Speaker 1: This is Master's in Business with Barry rid Hoolds on
Speaker 1: Bloomberg Radio.
Speaker 2: We have an extra special Masters in Business live panel
Speaker 2: that I recorded last month at Bloomberg's Hedge fund startup conference,
Speaker 2: and Wow, what a tremendous lineup. This was Alana Weinstein
Speaker 2: from IDW, probably the most prominent headhunter in the hedge
Speaker 2: fund industry. Additionally, we had a series of rock star
Speaker 2: advisors as part of the panel. Mike Rockefeller, he runs
Speaker 2: Woodline Partners there about six billion dollars. Previously he was
Speaker 2: at Citadel and Millennium. He really is one of the
Speaker 2: up and comers in the world of hedge funds. Thomas
Speaker 2: Wagner has been running a credit fund for about a decade.
Speaker 2: They run about over at Nighthead Capital. He runs about
Speaker 2: ten billion dollars. Really insightful stuff. Brennan Diaz probably runs
Speaker 2: the newest of these hedge funds. He's a little over
Speaker 2: a billion dollars. He launched right into the teeth of
Speaker 2: the pandemic, a long only billion dollar hedge fund. And
Speaker 2: this panel was absolutely fascinating.
Speaker 3: If you're thinking.
Speaker 2: About going out on your own, hanging your own shingle,
Speaker 2: just trying to do it, yourself. These folks can tell
Speaker 2: you exactly how challenging it is and the tools you're
Speaker 2: gonna need to succeed. I thought this was a really
Speaker 2: fascinating conversation with no Ado my panel discussion at Masters
Speaker 2: in Business Live The Emerging Manager Playbook. It's been a
Speaker 2: crazy couple of years, from the pandemic to the new
Speaker 2: regime of rate increases. Frame what's going on in today's
Speaker 2: environment and what's it like managing a fund in this
Speaker 2: sort of circumstances.
Speaker 1: Start with you sure so.
Speaker 4: I think one theme is that allocators are becoming more
Speaker 4: sophisticated about the return quality that they are receiving and
Speaker 4: what they're willing to pay for and what they want
Speaker 4: is uncorrelated alpha.
Speaker 3: And you take that.
Speaker 4: Concept, but then you look at the traditional long short
Speaker 4: hedge fund and they are running portfolios of less than
Speaker 4: thirty percent idio, which means that those returns are highly
Speaker 4: dependent on macro factors, very unpredictable factors that you'll be
Speaker 4: subject to. And what I think is an increasing appreciation
Speaker 4: is that a high idio portfolio is what is predictive
Speaker 4: for an uncorrelated alpha stream, and that is why you're
Speaker 4: seeing the massive increase in multimanager assets, and those assets
Speaker 4: have more than doubled since twenty seventeen. If you look
Speaker 4: at some of the top launches that are coming out
Speaker 4: in twenty twenty three, Ilex and Freestone, that trend looks
Speaker 4: to be continuing. And the reason why is that a
Speaker 4: multi manager provides a one stop shop for an allocator
Speaker 4: where you can get a high IDEO, lowvall durable return
Speaker 4: stream and you can do it in one single investment
Speaker 4: where you could have scale and you eliminate.
Speaker 2: Complexity, diversification built in right from the good go.
Speaker 3: That's right, Alana, Let's.
Speaker 2: Talk a little bit about this current environment. You see
Speaker 2: it from the perspective of talent.
Speaker 3: Tell us what you're seeing.
Speaker 5: Well, I'm going to zoom out, because if you all
Speaker 5: want to start a hedge fund, I think we need
Speaker 5: to kind of start at the top and I'm going
Speaker 5: to give you the macro and then we'll go quickly
Speaker 5: strategy by strategy. Barry, you and I talked about this recently.
Speaker 5: There was to me at least an amazing article that
Speaker 5: the FT put out a couple months ago which said
Speaker 5: this was news to me. I knew there were a
Speaker 5: lot of hedge funds, but apparently there are more hedge
Speaker 5: funds than burger kings. Okay, true, thirty thousand hedge funds.
Speaker 6: The other thing you should keep.
Speaker 5: In mind is that the average lifespan of a hedge
Speaker 5: fund is three years. So if you guys want to
Speaker 5: start a fund and you don't want it to be
Speaker 5: just another Burger king that goes out of business, you
Speaker 5: need to understand what the lay of the land is
Speaker 5: within each of those strategies. Mike talked a little bit
Speaker 5: about long short equities not to be like the grim reaper,
Speaker 5: but the reality is, if you're not a multi manager
Speaker 5: and you're not aggressively managing market risk, then you fall
Speaker 5: into the category of a long short single manager that
Speaker 5: probably takes concentrated more concentrated directional risk. And if you
Speaker 5: look at how these funds have performed over the last
Speaker 5: two full years twenty one and twenty two, the average
Speaker 5: the cumulative return of these funds is down forty percent, okay,
Speaker 5: with some funds down as high as sixty percent, like
Speaker 5: Tiger Global.
Speaker 6: So if you think about the dollars loss.
Speaker 5: To LPs, and it's important you understand this because forty
Speaker 5: percent of the hedge fund universe is long short equities,
Speaker 5: so I'm betting there's a decent percentage of you here
Speaker 5: that is thinking about starting a long short equity fund.
Speaker 6: There was a tremendous amount of AUM.
Speaker 5: Lost, so Tiger Global pre twenty twenty one was one
Speaker 5: hundred billion, Maverick fourteen billion, d one thirty billion, and
Speaker 5: then non Tiger cubs like Alkeon thirty billion, Perceptive ten billion.
Speaker 5: When you're down forty percent on average, it's a huge
Speaker 5: loss to the industry. More than fifty percent of total
Speaker 5: losses into in twenty twenty two came from long short
Speaker 5: equity funds, and half of hedge fund liquidations came from
Speaker 5: long short equity funds. So you really need to think
Speaker 5: about if you don't fall into a all alpha non
Speaker 5: correlated category like Mike does, what is the value that
Speaker 5: you're providing. Macro very volatile return stream. Twenty twenty one
Speaker 5: crappy year for most macro funds. Twenty twenty two, great year,
Speaker 5: twenty three again not such a good year, and you
Speaker 5: see again brand name funds like Rocos, Castle, Hook, Element
Speaker 5: Element charged forty percent fees was able to up it
Speaker 5: to that in twenty twenty shrinking and trying to stem
Speaker 5: the bleeding from negative returns.
Speaker 6: Credit a bright spot.
Speaker 5: But I think, and I'm sure Tom will talk more
Speaker 5: about this, you really need scale to compete. And then
Speaker 5: there's the multi managers, and that's going to be your
Speaker 5: biggest problem as a new emerging manager, how you're going
Speaker 5: to compete for talent within a paradigm that has everything
Speaker 5: to offer from.
Speaker 6: Analysts up through to pms.
Speaker 5: They have scale, they have capital, they have resources, they
Speaker 5: have a pathway to be a PM. They have an
Speaker 5: aggressive payout. They have that and they are like, it's
Speaker 5: like mitosis. You know, we used to have we have
Speaker 5: the tiger cubs. Now we have the multi manager cubs.
Speaker 6: Mike is one of them. He mentioned Islex. I hope
Speaker 6: it's okay. I share that you. He is now.
Speaker 5: Providing strategic investments to multi manager funds.
Speaker 6: Islex.
Speaker 5: Are two guys from Citadel that Mike and his team
Speaker 5: gave capital too, and they're going to launch with two billion.
Speaker 5: Freestone Grove, another Citadel guy, is going to launch with
Speaker 5: many billions. Andrew Comery, who came out of D E.
Speaker 5: Shaw is launching with three billion. So into the fray.
Speaker 5: So this is the environment you're entering into and I
Speaker 5: as someone who has been recruiting in this industry for
Speaker 5: the past twenty years with my team, and we're working
Speaker 5: with the biggest, most successful funds in the world. It's tough,
Speaker 5: Talent is scarce, it's they have many options, and I
Speaker 5: think the multi manager dynamic just makes it that much
Speaker 5: more intense.
