And to say
13:34
Speaker 1: we were prepared for that meeting, you know, as an understatement.
13:37
Speaker 1: So we get all the way over there, they brought
13:40
Speaker 1: they brought us into this huge auditorium to present to
13:42
Speaker 1: their team, and you know, we were like, okay, this
13:45
Speaker 1: is it, this is our chance. One gentleman comes in,
13:48
Speaker 1: he sits down. We waited a few minutes. We then
13:52
Speaker 1: asked where everyone else was, and he said he was
13:54
Speaker 1: the only one coming. Everyone else was busy so much
13:58
Speaker 1: so we ended up presenting to just Tim, and suffice
14:01
Speaker 1: to say, we walked away empty handed. But fortunately, a
14:07
Speaker 1: couple weeks later, two partners came to the table and
14:11
Speaker 1: anchored our launch, and like that we were in business.
14:15
Speaker 2: Wow, really really interesting. So let's talk a little bit
14:19
Speaker 2: about your launch in twenty nineteen. You come out of
14:23
Speaker 2: the gate pretty fast. Not a lot of emerging managers
14:27
Speaker 2: start with over a billion dollars. You guys were close
14:30
Speaker 2: to two billion. You know you have since really ran
14:33
Speaker 2: that up in the ensuing four years to over seven
14:38
Speaker 2: billion dollars. Tell us a little bit about how you
14:41
Speaker 2: built the firm and how it's structured.
14:44
Speaker 1: So we structured Woodline to enable our world class decision
14:48
Speaker 1: makers to operate at their very best. And there's a
14:51
Speaker 1: few key elements to that. One is we have a
14:53
Speaker 1: deep specialist approach, so where our teams are experts in
14:58
Speaker 1: the stocks that they cover. We also have a sole
15:01
Speaker 1: coverage model, so that means one person or one team
15:04
Speaker 1: is responsible for their group of names, no overlap. Our
15:09
Speaker 1: teams are also small and autonomous such that they can
15:13
Speaker 1: make decisions. Because we believe that people closest to the
15:17
Speaker 1: ground can make the best portfolio management decisions. And since
15:23
Speaker 1: I mentioned Bezos earlier, he has a great quote. He says,
15:27
Speaker 1: great teams should be small enough such that you can
15:30
Speaker 1: feed all of them with two pizzas. That's a good concept.
15:35
Speaker 1: We believe our senior team should have many years of
15:38
Speaker 1: experience perfecting their craft. There's a gentleman named Anders Ericsson.
15:43
Speaker 1: He's done great work on Mastery and he says that
15:46
Speaker 1: expert performance requires intense and deliberate practice for at least
15:51
Speaker 1: ten years. Our pms have eighteen years of experience.
15:55
Speaker 2: So you started with about twenty five employees, you have
15:58
Speaker 2: since ramped that up to over seventy five people. What's
16:01
Speaker 2: it like managing all those people and that degree of growth.
16:07
Speaker 1: We set up a Cocio model to deal with that
16:12
Speaker 1: vario issue so that we could attract the best talent,
16:16
Speaker 1: leverage the skills and capabilities of Carl and myself, allowing
16:21
Speaker 1: us to have more time both to invest. And we
16:25
Speaker 1: also set up a management structure of Matt, Carl and
16:29
Speaker 1: myself where every decision is made with a two thirds vote,
16:34
Speaker 1: and that allows us to really delineate our duties to
16:39
Speaker 1: where we see fit and has provided us the ability
16:43
Speaker 1: to manage a very complex infrastructure.
16:45
Speaker 2: So not ties it takes to you to really move
16:50
Speaker 2: a decision forward. Carl is your cocio, Metta is running operations.
16:57
Speaker 2: So how much does that free you and Carl up
16:59
Speaker 2: toll becus on the.
17:00
Speaker 1: Investing We get that question a lot, and we tell
17:04
Speaker 1: investors that both Carl and I spend more time now
17:10
Speaker 1: as cocios of Woodline actually investing in our portfolios than
17:14
Speaker 1: we did at Citadel, which is an amazing stat.
17:18
Speaker 2: And is that because of the structure where you began
17:21
Speaker 2: with someone running operations. It wasn't an afterthought a few
17:25
Speaker 2: years down the road exactly.
