1 00:00:02,200 --> 00:00:06,800 Speaker 1: Vias is Masters in Business with Barry Ridholts on Boomberg Radio. 2 00:00:07,240 --> 00:00:09,760 Speaker 1: This week on the podcast, I have a special guest. 3 00:00:09,960 --> 00:00:13,440 Speaker 1: His name is Andrew Beer. He has really a fascinating 4 00:00:13,880 --> 00:00:17,520 Speaker 1: background and career in finance. He's a managing member at 5 00:00:17,600 --> 00:00:21,119 Speaker 1: Dynamic Beta Investments, which is one of the oldest firms 6 00:00:21,160 --> 00:00:25,960 Speaker 1: doing liquid alternatives. Really quite fascinating. Their goal is to 7 00:00:27,040 --> 00:00:30,680 Speaker 1: roll out things that look like hedge funds, but with 8 00:00:31,160 --> 00:00:35,040 Speaker 1: full transparency, liquidity, and none of the high fees it 9 00:00:35,200 --> 00:00:39,240 Speaker 1: It's really a fascinating space, sort of bringing the philosophy 10 00:00:39,240 --> 00:00:42,760 Speaker 1: of Jack Bogel to the hedge fund space. If you're 11 00:00:42,760 --> 00:00:46,280 Speaker 1: at all interested in liquid alts or managed futures, or 12 00:00:46,360 --> 00:00:48,519 Speaker 1: want to learn how these things work, I think you'll 13 00:00:48,560 --> 00:00:52,480 Speaker 1: find this to be a fascinating and wonky conversation. So, 14 00:00:52,760 --> 00:00:57,720 Speaker 1: with no further ado, my conversation with Dynamic Beta's Andrew Beer. 15 00:00:59,080 --> 00:01:02,480 Speaker 1: Vias is men Steers in Business with Barry Ridholts on 16 00:01:02,680 --> 00:01:06,760 Speaker 1: Bloomberg Radio. My special guest this week is Andrew Beer. 17 00:01:07,280 --> 00:01:11,759 Speaker 1: He is a managing member at Dynamic Beta Investments, one 18 00:01:11,760 --> 00:01:15,039 Speaker 1: of the older firms in the liquid ault space. Their 19 00:01:15,080 --> 00:01:18,960 Speaker 1: goal is to deliver hedge fund like returns, but with 20 00:01:19,120 --> 00:01:24,119 Speaker 1: reasonable fees and daily liquidly UH their long short hedge 21 00:01:24,120 --> 00:01:28,160 Speaker 1: funny t F was up for the year in while 22 00:01:28,200 --> 00:01:33,800 Speaker 1: their managed futures fund was flat. Andrew Beer, Welcome to Bloomberg. 23 00:01:34,040 --> 00:01:35,720 Speaker 1: Thank you, Barry. It's a pleasure to be on the 24 00:01:35,760 --> 00:01:38,759 Speaker 1: call today. So let's start with your background. How did 25 00:01:38,800 --> 00:01:43,240 Speaker 1: you find your way to the investment management industry? So, 26 00:01:43,600 --> 00:01:46,320 Speaker 1: I it wasn't clear. I guess um. I started as 27 00:01:46,319 --> 00:01:49,559 Speaker 1: an em and a banker in the early UH and 28 00:01:49,760 --> 00:01:52,400 Speaker 1: back then, if you were an energetic young m and 29 00:01:52,440 --> 00:01:54,960 Speaker 1: a banker, you wanted to go into the aldo business. 30 00:01:54,960 --> 00:01:56,800 Speaker 1: That's where all the kind of same and glory was. 31 00:01:57,520 --> 00:02:00,120 Speaker 1: And so I went back to business school. One of 32 00:02:00,160 --> 00:02:01,840 Speaker 1: my second year of business school, I I got a 33 00:02:01,920 --> 00:02:05,000 Speaker 1: job at one of the LBO firms, a very well 34 00:02:05,000 --> 00:02:07,280 Speaker 1: respected firm in Boston run by guy named Tom Lee. 35 00:02:08,040 --> 00:02:10,079 Speaker 1: And in my so I was kind of in my 36 00:02:10,120 --> 00:02:12,600 Speaker 1: second year of business school and thinking about where I 37 00:02:12,639 --> 00:02:14,240 Speaker 1: was going to go in that industry, and I heard 38 00:02:14,240 --> 00:02:17,440 Speaker 1: about the secretive investment firm bow Post that had been 39 00:02:17,480 --> 00:02:20,280 Speaker 1: started by some Harvard Business School professors and was hiring. 40 00:02:21,160 --> 00:02:24,080 Speaker 1: So I applied. And I don't think I knew what 41 00:02:24,160 --> 00:02:25,840 Speaker 1: a hedge fund was but I really really like it. 42 00:02:25,800 --> 00:02:30,400 Speaker 1: I'd get focusing on these weird niche investment opportunities. So 43 00:02:30,840 --> 00:02:33,600 Speaker 1: instead of going into the LBO business or possibly doing 44 00:02:33,600 --> 00:02:36,400 Speaker 1: a PhD, I became a hedge fun guy. And you know, 45 00:02:36,440 --> 00:02:38,840 Speaker 1: twenty six years later, I'm I'm stuck in that role. 46 00:02:39,200 --> 00:02:41,760 Speaker 1: So let's stay with bout post for a minute. It's 47 00:02:41,880 --> 00:02:46,480 Speaker 1: run by Seth Clarman, a legendary investor. His book Margin 48 00:02:46,520 --> 00:02:49,399 Speaker 1: of Safety was published years ago and then went out 49 00:02:49,400 --> 00:02:53,120 Speaker 1: of print. Copies go for some crazy two thousand dollars 50 00:02:53,320 --> 00:02:57,800 Speaker 1: a copy on Amazon. What was it like working with 51 00:02:58,200 --> 00:03:01,840 Speaker 1: a legend like Seth Clarman? So it was, I mean, 52 00:03:01,960 --> 00:03:04,000 Speaker 1: it says it's extraordinary. I mean he is. He is 53 00:03:04,080 --> 00:03:07,240 Speaker 1: absolutely brilliant. And I think the interesting thing about Seth, 54 00:03:07,880 --> 00:03:11,280 Speaker 1: which is uh, is that Seth was a value investor, 55 00:03:11,360 --> 00:03:13,919 Speaker 1: probably from the day that he was born. It wasn't 56 00:03:13,919 --> 00:03:15,880 Speaker 1: something it wasn't a study that he read about. It 57 00:03:15,919 --> 00:03:19,399 Speaker 1: wasn't an academic paper that that resonated with him. Um. 58 00:03:19,400 --> 00:03:22,280 Speaker 1: He just thought of things in terms of value. Uh. 59 00:03:22,280 --> 00:03:24,679 Speaker 1: And but I think it's it's really important to note 60 00:03:24,720 --> 00:03:26,799 Speaker 1: that this was in the early stages of the industry. 61 00:03:27,800 --> 00:03:30,240 Speaker 1: The hedge fund industry was really a cottage industry back then. 62 00:03:30,760 --> 00:03:33,360 Speaker 1: Just to put it in perspective, bow Post had two 63 00:03:33,360 --> 00:03:36,480 Speaker 1: percent of the assets then that it has today, and 64 00:03:36,520 --> 00:03:40,520 Speaker 1: it was still considered one of the ten largest hedge funds. Um. So, 65 00:03:40,520 --> 00:03:43,160 Speaker 1: so what you can do with six million versus one 66 00:03:43,240 --> 00:03:45,920 Speaker 1: point eight million is very very different. And then you know, 67 00:03:45,960 --> 00:03:48,800 Speaker 1: and then a lot of these markets that people invest 68 00:03:48,880 --> 00:03:53,080 Speaker 1: in today were also in their infancy um so um. 69 00:03:53,120 --> 00:03:55,120 Speaker 1: You know, so he really was. It was an extraordinary 70 00:03:55,960 --> 00:03:58,000 Speaker 1: learning experience, and I think I think there are probably 71 00:03:58,040 --> 00:04:01,040 Speaker 1: three big things that I learned from Seth. And I 72 00:04:01,040 --> 00:04:03,520 Speaker 1: think the first was you should try to get the 73 00:04:03,600 --> 00:04:06,560 Speaker 1: area right um. In other words, it's much better to 74 00:04:06,600 --> 00:04:10,680 Speaker 1: find a dirt cheap area and spend your time then 75 00:04:10,720 --> 00:04:13,360 Speaker 1: then spend your time trying to find the best idea 76 00:04:13,400 --> 00:04:17,160 Speaker 1: in an expensive one. Um. And then I think the 77 00:04:17,600 --> 00:04:21,479 Speaker 1: second is that that things should be cheap for a reason. Uh. 78 00:04:21,560 --> 00:04:23,839 Speaker 1: And there's a certain humility in that. I think Seth 79 00:04:23,920 --> 00:04:26,200 Speaker 1: never thought that he could look at some big, large 80 00:04:26,200 --> 00:04:28,240 Speaker 1: cap stock that everybody else was looking at and think 81 00:04:28,240 --> 00:04:30,680 Speaker 1: he had a meaningful advantage. But if he could see 82 00:04:30,720 --> 00:04:35,000 Speaker 1: banks unloading real estate assets or UM, you know, because 83 00:04:35,040 --> 00:04:37,120 Speaker 1: they had a certain regulatory requirement where they had to 84 00:04:37,120 --> 00:04:39,080 Speaker 1: get rid of them. Well, that gave you a reason 85 00:04:39,160 --> 00:04:41,920 Speaker 1: why something might be selling it a discount. And I 86 00:04:41,960 --> 00:04:45,200 Speaker 1: think the third point is that risk isn't a statistic um. 87 00:04:45,240 --> 00:04:47,720 Speaker 1: That there are a lot of qualitative and other judgments 88 00:04:47,760 --> 00:04:49,760 Speaker 1: that go into thinking about the riskiness of an asset. 89 00:04:50,200 --> 00:04:53,039 Speaker 1: So the whole idea of margin of safety UM is 90 00:04:53,080 --> 00:04:56,520 Speaker 1: really embedded in in this kind of complex, multidimensional thinking. 91 00:04:57,120 --> 00:05:00,039 Speaker 1: And in part it was that UM, I think in 92 00:05:00,040 --> 00:05:02,200 Speaker 1: in more recent years, as I've thought about those years, 93 00:05:02,240 --> 00:05:04,799 Speaker 1: I think it's one of the reasons that concluded that value, 94 00:05:05,240 --> 00:05:09,039 Speaker 1: the value factor per se was really missing something. But 95 00:05:09,080 --> 00:05:11,440 Speaker 1: that's part of a much larger discussion. I think, well, 96 00:05:11,480 --> 00:05:14,080 Speaker 1: we're definitely gonna get to the value factor a little later, 97 00:05:14,600 --> 00:05:18,359 Speaker 1: you know. Your your comment about bow Post having two 98 00:05:18,680 --> 00:05:22,440 Speaker 1: of the assets in the hedge fund space reminds me 99 00:05:22,800 --> 00:05:26,760 Speaker 1: of a comment that Jim Chano's famously made. He said 100 00:05:26,760 --> 00:05:30,200 Speaker 1: thirty years ago when he was launching his funds, Uh, 101 00:05:30,240 --> 00:05:33,080 Speaker 1: there were a hundred hedge funds, they all created Alpha. 102 00:05:33,400 --> 00:05:36,160 Speaker 1: Today there's over ten thousand hedge funds. But it seems 103 00:05:36,200 --> 00:05:40,040 Speaker 1: like it's still those hundred hedge funds that are creating alpha. 104 00:05:40,800 --> 00:05:43,520 Speaker 1: Is that an overstatement or is there some truth to that? 105 00:05:44,000 --> 00:05:46,680 Speaker 1: So I think the hardest thing about hedge funds is 106 00:05:47,200 --> 00:05:51,960 Speaker 1: um is we're always looking at who is doing well today, 107 00:05:52,200 --> 00:05:54,520 Speaker 1: and people have a natural bias to assume that's going 108 00:05:54,560 --> 00:05:58,240 Speaker 1: to continue. UM. And so if you go back in time, 109 00:05:58,279 --> 00:06:00,800 Speaker 1: it's a little bit like the mutual fund industry. I remember, 110 00:06:00,800 --> 00:06:02,200 Speaker 1: back when I was at Bell Post, I was talking 111 00:06:02,240 --> 00:06:04,760 Speaker 1: to Guide Fidelity and he said, you know, we started 112 00:06:04,800 --> 00:06:07,440 Speaker 1: twelve new mutual funds every year, and we killed six 113 00:06:07,480 --> 00:06:10,280 Speaker 1: of them by June, and by the end of the year, 114 00:06:10,320 --> 00:06:14,000 Speaker 1: we've got three great performers. Um. The hedgehoan industry isn't 115 00:06:14,040 --> 00:06:15,960 Speaker 1: quite like that, But when you do look at hedge 116 00:06:15,960 --> 00:06:18,680 Speaker 1: funds today, people tend to focus on those hundreds that 117 00:06:18,720 --> 00:06:23,119 Speaker 1: have done well. What was interesting about was that as 118 00:06:23,160 --> 00:06:26,119 Speaker 1: as much as you repressed about guys, you know, having 119 00:06:26,360 --> 00:06:28,960 Speaker 1: historically good years, there are plenty of guys who had 120 00:06:29,000 --> 00:06:32,080 Speaker 1: middling years and and and you know plenty of guys 121 00:06:32,080 --> 00:06:35,479 Speaker 1: who at awful years and so um. You know. So 122 00:06:35,520 --> 00:06:38,839 Speaker 1: the hedgewood industry as a whole, I think had a 123 00:06:38,960 --> 00:06:42,800 Speaker 1: difficult but not nearly as bad as as it was 124 00:06:42,839 --> 00:06:46,240 Speaker 1: portrayed in the press. So let's talk about that, because 125 00:06:47,240 --> 00:06:52,640 Speaker 1: the reputation, especially since the Great Financial Crisis, was the 126 00:06:52,760 --> 00:06:56,279 Speaker 1: performance has been lacking. That the joke is come for 127 00:06:56,320 --> 00:06:59,200 Speaker 1: the high fee, stay for the under performance. Do you 128 00:06:59,200 --> 00:07:03,160 Speaker 1: think that's too hard or is that there for certainly 129 00:07:03,200 --> 00:07:06,159 Speaker 1: the bottom half of the hedge fund community, if not 130 00:07:06,279 --> 00:07:10,080 Speaker 1: more so. Here's an interesting it's interesting statistic that if 131 00:07:10,080 --> 00:07:13,600 Speaker 1: you could pick the top quartile of hedge funds in advance, 132 00:07:13,920 --> 00:07:16,040 Speaker 1: you'd be up thirty percent a year with no down years. 