WEBVTT - Ted Seides on the World’s Elite Money Managers 0:00:02.040 --> 0:00:08.200 This is Master's in Business with Barry Ridholds on Bloomberg Radio. 0:00:09.200 --> 0:00:12.920 This week on the podcast, once again, I am fortunate 0:00:13.240 --> 0:00:18.040 to have another extra special guest. Ted Side's has a 0:00:18.239 --> 0:00:24.800 fascinating career in allocating capital, both on an institutional basis 0:00:25.280 --> 0:00:31.200 and as an academic theoretical philosophical approach. Perhaps he is 0:00:31.320 --> 0:00:35.000 best known for a bet he made on a lark 0:00:35.080 --> 0:00:37.680 with this guy named Warren Buffett, which we spend a 0:00:37.720 --> 0:00:41.920 lot of time talking about. Really a hilarious and amazing 0:00:42.000 --> 0:00:47.000 conversation about this delightful experience he had. But he spent 0:00:47.080 --> 0:00:51.199 most of his career allocating capital to various hedge funds, 0:00:51.240 --> 0:00:56.680 private equity, venture etc. First working for David Twentzon at 0:00:56.760 --> 0:01:01.240 Yale and then later at Protege Partners, and now talks 0:01:01.280 --> 0:01:06.600 about the philosophy and art and science of allocation at 0:01:06.640 --> 0:01:11.039 Capital Allocators. I found our discussion to be an absolute joy, 0:01:11.080 --> 0:01:14.319 and I think you will also with no further ado, 0:01:15.080 --> 0:01:19.520 my conversation with Ted Side's of Capital Allocators. 0:01:19.959 --> 0:01:21.440 Thanks Barry, great to be here with you. 0:01:21.640 --> 0:01:26.240 That is quite a CV I stumbled through. Let's talk 0:01:26.280 --> 0:01:31.360 a little bit about your alternative investments career. How did 0:01:31.360 --> 0:01:32.640 you get started in this space. 0:01:33.520 --> 0:01:35.800 I got lucky in a sense that when I was 0:01:35.840 --> 0:01:39.640 an undergraduate at Yale, I took a class with David Swinson. 0:01:40.160 --> 0:01:43.959 God, I'm just so jealous at that sentence right then 0:01:44.000 --> 0:01:44.280 and there. 0:01:44.360 --> 0:01:48.280 Yeah, I didn't know a whole lot about markets or stocks. 0:01:48.280 --> 0:01:50.920 I had a mild passing interest in it. But he 0:01:51.080 --> 0:01:54.000 mentioned in this class that they hired one person a year, 0:01:54.760 --> 0:01:57.880 and so, alongside of Wall Street recruiting, in my senior year, 0:01:57.880 --> 0:02:01.080 I interviewed at the Ye Investment's office. Was fortunate to 0:02:01.120 --> 0:02:04.440 get that job and violated the two principles I had 0:02:04.480 --> 0:02:06.240 at the time, which was I wanted to be in 0:02:06.280 --> 0:02:08.400 a training program and I wanted to leave New Haven. 0:02:09.200 --> 0:02:12.840 And so you stayed in New Haven and did not 0:02:13.040 --> 0:02:17.240 enter a training program, although arguably working on just Onson 0:02:17.440 --> 0:02:19.440 is its own sort of training program, isn't it. 0:02:19.520 --> 0:02:22.160 Of course it was, but who knew at the time. 0:02:22.240 --> 0:02:25.240 This was back in nineteen ninety two. So that was 0:02:25.320 --> 0:02:28.880 my initial foray into the investment business. 0:02:29.840 --> 0:02:32.840 So you graduate cum LAUDI from Yale, you end up 0:02:32.919 --> 0:02:36.640 going to Harvard Business School. Tell us a little bit 0:02:36.680 --> 0:02:40.200 about how that led you to working with some of 0:02:40.240 --> 0:02:42.480 the managers that worked with the Yale Endowment. 0:02:42.680 --> 0:02:46.160 Sure, well, I spent five years working for David and 0:02:46.240 --> 0:02:48.120 learned just to a tremendous amount. 0:02:48.960 --> 0:02:50.639 That was really your MBA right there. 