WEBVTT - Why Asset Allocators Love Multi-Strategy Hedge Funds 0:00:00.160 --> 0:00:01.400 Hello, Odd Lots listeners. 0:00:01.440 --> 0:00:04.600 I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, We're doing 0:00:04.680 --> 0:00:06.960 another live show and it's right here in New York City. 0:00:07.160 --> 0:00:10.160 Yeah, this one should be our biggest yet, and we're 0:00:10.160 --> 0:00:12.560 going to have a bunch of Odd Lots favorites and 0:00:12.840 --> 0:00:15.600 do something maybe a little different to some of our 0:00:15.640 --> 0:00:17.919 previous live podcast recordings. 0:00:17.960 --> 0:00:20.799 When the guests are revealed, the show is going to 0:00:20.840 --> 0:00:22.520 sell out right away, so you should really just go 0:00:22.560 --> 0:00:23.920 get your ticket right now. 0:00:24.280 --> 0:00:25.480 It's June twenty sixth. 0:00:25.480 --> 0:00:28.120 It's at Recket, NYC, and you can find a ticket 0:00:28.120 --> 0:00:31.160 link at Bloomberg dot com slash odd Lots or Bloomberg 0:00:31.160 --> 0:00:34.200 Events dot com slash odd Lots Live and why. 0:00:34.080 --> 0:00:35.120 We hope to see you there. 0:00:38.000 --> 0:00:53.240 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:53.520 --> 0:00:56.680 Hello and welcome to another episode of the Authoughts podcast. 0:00:56.800 --> 0:00:58.280 I'm Tracy Alloway. 0:00:57.960 --> 0:00:59.120 And I'm Joe Wisenthal. 0:00:59.600 --> 0:01:04.320 Joe, did you, at some point last month when markets 0:01:04.360 --> 0:01:07.920 were being very, very dramatic, did you maybe hear that 0:01:08.000 --> 0:01:11.880 a pod was blowing up? Maybe just maybe. 0:01:11.680 --> 0:01:15.640 I probably saw some tweets, probably tongue in cheek. I 0:01:15.680 --> 0:01:18.600 may have sent some dms to people saying jokingly, have 0:01:18.640 --> 0:01:20.959 you heard of any pods blowing up? But no, it's 0:01:21.000 --> 0:01:23.759 become such a meme. Anytime like the market moves half 0:01:23.840 --> 0:01:27.160 a percent, I imagine some pods did blow up. But it 0:01:27.240 --> 0:01:28.759 is a funny joke, good intro. 0:01:29.080 --> 0:01:32.000 It's definitely become a thing. But I think it kind 0:01:32.040 --> 0:01:35.240 of highlights something something very real, which is there is 0:01:35.280 --> 0:01:39.120 this mystique around pod shops, the multi strategy hedge funds, 0:01:39.440 --> 0:01:42.480 and whenever something weird is happening in markets now, they 0:01:42.680 --> 0:01:45.360 tend to get blamed or people start joking about them. 0:01:45.680 --> 0:01:48.440 And also part of the mystique is there's just a 0:01:48.480 --> 0:01:51.160 lot of interest in why they seem to be so 0:01:51.320 --> 0:01:54.080 hot right now blowing up in a very different way. 0:01:54.520 --> 0:01:58.920 And what exactly is the attraction for big allocators of capital, 0:01:59.480 --> 0:02:02.520 because I always think it's not like big investors can't 0:02:02.720 --> 0:02:06.080 create their own diversified portfolios or invest in a fund 0:02:06.080 --> 0:02:09.920 of funds or traditional two and twenty or whatever. So 0:02:10.400 --> 0:02:14.079 what exactly is it about the pod shops that makes 0:02:14.120 --> 0:02:14.919 them so attractive. 0:02:15.120 --> 0:02:19.320 We've done a lot of episodes on the multistreads at 0:02:19.320 --> 0:02:21.600 this point, the pod shops so various flavors. 0:02:21.800 --> 0:02:24.240 There are still a lot of things I don't understand. 0:02:24.320 --> 0:02:27.000 First of all, my understanding is that they sort of 0:02:27.040 --> 0:02:30.240 continue to prove their metal. I mean, it seems like 0:02:30.360 --> 0:02:33.400 they didn't lose a lot of money in April during 0:02:33.440 --> 0:02:38.880 some of that volatility, So they have this promise uncorrelated returns. 0:02:38.960 --> 0:02:41.959 We'll get into how they deliver that. So far, it 0:02:42.080 --> 0:02:46.280 seems like they continue to more or less do what's advertised. 