133 00:07:16,600 --> 00:07:19,560 Speaker 1: No one would care about fees, right, It's it's a 134 00:07:19,560 --> 00:07:21,160 Speaker 1: little bit. It's a little bit like saying, I mean, 135 00:07:21,200 --> 00:07:24,240 Speaker 1: the hedge fund industry is even probably more so than 136 00:07:24,640 --> 00:07:28,600 Speaker 1: the mutual fund industry today, is replete with this idea 137 00:07:28,720 --> 00:07:30,920 Speaker 1: that you know, we're going to find the guy who's 138 00:07:30,920 --> 00:07:33,920 Speaker 1: going to go up. Um. In reality, people found find 139 00:07:33,920 --> 00:07:36,920 Speaker 1: the guy who went up and so, but that issue 140 00:07:36,960 --> 00:07:40,920 Speaker 1: aside um, uh. There. The disappointment about hedge funds in 141 00:07:40,920 --> 00:07:45,200 Speaker 1: the Tents comes from three areas. The first is that 142 00:07:45,360 --> 00:07:48,240 Speaker 1: as that two thousand and eight was quite bad um, 143 00:07:48,320 --> 00:07:50,120 Speaker 1: and it wasn't just that hedge funds went down more 144 00:07:50,160 --> 00:07:54,160 Speaker 1: than expected, but that made off blew up large parts 145 00:07:54,160 --> 00:07:58,239 Speaker 1: of the business, and there was widespread suspension of capital 146 00:07:58,240 --> 00:08:01,520 Speaker 1: for investors who wanted to get out. Uh. So you know, 147 00:08:01,600 --> 00:08:04,280 Speaker 1: this was a It was about as bad as it 148 00:08:04,320 --> 00:08:07,240 Speaker 1: could have been from a pr perspective for hedge funds UM. 149 00:08:07,320 --> 00:08:09,800 Speaker 1: And it was also in in in stark contrast to 150 00:08:10,480 --> 00:08:13,800 Speaker 1: the previous bear market, where hedge funds uh, you know, 151 00:08:14,040 --> 00:08:18,000 Speaker 1: actually made money during the bear market, something quite extraordinary. UM. 152 00:08:18,120 --> 00:08:19,960 Speaker 1: But the second issue in the two thousand tens is 153 00:08:20,000 --> 00:08:23,360 Speaker 1: that easy things did better um in the two thousand tens. 154 00:08:23,560 --> 00:08:26,040 Speaker 1: Sort that in the two thousands we had essentially a 155 00:08:26,080 --> 00:08:28,640 Speaker 1: lost decade for US equities. You know, the SMP was 156 00:08:28,680 --> 00:08:33,720 Speaker 1: down over the decade, NASAC was down something and in 157 00:08:33,760 --> 00:08:36,680 Speaker 1: the two thousand tents, just by owning large cap us 158 00:08:36,720 --> 00:08:40,120 Speaker 1: and tech, I mean that pretty much destroyed everything else. Um. 159 00:08:40,400 --> 00:08:42,559 Speaker 1: And then the last is that is that fees are 160 00:08:42,600 --> 00:08:45,679 Speaker 1: too high. And this is something I've written a lot about, 161 00:08:45,800 --> 00:08:49,720 Speaker 1: but basically, when somebody's earning three or four percent and 162 00:08:49,760 --> 00:08:53,880 Speaker 1: they're taking half of every dollar that they make, um Uh, 163 00:08:54,120 --> 00:08:57,480 Speaker 1: people get more frustrated with that over time. And so 164 00:08:57,520 --> 00:08:59,640 Speaker 1: it's it's sort of it's sort of a combination of factors, 165 00:08:59,679 --> 00:09:03,120 Speaker 1: and they're of psychological reasons. Um why But I think 166 00:09:03,120 --> 00:09:06,080 Speaker 1: actually the most interesting thing is that look a lot better. 167 00:09:06,600 --> 00:09:10,440 Speaker 1: That discussion of fees kind of leads me to a 168 00:09:10,440 --> 00:09:14,959 Speaker 1: different place, which is there have been some fairly innovative 169 00:09:14,960 --> 00:09:20,720 Speaker 1: new concepts in fees, not just the compression, but but 170 00:09:20,960 --> 00:09:26,040 Speaker 1: things like pivot fees where there's a participation to the 171 00:09:26,120 --> 00:09:30,200 Speaker 1: upside only if the fund is beating its benchmark, and 172 00:09:30,240 --> 00:09:34,640 Speaker 1: there's even a giveback if the fund is underperforming it's benchmark. 173 00:09:34,840 --> 00:09:38,000 Speaker 1: What what do you think that looks like in the future? 174 00:09:38,000 --> 00:09:42,160 Speaker 1: Are we going to see some innovation around traditionally higher 175 00:09:42,559 --> 00:09:47,319 Speaker 1: hedge fund fees? So? Um, I think it's going to 176 00:09:47,400 --> 00:09:50,760 Speaker 1: be mixed. I think a lot of the industry. Um. 177 00:09:50,760 --> 00:09:53,240 Speaker 1: You know, one of the one of the reasons there 178 00:09:53,280 --> 00:09:54,880 Speaker 1: there are a couple of reasons that hedge fund fees 179 00:09:54,880 --> 00:09:59,120 Speaker 1: have remained so high. Um. The the stark reality is 180 00:09:59,160 --> 00:10:02,640 Speaker 1: that most people who allocate two hedge funds, it's not 181 00:10:02,679 --> 00:10:04,880 Speaker 1: their money, so they really don't care. At the end 182 00:10:04,880 --> 00:10:07,040 Speaker 1: of the day, you know, they're they're investing in a 183 00:10:07,120 --> 00:10:10,320 Speaker 1: hedge fund because I mean, if you read the Financial Times, 184 00:10:10,480 --> 00:10:13,440 Speaker 1: or um or Bloombergs had some very good articles recently 185 00:10:13,600 --> 00:10:15,920 Speaker 1: on hedge funds that have gone up a hundred percent. 186 00:10:16,040 --> 00:10:18,360 Speaker 1: People will be lining up at the door and completely 187 00:10:18,360 --> 00:10:23,320 Speaker 1: in different defeats because it's much easier for people to say, UM, 188 00:10:23,360 --> 00:10:25,120 Speaker 1: you know, I don't care about fees as long as 189 00:10:25,160 --> 00:10:28,760 Speaker 1: my net returns are high. The problem is is when 190 00:10:28,800 --> 00:10:32,560 Speaker 1: you've got twenty guys and you're paying away six out 191 00:10:32,559 --> 00:10:35,400 Speaker 1: of every ten dollars that they make in fees, and 192 00:10:35,480 --> 00:10:38,560 Speaker 1: you look back over three or five years and um 193 00:10:39,080 --> 00:10:41,959 Speaker 1: uh and hedge funds have the hedge fund managers have 194 00:10:42,040 --> 00:10:45,439 Speaker 1: made billions of dollars and clients really happened. And there 195 00:10:45,480 --> 00:10:47,680 Speaker 1: was one article recently a better firm called Brevan Howard, 196 00:10:47,760 --> 00:10:51,319 Speaker 1: which is by all accounts run by Kindaman Alan Howard, 197 00:10:51,320 --> 00:10:53,400 Speaker 1: who's one of the greats of the hedge fund industry. 198 00:10:53,640 --> 00:10:56,319 Speaker 1: UM and those articles are talking about the fact that 199 00:10:56,360 --> 00:11:00,640 Speaker 1: his funds had historically good year. What they don't mention 200 00:11:01,160 --> 00:11:03,320 Speaker 1: is that when he had thirty billion dollars in assets, 201 00:11:03,360 --> 00:11:05,600 Speaker 1: they went through a five year period of time where 202 00:11:05,679 --> 00:11:09,440 Speaker 1: by my estimate, management made two to three billion dollars 203 00:11:09,520 --> 00:11:13,559 Speaker 1: while clients lost money. UM so, so fees are are 204 00:11:13,600 --> 00:11:16,080 Speaker 1: a real perpetual issue in terms of fulcrum fees and 205 00:11:16,120 --> 00:11:17,960 Speaker 1: things like that. I doubt most hetch ones will do it. 206 00:11:18,200 --> 00:11:21,679 Speaker 1: I think you'll have a bifurcation of products where some 207 00:11:21,760 --> 00:11:25,679 Speaker 1: will be expensive, um, some will be worth it, a 208 00:11:25,679 --> 00:11:27,559 Speaker 1: lot won't be worth it, and then you'll have a 209 00:11:28,040 --> 00:11:32,000 Speaker 1: suite of lower cost options for allocators to pick from. 210 00:11:32,120 --> 00:11:35,839 Speaker 1: Quite quite fascinating, So let's talk about this area. It's 211 00:11:35,920 --> 00:11:41,160 Speaker 1: quite fascinating. When did liquid alternatives begin to take off? 212 00:11:41,360 --> 00:11:43,800 Speaker 1: What does the space look like today? So it's a 213 00:11:43,840 --> 00:11:46,160 Speaker 1: it's a great question, and I think I think the 214 00:11:46,160 --> 00:11:48,880 Speaker 1: backdrop of liquid alts, You know, why do people care 215 00:11:48,880 --> 00:11:51,959 Speaker 1: about liquid als in the first place, basically comes down 216 00:11:51,960 --> 00:11:54,600 Speaker 1: to two things. The first is that the whole wealth 217 00:11:54,640 --> 00:11:59,480 Speaker 1: management industry has evolved tour trying to push clients into 218 00:11:59,520 --> 00:12:04,239 Speaker 1: model portfolios, and model portfolios by by definition, have diversification 219 00:12:04,280 --> 00:12:08,720 Speaker 1: between stocks, bonds, and hopefully other things. And so you know, 220 00:12:08,760 --> 00:12:12,520 Speaker 1: when you're building a model portfolio and you can include 221 00:12:12,559 --> 00:12:16,520 Speaker 1: a lot of different asset classes um in general, your 222 00:12:16,760 --> 00:12:19,680 Speaker 1: risk goes down and you get a smoother return profile 223 00:12:19,679 --> 00:12:23,160 Speaker 1: if you add in things that have diversification benefits. And 224 00:12:23,280 --> 00:12:25,240 Speaker 1: you know, the analog for this, or the precedent for 225 00:12:25,280 --> 00:12:29,240 Speaker 1: this is in the institutional space, where a corporate pension 226 00:12:29,280 --> 00:12:32,480 Speaker 1: plan forty years ago may have had one or two 227 00:12:32,480 --> 00:12:34,520 Speaker 1: asset classes in it, and today it might have thirty 228 00:12:34,600 --> 00:12:37,480 Speaker 1: or forty. So you know what liquid also are really 229 00:12:37,559 --> 00:12:40,520 Speaker 1: designed to do, or to bring hedge fund like strategies 230 00:12:40,559 --> 00:12:43,760 Speaker 1: that have proven diversification benefits, but make them available to 231 00:12:43,840 --> 00:12:46,320 Speaker 1: investors who can't meet the high minimums, don't have the 232 00:12:46,360 --> 00:12:51,000 Speaker 1: ability to, aren't a credited investors, um uh, can't bear 233 00:12:51,080 --> 00:12:56,080 Speaker 1: the i liquidity of investing in these products. Um. The 234 00:12:56,160 --> 00:12:59,320 Speaker 1: real liquid al market really took off in my mind 235 00:12:59,320 --> 00:13:03,000 Speaker 1: around two thousan and twelve, and that was when Fidelity 236 00:13:03,240 --> 00:13:06,480 Speaker 1: gave money to a hedge fund firm called Harden to 237 00:13:06,640 --> 00:13:10,520 Speaker 1: create a multi manager mutual fund and a lot of 238 00:13:10,559 --> 00:13:13,440 Speaker 1: people thought this was going to be the resurgence of 239 00:13:13,600 --> 00:13:15,920 Speaker 1: the fund of hedge fund industry, which had gotten battered 240 00:13:16,440 --> 00:13:20,440 Speaker 1: during the Great Financial Crisis, and um and it launched 241 00:13:20,440 --> 00:13:25,160 Speaker 1: this whole wave of alternative multi manager funds that were 242 00:13:25,200 --> 00:13:29,120 Speaker 1: designed to give you index plus like exposure to the 243 00:13:29,160 --> 00:13:31,160 Speaker 1: hedge fund space. So they have you know, a couple 244 00:13:31,160 --> 00:13:33,200 Speaker 1: of equity long short guys, a couple of credit guys, 245 00:13:33,240 --> 00:13:36,840 Speaker 1: a couple of macro guys, etcetera. And and what it 246 00:13:36,880 --> 00:13:39,120 Speaker 1: really did is it turned the attention of asset managers 247 00:13:39,160 --> 00:13:41,600 Speaker 1: to this area when they looked across the world and 248 00:13:41,640 --> 00:13:43,640 Speaker 1: they said, look at all these target date funds out there, 249 00:13:43,920 --> 00:13:45,600 Speaker 1: you know, look at all these e t F based 250 00:13:45,640 --> 00:13:50,040 Speaker 1: model portfolios. These things are are are in our minds, 251 00:13:50,240 --> 00:13:53,120 Speaker 1: under diversified because they don't have exposure to the same 252 00:13:53,200 --> 00:13:56,120 Speaker 1: kinds of strategies that a big pension plan might have. 253 00:13:57,400 --> 00:13:59,600 Speaker 1: And so it really kicked off this arms race among 254 00:13:59,640 --> 00:14:01,840 Speaker 1: fund nigment companies. And there were forty or fifty of 255 00:14:01,880 --> 00:14:03,760 Speaker 1: these funds that were launched within the next couple of 256 00:14:03,800 --> 00:14:08,520 Speaker 1: years and they were um and then and then since then, 257 00:14:08,520 --> 00:14:11,520 Speaker 1: there's really been this wave of wave after wave of 258 00:14:11,520 --> 00:14:14,400 Speaker 1: new products that have been launched. And so now there 259 00:14:14,400 --> 00:14:17,160 Speaker 1: are hundreds of products out there, but um, you know. 260 00:14:17,240 --> 00:14:19,840 Speaker 1: But it's one of the things we've written about is 261 00:14:19,840 --> 00:14:25,760 Speaker 1: is that we think actually the products are are uh, 262 00:14:26,120 --> 00:14:30,080 Speaker 1: shouldn't be shouldn't have investors, product should be shut down 263 00:14:30,080 --> 00:14:33,080 Speaker 1: because they don't do what they were originally designed to do. 264 00:14:33,600 --> 00:14:35,760 Speaker 1: So let's talk a little bit about both of those things. 265 00:14:36,200 --> 00:14:40,240 Speaker 1: What are these products designed to do. Is it simply 266 00:14:41,040 --> 00:14:43,920 Speaker 1: we're going to capture a premium that your stocks and 267 00:14:43,960 --> 00:14:47,280 Speaker 1: bonds aren't and give you daily liquidly. Is that the 268 00:14:47,360 --> 00:14:53,000 Speaker 1: concept behind hedge fund replication et s, so hedge fund replications. 