0:02:50.720 --> 0:02:53.560 That was my true investment MBA. David didn't want me 0:02:53.560 --> 0:02:54.800 to go to Busins school. He said, you're not going 0:02:54.840 --> 0:02:57.160 to learn anything about investing. You just stay here for 0:02:57.160 --> 0:02:59.440 a couple more years. But I really had an interest 0:02:59.800 --> 0:03:04.440 in trying to work directly at markets, and so my 0:03:04.560 --> 0:03:06.760 summer job at business school, I worked for a hedge 0:03:06.800 --> 0:03:08.840 fund that Yale had money with, and that was the 0:03:08.880 --> 0:03:12.240 summer of ninety eight. They were value long growth short. 0:03:12.320 --> 0:03:14.959 When Amazon went from forty dollars to two hundred and 0:03:15.000 --> 0:03:17.760 sixty dollars the same summer, phenomenal firm. 0:03:18.120 --> 0:03:21.320 Did long term capital management impact them at all? 0:03:22.040 --> 0:03:24.280 No, I mean not while I was there. I was 0:03:24.320 --> 0:03:26.799 there during the summer so that a few months later, 0:03:26.919 --> 0:03:31.119 two months later, it did. And then when I came out, 0:03:31.240 --> 0:03:33.880 I felt like I wanted to learn more about business 0:03:33.919 --> 0:03:37.720 analysis compared to stocks, even though that was my passion 0:03:37.760 --> 0:03:39.720 for stocks. So I worked at a private equity firm, 0:03:40.200 --> 0:03:42.360 that middle market private equity firm Yell had money with, 0:03:42.640 --> 0:03:44.320 and then I got wooed by a friend from business 0:03:44.360 --> 0:03:47.280 school to a larger one. And those were my kind 0:03:47.320 --> 0:03:50.280 of three formative experiences in direct investing. 0:03:50.000 --> 0:03:54.680 Hedge fund, private equity, and Yelle endowment. Right now, that's 0:03:54.760 --> 0:03:58.480 a that's a hell of a list. Are you still 0:03:58.640 --> 0:04:00.840 working with any of the managers Yale or is that 0:04:00.920 --> 0:04:02.000 along the disc. 0:04:02.160 --> 0:04:04.320 I mean that I left Yale twenty five years ago, 0:04:04.960 --> 0:04:06.680 so it's a little bit in the distant past. 0:04:07.120 --> 0:04:10.880 So it's funny because for a while what we were 0:04:10.920 --> 0:04:14.560 calling the Yale model. Really the genius of David Swinson 0:04:15.320 --> 0:04:18.960 was that he was so early to alternatives when they 0:04:18.960 --> 0:04:21.880 were small, they were mostly outperformers. There was a lot 0:04:21.880 --> 0:04:26.360 of alpha generation, not a giant pond to fish in, 0:04:27.360 --> 0:04:32.200 and the Yale model did spectacularly. What's the driver for 0:04:32.560 --> 0:04:36.680 endowment if not under performance? Well, certainly worse performance than 0:04:36.720 --> 0:04:39.760 we saw in the eighties, nineties and early two thousands. 0:04:39.880 --> 0:04:42.560 Yeah, I mean, the only caveat I would give to 0:04:42.600 --> 0:04:44.599 what you said is, I'm not sure if you measured 0:04:44.640 --> 0:04:47.279 it properly, the performance is worse. 0:04:48.040 --> 0:04:51.839 Oh no, it's much was it's lower. May it's lower. 0:04:51.960 --> 0:04:52.440 That's fair. 0:04:52.640 --> 0:04:55.160 But market returns the. 0:04:55.040 --> 0:04:58.200 Past decade twenty ten to twenty twenty, we were what 0:04:58.279 --> 0:04:59.360 fourteen fifteen. 0:04:59.040 --> 0:05:02.480 Percent your benchmark, which it isn't. For these pools of capital, 0:05:03.080 --> 0:05:03.800 what should. 0:05:03.560 --> 0:05:05.880 Be their benchmark? That's a that's a very by the way, 0:05:06.520 --> 0:05:10.320 very fair point your global investor. Maybe the SMP isn't 0:05:10.360 --> 0:05:11.320 the best manage that's right. 