YouSaid · the spoken record

Yen Liow

lines on the record: 98
first: 2021-12-27
most recent: 2021-12-27
sittings or episodes: 1
sources: podcast

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“Holes in this business, and I used to say, you know what, their talent, I can look the other direction. I just try to do good things with good people, and life is so much simpler and frankly so much more fun when you do it. And again, if you do it that way, you may not win, but you can't really lose. And I'll leave you with one of my close friends has a saying, we're all going to lose money in this business. We might as well lose money with the people that we like, right? And I firmly believe it”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Peace of mind and equanimity because you're at peace. Whatever happens is yours. It's okay. It's your best effort and it's good enough, by the way. But it eliminates forever regret, and so authenticity is the biggest one I want to send through this, is like it takes a tremendous amount of courage to be authentic. And by the way, I faced some awful rejection from this, right? It's not fun. But my God, it gives you peace of mind. And then linked to this is character over the successful. I admired the successful people in this world and often overlooked their character. My wife has an enormous bullshit meter, like she can smell character from a mile away and will not tolerate anyone who isn't kind nice to their core. No interest in it because she doesn't care how successful people are. And I love her for that. There are so many talented”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Are two linked TED and a third if you want to go into portfolio management, but the two that I think are the biggest ones is authenticity and then character. Authenticity, I made a huge mistake when I started R of Art Global in that I was failing conventionally. I went into a classic Tiger construct and it's terrifying being fully authentic. Why? Because it fully exposes you to rejection. You're completely naked. But by the way, I think that's the most important gift you can ever give yourself. Why? Because we only have one life. And if you really give it your all and you do it smartly, whatever happens is actually the truth. It's peace of mind. It just is. And so when you are truly deeply authentic, first of all, it's much more powerful because the root is you. It's not someone else. You may not win, but I guarantee you won't lose. You can't live a life of regret. So you get the huge benefit of people.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Number one is game selection. I think this changes lives entirely. People, if they're even listening to this podcast, So, if you're choosing efficient volatility, you're just running in circles, you're tap dancing on landmines, you've got to know where to focus your effort and then unleash all the hounds inside of you to go and attack it, but choose the right game. And so unfair fights changes everything. And I wish I'd known that younger and with a little bit more attention. I've got a lot of energy, but a lot of it was wasted. And I think, look, it's inevitable part of the game. But having wise counsel to know where to focus that energy and focus on the right game changes everything.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“It clear to me you may be gifted, you may be successful, but you are not better than anyone. Look out for everyone. Why? Because they're humans and they deserve the respect and our attention. And I love that”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“My mom is a very strong woman. She's five foot four, but she might as well be in a Mongol warrior. So this woman did not take crap from anyone. She stood up for herself, she stood up for her family, she stood up for her community. And my fire comes from my mom, right? We had some really rough times in Australia, and we turned up barely five years after the white Australia policy. They'd never even seen Asians in some parts of Australia. And she was tough to see through what we had to see through. And I learnt deeply from those lessons. My dad, who was a dentist, super kind. What I learned from my dad is he always looked out for the overlooked. Though this may seem very small, but it was always profound to me. My dad, every time we traveled, would always tip the housekeepers. Why? Because they never got acknowledgement for their efforts, always went out of his way to do it. And so for me, he always made.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“So, arrogance for me is the term is like you either be humble or you be humbled. And by the way, the first is a hell of a lot cheaper than the latter, right? It's such a privilege to be in this business. I just have no time for arrogance. And it's actually, in my view, it's exceedingly dangerous. I believe in confidence. False confidence is deadly. And so my number one pet peeve is when the chest pounders of the super uber analyst is like, I respect you probably made some really good calls, but if you're that aggressive, it only takes one to knock you out.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Arrogance and false confidence. Let's just step back and think about what we actually do for a living. When we place a bet, we are saying we're right and the whole world is wrong. My God is that arrogant. Gosh, just stop and think about that every time we act. We're right. The whole world is wrong. And so the other part of this is false confidence. Do you really think you know something that no one else knows? Seriously. I mean, seriously. And by the way, if that's true, it's likely illegal.