Speaker 1: Hello, Odd Lots listeners.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, We're doing
Speaker 2: another live show and it's right here in New York City.
Speaker 3: Yeah, this one should be our biggest yet, and we're
Speaker 3: going to have a bunch of Odd Lots favorites and
Speaker 3: do something maybe a little different to some of our
Speaker 3: previous live podcast recordings.
Speaker 2: When the guests are revealed, the show is going to
Speaker 2: sell out right away, so you should really just go
Speaker 2: get your ticket right now.
Speaker 1: It's June twenty sixth.
Speaker 2: It's at Recket, NYC, and you can find a ticket
Speaker 2: link at Bloomberg dot com slash odd Lots or Bloomberg
Speaker 2: Events dot com slash odd Lots Live and why.
Speaker 3: We hope to see you there.
Speaker 4: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 3: Hello and welcome to another episode of the Authoughts podcast.
Speaker 3: I'm Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal.
Speaker 3: Joe, did you, at some point last month when markets
Speaker 3: were being very, very dramatic, did you maybe hear that
Speaker 3: a pod was blowing up? Maybe just maybe.
Speaker 2: I probably saw some tweets, probably tongue in cheek. I
Speaker 2: may have sent some dms to people saying jokingly, have
Speaker 2: you heard of any pods blowing up? But no, it's
Speaker 2: become such a meme. Anytime like the market moves half
Speaker 2: a percent, I imagine some pods did blow up. But it
Speaker 2: is a funny joke, good intro.
Speaker 3: It's definitely become a thing. But I think it kind
Speaker 3: of highlights something something very real, which is there is
Speaker 3: this mystique around pod shops, the multi strategy hedge funds,
Speaker 3: and whenever something weird is happening in markets now, they
Speaker 3: tend to get blamed or people start joking about them.
Speaker 3: And also part of the mystique is there's just a
Speaker 3: lot of interest in why they seem to be so
Speaker 3: hot right now blowing up in a very different way.
Speaker 3: And what exactly is the attraction for big allocators of capital,
Speaker 3: because I always think it's not like big investors can't
Speaker 3: create their own diversified portfolios or invest in a fund
Speaker 3: of funds or traditional two and twenty or whatever. So
Speaker 3: what exactly is it about the pod shops that makes
Speaker 3: them so attractive.
Speaker 2: We've done a lot of episodes on the multistreads at
Speaker 2: this point, the pod shops so various flavors.
Speaker 1: There are still a lot of things I don't understand.
Speaker 2: First of all, my understanding is that they sort of
Speaker 2: continue to prove their metal. I mean, it seems like
Speaker 2: they didn't lose a lot of money in April during
Speaker 2: some of that volatility, So they have this promise uncorrelated returns.
Speaker 2: We'll get into how they deliver that. So far, it
Speaker 2: seems like they continue to more or less do what's advertised.
Speaker 2: I have a lot of questions about how and what
Speaker 2: is the actual source of alpha and how long can
Speaker 2: this go on, and whether there are a lot of
Speaker 2: copycats and whether that will cause alpha decay and all
Speaker 2: this stuff.
Speaker 3: I have questions about comp the most important thing.
Speaker 2: Well, this is really important, and actually, you know, we
Speaker 2: did that episode with the founder of Freestone, Grove dan Morello,
Speaker 2: just a lot of the conversation was about comp And
Speaker 2: I'm interested in comp because I'm interested in the topic
Speaker 2: of making a lot of money, But also I get
Speaker 2: the impression that comp and incentive alignment more broadly is
Speaker 2: actually one of the key problems that people are trying
Speaker 2: to solve for all the time.
Speaker 3: I think that's right. Okay, So I am very pleased
Speaker 3: to say we do, in fact have the perfect guest.
Speaker 3: We're going to be speaking with Ronan Cosgrave. He is
Speaker 3: a partner at Alburn Partners. So Ronan, thank you so
Speaker 3: much for coming on all thoughts.
Speaker 5: Thank you very much. I'm really honored to be here.
Speaker 3: First question, what exactly is Alborn Partners because it's not
Speaker 3: a pod shop itself.
Speaker 5: No, No, we're so.
Speaker 6: I co lead multi strategy heads fund coverage at Alborn.
Speaker 6: We are an advisory only independently owned consultant. We help
Speaker 6: institutional investors invest in hedge funds, private equity, real estate,
Speaker 6: all across the alternate that spectrum. We have about three
Speaker 6: undred and fifty clients worldwide and we advise on greater
Speaker 6: than seven hundred and fifty billion dollars in assets.
Speaker 2: Okay, give us a little bit more of your background.
Speaker 2: You're the perfect guests to talk about multi strategy hedge
Speaker 2: funds and why allocators like allocating to them. Talk to
Speaker 2: us about like how you built up your familiarity with
Speaker 2: the space and how you've built up your like understanding
Speaker 2: of their inner mechanics.
Speaker 6: That's a long answer. I've been over twenty years in
Speaker 6: the hedge front industry.
Speaker 5: Okay.
Speaker 6: I worked at a fund of funds called Pamco for
Speaker 6: fifteen years or the partner there did a whole lot
Speaker 6: of stuff there, covered pretty much kind of the constituent
Speaker 6: strategies of many of the multi strats, right, so you're
Speaker 6: talking about longstrared equity, long shot credit, convert arab ballarb.
Speaker 6: As it got more difficult, I got more involved, you know.
Speaker 6: Since then, I've worked with Albourne. I joined Albourne for
Speaker 6: four and a bit years ago, and you know, with
Speaker 6: my colleague Martina, we cover the multi strategy universe globally.
Speaker 6: So part of our job really is to kind of
Speaker 6: dig in deep into the multistrats, not just learn about
Speaker 6: the people, but the process, the inner mechanisms of what
Speaker 6: differentiates one particular multi strat from another. And the really
Speaker 6: cool thing is that they're all actually really different, you know.
Speaker 6: And one of the fun things listening to you guys
Speaker 6: is when you talk about pod shops and so on
Speaker 6: and so forth, or multi strats in general, I mean,
Speaker 6: there's huge differences in how they're run internally, you know.
Speaker 6: And the other thing I distinguish in the multi strategy
Speaker 6: space is the pod shops, which are the classic ones
Speaker 6: that are you know, you know, with the three layer
Speaker 6: of the fees versus the more traditional multi strategy hedge funds,
Speaker 6: which are two and twenty.
Speaker 1: Oh.
Speaker 3: That is an important difference, isn't it. Before we get
Speaker 3: into that, I want to ask, when you're doing due
Speaker 3: diligence on possible hedge fund investments, how do you go
Speaker 3: about doing that? Actually, because you just said you dig
Speaker 3: into you know, the culture, the people, risk management. How
Speaker 3: much access do you have and how do you do that?
Speaker 5: That's another big question.
Speaker 6: So the thing is with the multi strategy hedge fund
Speaker 6: space is you start really with the single strategy stuff,
Speaker 6: and it's not really fair to ask anybody to cover
Speaker 6: multi strategies if they haven't worked hard at understanding the
Speaker 6: individual contributions of all the different trades and trade types
Speaker 6: that make up a multi strategy. But the critical thing,
Speaker 6: and you alluded to this, is that multi strategy hedge
Speaker 6: funds are another level of abstraction away from the markets.