0:05:11.360 --> 0:05:15.400 I mean the one of the early innovative beliefs that 0:05:15.480 --> 0:05:18.520 David Swinson had was that if you're managing a pool 0:05:18.560 --> 0:05:22.039 of capital for what's effectively a perpetual time horizon infinite, right, 0:05:22.400 --> 0:05:26.920 you want thoughtful diversification. So if you start with the 0:05:27.000 --> 0:05:29.000 S and P five hundred, or in this case, stocks 0:05:29.040 --> 0:05:32.039 and bonds, you only have two asset classes. And the 0:05:32.120 --> 0:05:35.200 question was, if you can find other areas of investment 0:05:35.240 --> 0:05:37.640 that can generate the types of returns you need for 0:05:37.760 --> 0:05:42.120 your liability stream, diversification becomes the free launch. So the 0:05:42.279 --> 0:05:45.280 proper benchmark for those pools has to look a little 0:05:45.320 --> 0:05:47.680 bit like the underlying assets they're investing in. 0:05:47.839 --> 0:05:50.800 Fair enough, what so what what do you use for 0:05:50.839 --> 0:05:54.520 a benchmark? Now keep in mind, let's let's talk about 0:05:54.600 --> 0:05:58.080 what David invested in as an example. So of course 0:05:58.080 --> 0:06:00.919 there was stocks and bonds, but there was real estate, 0:06:01.040 --> 0:06:04.960 There were commodities before anybody had any idea, Wait, timber, 0:06:05.320 --> 0:06:08.360 why are we investing in timber? And then there was 0:06:08.560 --> 0:06:12.280 venture capital and private credit and hedge funds. So how 0:06:12.279 --> 0:06:16.719 do you create a benchmark for an allocation that looks 0:06:16.800 --> 0:06:19.240 nothing like a sixty forty allocation? 0:06:19.800 --> 0:06:21.800 Well you have to think about what you're trying to measure. 0:06:22.800 --> 0:06:25.000 So one reasonable benchmark, as you said, could be a 0:06:25.080 --> 0:06:28.839 sixty forty or seventy thirty. That's a really easy portfolio 0:06:28.839 --> 0:06:31.360 to create, and for sure, over the last ten fifteen 0:06:31.400 --> 0:06:34.119 years it's been hard to beat. Over a longer period 0:06:34.120 --> 0:06:37.120 of time, maybe not so much. If you look at 0:06:37.160 --> 0:06:40.159 the types of assets that you'll invests, and you can 0:06:40.320 --> 0:06:44.359 create a benchmark for each pool, and that allows you 0:06:44.400 --> 0:06:47.360 to do two things. It allows you to understand, generally speaking, 0:06:47.880 --> 0:06:51.839 what is a reasonable beta for that whole portfolio. And 0:06:51.880 --> 0:06:53.320 the other thing it allows you to do is to 0:06:53.400 --> 0:06:57.320 benchmark your ability to select managers that outperform both in 0:06:57.360 --> 0:06:59.640 each areas and across the sleeve. So you can imagine 0:06:59.800 --> 0:07:03.160 in real estate, there's a net Creef real estate index 0:07:03.200 --> 0:07:05.039 you could use. You could also use it read index, 0:07:05.080 --> 0:07:07.760 though it's not the same. In private markets, there are 0:07:08.120 --> 0:07:11.520 pure benchmarks in venture capital and private equity that you 0:07:11.520 --> 0:07:13.440 can use, and then you can aggregate those across the 0:07:13.480 --> 0:07:16.080 asset classes to get a benchmark for the pool as 0:07:16.080 --> 0:07:17.200 a hole. Huh. 0:07:17.760 --> 0:07:21.960 Really intriguing. So the two issues that have changed since 0:07:22.520 --> 0:07:27.120 the heyday of the Yale model. One is everybody's imitating 0:07:27.120 --> 0:07:30.480 the Yale model. So the first question is does that 0:07:30.640 --> 0:07:34.240 create challenges for an allocator that wants to follow the 0:07:34.320 --> 0:07:38.040 Yale model. It's no longer Hey, I got this whole 0:07:38.080 --> 0:07:42.040 field to myself. I got five hundred other endowment's foundations 0:07:42.080 --> 0:07:45.920 institutions trying to play in, trying to fish in this pond. 0:07:46.200 --> 0:07:49.520 Yeah, it absolutely does. And I think when you think 0:07:49.600 --> 0:07:54.440 through the Yale model, it helps to understand what David 0:07:54.560 --> 0:07:57.320 was thinking as opposed to what you put a label 0:07:57.360 --> 0:08:01.080 on the Yale model on what that means. David's brilliance 0:08:01.480 --> 0:08:05.600 was he started everything with first principles, you know, what 0:08:05.720 --> 0:08:08.120 makes sense? What set of beliefs do you have about 0:08:08.160 --> 0:08:10.080 the world in investing? And then how do you go 0:08:10.120 --> 0:08:13.560 