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Say it's wasted potential. There's so many people who, you know, if they're listening to this podcast, by definition, they've won the ovarian lottery. They've been lucky enough to be born into a society that's very well established and hopefully beyond the basic needs. The thing that kills me is when I see talent and it lacks the initiative and fire, the ignition to go after it. So in the history of mankind, this is literally the best time ever to be alive. And there are literally billions of people that would kill for most of our worst days. It eats me up so much when I see incredible talent that's lazy and they don't have the fire to go pursue it. It's such a gift that our creator has given to each of us and it's in my view disrespectful not to go try fulfill it and it's just so much fun to try.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Genghis Khan in the Making of the Modern World changed my life. I think it's a top five investment book of all time, written by Professor Jack Weatherford. Khan conquered 10 million square miles of this earth in 30 years. And the business analog of this is you cannot do extraordinary things doing ordinary things. He was, in my view, the most extraordinary applied learner in history of mankind. And I think there's lots of misconceptions about the Mongols and Khan. But my goodness was there a lot to learn from him.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Journaling alongside meditation. So I meditate 20 minutes first of every day and then right after it I journal for 20 to 30 minutes. And journaling lets me consolidate all my thinking. And I think it's really important that it's writing that really pushes all the various elements that's been brewing inside my head from overnight in the prior day. But journaling has been a game changer for me. I've been doing this for gosh, it's over 20 years now, and I'm still evolving how I do it. I think it's the most important discipline because it lets you take your threads of thought. and push them. We're in the business of thinking. And it's the most important part of my day. It's always done in the first part of the morning, so it's uninterrupted and not filled with just the randomness of the day. I would so strongly recommend it's changed my game. It's changed my life. It makes everything much more explicit and it's really, really the most critical part of my day.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“There's very little time outside of working family. The first one would be I'm an avid reader, so I try to read between 70 and 100 books a year. I love to read. Unfortunately, that feeds obviously into our core passion of investing. My biggest hobby, which obviously has also been challenged by COVID, is I love to travel. I'm an Aussie to the heart. And I did a 300-day trips around the world in my 20s, which were the best things I ever did. And I really miss being on the road and just seeing the world and being close with my friends. And the last part of that, my wife and I are big foodies. It's all linked into that. I think it's one of the greatest joys in life. And I can't wait to go back and explore all the great food around the world.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Is such an honor, but I think this is the most exciting time in history to be alive right now from just a broad what's going on in the economy and from a technological perspective. And it's just such a privilege to be able to invest and study it.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Every single day to do it, but we know what we have to do and how to do it doesn't mean it's going to guarantee us getting there. But I think our track record of success over these past four years gives me tremendous confidence in our abilities to do it. We'll constantly be 1% better all the time. And there's a couple of very big ones focused in there. We know where to find them. We know how to ride them. We know how to risk management. There's three things that I look for in our goals. One is peace of mind and transformative performance for our partners. The second is an ecosystem of great ideas, people and businesses and that really matters to me because doing great things with great people is probably the most joyful thing in the world for me. And then the final part of it is just have a hell of a lot of fun. And Ted, you know, we're having a ball in our firm. I'm so proud of them and we have an incredible portfolio. We're partnered with extraordinary people that we learn from every day. And now we're partnering with people who are frankly changing the world and helping them realize their visions.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“So we are five years into this thesis. We're seven years old as of this February. I'm the most excited I've ever been in my career, Ted. And so what I'm excited about is I think we have found for us the strategy that we know we can exploit through cycle for long periods of time. So our quest of the right tail, we have the strategy. We have the team. The team will evolve obviously over time, but I have an incredible team right now that I hope to be able to go through that whole passage together. We're assembling and finding our new partners that want to be part of that quest. It's not going to be straight. And when you get the right partners, you can achieve extraordinary things. And I've met many of those extraordinary people. So the most extraordinary part for me or what I'm most excited about, A, I think our business is positioned to do, I can see exactly what we have to do to get to the 20 year right tail, and we just have to go and do it. It's simple, but it's not easy. It's going to require a great...”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“On some of this, and we'll have to navigate all of it. The impact for us as we play our game, and that'll inform us at the margin. We don't really change our strategy. It's mathematically tautological what we do. But I believe those to be the big challenges that we face market-wide.