Speaker 6: Because yes, we do look at trades, at traders and
Speaker 6: pms and stuff like that, but almost as important as
Speaker 6: you're evaluating them as business models, you're evaluating them as
Speaker 6: risk models and investment models, and you know, they're all
Speaker 6: super interlinked. And one of the things that we look
Speaker 6: at and look for is kind of consistency between all
Speaker 6: the strands, because if you have things that are in
Speaker 6: conflict internally, you end up with a suboptimal outcome, right,
Speaker 6: I mean, we've all lived that in our own personal
Speaker 6: and professional lives. But if things aren't in a line,
Speaker 6: and you mentioned compensation, competition is a huge part of that,
Speaker 6: and I'm you know, one of the things I'd argue
Speaker 6: is that comp affects far, far, far more dimensions of
Speaker 6: a multi strategy hedge fund than almost any aspect.
Speaker 5: Yeah.
Speaker 2: No, this seems very interesting to me because often it
Speaker 2: feels as though, okay, you have some investment strategy and
Speaker 2: then make a lot of money and then okay, some
Speaker 2: of it goes to the manager and some of it
Speaker 2: goes to the outside investor. That's how I conceive of things.
Speaker 2: But it really does seem like comp structure is actually
Speaker 2: core to the business model. But before we get to that,
Speaker 2: why don't you actually go back for listeners, and for
Speaker 2: my sake, when you distinguish between the sort of traditional
Speaker 2: two and twenty multistrats with the so called podshops, In
Speaker 2: my mind, I associate with the millenniums of the world
Speaker 2: but talk to us about the differences in these business
Speaker 2: models when you use these terms.
Speaker 6: Yeah, so I refer to two and twenty simple it's
Speaker 6: a straight management fee of two, but it could be
Speaker 6: any fixed number, and a performance fee of twenty percent
Speaker 6: on the overall portfolio.
Speaker 5: So the only fees paid.
Speaker 6: By the investor are the management fee, which is idignated
Speaker 6: in advance, plus a cut of the gross performance of
Speaker 6: the portfolio as the whole. And that's a really critical
Speaker 6: distinction between between them and the platforms or pod shops. Right,
Speaker 6: so a pod shop has all that right now. First off,
Speaker 6: the first thing that happens is that the management fee
Speaker 6: may or may not be fixed. It can be what's
Speaker 6: known as a pass through fee, where it's kind of
Speaker 6: a blank check in many ways. For the most part,
Speaker 6: they do take good care of that. But the third
Speaker 6: layer of fees that's really important is that there's fees
Speaker 6: payable at the level of the PM, not at the
Speaker 6: overall fund. And when you get to that level, there's
Speaker 6: a lot of things that people take for granted and
Speaker 6: investing just simply breakdown, you know. And to go on
Speaker 6: to that, like the one thing that I keep getting told,
Speaker 6: you know, in my own personal investing life and everybody's
Speaker 6: personal investing life, is that diversification is the only fee
Speaker 6: launch R. When you are paying performance fees on a
Speaker 6: on individual components of a portfolio. Diversification is not a
Speaker 6: free launch. It costs you money, real money.
Speaker 3: Wait, can you explain how do clients? How do investors
Speaker 3: actually pay individual pms? Like, how does that work?
Speaker 5: Yeah?
Speaker 6: So in a pod shop, what you have you think
Speaker 6: about it is you have you know a number of pms,
Speaker 6: anything between five to three hundred and something. They each
Speaker 6: basically have their own individual P and L. Right, so
Speaker 6: they the manager, the overall fund manager track tracks each
Speaker 6: PM and their p and L. They'll charge back all
Speaker 6: the appropriate stuff that would be charged to that. They
Speaker 6: will normally be charged Bloomberg for example, all other trading costs,
Speaker 6: the analysts costs perhaps, and then if that number is
Speaker 6: above zero, the PM gets a payment from the manager
Speaker 6: out of the fund and that's their performance fees. So
Speaker 6: the investors themselves don't actually pay them, paid.
Speaker 5: For them by the manager.
Speaker 2: Now, you said that there can be the instances in
Speaker 2: when diversification is not a free launch, and so I
Speaker 2: take that to mean that you can have situations in
Speaker 2: which at the fund level you don't have a good
Speaker 2: year and you're not making any money. But some pod
Speaker 2: managers had a great year and they still have to
Speaker 2: get paid. And so you talk to us a little
Speaker 2: bit about these conditions under which that diversification can be costly.
Speaker 6: Yeah, let's use a simple, simple model. So you have
Speaker 6: a pod shop, but you want to got two pods,
Speaker 6: and at the end of the year, one pod is
Speaker 6: up ten dollars and one pod is down ten dollars.
Speaker 6: Because it's pod shop, you're paying on the panel of
Speaker 6: each individual PM. So let's say it's twenty percent. Right,
Speaker 6: So on a gross before fees basis your flat. However,
Speaker 6: you're paying the guy who was up ten dollars two dollars, right.
Speaker 6: So after this is added together, now your portfolio is
Speaker 6: down two dollars. And that is netting risk. And the
Speaker 6: interesting thing about netting risk is because to bring it
Speaker 6: out further, is that netting risk you could argue, well,
Speaker 6: that's you and be an issue for the ones that
Speaker 6: pay at the top level.
Speaker 5: Well, the issue is.
Speaker 6: That because they exist in a competitive landscape for pms,
Speaker 6: pod shops can go to a PM who didn't get paid.
Speaker 5: Right, So, if you think.
Speaker 6: About it, if that was a traditional two and twenty
Speaker 6: multi strat ten dollars up, ten dollars down, flash, nobody
Speaker 6: gets paid. The fact is you've got a very very
Speaker 6: unhappy PM who's up ten dollars, he's made ten dollars,
Speaker 6: who's like sitting there in the corner really angry because
Speaker 6: they worked really hard, they made a lot of money
Speaker 6: and they get nothing.
Speaker 5: And the pod shop can ring them up.
Speaker 6: And says we'll take you, yeah you know, and will
Speaker 6: guarantee if you make money you will get paid it.
Speaker 6: The other thing to remember as regards netting risk is
Speaker 6: it's actually we've modeled it at Albourne. We've worked it
Speaker 6: out and using various simulations, it averages for a just
Speaker 6: a regular set of managers and pms around one percent
Speaker 6: a year.
Speaker 5: Right.
Speaker 6: When you think about a two and twenty hedge fund,
Speaker 6: yeah you might, you kind of expectationally, should expect to
Speaker 6: pay one percent of that two percent management fee to
Speaker 6: people who've made money when everybody halse has lost money.
Speaker 6: And it can be way more than that, and that's
Speaker 6: a real business risk.
Speaker 3: So one thing I wanted to ask is I get
Speaker 3: the impression that podshops are very, very competitive, and you know,
Speaker 3: the talent is competitive, but the pod shop itself is
Speaker 3: supposed to kind of work together, right and the positions
Speaker 3: are supposed to diversify and even each other out and
Speaker 3: all of that. So I guess my question is how
Speaker 3: cutthroat is it actually working at a pod shop?