17:27
Speaker 1: Yeah, that structure was thought out so that we could
17:31
Speaker 1: focus on investing rather than having to spend all of
17:34
Speaker 1: our days managing people.
17:35
Speaker 2: So let's talk about some of those people. You have
17:38
Speaker 2: thirteen portfolio managers plus including you and Carl. You've talked
17:44
Speaker 2: about a player coach model. Explain what that is.
17:48
Speaker 1: So that's correct. So thirteen pms, including Carl and myself.
17:51
Speaker 1: We also have very seasoned analysts running portfolios, some not
17:56
Speaker 1: These are people truly the best at what they do.
17:59
Speaker 1: And what we mean player Coach is that Carl and
18:01
Speaker 1: I didn't want to just take the traditional chief investment
18:05
Speaker 1: officer role of management. We wanted to invest, and so
18:09
Speaker 1: Carl and I actually run individual portfolios within Woodline. So
18:14
Speaker 1: Carl runs a semi conductor portfolio, myself and my team
18:17
Speaker 1: led by a Niche Kapor and Brian Schmidt, run a
18:20
Speaker 1: bio pharma portfolio, and we spend most of our days
18:23
Speaker 1: on those portfolios.
18:24
Speaker 2: And then how much time do you devote to managing
18:28
Speaker 2: the other eleven or so pms.
18:32
Speaker 1: I would say we spend about seventy five percent of
18:35
Speaker 1: our time on our existing portfolios that we're running, and
18:39
Speaker 1: the remainder of our time managing others and thinking about
18:44
Speaker 1: the business strategically.
18:45
Speaker 2: So let's talk about your investment process. You come from
18:49
Speaker 2: a biotech background, Carl has a semiconductor background. Tell us
18:56
Speaker 2: a little bit about a process that has a dozen
19:00
Speaker 2: or so different pms, each with a different focus.
19:05
Speaker 1: We each have a different focus, but we all have
19:07
Speaker 1: the same bottoms up fundamental research process. The teams spend
19:12
Speaker 1: the majority of their time on research and learning about
19:15
Speaker 1: the companies that they cover. Each team covers a small
19:18
Speaker 1: group on average of about fifty to seventy names, so
19:21
Speaker 1: they can understand them better and they come up with
19:24
Speaker 1: unique insights on those stocks in their universe that may
19:28
Speaker 1: not be appreciated by the market, and then structure portfolios
19:31
Speaker 1: around those ideas.
19:33
Speaker 2: So when we think of the typical bottoms up stockpicker,
19:37
Speaker 2: it seems like there's a whole lot of variation, But
19:42
Speaker 2: lots of funds tend to look like other funds. You
19:46
Speaker 2: guys seem to look very different than the typical either
19:51
Speaker 2: sector focused or bottoms up stockpicking focused fund. What makes
19:57
Speaker 2: Woodline a little different, a little more unique.
20:00
Speaker 1: It really comes down to our portfolio construction. We hedge
20:05
Speaker 1: out not just market beta, but any factors that we
20:11
Speaker 1: can't predict. We focus solely on what is predictable, and
20:16
Speaker 1: we construct portfolios around that so that we don't succumb
20:20
Speaker 1: to factors that are moving the market on a day
20:23
Speaker 1: in and day out basis. That's a key differentiation.
20:25
Speaker 2: Give us some examples of those factors that you're looking
20:28
Speaker 2: to hedge out.
20:29
Speaker 1: Yes, So in addition to beta, you know, there's many
20:32
Speaker 1: factors that are moving stocks outside of what is idiosyncratic
20:35
Speaker 1: to a particular company. In fact, you can model these
20:38
Speaker 1: factors and their influence on stocks, so momentum, value, growth,
20:44
Speaker 1: short interest, and like other macro cross currents, we don't
20:49
Speaker 1: have a unique advantage in predicting these factors, so we
20:52
Speaker 1: hedge them out.
20:52
Speaker 2: Huh. So you describe your key overwriting strategy as market
20:58
Speaker 2: neutral equity focus on the global healthcare sector. Let's break
21:03
Speaker 2: that down. Market neutral means most of the time you're
21:06
Speaker 2: running long short. Is it long short against the market
21:10
Speaker 2: or long short within the sector?
