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

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“We bring this long and short together, we now turn over to this whole question of portfolio construction. You've got a bunch of names on the long side, a bunch of names on the short side, how you're thinking about both. How do you put the portfolio together and create the exposures that you want to create?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“People would be stunned by this. I actually don't understand it when people spend 60 to 80% of their time on the short side. My focus is where the money is. The short side is very difficult and it's very time intensive. And so one of the parts that we get to amortize our time really effectively is because we're so price disciplined on our short, we get to recycle our shorts for long periods of time. So for example, there are single names that we've shorted three plus times in the last two years successfully every time. And why it's the same thesis? We love it at one price. We hate it at another. We're not day traders. And again, trading is not my skill. Not at all what we base our outcomes on. But we're disciplined in that risk skew is great at one price. Riske is horrible at another. And that band is wide enough for us to make money. So to answer your question, us as an institution, we would spend less than a third of our time short selling, less than a third. And we can sustain 500 to 800 basis points of short alpha by doing that because we've built up seven years of inventory.”
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 it was just a really, really bad use of time. What we do to stop forcing ever in our EDN Socratic shorts, if we need protection on our longbook because the long book is extended, we can do hyper bespoke hedges designed to protect our longbook. It's its job literally is to protect the longbook. Not even idiosyncratic alpha. So the construct on our shortbook is 20 shorts. The second book is 40. And the book three, it varies a lot more. That one ranges from between 40 to 80, but it's much more idiosyncratic in nature.”
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 short book is 20 shorts. We also use bespoke hedges, which helps tremendously lever along our longbook. Another important factor in that. I think another material source of short underperformance is if you have to run at a certain level of short gross, you will jam it. We ran one of the largest idiosyncratic shortbooks in the world at Ziff. And the reason I created Aravart was in the bottom of GFC, markets are down 50 and we're hunting idiosyncratic shorts. I said keep all the sharp objects away from me because I would rather stab myself in the eye.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Itself. It's how disciplined are you on the entry and exit because the window is not much smaller and time is not forgiving. So there's a lot of things that we don't do on the short side, which frankly creates a massive amount of alpha 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
“You've effectively got an industry structure with a set of competitors and the competitive dynamics can only escalate separately on short selling the execution window is much shorter so it's not just the framework like on the long side we're playing for multiples of our capital on the short side we're playing for between 15 and 30 percent the execution window is much tighter and I'll come to that in one second as well then the third one is cyclical peaks It's where you've got peak revenues, peak margins, peak multiple. Two of the three is good enough. And if you can execute those three, and this is where variant perception, I think, is also poorly understood. It's variant perception when and at what price. If you have informational or analytic edge at $100, it may be extremely valuable at $50, it may be worthless. In fact, it may be dangerous. And so our execution discipline on the short side is extremely important. In fact, that adds more alpha than the idea.”
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're in the three actually. The left side, we're focused on the second quartile consistently because the first quartile is extremely dangerous and very hard to replicate. By the way, very sexy to pitch, very, very hard to risk manage and very, very difficult to execute. So we focus on the second quartile of consistency with the mission of 500 to 800, which we've done for the majority of the time we've existed. And more importantly, consistently. So here are the three. The first is we call them structural shorts. We love these. These are melting ice cubes. These are formerly good or great businesses where the premise the business was built on is no longer relevant, usually from technological obsolescence and or business model innovation. These are all tons of formerly great businesses and you get the double whammy of imploding earnings power in multiple reduction. These can be phenomenal shorts that you can press on the way down. The second one is a type of competition short. This is a wider variance of outcome.”
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 have to define this to be a little careful because I think risk is poorly understood on the short side. Our mission on the short side is to deliver 500 to 800 basis points of alpha consistently. So it's alpha long short spread that matters in equity longshort portfolios. And I actually think the left tail and short selling is extremely dangerous. So the down 50 to down 100 that your thesis is wrong is also happens to be the up 100. So if you study Any index in any year in the world, six of the top ten are really low quality businesses. Why? Because it's low prediction and probably very cheap and something happened and they explode. So we actually don't even look. It's very different. We're studying the far right tail and the longs, which by the way requires only consistency at the 80th percentile to land in the top five over time. So the one year curve is the 80. The 10-year curve is in the...”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Book one is typically 20 positions, top 10 typically between 80 and 90 percent of equity. Book two ranges between 20 and 40 positions. So in a crisis, we'll buy three stocks. It's not as if we're rotating the entire portfolio. It's like hyperactive for us as 20% of equity, which can actually meaningfully change outcomes, but it's not 50% of equity. And so we try to keep between 20 and 40 fresh in there at all times. In book three, there's about 100 to 200. It varies over time. It's a fairly stable number, and the reason it varies is IPOs and as we get to work through stuff, but that's what our screens produce.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“False precision that just doesn't admit to the realities of the markets that we face. So that's how we do it. We actually have risk systems that let me see it's like a control panel on flying a plane.”