0:02:46.840 --> 0:02:49.440 I have a lot of questions about how and what 0:02:49.600 --> 0:02:51.680 is the actual source of alpha and how long can 0:02:51.760 --> 0:02:53.880 this go on, and whether there are a lot of 0:02:53.919 --> 0:02:57.120 copycats and whether that will cause alpha decay and all 0:02:57.160 --> 0:02:57.920 this stuff. 0:02:58.400 --> 0:03:01.359 I have questions about comp the most important thing. 0:03:01.600 --> 0:03:03.840 Well, this is really important, and actually, you know, we 0:03:03.880 --> 0:03:07.680 did that episode with the founder of Freestone, Grove dan Morello, 0:03:08.000 --> 0:03:11.240 just a lot of the conversation was about comp And 0:03:11.400 --> 0:03:14.280 I'm interested in comp because I'm interested in the topic 0:03:14.320 --> 0:03:16.959 of making a lot of money, But also I get 0:03:16.960 --> 0:03:22.600 the impression that comp and incentive alignment more broadly is 0:03:22.800 --> 0:03:26.280 actually one of the key problems that people are trying 0:03:26.320 --> 0:03:27.400 to solve for all the time. 0:03:27.480 --> 0:03:30.000 I think that's right. Okay, So I am very pleased 0:03:30.000 --> 0:03:32.040 to say we do, in fact have the perfect guest. 0:03:32.320 --> 0:03:34.600 We're going to be speaking with Ronan Cosgrave. He is 0:03:34.600 --> 0:03:38.360 a partner at Alburn Partners. So Ronan, thank you so 0:03:38.440 --> 0:03:39.520 much for coming on all thoughts. 0:03:39.760 --> 0:03:41.320 Thank you very much. I'm really honored to be here. 0:03:41.600 --> 0:03:45.400 First question, what exactly is Alborn Partners because it's not 0:03:45.600 --> 0:03:46.880 a pod shop itself. 0:03:47.120 --> 0:03:48.400 No, No, we're so. 0:03:48.440 --> 0:03:51.080 I co lead multi strategy heads fund coverage at Alborn. 0:03:51.360 --> 0:03:55.280 We are an advisory only independently owned consultant. We help 0:03:55.360 --> 0:03:58.880 institutional investors invest in hedge funds, private equity, real estate, 0:03:59.040 --> 0:04:01.880 all across the alternate that spectrum. We have about three 0:04:01.920 --> 0:04:05.080 undred and fifty clients worldwide and we advise on greater 0:04:05.160 --> 0:04:07.840 than seven hundred and fifty billion dollars in assets. 0:04:08.120 --> 0:04:11.200 Okay, give us a little bit more of your background. 0:04:11.720 --> 0:04:14.880 You're the perfect guests to talk about multi strategy hedge 0:04:14.880 --> 0:04:18.440 funds and why allocators like allocating to them. Talk to 0:04:18.680 --> 0:04:21.360 us about like how you built up your familiarity with 0:04:21.440 --> 0:04:24.719 the space and how you've built up your like understanding 0:04:24.839 --> 0:04:26.440 of their inner mechanics. 0:04:26.720 --> 0:04:29.160 That's a long answer. I've been over twenty years in 0:04:29.160 --> 0:04:30.000 the hedge front industry. 0:04:30.120 --> 0:04:30.400 Okay. 0:04:30.520 --> 0:04:32.760 I worked at a fund of funds called Pamco for 0:04:32.839 --> 0:04:35.400 fifteen years or the partner there did a whole lot 0:04:35.400 --> 0:04:37.800 of stuff there, covered pretty much kind of the constituent 0:04:38.120 --> 0:04:40.840 strategies of many of the multi strats, right, so you're 0:04:40.839 --> 0:04:45.120 talking about longstrared equity, long shot credit, convert arab ballarb. 0:04:45.440 --> 0:04:47.919 As it got more difficult, I got more involved, you know. 0:04:48.240 --> 0:04:50.880 Since then, I've worked with Albourne. I joined Albourne for 0:04:51.040 --> 0:04:53.640 four and a bit years ago, and you know, with 0:04:53.640 --> 0:04:56.440 my colleague Martina, we cover the multi strategy universe globally. 