21:13
Speaker 1: We run neutral to the market and to the sub
21:17
Speaker 1: sector that we're in both.
21:19
Speaker 2: Yes, So that's got to be a challenging strategy to
21:23
Speaker 2: create for hedging both at the same time.
21:26
Speaker 1: And that's why we have a specialist structure. So we
21:30
Speaker 1: instead of having a healthcare PM or a tech PM,
21:33
Speaker 1: we have a semiconductors PM, we have a medical device PM.
21:38
Speaker 1: Just focusing on those fifty to seventy names within those
21:42
Speaker 1: sub sectors and then structuring portfolios within those sub sectors.
21:45
Speaker 1: So you have to be a specialist to take this approach.
21:49
Speaker 2: And a lot of funds that have found success seem
21:53
Speaker 2: to have run some pretty concentrated portfolios they hit a
21:57
Speaker 2: couple of big winners and it's worked out. You don't
22:01
Speaker 2: take that approach. Woodline has about twelve hundred positions. That
22:05
Speaker 2: seems almost like a closet index, but your performance doesn't
22:09
Speaker 2: track an index. You guys are absolutely not closet indexers.
22:13
Speaker 2: Why so many positions?
22:16
Speaker 1: The reason why it exists is because of our twenty
22:20
Speaker 1: individually constructed subsector portfolios that feed up into a master
22:24
Speaker 1: fund and the end result of that is over one
22:27
Speaker 1: thousand unique positions.
22:31
Speaker 2: So less concentrated exposure. What does that big of a
22:36
Speaker 2: set of holdings? Due to the funds of volatility and
22:40
Speaker 2: return patterns.
22:42
Speaker 1: So we offer investors and uncorrelated diversified return stream. Investors
22:48
Speaker 1: can expect us to be up or down one percent
22:51
Speaker 1: a month and our vall is around five percent annually.
22:58
Speaker 2: Huh, not too bad. What do you do in terms
23:02
Speaker 2: of risk management? How do you stay on top of
23:06
Speaker 2: Obviously you don't have a whole lot of concentration risk,
23:09
Speaker 2: but just generally speaking, what's the risk management process like?
23:13
Speaker 1: So each of the portfolios are running a high idiosyncratic
23:19
Speaker 1: ball portfolio on their own, and it all feeds up
23:22
Speaker 1: into the master fund, which creates a great product, but
23:28
Speaker 1: we also monitor that from a top level, both Carl
23:32
Speaker 1: and Matt and myself. You know, we'll meet weekly and
23:37
Speaker 1: look daily at our exposures and make any adjustments so
23:40
Speaker 1: that we continue to make sure that we are completely
23:43
Speaker 1: neutral to any macro factors.
23:45
Speaker 2: H quite intriguing. So let's talk about some of those
23:49
Speaker 2: sectors you focus on, tech, healthcare, industrials, energy, and consumer.
23:56
Speaker 2: Why these sectors they almost seem unrelated.
24:00
Speaker 1: Well, the primary driver in deciding where to invest is
24:03
Speaker 1: great talent. That's what we look at first. The secondary
24:08
Speaker 1: component is that we look for sub sectors that have
24:10
Speaker 1: the most disruption, innovation, and stock specific idiosyncratic volatility.
24:18
Speaker 2: Those sectors that you're focusing on, there's the greatest mispricing
24:23
Speaker 2: versus what the market believes. How do you how do
24:27
Speaker 2: you look at these sub sectors versus the general consensus.
24:31
Speaker 1: Usually they have the greatest complexity and the greatest disruption,
24:37
Speaker 1: and therefore there's a larger spread between winners and losers.
24:42
Speaker 1: And that's what's required to have a portfolio where the
24:46
Speaker 1: performance is really driven by our relative stock picking.
24:49
Speaker 2: Huh. That's interesting. In the past, you've mentioned that Woodline
24:53
Speaker 2: established a network of corporate execs and industry relationships. Tell
24:58
Speaker 2: us how you're using this network to generate alpha.