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Low end wage versus 50% that was middle class in GFC. The economic cost is dramatically different. The government transferred $630 billion of excess payments to cover off lost wages. It covered it by an extra $630 billion before the Biden $1.9 trillion stimulus. There is a lot of firepower coming. The next part of this is, I think, government policy, this is the first time we've seen coordinated fiscal and monetary policy coordinated in this country in quite a while. And then finally, The whole world is recovering at the same time. We haven't had this in multiple decades because COVID pulled us all down. We're all coming out at the same time. This is a shock that's coming to the right side of the demand curve. Now, I don't know if that translates to inflation, but I do believe we have a very, very good shot at it. And so finally, the question is in that environment, what impact does it have on growth versus value and on small cap versus large cap? And there is very strong historic view.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Stuff written about this, and I'm not a macro aware. I don't make big risk decisions based on macro, but the one part I do want to message is I actually think we're in for a very substantial demand shock to the upside. And the reason I say this is when I look through all of the data, I can't think of a major demand center that's not going to be coordinated and up in the next two years. I don't think we've seen this since the Second World War. So from the US perspective, the consumer, business and government are all in, all at the same time. The US consumer, by the way, is fully back. They're fully spending. They're spending it more on goods than services, but they're already fully back. Wage income is almost fully back to COVID levels. Unemployment skewed dramatically towards low wage, the human cost of this is extremely real, but the economic cost of it is completely misunderstood. 68% of all jobs that are lost is”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Stock as well as size of company. This is classic what happened in 2010. And actually a cyclical recovery yet alone one of this size, the worst quality businesses fly the most. In fact, the worst quality businesses that are levered fly the most. If I was a trader, that's what I would be trading right now. I know the framework. I just don't want to use it. Very dangerous way to invest, in my view. But that is the land of the hundred right now. And there's plenty of them absolutely flying. On top of the technological innovation that's going on. So we have 99 in 2010 mints together right now. We have to be able to navigate the cyclical recovery and the extreme right and left tail movement of retail that's the marginal price setter of markets. Henceforth, we have to adjust risk and we have to be careful about where we expose ourselves to cyclical recovery long or short. The next one is inflation. This is a really big one. We've gone through a 30-year deflationary boom. Lots of”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Let me touch on market observations and then let me touch on business construct, if I may. From the market observations, I think there's three big thematics that we'll have to face. One is there's obviously certain speculative components in the market today. The second is there's a big inflation debate. And then third, there's some tugs on factors, growth value as an example and small cap versus large cap. So in terms of the market outlook, speculative markets are challenging markets to deal with. But again, in the next 20 years, we're going to face them all. So what's the specific challenge of this? It means retail, by the way, is fully back. So retail is 20% of traded volume right now. It's double what it was in 2019. It's driving a lot of options. It's driving pockets of extreme movement. We saw this in 2010 and 1999. It's kind of interesting. It's two things mixed together. So you've got secular and you've got dramatic cyclical. So we've got microcaps dramatically outperforming the large caps. By the way, on dollar value of...”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“For a moment. And once you get great basis, and this is the paradox going back to the question of the ride, you have to embrace that our basis was inefficiently exploited, but there are times when it's going to have to go through efficient or even on the other side overpriced stages to capture the five to ten X. And so what we've focused on, it's extraordinary. Why is it even possible that large cap stocks can go up 100% since March of this year? Efficient markets don't behave that way, but they do at very few occasions in time. And that's all we need.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Or are they temporarily inefficient? So, inefficient markets are like microcap. It's very difficult for institutions to compete against individuals in microcap. Henceforth, it's systematically inefficient. Now, it doesn't mean they're always knowable either, to be fully clear. There are lots of businesses that are immature in there or, frankly, completely unknowable, very low quality businesses. You can still also get efficient markets within microcap. The next part, which is, I think, that this is the way it led me on, was we have some extraordinary right-tail investors. For example, Eddie Lampert, Tepper, Taurus, Druke Miller, who've generated extraordinary returns, Paul Tudor Jones, in very, very large markets. How's that even possible? And what I discovered is I call it temporal inefficiency. It's a paradox. Most of the time these are very efficient markets, but there are always occasions, and you don't need many in a year if you run a concentrated portfolio, where they go in a”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Efficient market means there's no benefit to skill. Either it's being competed away or it's completely unknowable. These concepts are different than competitive markets. You can have competitive markets that are efficient or inefficient. You can have uncompetitive markets that are efficient or inefficient. And now the last layer here is volatility. So volatility is price volatility and pricing discovery. So the separation between price volatility and business volatility is a ridiculously important concept to us. In general, our stocks will be volatile at times, but our businesses in general are not. So we can have fluxing prices, but we have very steady businesses. We can exploit volatility because we have one set of assumptions and intrinsic value. We can exploit when price meets or goes below our intrinsic value if both are fluxing, it's very different. So the question in the quest is, are they inefficient markets?