0:04:56.880 --> 0:05:00.320 So part of our job really is to kind of 0:05:00.960 --> 0:05:04.440 dig in deep into the multistrats, not just learn about 0:05:04.440 --> 0:05:08.359 the people, but the process, the inner mechanisms of what 0:05:08.400 --> 0:05:11.240 differentiates one particular multi strat from another. And the really 0:05:11.279 --> 0:05:13.919 cool thing is that they're all actually really different, you know. 0:05:14.080 --> 0:05:17.000 And one of the fun things listening to you guys 0:05:17.279 --> 0:05:19.520 is when you talk about pod shops and so on 0:05:19.600 --> 0:05:21.919 and so forth, or multi strats in general, I mean, 0:05:22.000 --> 0:05:25.000 there's huge differences in how they're run internally, you know. 0:05:25.080 --> 0:05:27.960 And the other thing I distinguish in the multi strategy 0:05:27.960 --> 0:05:30.040 space is the pod shops, which are the classic ones 0:05:30.080 --> 0:05:32.440 that are you know, you know, with the three layer 0:05:32.480 --> 0:05:36.400 of the fees versus the more traditional multi strategy hedge funds, 0:05:36.400 --> 0:05:37.240 which are two and twenty. 0:05:38.000 --> 0:05:38.200 Oh. 0:05:38.440 --> 0:05:41.160 That is an important difference, isn't it. Before we get 0:05:41.200 --> 0:05:44.120 into that, I want to ask, when you're doing due 0:05:44.160 --> 0:05:48.880 diligence on possible hedge fund investments, how do you go 0:05:48.960 --> 0:05:51.520 about doing that? Actually, because you just said you dig 0:05:51.560 --> 0:05:55.839 into you know, the culture, the people, risk management. How 0:05:55.920 --> 0:05:58.320 much access do you have and how do you do that? 0:05:59.640 --> 0:06:00.880 That's another big question. 0:06:01.440 --> 0:06:03.360 So the thing is with the multi strategy hedge fund 0:06:03.400 --> 0:06:07.480 space is you start really with the single strategy stuff, 0:06:07.800 --> 0:06:10.600 and it's not really fair to ask anybody to cover 0:06:10.680 --> 0:06:13.599 multi strategies if they haven't worked hard at understanding the 0:06:13.600 --> 0:06:17.600 individual contributions of all the different trades and trade types 0:06:17.600 --> 0:06:20.760 that make up a multi strategy. But the critical thing, 0:06:20.760 --> 0:06:23.560 and you alluded to this, is that multi strategy hedge 0:06:23.560 --> 0:06:27.640 funds are another level of abstraction away from the markets. 0:06:27.680 --> 0:06:30.800 Because yes, we do look at trades, at traders and 0:06:30.839 --> 0:06:33.720 pms and stuff like that, but almost as important as 0:06:33.720 --> 0:06:36.640 you're evaluating them as business models, you're evaluating them as 0:06:36.720 --> 0:06:40.880 risk models and investment models, and you know, they're all 0:06:40.920 --> 0:06:43.640 super interlinked. And one of the things that we look 0:06:43.680 --> 0:06:48.240 at and look for is kind of consistency between all 0:06:48.320 --> 0:06:51.560 the strands, because if you have things that are in 0:06:51.600 --> 0:06:55.520 conflict internally, you end up with a suboptimal outcome, right, 0:06:55.560 --> 0:06:57.200 I mean, we've all lived that in our own personal 0:06:57.200 --> 0:07:00.000 and professional lives. But if things aren't in a line, 0:07:00.320 --> 0:07:02.919 and you mentioned compensation, competition is a huge part of that, 0:07:02.960 --> 0:07:04.920 and I'm you know, one of the things I'd argue 0:07:05.520 --> 0:07:09.440 is that comp affects far, far, far more dimensions of 0:07:09.440 --> 0:07:12.480 a multi strategy hedge fund than almost any aspect. 0:07:12.760 --> 0:07:13.720 Yeah. 0:07:14.080 --> 0:07:17.560 No, this seems very interesting to me because often it 0:07:17.600 --> 0:07:21.560 feels as though, okay, you have some investment strategy and 0:07:21.600 --> 0:07:24.480 then make a lot of money and then okay, some 0:07:24.560 --> 0:07:27.080 of it goes to the manager and some of it 0:07:27.120 --> 0:07:30.440 goes to the outside investor. That's how I conceive of things. 