about and applying that with extreme discipline. He kind of 0:08:13.640 --> 0:08:16.080 wrote about that in his book, and people look at 0:08:16.080 --> 0:08:18.520 that and say, oh, I can replicate that, But most 0:08:18.520 --> 0:08:22.240 people have trouble having their own beliefs and then sticking 0:08:22.320 --> 0:08:24.040 to them when the rubber meets the road. In terms 0:08:24.040 --> 0:08:27.480 of execution. The other piece of it that David had 0:08:27.520 --> 0:08:30.680 that no one really could replicate is this deep belief 0:08:30.840 --> 0:08:36.640 in continuous improvement and incredible vision to see both, you know, 0:08:36.679 --> 0:08:39.280 big opportunities like you could think about hedge funds way 0:08:39.280 --> 0:08:42.400 back when, and then also small opportunities. So he thought 0:08:42.440 --> 0:08:45.800 about fees thirty five forty years ago before anyone else, 0:08:45.880 --> 0:08:47.440 and when you could do something about. 0:08:47.240 --> 0:08:49.080 It, it was him and Jack Bogel. That was pretty 0:08:49.120 --> 0:08:51.800 much it. Yeah, thinking about fees. So the other side 0:08:51.800 --> 0:08:56.200 of this is, and I'm gonna channel Jim Chenos who 0:08:56.400 --> 0:09:01.840 said of Kinnico's associates famous shorts, he said, you know, 0:09:01.880 --> 0:09:05.439 in the eighties there was five hundred hedge funds. They 0:09:05.480 --> 0:09:09.400 all generated alpha. Now there's eleven thousand hedge funds and 0:09:09.760 --> 0:09:13.840 five hundred generating alpha. So the other challenge is how 0:09:13.880 --> 0:09:18.200 do you choose from the pool of eleven thousand hedge 0:09:18.200 --> 0:09:21.080 funds and ten thousand venture funds and god knows how 0:09:21.120 --> 0:09:24.720 many private equity funds and private credit funds. Making the 0:09:24.960 --> 0:09:28.880 choice within the allocation seems to have become a whole 0:09:28.880 --> 0:09:33.400 lot more difficult, more complex, and even if you find 0:09:34.440 --> 0:09:37.400 a fund manager you really like, you're now competing with 0:09:37.480 --> 0:09:40.880 other LPs to put your billion dollars there. 0:09:41.120 --> 0:09:45.360 Yeah, that's absolutely right, And depending on the asset class, 0:09:45.640 --> 0:09:47.640 there are a different set of lenses. But just to 0:09:47.760 --> 0:09:50.400 use that example, in long short equity investing, the first 0:09:50.440 --> 0:09:51.880 question you have to ask is is that a place 0:09:51.920 --> 0:09:52.840 you want to be anymore? 0:09:52.960 --> 0:09:53.160 Right? 0:09:53.240 --> 0:09:56.280 Because it is a much tougher game, particularly adding value 0:09:56.280 --> 0:09:57.079 on the short side. 0:09:56.880 --> 0:10:00.520 Than shorting has always been hard. There's this there's this 0:10:00.720 --> 0:10:03.960 myth that people put out a short position and then 0:10:04.040 --> 0:10:07.080 talk it down and just count the money. It's much 0:10:07.120 --> 0:10:07.640 harder than that. 0:10:07.800 --> 0:10:12.679 Yeah, So I think selecting managers in any asset class 0:10:12.720 --> 0:10:16.000 has that two pieces right. So one is going back 0:10:16.040 --> 0:10:19.960 to David's first principles. What do you believe about what 0:10:20.000 --> 0:10:22.680 type of manager should outperform it. There's some people who 0:10:22.679 --> 0:10:27.160 think fundamental discretionary investing with people who know their business 0:10:27.240 --> 0:10:29.000 is better than anyone else is the right way to 0:10:29.000 --> 0:10:30.760 do it. There are other people that think, no, you 0:10:30.840 --> 0:10:34.360 need to be large and systematic, like Citadel or Millennium. 