Speaker 2: So let me see what Brennan has to say about this.
Speaker 2: You're the only long only person on the panel. Is
Speaker 2: it that challenging to be long only or how are
Speaker 2: you finding this environment from your investment style?
Speaker 7: Well, I mean, I think all the points Mike made
Speaker 7: are right, and I think that the whole rationale behind
Speaker 7: launching along only, coming from a long short background, was
Speaker 7: the realization that market structure was changing. The ability to
Speaker 7: access short alpha and short alpha curs were changing.
Speaker 1: In us.
Speaker 7: The ability to maintain short gross exposure with the same
Speaker 7: investment style and generate that level of alpha wasn't there
Speaker 7: as much, and so I kind of felt that pressure
Speaker 7: on the short side of the portfolio, forcing shorts or
Speaker 7: a running higher net kind of too bad options for
Speaker 7: an absolute return product. But looked at alongside a ledger
Speaker 7: and still felt very strongly that the pool of alpha.
Speaker 7: We were accessing there looking out you know, basically eighteen
Speaker 7: to eighteen to thirty six months, so not looking out
Speaker 7: five to ten years, but eighteen to thirty six months forward,
Speaker 7: looking forward to what underlying businesses are going to be earning,
Speaker 7: and thinking about absolute value and intrinsic value and taking big,
Speaker 7: concentrated bets on opportunities that were really attractive. That window
Speaker 7: was not only kind of as attractive as it ever been,
Speaker 7: but in some ways it is getting more attracted, kind
Speaker 7: of driven by the underlying short term volatility in the market.
Speaker 7: And so I don't think managing along only is more
Speaker 7: difficult to managing along shore. I think it's actually materially
Speaker 7: materially easier, which is kind of why we went down
Speaker 7: that route.
Speaker 1: And I also think that there's material demand.
Speaker 7: I think my expoint is one hundred percent right that
Speaker 7: allocators want to pay for value, right. You know, investors
Speaker 7: historically have not been you know, invested in hedge funds
Speaker 7: just to pay fees on beta. They've been willing to
Speaker 7: pay the fees on beta because the underlying assumption would
Speaker 7: be that you would deliver them enough OUTFA to cover.
Speaker 1: The beta costs.
Speaker 7: However, there are you know, large pools of capital in
Speaker 7: the world that want data exposure, very very large pools
Speaker 7: of capital that will always have beta exposure.
Speaker 1: And so I think the.
Speaker 7: Message of going to people and saying I will take
Speaker 7: that beta exposure, I personally want that beta exposure for
Speaker 7: my own capital, like over time, I want the beta
Speaker 7: because the beta collecting that risk premium should be positive
Speaker 7: and you only pay me when I generate value for you,
Speaker 7: value being defined as excess returns relative to the S
Speaker 7: and P.
Speaker 1: I think that has a lot of resonance with.
Speaker 7: With with a lot of capital providers out there, And
Speaker 7: I think that it's it's it's an opportunity for people
Speaker 7: who invest like me, who think like me, to to
Speaker 7: to go out and uh to go out and execute
Speaker 7: on if they so choose. But you know, you have
Speaker 7: to have the right model, you have to have a
Speaker 7: truly aligned fee structure and you and you have to
Speaker 7: kind of be willing to go down that road. So
Speaker 7: I I, you know, I think it's in many ways
Speaker 7: the same. It's it's it's it's responding to the same
Speaker 7: trend that Mike is talking about and taking it in
Speaker 7: a different direction.
Speaker 2: So so to clarify, some people have called them pivot fees.
Speaker 2: The profit participation is only on returns over and above.
Speaker 7: What the SPX is generally, so it's actually I would
Speaker 7: say even more advantageous in that our management fees are
Speaker 7: are a pre payment on future alpha, So we have
Speaker 7: to generate alpha before we get to any type of incentive, right,
Speaker 7: so that the idea is over time, over the life
Speaker 7: of the fund, which hopefully is a very long life.
Speaker 7: When you when we when we end at the end,
Speaker 7: we will look back and seventy percent of the economics
Speaker 7: of the alpha that has been generated will flow to
Speaker 7: the investors, in thirty percent will crew demander, and we
Speaker 7: try to make that as clean and transparent as possible.
Speaker 1: That creates more.
Speaker 7: Volatility in our in our and our overall incentive fee
Speaker 7: income relative to to other models. But I think that's
Speaker 7: very solvable from a talent perspective. HOWLD you kind of
Speaker 7: talk about that, but that's the underlying model.
Speaker 2: Really interesting, Tom, What do you make of this current
Speaker 2: environment and how are you finding the world of credit
Speaker 2: within within the headphones realm?
Speaker 8: Well, I, first of all, thank you Barry for having
Speaker 8: me here and for everyone tending appreciate it.
Speaker 1: You know, credit is.
Speaker 8: Relative to every other asset class we see today, and
Speaker 8: we invest we have of our ten billion, six of
Speaker 8: it is permanent capital, so we do a lot beyond
Speaker 8: just credit. We can do basically anything anywhere in the
Speaker 8: world we want. But credit today, and particularly private structured credit,
Speaker 8: so rescue financings, bridge loans, financings, to provide growth capital,
Speaker 8: all structured as credit offer the greatest amount of alpha
Speaker 8: relative to the risk I've ever seen.
Speaker 1: In the twenty five years have been doing this.
Speaker 8: It's extraordinary excess return and that's because that's not liquid.
Speaker 8: And one thing that I think all of you, or
Speaker 8: of those of you in the room that are contemplating
Speaker 8: launching a hedge fund, is there is an extreme push
Speaker 8: pull presently for liquidity visa V returns. Investors are allocators,
Speaker 8: are not liquid, and they need to generate returns, particularly
Speaker 8: in a context of higher rates where their hurdles have
Speaker 8: all gone up and they're stuck in older investments, particularly
Speaker 8: private equity. They're probably going to take a period of
Speaker 8: time to recover to the alpha generative returns that they
Speaker 8: had historically produced. So they want you to be liquid
Speaker 8: and generate returns. That's not really possible today. So you've
Speaker 8: got to find a niche that fits you. And I
Speaker 8: think the best advice that I could give for folks
Speaker 8: thinking about launching is forget all the noise, Forget what
Speaker 8: the markets want, forget what the LPs want.
Speaker 1: Do what you're going to be good at.
Speaker 8: It doesn't matter what your strategy is, doesn't matter what
Speaker 8: your structure is, doesn't matter what your fees are. If
Speaker 8: you're good relative to whatever benchmark you're posted against, you'll
Speaker 8: do just fine.
Speaker 1: Your business will.
Speaker 8: Grow, you'll make plenty of money, you'll retire a happy person,
Speaker 8: your kids will do never have to work if they
Speaker 8: don't want to.
Speaker 1: You'll do just fine.
Speaker 8: But if you try to shoehorn yourself into something that
Speaker 8: doesn't fit, it'll go terribly wrong.
Speaker 1: And I think the second most valuable piece of advice
Speaker 1: I can give you is.
Speaker 8: Separate from all the examples you're hearing up here, of
Speaker 8: all these multi billion dollar launches, that's not normal, right,
Speaker 8: It's not normal. And you might think you're gonna launch
Speaker 8: with billion dollars. A lot of helped us get started.
Speaker 8: We thought we were going to launch with a billion
Speaker 8: five as of March sixteenth, two thousand and eight.
Speaker 1: We had just come out of the Emerging Manager's Conference.
Speaker 6: Going was perfect.
Speaker 1: I was like, this is so easy.
Speaker 8: Then eight weeks we raised a billion and a half.
Speaker 8: We're going to launch with three billion. Ken Griffin was
Speaker 8: backing us. It was like the greatest thing ever. Next
Speaker 8: day bear Stearns went bankrupt and by the time we
Speaker 8: launched on June third, two thousand and eight, we had
Speaker 8: four hundred and thirteen million of caple and the world
Speaker 8: just changed. Nothing happened with us. All the investments we
Speaker 8: were pursuing was good. Our first couple years were spectacular,
Speaker 8: like everything went great and things turned out okay. But
Speaker 8: that second piece of advice is you can't bank on
Speaker 8: being a multi billion dollar launch, And so what does
Speaker 8: that mean.