25:03
Speaker 1: So we're very fortunate to spend our days building relationships
25:07
Speaker 1: with some of the world's leading executives. And these executives
25:11
Speaker 1: have a full plate of managing complex businesses, and so
25:15
Speaker 1: we're appreciative of the time that they spend with us
25:17
Speaker 1: and the members of the Woodline team. We have a
25:20
Speaker 1: responsibility to create a mutually beneficial engagement, and so we
25:25
Speaker 1: need to be well prepared, ask thoughtful questions and hopefully
25:29
Speaker 1: find ways to add value in terms of what we're
25:31
Speaker 1: seeing across the industry. And then in return, we get
25:35
Speaker 1: to have a front row seat of what these companies
25:37
Speaker 1: are doing and where they're going.
25:40
Speaker 2: Huh interesting. So, in the way you structured the firm,
25:45
Speaker 2: you Woodline does not have a full pass through. Tell
25:48
Speaker 2: us a little bit about firms that do have a
25:50
Speaker 2: pass through and why you elected not to go that way.
25:56
Speaker 1: That was one of the most important questions to answer
25:58
Speaker 1: when setting up the firm. We believed that establishing a
26:03
Speaker 1: partnership model more akin to what you would find with
26:06
Speaker 1: a private equity shop, as the best approach. And we're
26:10
Speaker 1: called Woodline partners for a reason. The partnership structure, coupled
26:14
Speaker 1: with our sole coverage model has allowed us to compete
26:19
Speaker 1: effectively for talent.
26:20
Speaker 2: So let's talk a little bit about that. On a
26:23
Speaker 2: pass through model, if you're a fund manager that's doing
26:29
Speaker 2: well and the firm is doing poorly, you still get
26:32
Speaker 2: full bonuses and everything else. Everybody else takes a hit.
26:36
Speaker 2: This is more of a all for one and one
26:39
Speaker 2: for all, sort of a three Musketeers approach. Everybody is
26:43
Speaker 2: a partner in the firm, not just running their own
26:46
Speaker 2: independent fiefdom.
26:48
Speaker 1: That's correct, and it really aligns incentives with our employees
26:54
Speaker 1: and our LPs so that we're all driving for the
26:56
Speaker 1: same goal.
26:58
Speaker 2: What does the lack of a pay us through do
27:01
Speaker 2: when you're competing for talent?
27:06
Speaker 1: So far, it has not impacted us because the partnership
27:11
Speaker 1: model has been an attractive component to candidates looking at Woodline.
27:17
Speaker 1: And also the sole coverage is an important component. When
27:20
Speaker 1: you are looking at a platform and you join, you know,
27:23
Speaker 1: another multi manager, you're one of two, three, four, six, eight,
27:28
Speaker 1: twenty teams covering the same stocks, and it's more of
27:32
Speaker 1: a mercenary type of approach. At Woodline, we only have
27:38
Speaker 1: one software PM, that's Elliott Wilson. You know, we only
27:42
Speaker 1: have one medical device PM that's Chris Hawkins. They are
27:45
Speaker 1: the key people.
27:47
Speaker 2: So given that, let's talk about some of those sub sectors.
27:52
Speaker 2: When you say you cover tech, how many different subsectors
27:57
Speaker 2: are under technology?
27:59
Speaker 1: There are four sub sectors currently under technology. There are
28:03
Speaker 1: four sub sectors currently under healthcare, and we break them
28:07
Speaker 1: up biotech services, pharma, semiconductors. We have a Japanese Tech PM,
28:16
Speaker 1: we have a Japanese consumer PM, we have a consumer
28:20
Speaker 1: Health and Wellness PM. These are all very specialized sub sectors.
28:25
Speaker 2: When you say Japanese tech, we're talking about companies in
28:29
Speaker 2: Japan that you're buying here. That's right, huh, really interesting.
28:34
Speaker 2: So each PM works for a specific fund, it's not
28:38
Speaker 2: part of a whole pulled fund. How does that.
28:40
Speaker 1: Break down, It's a good question. It's all one fund
28:44
Speaker 1: that provides diversified access to all of our subsector portfolios.
28:49
Speaker 1: Part of the challenge for sector specific funds over the
28:53
Speaker 1: past decade is the higher volatility and lower sharp associated
28:58
Speaker 1: with that approach.
29:00
Speaker 2: So one of the sectors you cover is energy. It's
29:04
Speaker 2: been a kind of odd space the past couple of years.