0:10:34.760 --> 0:10:37.200 There's no right or wrong, but you have to follow 0:10:37.240 --> 0:10:39.319 your own set of beliefs for what you think will 0:10:39.360 --> 0:10:42.600 work for your pool. The other piece of it, say, 0:10:42.600 --> 0:10:46.320 in something like venture capital, which you mentioned, access really matters, 0:10:47.120 --> 0:10:50.240 and that's where you could look at a Yale and 0:10:50.280 --> 0:10:52.720 say they had a first mover advantage thirty years ago. 0:10:53.040 --> 0:10:56.200 They are already in the top tier venture managers who 0:10:56.200 --> 0:10:58.800 don't take money from anybody else. And there are a 0:10:58.880 --> 0:11:01.280 lot of investors say that I have on the podcast 0:11:01.280 --> 0:11:03.640 to say, if we can't get into those top venture 0:11:03.800 --> 0:11:05.959 you don't have an allocation to venture. You have a 0:11:06.000 --> 0:11:08.360 group of managers and you take what you can get, 0:11:08.559 --> 0:11:12.120 but you don't extend beyond what you believe or the 0:11:12.240 --> 0:11:14.600 very top tier, because the dispersion of returns in that 0:11:14.640 --> 0:11:16.920 asset class is really wide, and you only want to 0:11:16.960 --> 0:11:18.040 be intay that top quarte. 0:11:18.200 --> 0:11:21.320 So we'll circle back to this podcast thing you referenced 0:11:21.360 --> 0:11:25.280 later because I'm interested in that. But I love the 0:11:25.360 --> 0:11:28.520 idea of the first move advantage. When you think about 0:11:28.600 --> 0:11:33.440 the Yale model. When Swanson was first allocating to these 0:11:33.559 --> 0:11:40.640 other asset types, commodities, lands, alternatives, it was the wild West, 0:11:40.679 --> 0:11:44.200 it was wide open. How much of an advantage did 0:11:44.240 --> 0:11:47.920 he have being a pioneer in those spaces. The old 0:11:47.960 --> 0:11:50.280 joke is yeah, yeah, the second mouse gets the cheese. 0:11:51.040 --> 0:11:52.880 In this case, it looks like the first mouse got 0:11:52.880 --> 0:11:53.280 the jets. 0:11:53.320 --> 0:11:55.560 It was shooting fish in a barrow. Really, when I 0:11:55.679 --> 0:11:59.760 worked at Yale, the hardest part of the game was 0:12:00.040 --> 0:12:03.600 understanding that the game was getting played, knowing where to 0:12:03.640 --> 0:12:05.559 go to access it, and then on top of that, 0:12:05.840 --> 0:12:09.200 having your board approval to let you do it. So 0:12:09.480 --> 0:12:12.240 to give you some examples of that, I joined Yale 0:12:12.280 --> 0:12:15.120 in ninety two. David was there in eighty five. There 0:12:15.120 --> 0:12:17.760 were some venture investments. When they got there. It wasn't 0:12:17.880 --> 0:12:21.480 a full thing, but they loved it. They quickly understood 0:12:21.600 --> 0:12:24.880 the potential for that. Oh the board, no yell David 0:12:24.960 --> 0:12:26.800 and Dean Takashi the team at Yale. 0:12:27.200 --> 0:12:30.400 But did the oversight. The governance was already in place. 0:12:30.720 --> 0:12:31.400 They really did. 0:12:31.920 --> 0:12:35.880 That's a huge aspect of Yale's success, no doubt the success. 0:12:35.480 --> 0:12:40.520 Of that governance. So they then had time to go 0:12:41.320 --> 0:12:44.439 to Silicon Valley to meet with the people, to see 0:12:44.480 --> 0:12:47.400 over a decade who was good and who wasn't, to 0:12:47.440 --> 0:12:50.920 ask questions and to make mistakes. That's a huge first 0:12:50.920 --> 0:12:53.320 move advantage. By the time I got there in ninety two, 0:12:53.640 --> 0:12:56.800 they had a great venture portfolio and almost nobody else 0:12:56.840 --> 0:12:58.359 even understood what venture. 0:12:58.080 --> 0:13:00.880 Capital was just starting to run up up ninety three, 0:13:01.040 --> 0:13:04.800 ninety four, ninety five, and by late nineties everyone had 0:13:04.880 --> 0:13:08.000 been piling in. If you're there a decade before, talk 0:13:08.040 --> 0:13:10.000 about first movie, Oh my goodness. 0:13:09.679 --> 0:13:11.200 And hedge funds were the same way. To give you 0:13:11.240 --> 0:13:14.560 a fun story. We launched Protege Partners in two thousand 0:13:14.600 --> 0:13:19.240 and two. In that period of time ninety two to two, 0:13:19.559 --> 0:13:21.560 you really had a golden era of hedge funds in 0:13:21.640 --> 0:13:22.400 terms of returns. 