Speaker 5: It varies.
Speaker 6: The fact is that a podshop is an entity that
Speaker 6: can make certain decisions to create either competition or cooperation.
Speaker 6: Any multistract can do this in a pure eat what
Speaker 6: you kill and vironment. Obviously there's no incentive to do cooperation,
Speaker 6: but people do recognize this, right, And what I would
Speaker 6: say for that is that it's all about what do
Speaker 6: you want as what does the manager want to produce?
Speaker 6: And one of the things what I would say is
Speaker 6: there's a real choice that you have to make between
Speaker 6: kind of talent and structure. And what do I mean
Speaker 6: by that? What I mean by that is to use
Speaker 6: the sports context. There's kind of two ways assemble professional
Speaker 6: sports teams. The first is to get a big pilot
Speaker 6: cash and go hire the best players in this position
Speaker 6: and put them on the field and hope for the best. Right,
Speaker 6: that's a focus on talent. The other way is to
Speaker 6: hire a really really good coach with a really good
Speaker 6: system and to have him or her go with their
Speaker 6: team kind of a moneyball system where you put together
Speaker 6: people who fit in the structure. And what that means
Speaker 6: is the first one is like the emphasis on the individual,
Speaker 6: and the second one of the emphasises on it on
Speaker 6: the whole. And when you talk about competition, one of
Speaker 6: the main ways you enforce competition.
Speaker 5: Is probably obviously compensation.
Speaker 6: If you have a situation where it's purely what you
Speaker 6: kill and you get a presentive of your own P
Speaker 6: and L and that's it, it's very very hard to
Speaker 6: enforce that level of That's where you get those cutthroat stories, right.
Speaker 6: But there are many others out there who have other
Speaker 6: ways of doing this who recognize that. You know, if
Speaker 6: you just have everybody in it for themselves, you produce
Speaker 6: a portfolio that's actually suboptimal at the top level.
Speaker 3: This is what I was going to ask. Have you
Speaker 3: noticed a difference in performance between the sort of cutthroat
Speaker 3: competitive firms versus the more cooperative ones.
Speaker 6: That's a really good question, and the short answer is
Speaker 6: it's really hard to distinguish between them. On the outside
Speaker 6: The interesting thing really is more around what happens when
Speaker 6: things are going badly for both that you're more likely
Speaker 6: to have people kind of like quickly leave the more
Speaker 6: competitive and cut throat one. Ah then you would have
Speaker 6: then maybe they're more cooperative, you know. I mean the
Speaker 6: cool thing about the pod shop and the platform space
Speaker 6: is there's literally no right way to do this. There's
Speaker 6: a real series of trade offs, right, and there's choices
Speaker 6: you make have cost many different different dimensions. Because, for example,
Speaker 6: if you choose to do cooperation right and you incentivize everybody,
Speaker 6: you typically would do it in a kind of a
Speaker 6: traditional multi strategy context, right. What that means is that
Speaker 6: you're not going to have the eat what you kill mentality.
Speaker 6: You may have certain bits around that, but if you
Speaker 6: use that thing, you have a very good place to work,
Speaker 6: but you.
Speaker 5: End up with a situation.
Speaker 6: Where As we talked about earlier, netting risk is a
Speaker 6: real cost. So what that often means is that compensation
Speaker 6: choice drives you to be a bit more correlated within
Speaker 6: your own portfolio and be a bit bit less, bit less,
Speaker 6: little lower sharp ratio. Why is that Because if netting
Speaker 6: risk or the cost of netting is a real business risk.
Speaker 6: You choose to minimize it, and the way easily to
Speaker 6: minimize it has had everybody kind of make money at
Speaker 6: the same time everybody kind of lose money at the
Speaker 6: same time, and then you won't be picked off by
Speaker 6: the pod Shopsimilarly, if you have competition, right, competition is
Speaker 6: an incredibly powerful human thing, but it gets out of
Speaker 6: control and you end up with a situation where people
Speaker 6: just burn out and just leave you. People are unhappy.
Speaker 6: You know, you have to kind of keep feeding people
Speaker 6: into it, and you know that that's totally fine because
Speaker 6: there are many other industries out there besides finance that
Speaker 6: does this, you know. But at the same time, you know,
Speaker 6: you end up with a whole lot of scenarios that
Speaker 6: are kind of you end up with a kind of
Speaker 6: a team of rivals, you know, and then that's it's
Speaker 6: a dynamic, but it is the one that you have
Speaker 6: to really control zooming out.
Speaker 2: Obviously, the performance of a lot of the well known
Speaker 2: names has done really well. You're talking to institutional allocators
Speaker 2: other than I guess the fact that the top line
Speaker 2: performance is good and everyone likes making money, what is
Speaker 2: the general pitch? And we've seen this trend obviously from
Speaker 2: allocation to single fund managers. You know your traditional guys
Speaker 2: who would like go on TV and they unveil their
Speaker 2: long or whatever. As a digression. I always think it's
Speaker 2: funny when you see these pod managers on TV and
Speaker 2: they get asked about their thoughts about the market, because
Speaker 2: it's clearly that's not really even what their focus is
Speaker 2: on in terms of business structure design. So I'm always
Speaker 2: sort of raise an eyebrow when I see these conversations.
Speaker 2: Talk to us about what it is about these entities
Speaker 2: in general that holds so much an appeal for an
Speaker 2: institutional allocator.
Speaker 6: They hold appeal for a variety of different reasons, and
Speaker 6: obviously it will depend on the individual mandate of the allocator,
Speaker 6: but there's a couple of fundamental things that really hold
Speaker 6: true across all multi threats. The first one is that
Speaker 6: it's interesting that we talk about pods like there's something new,
Speaker 6: But if you actually if all three of us decided
Speaker 6: to go out and invest into twenty individual hedge funds,
Speaker 6: we'd have the same issue. A. They would be paid
Speaker 6: on what they eat, what they kill. Yeah, B we
Speaker 6: would have to hire and fire people. By the way,
Speaker 6: hiring and firing people. Hiring is fun, Firing sucks.
Speaker 5: Yeah, But the point, but the.
Speaker 6: Overall thing is that each individual pe in that set
Speaker 6: of single strategy hedge funds is allocating according to what
Speaker 6: two things, what they think in their set of investors
Speaker 6: want and be what they're willing to bear because it's
Speaker 6: their only job and their name on the above the door.
Speaker 6: And so what you end up is is your set
Speaker 6: of allocations that when you're roll them up together, are
Speaker 6: individually way under risked, right, and you're not making as
Speaker 6: much money as you should given the talent that you're
Speaker 6: paying for and the amount of fees you're paying. So
Speaker 6: when you hire a multistrats, and part of the thesis
Speaker 6: of multi strats, which which is true, is that because
Speaker 6: they're a unitary portfolio with somebody atop in charge of
Speaker 6: it driving the risk of the individual pms, not the
Speaker 6: individual pms themselves, you can and you really should end
Speaker 6: up with a better return stream because you've coalested all
Speaker 6: together under a single unitary authority and they can put
Speaker 6: them to you know, they put leverage to work, risk
Speaker 6: to work, so that the individual PM might be more
Speaker 6: risky than they really really want to be or maybe
Speaker 6: it's probably obscured from them usually, but at the end
Speaker 6: of the day, that rolls up into an appropriately risk
Speaker 6: portfolio return. Right, And you know, having somebody who worked
Speaker 6: in fund of funds, one of the issues of fund
Speaker 6: of funds is just that you had fantastic sharp ratios,
Speaker 6: but the returns were low.