Speaker 1: That means you have to do everything.
Speaker 8: You stand how to set up a computer on a phone,
Speaker 8: You better know how to debug your computer, you better
Speaker 8: know how to answer the phones politely, you should know
Speaker 8: how to make good coffee for your LPs when we
Speaker 8: stop by.
Speaker 1: You're going to be doing all of it, Like, don't
Speaker 1: kid yourself.
Speaker 8: And if you don't launch with billions of dollars of
Speaker 8: capital locked up for a multi year period. You run
Speaker 8: a lot of risk that you create a cost structure that'
Speaker 8: seemed compatible with where your capital could be, not where
Speaker 8: it is today. So I would advise that you do
Speaker 8: what you're good at and learn how to do everything well,
Speaker 8: and work really, really hard and stick to it for
Speaker 8: a period of time and if you love it, it'll
Speaker 8: work out.
Speaker 2: So let's address the issue you just touched on that
Speaker 2: subscale operations. How do you compete for talent in the
Speaker 2: most competitive market in the world when you can't write
Speaker 2: giant checks and you're running subscale.
Speaker 3: Let's start with you.
Speaker 6: He ran subscale. That's good, clear, but on.
Speaker 2: A relative basis, Yeah, it was only two billions.
Speaker 4: Well, you know, there's a great movie that came out
Speaker 4: in nineteen eighty nine, so some of you might not
Speaker 4: have known it, but Fielded Dreams and if you haven't
Speaker 4: seen it, the main character Ray Kinsella who's played by
Speaker 4: Kevin Costner. He's out in the middle of his cornfield
Speaker 4: and he hears a voice.
Speaker 1: If you build it, he will come.
Speaker 4: And he doesn't know what build it is, but he
Speaker 4: decides to build a baseball field in his cornfield and
Speaker 4: lo and behold a bunch of dead baseball players show
Speaker 4: up at his house and start playing baseball. And you
Speaker 4: should have the mindset of what that movie tells you,
Speaker 4: which is, if you build it, they will come. If
Speaker 4: you have a differentiated value proposition, people will invest. And
Speaker 4: you know, this panel is a great representation because it's
Speaker 4: all different strategies. We're all but what we have and
Speaker 4: what people forget is what we're offering is a product.
Speaker 4: And so you have to ask yourself, Okay, why am
Speaker 4: I here, what is the product that I'm offering, and
Speaker 4: what customer base is going to want this product? And
Speaker 4: if you invest early in your infrastructure, if you hire
Speaker 4: before you have capital, not after, then I think that
Speaker 4: you will get that capital. You know, my good friend
Speaker 4: Brandon Haley, who launched holisne He in twenty seventeen, had
Speaker 4: over two dozen employees without a zero with zero dollars
Speaker 4: and he ended up being a gigantic launch because he
Speaker 4: sold that story to investors. So that's the mindset I
Speaker 4: would take lot.
Speaker 5: I think the difference, though, Mike, is you were coming
Speaker 5: from Citadel.
Speaker 6: Brandon was coming from Citadel.
Speaker 5: People were willing to come before you built it because
Speaker 5: they knew what each of you represented. We as a
Speaker 5: firm are very loath I'll be candied with you to
Speaker 5: do work with emerging managers because the truth is, most
Speaker 5: of you are.
Speaker 6: Not launching with millions of dollars. You're probably not even
Speaker 6: launching with hundreds of millions of dollars. And given how
Speaker 6: competitive the talent market is, it's very hard for really
Speaker 6: talented people to get behind you with no proof of
Speaker 6: concept because they're making two bets on you that are
Speaker 6: beyond the.
Speaker 5: Scope of what they're the bets they're normally making. They're
Speaker 5: making a bet on you as a new founder, you've
Speaker 5: never done this before, and they're making a bet that
Speaker 5: you can scale, that you are worth getting in the
Speaker 5: trenches with, and that you can grow.
Speaker 6: And I guess the.
Speaker 5: Good news bad news about my Unfortunately, it's not a prediction,
Speaker 5: it's just a fact of life.
Speaker 6: Very few of you will launch with scale.
Speaker 5: Is if you're under two hundred and fifty million, I
Speaker 5: actually don't think you need to worry about this.
Speaker 6: You guys may disagree with me, but if you're a.
Speaker 5: Really small fund, and many of you may start with
Speaker 5: twenty five million, or fifty million or one hundred million,
Speaker 5: you can hire junior people. You can hire people out
Speaker 5: of the cell side. You can hire people at a
Speaker 5: banking and they're moldable and will be thrilled to have
Speaker 5: a seat at the table. And I also think it's
Speaker 5: difficult unless people.
Speaker 6: Know you and have worked with you before.
Speaker 5: You know, the whole other set of things is are
Speaker 5: you a good mentor can you develop them? Are you
Speaker 5: going to pay them fairly? Are they joining something special
Speaker 5: with a great culture? Is there a runway? These are
Speaker 5: all the sets of things we deal with in helping
Speaker 5: people cross the divide to go from where they are
Speaker 5: to a large, established manager and get them comfortable on
Speaker 5: all those points.
Speaker 6: And so that's also there. And if they haven't.
Speaker 5: Worked with you, you know, they don't really know what
Speaker 5: the odds are that it's going to be a good fit.
Speaker 5: And you in turn also don't want to bring on
Speaker 5: board senior people that you don't really know and have
Speaker 5: to give them substantial points in the fund and then
Speaker 5: it may not work out. And if you end up
Speaker 5: with the high class problem of achieving scale, then we
Speaker 5: get into the setting up an economic structure which is
Speaker 5: going to be attractive to your investment staff. And I'd
Speaker 5: say the one guiding principle on that is, and it's.
Speaker 6: A good thing.
Speaker 5: As a newer fund, the value creation for everyone working
Speaker 5: there should come at a massively different pace than sitting
Speaker 5: at a large, established player where much of that value
Speaker 5: has already been created.
Speaker 6: So what do I mean by that?
Speaker 5: If let's call it twenty five to thirty percent gets
Speaker 5: paid out to the investment and leadership team.
Speaker 6: This is on average, and.
Speaker 5: This is a back of the envelope thought, but I
Speaker 5: think directionally it's true here you should be talking about
Speaker 5: thirty percent at going to fifty percent to the extent
Speaker 5: that the people you hire. And again this is further
Speaker 5: on down the road. Once you have scale and can
Speaker 5: attract more and your credible people to the extent that
Speaker 5: they put up great performance, they can hire and develop people,
Speaker 5: then you're able to take on more capital and.
Speaker 6: You're creating more value.
Speaker 5: But at the end of the day, everyone is going
Speaker 5: to reference you within an inch of your life, and
Speaker 5: the same way LPs are going to want to get
Speaker 5: a point of view on you, talent will too. And
Speaker 5: there's what you're telling them upfront, which hopefully is attractive,
Speaker 5: But even more attractive is the path forward and you
Speaker 5: don't want them discounting any of the promises or vision
Speaker 5: that you're giving them because of what they're hearing in
Speaker 5: the market. So that's something to bear in mind, and
Speaker 5: I think really critical as you ad both in the
Speaker 5: less so maybe in the immediate term, but certainly as
Speaker 5: you progress and are trying to reach out to really
Speaker 5: talented establish people, right.
Speaker 2: And you're finding the same sort of circumstances when you're
Speaker 2: competing for talent.
Speaker 3: What's your journey been like?