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's not every day, and this is another paradox of our style of investing. And Charlie Munger has written quite extensively about this and also admitted to it, you know, there's a huge paradox that we all know that very high quality businesses rarely get cheap, and they get actually very expensive on the ride. We all try to buy them cheap, and we fully accept they're very expensive in certain stages of the ride that we would never buy them there. So I think another one of the misunderstandings, and it's a very different culture, so I fully accept it's been successful for others. It hasn't been successful for us, we do not think every day if we bought our portfolio what we do. I think that's a false paradigm. And by the way, antithetical to tax effective investing. I believe it's false precision. And so what we think is like, I call it crayon math, right? It's got to be directional, and it's, by the way, a blunt crayon if it requires a five-page spreadsheet and third decimal point. Hey, it's BS and BS out, and it's completely...”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Year on year what I know is that if I do nothing, I already know in a year's time the intrinsic value of my portfolio is materially higher. And so I've separated out price signal from performance of our portfolio. We focus on potential energy in our portfolio. Our portfolio is either coiling with profit potential or it's performing. I can't control the latter. We focus only on the former we surrender to the latter. And so what lets us be super patient is I can literally see now it's false precision, let's be clear about this, on what the future return potential, I don't know the path and how it gets there, but I can see literally on a two, three or four year basis what is broadly embedded in my first and second portfolio, and I can broadly see what the factor risks that we're taking to get there, and the default for us is largely do nothing when we've set because it's really hard to get these cheap.”
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 I'm not a naturally patient person. I come with pretty high energy to everything I do. So I'm a highly visual person and we had to create our own risk systems over the last five years that lets me see the profit potential of our businesses. So my source of strength comes from the quality of our businesses, the quality of the people that we partner with, and the quality of my team. My source of patience comes from earnings power. So when I can see, literally see that every day our portfolio is compounding earnings power at 20.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Important drivers in a high performance tax efficient compounder portfolio, you can't be a tax efficient investor if trading is a driver of profit creation. It has to be durable earnings power. If that strategy isn't absolutely elemental, you by definition are not going to be a tax effective investor.”
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 one stock, the IRR compresses dramatically. And then you've got this next idea, which looks very sexy. And if you're trying to capture 5 to 10 times your money, at certain periods you have to willingly accept those single stocks are going to underperform and likely draw down. So the skill in the upside volatility part of the ride is whether or not you understand how confident are you in forecasting outcomes, first of all, on earnings power, and are you willing to accept the volatility of that ride? And in my study of the right tail on single security and investors, it's inevitable in the passage to the right tail that downside volatility will hit you. And the reason it also hits you is you have to be willing to let it run to the upside. And so this is a definitive skill. I've spent a real amount of time writing white papers to try to dissect this and make it far more explicit. And that's a very important part of our training. We try to make implicit things explicit. This is one of 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, upside volatility doesn't get anywhere near the amount of attention. And if you want to capture five to ten times your money, you're going to have to handle periods that are uncomfortably higher multiple, expensive. You have to willingly accept there's going to be periods of drawdown. If you want to try to capture it, you have to willingly accept there are periods of underperformance in that. The hard part is no one knows when it is. And you have to willingly surrender to that journey if that's what you want to do. So another part of the journey here is false precision. Even in operating in a high prediction environment, we have very talented analysts who are very good at forecasting our monopolies and oligopolies. But valuation is an art and driven by flows and a lot of different factors. And the difference between pinning your exit point two, three, four, or five years out is vastly different on your expected return for a single stock. The other hard part is you make 100% in a year.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Adrenal price response is exceedingly dangerous. In fact, we don't even trade day off. I don't even have a Bloomberg. We trade on a T plus one basis to remove the adrenal elements of decision making. Why? Because quite candidly, no decision we make on a daily basis actually matters. But Lee's point on you have to double down or you have to remove, I think is relevant for low prediction environments. But by the way, there's also severe danger in that because if it's a low prediction environment where you're doubling down, in my view, that's bravado. That's not skill. You're not basing that on fact and you're not thinking probabilistically. You're actually, that's a price signal that has no effective message to it. That's noise.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Important skills in investing is taking the loss. I think that's the difference between a professional and an amateur quite candidly is this is a business of error reduction. If you don't know how to take loss, you can't play this game effectively. And knowing the difference between opportunity and risk in downside volatility is everything. I call that the bottom of the Nike swoosh. That is, if you've got the chance and you've got dry powder, we go for it, absolutely. But you've also got to bring the human element to this. If you're running a firm with multiple analysts and it's a big position, a 15 plus percent position and it's just drawn down 20 plus percent. That's a big number for that analyst. It's likely half their exposure and they're freaking out. And now you've got career risk in their head, right? If you double down there and they're wrong, they're gone and they know it. So you've got to be human about this. This is the other part of the equation I find is not well understood. This is a human art. It's not a science. And I actually think...”
