YouSaid · the spoken record

David F. Swensen

lines on the record: 95
first: 2017-12-18
most recent: 2017-12-18
sittings or episodes: 1
sources: podcast

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“Drive the boat. It may be joining an investment organization in a more of a business capacity and however I can help. But it's really trying to find something that I have conviction in what the underlying product is with great people.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've had some friends suggest that my next book should be about career phases and transitions. I think I have enough material. I don't know if I'll have the time to do it right now. So I spent the last year trying to figure out how to plug in and where and the particular skill set I have is very specific. I know how to take out a certain type of trash at a certain time of day. And there's a degree to which that's been a little bit devalued financially in the marketplace. What I've done, I have three or four board relationships with, they're mostly relatively early stage asset management business run by a close friend of mine who I used to manage some money for protege and outsourced operations business, things in and around the asset management space. And I'm still kind of looking for the right fit, which may be a different allocator position really with a pool of capital that feels stable where I can try to help.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“And then the last question is what's next for you? So you mentioned obviously a sort of transitional period have kind of seemingly met everyone and done it all in the hedge fund world. What has your interest right now? Maybe it's several things.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a book that perfectly encapsulates that, which you may have read, which is Dan Harris's 10% happier, which was basically his experiment. He went through a whole thing. He went and met with Deepak Chopra. He did the whole gamut. And was very skeptical. And ultimately says, basically that's it, that I feel 10% happier that there is a noticeable, not massive, but a noticeable improvement and that it is cumulative, that it seems maybe that 10% this book is a couple years old. Maybe that's 20% now or 30%. That seems to be the common experience that it helps you recognize in yourself trigger reactions that don't make any sense. If you're looking back through the lens of a year, if you're asked a question, okay, you're from now looking back on this, does my reaction make sense? And it helps you identify those and get rid of them. Too great, too great daily ideas.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a cumulative benefit type circumstance. I think of anything there's a marginal increase in the sense of calm I have, mostly with interactions with people that trigger emotional responses, that just have more of an ability to see it for what it is, an emotional response, and then not react. And so that's been the tangible thing, I think, that's come from it”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“So Headspace is a really neat app, and meditation is like the, it's kind of like the Mark Twain talked about the classics that everyone says they've read them, but they actually haven't read them. Same thing with meditation, it seems. This is this really popular meme that everyone wants to do. And it's incredibly having been followed the same story. It's incredibly hard to do consistently. And Headspace really works. I'm curious what you say has been beneficial. Can you flesh that out a bit? What about it has been helpful or good or joyous or whatever the adjective might be?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Tony goes on stage in the morning, he jumps on a trampoline for like five or ten minutes to get his body going in the morning. And I don't work out every day. I wish I did. It's not a great word. My life hasn't evolved in such a way that I do get a real great workout in every day. So what I started doing was in the days that I wasn't working out, I get up and I do, for me, the equivalent of his jumping on a trampoline. I do 50 jumping jacks, 30 push-ups, 30 sit-ups, 30 squats, and I'm done. And it's not a work. I don't view it as a workout, but it gets my body moving. And so those have been hugely impactful.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“I would start that by saying I found that the only time of day where I have consistency is first thing in the morning. And so what I do first thing in the morning ends up being those things that create the habits. And I would say there are two, not every day, but most days. One is a short meditation. So I was not a meditator until in the last year. And the concept of sitting down for 40 or 50 minutes, I just couldn't imagine it, but I used the Headspace app. I do 10-minute meditations every day. And that's been, I think, hugely beneficial. And the second is some form of working out. And I've always been kind of a workout nut and a fitness nut and everything from running to high intensity stuff, cycling, whatever it is. But there's been one change in the last bunch of months, and it came from having watched Tony Robbins' documentary. Fantastic one-hour documentary. And the thing I picked out of it was that before...”