Speaker 3: That's a really important point. One other thing I wanted
Speaker 3: to ask just on the why allocators are interested in
Speaker 3: multi strats. Point One thing you sometimes hear is that, well,
Speaker 3: multistrats or pod shops they can dip in and out
Speaker 3: of positions really really fast, and they can react to
Speaker 3: the market very very quickly. How true is that?
Speaker 6: So let's go back to two and twenty funds versus
Speaker 6: pod shops, because it's differently.
Speaker 5: True for both of them.
Speaker 6: Let's talk about pod shops first, right in the kind
Speaker 6: of the stylized pod shop, you get to set up,
Speaker 6: you get money, you ale, you invested as a PM,
Speaker 6: and you get paid on that. If you get cut,
Speaker 6: if your capital you get cut substantially. Even with the
Speaker 6: best will in the world and the promises from above
Speaker 6: saying it'll come back to you, your pay has been cut.
Speaker 6: And I mean we're all professionals here. If your pay
Speaker 6: is cut by fifty percent, your updated your CV and
Speaker 6: you're checking the job market. Okay, So in the context
Speaker 6: of responding to opportunities in the market, it's hard to
Speaker 6: move too much too quickly in the context of a
Speaker 6: pod shop, why because of that reason, and be because
Speaker 6: that person may not be there to do when it's
Speaker 6: an opportunity there. So it's kind of hard. They do
Speaker 6: do it, They absolutely do do it. They will lever
Speaker 6: up into opportunity. But when you think about what people's
Speaker 6: kind of perception in their heads of what it is,
Speaker 6: it's completely more static than you'd imagine. In the context
Speaker 6: of a traditional fee structure, the two and twenty, it's different, right,
Speaker 6: everybody is incentivized to get the top line to be
Speaker 6: the highest number it can be. And so if I'm
Speaker 6: a convert manager and your merger art manager, I'm cool
Speaker 6: with being my capital be given away. I assume I
Speaker 6: get it back eventually. But if it makes the overall
Speaker 6: proibly larger, I can benefit in the long run too.
Speaker 6: So the ability and then quite frankly, the willingness to
Speaker 6: move capital in size around it is really that's where
Speaker 6: camp comes in. Camp has now led us to the
Speaker 6: situation where it's hard to move capital right, and you
Speaker 6: think about, like we talked about it, kind of the
Speaker 6: theme of this for me is comp kind of drives everything.
Speaker 6: How you structure your camp is one of the principal
Speaker 6: underlying features or a and how multi strategies work.
Speaker 2: I think this is such an important point because again
Speaker 2: I think, like comp structure.
Speaker 7: You hear about it like people love.
Speaker 2: Reading stories about bonuses, et cetera. And people love reading
Speaker 2: stories about people getting paid a lot of money, or
Speaker 2: maybe they hate read these stories about people love getting
Speaker 2: mayde but this idea that no, this is the business
Speaker 2: you know people. I think when people hear bonuses, they're like, oh,
Speaker 2: you get some extra money. But the business is design.
Speaker 2: I mean, to hear you describe it. The business is
Speaker 2: the design of the bonus. The business is the design
Speaker 2: of the comp.
Speaker 6: It kind of is you know, it drives so much
Speaker 6: if you just think about, like we talked about, how
Speaker 6: a capital allocation is basically held back or you know,
Speaker 6: you're the way you can do it is changed by
Speaker 6: how you compensate people, you know, or constrained is the
Speaker 6: better world. There's other things like I mean you think
Speaker 6: about in the context I going back to like the
Speaker 6: story about the single strategy hedge funds, you also have
Speaker 6: the similar problems. Were given too much leeway in an
Speaker 6: e EQ what you kill environment, pms will start to
Speaker 6: set risk to suit themselves than they do for the
Speaker 6: overall portfolio, because after all, why should they care, you know,
Speaker 6: why should they care about the overall portfolio performance? If
Speaker 6: if I can you know, if I've made money for
Speaker 6: the first nine months of the year, you know, the
Speaker 6: temptation is a lockdown risk and have Christmas, you know,
Speaker 6: enjoy Christmas rather than take more risks where at the
Speaker 6: portfolio at the top level may not want that, you know,
Speaker 6: So you have all these other things that drive others,
Speaker 6: drive these decisions of people, you know, across so many
Speaker 6: different dimensions. It's one of the most fascinating things because
Speaker 6: you know, at Albourn we've done a huge amount of
Speaker 6: work trying to understand this.
Speaker 5: But I learned Python to do this. God help me. Yeah,
Speaker 5: it's just one of those things.
Speaker 7: How does the what.
Speaker 2: You kill environment solve for the problem of the PM
Speaker 2: who's made money for nine months of the year and
Speaker 2: then want to lock it down? What types of risk
Speaker 2: controls or I guess controls for under risk because in
Speaker 2: a way, the thing that they don't want is someone
Speaker 2: taking some risk or you know, getting too conservative. What
Speaker 2: are the approaches that they have to align those incentives
Speaker 2: so that you have to keep going for those final
Speaker 2: three months of the year, even if it means risking
Speaker 2: your great year.
Speaker 6: I mean, sometimes it's very simple minimum amounts of capital
Speaker 6: deployment requiring. You know, it's kind of hard, right because
Speaker 6: at the end of the day, if you've got successful
Speaker 6: PM on the year, yeah, and you want to keep
Speaker 6: them or her, it's not an easy question to answer.
Speaker 6: And like there are more hybrid approaches to these what
Speaker 6: you kill right for example, partnership so you know, many
Speaker 6: funds offer partnership to the pms where they do participate
Speaker 6: in the overall fund fund profits. You know, there's other
Speaker 6: kind of you know, fancier trade ways to make you know,
Speaker 6: increase say the payoffs to the PM depending on the
Speaker 6: fund's performance.
Speaker 5: It fun's overall performance.
Speaker 6: But yeah, it's a really hard problem because it's a camp.
Speaker 6: It's a personal relations problem, you know. I mean sometimes
Speaker 6: you just got to accept it. You got a guy
Speaker 6: who's up coming to the end of the year and
Speaker 6: they're just going to de risking. Look, the thing beyond
Speaker 6: camp is really culture, right, and you can say comp
Speaker 6: drives culture.
Speaker 5: But it's not quite that simple.
Speaker 6: You couldn't just hire the sort of individual who won't
Speaker 6: do that, you know, and a lot of funds will
Speaker 6: talk about we talked about the war for talent. I
Speaker 6: often call it the war on talent. But people go
Speaker 6: to places they want to work with, people who they
Speaker 6: want to work for, and you do try to just
Speaker 6: hire professionals, regular people like us who work through the holidays,
Speaker 6: you know, and stuff like that, you know, just to
Speaker 6: finish off top for the year. You know, you've got
Speaker 6: to hire the right people.