Speaker 7: Well, I think it's a little bit focused on the
Speaker 7: type of talent recruiting, right. So I come from a
Speaker 7: world and a lineage of funds where we don't hire
Speaker 7: experience people. Where there's a kind of fundamental viewpoint in
Speaker 7: the firms I've worked at that we hire people that
Speaker 7: are less experienced and we train and develop them. And
Speaker 7: that obviously aligns easier when you're subscale, but that that's
Speaker 7: not I didn't make the decision because of scale. That's
Speaker 7: just how the world I come from does things. I
Speaker 7: think though, to a honest point, you have to be
Speaker 7: realistic about what the envelope of what you can spend is,
Speaker 7: what that looks like, and that what the talent you
Speaker 7: can get with that in a line against that. So
Speaker 7: you have to be really kind of thoughtful about, you know,
Speaker 7: Tom twin earlier, what am I, what do I want
Speaker 7: to do?
Speaker 1: What does my strategy look like? What does that business
Speaker 1: plan look like?
Speaker 7: What am I capable of doing from a development and
Speaker 7: a mentoring and a leadership perspective? And then how does
Speaker 7: that work from an economic perspective, both in terms of
Speaker 7: day one but also to a honest point, what does
Speaker 7: it look like over time? What does that economic trajectory
Speaker 7: look like with success as you go? And I think
Speaker 7: you want to be transparent with people around what day
Speaker 7: one looks like, what that evolved to over time, and
Speaker 7: what are the parameters that trigger that evolution. And I
Speaker 7: would say the other thing that's you know, fundamentally different
Speaker 7: is that the analysts I would guess at all of
Speaker 7: our firms are probably doing you know, they're all being analysts,
Speaker 7: but they're probably doing slightly different things. That the job
Speaker 7: is not the same at every firm. And I think
Speaker 7: that you want to be clear in terms of the
Speaker 7: way you're going to invest the types of things that
Speaker 7: the analysts will be expected to do, and that will
Speaker 7: there'll be some natural self selection of firms that individuals
Speaker 7: that want to have that think they can be more
Speaker 7: or less successful in different environments.
Speaker 2: And let me follow up, when you talk about hiring
Speaker 2: people and mentoring them and shaping them, is it just
Speaker 2: analysts or is it traders and pms and others within
Speaker 2: within the funds?
Speaker 7: I would say my general point of view is that
Speaker 7: it's it's pretty much true across the entirety of the firm.
Speaker 7: That when I think about the firms that I've worked
Speaker 7: with and I work with in the past that have
Speaker 7: been successful, and you look at the people that have
Speaker 7: been highly successful there, none of them were really senior
Speaker 7: hires coming in. They were hired pretty junior, and they
Speaker 7: were trained and developed within those firms. And in a
Speaker 7: lot of those firms, some of the biggest hiring mistakes
Speaker 7: they've ever made were more senior. Now, that's that's true
Speaker 7: for our process, that's not true for everyone else's process.
Speaker 7: And so I think that there's always been a natural
Speaker 7: pull towards going younger and less experienced and training and
Speaker 7: developing those people. And that just makes it easier for
Speaker 7: me in the current environment because I'm not competing against
Speaker 7: you know, the type of people that aligned.
Speaker 5: Well, you're also not injecting a fully formed human so
Speaker 5: to speak, and our business into the ecosystem, and you
Speaker 5: don't know if the tissue is going to reject the organism.
Speaker 1: It almost certainly will.
Speaker 5: The one other thing, though, is as a new manager
Speaker 5: without much capital, just bear in mind, LPs are making
Speaker 5: a bet on you. They're making a bet on you
Speaker 5: as a manager not on the bench yet if you're
Speaker 5: launching with just a small amount of capital.
Speaker 2: Interesting point, Tom, you've been doing this for a while.
Speaker 2: What's your experience been competing for talent and either hiring
Speaker 2: or building at all.
Speaker 8: Yeah, it's it's really challenging. It's always the toughest part
Speaker 8: of the business.
Speaker 1: I think.
Speaker 8: Well, second in raising the money, that's that's probably you know,
Speaker 8: parting dollars from people. We have long lockups and a
Speaker 8: lot of it's really long, so that's that's always the
Speaker 8: longest process. But you know, I think it's an it's
Speaker 8: a unique challenge today because there's been a shift over
Speaker 8: the last you know, fifteen years that we've run Nighthead
Speaker 8: where a new generation of professionals are coming into the
Speaker 8: industry or have come into the industry. They expect a
Speaker 8: lot more sooner. And I think this is you know,
Speaker 8: this is pretty common across the you know generation of
Speaker 8: folks that are say twenty five to late thirties years.
Speaker 8: And that's difficult because if you think about the last
Speaker 8: fifteen years, we've gone fifteen years without a recession, really,
Speaker 8: and that means you really don't know what you're doing
Speaker 8: because if you have, yes, you invested in one year
Speaker 8: with rate rise, okay, but you still haven't invested in
Speaker 8: a recession. So it's really hard to get people that
Speaker 8: have experienced that are relatively junior, that have a perspective
Speaker 8: of how bad things can be. Right, and we've learned
Speaker 8: what happens with higher rates, or we're beginning to learn
Speaker 8: what happens with higher rates, which not even I or
Speaker 8: people substantially more experienced than I am, have contended with.
Speaker 8: It hasn't happened since the late seventies, and so you know,
Speaker 8: we're seeing new things. Well that means that if you
Speaker 8: have folks that haven't experienced those things, even if they
Speaker 8: can imagine them, it's different to actually experience them. And
Speaker 8: so managing people that haven't yet had the experience the
Speaker 8: challenge and for you, as emerging managers. You need to
Speaker 8: do that in a way that controls risks and keeps
Speaker 8: people motivated. That's challenging, right, They when they believe that
Speaker 8: they deserve more, they have a genuine view that they
Speaker 8: should have more responsibility, more seniority, more economics, but they
Speaker 8: haven't yet been battle tested. That's a tough dynamic, and
Speaker 8: it's one that you really need to be very thoughtful
Speaker 8: about and how you manage. I would say, don't cave
Speaker 8: to the pressure. You know, find the right people that
Speaker 8: understand that it's a process. They've got to be committed
Speaker 8: to building the business alongside you, or it's going to
Speaker 8: come crumbling in upon itself. I think the other thing
Speaker 8: that's notable that we've seen recently is there's some really
Speaker 8: high cost structures in the hedge fund world, you know,
Speaker 8: like eight percent eight percent fixed costs. Like that's insane,
Speaker 8: like insane that that is not the way to start
Speaker 8: and run a business. If you have your fixed costs
Speaker 8: meaningfully above your guaranteed fees and then you adjust for
Speaker 8: loss of capital, right, if you can't build that cushion in,
Speaker 8: you're at risk. Like just look at yourself, like a business,
Speaker 8: would you invest in that business because your LPs are
Speaker 8: going to look at it the same way. They say,
Speaker 8: what happens if I allocate this business like I don't
Speaker 8: want to be like everybody, you know, running for the door.
Speaker 8: And if I'm the you know, the ant and the
Speaker 8: elephants behind me, it's not going to be a good day. So,
Speaker 8: you know, you have to think about the cost structure,
Speaker 8: which aligns with how you manage the people, which aligns
Speaker 8: with what type of people to hire. So it's a
Speaker 8: it's a multi variable analysis which I'm definitely not smart
Speaker 8: enough to solve, but it's you know, for me, it's
Speaker 8: a feel you know, the types of folks that you
Speaker 8: can hire they think will be a good fit. And
Speaker 8: I think it's incumbent on new managers to think about, Okay,
Speaker 8: who do I want to have effectively in the trenches,
Speaker 8: you know, with you because I think the reason that
Speaker 8: a lot of firms fail in that first three to
Speaker 8: five year period is because they build themselves or they
Speaker 8: expect stratospheric growth, and the reality is it can be
Speaker 8: really lumpy, right, you just don't know, you know, our
Speaker 8: experience is a good one. We launched, we thought we
Speaker 8: were gonna have tons of capital we had less. The
Speaker 8: markets fall off a cliff, and I mean like fell,
Speaker 8: like really really off a cliff, and no one we
Speaker 8: didn't expect that, but we built the business to be
Speaker 8: able to withstand that, and then we grew, you know,
Speaker 8: really rapidly after that because we set up for you
Speaker 8: know what if everything goes wrong.