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“First of all, we define an unfair fight by the competitive win rate is very high. So you win a lot more than you lose and you retain a lot more than you lose. And the starting premise of that is business quality compounds value every day. So the question you're really asking, and this is the big quest, so the quest to the right tail, the right tail being defined as the Hall of Fame of investing or extremely high return, whatever you want to define it at. But how do you get there? The game of investing is about how do you systematically exploit inefficiency. That's the real question. And so the questions for us is where does the inefficiency lie and what is your system to go exploit it? Our quest is effectively finding durable brisk compounders and we find them in inefficient volatility. So the thing that we have to separate here is we define inefficient markets as those where edge and skill has a benefit. You can accrue consistent outperformance against that market alpha. The next one is what is an efficient market?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“It was really just looking at the facts and then surrounding ourselves with people who helped us see the truth. You also know it when you go through periods like COVID and if you have equanimity, you've absolutely found it. And I believe we've found it for us”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“And I just had to do lots and lots of internal work, and I looked through all my time. This is whether it's sports, academics, business, investing. What were the patterns? And we studied, by the way, in the summer of 2016, we studied every trade. We did up till that point. And we looked at the patterns of our behavior and the thesis and the outcomes. And it was really clear we were very quiet when volatility hit us in our horses, barely touched them, and actually we were strong. We would add, or at worst, we just held through, but we very, very rarely lost our strength. I looked at the other two. The second one actually was pretty good too. Third one was a disaster. We could not work out risk from volatility. We really couldn't. Something down 50, we would add and go, based on what? It's still a projection. We can't work out of the thesis's holding or not. And so, again, for me, I just didn't have the skill to navigate it.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Part of this was already in there, but this takes a lot of introspective work. Quality has always been a touchstone for me. So I'm a double immigrant. Double immigrant means if you don't work hard, no one's coming to help you. Now I've got two very loving parents, so it's not completely literal. But, you know, when we moved to Australia, when we're very young, I mean, we didn't exactly have a sporting community that was there to capture us. And, you know, my dad and my mom had to work very hard to make sure we were okay. And then my wife and I moved to America after that with literally the last thousand dollars we had in our pocket. So part of this for me is just deeply understanding the root of my strength. And what I had already known, and it's a bit of an irony because we literally named this fund after Genghis Khan's army, right? And we knew, and the reason why I started this was he did extraordinary things focusing exclusively on unfair fights. Exclusively. Why? Because to do anything extraordinary can't be close. The odds must be stacked in your favor.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Cost of this level of performance. You have to. You have to be able to stick with it because no strategy is evergreen. And when you're truly resonant with it, you don't give up on it and we're patient because we can see earnings power drives every day.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Price volatility and business volatility, we have to separate the two. And so that's a really important part for us. I don't like both sides of it. I can't exploit it consistently. So what happened to me again, I understand all the three sources of monstrous alpha, the one that resonated most deeply with who I am and frankly gave me peace of mind and equanimity in peace of mind I think a really underrated concept in investing. Simplicity is the other one, right? It's really hard to execute consistently over two decades, yet alone at the highest possible levels. And if you don't have equanimity in storms, you can't make good decisions. And so for us, this took us quite a while. In fact, I think it's one of the most important insights I've ever had is we understand the essence of why we're authentically aligned with that strategy. And now it's allowed us to build out every part of our business model to be consistent with it, which, by the way, the cost of it, we will willingly underperform certain types of markets. You have to.