Speaker 3: So listening to talk on pass throughs versus traditional fees
Speaker 3: the two and twenty, I'm kind of wondering why would
Speaker 3: you ever invest in a pass through because when you
Speaker 3: describe the downsides, it's like you don't have as much cooperation.
Speaker 3: Maybe it's harder to move capital around. It seems like
Speaker 3: the traditional fee structure might be the better choice here.
Speaker 3: But tell me why I'm wrong.
Speaker 6: Well, we've been taking I mean that this is partially
Speaker 6: my training, taking the side of the alligator here and
Speaker 6: you're right, like superficially at the top level, a pass
Speaker 6: through it seems like a bad idea for the allocator,
Speaker 6: but there's kind of three people, three entities getting commed.
Speaker 6: Here is the alligator, they're the manager and they're the PM.
Speaker 6: And the thing is one of the one of the
Speaker 6: standout features phychologically of most pms is they all think
Speaker 6: they're really good. That's how you become a PM. You
Speaker 6: become ambitious, you press yourself to test yourself against the market.
Speaker 6: A pass through manager will give you the max compensation
Speaker 6: if you're a good PM, right, And at the end
Speaker 6: of the day, what we're describing is an industry that
Speaker 6: relies on pms to do good work and who are
Speaker 6: really smart. And if you have a situation where they're
Speaker 6: going to get paid in a particular entity more than
Speaker 6: another sort, they will gravitate towards that. So the answer
Speaker 6: to your question is, if alligators had their way, they
Speaker 6: probably wouldn't.
Speaker 5: Want to invest in pass throughs.
Speaker 6: But the fact is that they don't have a choice,
Speaker 6: and pass throughs are you know. The other thing to
Speaker 6: remember is past throughs are good for pms. But the
Speaker 6: interesting thing and people do forget about. This is in
Speaker 6: a past through situation in a pod shop, the PM
Speaker 6: is getting paid from their own P and L. The
Speaker 6: manager themselves is fully aligned with the investor, with the
Speaker 6: allocator because they're only getting paid off the netted of
Speaker 6: all the pass throughs. They're paying off the same P
Speaker 6: and L at the top line as the investor. So
Speaker 6: there is somebody and I mean people do talk about
Speaker 6: how much has been paid, how much they make and whatever.
Speaker 6: It's a an like I've heard it described as the
Speaker 6: worst best job in the world, but it's an incredible
Speaker 6: thing of coordination and getting people together. But they're actually
Speaker 6: incentivized and in aligned within allocator and to give them
Speaker 6: their due. They do their best to do that because
Speaker 6: they are conscious of keeping costs under control because that's
Speaker 6: their profit margin that's eating into I mean the other
Speaker 6: I mean, the other thing is which is kind of
Speaker 6: scary for allocators is the extra layer of.
Speaker 5: Fees, right, and it does cost money.
Speaker 6: And fundamentally speaking, the other thing that camp is driving
Speaker 6: in that case is risk. Right, they're driving leverage. We've
Speaker 6: done simulations and a pass through manager has to be
Speaker 6: around one third more leverage than then the two layer
Speaker 6: of fees two and twenty manager. I mean they have
Speaker 6: to be because they have to make more money to
Speaker 6: pay that extra cache out and it costs.
Speaker 5: Real money to do that.
Speaker 6: And you know, you know, in one sense, price is
Speaker 6: what you pay, values what you get. Returns have been
Speaker 6: really good because of the pass through manager has been
Speaker 6: a really effective business model investing side. Yeah, but yeah,
Speaker 6: I mean alecators do complain about the cost.
Speaker 2: It's something I'm curious about with the very traditional hedge
Speaker 2: fund model, which you described very a good articulation. If
Speaker 2: I'm an institutional allocator, I'm diversified. Therefore, I want my
Speaker 2: allocations to take max risk. The individual hedge fund manager
Speaker 2: might not want to take mask max risk because it's
Speaker 2: their whole career and name on the line. What is
Speaker 2: actually the expectation in the sort of traditional hedge fund
Speaker 2: model for like, how much of the manager's net worth
Speaker 2: is in the fund and how do you establish that?
Speaker 2: And by the way, if I were a hedge fund
Speaker 2: manager had done really well, I would buy a lot
Speaker 2: of mansions and yachts and stuff so that if my
Speaker 2: fund ever went to zero, I still have a lot
Speaker 2: of wealth.
Speaker 6: You've thought this through, jah, Yeah, mentions where in particular.
Speaker 2: Miami, Aspen, the Golf States, New York City and anyway.
Speaker 2: But like, how do they like, how do you how
Speaker 2: do they actually establish that the man is fully aligned
Speaker 2: with the performance of their fund.
Speaker 6: So that is a really really good question because opinions
Speaker 6: really vary there, right, And the standard answer to that
Speaker 6: question is the majority of the manager's liquid net worth
Speaker 6: and you can define that whichever way you want.
Speaker 1: Is their way to audit there. I mean, I say, hey, look,
Speaker 1: I have it all on my fund.
Speaker 5: You can, you can have to admin.
Speaker 6: The manager can authorize the administrator of the fund to
Speaker 6: disclod their investment in the fund to you if you
Speaker 6: ask them nicely.
Speaker 1: They don't know that I have.
Speaker 2: They wouldn't know if I had a billion dollars in
Speaker 2: bitcoin on a private wallet.
Speaker 1: That's not any any key.
Speaker 2: I'm just saying I would when I hear this, I
Speaker 2: saw this in your notes. When I hear this, my
Speaker 2: first mind goes to how can I pocket net worth
Speaker 2: and places that aren't easily visible, and so I'm not
Speaker 2: fully exposed to my own fund.
Speaker 5: Sorry, look, I mean they actually big They's a bigger question.
Speaker 6: There, okay, In which you mentioned at the starter your
Speaker 6: question before you went on about the nice mansion an
Speaker 6: aspect which is kind of distracting me right now. But
Speaker 6: to be clear, the fact is that if you have
Speaker 6: all your money in a fund, yeah, you're kind of
Speaker 6: going to mind it differently, yeah right.
Speaker 5: Yeah. And if I'm an investor who's got a hundred
Speaker 5: of funds like that, I don't want.
Speaker 6: Yeah, yeah, you're going to be You're going to under
Speaker 6: risk it relative what I want as an investor, and
Speaker 6: so it's a real dance.
Speaker 2: Right.
Speaker 6: Again, it goes back to the character the person you're hiring,
Speaker 6: which we talked about earlier on about the pad shot
Speaker 6: with the similar scenario. It really depends on how you
Speaker 6: want to risk manage your investments as an alligator, right
Speaker 6: because at the end of the day, when you're asking
Speaker 6: a manager to put their own capital in the fund,
Speaker 6: you're signing them a certain role as a risk manager
Speaker 6: because and you have to assess honestly, my answer is,
Speaker 6: it really depends on the person who I'm dealing with
Speaker 6: and the sort of person who I think we're dealing with.