Speaker 1: So I threw a lot into the mix there.
Speaker 8: But I think all of these things are important considerations
Speaker 8: when you're hiring. It can go great, you can build
Speaker 8: for huge success and have it, and that's fantastic, But
Speaker 8: the odds are that that won't happen either.
Speaker 1: The markets won't give it.
Speaker 8: To you, the personnel won't be there, you know, the
Speaker 8: capital won't come in the way that you expect. So
Speaker 8: if you build for a sense of conservatism and you
Speaker 8: build a buffer around your business, you know you'll get
Speaker 8: to escape velocity.
Speaker 3: Really interesting.
Speaker 2: I'm intrigued by anyone who's working for you who was
Speaker 2: born after before, if they were born after nineteen eighty seven,
Speaker 2: they've never experienced the recession in their professional career.
Speaker 3: It's pretty right, pretty amazing.
Speaker 2: So let's talk a little bit about you mentioned your LPs.
Speaker 2: How do each of you differentiate yourself what you're selling.
Speaker 2: Point when you're either trying to bring in capital or
Speaker 2: hire somebody, or in any other way, make yourself differentiated
Speaker 2: from the masses that are out there.
Speaker 3: Let's start with you, Mike.
Speaker 1: Sure.
Speaker 4: So our view is and was that the successful funds
Speaker 4: in the next decade are those that will be durably
Speaker 4: built businesses. As Tom mentioned, you know, you have to
Speaker 4: think about this as a business and those that can attract,
Speaker 4: retain and develop talent with a competitive advantage. And you
Speaker 4: know this past weekend there was a Formula one race
Speaker 4: in Monaco, so I'll use that as an example because
Speaker 4: a durable successful hedge fund is a lot like an
Speaker 4: F one racing team. Right, you have the racers, you
Speaker 4: have your investment team, that's the DNA of your business.
Speaker 4: But without a great car, you can't win races. And
Speaker 4: behind those cars, okay, you have mechanics, engineers, strategists, teams
Speaker 4: of people that are helping. And similarly, the hedge fund
Speaker 4: of today and for the next decade will be a
Speaker 4: hedge fund that has an infrastructure that can support their
Speaker 4: investment team, allow them to operate at peak performance, and
Speaker 4: then run the business of a fund and that's a
Speaker 4: different job than what all of us here as investment
Speaker 4: managers do. That's not our expertise. So you have to
Speaker 4: have that infrastructure, those experts in house to help you
Speaker 4: do that, and that I think that has been a
Speaker 4: big selling point for our LPs in the beginning, but
Speaker 4: also the talent that we bring in knowing that we've
Speaker 4: built this to last.
Speaker 2: What I'm hearing from you, Mike, is that generating alpha.
Speaker 2: That's table stakes.
Speaker 3: That's just what you need to sit down.
Speaker 2: Everything beyond that seems to be where you separate yourself.
Speaker 3: From the crowd. Absolutely.
Speaker 4: LPs want to know that they can put capital and
Speaker 4: they know it's going to be an I liquid investment
Speaker 4: and know that they are putting capital into a stable,
Speaker 4: durable business. And that's what you have to provide them when.
Speaker 3: You launch Alana.
Speaker 2: You have a unique perspective on differentiators and hedge funds.
Speaker 3: Tell us what you see from your vantage.
Speaker 5: Point, Well, people come in and they meet with us
Speaker 5: and they talk about what they're going to do. And
Speaker 5: I will tell you, having seen a gazillion presentations, investor
Speaker 5: materials letters, it's great to have that stuff done in
Speaker 5: a way which obviously you're going to put time into it,
Speaker 5: you want to feel proud of it, but at the
Speaker 5: end of the day, my feeling is this industry is
Speaker 5: for the most part, very commoditized. And the reason I
Speaker 5: went through the different strategies is to let you know
Speaker 5: that to the extent you're launching a strategy that has
Speaker 5: not performed well in the last couple of years, LPs
Speaker 5: are not going to give you the benefit of the doubt.
Speaker 5: It doesn't matter what your presentation materials look like. It
Speaker 5: just doesn't. You're going to have to put up performance.
Speaker 5: And the biggest piece of advice I can give you
Speaker 5: is maybe you know you can say you're differentiated all
Speaker 5: of this stuff. You've got to start investing as quickly
Speaker 5: as possible. You bang the tin cup for capital for
Speaker 5: the first three to six months, You do what you can,
Speaker 5: and then stop literally stop. As counterintuitive as that sounds,
Speaker 5: what you want to do is start to prove show
Speaker 5: some proof of concept because unless you are coming from
Speaker 5: a fund that is a top multi manager, or you're
Speaker 5: coming from a great a fund that is pedigreed, and
Speaker 5: LPs want more of that DNA like I'll give you
Speaker 5: another example.
Speaker 6: Last year, braid Well launched.
Speaker 5: That was a fund started by Alex Carnal that came
Speaker 5: out of Deerfield and had a huge reputation in healthcare,
Speaker 5: and he launched with.
Speaker 6: Over three billion dollars.
Speaker 5: So unless there's something that LPs can see sink their
Speaker 5: teeth into in terms of the DNA that you carry,
Speaker 5: you're going to have to show.
Speaker 6: Them what you can do.
Speaker 5: And then yes, it becomes a question of how do
Speaker 5: you beg borrow and steal to fund the enterprise while
Speaker 5: you're putting off performance so that.
Speaker 6: You can then go back to LPs raise capital and.
Speaker 5: Also get better talent, because now this field of dreams
Speaker 5: has some skin on the bones.
Speaker 2: Brennon, what do you think what is the differentiator for
Speaker 2: you as a long only fund manager?
Speaker 7: I mean, I think the easy answer is that we're
Speaker 7: a long only head manager that's doing concentrated hedge fund
Speaker 7: like investing, and there's people that do that, so I like.
Speaker 7: But the field there is a lot smaller, and the
Speaker 7: pools of capital allocated.
Speaker 1: Against long only or are pretty large.
Speaker 7: There's a lot of money in passes, there's a lot
Speaker 7: of money and other long only strategies, So it's different
Speaker 7: than launching, you know, a higher fee product like a
Speaker 7: long short product where you're competing against you know, the
Speaker 7: mics of the world, where they're making those trade offs,
Speaker 7: it's a little bit different. I would also echo the
Speaker 7: idea that my experience and not every allocator is the same.
Speaker 7: Allocators want it to invest in what they perceive as
Speaker 7: institutional scale managers. It doesn't necessarily mean you need to
Speaker 7: have thirty employees, but they want to. They want to
Speaker 7: look at it as a real business. They want to
Speaker 7: understand the plan, They want to understand how you think
Speaker 7: about the growth of the business, the contingencies of the business.
Speaker 7: But your strategy is how you're building the culture. Because
Speaker 7: to be perfectly frank that I think that's the that's
Speaker 7: the easiest thing to kind of underwrite from an outside.
Speaker 1: Perspective's always there to underwrite stock pitches.
Speaker 7: I find it hard to underwrite stock pitches if I
Speaker 7: don't know the stock really really well. And so I
Speaker 7: think you want to you want to invest in that
Speaker 7: part of the business, and what that investment looks like
Speaker 7: is going to be, you know, specific to your strategy. Right,
Speaker 7: it looks very different for a multimanager than it does
Speaker 7: for a smaller organization. But you can still I would
Speaker 7: say get to that level of institutional scale as a
Speaker 7: smaller manager if you if you make it a priority
Speaker 7: and you're thoughtful around how that looks both day one
Speaker 7: and what your communication looks like for what it should
Speaker 7: be over time.
Speaker 3: Tom, what's your big differentiator?
Speaker 1: I don't think we really have one. No.
Speaker 8: I think there's a great quote pickable that's not picking out.
Speaker 1: We're yeah, random sports investments. Seth Klarman. I read a
Speaker 1: great quote.
Speaker 8: By him, I think two weeks ago, and he said,
Speaker 8: we're fortunate to be unconstrained by a specific investment strategy.