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Moneyball 2.0 written by the beat journalist for the Pittsburgh Pirates in and around the Pittsburgh Pirates. I think it was 2013, 2014 seasons. And it won't have the same impact as Moneyball because that was sort of the revolutionary concept. But if anyone is interested in baseball generally, in statistics and in thinking deeper about, okay, now that the first big discovery is made, what do you do from there? The book is unbelievably good and everyone I've recommended it to. It's all been in the Money Management Industry. Every single person who's read it, usually two or three months later when they get around to it has sent me an email saying, I can't believe I hadn't heard about that before. And my recommendation shouldn't be much of anything. I heard about the book from Seth Claran. And so for those who care more about what Seth says than what I do, which probably includes me, he was the one who first recommended it to me. And it's a phenomenal book.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Let me go with two. And the one is not new, but there's a caveat. So in the last couple weeks, for the first time, I have been reading Dale Carnegie's How to Win Friends and Influence People. And it's a book I've known I should read forever. In fact, I probably read the first 10 or 20 or 30 pages, a whole bunch of times. But I've actually started to read through it. And it's so good that I think sometimes you look at other people's classics and you say, oh, yeah, I should probably read that or I shouldn't. But that's incredibly powerful and it's one of those things where I said, boy, I really wish I had read this a long time ago. So that's not new, but the notion of, hey, if there's a book that other people seem to be saying is really good, go read it anyway. Don't read the Cliff Notes. And the one that I have in the last year read and have mentioned to a lot of my money managers, and for some reason this book has not gotten the traction that it should have. It's a book called Big Data Baseball. It is a fact.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Now, to flip what I was saying earlier, it reminds me of in the long run world the phenomenon of value suffering such a really bad six, seven-year run. And interesting arguments impossible to confirm or deny, but interesting nonetheless that the Fed's actions, zero interest rates in general, sort of a perpetual bid that's been created in risk assets has removed what worked about value investing to a large extent where things would correct, often overcorrect. We've had this perfectly straight up line pretty much. And when that happened, when those overreactions happened, value investors would be a backstop. They would swoop in at preferential distressed prices and ultimately benefit from that. But that opportunity just really hasn't happened, certainly not in large cap stocks, maybe more in special situations, smaller companies. But as you point out, the timing sometimes can be everything.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“We haven't seen that period of time. And there have been pockets, there have been months where hedge funds look like they're crowding over each other and the downside returns aren't what people expect. And so that may be the case. But the other piece is this notion of innovation in the capital markets. And there have been so many pockets of opportunity, subprime mortgages being won, where if there is something askew in the capital markets, it is hedge fund managers that find it. And sometimes in mass. And we just haven't seen that in a long time. Certainly anything on the short side. So there's a lot of people that are crying doomsday right now. You hear warnings from so many different well-thought of practitioners and yet the only way to capture that value is to be short something and it's really the hedge funds that do that. So I'm not sure this is the right time for people to say given the pricing of equity in credit markets to say, hey, this is what we should abandon.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that the default to have an allocation of hedge funds in a portfolio probably doesn't make any sense in the same way that we could say the default to buying a bunch of growth stocks doesn't make any sense. But hedge funds structurally have done two things over time, only one of which we've seen in almost the last decade, that you don't get access to in the long-only world. And so the first is managed risk. So a well-managed hedge fund, even a long short equity hedge fund, the way that returns have generated equity-like returns over time is by underperforming in the up markets and protecting capital in the down markets, but with a positive skew. We've had such strong equity markets that you would expect hedge funds to underperform.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Very reasonable comparison, and you have seen certain institutions abandon hedge funds. And if I looked at those institutions, they tend to be large pension funds with challenging governance bodies where the hedge fund allocation was fairly material anyway. But the noise around fees was high.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Phenomenally well. So the question is, I would argue people shouldn't buy gross stocks. Now that means you don't get to participate in the most fun names. And you could port that argument over and say from an allocator's perspective, we shouldn't invest in hedge funds because we might get lucky. We might have, you know, we might be the first investor in John Paulson's fund that goes up in an unbelievable amount. But the odd suggest that this as a group, our allocation as a group is just not going to be able to out-earn the fees relative to the S&P 500 from Vanguard. So what do you think from an allocator's perspective? Is it the same answer? Is it getting too hard? How should we think about this?