29:09
Speaker 2: The Russian invasion of Ukraine, oil spikes and by the
29:13
Speaker 2: end of the year it's below where it was when
29:15
Speaker 2: the invasion starts. Now we have the war in the
29:18
Speaker 2: Middle East, oil fools below eighty dollars. How do you
29:22
Speaker 2: contextualize oil? And what other energy subsectors do you do
29:27
Speaker 2: you look at? Do you look at non carbon energy?
29:30
Speaker 2: What else is in that area?
29:34
Speaker 1: So energy was one of those sectors that we didn't
29:36
Speaker 1: initially launch with, and the reason why was because there
29:41
Speaker 1: was a lot of correlation among the companies within energy,
29:45
Speaker 1: and with all that's gone on in the world, including
29:49
Speaker 1: clean energy, there's been a lot more dispersion among energy
29:53
Speaker 1: companies and have allowed us to first of all, find
29:57
Speaker 1: a great analyst covering those names, also to run a
30:01
Speaker 1: high idiosyncratic portfolio. So that's why we entered the sector.
30:05
Speaker 2: Hey, it's a really exciting time in healthcare. The mRNA
30:10
Speaker 2: drugs have been applied to all sorts of different things
30:13
Speaker 2: beyond COVID. The obesity drugs like ozembic and wagovi are
30:19
Speaker 2: finding amazing traction and having great results. This is your space,
30:24
Speaker 2: the healthcare sector. What's it like in this area these days?
30:30
Speaker 1: It's an incredibly exciting time to be a healthcare investor.
30:35
Speaker 1: Science has gotten to the point where we are understanding
30:38
Speaker 1: biology and how to target areas that we hadn't known
30:43
Speaker 1: for decades, and we're seeing some incredible results. You know,
30:48
Speaker 1: we've made some breakthroughs in Alzheimer's disease, We've made some
30:51
Speaker 1: breakthroughs in obesity and in diabetes, in cancer, and so
30:57
Speaker 1: to be a healthcare investor right now is probably the
31:01
Speaker 1: best time that I've seen in the last twenty years.
31:04
Speaker 2: Huh, really interesting. So you mentioned cancer cell therapeutics looks
31:08
Speaker 2: like it's a fascinating area. What's happening in that medical space.
31:13
Speaker 1: Self therapy is very exciting. You basically take a patient's
31:18
Speaker 1: cells out, you infuse them, and put them back in
31:22
Speaker 1: the patient's body to fight the cancer. And we've had
31:25
Speaker 1: remarkable results, particularly in types of blood cancer. But now
31:30
Speaker 1: we are starting to see the promise to work on
31:33
Speaker 1: solid tumors using this approach. And it comes down to
31:38
Speaker 1: the industrial complex around these because you have to manufacture
31:43
Speaker 1: these cells for each individual patient.
31:45
Speaker 2: It has to match their own genetics.
31:48
Speaker 1: You have to take the cells out of a person's
31:50
Speaker 1: body and align it just for that individual person and
31:55
Speaker 1: then and put them back in. And so this is
31:57
Speaker 1: not something that you can do like a pill where
32:00
Speaker 1: you're manufacturing millions of these. This is a one by
32:04
Speaker 1: one approach, and so we have to figure out a
32:06
Speaker 1: way to make it more efficient, less costly. But I'm
32:10
Speaker 1: confident we'll do that.
32:11
Speaker 2: So let's talk a little bit about what's going on
32:15
Speaker 2: in terms of the hedge fund industry. Eleven thousand hedge
32:19
Speaker 2: funds today, go back twenty five years, there were I
32:22
Speaker 2: don't know a couple of hundred. Are there too many
32:25
Speaker 2: hedge funds? Has it gotten too crowded? Tell us about
32:29
Speaker 2: what the space is like.
32:31
Speaker 1: The growth in the number of hedge funds has slowed recently,
32:35
Speaker 1: and we think that'll likely continue as the consolidation of
32:39
Speaker 1: talent into the large Platform models appear structural, and like
32:45
Speaker 1: any fast growing business, there will be winners and losers,
32:48
Speaker 1: but the platforms offer a material value proposition to their
32:53
Speaker 1: portfolio managers and limited partners alike and will likely survive
32:58
Speaker 1: various market regimes.
33:00
Speaker 2: So define what you mean by platform business models. I
33:03
Speaker 2: think a lot of people may not be familiar with
33:05
Speaker 2: that term.