269 00:14:53,040 --> 00:14:56,360 Speaker 1: So I think one change is that people generally don't 270 00:14:56,360 --> 00:15:00,640 Speaker 1: think of hedge funds as a single massive strategy um 271 00:15:00,680 --> 00:15:02,560 Speaker 1: and just to go back to the definition of hedge funds, 272 00:15:02,560 --> 00:15:05,640 Speaker 1: I mean hedge funds, there are dozens and dozens of 273 00:15:05,680 --> 00:15:09,800 Speaker 1: different kinds of substrategies of hedge funds um. The the 274 00:15:10,040 --> 00:15:13,000 Speaker 1: the common theme in hedge funds, which which I think 275 00:15:13,080 --> 00:15:16,040 Speaker 1: is very important but but can be lost in some 276 00:15:16,160 --> 00:15:18,880 Speaker 1: of this, is that in general hedge funds are a 277 00:15:18,960 --> 00:15:21,680 Speaker 1: lot more flexible than mutual funds or et f so 278 00:15:21,680 --> 00:15:25,640 Speaker 1: they're equivalent. So a guy who was a you know, 279 00:15:25,760 --> 00:15:27,960 Speaker 1: invested primarily in tech stocks at the end of two 280 00:15:27,960 --> 00:15:31,360 Speaker 1: thousand nineteen might be heavily invested in emerging market stocks 281 00:15:31,360 --> 00:15:33,880 Speaker 1: today and he doesn't have allocators, you know, wondering why 282 00:15:33,920 --> 00:15:36,920 Speaker 1: he burst out of his his strategy bucket. And the 283 00:15:36,960 --> 00:15:39,920 Speaker 1: other thing of the hedge funds no style boxes. I mean, 284 00:15:39,960 --> 00:15:42,280 Speaker 1: the institutions have tried to put style boxes on it, 285 00:15:42,360 --> 00:15:45,000 Speaker 1: but which has actually been negative for the industry. But 286 00:15:45,880 --> 00:15:47,520 Speaker 1: but it's nothing like what you see in the mutual 287 00:15:47,520 --> 00:15:50,160 Speaker 1: fund space. And the other is that these guys generally 288 00:15:50,200 --> 00:15:54,160 Speaker 1: have their own money on the line. So I don't 289 00:15:54,160 --> 00:15:57,360 Speaker 1: know many mutual funds where you've got the mutual fund 290 00:15:57,400 --> 00:16:00,160 Speaker 1: manager as a billion dollars his own capital sitting alongside you. 291 00:16:01,000 --> 00:16:05,280 Speaker 1: And that enforces a particular intellectual honesty in it that 292 00:16:05,360 --> 00:16:08,200 Speaker 1: if they think, uh, if they've just made a killing 293 00:16:08,440 --> 00:16:12,440 Speaker 1: on you know, having owned Apple and Amazon over the 294 00:16:12,480 --> 00:16:16,080 Speaker 1: past five years and they're taking profits, it doesn't mean 295 00:16:16,080 --> 00:16:18,120 Speaker 1: that they have to turn around and go into Maderna 296 00:16:18,520 --> 00:16:21,720 Speaker 1: or Teslas they think those stocks are overpriced, Um, they can. 297 00:16:21,760 --> 00:16:24,600 Speaker 1: They can go to different areas and find cheaper opportunities 298 00:16:25,400 --> 00:16:29,320 Speaker 1: and so um. So you know, I think when people 299 00:16:29,360 --> 00:16:31,960 Speaker 1: are looking at these strategies and thinking about as a 300 00:16:32,120 --> 00:16:34,760 Speaker 1: portfolio perspective in the wealth management space, you start with 301 00:16:34,800 --> 00:16:38,400 Speaker 1: the idea that there are specific strategies equity long short, 302 00:16:38,640 --> 00:16:43,000 Speaker 1: you know, managed futures, um, uh, certain other strategies that 303 00:16:43,040 --> 00:16:46,160 Speaker 1: can be building blocks into portfolio, and you can look 304 00:16:46,200 --> 00:16:48,640 Speaker 1: at the very very long term returns of these strategies 305 00:16:49,200 --> 00:16:51,400 Speaker 1: put them into your asset allocation model and make a 306 00:16:51,400 --> 00:16:55,080 Speaker 1: determination as to how much diversification benefit they provide and 307 00:16:55,120 --> 00:16:57,600 Speaker 1: whether they should be in your portfolios. And so I 308 00:16:57,600 --> 00:16:59,960 Speaker 1: think I think when the liquid alternative space, their move 309 00:17:00,040 --> 00:17:04,880 Speaker 1: being away from some of these broad strategies that that 310 00:17:04,880 --> 00:17:10,159 Speaker 1: that cover the whole universe to strategy specific building blocks, 311 00:17:10,200 --> 00:17:13,240 Speaker 1: and that's what we really focused our time. So who 312 00:17:13,280 --> 00:17:16,560 Speaker 1: are the owners of these liquid alls? Who are the allocators? 313 00:17:16,640 --> 00:17:21,359 Speaker 1: Is it foundations? Institutional investors are a s. Who are 314 00:17:21,359 --> 00:17:23,919 Speaker 1: the buyers of these It's a good question. I have 315 00:17:23,960 --> 00:17:26,600 Speaker 1: to say, I don't know the granular data. I suspect 316 00:17:26,720 --> 00:17:29,600 Speaker 1: most of it is is ori as and wealth management 317 00:17:29,600 --> 00:17:34,879 Speaker 1: firms that institutions who particularly those who don't have liquidity constraints, 318 00:17:34,960 --> 00:17:38,600 Speaker 1: tend to like hedge actual hedge funds more than they 319 00:17:38,640 --> 00:17:41,200 Speaker 1: like liquid alternatives. I would say five years ago I 320 00:17:41,240 --> 00:17:44,560 Speaker 1: saw some consulting firms building liquid alts efforts, and that 321 00:17:44,600 --> 00:17:46,800 Speaker 1: seems to have somewhat died out. I guess there are 322 00:17:46,840 --> 00:17:49,159 Speaker 1: there are two big problems with liquid aults. The first 323 00:17:49,320 --> 00:17:52,480 Speaker 1: is that a lot of hedge fund strategies. When you 324 00:17:52,600 --> 00:17:56,320 Speaker 1: take a guy who's been earning eight percent per annum 325 00:17:56,560 --> 00:17:58,280 Speaker 1: in his hedge fund and you ask him to do 326 00:17:58,359 --> 00:18:01,440 Speaker 1: the same thing in a mutual and uh, you often 327 00:18:01,560 --> 00:18:04,239 Speaker 1: end up with three, four or five. So so you 328 00:18:04,280 --> 00:18:06,320 Speaker 1: lose a lot of performance on the top just based 329 00:18:06,359 --> 00:18:08,840 Speaker 1: on on the constraints. And that was the problem with 330 00:18:08,920 --> 00:18:12,760 Speaker 1: Fidelity its original investments is and this is something I 331 00:18:12,760 --> 00:18:14,520 Speaker 1: think we were one of the few people who realized 332 00:18:14,520 --> 00:18:17,200 Speaker 1: it pretty early on, is that they were losing four 333 00:18:17,240 --> 00:18:20,560 Speaker 1: to five basis points of pre few returns just by 334 00:18:20,640 --> 00:18:22,640 Speaker 1: asking these guys to do what they were doing within 335 00:18:22,680 --> 00:18:26,880 Speaker 1: a mutual fund constraint UM. So broadly across the industry, 336 00:18:27,080 --> 00:18:29,639 Speaker 1: Liquid Alts and willsher has good data on this, but 337 00:18:29,640 --> 00:18:32,520 Speaker 1: broadly across the industry, will Liquid also under performed by 338 00:18:32,560 --> 00:18:35,840 Speaker 1: twohundred basis points. And that doesn't mean hedge funds were 339 00:18:35,840 --> 00:18:37,600 Speaker 1: doing ten and these guys were doing eight. It means 340 00:18:37,680 --> 00:18:40,560 Speaker 1: hedge ones were doing five and these guys were doing three. UM. 341 00:18:41,320 --> 00:18:45,159 Speaker 1: And the other issue with single manager risk and you know, 342 00:18:45,240 --> 00:18:51,000 Speaker 1: the of the products are simply single manager funds that 343 00:18:51,040 --> 00:18:55,919 Speaker 1: have been poorted into into a mutual fund. And the 344 00:18:56,040 --> 00:18:59,639 Speaker 1: problem with that from a diversification perspective is that hedge 345 00:18:59,640 --> 00:19:04,080 Speaker 1: funds strategies like equity long short as a strategy can 346 00:19:04,119 --> 00:19:09,439 Speaker 1: provide or miniatutures as a strategy can provide valuable diversication benefits, 347 00:19:09,440 --> 00:19:13,360 Speaker 1: but x y Z manager within that space generally does not. 348 00:19:14,400 --> 00:19:17,040 Speaker 1: And and the analog that we use is that if 349 00:19:17,080 --> 00:19:19,399 Speaker 1: you know, if you like, many people today are saying 350 00:19:20,160 --> 00:19:25,359 Speaker 1: US markets has gotten very expensive relative to say, emerging markets, 351 00:19:25,359 --> 00:19:27,080 Speaker 1: and we want to move to emerging We want to 352 00:19:27,119 --> 00:19:30,760 Speaker 1: add exposure to emerging markets. You don't pick a stock 353 00:19:30,840 --> 00:19:33,240 Speaker 1: in emerging markets and call it a day. But that 354 00:19:33,320 --> 00:19:35,960 Speaker 1: whole idea of saying we like equity long short and 355 00:19:36,000 --> 00:19:39,159 Speaker 1: we're going to give it to Bob is a terrible, 356 00:19:39,280 --> 00:19:42,760 Speaker 1: terrible idea because Bob, like every other guy in the space, 357 00:19:42,800 --> 00:19:44,600 Speaker 1: no matter what kind of a terror he's been on, 358 00:19:45,119 --> 00:19:46,879 Speaker 1: he is going to blow up on you in the 359 00:19:46,880 --> 00:19:49,800 Speaker 1: next couple of years. Mean reversion is a cruel mistress 360 00:19:49,840 --> 00:19:53,840 Speaker 1: to say the least you mention managed futures as a 361 00:19:53,880 --> 00:19:56,919 Speaker 1: form of liquid alts. I have to confess I have 362 00:19:57,200 --> 00:20:01,240 Speaker 1: never seen the attraction to this. It feels like the 363 00:20:01,480 --> 00:20:04,120 Speaker 1: and I tend to think of this as the commodity traders, 364 00:20:04,119 --> 00:20:08,040 Speaker 1: even though that's not fair. The rock star commodity traders 365 00:20:08,720 --> 00:20:13,040 Speaker 1: tend to trade their own portfolios and everybody else tries 366 00:20:13,119 --> 00:20:18,760 Speaker 1: to raise outside capital. Convince me I'm completely wrong about that. Sure, 367 00:20:18,880 --> 00:20:22,760 Speaker 1: so you're not, I would say, Um, you're not at 368 00:20:22,800 --> 00:20:27,520 Speaker 1: all completely wrong. The there are two great benefits of 369 00:20:28,000 --> 00:20:32,280 Speaker 1: managed tutures in the context of a larger portfolio. And 370 00:20:32,359 --> 00:20:34,120 Speaker 1: let's take a step back and talk about what manner 371 00:20:34,200 --> 00:20:38,000 Speaker 1: tutures is, right, So manor tutres, it's called futures because 372 00:20:38,040 --> 00:20:40,840 Speaker 1: these guys go along and short futures contracts, and it's 373 00:20:40,880 --> 00:20:44,399 Speaker 1: managed because they're not doing it in a passive way. Um. So, really, 374 00:20:44,440 --> 00:20:47,480 Speaker 1: what it means if you walk onto uh, you know, 375 00:20:47,520 --> 00:20:50,360 Speaker 1: walk into the office of a man of tutres hedge fund, 376 00:20:50,400 --> 00:20:53,120 Speaker 1: You've got a bunch of guys with computers who are 377 00:20:53,160 --> 00:20:57,040 Speaker 1: trying to identify in general, trying to identify trends and 378 00:20:57,119 --> 00:20:59,960 Speaker 1: momentum among different markets. So if gold has been going up, 379 00:21:00,040 --> 00:21:03,040 Speaker 1: is it is it likely to continue going up? If 380 00:21:03,480 --> 00:21:06,520 Speaker 1: ten your treasury yields have been rising, should they be 381 00:21:06,600 --> 00:21:11,960 Speaker 1: shorting um the ten year treasury um? And then you know, 382 00:21:12,000 --> 00:21:14,000 Speaker 1: and then and then the art and the science of 383 00:21:14,040 --> 00:21:16,240 Speaker 1: it is figuring out which markets do you want to 384 00:21:16,280 --> 00:21:18,560 Speaker 1: be long and short? When do you rebalance, etcetera. So 385 00:21:18,600 --> 00:21:22,280 Speaker 1: that's where you get into the whole managed side of it. UM. Historically, 386 00:21:22,560 --> 00:21:26,960 Speaker 1: manitutors have had two very very powerful benefits relative to 387 00:21:27,760 --> 00:21:32,040 Speaker 1: UH for for a diverse fied portfolio, particularly of stocks 388 00:21:32,040 --> 00:21:34,879 Speaker 1: and bonds. The first is they tend to have zero 389 00:21:34,920 --> 00:21:39,000 Speaker 1: correlation to both over time UM and although I will 390 00:21:39,040 --> 00:21:41,600 Speaker 1: tell you that because they are long and short different 391 00:21:41,600 --> 00:21:43,720 Speaker 1: things at different times, the correlations will go up and 392 00:21:43,760 --> 00:21:46,399 Speaker 1: down over time. So it's not something like you're buying 393 00:21:47,080 --> 00:21:48,800 Speaker 1: I don't know, like a private debt instrument that you 394 00:21:48,800 --> 00:21:50,400 Speaker 1: don't mark to market. It does go up and down. 395 00:21:51,160 --> 00:21:53,440 Speaker 1: And the second is that they've tended to do very 396 00:21:53,480 --> 00:21:56,600 Speaker 1: well in the worst equity markets. So they were up 397 00:21:56,680 --> 00:22:00,960 Speaker 1: fifteen in two thousand and then continue to to do 398 00:22:01,080 --> 00:22:05,199 Speaker 1: well in in um UH during that bear market, and 399 00:22:05,240 --> 00:22:10,600 Speaker 1: then they were up in two thousand eight and then 400 00:22:10,640 --> 00:22:16,520 Speaker 1: did well in two thousand fourteen UM. So the and 401 00:22:16,640 --> 00:22:18,960 Speaker 1: that's great, right because you know, even if you have 402 00:22:19,040 --> 00:22:21,879 Speaker 1: a small FEP of two percent allocation to manage futures 403 00:22:21,960 --> 00:22:24,760 Speaker 1: in in your standing with a client in the beginning 404 00:22:24,760 --> 00:22:27,919 Speaker 1: of two thousand nine, and you have this you know, 405 00:22:28,160 --> 00:22:30,879 Speaker 1: small beacon of green in the sea of red, you 406 00:22:30,920 --> 00:22:35,320 Speaker 1: look like a hero. UM. The two issues with mannered futures, 407 00:22:35,359 --> 00:22:40,159 Speaker 1: which are very very real, is that first, managed tuture's 408 00:22:40,240 --> 00:22:44,560 Speaker 1: fees and expenses are still ridiculously high, and by that 409 00:22:44,680 --> 00:22:48,119 Speaker 1: I mean even in a big hitch fund product. But 410 00:22:48,200 --> 00:22:52,199 Speaker 1: at time eight dollar gets back to clients, it's been 411 00:22:52,240 --> 00:22:55,040 Speaker 1: after something like five basis points in fees and expenses. 