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“One of the things that I think about a lot when I think about allocating to managers being one is the same phenomenon we see in value and growth stocks. Overpay for growth. That's the MO of markets for 50, 60, 70 years everywhere we look, we see the same phenomenon. And it's the classic Alexander Pope Hope springs eternal in the human breast. And for every moonshot growth winner, of which there are a lot more than value stocks, to be fair. So more kind of winning tickets come from that growth universe than from the value one. But in aggregate, it seems to be a mistake to be a growth investor unless you get really lucky. I wonder if there's some of this that will always sustain the same psychology that will always sustain the hedge fund world because it is the most talented, smart, charismatic people with probably the greatest potential upside. It sounds to me like a growth stock in a person versus a small group versus a public company. And some of them work out.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Hedge fund would ever grow to something more meaningful. So when I talk to people, I said that's how they need to think about it. And if they're so passionate and so entrepreneurial that they really want to do that, they should go ahead and do it. The difference today with 20 or 30 years ago is the opportunity cost is much, much higher. So that talented person that might be able to get $20 or $50 million and therefore get three or four or five hundred thousand dollars of management fee income can get a job that pays that or presumably much more than existing hedge fund today. And so people have to make that assessment for themselves.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“I thought it was going to be sufficiently difficult going forward to start new hedge funds that I realized I had to shift my own life and my own career. So I had this body of knowledge, but I didn't want to spend my time pursuing that anymore. So I figured what better thing to do than to share it because there are people who will go out and do this and be successful. I think if there is one piece of advice that I've tried to tell people, they need to think about their own hedge fund as the entrepreneurs did 20 or 30 years ago, which was if you got to 25 or 50 million dollars, that could be a great life. And you manage that money if you can compound it one day, it'll be $100 million. And one day it'll be $150 million. And without this wage inflation that's occurred, that's how today's $20 billion hedge funds started. There is no promise, nor was there back then that the $100 million”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so I would start by saying it is getting too hard. It's very hard to counsel one person not to follow a dream they have. But I think the probability of success of a very smart, very talented, very well-trained person with a strong pedigree is much lower than it was five or 10 or 15 years ago. Part of the reason I wrote the book was I was in a unique chair that not that many people were in where I had lots and lots of experience with startup hedge funds. And I had seen these patterns of mistakes that people make that are repeated because they don't know that other people have made those mistakes in the past. And at the same time...”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“So getting down to brass tacks, if we have somebody out there that is entrepreneurial and interested in starting a hedge fund, how would you counsel them generically? Is it just getting too hard or is there some circumstance that it still makes sense? And then we'll do the same from the allocator's perspective of investing in these funds. Yeah.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“And he looked up and he just heard, Yeah, it worked. Like there was almost this, this was before the end of 2007, before he had collected the billions of incentives that he earned. And so that was one because I and probably many other people struggle with the notion of trying to be perfect and dealing with my own imperfections in life. But that actually was a perfect investment. And so it's hard because once you do that, you have this tendency that you can go look for it again. And you'll probably never find it again in your career. But it was such an obvious one that stands out. There are many, many other stories and other great investments and other failed investments, but it's hard when something like that happened and you were a part of it to not have that be the most memorable.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Doc loans, all this crazy stuff that Michael Lewis and now movie theaters everywhere show. But it was a lot different to say, hey, we have a risk reward and a view that we already have that says we're going to make four up for one down. And now someone's showing us a thousand up for one down. What do you do? And living in the northeast, it was pretty tangible to feel the growth in the real estate market. Just anyone who owned property, the prices just seem to go up and up and up and up and up. And you can see the data. So the notion that that would slow down, especially if you're trained as a value investor and leave them reversion of the mean, it wasn't that much of a stretch to get there. But that was watching it. I remember having conversation with JP, John Paulson, about a year later. It was the fall of 2007. And we had his deck that showed if housing prices just stabilized, let alone went down, we were going to make like 10 times our money or something like that. And there was one slide that showed the risk reward, and we put the slide.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, the one that obviously sticks out isn't one of the 40. I mean, Project probably made 200 investments. 