33:06
Speaker 1: So when I talk about the platforms, some people refer
33:08
Speaker 1: to them as the multi managers. The big market leaders
33:11
Speaker 1: are Citadel and Millennium.
33:13
Speaker 2: And coincidentally, two places you happen to have worked.
33:16
Speaker 1: That's right. That's right, And what the platforms offer is
33:24
Speaker 1: two things. One, from a PM and analyst standpoint, they
33:28
Speaker 1: allow pms and analysts to invest in their portfolios and
33:32
Speaker 1: not worry about the operational complexities of running a business.
33:36
Speaker 1: That's huge. And from an LP standpoint, there are lots
33:42
Speaker 1: of decision makers, so there are lots of ideas and
33:46
Speaker 1: it results in a uncorrelated, diversified alpha return stream and
33:51
Speaker 1: one that an LP can do in a single investment
33:55
Speaker 1: versus the complexity of multiple investments in many funds.
33:58
Speaker 2: So when you we were at both Citadel and Millennium,
34:02
Speaker 2: you didn't have to deal with any of the operational challenges.
34:05
Speaker 2: What has it been like pivoting to running a business,
34:10
Speaker 2: hiring people, dealing with regulations, managing people, dealing with clients
34:14
Speaker 2: and LPs. How different is this experience from what you
34:19
Speaker 2: had previously.
34:20
Speaker 1: It's complex and it's critically important to have a fully
34:25
Speaker 1: built out infrastructure to support your investment team and manage
34:29
Speaker 1: the operations of your business. And we're fortunate to have
34:31
Speaker 1: Matt Hooker and his team doing that for us very
34:34
Speaker 1: effectively and allows our investment team to invest even more
34:40
Speaker 1: than we were at Citadel, which is incredible.
34:44
Speaker 2: So we've talked about a lot of different funds. We
34:46
Speaker 2: mentioned d Show, we mentioned Millennium, we mentioned Citadel. Each
34:50
Speaker 2: of those have a very specific corporate culture driven by
34:54
Speaker 2: the founder. How do you create a corporate culture at
34:58
Speaker 2: your own fund?
35:00
Speaker 1: I just watched an interview where Ray Dalyo was speaking
35:05
Speaker 1: to Bill Belichick, the head coach of the Patriots.
35:07
Speaker 2: Huh.
35:08
Speaker 1: Bill had just earned his three hundredth career win, and
35:12
Speaker 1: Ray is all about principles, and so he asked Bill
35:16
Speaker 1: what his principles as a head coach are and Bill said,
35:20
Speaker 1: put your team first, do your job, and continually focus
35:25
Speaker 1: on improvement. And these are the key principles to any
35:28
Speaker 1: successful organization, and they're certainly part of the DNA of Woodline.
35:33
Speaker 1: But a football team has a lot in common with
35:36
Speaker 1: a successful investment firm. You know, on a football team,
35:38
Speaker 1: you have a little over fifty people who dress for
35:41
Speaker 1: the game, plus an entire organization around that, and everyone
35:46
Speaker 1: dreams of being the quarterback or the star running back,
35:49
Speaker 1: but the success of a team is driven by all
35:53
Speaker 1: those people who are doing jobs that may not have
35:57
Speaker 1: that same kind of glorified role Woodline. Carl likes to
36:01
Speaker 1: say that people join because they choose to be on
36:05
Speaker 1: a great team, rather than being an all star on
36:08
Speaker 1: an OK team. And I think that's true. And I
36:11
Speaker 1: like to think of Woodline as an organization of linemen,
36:15
Speaker 1: defensive ends, and kickers, where every role is celebrated and
36:19
Speaker 1: every person critical to achieving its goals.
36:23
Speaker 2: Let's talk a little bit about return quality. You've discussed
36:26
Speaker 2: this previously. How do you define return quality and what
36:31
Speaker 2: do you have to do to deliver it?
36:33
Speaker 1: So, ultimately, the goal for all investors across strategies public
36:36
Speaker 1: private is to generate uncorrelated alpha, and it starts with
36:40
Speaker 1: good risk management and optimal portfolio construction. If you look
36:46
Speaker 1: at the average investment fund, it has a risk profile
36:50
Speaker 1: of around thirty percent idiosyncratic risk. So let's flip that around.