412 00:22:56,080 --> 00:22:59,439 Speaker 1: And in the nineteen eighties and the early nineteen nineties, 413 00:22:59,600 --> 00:23:02,600 Speaker 1: when you know, these strategies were completely esoteric and nobody 414 00:23:02,680 --> 00:23:04,520 Speaker 1: knew how to do these things, this is one of 415 00:23:04,560 --> 00:23:08,200 Speaker 1: the most expensive areas in the in the hedge fund space, 416 00:23:09,119 --> 00:23:12,240 Speaker 1: I mean manager Bloomberg had an article that showed that 417 00:23:13,119 --> 00:23:17,040 Speaker 1: one fund was charging about ten for an um UH 418 00:23:17,119 --> 00:23:20,320 Speaker 1: and so fees have come down a lot, but not 419 00:23:20,359 --> 00:23:23,239 Speaker 1: nearly as much as they should have UM and so 420 00:23:23,280 --> 00:23:25,840 Speaker 1: as returns have come down as markets have become more efficient, 421 00:23:25,880 --> 00:23:28,520 Speaker 1: it means that basically, for the past five years, every 422 00:23:28,520 --> 00:23:30,440 Speaker 1: dollar these guys have made has gone to them and 423 00:23:30,480 --> 00:23:34,120 Speaker 1: their counterparties, not to clients UM. And then the second 424 00:23:34,320 --> 00:23:36,760 Speaker 1: is single manager risk. Right, So now you have an 425 00:23:36,800 --> 00:23:41,600 Speaker 1: area that's attractive but that on average has been earning 426 00:23:41,720 --> 00:23:44,879 Speaker 1: zero and you want to add to its space because 427 00:23:44,880 --> 00:23:47,520 Speaker 1: you believe in the long term diverstication benefits. What do 428 00:23:47,560 --> 00:23:49,879 Speaker 1: you do. You find the one guy who killed it 429 00:23:49,920 --> 00:23:53,480 Speaker 1: over the past two years. Right, And the problem in 430 00:23:53,520 --> 00:23:55,639 Speaker 1: the manage futures is the second problem is what we 431 00:23:55,720 --> 00:23:59,480 Speaker 1: call single manager risk. When a guy outperforms everybody else 432 00:23:59,640 --> 00:24:01,720 Speaker 1: I in our fifteen percent a year for two or 433 00:24:01,760 --> 00:24:05,159 Speaker 1: three years. It's luck, not skills that they happen to 434 00:24:05,160 --> 00:24:08,560 Speaker 1: be overweight treasuries in March, and they happen to be 435 00:24:08,600 --> 00:24:11,680 Speaker 1: long gold at the time the gold took off. And 436 00:24:11,800 --> 00:24:14,119 Speaker 1: so what happens again and again in this space is 437 00:24:14,160 --> 00:24:16,639 Speaker 1: that people say I want managed futures, I give it 438 00:24:16,680 --> 00:24:19,360 Speaker 1: to this guy, and then he blows up on me. 439 00:24:20,040 --> 00:24:23,040 Speaker 1: And you know, the poster child for this is a Qure, 440 00:24:23,119 --> 00:24:28,679 Speaker 1: which did something phenomenally positive for the UH managed futures 441 00:24:28,760 --> 00:24:31,120 Speaker 1: mutual fund space in two thousand ten when they launched 442 00:24:31,520 --> 00:24:34,400 Speaker 1: what was a at that point a remarkably low cost 443 00:24:34,400 --> 00:24:37,320 Speaker 1: product of a hundred and twenty one basis points um. 444 00:24:37,480 --> 00:24:39,359 Speaker 1: But they went through a good period and they became 445 00:24:39,359 --> 00:24:43,480 Speaker 1: the default allocation in everybody's portfolio. So you'd have guys 446 00:24:43,480 --> 00:24:46,720 Speaker 1: who would have a diversified portfolio and then five with 447 00:24:46,840 --> 00:24:50,720 Speaker 1: a q r UM for their managed Future sleeve, and 448 00:24:50,800 --> 00:24:54,000 Speaker 1: that fund went to fourteen and a half billion in assets. 449 00:24:54,600 --> 00:24:57,080 Speaker 1: And then like every managed sutures fund that's been on 450 00:24:57,080 --> 00:24:59,960 Speaker 1: a hot streak, it underperformed by over the next year 451 00:25:00,080 --> 00:25:05,720 Speaker 1: two and now it's lost its assets. So so our 452 00:25:05,760 --> 00:25:08,440 Speaker 1: approach to it was really, we've got to solve If 453 00:25:08,440 --> 00:25:11,360 Speaker 1: we want the two first benefits, you've got to solve 454 00:25:11,800 --> 00:25:14,520 Speaker 1: those two issues. And the best way that we found 455 00:25:14,520 --> 00:25:19,359 Speaker 1: to solve it is you replicate. So you basically imitation 456 00:25:19,440 --> 00:25:23,119 Speaker 1: is the greatest form of flattery. You replicate twenty of 457 00:25:23,160 --> 00:25:26,440 Speaker 1: the largest managators hedge funds, but you replicate what they're 458 00:25:26,440 --> 00:25:31,080 Speaker 1: doing the four fees, so if they're long gold, by 459 00:25:32,160 --> 00:25:37,720 Speaker 1: will go along gold. And but we don't have a 460 00:25:37,800 --> 00:25:40,200 Speaker 1: hundred basis points of treating costs. We don't have three 461 00:25:40,520 --> 00:25:44,159 Speaker 1: basis points and fees. So we get you back to 462 00:25:44,280 --> 00:25:47,399 Speaker 1: what these strategies can do before fees and and and 463 00:25:47,520 --> 00:25:52,440 Speaker 1: pass those diversification benefits back to clients. Last question on 464 00:25:52,480 --> 00:25:57,600 Speaker 1: this space, when you reference these sort of esoteric areas 465 00:25:58,200 --> 00:26:03,520 Speaker 1: the academics would have us eve they're really outperforming. Part 466 00:26:03,600 --> 00:26:06,000 Speaker 1: of it, as you mentioned, was luck. Part of it 467 00:26:06,200 --> 00:26:11,480 Speaker 1: is just inefficiencies in these lesser thinner markets, lesser traded 468 00:26:11,520 --> 00:26:16,959 Speaker 1: thinner markets that when everybody eventually piles into those inefficiencies, 469 00:26:17,000 --> 00:26:20,480 Speaker 1: eventually get arbitraged away. What what are your thoughts on 470 00:26:20,480 --> 00:26:24,239 Speaker 1: on some of the academic criticisms of this. So I 471 00:26:24,280 --> 00:26:29,399 Speaker 1: think there's a huge problem with academic finance in general. Um. 472 00:26:29,840 --> 00:26:33,000 Speaker 1: The first problem is that most academic finance guys are 473 00:26:33,040 --> 00:26:37,960 Speaker 1: also practitioners. So this whole notion that academic finances some 474 00:26:38,600 --> 00:26:43,800 Speaker 1: objective assessment of these markets, um uh is often clouded 475 00:26:43,840 --> 00:26:46,280 Speaker 1: by the fact that you know, these guys have another 476 00:26:46,280 --> 00:26:50,879 Speaker 1: paper where they're trying to sell you something. Um the um. 477 00:26:50,920 --> 00:26:54,520 Speaker 1: But but but this notion that markets get more efficient 478 00:26:54,560 --> 00:26:58,040 Speaker 1: over time is absolutely true. Um. And I think you know, 479 00:26:58,080 --> 00:27:02,159 Speaker 1: my criticism of the value factor is that, you know, 480 00:27:02,200 --> 00:27:08,320 Speaker 1: what Fauma identified in nineteen was that these cheap, beaten 481 00:27:08,440 --> 00:27:13,280 Speaker 1: up stocks, we're cheap and they were built to stay 482 00:27:13,320 --> 00:27:16,399 Speaker 1: that way. I mean, think think about what it was 483 00:27:16,480 --> 00:27:19,560 Speaker 1: like for Warren Buffett in the nineteen sixties to find 484 00:27:19,800 --> 00:27:24,119 Speaker 1: a stock like Berkshire Hathaway. He had to pick up 485 00:27:24,160 --> 00:27:27,040 Speaker 1: the phone, probably a rotary phone at that point, you know, 486 00:27:27,160 --> 00:27:31,160 Speaker 1: call information wherever this company was located, have them mail 487 00:27:32,520 --> 00:27:34,800 Speaker 1: annual reports to him. He gets them two months later, 488 00:27:34,880 --> 00:27:39,040 Speaker 1: he's calculating by hand the market cap. You know, he may. 489 00:27:39,200 --> 00:27:42,000 Speaker 1: I mean, it's just it's just the level of information 490 00:27:42,119 --> 00:27:45,200 Speaker 1: of just trying to get information on these companies was 491 00:27:45,200 --> 00:27:49,199 Speaker 1: was was incredibly difficult, and there was no glory in that. 492 00:27:49,560 --> 00:27:52,520 Speaker 1: You know, this wasn't uh An m and a banker 493 00:27:52,720 --> 00:27:55,360 Speaker 1: being you know, kind of showing up on the cover 494 00:27:55,440 --> 00:27:59,960 Speaker 1: of Forbes. These guys were poiling in basements, in his case, 495 00:28:00,000 --> 00:28:04,119 Speaker 1: in an attic. And so you know, now today you 496 00:28:04,160 --> 00:28:09,120 Speaker 1: can pull up carefully curate, curated financial information on every 497 00:28:09,119 --> 00:28:13,199 Speaker 1: publicly traded stock UM, you can screen them, you can 498 00:28:13,280 --> 00:28:16,359 Speaker 1: run analytics on it. It is the world has changed 499 00:28:16,359 --> 00:28:18,240 Speaker 1: and the world has become more efficient, and there are 500 00:28:18,440 --> 00:28:20,360 Speaker 1: you know, I think one of the things that I've 501 00:28:20,359 --> 00:28:21,680 Speaker 1: been asked to do was write a book on this 502 00:28:22,240 --> 00:28:26,440 Speaker 1: UM and just to use examples of kinds of things 503 00:28:26,440 --> 00:28:28,520 Speaker 1: that people are doing thirty years ago that if you 504 00:28:28,800 --> 00:28:31,840 Speaker 1: could go back thirty years ago, you would say, by everything, 505 00:28:32,200 --> 00:28:36,000 Speaker 1: it's like, forget about whether you're paying eight cents and 506 00:28:36,000 --> 00:28:39,520 Speaker 1: and farallon you know is paying seventy eight and some 507 00:28:39,640 --> 00:28:42,440 Speaker 1: other guy in Soros is, you know, is willing to 508 00:28:42,480 --> 00:28:46,840 Speaker 1: pay a D two just by everything because the world 509 00:28:46,840 --> 00:28:51,080 Speaker 1: has become much more difficult for active managers. Venture capitalist 510 00:28:51,360 --> 00:28:55,360 Speaker 1: Mark Andresen said something very similar. Go back and look 511 00:28:55,400 --> 00:28:59,000 Speaker 1: at at all the original investments they made in these 512 00:28:59,040 --> 00:29:01,960 Speaker 1: pre public companies. Would would it have mattered if they 513 00:29:01,960 --> 00:29:05,640 Speaker 1: paid twice as much for Facebook? Although admittedly there's a 514 00:29:05,680 --> 00:29:09,440 Speaker 1: touch of survivorship bias in that. Let's talk a little 515 00:29:09,440 --> 00:29:14,520 Speaker 1: bit about the approach dynamic beta takes. What is unique 516 00:29:14,520 --> 00:29:18,920 Speaker 1: about it. How do you guys go about replicating all 517 00:29:19,000 --> 00:29:22,640 Speaker 1: of those single manager firms. So what we do a 518 00:29:22,640 --> 00:29:26,320 Speaker 1: thing called hedge fund replications, and replication is a terrible 519 00:29:26,720 --> 00:29:29,240 Speaker 1: term because it's I think a lot of people here 520 00:29:29,240 --> 00:29:33,240 Speaker 1: and they think of mediocrity. But let me frame it 521 00:29:33,360 --> 00:29:38,120 Speaker 1: in a slightly different way. If the only way that 522 00:29:38,200 --> 00:29:41,600 Speaker 1: you today could invest in the five hundred stocks in 523 00:29:41,600 --> 00:29:45,200 Speaker 1: the S and P was by investing with active managers 524 00:29:45,240 --> 00:29:48,880 Speaker 1: who charged three hundred basis points, and someone came along 525 00:29:48,920 --> 00:29:55,360 Speaker 1: and said, we can directly access four to five hundred 526 00:29:55,400 --> 00:29:57,920 Speaker 1: of those stocks and we'll charge you a hundred basis 527 00:29:57,920 --> 00:30:02,000 Speaker 1: points for it, it would be a pretty clear decision 528 00:30:02,400 --> 00:30:05,400 Speaker 1: that the latter is not only likely to give you 529 00:30:05,840 --> 00:30:09,600 Speaker 1: the benefits of investing in the SMP five, but it's 530 00:30:09,600 --> 00:30:12,240 Speaker 1: probably gonna do a lot better than those active managers. 