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 is macro, the second is factor, and the third is idiosyncratic. If it's macro driven, nothing has changed in our thesis, potentially the flow-through rate, but in our underwriting, the quality of the business is unchanged. The second factor rotations, well, if earnings power is still intact and the thesis hasn't changed, it's a flow driven issue. There's nothing broken in the thesis, idiosyncratic is the single security problem that you have to address. So in terms of Lee's advice on this, by the way, I find that a little too trading adrenal personally for my taste, right? If you own a position of a very concentrated portfolio, which ours is 80 to 90% for the top 10, right? And I think that's a really important part of our structural design because I totally believe that markets are efficient most of the time. And if you need lots of ideas to be able to beat the market, I think your odds are significantly diminished. A concentrated portfolio lets you do that. But overly concentrated amplifies volatility and error rate dramatically. But I think one of 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
“Book is a great book, and one of the few books that's been written in this space, but the mindset is very different, and that comes down to the difference between high and low prediction environments. So we're in the business of predicting the future, which by definition is unknowable. However, there's a massive difference between high and low prediction environments. We invest in monopolies and oligopolies. By definition, those are higher predictable environments because we've isolated the element of competition. Competition alone reduces predictive ability dramatically. Why? Because your competitor the next day can wake up and decide we're changing terms of engagement. And that's exactly what happened during COVID. So we've focused exclusively on monopolies and oligopolies. That's all we focus on. And we just wait. So Lee's point is, by the way, correctly so, do you know the difference between opportunity and risk in downside volatility? For us, it depends on what drove it. So there's three types of downside 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
“We got to get to both of these. So, on the downside volatility, more and more I'm hearing people cite the book, The Art of Execution, which, among other things, says if you have that 20% drawdown, the right strategy is to either cut it or to double down. And you're saying the opposite of that. How have you thought about that research and the data set compared to how you're going about implementing?”
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, and I think it's a really important driver of high performance, is how well invested you are in cycle. And I think most investors, including us till not that long ago, always love to So, what we've adjusted to, and this has been for and a bit years ago now, is when you're owning very high quality businesses, we don't feel compulsion to add down. It's emotionally very satisfying. It's a great thing to talk about. But if you've already got a huge position, it draws down 20%, well, base rate of history will tell me, actually, it's 15% every year and it's 50% at least once every 10 years, that's kind of normal. And if I have dry powder or I can rotate into it more great, but the policy is internally, actually we don't feel any compulsion to be adrenal to having to add down because anything's down 20%. We just don't behave that way. Upside volatility is the harder part, actually. And I believe for compounders, upside volatility is the true show of skill.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Decisions. The challenge with compounders is you have to be patient, and that's the scarcest commodity in my view in global equity markets. So when you get violent rotations like we did in December of 2018 and March of 2020, we bought three stocks in a week, which for us is the equivalence of hyperactivity. We get the chance to upsize everything and we get the chance to rotate into higher quality and we get the chance to finally buy some things that have rarely been cheap. And that's the opportunity for it. So the biggest challenge is you need to structurally build in patients. Now, the other part of this is handling up and down volatility. Down volatility is quite commonly known. I think there's been a lot of attention to it. The most important part I would emphasize in downside volatility, our approach to this is hold through, not add down. Now this is a profound one for us. It was a shift in 2016 for us. When your philosophy...”