36:55
Speaker 1: That means the average investment firm has seventy percent of
36:59
Speaker 1: their performance that will be influenced by macro and market factors.
37:05
Speaker 1: That's not high quality, and we think the industry can
37:08
Speaker 1: do better than that.
37:10
Speaker 2: And you cover North America, Europe and Asia. Are you
37:14
Speaker 2: seeing more opportunities in one geography versus another? The world
37:19
Speaker 2: really is pretty uncorrelated these days.
37:23
Speaker 1: We see opportunities for our strategy in the US, Japan,
37:28
Speaker 1: and Europe.
37:29
Speaker 2: Japan especially has been a house of fire lately. The
37:34
Speaker 2: Nike is up substantially. I don't think we're all that
37:37
Speaker 2: far from the prior peaks before their big collapse in
37:42
Speaker 2: eighty nine. What is it that's driving Japan despite all
37:47
Speaker 2: of their demographic problems and everything else.
37:50
Speaker 1: What's happening over there, Well, what makes a good market
37:55
Speaker 1: for US is breath of companies, liquidity, and having rules
38:00
Speaker 1: based system. And in any of these markets, the market
38:04
Speaker 1: being up or down really doesn't matter to us. If
38:08
Speaker 1: tomorrow you told me the market was going to be
38:10
Speaker 1: up five percent or down five percent, it would likely
38:14
Speaker 1: have very little impact on the performance of Woodline. And
38:18
Speaker 1: so we really look at talent and then the types
38:22
Speaker 1: of companies that are within a market that we can
38:25
Speaker 1: structure a diversified portfolio with.
38:29
Speaker 2: So, if I say to you, US has been really
38:32
Speaker 2: strong economically and Japan has been doing well, but Europe
38:36
Speaker 2: has been limping along. They've been rolling recessions from the
38:39
Speaker 2: UK to Germany to France. They can't get out of
38:42
Speaker 2: their own way. You don't care about that macro stuff.
38:45
Speaker 2: You want to find the right company at the right price.
38:48
Speaker 1: And we want to pick the winners and the losers,
38:51
Speaker 1: and we want to structure portfolios around those winners and losers,
38:55
Speaker 1: and the market just does not matter.
38:57
Speaker 2: Huh. That's really quite fascinating. All right, we only have
39:01
Speaker 2: you for a limited amount of time, so I'm going
39:04
Speaker 2: to jump to my favorite questions. I ask all of
39:07
Speaker 2: my guests starting with what have you been streaming these days?
39:11
Speaker 2: Tell us what you're either watching or listening to, either
39:16
Speaker 2: video or podcasts, or whatever's keeping you entertained.
39:19
Speaker 1: Most recently, I've been listening to Founders, where David Cenra
39:23
Speaker 1: summarizes the biographies of path leaders and entrepreneurs.
39:29
Speaker 2: Interesting. Let's talk about your mentors who helped shape your career.
39:36
Speaker 1: Well. Ken Griffin is a larger than life figure and
39:39
Speaker 1: teacher that leaves it imprint about how you think about
39:42
Speaker 1: things your entire life. I'd also say that Brandon Haley,
39:46
Speaker 1: who started Holosecene. He was the first of our group
39:50
Speaker 1: at Citadel to launch his own fund and he blazed
39:53
Speaker 1: a path for Woodline and others and was critical in
39:57
Speaker 1: helping all of us get started. Woodline wouldn't be year
40:00
Speaker 1: without him. And then on a personal level level, my
40:04
Speaker 1: father for teaching me the value of loyalty and hard
40:08
Speaker 1: work and consistency. I've been really fortunate, Barry. So I
40:12
Speaker 1: could go on for a while.
40:15
Speaker 2: Let's talk a little about books, some of your favorites
40:17
Speaker 2: and what you're reading right now. You mentioned Monkey Business.
40:21
Speaker 2: What other books are you enjoying.
40:23
Speaker 1: One of my all time favorites is Shoe Dog by
40:26
Speaker 1: Phil Knight. Have you read that?
40:27
Speaker 2: Yes? Really interesting?
40:29
Speaker 1: Yeah, it's so great. What I love about that is,
40:31
Speaker 1: after a long and sometimes grueling road for him building Nike,
40:37
Speaker 1: he said he could he wished he could go back
40:39
Speaker 1: and do it all over again.