40 were seeds. The most obvious one that sticks out was protege was the largest day one investor in John Paulson's subprime fund. The reason it sticks out for me isn't just the sort of windfall that came from it, but I was always more amazed at other people that invested in that fund because our pattern to get there made a lot of sense. We had very bearish views on high yield debt starting in 2004 and had been short high yield debt with a manager on a risk reward that you can say, okay, we're paying 6% and that became 5%. You're paying out 4%. And if it really worked, you were going to make 20 or 30 points. And then someone comes in with a presentation that says you're going to lose 8% a year. And if you're right, you're going to make 10 times your money. And we now know all the reasons why. But at the time, it didn't take a lot of work to start calling around and saying, are these things real?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's the equation people have to understand as sort of. What's their conviction in their skill? The more conviction you have or the more skill you have, the more you should be able to concentrate either in your best manager picks or the manager in their best security picks. And what are the consequences of that in the periods of time when you're wrong?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“I don't know the answer to that. It's really a function of the risk tolerance of the governance decision-making body. So for some allocators, that might be a fund of funds. That might be their clients for endowment foundation. It might be their board. And risk tolerance isn't something you just, hey, let's have a questionnaire. Oh, great. So we know we can withstand 10% drawdown. But through time and experience, you start to get a sense of the losses that people are comfortable with. renders itself to the level of, let's call it concentration. What we know is that more concentration is better. That has to be dovetailed with some level of skill, right? If you have no skill, concentration is a lot worse. But then you probably should just be indexing. So if we assume there's some level of skill, whether that's in the allocator's ability to pick a manager or the manager's ability to pick securities, the data and research has shown that concentration is better, but it also comes with more volatility. And so I don't know that there are specific numbers.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“One of my favorite lines from the book is you go through the checklist of attributes of successful managers. And then at the end of it, you say, now this set of characteristics describes more failures than successes. And coming back to this idea of luck and random outcomes where two guys or the set or two girls are the same exact pedigrees, you know, one works and one doesn't. It's got to be a huge challenge from the allocator's perspective. So when you, if you think about advice to allocators, how much diversification should there be across, if the whole idea behind a seating business is you're diversifying, right? You're capturing that phenomenon that, you know, hopefully you hit some real big wins from an investment and business standpoint and acknowledge ahead of time you're going to have losses. So what's the right mix if and fewer people are doing this these days? But if an allocator has”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's not. And then a big one that we haven't talked about is when people stumble and have these people stumbled. A lot of times if you're 32 to 38 years old, as we talked about in the book, and it happens to be the right time to start your headphone, those people are on a track. They've gone to the right school. They've had the right job. They've had great success in their career. And some people just continue on that path throughout their life, but most don't. Most at some point in time struggle and stumble. And sometimes it's only at those moments in time where you start to see things like resilience and tenacity that some people can make.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Organization, and did they tend to have attributes that are repeatable on their own, or was it more a function of the timing and the environment they're in? And you saw both, but there were certain, you take an organization like Tiger that people knew well. My favorite correlator to that was there was a hedge fund, the very few people knew called Siegler Colliery. It wasn't a scaled big hedge fund. And I think one of the guys still manages money and Peter Collier still manages money, but Scott Bomber, who had a great fund at SAB and David Einhorn from Greenlight, came out of there and you had three or four people that Curtis McGuinness at Ivory came out of. They had three or four people that were really successful. They came out of the same fund that wasn't as successful. And so over the years, you had all different kinds of iterations of these houses of wherever people were emanating from. So it's always an important question to ask. What created this person's success? What part of the pedigree is repeatable?