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Months, we bought one stock. We didn't trade a single share in our longbook in the fourth quarter of this year. If you have lots of analysts, that's a really challenging thing for them to do. If they're not prepared to focus on preparation rather than daily activity, culturally, we're a nightmare for the vast majority of the long short world. Complete and utter nightmare for a select few, it's nirvana. So for us, the matching of who we are with the strategy, there are many elements of this that really matter to me. One is, first of all, and this is just resonant, I think false confidence is deadly in this business. So I need to have the confidence when I take action. I need it based on facts and fact patterns that I can see and I can count upon. And so for me, the quality of the business and the quality of the people we deal with are elemental to what we do. To arbitrage volatility, it requires the ability for one side of the two side equation to be relatively fixed.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Never going to be Roger Federer. Roger has the talent and the ability to execute at a very high level. I know what a perfect forehand looks like. I just can't hit them under stress all the time. And I think this is a really important thing most people have to get in mind is like just because you know what's the right thing to do doesn't mean you can do it. And anybody who's had a golf lesson or a tennis lesson should know that why they think investing is different. I don't understand. Barriers to entry in this business are exceedingly low. Barriers to excellence are incredibly high. And so for us, we had to match who we are with the strategy. I know that horses or compounders works. I completely understand it. Now from an authenticity matching my temperament and my skill, my team's temperament and our skill to that strategy is a critical part of this. So we actually had to part ways with some extreme talent that doesn't have the temperament to do this.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“One of the first realizations for me in deeply studying high performance management teams as well as high performing investors is the element of authenticity. So what I found is there's three A's in high performance teams. Authenticity, autonomy and accountability. Stars need the room to make mistakes, learn, perform, and they need to be held accountable because A players like to play with A players. The authenticity part is the most important part of all though. Why? Because there's thousands of funds in this world and if you're going to make a contribution, it needs to be the most genuine version of you. That's the only thing that the world needs. It doesn't need another fund. And so for us, the first lesson that came through here is let's go back to the three frameworks. We've done very well with two of them. We've done woefully with a third. I know the strategy works. It's me. That's the variable. So the analog I give you there is I've had tennis lessons almost my entire life. I'm 49 years old.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“The things you touched on earlier is the reality that this is sort of a deeply personal and human business at its core. And I'm curious as you've thought through all of these structural things about the business and the processes that you wanted to implement, what parts of it do you think resonated most for you in establishing kind of the goals and the processes that, particularly from 2016 forward that you wanted to implement with you and your team?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“And the reason it's an amplifier skill is the cost of high performance is volatility. It's also the provider of it. And if structures are fragile in times of volatility, literally that's when the opportunity is being presented and it's creating systems level risk. So duration has to be matched with the strategy and alignment needs to occur very early in the process to understand the volatility characteristics of any strategy.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“And then the last part of this is the splits on the carry for the value that's created. The industry norm is on an alpha perspective, something around the 30% mark is deemed over long periods of time to have been appropriate, but there needs to be demonstrated skill for that. And so I believe, and that's what we've done too, is a scaling management fee, a fixed hurdle, right? Hard hurdle, no catch-up, and then a fixed component of the carrier above it. Now, the last part of that obviously is duration, which goes from completely liquid to higher locks. In theory, we would be looking obviously for matched duration. That's what lets us weather volatility. This is a really critical question because I actually think it's time arbitrage is the most”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the first part of this is management fee, hurdle, and incentive are the three parts of the equation here. Management fee, you know, there's four parts to the equation to get to the right tail. The fifth is absolutely expenses and fees. For net returns for clients. And if you're going to be in the business of investing, obviously the only thing that matters is how much value we create for our clients. So the first one on management fee is, I think the industry is evolving to scaling. Why? Because management fee was always designed to give us edge and keep the business in play, provide ballast to the business. By the way, too lean on that is not good either, in my view, right? It creates fragility into the business model. And I believe most fund structures are already quite fragile. It doesn't help to make them more fragile. The second one then is some form of hurdle. The reason I say that is if you're going to be a higher net exposure, there obviously is some beta in the portfolio. And beta can be sourced more cheaply.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Exceedingly valuable. The issue is the expected returns there should be between 6 and 9% net. Anything more than that, which by the way there are people who are doing significantly more than that. They're extremely skilled. But that's a choice on do they court it from that or to a higher net structure. And if they moved all that alpha to a market enhanced through cycle return, the numbers would be even bigger. So we as a firm made a strategic choice in 2016. We're the latter. We're focused on through cycle return. Our quest in investing was to compete in the right tail. We came here to compete on how much we could compound capital over long periods of time. So we have ported our alpha to a higher net structure based upon our horses to compound capital as tax efficiently and as briskly as we can for as long as we can.