531 00:30:13,120 --> 00:30:17,160 Speaker 1: And so what hedge fund replication basically is is it's 532 00:30:17,320 --> 00:30:21,239 Speaker 1: using models to try to understand how hedge funds are 533 00:30:21,280 --> 00:30:27,360 Speaker 1: position today across equities, rates, currencies, commodities, and then copy 534 00:30:27,440 --> 00:30:31,600 Speaker 1: their asset allocation in a low cost form. And so 535 00:30:31,720 --> 00:30:33,880 Speaker 1: on our side, we really pioneered this idea. And by 536 00:30:34,080 --> 00:30:36,280 Speaker 1: the way that the whole concept of hedge fund replication 537 00:30:36,800 --> 00:30:39,360 Speaker 1: has been around since the mid two thousand's and it's 538 00:30:39,400 --> 00:30:42,400 Speaker 1: really the only area of the liquid old space that 539 00:30:42,480 --> 00:30:46,400 Speaker 1: has worked consistently and reliably. And it's not just us. 540 00:30:46,400 --> 00:30:47,800 Speaker 1: I mean, the way you would analyze this is you 541 00:30:47,800 --> 00:30:49,640 Speaker 1: would you would look at what we've done, but also 542 00:30:49,680 --> 00:30:52,200 Speaker 1: look at at other firms who've been in the space, 543 00:30:52,520 --> 00:30:56,400 Speaker 1: um and um, and it's it's But what sort of 544 00:30:56,400 --> 00:31:00,520 Speaker 1: remarkable about about this whole concept is that you don't 545 00:31:00,640 --> 00:31:02,720 Speaker 1: just do as well as hedge funds. You tend to 546 00:31:02,760 --> 00:31:05,840 Speaker 1: do better. And the reason you do better is entirely 547 00:31:05,920 --> 00:31:08,840 Speaker 1: through cutting out fees. Before the crisis in this space, 548 00:31:08,920 --> 00:31:11,280 Speaker 1: people generally thought if we can create something that does 549 00:31:11,440 --> 00:31:14,840 Speaker 1: just as well as this leading hedge fund index, but 550 00:31:15,000 --> 00:31:18,040 Speaker 1: offers daily liquidity and low fees. We're gonna be heroes, right, 551 00:31:18,120 --> 00:31:21,320 Speaker 1: this is gonna be We're gonna be the John Bogels 552 00:31:21,360 --> 00:31:25,760 Speaker 1: of of the alternative investment industry. And remarkably, they did 553 00:31:25,760 --> 00:31:29,000 Speaker 1: it right, and we did it and so but after 554 00:31:29,040 --> 00:31:30,920 Speaker 1: the crisis, we said, maybe we can even do better, 555 00:31:31,840 --> 00:31:35,680 Speaker 1: because when we're seeing this portfolio of hedge funds delivering 556 00:31:35,720 --> 00:31:38,600 Speaker 1: six percent per anum, maybe they're really doing ten be 557 00:31:38,640 --> 00:31:41,640 Speaker 1: four fees. And if we can replicate eight or nine 558 00:31:41,800 --> 00:31:45,240 Speaker 1: or even ten of the ten and charge less, it 559 00:31:45,280 --> 00:31:47,920 Speaker 1: won't just be like an index product, it will be 560 00:31:47,960 --> 00:31:51,000 Speaker 1: an index plus product and um. And so I think 561 00:31:51,040 --> 00:31:54,360 Speaker 1: I think we're now known as the only firm at 562 00:31:54,400 --> 00:31:57,240 Speaker 1: least that I'm aware of, that has been able to 563 00:31:57,280 --> 00:32:01,160 Speaker 1: consistently outperform portfolios of hedge funds, so similar to what 564 00:32:01,200 --> 00:32:03,480 Speaker 1: you would think of fund of funds would do, but 565 00:32:04,120 --> 00:32:08,680 Speaker 1: with better draw down characteristics, low fees and daily liquidity. 566 00:32:08,800 --> 00:32:12,360 Speaker 1: And so in two thousand eighteen, UM, a fast growing 567 00:32:13,080 --> 00:32:17,000 Speaker 1: French institutional investor called i AM Global Partner was doing 568 00:32:17,040 --> 00:32:20,200 Speaker 1: this multi year analysis of the liquid dolt space and said, 569 00:32:20,360 --> 00:32:22,440 Speaker 1: you know, we think these guys have the best mouse trap, 570 00:32:22,600 --> 00:32:25,640 Speaker 1: but they don't have any products that are available to 571 00:32:25,680 --> 00:32:28,080 Speaker 1: a broader range of investors. And that's when they partnered 572 00:32:28,160 --> 00:32:30,680 Speaker 1: up with us and then launched these two ETFs around 573 00:32:30,680 --> 00:32:34,880 Speaker 1: existing strategies. In two is the plan to eventually become 574 00:32:35,080 --> 00:32:38,400 Speaker 1: the vanguard of the alternative space. Are you guys going 575 00:32:38,480 --> 00:32:41,720 Speaker 1: to roll out more products or are you going to 576 00:32:41,840 --> 00:32:46,040 Speaker 1: stay focused on just a handful of products. We've been very, 577 00:32:46,120 --> 00:32:48,600 Speaker 1: very focused on what we do, and I expect us 578 00:32:48,600 --> 00:32:51,080 Speaker 1: to continue to be narrowly focused. Um, there are only 579 00:32:51,160 --> 00:32:54,600 Speaker 1: certain strategies for which this works incredibly well. In the 580 00:32:54,640 --> 00:32:58,240 Speaker 1: mannered future space. Uh, we've basically found a way to 581 00:32:58,360 --> 00:33:02,640 Speaker 1: outperform la large hedge funds by four basis points brandom 582 00:33:02,640 --> 00:33:05,840 Speaker 1: with less risk. So if you're deciding how do you 583 00:33:05,840 --> 00:33:08,400 Speaker 1: want to get exposure to manage features, this should be 584 00:33:08,400 --> 00:33:12,520 Speaker 1: the obvious choice. We run into all sorts of agency 585 00:33:12,520 --> 00:33:15,200 Speaker 1: and behavioral issues in that you know, for the same 586 00:33:15,200 --> 00:33:19,040 Speaker 1: reason that that that allocators fought paths of investing for years, 587 00:33:19,040 --> 00:33:21,440 Speaker 1: But that's that's changing and we'll we'll continue to change. 588 00:33:22,080 --> 00:33:23,960 Speaker 1: But you know, in our case, I think actually and 589 00:33:24,240 --> 00:33:28,880 Speaker 1: going back to think about seth uh. One of the 590 00:33:28,920 --> 00:33:31,280 Speaker 1: best things you can do and asset management is decide 591 00:33:31,360 --> 00:33:34,160 Speaker 1: what not to do. And so when you ask the 592 00:33:34,240 --> 00:33:37,440 Speaker 1: questions about the history of the liquid all space, every 593 00:33:37,480 --> 00:33:39,720 Speaker 1: time there was a new wave of products, we try 594 00:33:39,800 --> 00:33:42,400 Speaker 1: to look at it with an open mind and say, hey, 595 00:33:42,440 --> 00:33:45,040 Speaker 1: maybe this does something better than what we're doing, Maybe 596 00:33:45,080 --> 00:33:48,160 Speaker 1: we should do this instead. And every time we concluded 597 00:33:48,360 --> 00:33:50,480 Speaker 1: that these were products that we're being you know, that 598 00:33:50,560 --> 00:33:52,800 Speaker 1: look great on paper, that wouldn't work in practice. And 599 00:33:53,080 --> 00:33:54,760 Speaker 1: I think we've been write six out or six times 600 00:33:54,760 --> 00:33:58,480 Speaker 1: on that. So it's possible that we would introduce new products, 601 00:33:58,480 --> 00:34:01,120 Speaker 1: but I don't expect to do it broadly. Our goal 602 00:34:01,280 --> 00:34:06,040 Speaker 1: right now is that for anybody who's managing a diversified 603 00:34:06,040 --> 00:34:09,680 Speaker 1: portfolio who thinks that and we can help to make 604 00:34:09,719 --> 00:34:12,319 Speaker 1: the argument who thinks that hedge fund type strategies and 605 00:34:12,320 --> 00:34:14,640 Speaker 1: then in this mean I mean specifically equity long short 606 00:34:14,680 --> 00:34:19,160 Speaker 1: and managed futures um has a role in their portfolios. 607 00:34:19,880 --> 00:34:22,200 Speaker 1: The argument that we would make is that the way 608 00:34:22,239 --> 00:34:27,120 Speaker 1: that we do it is more predictable, more reliable, has 609 00:34:27,920 --> 00:34:31,480 Speaker 1: tends to outperform over time. And therefore, if you're thinking 610 00:34:31,480 --> 00:34:34,640 Speaker 1: in five or ten year increments in terms of how 611 00:34:34,680 --> 00:34:36,520 Speaker 1: your clients you know, are going to end up viewing 612 00:34:36,520 --> 00:34:38,520 Speaker 1: this portfolio and how you're going to be this portfolio. 613 00:34:39,160 --> 00:34:42,800 Speaker 1: We should become the default allocation. So let's talk about 614 00:34:42,840 --> 00:34:44,719 Speaker 1: one of the e t F in the space that 615 00:34:44,800 --> 00:34:49,560 Speaker 1: you guys manage, the long shorthead strategy to dB H 616 00:34:49,719 --> 00:34:55,040 Speaker 1: had a great year was up. Tell us how that 617 00:34:55,320 --> 00:34:59,320 Speaker 1: sort of e t F is constructed, what goes into 618 00:34:59,400 --> 00:35:02,480 Speaker 1: that and who do you think that's appropriate for. So 619 00:35:02,640 --> 00:35:05,640 Speaker 1: that's a strategy that we It's based on a strategy 620 00:35:05,680 --> 00:35:08,200 Speaker 1: we originally developed in two thousand twelve, which is that 621 00:35:08,280 --> 00:35:11,440 Speaker 1: we we look at forty of the largest equity long 622 00:35:11,440 --> 00:35:14,719 Speaker 1: shortage funds and diversified across a lot of different strategies 623 00:35:15,160 --> 00:35:21,040 Speaker 1: fundamental value, fundamental growth, UM, emerging markets, sector specialists, etcetera. 624 00:35:21,880 --> 00:35:25,440 Speaker 1: And we analyze how those guys have been making money 625 00:35:25,880 --> 00:35:29,520 Speaker 1: the four feets and our goal and what our research 626 00:35:29,560 --> 00:35:33,680 Speaker 1: has basically shown is that UM that the way these 627 00:35:33,719 --> 00:35:39,319 Speaker 1: guys primarily generate alpha over time is by getting is 628 00:35:39,320 --> 00:35:42,160 Speaker 1: through better asset allocation. And and this goes all the 629 00:35:42,160 --> 00:35:44,800 Speaker 1: way back to you know what I mentioned about about 630 00:35:44,840 --> 00:35:47,880 Speaker 1: Seth Klarman and this whole idea of get the area 631 00:35:48,000 --> 00:35:50,080 Speaker 1: right if you look at you know, for instance, over 632 00:35:50,120 --> 00:35:52,960 Speaker 1: the past twenty years in the equity long short space, 633 00:35:53,440 --> 00:35:57,440 Speaker 1: they preserved capital and made money in two thousands through 634 00:35:57,440 --> 00:36:00,360 Speaker 1: two thousand too, not because they picked a particular stock 635 00:36:00,440 --> 00:36:03,680 Speaker 1: and short at a particular stock, but they were very 636 00:36:03,719 --> 00:36:08,600 Speaker 1: long small cap value stocks and very short large cap 637 00:36:08,600 --> 00:36:11,200 Speaker 1: growth stocks at the time the markets fell apart, I mean. 638 00:36:11,320 --> 00:36:13,720 Speaker 1: But then by the mid two thousands they had pivoted 639 00:36:13,719 --> 00:36:16,840 Speaker 1: into emerging markets and they rode the brick wave and 640 00:36:16,880 --> 00:36:19,680 Speaker 1: that was on the long side entirely. And interestingly in 641 00:36:19,719 --> 00:36:22,719 Speaker 1: the two thousand tens, they did get the markets right. 642 00:36:23,000 --> 00:36:26,400 Speaker 1: They were went into US quality stocks in two thousand 643 00:36:26,400 --> 00:36:29,880 Speaker 1: twelve before those stocks took off, and then ultimately embraced 644 00:36:29,920 --> 00:36:32,480 Speaker 1: tech stocks towards the end of the decade. The problem 645 00:36:32,520 --> 00:36:35,360 Speaker 1: with the Ladder two was that they don't have that 646 00:36:35,440 --> 00:36:37,239 Speaker 1: much of an edge in terms of picking which tech 647 00:36:37,280 --> 00:36:41,200 Speaker 1: stock is going to take off. So when you compare 648 00:36:41,239 --> 00:36:44,880 Speaker 1: them to the NASDAC or or or particularly two, or 649 00:36:44,880 --> 00:36:46,600 Speaker 1: to the SMB five fight or, they don't look as good. 650 00:36:46,960 --> 00:36:49,359 Speaker 1: So what we try to do is basically figure out 651 00:36:49,600 --> 00:36:51,959 Speaker 1: you know, if you if you if you could look 652 00:36:52,040 --> 00:36:54,880 Speaker 1: through each of these guys portfolios today and see exactly 653 00:36:54,880 --> 00:36:57,920 Speaker 1: how much they were long and short every single stock. 654 00:36:58,640 --> 00:37:01,480 Speaker 1: How much could we group into the s, how much 655 00:37:01,520 --> 00:37:04,320 Speaker 1: can we group into small cap stocks, mid cap stocks, 656 00:37:04,440 --> 00:37:08,880 Speaker 1: emerging markets, you know, non us developed into those major buckets. 657 00:37:09,640 --> 00:37:12,680 Speaker 1: And if we get that right, then that ends up 658 00:37:12,719 --> 00:37:17,560 Speaker 1: explaining their preview returns. So how do you that information? 659 00:37:17,640 --> 00:37:21,279 Speaker 1: How could you tell what these private and not very 660 00:37:21,360 --> 00:37:26,480 Speaker 1: transparent funds are doing in order to replicate what the 661 00:37:26,600 --> 00:37:30,279 Speaker 1: broad industry is doing. So the way that you can 662 00:37:30,320 --> 00:37:35,400 Speaker 1: do it most reliably is actually by analyzing recent performance. 