Speaker 4: Right.
Speaker 6: If I think it's somebody who is just really professional
Speaker 6: and good, I'm not so sure. That having all their
Speaker 6: money in the fund is necessary, you know, if I
Speaker 6: think it's somebody where.
Speaker 2: They see other funds too, you know, big fund managers
Speaker 2: see they do.
Speaker 6: Yeah, I mean I used to see that at my
Speaker 6: former job, you know, and it was a real issue
Speaker 6: because you did have people who, you know, they had
Speaker 6: made decent money. But like, what we really wanted to
Speaker 6: see at the time that PAMCO was people putting their
Speaker 6: money into the business, you know, paying for Bloomberg, paying
Speaker 6: for office space, you know, all that over over putting
Speaker 6: money in the fund, because that was commitment to the business. Interesting, right,
Speaker 6: I mean that's something that we're you know, we were
Speaker 6: comfortable more as comfortable with them putting working capital into
Speaker 6: a functioning business.
Speaker 5: Interesting.
Speaker 6: We then maybe putting more an extra five hundred thousand,
Speaker 6: a million, two million million dollars into a fund.
Speaker 1: Very interesting.
Speaker 3: So much of what you're describing it sounds very very granular,
Speaker 3: like the idea of looking at individual talent to see
Speaker 3: how they operate, looking at something like culture, which tends
Speaker 3: to be difficult to define. If I'm an allocator, how
Speaker 3: much transparency or how much information am I actually getting
Speaker 3: from one of these funds? And I realized allocators will
Speaker 3: hire your company Albourne to actually do a lot of
Speaker 3: this due diligence for them. But if Albourne was out
Speaker 3: of the picture, what would I be seeing if I'm
Speaker 3: a potential allocator.
Speaker 6: So that's a a long there's a long answer to
Speaker 6: that question, and it really does depend on a if
Speaker 6: you're a certain size of an alligator.
Speaker 5: There's there's kind of the fast lane.
Speaker 3: Ah so if I'm PIMCO or something, if.
Speaker 6: You're in you get in the executive lounge, you know,
Speaker 6: you'll get treated more, you know, get more access. You
Speaker 6: know that, and there's nothing wrong with that because simply
Speaker 6: these people have limited time, you know, and somebody who's
Speaker 6: going to be a larger client will get more in
Speaker 6: almost any line of business, you know, in terms of access,
Speaker 6: it does vary, I think, you know if I you know,
Speaker 6: speaking of an allocator's shoes. You know, basic stuff is
Speaker 6: regular meetings, good substantial risk reports, helping me understand where
Speaker 6: and how risk is our plays, you know, updates when necessary,
Speaker 6: and then you know, just it's really it is granular.
Speaker 6: It's multi strategies are a combination of both zooming out
Speaker 6: and taking the big But we talked about what camp
Speaker 6: means in the global scale and how it's all that,
Speaker 6: but it's also super super granular, so understanding you really
Speaker 6: want to understand, like where their real competency is as
Speaker 6: the multi strated, because many places start off with a
Speaker 6: particular kind of thing.
Speaker 5: They're good at.
Speaker 6: Equities, Yeah, right, you know, at the end of the day,
Speaker 6: most multi strategies make most of their money from kind
Speaker 6: of I would call it equity alpha for lack of
Speaker 6: a better word, which can include traditional long short equity,
Speaker 6: quant equities index rebaal. We've heard about that a couple
Speaker 6: of times. You know, all this sort of stuff that's
Speaker 6: kind of equity alpha. Then you have other ones who
Speaker 6: have more focused on kind of fixed income and credit,
Speaker 6: you know, and you've got to understand what you're getting.
Speaker 6: And I mean, then you've got to think about, given
Speaker 6: what I think that my heuristic or my mental map
Speaker 6: of what these guys are, does each incremental change what
Speaker 6: they do. Does that makes sense because you know, I
Speaker 6: mean one of the things I like to think about
Speaker 6: is making sure that the stories are aligned.
Speaker 5: Very simple stuff.
Speaker 6: Right, Let's say I'm a pod shot manager, you're an
Speaker 6: allocator in here, and.
Speaker 5: I go on you know to ask a constructure, Well,
Speaker 5: my pms.
Speaker 6: You know, we put them in a room, give them Bloomberg,
Speaker 6: We give them all the facility they need.
Speaker 5: We charge them for that, and they just get paid
Speaker 5: on their own P and L. Yeah.
Speaker 6: Oh okay, you say, I find good And then you say, okay,
Speaker 6: well talk to me about you know what sort of
Speaker 6: culture you have? Oh yeah, well, actually you know what
Speaker 6: we also, you know, we have a real cooperative culture
Speaker 6: becomes loved here. You know, they all get back massages
Speaker 6: and we all work together as across the team as well,
Speaker 6: you know, and you're kind of going answer one and
Speaker 6: answer to don't make sense together, right, And you see
Speaker 6: this in all sorts of sort of ways, you know,
Speaker 6: And the thing is that what happened is that people
Speaker 6: have you know, the successful funds are the ones who's
Speaker 6: answered made answer one and answer to come I line
Speaker 6: up together, you know, in whichever way it needs to be.
Speaker 5: They've worked on ways.
Speaker 6: That makes sense that they're kind of I hate to
Speaker 6: say about like a narrative alignment and how they do things.
Speaker 6: They know what they're good at, you know, like what
Speaker 6: for example, you don't have somebody who's really really got
Speaker 6: an equities background to suddenly decide to hire some you know,
Speaker 6: rockstar and allocate forty percent into commodities. You know, that
Speaker 6: would be kind of a weird thing.
Speaker 2: Well, so I know you're not going to like name
Speaker 2: any specific names. I will name some names, but you
Speaker 2: don't have to talk about them directly, you know, like
Speaker 2: I mentioned someone like Ken Griffin or in Izy England
Speaker 2: or at Millennium. When you look at the managers who
Speaker 2: have done really well in this space, what are they
Speaker 2: good at?
Speaker 6: They are good at what I said, kind of bringing
Speaker 6: alignment to finding that align, finding that solvement for align,
Speaker 6: you know, solving for kind of the business issues, the
Speaker 6: risk issues, the investment issues, and the personnel issues, and
Speaker 6: making sure that they all work together.
Speaker 5: You know, they're really successful.
Speaker 6: People are just not that they are in it for
Speaker 6: the money, but now they're in it for the competition
Speaker 6: to improve because like I said, it's the best worst
Speaker 6: job in the world.
Speaker 5: You know, I would like.
Speaker 1: To try it out at least for a little bit
Speaker 1: see how good it is.
Speaker 7: I have a question.
Speaker 2: Part of the appeal of any multi strategy hedge fund
Speaker 2: is the internal diversification. Obviously, whether we're talking about the
Speaker 2: two and twenty or whether we're talking about the pure
Speaker 2: pod model. You have these periods where one trade more
Speaker 2: or less works out very well for a long time.
Speaker 2: In the twenty tens, it was the disinflationary trade, which
Speaker 2: represented in rates, and it was the tech trade or
Speaker 2: various flavors of that. What do you see when you
Speaker 2: do due diligence on a fund? What do you look for?