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“When it's middling or when it's going down. So to answer your question on what's the right structure, the choice, in my view, is alpha is still alpha and it's very valuable and it's hard to mine. So the choice is alpha transport. Do you transport it from a high net structure? And I think, Ted, that depends on the use case. So the irony of all irony is from me is I actually think the two extremes here are bond proxy or high throughput return. Bond proxy in a 60-40 world, the role of the 40 was to be up into a down equity market and generate yield. Obviously yield is very challenged now, but to be able to generate through cycle return and be uncorrelated is a big hole in 60-40 portfolio structure, which ironically market neutral hedge funds are a prime position to do. But they must be up into down equity markets. That is the requirement. And so transporting alpha to a low net structure is”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“To create a through cycle, profit neutral or additive on a P&L basis short portfolio. At 500 basis points, you needed about 300 to 400 basis points of alpha to break even through cycle that lets you lever for long short spread through cycle. Now it's closer to 800 basis points. That's a very heavy lift to break even. The second was the industry has faced a very strong cyclical upcycle market. S&P 500 has generated almost 17% compounded return since GFC. That's extraordinarily strong. Through cycle returns, total return is closer to between 8 and 10 percent depending upon the time series you use. So very, very cyclically strong. I don't believe structure of markets has changed and that can persist. In fact, I think it's challenging to do even higher than mid single digits this next decade. But those are the two things that the industry faced. And long short, equity is a lower than 100 net structure, which will always lag a super cycle because it beats it.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“First of all, I don't want to say that I ever know what optimal ever means. I think there's so many ways to make money, and there's so many gifted investors that just like investing at large, I don't think there is a perfect way. However, there are choices to be made. So let me stop and look back and then explain what my answer to that is. First of all, there was a secular and cyclical changes that have affected this industry over the past 10 years. The secular shift that we worked out in 2010, it creeped up on us. Interest rates drive short rebate. Short rebate is what allowed us to be uncorrelated and very high through cycle return. That changed in GFC. So the front end of the curve drives short rebate. Front end of the curve went to the zero bound. So short rebate went from 400 to 500 basis points to negative 40 basis points at present. That is a dramatic shift in the business model, which I believe to be second. I don't believe the front end of the curve is getting back to those levels in a very long time. The impact henceforth is how much alpha is required.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Long short equity, when I entered it in 2000, it was experiencing what would be at that point a decade of the golden era, like uncorrelated extremely high returns, a dream shot for equity investors. And then everything changed in GFC. So part of the reason I came into the long short world was it was an advantaged balance sheet. We could do things that others couldn't that helped us be uncorrelated, manage risk, and generate alpha through cycle. Private equity REITs have advantaged balance sheets. Private equity, levered recap is one of the most important levers they have. By the way, you know, incredible advantage that allows for multiple trillions of billions of dollars to be able to exploit this much alpha at this much scale. So what happened is, yes, there's been a lot of changes in the long short world. And I actually believe we've got to evolve because there was dramatic shifts in GFC that”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“So let me define game selection. First of all, I think it's the most important decision we as leaders and as allocators make. It's literally choose the game. And what I mean by that is there is tons of very hardworking, hyper intelligent people in this industry. If you don't direct them to an inefficient market with a system to exploit that inefficiency, that effort is wasted. It's by far the most important decision we make. And by the way, from my perspective, the most transformative moment in my investing career was shifting from variant perception to unfair fights. I made it in 2016. My firm is named after Genghis Khan's army, and the whole notion of his strategy was based on unfair fights. And that one decision changed everything in our approach to our longbook. We even stopped using the three playbooks because only one mattered once you embraced this one fact. And now let's shift to the long short equity business.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“You used the words game selection. I want to take a step back a little bit from your own research process and think about how do you view game selection? Let's just start with in long short equity, which has been under scrutiny for so long.