0:13:22.600 --> 0:13:27.160 Now, the whole pre financial crisis decade or two, hedge 0:13:27.160 --> 0:13:30.680 funds crushed crushed it, or at least the top pick 0:13:30.720 --> 0:13:34.559 a number thirty forty percent less twenty thirty percent. 0:13:34.679 --> 0:13:37.560 I know. Back then the premier job in asset management 0:13:37.600 --> 0:13:40.680 was to run Fidelity Magellan. There was no reason to 0:13:40.720 --> 0:13:43.160 think people would make billions of dollars running hedge funds. 0:13:43.200 --> 0:13:44.920 It was such a boutique industry. I used to say 0:13:44.920 --> 0:13:46.800 that the guys who ran hedgehunds were the one who 0:13:46.840 --> 0:13:48.120 woke up on the wrong side of the bed in 0:13:48.160 --> 0:13:49.920 the morning and felt like they just had to short 0:13:50.360 --> 0:13:53.840 because things were going wrong. So when we launched Protege, 0:13:53.840 --> 0:13:56.960 we had we had a classification of hedge funds and 0:13:56.960 --> 0:13:59.320 said we're going to not invest in the large ones. 0:14:00.040 --> 0:14:02.600 In two thousand and two, the bucket of the largest 0:14:02.640 --> 0:14:06.240 hedge funds was those north of one billion dollars. And 0:14:06.240 --> 0:14:08.120 then I started reaching out to some of the managers 0:14:08.160 --> 0:14:10.440 I knew for my time at Yale, and one of 0:14:10.480 --> 0:14:13.960 them said to me, we're closed. We have a weight list, 0:14:14.080 --> 0:14:15.800 and I said, what what is that? He said, I 0:14:15.800 --> 0:14:18.800 don't know. But all of a sudden people have said, 0:14:18.840 --> 0:14:20.040 why don't you start a wait list? 0:14:20.120 --> 0:14:21.600 We're at a capacity And that's that. 0:14:21.960 --> 0:14:25.320 Before two thousand and two, there were no capacity issues 0:14:25.360 --> 0:14:27.560 with whoever you thought the best hedge funds were. 0:14:27.600 --> 0:14:32.239 And subsequently there's been some academic research that has implied, 0:14:32.840 --> 0:14:35.640 I don't want to say you found, but strongly implied 0:14:36.160 --> 0:14:40.520 that much and again much not most of the alpha 0:14:40.720 --> 0:14:43.200 is coming from the emerging managers, you know. 0:14:43.400 --> 0:14:45.400 So that was the premise of the business we started 0:14:45.440 --> 0:14:49.360 at Protege, and I would tell you that whow true 0:14:49.560 --> 0:14:52.400 in that academic research, it's all deeply flawed. 0:14:52.880 --> 0:14:55.160 Well, there's a little hindsight bias built in. 0:14:55.240 --> 0:14:59.400 Right, there's hindsight bias. The data of the managers you 0:14:59.440 --> 0:15:01.920 really want to measure isn't included, and. 0:15:01.840 --> 0:15:03.120 It's all self reported, right. 0:15:03.160 --> 0:15:06.520 And then I've never seen a study who said that 0:15:06.560 --> 0:15:10.160 the large managers were anything north of fifty million in 0:15:10.200 --> 0:15:13.480 assets the large managers. So you look at those studies, 0:15:13.520 --> 0:15:16.400 they see these small ones are less than five million. 0:15:16.480 --> 0:15:19.480 Million or billion. Are we talking like that's a typo? 0:15:19.640 --> 0:15:22.160 It sounds like because do you look at Millennium and 0:15:22.200 --> 0:15:27.440 Citadel and oak Tree and correct AQR which just had 0:15:27.440 --> 0:15:31.920 a fantastic year, and Bridgewater We're talking fifty one hundred, 0:15:32.000 --> 0:15:34.920 one hundred and fifty billion dollars. These are massive pols. 0:15:34.960 --> 0:15:37.720 The promise the academics should do the research don't have 0:15:37.760 --> 0:15:40.680 access to the performance data of the funds that matter. 