Speaker 7: Because I would just.
Speaker 2: Think, yeah, here's a bunch of people, but all you
Speaker 2: all want to make money, so y'all put on the
Speaker 2: same trade in different clothing, right, and there's different ways
Speaker 2: to play the same trade. How do the good funds
Speaker 2: actually establish diversification?
Speaker 6: So there's actually April is a really good example of
Speaker 6: the versification at work and what it means for how
Speaker 6: funds work. And I'm going to loosely describe April very loosely,
Speaker 6: and I'm sure somebody in your audience will go completely wrong,
Speaker 6: but loosely, April was mostly in equity story, right, And
Speaker 6: what we had, what we saw was equity only focused
Speaker 6: managers had a much tougher time of it than the
Speaker 6: diversified managers. Okay, so diverse fight I being cross commodities
Speaker 6: rates converts other stuff.
Speaker 5: And why is that important?
Speaker 6: Because last year one of the biggest trades that worked
Speaker 6: with equities, right, And so the way you stay and
Speaker 6: so the way you stay diversified is really disciplined, right.
Speaker 6: And you know, in the context of what you're trying
Speaker 6: to do. One of the interesting things about running simulations
Speaker 6: around multistrats, right is you actually don't need to have
Speaker 6: such great pms or great trades to have a really
Speaker 6: good multi strat if you risk manage it right. Okay,
Speaker 6: if you actually have a set of people who are
Speaker 6: very lowly correlated with each other and you put them together,
Speaker 6: you lever them up, you can have a very good business.
Speaker 6: So to your question is, like, the answer is, you
Speaker 6: got to be disciplined, You got to have like you
Speaker 6: put the right amount of risk into your twenty ten
Speaker 6: different inflationary trade, put the right amount of risk into
Speaker 6: fundamental fundamental equity market neutral last year. But you make
Speaker 6: sure that you're not over the limit, right, and you
Speaker 6: stay disciplined so.
Speaker 7: That our equity market neutral.
Speaker 2: I would still find a way to make it long
Speaker 2: tech and disguise there.
Speaker 5: Well, people totally do. Yeah.
Speaker 6: I mean, look, we haven't even got into factor factor
Speaker 6: controls and stuff like that, and so on and so forth. Look,
Speaker 6: the fact is that and there's multiple answers to that
Speaker 6: question across how multi strates have implemented this in terms
Speaker 6: of what they're willing to take in terms of factor
Speaker 6: risk or sector risk and stuff like that and when.
Speaker 6: But when you get down to it, look, the job
Speaker 6: of an investor, any investor is to take risk in
Speaker 6: the way they're supposed to. And multi strategy funds they
Speaker 6: take risk. You know, there's no getting around that. Key
Speaker 6: is is how you take it, how disciplined you stay
Speaker 6: with it, the quality of the people, the quality of
Speaker 6: the structure around that, and just you know, sometimes some
Speaker 6: look as well.
Speaker 3: Just on the risk management side, it sounds like a
Speaker 3: lot depends on historical core correlations when it comes to diversification,
Speaker 3: and what we've seen in recent years and in April
Speaker 3: is some of those historic correlations breaking down, So for instance,
Speaker 3: bonds not being a good hedge for equities, or more
Speaker 3: recently the dollars selling off at the same time that
Speaker 3: bonds were selling off. How are people managing or judging
Speaker 3: that correlation risk because that seems to be a potential
Speaker 3: area of weakness for multi strats.
Speaker 6: It's a weakness for everybody, potential area weakness for everybody.
Speaker 6: I think, look, management of correlation is super fundamental to
Speaker 6: management of risk. In the context of any multi strategy
Speaker 6: hedge fund. There's tremendous benefits to keeping your correlation low
Speaker 6: between your strategies, in terms of risk management, in terms
Speaker 6: of how much you can lever, in terms of everything.
Speaker 6: When I look at managers, when I test managers, when
Speaker 6: they you know, when I simulate managers, I look at
Speaker 6: kind of two regimes, low and high correlation, and everything
Speaker 6: that works in low is punishes you in high correlation. Right.
Speaker 6: For example, when you're creating diversified portfolio of really cool
Speaker 6: trades that have nothing to do with each other, is great.
Speaker 6: When it works in a high correlation environment is a
Speaker 6: nightmare because it's things you've never heard of blowing up.
Speaker 6: Because I mean, there's a limited amount of things that
Speaker 6: any any one person can know, right, So every choice
Speaker 6: you make at a low correlation environment will come back
Speaker 6: to bite you in a high correlation environment. Correlations between
Speaker 6: asset classes is a fundamental part of that. But the
Speaker 6: critical thing around that is the and this is one
Speaker 6: of my managers said to this, it's like, when you're
Speaker 6: sufficiently diversified, each individual line it him you ad makes
Speaker 6: no difference to the portfolio risk or innd like that,
Speaker 6: except what you're actually looking to allocate when you're at
Speaker 6: that diversified is how much of a loss you can
Speaker 6: make in that high correlational environment, how much of a
Speaker 6: loss you're willing to bear, And so if that individual
Speaker 6: component is something that's additive to that loss or makes
Speaker 6: it worse, that's where you judge it. Right, when you're
Speaker 6: sufficiently diversified, so you try to insulate yourself from breakdown
Speaker 6: and correlation by having a budget for that breakdown and
Speaker 6: correlation and making sure that you're individ you a components.
Speaker 6: You know what each individual component for portfolio is going
Speaker 6: to do for that and if you do that, then
Speaker 6: you're kind of that's how you kind of figure that
Speaker 6: one out.
Speaker 1: Look.
Speaker 6: You can buy hedges as well, and people do explicitly
Speaker 6: do tail hedging to provide kind of return and cash
Speaker 6: in those sorts of scenarios. But allocating that tail risk,
Speaker 6: especially in a pod shot because they're more diversified, is
Speaker 6: probably the most important job that these guys have.
Speaker 2: One of the things that I'm interested in is you know,
Speaker 2: there's still new multistrats being launched. A lot of them
Speaker 2: continue to make a lot of money, but there has
Speaker 2: to be some limit to the alpha generated capacity of
Speaker 2: these vehicles. I would think, and I'm trying to wrap
Speaker 2: around my head about what happened. Does more and more
Speaker 2: funds launch and what is the capacity? And based on
Speaker 2: this conversation, if I had to.
Speaker 1: Guess about what degrades alpha over.
Speaker 2: Time, it would be something to do with compensation, where
Speaker 2: just like all the money accruise at the PM level
Speaker 2: because there's such competition with more talk to us about
Speaker 2: like how you would articulate the source of alpha and
Speaker 2: how much can realistically be captured as more and more
Speaker 2: people and more and more money flows into this space.
Speaker 6: Okay, so articulating a source of alpha, that's probably the
Speaker 6: biggest question there is.
Speaker 5: An investing for hedge funds. Can I cope with a metric?