0:07:30.520 --> 0:07:33.920 But it really does seem like comp structure is actually 0:07:34.080 --> 0:07:36.160 core to the business model. But before we get to that, 0:07:36.360 --> 0:07:39.080 why don't you actually go back for listeners, and for 0:07:39.160 --> 0:07:42.400 my sake, when you distinguish between the sort of traditional 0:07:42.440 --> 0:07:47.120 two and twenty multistrats with the so called podshops, In 0:07:47.240 --> 0:07:50.040 my mind, I associate with the millenniums of the world 0:07:50.240 --> 0:07:53.080 but talk to us about the differences in these business 0:07:53.120 --> 0:07:54.840 models when you use these terms. 0:07:54.960 --> 0:07:58.240 Yeah, so I refer to two and twenty simple it's 0:07:58.280 --> 0:08:00.720 a straight management fee of two, but it could be 0:08:00.760 --> 0:08:03.960 any fixed number, and a performance fee of twenty percent 0:08:04.080 --> 0:08:05.480 on the overall portfolio. 0:08:05.560 --> 0:08:07.080 So the only fees paid. 0:08:06.880 --> 0:08:09.080 By the investor are the management fee, which is idignated 0:08:09.120 --> 0:08:13.120 in advance, plus a cut of the gross performance of 0:08:13.120 --> 0:08:15.560 the portfolio as the whole. And that's a really critical 0:08:15.640 --> 0:08:19.600 distinction between between them and the platforms or pod shops. Right, 0:08:19.680 --> 0:08:24.040 so a pod shop has all that right now. First off, 0:08:24.440 --> 0:08:26.880 the first thing that happens is that the management fee 0:08:27.000 --> 0:08:28.880 may or may not be fixed. It can be what's 0:08:28.920 --> 0:08:31.040 known as a pass through fee, where it's kind of 0:08:31.040 --> 0:08:33.480 a blank check in many ways. For the most part, 0:08:33.520 --> 0:08:35.840 they do take good care of that. But the third 0:08:35.920 --> 0:08:38.600 layer of fees that's really important is that there's fees 0:08:38.720 --> 0:08:42.360 payable at the level of the PM, not at the 0:08:42.400 --> 0:08:44.920 overall fund. And when you get to that level, there's 0:08:44.960 --> 0:08:47.120 a lot of things that people take for granted and 0:08:47.200 --> 0:08:50.120 investing just simply breakdown, you know. And to go on 0:08:50.160 --> 0:08:52.400 to that, like the one thing that I keep getting told, 0:08:53.040 --> 0:08:55.080 you know, in my own personal investing life and everybody's 0:08:55.080 --> 0:08:58.560 personal investing life, is that diversification is the only fee 0:08:58.600 --> 0:09:03.640 launch R. When you are paying performance fees on a 0:09:04.160 --> 0:09:07.559 on individual components of a portfolio. Diversification is not a 0:09:07.600 --> 0:09:10.280 free launch. It costs you money, real money. 0:09:10.920 --> 0:09:14.679 Wait, can you explain how do clients? How do investors 0:09:14.720 --> 0:09:18.439 actually pay individual pms? Like, how does that work? 0:09:18.960 --> 0:09:19.280 Yeah? 0:09:19.320 --> 0:09:22.000 So in a pod shop, what you have you think 0:09:22.040 --> 0:09:24.800 about it is you have you know a number of pms, 0:09:24.880 --> 0:09:28.559 anything between five to three hundred and something. They each 0:09:28.600 --> 0:09:30.960 basically have their own individual P and L. Right, so 0:09:31.040 --> 0:09:35.000 they the manager, the overall fund manager track tracks each 0:09:35.040 --> 0:09:38.520 PM and their p and L. They'll charge back all 0:09:38.520 --> 0:09:39.920 the appropriate stuff that would be charged to that. They 0:09:40.000 --> 0:09:43.880 will normally be charged Bloomberg for example, all other trading costs, 0:09:43.960 --> 0:09:46.920 the analysts costs perhaps, and then if that number is 0:09:46.920 --> 0:09:50.240 above zero, the PM gets a payment from the manager 0:09:50.280 --> 0:09:52.559 out of the fund and that's their performance fees. So 0:09:52.600 --> 0:09:55.760 the investors themselves don't actually pay them, paid. 0:09:55.520 --> 0:09:56.520 For them by the manager. 