0:15:41.400 --> 0:15:44.400 None of them are call it asset weighted. And so 0:15:44.680 --> 0:15:48.040 those studies, while true and while they seem to have 0:15:48.880 --> 0:15:54.920 an intellectual vigor to them in thought process, they're really 0:15:54.960 --> 0:15:57.120 not based on anything in the real world of the 0:15:57.160 --> 0:15:58.200 investment market. 0:15:58.400 --> 0:16:01.320 So all of this tease up the obvious question, was 0:16:01.400 --> 0:16:04.040 Warren Buffett right or most people better off in an 0:16:04.040 --> 0:16:07.400 index fund than playing with an active manager, be it 0:16:08.160 --> 0:16:11.200 a mutual fund or high fee hedge funds. 0:16:11.440 --> 0:16:14.080 Yeah, I said back then the bets started in two 0:16:14.120 --> 0:16:17.520 thousand and seven, and I say today, being in the 0:16:17.560 --> 0:16:21.120 market and investing in hedge funds is completely apples and oranges. 0:16:22.280 --> 0:16:26.400 So for a taxable investor, hedge funds generally aren't tax efficient. 0:16:26.720 --> 0:16:28.720 And when you look at the assets that are invested 0:16:28.760 --> 0:16:31.120 the three trillion in hedge funds, I would guess that 0:16:31.240 --> 0:16:34.080 north of ninety percent of that are in institutions that 0:16:34.160 --> 0:16:34.680 don't pay. 0:16:34.520 --> 0:16:36.080 Tax, so foundations, endowments. 0:16:36.320 --> 0:16:39.200 So as an individual it probably doesn't make sense generally speaking. 0:16:39.560 --> 0:16:43.840 As an institution, it has a very different risk return 0:16:43.920 --> 0:16:47.960 profile that, when done well, fits in really well with 0:16:48.200 --> 0:16:51.080 the diversified portfolio that we talked about earlier. 0:16:51.360 --> 0:16:54.280 You have to tell us how where did the idea 0:16:54.360 --> 0:16:57.080 come from? How did you reach out to Buffet? And 0:16:57.120 --> 0:16:58.200 what was his response? 0:16:58.360 --> 0:17:01.360 Yeah, well, in you have to go back. This is 0:17:01.440 --> 0:17:03.520 the summer of two thousand and. 0:17:03.600 --> 0:17:06.680 Seven seven, So let me set the table a little bit. Yeah, 0:17:06.720 --> 0:17:09.280 the run up in the dot COM's to two thousand, 0:17:09.960 --> 0:17:12.800 I have a vivid recollection of people saying, ah, Buffet's 0:17:12.800 --> 0:17:16.480 all these lustes touch right. Then everything implodes and again 0:17:16.520 --> 0:17:22.320 Buffett is outperforming for a while posts October Lows and 0:17:22.520 --> 0:17:26.800 two March double bottom, O three the invasion of Iraq. 0:17:26.840 --> 0:17:29.840 By the time you get to seven, market's up eighty 0:17:29.960 --> 0:17:35.119 ninety percent from the lows, and housing is just about 0:17:35.160 --> 0:17:38.280 peaking and things are starting to come apart around then 0:17:38.320 --> 0:17:42.480 by seven it's pretty clear that the housing bears are 0:17:42.560 --> 0:17:43.480 are gonna be right. 0:17:43.600 --> 0:17:49.040 That's right. So I had seen that Warren had made 0:17:49.080 --> 0:17:52.399 a comment to a bunch of students. So a year 0:17:52.480 --> 0:17:56.440 or two before that he had written about fees, the 0:17:56.520 --> 0:17:59.000 head rocks, and the gut rocks, and I guess he 0:17:59.040 --> 0:18:01.440 had made some throwwake that hedge funds could never beat 0:18:01.440 --> 0:18:04.040 the market. A student asked him about it, and his 0:18:04.160 --> 0:18:06.239 response was, well, no one's taken me up on it, 0:18:06.240 --> 0:18:07.240 so I must be right. 0:18:07.480 --> 0:18:10.879 Meaning no one's taking me up on his statement. Or 0:18:10.920 --> 0:18:12.840 did he lay out a challenge. 0:18:13.560 --> 0:18:15.399 I'm not quite sure because I didn't hear what he 0:18:15.440 --> 0:18:18.439 originally said, but it came off as it was a 0:18:18.480 --> 0:18:22.439 form of a challenge. And at the time I was 0:18:22.520 --> 0:18:25.840 managing proj Partners with a hedge fund of funds. We 0:18:25.840 --> 0:18:28.160 were short subprime mortgages with John. 0:18:28.040 --> 0:18:30.440 You were crushing it. Let me say what Your compliance 0:18:30.440 --> 0:18:33.000 wouldn't allow you to say. You guys were killing it 0:18:33.040 --> 0:18:34.040 in the mid two thousands. 