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 biggest challenge you have on a compound portfolio is you've got to be extremely patient, both in terms of holding them and waiting for them. And this is one of the things why I think it's very simple, but it's very, very hard. So in 2017, spanning 2017, we had enormous performance, but we bought one stock for 17 months. When you have a big analyst team and you buy one stock in 17 months, it drives them crazy. So our construct is we have three books on each side of our portfolio. Three am I long and three on our short. Book one is live, book two is fully battle ready inventory, book three is a curated research universe. Our team focuses exclusively on the second portfolio. My job is the first portfolio. So their job is to make sure the portfolio is primed with potential performance. And if we get price volatility, we are fully battle prepared. And it's inexcusable to us not to be prepared. So it's a separation of research process from risk.”
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 before we turn to the three things that work on the short side, I'm curious as you focus in on these horses, it sounds so simple, right? You find these durable compounders and you just hold them for a long time. What are the challenges that come up in managing that portfolio and the inevitable volatility that you see in these names over time?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Buying your way up into quality. So it starts off with a much more cash generative business, but it's much more cyclical, generally speaking, or it's run poorly. And then you put in a team or you combine it and the industry starts finding more rationality or pricing power or cost efficiency. And then you can start buying and upgrading the quality of earnings power. It's a very, very explosive model. It's just very hard to put into place. But the hedge fund world loves this because it's highly idiosyncratic, but it's really hard, or at least it's hard for me.”
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, this is the worst one in the world, so I'll tell you what it is, but I like this is one where I know exactly that it works, and I know exactly that I can't do it. And I don't know how to risk management. So the framework here is effectively you tie two businesses together or you find a lower quality business, you bring in a new management team and you try to change it. So the quality transition is usually got some M&A component to this. By the way, hedge funds love this. Why? Because it's highly idiosyncratic. It's a 30, 40, 50, 60 IRR, but it's very, very low prediction environment. And what I mean by that is there's lots of variables to get this right. But what you get it right, it's 350 yards straight down the middle. But the hit rate for me personally was terrible. And it's very difficult thing to risk management because you don't know when your thesis is not going right until it's too late, which is vastly different than our horses. So for this one, you have to be able to take a lower quality industry or company, and you either upgrade it through a management team and M&A, or you'll”
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 cash flow explodes, and that's how you get a 10 bagger. And so that was a very, very productive playbook that we applied to agriculture and to the energy complex when I was at ZIF and for the first three years at Aravart. It's infrequent. So compounders are pervasive. This framework is scarcer. You need a demand shock and then you need a delayed supply response. They do exist. I am seeing them right now. That's how that framework works.”
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 the past two decades, this effectively has been almost everything on the other side of China. So what happens is you have a demand shock and it takes multiple years for the supply to catch up. So these are traditionally lower quality businesses. This is not something we focus on a lot right now. In fact, although that playbook would be quite handy in what we're seeing where markets are going this next couple of years. So the playbook we applied it primarily was through energy in everything from natural gas, refiners, and chemicals and food commodities for that matter. What happens you have an entire demand shock, a shift in the demand curve into a fixed or delayed supply response? So what happens is you have a lower quality industry and margins explode and stay high for multiple years. And that drives a rerating from usually a mid-single digit multiple to a double digit multiple. You get a two or three or four x on the multiple and you get a two or three x on the earnings power.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Gone straight. That's what keeps pulling people in. So the hardest part about being an investor in high quality compounding is you require at a systems level to build in patients, to wait for great businesses to become cheap. It's very rare or you need to have the fortitude to be able to predict two, three, four years out and have the boldness to hold through volatility to see your thesis out. Those are very, very difficult skills. The mathematics of this is actually very elegant and simple. The execution of this is very challenging.”
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 one of the false gods in our industry is actually the highest performing short-term stocks are lower quality businesses that are levered. If you catch them in the right part of the cycle or you catch them when they're transitioning from lower quality to higher quality, those are explosive one-year returns. So the trade-offs that I see in people that are coming into compounding is they're making great businesses really trade cheaply. And those that are much more optically valuation sensitive will tend to lower quality businesses if they don't have the patience to wait for great businesses to become cheap. Henceforth, they're trading off business quality. And the reason why they do it, so Ted, I'm not a golfer. I play once in a while, but it's the equivalent, in my view, when you're bringing out your honking driver and you smack it down the middle of the fairway and it goes 300 yards, right? But the problem is it's one out of 15 of those holes where it's actually”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Compounders is certainly a word that you hear very desirable. I'm curious as you looked at compounders, take the other side of that, which is what are the compounders that you may see other people invest in that you think don't work very well?”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Finding growth rates of earnings power that is in the 20s to 30s, multiples of the underlying market, and then finding them with reasonable prices that lets us navigate volatility up and down through cycle.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Compounders at its finest, in my view, is some elements of either monopolistic or oligopolistic market structures that can compound earnings power at a brisk rate over long periods of time. So compounding, I think, is the most important thing we do in investing period. That is, in my view, the entire quest of the mission. And compounders by definition is the most mathematically elegant version of it. It's effectively finding companies that can compound and have durable earnings power for long periods of time. And within compounders is hypergrowth to lower but steadier growth and everything in between. So within compounders at large, what we found for us is we only focus on what we call horses, which is a type of garp. And it's not hypergrowth and it's not slow because our true north is we believe earnings power drives total return over time, not in the short term. In the short term, multiple is a very large driver by the time year three through five.”