0:09:57.800 --> 0:10:01.199 Now, you said that there can be the instances in 0:10:01.320 --> 0:10:04.280 when diversification is not a free launch, and so I 0:10:04.400 --> 0:10:08.000 take that to mean that you can have situations in 0:10:08.040 --> 0:10:10.960 which at the fund level you don't have a good 0:10:11.040 --> 0:10:14.640 year and you're not making any money. But some pod 0:10:14.760 --> 0:10:17.040 managers had a great year and they still have to 0:10:17.040 --> 0:10:19.440 get paid. And so you talk to us a little 0:10:19.440 --> 0:10:24.240 bit about these conditions under which that diversification can be costly. 0:10:24.440 --> 0:10:27.120 Yeah, let's use a simple, simple model. So you have 0:10:27.160 --> 0:10:29.160 a pod shop, but you want to got two pods, 0:10:29.400 --> 0:10:30.760 and at the end of the year, one pod is 0:10:30.840 --> 0:10:33.320 up ten dollars and one pod is down ten dollars. 0:10:33.600 --> 0:10:35.800 Because it's pod shop, you're paying on the panel of 0:10:35.800 --> 0:10:39.200 each individual PM. So let's say it's twenty percent. Right, 0:10:39.240 --> 0:10:43.319 So on a gross before fees basis your flat. However, 0:10:43.720 --> 0:10:46.760 you're paying the guy who was up ten dollars two dollars, right. 0:10:46.840 --> 0:10:50.120 So after this is added together, now your portfolio is 0:10:50.120 --> 0:10:53.480 down two dollars. And that is netting risk. And the 0:10:53.520 --> 0:10:56.600 interesting thing about netting risk is because to bring it 0:10:56.640 --> 0:10:59.679 out further, is that netting risk you could argue, well, 0:10:59.720 --> 0:11:01.280 that's you and be an issue for the ones that 0:11:01.360 --> 0:11:02.800 pay at the top level. 0:11:03.280 --> 0:11:05.000 Well, the issue is. 0:11:04.640 --> 0:11:07.200 That because they exist in a competitive landscape for pms, 0:11:07.720 --> 0:11:10.679 pod shops can go to a PM who didn't get paid. 0:11:11.080 --> 0:11:11.840 Right, So, if you think. 0:11:11.720 --> 0:11:14.720 About it, if that was a traditional two and twenty 0:11:14.800 --> 0:11:17.760 multi strat ten dollars up, ten dollars down, flash, nobody 0:11:17.760 --> 0:11:19.760 gets paid. The fact is you've got a very very 0:11:19.800 --> 0:11:22.600 unhappy PM who's up ten dollars, he's made ten dollars, 0:11:22.640 --> 0:11:25.839 who's like sitting there in the corner really angry because 0:11:25.840 --> 0:11:28.040 they worked really hard, they made a lot of money 0:11:28.480 --> 0:11:29.319 and they get nothing. 0:11:29.880 --> 0:11:31.439 And the pod shop can ring them up. 0:11:31.400 --> 0:11:33.679 And says we'll take you, yeah you know, and will 0:11:33.679 --> 0:11:36.319 guarantee if you make money you will get paid it. 0:11:36.559 --> 0:11:39.160 The other thing to remember as regards netting risk is 0:11:39.200 --> 0:11:42.040 it's actually we've modeled it at Albourne. We've worked it 0:11:42.080 --> 0:11:45.800 out and using various simulations, it averages for a just 0:11:45.840 --> 0:11:48.959 a regular set of managers and pms around one percent 0:11:48.960 --> 0:11:49.280 a year. 0:11:49.960 --> 0:11:50.160 Right. 0:11:50.160 --> 0:11:52.760 When you think about a two and twenty hedge fund, 0:11:52.880 --> 0:11:56.280 yeah you might, you kind of expectationally, should expect to 0:11:56.320 --> 0:11:58.959 pay one percent of that two percent management fee to 0:11:59.040 --> 0:12:01.199 people who've made money when everybody halse has lost money. 0:12:01.440 --> 0:12:03.120 And it can be way more than that, and that's 0:12:03.160 --> 0:12:17.520 a real business risk. 0:12:20.559 --> 0:12:22.880 So one thing I wanted to ask is I get 0:12:22.880 --> 0:12:28.800 the impression that podshops are very, very competitive, and you know, 0:12:28.840 --> 0:12:32.520 the talent is competitive, but the pod shop itself is 0:12:32.559 --> 0:12:36.120 supposed to kind of work together, right and the positions 0:12:36.160 --> 0:12:40.360 are supposed to diversify and even each other out and 0:12:40.400 --> 0:12:42.559 all of that. So I guess my question is how 0:12:42.640 --> 0:12:45.360 cutthroat is it actually working at a pod shop? 0:12:46.559 --> 0:12:47.240 It varies. 