Speaker 1: Remember the quote.
Speaker 8: Directly, that's so beautiful, right, because what are you paying
Speaker 8: bao posts for. You're paying them to go out and
Speaker 8: find great investments where there's downside protection. So the way
Speaker 8: that we present what we do is that we can
Speaker 8: invest anywhere in the world really in anything, but everything
Speaker 8: we do we.
Speaker 1: Take a credit approach to which is we have an
Speaker 1: extreme focus on.
Speaker 8: Capital preservation and we try to structure for the best
Speaker 8: possible return. Sometimes it's an equity like return or linked
Speaker 8: return or convertible or warrants, so.
Speaker 1: We can gain an equity return, but that's really the approach.
Speaker 1: So every investment that we pursue we take that approach.
Speaker 8: With the investment that we made in the football team
Speaker 8: in the UK was structured as a secured loan with
Speaker 8: you know, the ability to eventually you know, gain full control.
Speaker 1: You know.
Speaker 8: A lot of the investing that we've pursued has been
Speaker 8: structured in that way. And I think that's a differentiator
Speaker 8: because it's a little different than investing in somebody that's
Speaker 8: going to go trade hyal bonds or you know.
Speaker 1: Do public distress.
Speaker 8: And I think the second thing is, at least from
Speaker 8: my core business, which we started as a distressed debt fund,
Speaker 8: the distress debt funds just went off the rails the
Speaker 8: last fifteen years. The way that they operate is they
Speaker 8: look at a business as a carcass and then approach
Speaker 8: it to fight over the carcass.
Speaker 1: Right.
Speaker 8: We look at a business that might be a carcass
Speaker 8: and say, can we revive that thing?
Speaker 1: Right? Because if you.
Speaker 8: Can, the pie that you're fighting over grows, And that's
Speaker 8: a lost art for a lot of investors in turnarounds,
Speaker 8: like there aren't many real turnaround experts anymore, and that
Speaker 8: is how you make tons of money, at least in
Speaker 8: my sub sector. And so I think we've done that
Speaker 8: pretty well. Like we've invested in a few businesses the
Speaker 8: last few years where we had control that we've turned around.
Speaker 8: You know, our biggest short going into the COVID was Hurts.
Speaker 8: It's now our largest long we've ever had in the
Speaker 8: history of the firm, and it was a turnaround plate
Speaker 8: you know, centered around electrifications. So you know, I think
Speaker 8: you've got again. It goes back to what I said
Speaker 8: the very beginning. You got to find what you're good
Speaker 8: at and what you love and then apply it to
Speaker 8: your strategy and do that.
Speaker 1: Like, just do that, forget all the noise.
Speaker 8: Just do what you love and what you're good that
Speaker 8: and the rest of it should should be okay.
Speaker 5: But also having a structure that supports what you do
Speaker 5: is very advantageous. I mean, I don't want this to
Speaker 5: be lost on you. Of that ten billion, four billion
Speaker 5: is in an insurance company, and you have what another.
Speaker 1: Four two and a half that's in draw down.
Speaker 6: Right, so there's no timeline for returning capital.
Speaker 8: Some of our capital is literally the insurance company is permanent, permanent,
Speaker 8: and then one of the drawdown funds the investor. It's
Speaker 8: a really like uber wealthy family. When we draw the capital,
Speaker 8: we never have to give it back. Now, we don't
Speaker 8: get paid until we give it back, but we don't
Speaker 8: actually have to give it back. And our fee is
Speaker 8: a sliding don't steal this, by the way, it's like
Speaker 8: a really good idea. It took a long time to
Speaker 8: come up with this. The fee is a sliding scale
Speaker 8: based on the IRR. So there's this weird push pull
Speaker 8: because sometimes you do a great investment, you compound at
Speaker 8: forty or thirty five or thirty for the first eighteen months,
Speaker 8: and then you know you're not going to continue compounding.
Speaker 1: At that rate. You're probably going to slide to a
Speaker 1: lower level.
Speaker 8: Well, we have to decide do we want to ca
Speaker 8: after the higher and send a fee, or do we
Speaker 8: want to hold it and make it a larger moike.
Speaker 8: I always go for the larger moik, right, Like, the
Speaker 8: worst thing you can do is try to live off
Speaker 8: of IRRs. It's not possible. It can't eat those moik
Speaker 8: is what you want. So that duration of capital is hard.
Speaker 8: But the dumbest decision I ever made was pursuing long
Speaker 8: duration capital. We would be three times larger, four times larger.
Speaker 8: If I had just you know, built a colo business
Speaker 8: and listened to Alanta and like hired people to do
Speaker 8: direct lending and do these other things.
Speaker 6: I wouldn't tell you to do that.
Speaker 8: No, but you were like you always had these good ideas,
Speaker 8: like this is what your peers are doing, and you
Speaker 8: had very very good advice over time that I listened
Speaker 8: to none of and I'm much poorer for it.
Speaker 6: Well, but friend's it ten million dollar fun. So there
Speaker 6: you go.
Speaker 8: No, but I said, you're going way back. I want
Speaker 8: permanent capital because if I just said, if we can
Speaker 8: have permanent capital, we could do whatever we want, Like
Speaker 8: we could buy English soccer teams. Now what I said
Speaker 8: we could do we could make investments that really compound
Speaker 8: for a long period of time. And so we focused
Speaker 8: on doing that. Maybe it was a good decision and
Speaker 8: maybe it wasn't. Time will tell, But again it went
Speaker 8: back to like that's what we love, that's.
Speaker 1: What we wanted to do.
Speaker 6: Being it's not just the strategy, it's also the structure.
Speaker 1: You wrap that up.
Speaker 5: You created a structure which is like I mean, it's
Speaker 5: almost a mini Apollo. You created a structure where you
Speaker 5: just charge on alpha. LPs can get behind that. It
Speaker 5: may be long only, but you're just charging on alpha
Speaker 5: and you're all alpha. So and you have all of
Speaker 5: the DNA from one of the greatest hedge funds in
Speaker 5: the world. These are things that make each of these
Speaker 5: guys differentiated to your question and unique. And the reality
Speaker 5: is there are very few individuals that come to market
Speaker 5: with that skill set and that foresight.
Speaker 6: So since that brought up site back, then that's true.
Speaker 3: Since we've brought.
Speaker 2: Up LPs and allocators, I want to skip ahead to
Speaker 2: this question. What's the hardest question that you get asked
Speaker 2: by your limited partners or allocators? What's the most challenging
Speaker 2: question they throw it?
Speaker 3: You will start with you again mine.
Speaker 4: Yeah, I think there are two hard questions. One is
Speaker 4: on the topic of exiting people. And you know that
Speaker 4: is you know, mostly an objective decision, but there's a
Speaker 4: lot of subjectivity to it as well. And I think
Speaker 4: you know, LPs want it to be you know, objective,
Speaker 4: and it's sometimes you know, hard to explain explain some
Speaker 4: of the background to why we might keep somebody versus
Speaker 4: versus exits to them. I think the second question that
Speaker 4: they ask and we have a tough time with is
Speaker 4: just on adapting any strategy that we have. You know,
Speaker 4: LPs don't want you to adapt and change the business
Speaker 4: model that you promised and that and that's and I
Speaker 4: think that's completely fair. But there are times that are
Speaker 4: critical in a fund's life that you need to adapt
Speaker 4: or you'll die.
Speaker 3: And so for example, right, so.
Speaker 4: You know, whatever it may be, that that is a
Speaker 4: hard question to answer because you know, most of the
Speaker 4: time what they want to hear is don't change your.
Speaker 1: Path at all.
Speaker 5: Alana, you want to, well, I do want to, but
Speaker 5: I also want to comment on what.
Speaker 6: Mike said, I do. That's true.
Speaker 5: But when you have, however, many years of putting up
Speaker 5: great performance and delivering exactly what you promised LPs, there's
Speaker 5: a higher receptivity I think, to then whatever you see
Speaker 5: the pivot points, as I've seen this with other clients
Speaker 5: as well that maybe started as one thing and as
Speaker 5: long as they didn't stray too far from their core DNA.