0:18:34.520 --> 0:18:38.120 We had a great run. And I read a statement 0:18:38.160 --> 0:18:41.159 and my thought was, look, he's Warren Buffett, but he 0:18:41.240 --> 0:18:44.119 just made a really bad bet because for all the 0:18:44.160 --> 0:18:46.159 reasons you just said, the S and P was trading 0:18:46.200 --> 0:18:48.880 it all time highs. And let's keep mind interest rates 0:18:48.880 --> 0:18:51.119 were normalized then and. 0:18:51.080 --> 0:18:54.160 What mid they had just started going up. 0:18:54.400 --> 0:18:56.720 Well rates short term rates were four or five six. 0:18:56.680 --> 0:18:58.440 Pers Okay, so reasonable, right? 0:18:59.160 --> 0:19:04.560 And I looked at that and said, well, you know 0:19:04.640 --> 0:19:06.600 you wouldn't want to bet on the market over ten 0:19:06.680 --> 0:19:09.760 years starting at that point in time. And meanwhile, hedge 0:19:09.760 --> 0:19:13.080 funds had been cranking along, generating market like returns with 0:19:13.119 --> 0:19:16.720 a lot less volatility. And so I wrote him a 0:19:16.760 --> 0:19:20.480 one page letter and mail or hard C. I didn't 0:19:20.480 --> 0:19:23.640 have his email, so I sent it snail mail, and 0:19:23.800 --> 0:19:28.320 he sent back through his assistant a PDF with a 0:19:28.359 --> 0:19:31.359 little chicken scratch response, and I made the letter. I 0:19:31.359 --> 0:19:34.720 actually put the letter in my first book to describe 0:19:35.000 --> 0:19:39.560 how you get somebody's attention. And he said, well, it 0:19:39.600 --> 0:19:41.520 has to be this and that and has to be 0:19:41.560 --> 0:19:43.600 clatteralized with a letter of credit. And I was like what, 0:19:44.640 --> 0:19:45.920 And so I sent me another. 0:19:45.960 --> 0:19:50.600 Specifically the bet. He wanted cash up front credit It's unclear, 0:19:50.680 --> 0:19:53.600 but he didn't want anybody just sort of, you know, 0:19:53.680 --> 0:19:55.400 fooling around. He wanted serious. 0:19:55.640 --> 0:19:58.159 Correct. It felt a little dismissive. So I sent him 0:19:58.160 --> 0:20:01.800 another one. I said, Okay, fine of you say, and 0:20:01.800 --> 0:20:03.040 then he's warm Buffett. 0:20:03.040 --> 0:20:04.760 Why are you gonna argue with him about it? Right? 0:20:04.920 --> 0:20:09.119 Started the terms great, I'm in Yeah. It started a back. 0:20:08.880 --> 0:20:12.840 And forth series of letters. It was all written out 0:20:13.000 --> 0:20:14.199 that was hysterical. 0:20:14.240 --> 0:20:17.040 But by the way, I just picture I just I 0:20:17.160 --> 0:20:22.480 just picture this as a sort of sort of a 0:20:22.480 --> 0:20:28.359 Civil War soldier writing home dearest Martha. I am considering 0:20:28.480 --> 0:20:32.040 it like in the two thousands, you guys are sending 0:20:32.200 --> 0:20:33.320 letters back and forth. 0:20:33.359 --> 0:20:37.320 Yeah, that's right. And it got to the point where 0:20:37.359 --> 0:20:41.639 there was the potential to do this nonprofit like charitable bet. 0:20:42.080 --> 0:20:44.879 By the way, I don't even have to ask, but 0:20:44.880 --> 0:20:49.840 I'm gonna ask. You have all these letters saved framed somewhere, 0:20:49.880 --> 0:20:51.200 like please tell me you kept ev. 0:20:51.200 --> 0:20:51.960 It's in a PDF. 0:20:52.800 --> 0:20:56.680 But I mean the originals, the original so three, four, 0:20:56.880 --> 0:20:58.360 five times, how many times back. 0:20:58.160 --> 0:21:01.320 And forth something like that. Yeah, don't remember the exact amount. 0:21:01.520 --> 0:21:03.879 And I had originally said, hey, let's bet dinner at 0:21:03.960 --> 0:21:07.239 Gorat's his favorite place. Maybe one hundred thousand dollars your 0:21:07.240 --> 0:21:09.200