0:12:47.720 --> 0:12:51.880 The fact is that a podshop is an entity that 0:12:51.960 --> 0:12:55.600 can make certain decisions to create either competition or cooperation. 0:12:56.120 --> 0:12:59.440 Any multistract can do this in a pure eat what 0:12:59.520 --> 0:13:03.800 you kill and vironment. Obviously there's no incentive to do cooperation, 0:13:04.040 --> 0:13:07.840 but people do recognize this, right, And what I would 0:13:07.880 --> 0:13:12.520 say for that is that it's all about what do 0:13:12.559 --> 0:13:15.640 you want as what does the manager want to produce? 0:13:16.080 --> 0:13:18.960 And one of the things what I would say is 0:13:19.000 --> 0:13:21.120 there's a real choice that you have to make between 0:13:21.240 --> 0:13:24.080 kind of talent and structure. And what do I mean 0:13:24.120 --> 0:13:27.200 by that? What I mean by that is to use 0:13:27.200 --> 0:13:30.000 the sports context. There's kind of two ways assemble professional 0:13:30.000 --> 0:13:32.840 sports teams. The first is to get a big pilot 0:13:32.840 --> 0:13:35.560 cash and go hire the best players in this position 0:13:35.840 --> 0:13:38.679 and put them on the field and hope for the best. Right, 0:13:38.720 --> 0:13:41.040 that's a focus on talent. The other way is to 0:13:41.120 --> 0:13:43.240 hire a really really good coach with a really good 0:13:43.240 --> 0:13:47.880 system and to have him or her go with their 0:13:47.920 --> 0:13:50.640 team kind of a moneyball system where you put together 0:13:50.679 --> 0:13:52.880 people who fit in the structure. And what that means 0:13:53.000 --> 0:13:56.240 is the first one is like the emphasis on the individual, 0:13:56.800 --> 0:13:58.760 and the second one of the emphasises on it on 0:13:58.800 --> 0:14:02.760 the whole. And when you talk about competition, one of 0:14:02.760 --> 0:14:05.160 the main ways you enforce competition. 0:14:04.800 --> 0:14:06.320 Is probably obviously compensation. 0:14:06.800 --> 0:14:10.280 If you have a situation where it's purely what you 0:14:10.360 --> 0:14:12.080 kill and you get a presentive of your own P 0:14:12.160 --> 0:14:15.240 and L and that's it, it's very very hard to 0:14:15.520 --> 0:14:19.840 enforce that level of That's where you get those cutthroat stories, right. 0:14:19.880 --> 0:14:21.960 But there are many others out there who have other 0:14:22.040 --> 0:14:25.160 ways of doing this who recognize that. You know, if 0:14:25.200 --> 0:14:27.840 you just have everybody in it for themselves, you produce 0:14:27.840 --> 0:14:30.560 a portfolio that's actually suboptimal at the top level. 0:14:30.800 --> 0:14:32.280 This is what I was going to ask. Have you 0:14:32.360 --> 0:14:36.119 noticed a difference in performance between the sort of cutthroat 0:14:36.200 --> 0:14:38.880 competitive firms versus the more cooperative ones. 0:14:38.960 --> 0:14:41.320 That's a really good question, and the short answer is 0:14:41.360 --> 0:14:44.760 it's really hard to distinguish between them. On the outside 0:14:45.320 --> 0:14:49.080 The interesting thing really is more around what happens when 0:14:49.080 --> 0:14:51.760 things are going badly for both that you're more likely 0:14:51.800 --> 0:14:53.800 to have people kind of like quickly leave the more 0:14:53.800 --> 0:14:56.480 competitive and cut throat one. Ah then you would have 0:14:56.720 --> 0:14:59.400 then maybe they're more cooperative, you know. I mean the 0:14:59.480 --> 0:15:02.120 cool thing about the pod shop and the platform space 0:15:02.520 --> 0:15:05.000 is there's literally no right way to do this. There's 0:15:05.040 --> 0:15:08.080 a real series of trade offs, right, and there's choices 0:15:08.120 --> 0:15:11.680 you make have cost many different different dimensions. Because, for example, 0:15:11.960 --> 0:15:15.560 if you choose to do cooperation right and you incentivize everybody, 0:15:15.600 --> 0:15:16.880 you typically would do it in a kind of a 0:15:16.880 --> 0:15:20.920 traditional multi strategy context, right. What that means is that 0:15:20.960 --> 0:15:23.320 you're not going to have the eat what you kill mentality. 