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“We're not well liked to tiger, and we're not thought of as good people or talented investors and then turned into Uber successful hedge fund managers. So there was something about the training ground at Tiger that was repeatable. And I could reflect on my own background at Yale. There is something to the structure of what Yale did and the discipline that has been proven that David has been able to teach other people. It's Seth Alexander, who I worked with and Paula Valenta Bowden and Andy Golden of Princeton and Peter Ahmond at Penn and now Rob Wallace at Stanford, all of them have varying degrees of skill. They're all very smart, very good people, but they've all been successful and more successful than the rest of the Endowment Foundations. And there is something to that in a training ground. So one of the things that we used to do was spend a fair amount of time trying to understand the history of people. And often you had limited data points, but the history of people that came out of a particular”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a fantastic question. I do think you run across just about everything. So it's hard to, it is hard to, I'm thinking in my head, you see me staring off into spaces, you're asking the questions, or what are the examples of each. I remember specific examples of people who came out with great pedigree who couldn't really replicate it on your own. And if you want to take a broad brush now they don't even exist. The old SAC was a great example for many, many years SAC generated phenomenal returns on the capital, and yet with somewhat some great consistency, the people that spun out couldn't come anywhere near replicating it on its own. And back then, SAC was really opaque. And now I think people have a better understanding of what a multi-manager platform hedge fund is and why what the success factors are. And in contrast, you had the old tiger management where almost there were people that if you did your due diligence back in the day,”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“One of the things that I find interesting is the portability of skill and the pedigree is the idea behind pedigree is to say, well, they've got typically great mentorship, a proven track record, they're probably going to do well. And to use an analogy from another industry, this has been written about a lot recently. If you think at Marissa Mayer's tenure at Yahoo, that she left Google, and this happens all the time, with a sort of halo effect. And now in hindsight, and of course, there's counter examples to this. But you often find people whose success in hindsight seems to be as much because of the institution that they were a part of before their own personal abilities. Is that an issue that you came across often with kind of the pedigree type investor that their independent success was less than success?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Views the business interest as valuable as the investing, which many do. It's not that they discount the investment returns on their capital. It's just they're also looking at as a business. The esoteric strategy probably falls short because usually it's capacity constrained and therefore you can't scale a business out of it. Now you're left with a pedigree versus someone with a great track record. Both can have merit. Again, it depends on who it is and why and what the charisma, the charismatic element of it of those two people, the guy with two great years who can't talk his way out of a closet isn't going to raise any money. So there are a lot of factors that go into it, but you really have to marry what that allocator Cedar is trying to achieve with the particular merits of the different.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a great question. I think you have to start with what's the allocator's interest. Because depending on the, and there's no right or wrong answer to this, but depending on the allocator's disposition, you will have three different answers. So let me walk through that. An allocator in the seat like protege was, where the investing was really driven by the investment returns on who the seed was, the middle manager who just had a good track record is the least useful. They may be the most useful in terms of short term being able to grow assets, but the least useful because we don't even know what we're talking about, what the strategy is and why they got there. But oftentimes when someone who's had outsized performance, they may revert. And that's sort of the worst thing you could do. Now at your left with a pedigreed person and someone in an esoteric strategy, well, if that esoteric strategy is particularly interesting for some structural reason, that may well be the right place to be. Now, if you're a seed.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Fair enough. Let's say you were faced with a group of managers with whom you could make a seat investment and you knew you had one edge, if you will. And the three options are a fantastic pedigree. So let's say, let's call it notable success at a big hedge fund. The second would be a early track record that's good. Let's say they've got a one or two-year track record that's really strong. Or three, a strategy, which is, and we've already touched this, that there's nothing new under the sun, but maybe a strategy that on the sliding scale is very unique. Is one of those three more fertile ground than the others, do you think, for finding interesting opportunities from an allocator's perspective?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Short sellers that might have been typically run, call it 80 or 90% short, you go into the fall of 08, and as they're making money, the short positions shrink, and so they get less and less net short. And so the hedge that you want gets less and less, more impactful. And that ended up being fine through 2008, and many of the dedicated short sellers were only 20 or 30 percent short going into 2009. And you think about 2009, you say, well, that was great, right? Well, not really, because in January,”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Everything exists. We talked about that before. The short selling as a product has had some real structural challenges over the years. And they're really twofold. One is that most of the time markets go up 60 or 70 percent of the years and therefore 60% of the years you lose money. And if that's not properly thought of, people get tired of it. usually right before the big moment that you need it. That's the sort of obvious and what you saw with dedicated short sellers through 2008 and the subsequent years was sort of a great testament to that. There really aren't that many anymore. The other challenge is a little bit more subtle, which is managing a short only portfolio has a real rebalancing issue. And if you just think about the fall of 2008 and early 2009, dedicated to the...”