Speaker 6: I probably could in terms of just volatility and markets extract,
Speaker 6: you know, you know, alpha extraction from that, you know,
Speaker 6: I mean for me that they're kind of critical things
Speaker 6: in terms of understanding what alpha is. Is most of
Speaker 6: the time in most markets there's a large number of
Speaker 6: people with different mandates, different things going on their head,
Speaker 6: different things going on their institutions. As long as there's
Speaker 6: a sufficient ecosystem of time horizons, capital constraints, there's always
Speaker 6: going to be the alpha. And the interesting thing about
Speaker 6: you know, certain markets, for example, is like alpha and
Speaker 6: this may sound a little bit of philosophical, alpha can
Speaker 6: be something other than money. For example, if you take
Speaker 6: a tap simple tail edging situation, buying puts on the
Speaker 6: S and P, right, they're notoriously expensive, right, But the
Speaker 6: alpha that the people who buy puts get is the
Speaker 6: kind of the alpha of a peace of mind for
Speaker 6: the rest of their portfolio.
Speaker 5: Right.
Speaker 6: So I mean, if you're a hard edged to hedge funds,
Speaker 6: you're monetizing the alpha by doing a dispersion trade. But
Speaker 6: like for people who are like feel can they can
Speaker 6: sleep at night by buying puts, that's fine. You know
Speaker 6: they're taking their alpha and kind of non manatory form.
Speaker 6: Now that I said that's philosophical. In other cases, you know,
Speaker 6: the hedge fund space, they're the pushing the pull going
Speaker 6: on here, right, And so you talk about multi strategies
Speaker 6: hedge funds, but they're not the only sort of hedge
Speaker 6: funds the whole set of other hedge funds doing other things.
Speaker 6: And so you know, if you just what's been happening,
Speaker 6: and that's why we're talking about multi strategy hedge funds.
Speaker 6: Is broadly speaking, hedge fund investing is more or less
Speaker 6: the same size for the past couple of years. But
Speaker 6: this share of multi strategies have gone up because, like
Speaker 6: as I said, they kind of offer a pretty good
Speaker 6: deal to a PM. You know, they take away all
Speaker 6: the business risks that they have to deal with. They
Speaker 6: don't talk to me, you know, they just get to
Speaker 6: INVESTI trade, thank you. But you know, they take away
Speaker 6: all that sort of risk, and so the pms they
Speaker 6: kind of have a different maybe better life, depending on
Speaker 6: what their admissions are and stuff. And as I said,
Speaker 6: for investors, the underlying risk taking inside of a multi
Speaker 6: strat makes for a better kind of return and level
Speaker 6: at the top level. You know, I think this will reverse,
Speaker 6: you know, over time, but like for the moment, like multistrats,
Speaker 6: and you ask about how big individual multi strats can
Speaker 6: get it as well, which is an interesting question. Empirically,
Speaker 6: kap is around fifty fifty to seventy billion dollars right
Speaker 6: now you know, whether that's liquidit in markets, whether that's
Speaker 6: share of Wall Street's bank's credit book, you know that's
Speaker 6: or where it's just organizational sites because you know they're
Speaker 6: hard to manage, you know, hundreds of pms right, physically
Speaker 6: and mathematically different to do that.
Speaker 3: Is prime brokerage a factor as well, because I imagine,
Speaker 3: you know, if you have a multi strat that suddenly
Speaker 3: becomes as big as JP Morgan or something that's unrealistic,
Speaker 3: but just as an extreme example, I can't imagine the
Speaker 3: prime brokers.
Speaker 5: Are going to be okay with that, with what exactly.
Speaker 3: With the size and the risk of a giant multi
Speaker 3: of having a relationship with a giant multi strat.
Speaker 6: They would not love it because you know it just
Speaker 6: put it's this famous story. If a few ten dollars
Speaker 6: to the bank, it's your problem. Yeah, billion dollars the bank,
Speaker 6: it's their problem. So you know, banks across the world
Speaker 6: avoid try to avoid having customers so large that they
Speaker 6: it becomes their problem.
Speaker 5: So yes, the answer is yes.
Speaker 3: Ronan Cosgrave, thank you so much for coming on all
Speaker 3: thoughts and explaining to us why comp is important.
Speaker 2: That was fantastic come back on the podcast again for
Speaker 2: a further conversation.
Speaker 1: But that's great, Thank.
Speaker 8: You guys, Joe.
Speaker 3: That was fun.
Speaker 7: That was great. Yeah.
Speaker 3: I like digging in to the business model of these things.
Speaker 3: One thing I hadn't come to appreciate is the idea
Speaker 3: of how difficult it might be to actually move around
Speaker 3: capital because no one wants to be firing pms that
Speaker 3: you fought like tooth and nail to actually hire in
Speaker 3: a competitive environment.
Speaker 2: I mean, so this gets to something that actually I
Speaker 2: thought about after we did that recent episode with Scott
Speaker 2: back on boutique investment banks.
Speaker 7: Which is the idea of where.
Speaker 2: Does franchise value come in in a talent driven business? Yeah,
Speaker 2: in boutique investment banking, there's another area where it's like, Okay,
Speaker 2: you build this talent, but is there any franchise value
Speaker 2: external that? And so it was really interesting to hear
Speaker 2: Ronan talk about at any hedge fund, not just the
Speaker 2: degree to which the manager has actual money tied to
Speaker 2: the investments in this space, but to which they're invested
Speaker 2: in the business as a business, as opposed to just
Speaker 2: the fund. I thought that was a super fantastic Yeah.
Speaker 3: And also like the idea of looking at over head
Speaker 3: spending as like an indication how much people care about
Speaker 3: the business.
Speaker 2: Yeah, I hadn't thought of that. You know, I would
Speaker 2: like to be in this space one day. That's never
Speaker 2: going to happen for obvious reasons. But it's very fun
Speaker 2: thinking about ways in which, depending on what seat we have,
Speaker 2: we're gaming the system.
Speaker 1: You know.
Speaker 2: So it's like, if I'm at the manager level, I'm
Speaker 2: thinking about how I can have personal wealth that is
Speaker 2: visible to me.
Speaker 3: But is it not that your mind immediately goes to
Speaker 3: gaming the system.
Speaker 2: It's not visible to the LPs. I think about how
Speaker 2: if I were at the PM level, I was like, yeah,
Speaker 2: of course I'm taking a market neutral long short book,
Speaker 2: but I'm really just finding a closet way to go
Speaker 2: long in video. During the AI bull market, it does
Speaker 2: feel though that like part of the entire game is here.
Speaker 2: You have these parameters and risk constraints and so forth,
Speaker 2: and this cat and mouse game between those who want
Speaker 2: to essentially find a way out of the constraints and
Speaker 2: those who want to put them back in the box.
Speaker 3: Yeah, that seems to be a fundamental tension, although I
Speaker 3: imagine it exists, you know, in some other funds as well.
Speaker 2: And I just like the fact that all this bonus
Speaker 2: money is the business itself. I think that's a really
Speaker 2: important idea when you hear about bonuses, et cetera. This
Speaker 2: is not just like someone getting their Christmas bonus.
Speaker 1: This is the business. This is the business.
Speaker 3: Shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 3: This has been another episode of the Odd Lots podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Jill Wisenthal. You can follow me at the Stalwart.
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