0:15:23.360 --> 0:15:26.080 You may have certain bits around that, but if you 0:15:26.200 --> 0:15:30.000 use that thing, you have a very good place to work, 0:15:30.880 --> 0:15:31.280 but you. 0:15:31.320 --> 0:15:32.320 End up with a situation. 0:15:32.400 --> 0:15:34.400 Where As we talked about earlier, netting risk is a 0:15:34.440 --> 0:15:37.640 real cost. So what that often means is that compensation 0:15:37.840 --> 0:15:41.400 choice drives you to be a bit more correlated within 0:15:41.480 --> 0:15:43.960 your own portfolio and be a bit bit less, bit less, 0:15:44.360 --> 0:15:47.400 little lower sharp ratio. Why is that Because if netting 0:15:47.480 --> 0:15:49.760 risk or the cost of netting is a real business risk. 0:15:49.800 --> 0:15:51.840 You choose to minimize it, and the way easily to 0:15:51.920 --> 0:15:54.160 minimize it has had everybody kind of make money at 0:15:54.160 --> 0:15:56.600 the same time everybody kind of lose money at the 0:15:56.600 --> 0:15:58.560 same time, and then you won't be picked off by 0:15:58.560 --> 0:16:03.440 the pod Shopsimilarly, if you have competition, right, competition is 0:16:03.560 --> 0:16:08.120 an incredibly powerful human thing, but it gets out of 0:16:08.120 --> 0:16:10.720 control and you end up with a situation where people 0:16:10.800 --> 0:16:13.640 just burn out and just leave you. People are unhappy. 0:16:14.160 --> 0:16:15.880 You know, you have to kind of keep feeding people 0:16:15.960 --> 0:16:18.000 into it, and you know that that's totally fine because 0:16:18.040 --> 0:16:20.480 there are many other industries out there besides finance that 0:16:20.520 --> 0:16:24.080 does this, you know. But at the same time, you know, 0:16:24.120 --> 0:16:25.720 you end up with a whole lot of scenarios that 0:16:25.760 --> 0:16:27.960 are kind of you end up with a kind of 0:16:27.960 --> 0:16:30.880 a team of rivals, you know, and then that's it's 0:16:30.880 --> 0:16:32.400 a dynamic, but it is the one that you have 0:16:32.440 --> 0:16:34.640 to really control zooming out. 0:16:34.920 --> 0:16:38.120 Obviously, the performance of a lot of the well known 0:16:38.240 --> 0:16:42.680 names has done really well. You're talking to institutional allocators 0:16:43.240 --> 0:16:45.800 other than I guess the fact that the top line 0:16:45.840 --> 0:16:48.760 performance is good and everyone likes making money, what is 0:16:48.800 --> 0:16:52.560 the general pitch? And we've seen this trend obviously from 0:16:52.720 --> 0:16:56.680 allocation to single fund managers. You know your traditional guys 0:16:56.680 --> 0:16:58.560 who would like go on TV and they unveil their 0:16:58.600 --> 0:17:01.680 long or whatever. As a digression. I always think it's 0:17:01.680 --> 0:17:04.760 funny when you see these pod managers on TV and 0:17:04.760 --> 0:17:07.400 they get asked about their thoughts about the market, because 0:17:07.400 --> 0:17:09.800 it's clearly that's not really even what their focus is 0:17:09.920 --> 0:17:12.359 on in terms of business structure design. So I'm always 0:17:12.359 --> 0:17:15.480 sort of raise an eyebrow when I see these conversations. 0:17:15.800 --> 0:17:18.800 Talk to us about what it is about these entities 0:17:18.800 --> 0:17:21.639 in general that holds so much an appeal for an 0:17:21.640 --> 0:17:22.720 institutional allocator. 