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolute return, I'm going to be a true hedge. I think he even says my role is to allow my investors to be more responsibly long, that I'm going to do well in environments when they're, you know, their beta basically portfolios are suffering. And then I'm a true hedge. Do you think that that's maybe a pocket of opportunity for more people? Maybe they have, and I just don't know. I don't know the world like you do. Have others emulated that style where it's, it doesn't even need to just be a broad market hedge. Maybe it's something really specific within someone's levered long to consumer stocks and they want a short consumer book or something like that. Does that exist? Is that just too niche?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, it just seems like, God, there's got to be some way of alignment that can make this work because it's true. Like so much of the real talent is over the last 15 years is left long only and is in the hedge fund world. Certainly some of the most interesting people that I meet, why wouldn't they go into that structure? It makes more sense from a business standpoint. So maybe we could talk a bit about some unique styles of funds. One of the things that we've realized and again our business is long only, so it's different, is that just the standard, you know, people need another large value manager like they need a bullet in the head. And maybe the same thing with a long plain vanilla, long short equity manager. There's just a saturation of these styles. One of the people and styles that I've always been fascinated by is Jim Chanos because he is saying, I'm going to meet a different need. It's not necessarily”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a really interesting concept for the reasons that you describe probably a better version of the product I thought about. It didn't get traction, I would guess it's because those amounts are just going to be too small for a long time to sort of notice. It's one thing if it's an endowment. It's another thing if it's like a penny that you're calling an endowment.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“What about something radical? And this may not even be legally possible, I don't know. But knowing what we know about psychology and certain biases, there's this endowment effect where something you have you think is more valuable than when you didn't have it. What if instead of discounting fees over time, sort of the frequent flyer thing, what if you took the discount at each stage, carved it off, and put it in some sort of side vehicle that you kept investing on behalf of the investor, but they only gained like it's some sort of like reverse vest where it was theirs, but they didn't get it if they left on some schedule. So if they left quickly, they sacrifice the assets that had accumulated in this side pocket fund. I don't know how this would even be set up. But you see where I'm going, like carve off a part of their fees, keep investing it for them, and then effectively they earn into that.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's true generally. In the asset management industry, what you find for reasons that are a little bit confusing is if you think of just normal business strategy, sort of one of Porter's models of price differentiation and product differentiation, investors really for the most part do not select their investment managers based on price. It's much more about perception of quality. And so the manager who's launching, who says, okay, I do think I'm great. And in addition to that, I'm going to create a fee structure that's going to be much more sustainable, that's going to reward people over long periods of time. That in and of itself, even if it's the only fund that has that, does not get money in the door.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, it seems like a classic dilemma where the first mover may not, people are so used to a certain structure and there's so much inertia that it's an irrational decision from a business standpoint to offer something really innovative, even if it's great, because innovations diffuse slowly often and early innovations don't work. And the mindset is hard to change.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That tremendous amount of inertia in the existing business, but it's also a rational business decision, right? You may say, hey, over time, this is a great fee structure, but once someone's been managing a certain amount of money and they build... Cost structure that supports it, it's really, really hard to dramatically reduce the revenue base almost no matter how high the fees are. People get accustomed to spending into what their management fees are. So it is a real business challenge to make a dramatic change that's just going to slash revenues the next year.