Speaker 5: I have one client that is now fifty billion. He
Speaker 5: was thirty billion two years ago, and he's done it
Speaker 5: through us thinking through create other strategies and other products
Speaker 5: that are tangential. But still related and he's got credibility
Speaker 5: with his LPs because of what he's delivered turnover.
Speaker 6: Okay, I just have to comment on this because.
Speaker 5: You know, like it's such as the bane of my existence,
Speaker 5: and I think it's one of the biggest problems in
Speaker 5: our industry. People are terrified. LPs are terrified to fire people.
Speaker 5: They think somehow it's.
Speaker 6: Going to reflect poorly on their ability to retain a team,
Speaker 6: their culture, something bad's going on at the fund.
Speaker 3: You mean gps are terrified of fire people.
Speaker 5: Yeah, but they're terrified of l people.
Speaker 6: Well think, Sorry, that's what I meant.
Speaker 5: You have to be You have to give people room
Speaker 5: to fail or to succeed rather give give them runway,
Speaker 5: give them tools, help them develop. But at a certain
Speaker 5: point you need to graciously exit them if they're not
Speaker 5: cutting it. Because the majority of you will not have
Speaker 5: a pass through model. Okay, I mean.
Speaker 6: That's just the truth.
Speaker 5: And you're gonna have a little problem called netting, which
Speaker 5: is Peter over here. I'm going to use just simple
Speaker 5: illustration his ideas put up one hundred million of piano
Speaker 5: p and L and Paul over here lost one hundred million,
Speaker 5: and you're zero and which you don't want to do.
Speaker 6: Who is Peter and Paul?
Speaker 5: You don't want to pay from You don want to
Speaker 5: take from this guy to pay that guy. Sorry, take
Speaker 5: from this guy to pay that guy. Because you're gonna
Speaker 5: end up losing your best people. And you also don't
Speaker 5: want your a's to feel like they're surrounded by a
Speaker 5: bunch of bees or worse yet, c's. So you need
Speaker 5: to manage people who are not cutting it and give
Speaker 5: them time to succeed.
Speaker 6: You need to manage them out and don't worry about
Speaker 6: about your LPs because at the end of the day
Speaker 6: you're going to have a much bigger problem if your
Speaker 6: stars leave.
Speaker 2: The appreciate you cutting your losses.
Speaker 6: I just you have to manage talent the way you
Speaker 6: manage your portfolio. That's how you have to approach it.
Speaker 5: You have to be you have to be rigorous, you
Speaker 5: have to be you know, you have to make tough
Speaker 5: decisions and you can't worry about anything else.
Speaker 6: This is the biggest problem.
Speaker 5: It's not just emerging managers, but in general that I
Speaker 5: see in our industry and the best founders, okay.
Speaker 6: Are the ones who do this really really well.
Speaker 5: And sometimes you know, people sort of they get a
Speaker 5: bad rep for it, but they're also the best at
Speaker 5: developing people and giving people the most runway.
Speaker 6: It's about creating an environment which attracts rock stars. On
Speaker 6: your question toughest question, one of the things you mentioned
Speaker 6: mentioned is how you're going to pay for resources. So,
Speaker 6: if you have a two percent management fee and you're
Speaker 6: an one hundred million dollar fund and you come from
Speaker 6: a fund we're used to having tens of millions of
Speaker 6: dollars spent on research and software, in data and corporate access,
Speaker 6: you have to answer the question.
Speaker 5: To LPs as to how you're going to fund that.
Speaker 5: You can't have you touched on this. You can't have
Speaker 5: as one hundred million dollar fund two percent management fee
Speaker 5: and then one million dollars spent on fund expenses because
Speaker 5: that's a three percent dragon returns out of the gate,
Speaker 5: and it's even higher if you're less.
Speaker 6: And the answer to that question really has to come
Speaker 6: back to how are you special? Okay, you don't need
Speaker 6: all these data sources. I'm going to do X. I'm
Speaker 6: going to do it really well, and here's what I need.
Speaker 5: And be very precise about what you're bringing to the
Speaker 5: table and the resources you need. To support that. The
Speaker 5: reality is you're not competing head on with these funds
Speaker 5: that spend tens of millions of dollars or even hundreds
Speaker 5: of millions of dollars on research.
Speaker 2: Brandon, what's the toughest question you get asked by potential LPs?
Speaker 7: I'd say during the fundraising process. For me, the toughest
Speaker 7: is always what what's your target that you're going to
Speaker 7: raise to which my answer is, I have no idea.
Speaker 7: You tell me, we'll see. I'm going to launch it
Speaker 7: and we're going to see what it is, and it'll
Speaker 7: be what it is now. I would say that the
Speaker 7: hardest question I always it's a little bit like the
Speaker 7: last question is how do you how do you differentiate
Speaker 7: yourself versus other funds? Because I always inherent in that
Speaker 7: question is you have to know what that other fund
Speaker 7: is doing. And like I'm a strong believer that unless
Speaker 7: you're in the walls and unless you understand.
Speaker 1: Exactly how the investment process works, it's really hard to
Speaker 1: compare yourself to another fund.
Speaker 7: And so I try to turn it back to this,
Speaker 7: you know, this is how we invest, this is how
Speaker 7: we do things. You compare that to the other people,
Speaker 7: you kind of see in the market, but during the
Speaker 7: fundraising process for kind of everyone in this room that's
Speaker 7: about to go through it, you know, the how what
Speaker 7: what's your target for raising? I always found somewhat music
Speaker 7: because I don't think anybody really knows until last minute.
Speaker 3: Tom, how about you, I'm looking for a doozy from you.
Speaker 8: It's I love the question, like what do you see
Speaker 8: as the great opportunities over the next six months?
Speaker 1: You're literally like really you know the answer to that question.
Speaker 8: I wouldn't need you as an LP, right, I'd already
Speaker 8: be retired.
Speaker 1: Like managing my own money and somebody else being managing
Speaker 1: my money in the family office. I'd be a professional
Speaker 1: flight fisherman, you know.
Speaker 8: Like March, you know, sixteenth, twenty oh eight, no one
Speaker 8: knew that we were about to embark in the greatest
Speaker 8: run of distressed financials we've ever seen.
Speaker 1: Right September tenth, two.
Speaker 8: Thousand and one, no one knew there'd be a huge
Speaker 8: opportunity in airlines. You know, we just kind of go
Speaker 8: through history like you just don't know. So I think
Speaker 8: my answer to this question generally, and playing off a
Speaker 8: little bit of the other comments, is don't worry about
Speaker 8: what the LPs think. Okay, just say what you do,
Speaker 8: what you believe is right for generating returns. Because I'll
Speaker 8: tell you, particularly as a distressed in, the LP's are
Speaker 8: always wrong, always, like very very rarely do we make
Speaker 8: a new investment and people go, Wow, that's great. Usually
Speaker 8: they're like, oh my god, really, like you really think
Speaker 8: that's a good investment? Yes, like this is what's going
Speaker 8: to happen, Like, oh my god, who lost his mind?
Speaker 8: So I think you have to balance the fact that
Speaker 8: you're the asset manager, you're the business builder. Just be honest,
Speaker 8: right and stick to your strategy, but don't get swayed
Speaker 8: by what the crowd thinks.
Speaker 1: That's a surefireway to fail.
Speaker 2: Let's stay on that end of the panel for this question.
Speaker 2: Tell us the biggest surprise or lesson learned over the years,
Speaker 2: what really sticks with you.
Speaker 1: And I'm still doing it now. I think the fact
Speaker 1: that I like it so much.
Speaker 8: Yeah, I came from you know, I was on a
Speaker 8: sell side trading floor with a thousand people and it
Speaker 8: was sort of like, you know, very collegial, lots of
Speaker 8: interpersonal reaction, interaction, very loud, boisterous.
Speaker 1: I love that and thrived in it.