0:17:23.000 --> 0:17:26.080 They hold appeal for a variety of different reasons, and 0:17:26.119 --> 0:17:28.879 obviously it will depend on the individual mandate of the allocator, 0:17:29.280 --> 0:17:31.880 but there's a couple of fundamental things that really hold 0:17:31.960 --> 0:17:34.880 true across all multi threats. The first one is that 0:17:35.880 --> 0:17:38.640 it's interesting that we talk about pods like there's something new, 0:17:38.640 --> 0:17:40.679 But if you actually if all three of us decided 0:17:40.680 --> 0:17:43.719 to go out and invest into twenty individual hedge funds, 0:17:44.560 --> 0:17:47.320 we'd have the same issue. A. They would be paid 0:17:47.560 --> 0:17:49.919 on what they eat, what they kill. Yeah, B we 0:17:50.000 --> 0:17:52.200 would have to hire and fire people. By the way, 0:17:52.600 --> 0:17:55.240 hiring and firing people. Hiring is fun, Firing sucks. 0:17:55.400 --> 0:17:57.920 Yeah, But the point, but the. 0:17:57.880 --> 0:18:00.800 Overall thing is that each individual pe in that set 0:18:00.840 --> 0:18:04.280 of single strategy hedge funds is allocating according to what 0:18:04.520 --> 0:18:07.440 two things, what they think in their set of investors 0:18:07.480 --> 0:18:10.159 want and be what they're willing to bear because it's 0:18:10.160 --> 0:18:13.600 their only job and their name on the above the door. 0:18:14.119 --> 0:18:15.960 And so what you end up is is your set 0:18:16.000 --> 0:18:19.640 of allocations that when you're roll them up together, are 0:18:19.840 --> 0:18:24.080 individually way under risked, right, and you're not making as 0:18:24.160 --> 0:18:25.920 much money as you should given the talent that you're 0:18:25.920 --> 0:18:28.280 paying for and the amount of fees you're paying. So 0:18:28.320 --> 0:18:30.639 when you hire a multistrats, and part of the thesis 0:18:30.680 --> 0:18:33.320 of multi strats, which which is true, is that because 0:18:33.359 --> 0:18:36.399 they're a unitary portfolio with somebody atop in charge of 0:18:36.440 --> 0:18:39.720 it driving the risk of the individual pms, not the 0:18:39.720 --> 0:18:43.239 individual pms themselves, you can and you really should end 0:18:43.320 --> 0:18:45.879 up with a better return stream because you've coalested all 0:18:45.880 --> 0:18:49.240 together under a single unitary authority and they can put 0:18:49.280 --> 0:18:50.920 them to you know, they put leverage to work, risk 0:18:51.000 --> 0:18:54.280 to work, so that the individual PM might be more 0:18:54.359 --> 0:18:56.400 risky than they really really want to be or maybe 0:18:56.440 --> 0:18:58.879 it's probably obscured from them usually, but at the end 0:18:58.880 --> 0:19:01.280 of the day, that rolls up into an appropriately risk 0:19:01.359 --> 0:19:04.280 portfolio return. Right, And you know, having somebody who worked 0:19:04.320 --> 0:19:05.960 in fund of funds, one of the issues of fund 0:19:05.960 --> 0:19:08.360 of funds is just that you had fantastic sharp ratios, 0:19:08.440 --> 0:19:09.400 but the returns were low. 0:19:10.880 --> 0:19:13.520 That's a really important point. One other thing I wanted 0:19:13.520 --> 0:19:17.240 to ask just on the why allocators are interested in 0:19:17.320 --> 0:19:20.879 multi strats. Point One thing you sometimes hear is that, well, 0:19:21.119 --> 0:19:24.440 multistrats or pod shops they can dip in and out 0:19:24.480 --> 0:19:27.280 of positions really really fast, and they can react to 0:19:27.320 --> 0:19:30.080 the market very very quickly. How true is that? 0:19:31.040 --> 0:19:33.720 So let's go back to two and twenty funds versus 0:19:33.760 --> 0:19:35.880 pod shops, because it's differently. 0:19:35.440 --> 0:19:36.520 True for both of them. 0:19:36.880 --> 0:19:39.840 Let's talk about pod shops first, right in the kind 0:19:39.840 --> 0:19:42.040 of the stylized pod shop, you get to set up, 0:19:42.080 --> 0:19:44.440 you get money, you ale, you invested as a PM, 0:19:44.520 --> 0:19:47.040 and you get paid on that. If you get cut, 0:19:47.320 --> 0:19:49.800 if your capital you get cut substantially. Even with the 0:19:49.800 --> 0:19:52.000