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“But there's also a governance issue that comes into play, which you can imagine, let's say an allocator has money with a manager for five years, everything's going well, and then the manager goes through a soft spot of performance. But because they've been there for five years, their fees are lower than they will be for a comparable manager. Well, in that board meeting, there's going to be a marginal reason why it might make sense to hang around. And that mostly doesn't exist. The switching costs, it's certainly in the hedge fund industry and probably all of asset management are just way too low. Now, one of the things I learned was the number of people who said to me, wow, that's a great idea. But there's no real innovation unless it's in a new fund. And that's because people have embedded fee structures. And if you start offering, imagine you're Oxif and you have $30 or $40 billion, let alone the other problems they may be having now. And you want to reward your investors for loyalty discounts. Well, tomorrow, you're going to have to slash your fee.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“There is, I actually wrote a paper a couple years ago about a fee structure that I thought was different and hadn't been used. And to do that, you have to get outside of the investment industry, as we talked about pretty much everything's been tried already. And I thought a frequent flyer programs. And so A feast structure that would go down over time based on the duration of an investor's time with the manager. So you have seen discounts for size. You have seen early discounts. Once in a while, I know of only a few examples. You have seen managers reduce their fees for everyone just as their business grows. But the notion of almost a frequent fire discount is obvious on the surface because everyone goes in thinking they are a long-term investor, but we know that data shows that's not the case.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Do you know of any examples of managers that, again, I'm fresh off a discussion with the guys at Vanguard, so my thinking is a bit colored because I think one of the most genius things that they did obviously was this mutual structure where the funds own the company. And so the alignment of incentives is perfect for the long-term investor, right? Are there hedge funds that think like that? Could that thinking be incorporated into, let's say we've got a guy or a girl that's got phenomenal talent and is a stock picking genius and they want to set up a two decade, three decade, four decade multi-generational, successful hedge fund business? Is there a way that we could incorporate that thinking, that kind of mutual thinking into a business?”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That, yes, it's tougher, yes, competition is higher, yes, returns have come down, all of which is true. It's just that the investors don't require the same types of returns they did to invest in these strategies.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“That we want, and we're going to put this on top. And if you think about what that means, the required rate return on the hedge fund portfolio dropped from a day when Yale had it at 6% to something that just barely covers the cost of capital. So today that would mean the required rate of return to hedge fund portfolio might be 1% or 2%. And so even though in the paradox of skill, the relative competition is tougher, sort of the relative, the ability to generate sort of performance relative to other more skilled practitioners is harder. At the same time, the required rate of return that many institutions have for their hedge fund portfolio has just gone down and down and down and down and down so that the large pension fund who is using hedge funds not as an asset class or they're not taking money and allocating it, they're just putting it on top of their long only equity portfolio. If they manage risk the right way and they make 2%, they're super happy. And those are huge pots of money. So it's hard that there's this other dynamic. It's not just the fact that”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“The idea was equity like expected returns with less risk and certain less correlation. The equity markets. And back then, maybe that was a 5% or 6% real rate of return. That was the benchmark. Ten years ago, I saw Dave Swenson give a speech. And someone had said to him very appropriately, your benchmark for this asset class is, let's call it, 5% real. That's a 7% rate of return. For 10 years, you have made 12%. How do you explain that? And he sort of shrugged his shoulders. The point being You don't need to make 12% if your acquired rate return is only 7%. And that 7% was, that's real. If you think about Trojan, five points of alpha is really tough. Around that time, the notion of, well, you have risk parity and portable alpha came into play. And so you had pre-crisis, you had a bunch of pension funds, other institutions that said, we're going to invest in hedge fund portfolio and effectively buy the beta.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source
“Maybe. I don't think so, but let me try to explain why. Because I've seen a lot of hedge funds, I've seen a lot of long-only funds over the years. Private equity was a whole nother animal. And even if you look at the academic data that consistently maligns hedge funds, what you find is that for whatever reason, this universe of hedge funds on a gross basis adds value and far more value than the traditional long only does on a manager by manager basis. The problem is that it's being paid away in fees. So one of the reasons why these fees have come up when the competition has gotten higher and therefore relative skill is harder to assess, is that the required rate of return on a hedge fund portfolio has just gone down and down and down. So let me give some examples. In my early years at Yale, Yale had and still has a bucket they call absolute return.”
2017-12-18 · Capital Allocators · Deep Dive into Hedge Funds (Capital Allocators, EP.34) · IDENTIFIED FROM THE TRANSCRIPT · source