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 three are built up of one is compounders at large. There's lots of different variants in there dependent upon the growth rates and the valuation paradigms. The second is called secular with encyclical. It's a commodity framework where there's a demand shock with a delayed supply response. And then the third element in there is called quality transitions. It's an M&A framework which either at a company or an industry level, it consolidates to improve the quality of outcomes and a re-rating of the entire industry structure.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“That worked for me. There were many parts that were excellent that still didn't work for me, to be fully clear, but I brought over what I organically had decoded from myself as the Three Right Tail and the Three Left Tail strategies. And I tried to assemble a team and a portfolio construct that could exploit 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
“Absolutely. So Ziff was extraordinarily detailed in their training for single security selection and risk management processes. So I ported that from Ziff to Aravart. What I focused on, though, is in my research in that period, which was about eight years into it at the time, I knew there was three right-tail strategies that defined the right tail. And so I defined the right tail, by the way, as five and ten-year rolling periods above 20% compounded returns. And what I found is about 14% of securities above a billion dollars in market cap could do it. This was in the prior 26 years, and only 3% of securities could do it for 10-year rolling periods. And I knew what the strategies were. So I took those three strategies and I had three for the left hail as well. And we launched Avart with that. I didn't have the centralized portfolio systems level risk skills when I started this fund. That was something I knew I had to work out as a portfolio manager. But what we took from Ziff is, in my view, I took the best parts.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Take me back a little bit. You started Arvat seven years ago. Markets have changed a lot, even just in that period of time. So you had touched on the things that you learned, the processes that work, the edges that are there, and then what works for you. And maybe one by one, let's go through that from your perspective when you were leaving ZBI. So the first piece there is, what are those processes that you decided to take with you in your sort of investment approach in the initial years of that kind of Jones model hedge fund structure for Arva?”
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 thought process in setting up equity market neutrality was the family believed very fervently that in equity market neutrality, it would reward skill through cycle and remove the vicissitudes of markets. And so it was more reliant on alpha what we could produce, the skill and repetitive process of what we could produce versus just the time arbitrage of markets. Now, I disagreed with the structure, although it was incredibly successful, because I actually do believe that time arbitrage is one of the greatest advantages in markets if you can exploit it. The family chose differently and was, again, insanely successful in exploiting it. But when I left ZBI and created Aravart Global, I started off with a more traditional tiger net long structure, but actually after reviewing what had happened to the markets, and we'll get into that at some point in this conversation, I actually shifted to a significantly higher net structure because I think the structure 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
“of equity markets for the long side and the left tail for the short side of the market. But there was also, and I think it's a really insightful question, there's a material overlap that needs to be discovered between what works and can you do it. And that journey took me another 10 years. I worked out what works, but it took me another 10 years to work out what works for me.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Which is much more enduring and behavioral edge as well, which is persistent actually. So I discovered actually after the first five years that I was at ZIF, I didn't feel like what I was doing was persistent and scalable. It felt like I had to chase down the rabbit every year and find it. And it was frankly, I didn't find it enduring. And we were so process oriented. And so I actually started in the summer of 2006 at a summer retreat Eddie Lambert came to it actually. And I just said to Eddie, how did you manage to be this good, this young? Right? No one's this good, this young. It's not natural. And he just said to me in his 20s and 30s, he would put an enormous amount of effort training his patent recognition of the right tail. And he effectively gave me insight into the right tail of patent recognition. And the way he did it was through a case study methodology. And so Ted, one of the things that I discovered was I spent the next 15 years of my life decoding the right.”
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 a really great question. And by the way, Ziff was focused on variant perception, so it actually allowed a lot of individual exploration on your question, Ted. And for me, initially, there was lots of different approaches. So this was a long, short fund. And actually, the first hundred million dollars I made was on the short side. This was coming out of the dot-com bust. So on both the long and the short side, we were exploring all the different elements of investing. And so just stepping back for a second, there are four edges in the business, right? So the pursuit of compounded returns over long periods of time, the four edges were informational, analytical, behavioral, and instructional. The Ziffs had permanent capital. We had a massive structural advantage. Back then, there was informational advantage. This pre-GFC. And we had forensic accountants. We had investigative journalists. And, you know, there was information edge that was still available back then. And then we focused extremely on analytic edge.”