663 00:37:35,960 --> 00:37:39,160 Speaker 1: So looking at thirteen filings doesn't doesn't give you much 664 00:37:39,200 --> 00:37:42,239 Speaker 1: valuable information, believe it or not. Um Uh, you know, 665 00:37:42,320 --> 00:37:46,600 Speaker 1: even reading prime brokers reports isn't terribly helpful. The way 666 00:37:46,600 --> 00:37:49,239 Speaker 1: to do it most reliably is you simply run a 667 00:37:49,560 --> 00:37:53,359 Speaker 1: what's called the multi factor regression against recent performance. And 668 00:37:53,400 --> 00:37:56,200 Speaker 1: to be very clear, this does not work with a 669 00:37:56,320 --> 00:37:59,080 Speaker 1: particular hedge fund. Doesn't work terribly well with a particular 670 00:37:59,080 --> 00:38:03,160 Speaker 1: hedge fund because they will change what they do faster 671 00:38:03,360 --> 00:38:06,759 Speaker 1: than than than the models can pick up. But in 672 00:38:07,200 --> 00:38:09,680 Speaker 1: the case of a pool of forty of these guys, 673 00:38:09,920 --> 00:38:11,879 Speaker 1: um it's a little bit like do you ever read 674 00:38:12,360 --> 00:38:16,920 Speaker 1: Jim Sirwicki's The Wisdom of Crowds? So it's basically that idea. 675 00:38:17,280 --> 00:38:19,600 Speaker 1: It's that it's that you know, whether one guy is 676 00:38:19,680 --> 00:38:22,600 Speaker 1: long or short, a particular stock or a particular area 677 00:38:22,640 --> 00:38:25,840 Speaker 1: is much less important than than you know than these guys, 678 00:38:26,400 --> 00:38:29,160 Speaker 1: they're they're collective wisdom. You're looking more or less it 679 00:38:29,280 --> 00:38:33,000 Speaker 1: quarterly returns for the group and reverse engineering what they're 680 00:38:33,000 --> 00:38:37,279 Speaker 1: doing based on how broader asset classes are performing. What 681 00:38:37,360 --> 00:38:40,719 Speaker 1: would have gotten them to their quarterly numbers? Is that 682 00:38:41,320 --> 00:38:44,200 Speaker 1: ballpark exactly with the with the with the one correction 683 00:38:44,200 --> 00:38:46,520 Speaker 1: that it's monthly not quarterly. So you look at you 684 00:38:46,520 --> 00:38:48,520 Speaker 1: look at the past fourteen months of data. Is the 685 00:38:48,520 --> 00:38:51,200 Speaker 1: way that we do it. And so so if you 686 00:38:51,280 --> 00:38:54,040 Speaker 1: take a year like last year, um, you know, the 687 00:38:54,080 --> 00:38:58,440 Speaker 1: equity long short space overall was up seventeen and a half, 688 00:38:58,520 --> 00:39:01,200 Speaker 1: let's say, so, really a remarkably good year for hedge 689 00:39:01,200 --> 00:39:03,759 Speaker 1: funds in that equity long short guys were up as 690 00:39:03,840 --> 00:39:06,760 Speaker 1: much as the SMP but with you know a half 691 00:39:07,120 --> 00:39:10,160 Speaker 1: of the risk. But pre see they were up twenty 692 00:39:10,200 --> 00:39:13,680 Speaker 1: three or twenty four. So so our goal is can 693 00:39:13,680 --> 00:39:16,800 Speaker 1: we get all twenty three or twenty four only charge 694 00:39:17,360 --> 00:39:21,040 Speaker 1: basis points in an ETF and get all that x so. So, 695 00:39:21,040 --> 00:39:24,160 Speaker 1: so hedge funds overall maybe did five hundred basis points 696 00:39:24,160 --> 00:39:27,839 Speaker 1: of alpha. We get closer to a thousand. That's quite fascinating. 697 00:39:28,400 --> 00:39:31,920 Speaker 1: You have previously written that we are on the cusp 698 00:39:32,480 --> 00:39:36,839 Speaker 1: of a new golden age for hedge funds. Explain. So 699 00:39:36,920 --> 00:39:38,640 Speaker 1: the first thing that I would say is that is 700 00:39:38,640 --> 00:39:41,560 Speaker 1: that just in terms of my my my credibility in 701 00:39:41,640 --> 00:39:44,399 Speaker 1: terms of writing that article. I've been a very well 702 00:39:44,440 --> 00:39:47,800 Speaker 1: known critic of hedge funds in many circumstances. So this 703 00:39:48,000 --> 00:39:52,640 Speaker 1: is not somebody who is dogmatically pitching a party line. Uh. 704 00:39:52,719 --> 00:39:54,279 Speaker 1: In fact, my friends used to say, if my car 705 00:39:54,320 --> 00:39:57,120 Speaker 1: broke down in GreenEDGE or Mayfair, I should lock the 706 00:39:57,160 --> 00:40:00,239 Speaker 1: doors and call hots to rescue. Um. So the the 707 00:40:01,480 --> 00:40:04,200 Speaker 1: But but we saw something really interesting last year in 708 00:40:04,280 --> 00:40:08,200 Speaker 1: that about mid year in our portfolios we started to 709 00:40:08,280 --> 00:40:11,280 Speaker 1: see what ultimately became the value and E M pivot 710 00:40:12,360 --> 00:40:14,960 Speaker 1: and hedge funds got a lot of things right last year. 711 00:40:15,080 --> 00:40:17,440 Speaker 1: So the first thing they did right, so they and 712 00:40:17,440 --> 00:40:19,920 Speaker 1: by the way to understand positioning, they went in with 713 00:40:19,960 --> 00:40:24,279 Speaker 1: the tech bias um into two thousand twenty. Overall, some 714 00:40:24,280 --> 00:40:26,640 Speaker 1: some firms were you know, we're long airline stocks and 715 00:40:26,640 --> 00:40:29,640 Speaker 1: got run over. But but overall the industry had had 716 00:40:29,680 --> 00:40:31,440 Speaker 1: had somewhat of a tech bias, And it kind of 717 00:40:31,440 --> 00:40:34,080 Speaker 1: blows up the academic notion that hedge funds are always 718 00:40:34,080 --> 00:40:36,680 Speaker 1: long value, because in fact, what we've seen is that 719 00:40:36,880 --> 00:40:38,759 Speaker 1: what hedge funds do as much more dynamic and changes 720 00:40:38,760 --> 00:40:41,640 Speaker 1: over time. But um, but then they didn't. They didn't 721 00:40:41,680 --> 00:40:45,280 Speaker 1: cut risk in the draw down, and as we started 722 00:40:45,320 --> 00:40:49,120 Speaker 1: coming back uh in the second quarter, they bought into 723 00:40:49,120 --> 00:40:53,320 Speaker 1: the recovery. They bought into the availability of the vaccine 724 00:40:53,320 --> 00:40:57,560 Speaker 1: at some point, and and and the depth and of 725 00:40:57,719 --> 00:41:01,200 Speaker 1: the fiscal and monetary stimulus. So they were adding risk 726 00:41:01,600 --> 00:41:04,719 Speaker 1: as the market came back. And then really interestingly, we 727 00:41:04,760 --> 00:41:09,840 Speaker 1: started to see a pivot where tech stocks um. Whereas 728 00:41:09,840 --> 00:41:13,840 Speaker 1: they increased risk, they weren't adding more to tech stocks, 729 00:41:13,880 --> 00:41:16,320 Speaker 1: they were taking it and adding it to emerging markets 730 00:41:16,320 --> 00:41:19,480 Speaker 1: and small cap stocks and non US developed and so 731 00:41:19,640 --> 00:41:22,520 Speaker 1: a lot of quant value investors have been waiting for 732 00:41:22,560 --> 00:41:26,320 Speaker 1: this rotation into value to happen for years and and 733 00:41:26,320 --> 00:41:28,839 Speaker 1: and we think it happens in a slightly different way, 734 00:41:28,920 --> 00:41:31,080 Speaker 1: which is that if you're a hedge fund, you know, 735 00:41:31,120 --> 00:41:34,000 Speaker 1: as I mentioned, that's had a tech stock that's tripled 736 00:41:34,480 --> 00:41:36,480 Speaker 1: over the past three years and has just gone up 737 00:41:36,520 --> 00:41:40,560 Speaker 1: you know in the second quarter. A prudent investor will 738 00:41:40,600 --> 00:41:43,040 Speaker 1: take profits on it, and then where do you put it. 739 00:41:43,120 --> 00:41:44,960 Speaker 1: You don't have to go back into tech stocks. So 740 00:41:45,000 --> 00:41:49,040 Speaker 1: they started to look for cheaper areas. And so because 741 00:41:49,080 --> 00:41:51,440 Speaker 1: of that, I think what you've seen is that hedge 742 00:41:51,440 --> 00:41:54,319 Speaker 1: funds and this whole idea of asset allocation, the opportunity 743 00:41:54,400 --> 00:41:58,239 Speaker 1: set for them in the looks great because back in 744 00:41:58,320 --> 00:42:01,360 Speaker 1: two thousand sixteen or two and seventeen, people were starting 745 00:42:01,400 --> 00:42:04,760 Speaker 1: to say the US looks expensive relative to emerging markets. 746 00:42:04,760 --> 00:42:06,800 Speaker 1: And then the US took off and emerging markets didn't, 747 00:42:06,840 --> 00:42:09,520 Speaker 1: and then it was you know that small cap stocks 748 00:42:09,560 --> 00:42:12,640 Speaker 1: might look cheap, and you know, then you had more 749 00:42:12,760 --> 00:42:16,640 Speaker 1: years of of US large cap dominating. And so you know, 750 00:42:16,680 --> 00:42:20,280 Speaker 1: this this evaluation rubber band has been stretching and stretching, 751 00:42:20,960 --> 00:42:24,520 Speaker 1: and we've seen hedge funds pivoting into it. And so 752 00:42:24,640 --> 00:42:27,279 Speaker 1: when if you're the reason this is really important is 753 00:42:27,320 --> 00:42:31,520 Speaker 1: if you have a portfolio today, like most wealth managment 754 00:42:31,560 --> 00:42:35,600 Speaker 1: portfolio that is heavily biased towards US large cap stocks 755 00:42:35,800 --> 00:42:38,720 Speaker 1: and fixed income instruments, you have a really big problem. 756 00:42:38,840 --> 00:42:41,480 Speaker 1: I mean, US large cap stocks are historically expensive, and 757 00:42:41,520 --> 00:42:44,920 Speaker 1: fixed income instruments the expected returns are close to zero, 758 00:42:45,760 --> 00:42:49,880 Speaker 1: So so you know, how can you add something that 759 00:42:49,960 --> 00:42:52,840 Speaker 1: does better? And I think what we're seeing is the 760 00:42:52,840 --> 00:42:56,279 Speaker 1: opportunity set for hedge funds now because these valuation disparities 761 00:42:56,280 --> 00:42:59,080 Speaker 1: are so wide and they have the flexibility to really 762 00:42:59,120 --> 00:43:02,040 Speaker 1: take advantage of it. They have a clear role in 763 00:43:02,040 --> 00:43:04,759 Speaker 1: investors portfolios over the next ten years. So that's a 764 00:43:04,800 --> 00:43:09,560 Speaker 1: really interesting observation. The US has certainly been much pricier 765 00:43:09,719 --> 00:43:14,120 Speaker 1: than overseas and emerging markets for way over a decade, 766 00:43:14,239 --> 00:43:17,120 Speaker 1: and you could say the same is truth for growth 767 00:43:17,120 --> 00:43:20,840 Speaker 1: over value in large cap over small cap. What sort 768 00:43:20,880 --> 00:43:25,680 Speaker 1: of persistency might hedge funds have in these spaces. Do 769 00:43:25,800 --> 00:43:31,480 Speaker 1: you find generally they're willing to ride out that rotation 770 00:43:31,520 --> 00:43:33,920 Speaker 1: for a long period of time or or does it 771 00:43:34,520 --> 00:43:38,040 Speaker 1: you mentioned a decade? The reputation is a little bit 772 00:43:38,120 --> 00:43:40,480 Speaker 1: of the flavor of the month sort of thing, and 773 00:43:40,560 --> 00:43:43,160 Speaker 1: whatever next shiny object comes along is going to draw 774 00:43:43,200 --> 00:43:47,040 Speaker 1: their attention again. I I always have to say, is 775 00:43:47,080 --> 00:43:50,040 Speaker 1: that an exaggeration or does it not apply to everybody. 776 00:43:50,160 --> 00:43:52,960 Speaker 1: Is in an overstatement or is there some truth to that? 777 00:43:53,440 --> 00:43:55,799 Speaker 1: So the core of what hedge funds do is to 778 00:43:55,800 --> 00:44:00,120 Speaker 1: get these multi year trends right. The attention often is 779 00:44:00,160 --> 00:44:03,520 Speaker 1: two short term shifts. So, for instance, hedge funds are 780 00:44:03,600 --> 00:44:07,200 Speaker 1: have been short the US dollar. You know, the general 781 00:44:07,920 --> 00:44:11,520 Speaker 1: view among hedge funds is that um, other parts of 782 00:44:11,560 --> 00:44:14,640 Speaker 1: the world are recovering faster than the US. The FED 783 00:44:14,760 --> 00:44:18,279 Speaker 1: is likely to let the economy run on hot, which 784 00:44:18,360 --> 00:44:20,680 Speaker 1: could be more inflationary for the U S and other 785 00:44:20,719 --> 00:44:22,960 Speaker 1: parts of the world. But you know, what we've seen 786 00:44:23,000 --> 00:44:25,440 Speaker 1: over the past five years is is that that you know, 787 00:44:25,480 --> 00:44:28,560 Speaker 1: and that view leads them to want to own more 788 00:44:28,600 --> 00:44:34,960 Speaker 1: emerging markets over time. If something materially broke down that view, UM, 789 00:44:34,960 --> 00:44:37,320 Speaker 1: if the FED announced tomorrow that they were going to 790 00:44:37,400 --> 00:44:39,200 Speaker 1: hike rates, then you would then you would see a 791 00:44:39,200 --> 00:44:40,960 Speaker 1: shift and a change, and that's what you want hedge 792 00:44:40,960 --> 00:44:43,160 Speaker 1: funds to do. But you know, again, I think that 793 00:44:43,440 --> 00:44:46,120 Speaker 1: always the the the issue with looking at hedge funds 794 00:44:46,360 --> 00:44:50,000 Speaker 1: is is it's the difference between you know, the individual 795 00:44:50,120 --> 00:44:54,280 Speaker 1: data point, the anecdote that's being circulated versus what's happening 796 00:44:54,280 --> 00:44:57,800 Speaker 1: more broadly in the industry, and so I wouldn't expect 797 00:44:57,840 --> 00:45:00,520 Speaker 1: if hedge funds are long emerging mar because they're buying 798 00:45:00,560 --> 00:45:03,799 Speaker 1: emerging markets today. I wouldn't guarantee you that they would 799 00:45:03,800 --> 00:45:06,920 Speaker 1: be long in five years, but these tend to be 800 00:45:06,960 --> 00:45:09,919 Speaker 1: pretty stable and persistent. Um. But I think the other 801 00:45:10,040 --> 00:45:12,720 Speaker 1: thing that's that's you know, so when you think about that, 802 00:45:12,719 --> 00:45:15,520 Speaker 1: that grates with how a lot of people think about 803 00:45:15,560 --> 00:45:18,280 Speaker 1: hedge funds and that they want to hear something special 804 00:45:18,320 --> 00:45:20,920 Speaker 1: about this stock or that stock, or some particular trade 805 00:45:20,920 --> 00:45:24,600 Speaker 1: that nobody's thought about. But the competitive advantage of hedge 806 00:45:24,600 --> 00:45:26,520 Speaker 1: funds is that when they like a market and they 807 00:45:26,520 --> 00:45:29,879 Speaker 1: see an opportunity, they can go big. And so back 808 00:45:29,920 --> 00:45:32,560 Speaker 1: to that example that I used in the mid two 809 00:45:32,640 --> 00:45:34,880 Speaker 1: thousand's when I first started looking at this space and 810 00:45:34,920 --> 00:45:38,360 Speaker 1: whether this idea would work, it showed that hedge funds 811 00:45:38,400 --> 00:45:40,880 Speaker 1: on average had about a thirty five percent long position 812 00:45:40,880 --> 00:45:44,359 Speaker 1: and emerging markets. But you would never see you would 813 00:45:44,360 --> 00:45:46,759 Speaker 1: never walk into a wealth manager in the US who 814 00:45:46,800 --> 00:45:50,920 Speaker 1: likes or even a pension fund who is very optimistic 815 00:45:50,920 --> 00:45:53,280 Speaker 1: about emerging markets and see a thirty five percent emerging 816 00:45:53,280 --> 00:45:55,560 Speaker 1: markets position. You might see they if they love it, 817 00:45:55,600 --> 00:45:58,760 Speaker 1: they go from four to six. And so that flexibility 818 00:45:58,840 --> 00:46:03,000 Speaker 1: is very, very powerful over time, because you know, over 819 00:46:03,040 --> 00:46:05,520 Speaker 1: the period that I've described in the mid two thousand's, 820 00:46:05,640 --> 00:46:08,719 Speaker 1: emerging markets outperformed the SMP by thirty pc a year. 821 00:46:09,520 --> 00:46:13,640 Speaker 1: So acid allocation was giving hedge funds a thousand basis 822 00:46:13,640 --> 00:46:16,040 Speaker 1: points of alpha year. It didn't matter what you owned 823 00:46:16,040 --> 00:46:19,800 Speaker 1: an emerging markets, it's that you you picked the right area. 824 00:46:20,120 --> 00:46:22,120 Speaker 1: And so I think what we have over the next 825 00:46:22,160 --> 00:46:25,920 Speaker 1: decade again is, you know, is the easy money in 826 00:46:25,960 --> 00:46:28,520 Speaker 1: the SMP has been made. The easy money in the 827 00:46:28,600 --> 00:46:30,839 Speaker 1: nattack has been made and couldn't go on for two years. 828 00:46:30,880 --> 00:46:34,319 Speaker 1: Of course it could, but looking back ten years from now, 829 00:46:34,360 --> 00:46:37,760 Speaker 1: it is hard to see. I think it's statistically impossible 830 00:46:37,800 --> 00:46:41,279 Speaker 1: to see the SMP putting up another decade with annual returns. 831 00:46:41,800 --> 00:46:44,400 Speaker 1: It makes a lot of sense historically you should start 832 00:46:44,440 --> 00:46:49,200 Speaker 1: to see some mean reversion. You have referenced the second 833 00:46:49,239 --> 00:46:53,040 Speaker 1: holy grail of hedge funds. I always think of the 834 00:46:53,040 --> 00:46:56,680 Speaker 1: first holy grail as alpha. What's the second holy grail? 835 00:46:57,160 --> 00:46:58,920 Speaker 1: So let me let me first start with it with 836 00:46:58,960 --> 00:47:00,880 Speaker 1: the term alpha. So pete to use alpha in a 837 00:47:00,960 --> 00:47:03,600 Speaker 1: lot of different ways. Um, The interesting thing about going 838 00:47:03,600 --> 00:47:06,640 Speaker 1: back to the nines. Nobody talked in terms of alpha. 839 00:47:06,840 --> 00:47:10,040 Speaker 1: I mean alpha was a concept that was applied to 840 00:47:10,080 --> 00:47:13,840 Speaker 1: hedge funds by institutional allocators who are trying to justify 841 00:47:14,040 --> 00:47:19,080 Speaker 1: an allocation UM. And it is statistically problematic um because 842 00:47:19,080 --> 00:47:21,680 Speaker 1: it all depends on what you're comparing one return stream 843 00:47:21,719 --> 00:47:25,560 Speaker 1: to another UM. But but the basic idea of the 844 00:47:25,600 --> 00:47:28,200 Speaker 1: first holy grail of hedge funds back in the mid 845 00:47:28,200 --> 00:47:30,959 Speaker 1: two thousand's was what I described. Can you find Seth 846 00:47:31,040 --> 00:47:34,080 Speaker 1: Carman in two when he's just hired to build and 847 00:47:34,160 --> 00:47:36,640 Speaker 1: run Bell Post, you know, can you find George Soros 848 00:47:36,640 --> 00:47:39,400 Speaker 1: and Julian robertson the nineteen seventies, Can you find I 849 00:47:39,400 --> 00:47:42,120 Speaker 1: don't know, you know, even today Christiam Way when when 850 00:47:42,120 --> 00:47:47,200 Speaker 1: he launched Higher Global um but um but and and 851 00:47:47,280 --> 00:47:50,640 Speaker 1: that's what the business lives in breathes on that that 852 00:47:51,040 --> 00:47:54,359 Speaker 1: you know that if you if you try to identify 853 00:47:54,640 --> 00:47:57,080 Speaker 1: a guy today, he's going to continue to put up 854 00:47:57,200 --> 00:47:59,440 Speaker 1: or he's not going to continue to put up spectacular numbers, 855 00:47:59,520 --> 00:48:02,160 Speaker 1: or or he is, you know, so smart and so 856 00:48:02,200 --> 00:48:04,000 Speaker 1: capable that that's exactly what he's going to do over 857 00:48:04,000 --> 00:48:08,400 Speaker 1: the next ten years. The reality is that's nearly impossible. UM. 858 00:48:08,400 --> 00:48:10,480 Speaker 1: And if you could do it, you know, you should 859 00:48:10,480 --> 00:48:13,080 Speaker 1: give all your money to three guys, go home and 860 00:48:13,239 --> 00:48:16,040 Speaker 1: come back in ten years. UM. So the second only 861 00:48:16,080 --> 00:48:19,239 Speaker 1: grail was was we like the divers ocation benefits of 862 00:48:19,280 --> 00:48:23,279 Speaker 1: the broad of the industry broadly, but god, it's frustrating 863 00:48:23,280 --> 00:48:26,520 Speaker 1: to pay these high fees. You know. It's it's difficult 864 00:48:26,560 --> 00:48:29,000 Speaker 1: to invest in something that's a liquid where sometimes we 865 00:48:29,000 --> 00:48:32,160 Speaker 1: don't get our money back at exactly the wrong time. UM. 866 00:48:32,200 --> 00:48:36,560 Speaker 1: You know, these things blow up with frustrating frequency. So 867 00:48:36,640 --> 00:48:40,600 Speaker 1: if you could deliver the performance of hedge funds broadly 868 00:48:41,480 --> 00:48:46,800 Speaker 1: but with low fee's, daily liquidity, better downside characteristics, transparency, 869 00:48:46,880 --> 00:48:49,480 Speaker 1: that this should have a role in every single hedge 870 00:48:49,480 --> 00:48:53,239 Speaker 1: fund portfolio that you don't then necessarily have to just 871 00:48:53,360 --> 00:48:57,520 Speaker 1: pick ten or fifteen different liquid hedge funds. You could 872 00:48:57,520 --> 00:49:02,480 Speaker 1: have of your assets in this liquid, low cost vehicle 873 00:49:03,440 --> 00:49:05,839 Speaker 1: and and then pick and shoots how you how you 874 00:49:05,880 --> 00:49:08,719 Speaker 1: invest UM. So it makes it makes all of hedge 875 00:49:08,719 --> 00:49:12,880 Speaker 1: fund investing UM not just more efficient, but also it 876 00:49:12,920 --> 00:49:16,880 Speaker 1: tends to um. It actually tends to improve returns and 877 00:49:17,160 --> 00:49:20,200 Speaker 1: improve performance over time. And so you know, if this 878 00:49:20,239 --> 00:49:23,560 Speaker 1: had been embraced by institutional investors back in in in 879 00:49:23,640 --> 00:49:26,960 Speaker 1: two thousand's uh, in the sorry or in the two 880 00:49:26,960 --> 00:49:30,440 Speaker 1: thousand ten you know, they would have saved hundreds of 881 00:49:30,440 --> 00:49:33,480 Speaker 1: billions of dollars in fees over the next decade. Um. 882 00:49:33,560 --> 00:49:37,000 Speaker 1: But but the whole concept of it runs into the 883 00:49:37,040 --> 00:49:40,399 Speaker 1: same issues that the active versus passive debate has has 884 00:49:40,440 --> 00:49:42,480 Speaker 1: been dealing with in in you know, the rest of 885 00:49:42,520 --> 00:49:46,839 Speaker 1: the asset managed industry for thirty years. So you touch 886 00:49:46,960 --> 00:49:49,560 Speaker 1: upon two things that I have to ask before we 887 00:49:49,960 --> 00:49:57,000 Speaker 1: get to my favorite questions. One is that active passive debate. Again, 888 00:49:57,080 --> 00:49:59,880 Speaker 1: going back to the academics, you would think that as 889 00:50:00,080 --> 00:50:05,920 Speaker 1: more people become passive, that should create inefficiencies that make 890 00:50:05,960 --> 00:50:08,320 Speaker 1: it easier for the stock pickers to make it easier 891 00:50:08,360 --> 00:50:11,680 Speaker 1: for the active players. Do you think that is accurate? 892 00:50:12,200 --> 00:50:16,040 Speaker 1: And why have we seen so many active managers fail 893 00:50:16,760 --> 00:50:21,040 Speaker 1: to adjust to the money flows into passive. It's a 894 00:50:21,120 --> 00:50:26,239 Speaker 1: great question, right, does does passive make active more difficult? Um? 895 00:50:26,360 --> 00:50:28,400 Speaker 1: And I will tell you that I honestly do not 896 00:50:28,719 --> 00:50:31,239 Speaker 1: do not know the answer to it. In theory, you 897 00:50:31,280 --> 00:50:33,600 Speaker 1: are correct, right, I mean hedge funds should be out 898 00:50:33,640 --> 00:50:38,120 Speaker 1: there saying here's this stock, it's undervalued because it's not 899 00:50:38,200 --> 00:50:41,520 Speaker 1: included in this index, um, And all we have to 900 00:50:41,560 --> 00:50:43,840 Speaker 1: do is by it is by it today and wait, 901 00:50:44,200 --> 00:50:47,400 Speaker 1: and you know this big dumb elephant of an investor 902 00:50:47,480 --> 00:50:49,520 Speaker 1: is going to come up and buy of the assets 903 00:50:49,800 --> 00:50:52,839 Speaker 1: in one day of the float in one day. UM. 904 00:50:53,280 --> 00:50:55,080 Speaker 1: I think that you know, there are a lot of 905 00:50:55,360 --> 00:50:59,799 Speaker 1: um uh, there are a lot of myths about hedge 906 00:50:59,800 --> 00:51:03,040 Speaker 1: fund um that that have been perpetuated for a long 907 00:51:03,120 --> 00:51:06,720 Speaker 1: time because there I would say they're convenient myths. UM. 908 00:51:06,920 --> 00:51:09,160 Speaker 1: One that I've heard repeatedly that I've been asked about 909 00:51:09,239 --> 00:51:12,040 Speaker 1: is is, oh, hedge funds aren't making money today because 910 00:51:12,400 --> 00:51:16,239 Speaker 1: because the markets aren't volatile enough. Um. That I haven't 911 00:51:16,239 --> 00:51:18,719 Speaker 1: seen any good data that actually supports the contention that 912 00:51:18,880 --> 00:51:24,279 Speaker 1: a normally more volatile market is necessarily good for hedge funds. UM. 913 00:51:24,360 --> 00:51:26,400 Speaker 1: What I do think, though, you can say is that 914 00:51:26,400 --> 00:51:31,080 Speaker 1: when when markets trend aggressively over some period of time, 915 00:51:31,719 --> 00:51:34,840 Speaker 1: that hedge funds can be very good on at at 916 00:51:34,920 --> 00:51:37,200 Speaker 1: at jumping in and capitalizing on those trends, whether it's 917 00:51:37,239 --> 00:51:42,839 Speaker 1: managed futures or other areas. Um. So um you know. So, 918 00:51:42,880 --> 00:51:46,200 Speaker 1: I think I think passive is has has been a 919 00:51:46,200 --> 00:51:48,399 Speaker 1: little bit of a buggy man that people have put 920 00:51:48,480 --> 00:51:52,319 Speaker 1: up there. UM. But again, I, you know, I will 921 00:51:52,400 --> 00:51:55,600 Speaker 1: admit that I don't have a strong conclusion on this, 922 00:51:55,680 --> 00:51:57,840 Speaker 1: and maybe tomorrow somebody will show me something that that 923 00:51:58,000 --> 00:52:00,440 Speaker 1: is dispositive, but I haven't seen it. And early in 924 00:52:00,480 --> 00:52:04,160 Speaker 1: your career you were pretty heavily involved in the Comaliti 925 00:52:04,239 --> 00:52:08,520 Speaker 1: space and the Greater China region. Do you still track 926 00:52:08,680 --> 00:52:12,839 Speaker 1: China closely and do you have anything particular to say 927 00:52:12,840 --> 00:52:17,040 Speaker 1: about what's been going on over there lately? I don't, UM, 928 00:52:17,080 --> 00:52:19,520 Speaker 1: I would say, my so, my experience with China was 929 00:52:20,040 --> 00:52:24,000 Speaker 1: that around two thousand UM I had these these came 930 00:52:24,080 --> 00:52:26,239 Speaker 1: up with these two macro themes. One was that commodities 931 00:52:26,239 --> 00:52:28,360 Speaker 1: would become much more important than they had been in years, 932 00:52:28,440 --> 00:52:31,759 Speaker 1: and the other was that the Greater China region really 933 00:52:31,800 --> 00:52:35,680 Speaker 1: specifically China was going to become an important areavaset management 934 00:52:35,719 --> 00:52:37,480 Speaker 1: and so I you know, within a couple of years, 935 00:52:37,520 --> 00:52:40,840 Speaker 1: I'd started to hedge funds in completely different businesses UM 936 00:52:41,080 --> 00:52:45,919 Speaker 1: with guys to to to capitalize on both of those. Um. 937 00:52:46,080 --> 00:52:47,960 Speaker 1: I would say, the experience that we that that we 938 00:52:48,040 --> 00:52:54,440 Speaker 1: had with China was that, uh, capitalism in China is done, 939 00:52:54,560 --> 00:52:56,240 Speaker 1: or at least