Speaker 8: I know it's super surprising and the you know, when
Speaker 8: you go to run your own firm and you start,
Speaker 8: particularly you're small, it's just totally different.
Speaker 1: And I wasn't sure that it would give me the same.
Speaker 8: Level of satisfaction and that that get energized every day.
Speaker 8: It's been way better. You know, my afro's gone and
Speaker 8: I lost all my hair.
Speaker 1: Which probably means to stress levels up.
Speaker 8: But it definitely has been, you know, a pleasure and
Speaker 8: far exceeding what I ever anticipated.
Speaker 2: Brendan, what's the biggest lesson or biggest surprise that you
Speaker 2: learned over the past few years.
Speaker 7: I think the biggest surprise, and I think it's not
Speaker 7: intellectually a surprise, but it's a little bit like having kids.
Speaker 7: You don't really know what it's like until you've got them.
Speaker 7: If you've worked, if your background is working at other funds,
Speaker 7: working with other people, you have peers. You work with
Speaker 7: other people, you have peers if something's going wrong, and
Speaker 7: go complain to those peers. When it's yours. It's you
Speaker 7: and the way you behave and the way you act
Speaker 7: and who you talk. It all matters because you're setting
Speaker 7: the culture for the entire organization. And that's, you know,
Speaker 7: the thing Jim Parsons, who who I worked with before,
Speaker 7: showed me before I started. You know, the highs are
Speaker 7: higher and the lows or lower, and you kind of
Speaker 7: feel it more internally, and the ability to socialize it
Speaker 7: out is less.
Speaker 1: There and so it's one of those things.
Speaker 7: It's not obviously I would say that I think everyone
Speaker 7: in the room be like Again, of course it is,
Speaker 7: but until you go through it, you don't know what
Speaker 7: it's like.
Speaker 1: And again, highser higher, lowers or lower. I think it
Speaker 1: nets out to being awesome, but.
Speaker 7: Prepare yourself for that, and prepare yourself that it's different
Speaker 7: and how you behave matters.
Speaker 2: A lot you've seen, You've seen so much from your
Speaker 2: vantage point. Tell us what was the biggest surprise was
Speaker 2: for you. We'll save the biggest lesson for the last question,
Speaker 2: but was.
Speaker 6: I just want to answer it this way.
Speaker 5: I mean, it nets out that it's awesome when you're successful.
Speaker 6: But the common the most common one thing I hear.
Speaker 5: I mean I get this literally at least once a
Speaker 5: week from real managers.
Speaker 6: These aren't guys who couldn't cut it.
Speaker 5: These are guys who got to at least two three
Speaker 5: four hundred million. They had actually good returns even with
Speaker 5: the volatility of the last.
Speaker 6: Couple of years.
Speaker 5: And they are either closing shop and you just need
Speaker 5: to be aware of this, or they're just not having
Speaker 5: fun anymore. You talked about having fun and loving it.
Speaker 5: You go into this business, you go into the idea
Speaker 5: of starting a fund. You're all emerging managers for two reasons.
Speaker 5: You believe in your strategy and you want to put
Speaker 5: it out into the world with your own imprimature and
Speaker 5: which you don't really realize or maybe you realize it,
Speaker 5: but yes, like the having kids analogy, it's not until
Speaker 5: you're in the seat that it's really tangible. These two
Speaker 5: things investor and entrepreneur, these two hats you need to wear,
Speaker 5: are actually in conflict with each other. And every moment
Speaker 5: you spend, particularly as a new manager, not investing, and
Speaker 5: many of you will not be able to afford out
Speaker 5: of the gate the same infrastructure that these guys could.
Speaker 5: So you're going to get pulled into HR issues and
Speaker 5: legal issues and administration issues, and god, you're going to
Speaker 5: be dealing with LP sometimes one hundred percent of your time,
Speaker 5: and you're going to be trying to put up great performance,
Speaker 5: and that's exhausting and it's sad, But there are many
Speaker 5: I just have to tell the truth. There are many
Speaker 5: examples of individuals who got to a point where one
Speaker 5: might call them successful. They're running four hundred million, five
Speaker 5: hundred million. I have one guy who's running a billion
Speaker 5: and a half. His returns have suffered because of the distraction,
Speaker 5: or they're just not having fun anymore, because the thing
Speaker 5: that got them into this in the first place was
Speaker 5: a love of investing, and they find themselves actually focused
Speaker 5: on a whole host of other issues which really are
Speaker 5: not how they want to spend their time. So if
Speaker 5: this is what you really want to do, and it's
Speaker 5: an itch you want to scratch, you should go do it.
Speaker 5: But to the extent what you really want to do
Speaker 5: is have autonomy, invest have scale out of the gate,
Speaker 5: have great resources, and not that fus necessarily about all
Speaker 5: the rest of it. We should have that conversation, and
Speaker 5: if you do launch, and you launch successfully, we'll have
Speaker 5: that conversation too.
Speaker 3: Mike, what was the biggest lesson, biggest surprise to you?
Speaker 4: Yeah, you know, I bear You asked this question when
Speaker 4: I was on another panel with you A couple of
Speaker 4: years ago, and interesting, Michael, Interestingly, it's the same answer.
Speaker 4: And you know, this is a talent driven business, and
Speaker 4: what's been most surprising is the compounding effect of great talent.
Speaker 4: You always think about it in financial terms, but people
Speaker 4: who hire great people and keep the bar high, it's
Speaker 4: amazing what it does to your business.
Speaker 1: And so that's been the biggest surprise continues to be.
Speaker 3: So we're just about out of time.
Speaker 2: We don't have time for audience questions, but let me
Speaker 2: just throw one last question ten second response from each
Speaker 2: of you, and we'll.
Speaker 3: Start with Tom.
Speaker 2: One piece of advice for someone about to launch a
Speaker 2: new fund, Just.
Speaker 8: As I said earlier, just do what you love, surround
Speaker 8: yourself with people that you really want to work with,
Speaker 8: and stay true to your initial objectives, one of which
Speaker 8: has to be to work as hard as you possibly can.
Speaker 5: Right.
Speaker 1: Yeah, I would kind of a correlaria to that.
Speaker 7: Don't try to sell people on what you think that
Speaker 7: you want to hear. You have to come to market
Speaker 7: with a perspective. You have to have a strong point
Speaker 7: of view, and that either works or it doesn't. And
Speaker 7: that's the that you have to kind of underlying make.
Speaker 7: But it won't work if you try to go if
Speaker 7: you try to shoehorn it into something that it's not.
Speaker 5: Alana, take your time with respect to hiring people, build
Speaker 5: this in the right way. LPs would rather see a
Speaker 5: longer and slower ramp. With respect to optimizing your investment
Speaker 5: team and your non investment team and performance.
Speaker 6: First, focus on putting up the numbers.
Speaker 3: Final word, Mike, what do you got?
Speaker 4: I'd have to say in honor of the late Sam
Speaker 4: Zell who said this, go for greatness.
Speaker 2: Truthic Mike Rockefeller, Alana Einstein, Tom Wivener, Brennan Diaz, thank
Speaker 2: you so much for your time in your insights, and
Speaker 2: you're out of here again. So that was the entire panel.
Speaker 2: You heard the whole thing in its entirety.
Speaker 3: We ran late, didn't get to.
Speaker 2: Get questions from the audience, and it was really just
Speaker 2: all Diaz, Rockefeller, Wagner, and Weinstein discussing how challenging it
Speaker 2: is launching your own fund, especially in this environment. Special
Speaker 2: thanks to my audio engineer, Rob Bragg for putting this together.
Speaker 2: Michael Boyle was the producer of this event. And if
Speaker 2: you ever get a chance to attend any of these
Speaker 2: Bloomberg Live events, they're really quite special, really really worthwhile.
Speaker 2: Take the time and spend a couple hours and watch
Speaker 2: some of these folks tell you what they've done to succeed.
Speaker 3: You won't be disappointed.
Speaker 2: Thanks for listening to this podcast. Extra Master's in Business
Speaker 2: Life