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, training was an essential part of this. They have a very high training culture. And we were exposed to many of the greatest investors in the world, the ZIFs were very connected and they brought many of them in. So at a fairly early stage of my career, Steve Mandel, John Griffin, Jim Chainos, Eddie Lampert, they would all come through and would share with us some of their wisdom and we would get a chance to pepper them with questions. And frankly, it was like a compressed business school experience, very tangible formats with a group of peers that were at similar stages of life that were very competitive and very established learning machines. And it was honestly 13 years the best years of my life.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Brothers also learnt this from Ziff Davis, which was an extraordinary culture in its industry. And this was really all about people, processes and training. So first of all, on the people front, incredibly good people, very hardworking, very curious, very performance-oriented, but given the room to be accountable, authentic,”
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 spent the next 13 years at Ziff Brothers. And that was just an amazing experience and learned from a ton of people. And that's how I got into the game. So why don't you walk through a bit of what ZBI's structure was and how you learned along the way while you were there? So ZBI was the private investment vehicle for the Ziff family. The ZIF family came from Ziff Davis Publishing and it was run by the three brothers. So the patriarch was Bill Ziff and it was run by his three sons. This was an incredible learning opportunity and a phenomenal culture. So I started there in the summer of 2000 and there was about six of us inside there. And interestingly enough, they love training from the bottom up. So not one of us, including the portfolio manager Ian McKinnon, had professional public market experience at the time. So it was designed as an equity market neutral structure, one central book. I ran at the end of it three of the sector portfolios that focused into it. It was wonderful, wonderful culture.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Was until I was 29. I studied law and I studied accounting in Australia and then I went and actually to work for a Bain& Company, the consulting firm for the next five years, which was just an amazing, in-depth immersion into understanding business strategy and the success drivers of business. And then quite frankly, coming out of the dot-com bust, I thought I was going to go work for a bane capital or one of the private equity firms. And it was just through great fortune in the summer of the dot-com bust that I went and worked for an extremely close friend of mine, Ian McKinnon, at Ziffbrothers Investments. And so I stumbled into this industry. I wish I could tell you that it was something that was purposeful for when I was younger. It wasn't. I was very interested in investing, but more interested in business quite candidly. And I was very, very lucky to land at ZVI and actually started my professional investing career the day the markets reopened after 9-11. So September 1701 was the first day I started 30 years old, plus one day my professional investing crew.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Forward. For those lovers of learning about the nuance of public equity investment strategies, you're in for a real treat. Please enjoy my conversation with Yen Liao. Again, thanks so much for doing this. Ted, so great to see you. Thank you so much for your time. Let's just start with your background and maybe how you first got interested in investing. So, Ted, I fell in love with business when I was really young. So I grew up in Australia. And when I was a teenager, I just grew up completely in awe of business. And it was the creation aspects of it that really captured me. What I meant specifically is I always wondered how a single person could create a company or a real estate fortune in one lifetime. And that just captured me at a very young age. And I started manual labor at a very young age as well. And I was very fortunate that I had a mentor. His name was Peter Gunn, who let me work in his warehouses and taught me a lot of the simple skills of capitalism and investing when I was very, very young, but through the toils of hard labor. And so I actually started investing when I was about 15 years old. But for the fullness of record for the first 15 years of my investing life, I didn't know what I was doing. So I didn't even know what a hedge.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source
“Guest on today's show is Yen Liao, the founder and managing partner of Aravat Global, a fundamental global equity firm based in New York that manages long short and long-only products. Yen founded Arvat after a long stint at famed family office Ziff Brothers Investments, where he was part of the team that managed a market neutral, long short hedge fund in a culture of framework thinking and continuous improvement. Our conversation covers Yen's background, experience at ZBI, and lessons about process, competitive edge, and training. We then turn to his application of those lessons to Aravat Global. We discuss three right-tail strategies for long positions, the challenges in owning compounders, the art of short selling, portfolio construction, game selection, drivers of success, and challenges going on.”
2021-12-27 · Capital Allocators · #4: Yen Liow – The Quest for the Right Tail at Aravt Global, EP.188 · IDENTIFIED FROM THE TRANSCRIPT · source