40:41
Speaker 2: I recall that I thought that was the most bonkers
40:43
Speaker 2: thing in the whole book. Ye, after literally selling shoes
40:47
Speaker 2: out of the trunk of his car and not knowing
40:50
Speaker 2: if they're gonna have enough money to pay vendors, and
40:53
Speaker 2: constantly getting by on the skin of their teeth. The
40:56
Speaker 2: first third of that book is like, I know the outcome,
41:00
Speaker 2: and it still feels like they're not going to make it.
41:03
Speaker 2: They're just skating by.
41:04
Speaker 1: Yeah, I know it's it's amazing and it's inspiring for
41:07
Speaker 1: any entrepreneur.
41:09
Speaker 2: Any of the books you want to mention or.
41:10
Speaker 1: I'm reading Musk right now and that's.
41:14
Speaker 2: Uh Walter Isaacson. Yes, that looks that's that. That looks
41:18
Speaker 2: like it's too big to read. It's a giant tone.
41:20
Speaker 1: I'm a third of the way through.
41:22
Speaker 2: Yeah.
41:23
Speaker 1: What I didn't know, Maybe I should have known this
41:26
Speaker 1: was that Elon actually started SpaceX before he took over Tesla.
41:31
Speaker 2: Right, He didn't start Tesla, he joined it, didn't start PayPal,
41:35
Speaker 2: he joined it, But SpaceX was.
41:37
Speaker 1: Basactly Yeah, he was thinking about space travel, you know,
41:41
Speaker 1: from a very early age.
41:43
Speaker 2: Huh. Quite interesting. Uh. And our final two questions, what
41:47
Speaker 2: sort of advice would you give to a college grad
41:50
Speaker 2: interested in a career in investing or hedge funds?
41:54
Speaker 1: Place learning and experience over salary entitle.
42:00
Speaker 2: No matter what, No matter what, you got to get
42:02
Speaker 2: those fundamentals down, the money will take care of itself.
42:05
Speaker 1: Later, exactly.
42:06
Speaker 2: And our final question, what do you know about the
42:09
Speaker 2: world of investing today that you wish you knew when
42:12
Speaker 2: you were first starting out fifteen twenty years ago.
42:19
Speaker 1: So I was fortunate enough to spend time with Will
42:24
Speaker 1: I Am from The Black Eyed Peas a couple of
42:25
Speaker 1: years ago, and I was asking him, Will what was
42:31
Speaker 1: it that really made you so successful? And he said
42:35
Speaker 1: that at a very early age, when he was in
42:38
Speaker 1: high school, he started looking forward ten years, twenty years,
42:43
Speaker 1: thirty years, and then he would envision himself then and
42:47
Speaker 1: then work backward. So I would say, you know, let's
42:52
Speaker 1: all be like Will I Am and look thirty years
42:56
Speaker 1: ahead and envision what the future will look like, so
42:58
Speaker 1: we don't miss.
42:59
Speaker 2: Out really interesting Mike, Thanks for being so generous with
43:03
Speaker 2: your time. We have been speaking with Mike Rockefeller, co
43:08
Speaker 2: chief investment officer and co founder of Woodline Partners. If
43:13
Speaker 2: you enjoy this conversation, well, be sure and check out
43:16
Speaker 2: any of the previous five hundred discussions we've had over
43:20
Speaker 2: the past nine years. You can find those at Apple Podcasts, Spotify, YouTube,
43:26
Speaker 2: wherever you find your favorite podcasts. Sign up from my
43:29
Speaker 2: daily reading list at ridults dot com, Follow me on
43:32
Speaker 2: Twitter at ridults, follow all of the Bloomberg family of
43:36
Speaker 2: podcasts on Twitter at podcast I would be remiss if
43:40
Speaker 2: I did not thank the PRAC team that helps put
43:42
Speaker 2: these conversations together each week. Sarah Livesey is my audio engineer.
43:47
Speaker 2: Attika Valbrunt is my project manager. Sean Russo is my researcher.
43:52
Speaker 2: Anna Luke is my producer. I'm Barry Ridholts. You're listening
43:57
Speaker 2: to Masters and Business on Bloomberg Radio Back