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Our protocol into material macro drawdowns is we cover aggressively our book. We only had three shorts left by the end of March, right? We covered everything and that dramatically increased our net exposure, which by the way means you can't use up what is natural in the balance sheet capacity of your longbook because the third dimension here is net exposure. And you need to be able to think all of that through.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Short exposure sits at about 50% today. It varies between 20 and 50. So the other part that's very difficult here and something that has to be thought through before battle is the dynamic nature of what do you do into major drawdowns. So for example, I think it's also misunderstood. In a massive drawdown, your shorts have been eviscerated. You have to cover them. They're extremely dangerous. In fact, they're the most dangerous thing in your portfolio. And so it's highly counterintuitive, but actually there's so many things about investing that are counterintuitive. Fear is the greatest gift to our style of investing. Greed is the enemy. The only time we get to buy things cheaply is when there's tremendous amount of fear. It's incredibly dangerous for long-term compounding when people are all greedy. So into a massive drawdown, macro drawdown, shorts, the first priority in a long short portfolio is get all the shorts out of the book, which naturally adds netting risk to your portfolio.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“So we sit at about one thirty today, and I think this is a really important question for long, short portfolios and even long-only portfolios for that matter. I think it's human nature to want to hold dry powder. It's just satisfying being able to add down. It sounds better. It sounds more responsible, more adult. The problem is our cost of capital, our realized earnings power is 20% the last four years, including COVID. And we project thirty to forty over the next two to three years, very high for our standards, but it's coming out of a cyclical trough. For us, our own whole dry powder, the base rate of a 20% drawdown in markets is about five percent of time. And so you have to time that perfectly in order for that dry powder to be executed in our portfolio construct. So at the moment, we've moved it to a central tendency of about 130 in a long short portfolio. One of the core advantages of long short is the levered balance sheet. And so if we don't use...”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“We own excellent assets and we know how much they're worth, or at least we have a pretty good fix on what their earnings power is two, three, four years out. It may not be two, three months out, but we have a pretty good idea on the profit potential of our portfolio, and over time it will recover. So we have protocols to how to deal with each of these rotations and also how to determine between, are we wrong or is it price volatility?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a lot of art in here, but we've tried to make it explicit rather than implicit. So my team knows we have budgets by factor that, for example, the amount of leverage that we'll allow into our portfolio, why? Because it all correlates when there's a credit crisis. They all act as one. So we have a budget for that. And when it gets a little high, we don't allow any more capital to come in for that. We don't work on any more ideas. And we have those budgets for all types of non-macro and non-idiosyncratic type risk. Now, the drawdown protocols are really important in this as well. So understanding the volatility, tolerance of yourself and your team and your partners is a really important part of the game. To finish first, you must first finish, right? And unfortunately, that point of equanimity, you only find it out in the thicker battle and it evolves. So it's a very, very challenging paradigm to solve. For us, we know because we chose an excellent game that if we get hit by price volatility, which we did in COVID,”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Optimizing through cycle return versus drawdown. Drawdown is driven by two things. One is error rate. The second is various rotational elements times gross exposure. And that's the skill of portfolio management is we need to design risk buckets for how much we want exposure to the up and to the down. I loved the podcast that Joel Greenblatt did with you and I completely agree with his policy on like we're pretty concentrated in our top 10, but we do it facing downwards, not upwards where how much money can you lose in the big positions, not how much money that you make. That's the only way you navigate for duration. And so what we're doing is we've created from the risk management perspective, and it's again systems level risk is the job of a portfolio manager. It's risk budgets, which will be determined by how much drawdown you can tolerate and maintain equanimity when it happens, and also how much damage do you take when you're wrong. And so the exposures for us.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Me three years to work this out at Aravart. The first three years the step up to portfolio manager from single stock, money maker is an enormous step up. And so I think the biggest question we have to ask, and there is a tremendous amount of alpha to be added in portfolio management skill, and it's effectively balancing, optimizing return for how much drawdown risk are you want to face. And optimizing return is gross exposure, which I think is incredibly underutilized and not focused on. It's a source of massive value. So just to bring that alive, the difference between 10 points of long exposure is literally one of your largest positions either in the portfolio or it's not. I think that's profound. And actually, understanding the risk boundaries of your strategy is an essential portfolio management skill. You have to know the balance sheet edges of your strategy and know when to use them. I just don't think this gets enough focus. The next part of this is manage.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source