back then was done. With a different 940 00:52:56,239 --> 00:53:00,799 Speaker 1: set of rules um. And that that you know, the 941 00:53:00,880 --> 00:53:07,799 Speaker 1: idea of sporting UM, standards of of of conduct as 942 00:53:07,800 --> 00:53:13,160 Speaker 1: it relates to two Chinese business activities often meant that 943 00:53:14,120 --> 00:53:17,520 Speaker 1: the guy who had those standards was somehow the guy 944 00:53:17,600 --> 00:53:20,480 Speaker 1: who walked out of the room with no money. Um. 945 00:53:20,560 --> 00:53:23,320 Speaker 1: And and clearly there's a lot more government intervention in 946 00:53:23,360 --> 00:53:24,920 Speaker 1: the economy. I remember a guy at one of the 947 00:53:24,960 --> 00:53:27,840 Speaker 1: private equity firms who had investments in China basically saying 948 00:53:27,920 --> 00:53:30,640 Speaker 1: that you know, he was talking about how the government 949 00:53:30,680 --> 00:53:33,880 Speaker 1: would let them have two out of one out of 950 00:53:33,920 --> 00:53:35,680 Speaker 1: three or two out of three investments would make money, 951 00:53:35,680 --> 00:53:37,040 Speaker 1: and if the third one is making money, then have 952 00:53:37,120 --> 00:53:42,160 Speaker 1: to somehow give it back. Um. So um. I've spoken 953 00:53:42,160 --> 00:53:44,440 Speaker 1: to some people recently about China who have continued to 954 00:53:44,440 --> 00:53:47,960 Speaker 1: do business there and and those those concerns, concerns are 955 00:53:47,960 --> 00:53:49,680 Speaker 1: still out there, but at a granular level, I'm not 956 00:53:49,760 --> 00:53:52,640 Speaker 1: I'm not close to it today. Quite interesting. I know 957 00:53:52,719 --> 00:53:54,919 Speaker 1: I only have you for a limited amount of time, 958 00:53:55,000 --> 00:53:58,520 Speaker 1: so so let's jump to our favorite questions that we 959 00:53:58,600 --> 00:54:01,680 Speaker 1: ask all of our guests. Tell us what you're streaming 960 00:54:01,719 --> 00:54:06,680 Speaker 1: these days, what's keeping you entertained during a Lockdown either Netflix, 961 00:54:06,719 --> 00:54:10,239 Speaker 1: Amazon Prime podcast. What what are you keeping busy with? 962 00:54:10,560 --> 00:54:12,480 Speaker 1: So this is going to be the most depressingly boring 963 00:54:12,520 --> 00:54:16,759 Speaker 1: answer for you, I'm sure everyone, but um My dad 964 00:54:16,920 --> 00:54:19,439 Speaker 1: is eighty six years old and he's a lifelong opera fan, 965 00:54:20,120 --> 00:54:23,400 Speaker 1: and he lives in New York and last year, at 966 00:54:23,400 --> 00:54:25,440 Speaker 1: this time, he was going to the opera three times 967 00:54:25,440 --> 00:54:28,200 Speaker 1: a week and I was trying to join him there. 968 00:54:28,239 --> 00:54:30,560 Speaker 1: He obviously can't go to the opera this year. UM, 969 00:54:30,640 --> 00:54:34,000 Speaker 1: So I've been streaming operas on Amazon Prime to either 970 00:54:34,080 --> 00:54:36,640 Speaker 1: watch with him or or talk to him about. Um 971 00:54:36,719 --> 00:54:38,640 Speaker 1: I do get another things as well, but it's not 972 00:54:39,080 --> 00:54:41,920 Speaker 1: it hasn't been a priority for me. That's not boring. 973 00:54:42,160 --> 00:54:44,160 Speaker 1: Opera is kind of interesting. Even if you're not an 974 00:54:44,200 --> 00:54:47,960 Speaker 1: opera buff. It's still, you know, not running the television. 975 00:54:48,040 --> 00:54:49,360 Speaker 1: The poor guy used to take me when I was 976 00:54:49,440 --> 00:54:52,560 Speaker 1: young and and I would fall asleep. I'd have, you know, 977 00:54:52,640 --> 00:54:54,640 Speaker 1: a big lunch and then fall asleep every time. So 978 00:54:54,680 --> 00:54:58,799 Speaker 1: I think in my in my fifties, i'm I'm, I've 979 00:54:59,120 --> 00:55:01,160 Speaker 1: had sort of a renewed interest in it, and it's 980 00:55:01,200 --> 00:55:02,759 Speaker 1: it's wonderful to be able to share it with him. 981 00:55:03,080 --> 00:55:07,080 Speaker 1: Tell us about your early mentors who helped to shape 982 00:55:07,200 --> 00:55:11,920 Speaker 1: your career. So I think the earliest one is uh 983 00:55:12,239 --> 00:55:16,120 Speaker 1: is my late uncle Amo hotn Um. It's h o 984 00:55:16,280 --> 00:55:19,319 Speaker 1: u g h t o n um he Uh. He 985 00:55:19,400 --> 00:55:22,240 Speaker 1: was this really extraordinary guy who unfortunately passed away earlier 986 00:55:22,280 --> 00:55:25,880 Speaker 1: this year at age three. But he had run a 987 00:55:25,920 --> 00:55:30,680 Speaker 1: company called Corning Glass, which was a business that his 988 00:55:30,800 --> 00:55:33,920 Speaker 1: slash my family started back in the eighteen fifties. But 989 00:55:33,960 --> 00:55:36,920 Speaker 1: then he went to Washington and my first job was 990 00:55:36,960 --> 00:55:40,120 Speaker 1: working for him as he was a young congressman. And 991 00:55:40,160 --> 00:55:42,000 Speaker 1: you know, I hope people listening to this will go 992 00:55:42,080 --> 00:55:45,320 Speaker 1: read his obituary because if there was ever an example 993 00:55:45,360 --> 00:55:48,359 Speaker 1: of somebody that we need in Washington today, it's him. Uh. 994 00:55:48,400 --> 00:55:50,719 Speaker 1: He went to Washington, he served as a congressman, He 995 00:55:50,800 --> 00:55:53,959 Speaker 1: tried to be bi partisan, he was friends with people 996 00:55:54,040 --> 00:55:56,840 Speaker 1: across the aisle. Um. He really I think set the 997 00:55:56,880 --> 00:56:00,400 Speaker 1: standard um and and he I think just taught me 998 00:56:01,480 --> 00:56:06,359 Speaker 1: ultimately just a level of decency in business. Um Uh. 999 00:56:06,400 --> 00:56:10,320 Speaker 1: You know, ultimately you are responsible for for for conduct 1000 00:56:10,320 --> 00:56:13,400 Speaker 1: and it's not always about just making money. Um. And 1001 00:56:13,440 --> 00:56:14,840 Speaker 1: I think you know, I think another guy is is 1002 00:56:14,920 --> 00:56:18,560 Speaker 1: Jim Wolfinson, who was when I was gave me my 1003 00:56:18,600 --> 00:56:21,120 Speaker 1: first job as an m and a investment banker, and 1004 00:56:21,120 --> 00:56:22,839 Speaker 1: then he later went on to run the World Bank. 1005 00:56:23,680 --> 00:56:25,439 Speaker 1: But he was just he was just an extraordinary guy. 1006 00:56:25,480 --> 00:56:28,600 Speaker 1: And in his you know, when I knew him back then, 1007 00:56:28,920 --> 00:56:33,319 Speaker 1: he just had this um, this energy in terms of 1008 00:56:33,360 --> 00:56:35,440 Speaker 1: wanting to learn. He picked up the cello when he 1009 00:56:35,480 --> 00:56:39,160 Speaker 1: was forty or something and was performing with Yo Yo 1010 00:56:39,200 --> 00:56:44,080 Speaker 1: ma um within within ten years. Just just just extraordinary, 1011 00:56:44,120 --> 00:56:46,600 Speaker 1: And I think there was something about he had. He 1012 00:56:46,640 --> 00:56:52,360 Speaker 1: had almost a Warren Buffett like um enthusiasm for things. UM. 1013 00:56:52,520 --> 00:56:56,080 Speaker 1: I had the pleasure of actually visiting with Buffett in 1014 00:56:56,640 --> 00:56:59,319 Speaker 1: two thousand sixteen on on election day, believe it or not. 1015 00:57:00,080 --> 00:57:03,759 Speaker 1: We were talking about value investing and seth and and 1016 00:57:03,760 --> 00:57:05,799 Speaker 1: and all these things, and you know, and the guy, 1017 00:57:06,000 --> 00:57:08,319 Speaker 1: at whatever age he was, was just still bouncing off 1018 00:57:08,320 --> 00:57:10,320 Speaker 1: his share with enthusiasm of talking about things. And I 1019 00:57:10,320 --> 00:57:14,960 Speaker 1: think there's something really inspiring about that. UM. And then 1020 00:57:15,000 --> 00:57:16,479 Speaker 1: I think, you know, I think the one who's who's 1021 00:57:16,480 --> 00:57:18,000 Speaker 1: not an early mentor, but I think one of the 1022 00:57:18,040 --> 00:57:20,440 Speaker 1: people I do admire at most in the industry today 1023 00:57:20,960 --> 00:57:22,760 Speaker 1: or you know, over the past couple of decades is 1024 00:57:22,800 --> 00:57:26,880 Speaker 1: John Bogel, because he was right. You know, he was right, 1025 00:57:26,960 --> 00:57:29,240 Speaker 1: and he stuck to his guns in the face of 1026 00:57:29,320 --> 00:57:33,720 Speaker 1: withering criticism and gale force hat wins and um, you know, 1027 00:57:33,760 --> 00:57:35,720 Speaker 1: I think I was as I was thinking about this, 1028 00:57:35,920 --> 00:57:38,160 Speaker 1: I wanted to see if I could there are there 1029 00:57:38,160 --> 00:57:40,160 Speaker 1: are two quotes that I thought, I is it okay 1030 00:57:40,160 --> 00:57:41,480 Speaker 1: with you if I if I share two quotes, but 1031 00:57:41,560 --> 00:57:44,000 Speaker 1: I think are just sort of fascinating, really active in passivate. 1032 00:57:44,680 --> 00:57:46,960 Speaker 1: So if you so. John Bogel, part of what he 1033 00:57:46,960 --> 00:57:49,720 Speaker 1: was influenced by was was Nobel lawyer at Paul Samuelson's 1034 00:57:49,760 --> 00:57:52,560 Speaker 1: whole idea of index funds and investing in the market. 1035 00:57:53,480 --> 00:57:55,760 Speaker 1: And what Paul Samuelson said about John Bogel in the 1036 00:57:55,800 --> 00:58:00,120 Speaker 1: first index fund was quote this Vogel invention along with 1037 00:58:00,160 --> 00:58:03,720 Speaker 1: the invention of the wheel, the alphabet Gudenberg printing right, 1038 00:58:03,800 --> 00:58:07,840 Speaker 1: And so it was basically, look how extraordinary this index 1039 00:58:07,840 --> 00:58:12,200 Speaker 1: fund is. And I remember in the I think because 1040 00:58:12,280 --> 00:58:14,680 Speaker 1: the late nine nineties early two thousand's, one of the 1041 00:58:14,760 --> 00:58:19,600 Speaker 1: luminaries of the LBO industry was had this great quote 1042 00:58:19,600 --> 00:58:23,840 Speaker 1: which said, after the wheel, God's greatest invention was to 1043 00:58:23,920 --> 00:58:27,640 Speaker 1: carry and that to me, those two quotes summarized to 1044 00:58:27,720 --> 00:58:30,480 Speaker 1: be the whole active and passive debate. Is the role 1045 00:58:30,640 --> 00:58:35,120 Speaker 1: of asset managers to put their clients first and try 1046 00:58:35,160 --> 00:58:38,240 Speaker 1: to get as much money as they can reasonably get 1047 00:58:38,280 --> 00:58:42,640 Speaker 1: back to their investors, or is it to maximize the 1048 00:58:42,640 --> 00:58:46,800 Speaker 1: profits of an asset management industry? And uh uh, you 1049 00:58:46,840 --> 00:58:49,680 Speaker 1: know I've gost fourty years, I've cast my lot with 1050 00:58:49,680 --> 00:58:53,040 Speaker 1: with Bogel. That's funny. You know you referenced the Financial 1051 00:58:53,080 --> 00:58:57,960 Speaker 1: Times earlier. They were the first ones who had the 1052 00:58:58,080 --> 00:59:02,600 Speaker 1: quote out that a hedge funds is a system by 1053 00:59:02,640 --> 00:59:07,360 Speaker 1: which a savvy manager transfers wealth from naive investors to himself. 1054 00:59:07,920 --> 00:59:13,040 Speaker 1: And I certainly think Bogel understood that, as did the 1055 00:59:13,080 --> 00:59:16,880 Speaker 1: person who was talking about the carry. Let's go to 1056 00:59:16,920 --> 00:59:21,000 Speaker 1: everybody's favorite question. Tell us about what you're reading these days? 1057 00:59:21,160 --> 00:59:24,760 Speaker 1: Are what are some of your favorite books? So? Um? So, 1058 00:59:24,840 --> 00:59:27,520 Speaker 1: my my favorite books keep changing. UM. I go through 1059 00:59:27,520 --> 00:59:29,880 Speaker 1: phases where I got kind of obsessed with a particular 1060 00:59:29,920 --> 00:59:33,560 Speaker 1: topic and then kind of move on. UM. The one 1061 00:59:33,640 --> 00:59:36,160 Speaker 1: one book that I keep going back to um and 1062 00:59:36,280 --> 00:59:38,720 Speaker 1: it has a lot to do with the hedge fund industry, 1063 00:59:38,760 --> 00:59:41,040 Speaker 1: although it has nothing to do with the hedge fund industry, 1064 00:59:41,080 --> 00:59:42,720 Speaker 1: which is a book that believe it or not was 1065 00:59:42,760 --> 00:59:45,360 Speaker 1: written in nineteen sixty two by again, I'm Thomas Kotten, 1066 00:59:45,840 --> 00:59:49,440 Speaker 1: and it's called the Structure of Scientific Revolutions. And what 1067 00:59:49,640 --> 00:59:55,240 Speaker 1: he basically identified was that, um, that you know that 1068 00:59:55,240 --> 00:59:59,160 Speaker 1: that that progress, in his case, scientific progress doesn't just 1069 00:59:59,360 --> 01:00:02,600 Speaker 1: happen in the sort of gradual way that most people 1070 01:00:02,720 --> 01:00:06,600 Speaker 1: who have been you have an existing paradigm, and most 1071 01:00:06,640 --> 01:00:09,240 Speaker 1: people who have been been been brought up in that paradigm, 1072 01:00:09,240 --> 01:00:11,040 Speaker 1: They've been trained in it. They want to believe in 1073 01:00:11,080 --> 01:00:14,560 Speaker 1: the paradigm. The self selected into the paradigm, and they 1074 01:00:14,600 --> 01:00:17,640 Speaker 1: will not abandon the paradigm until there was something new 1075 01:00:17,920 --> 01:00:20,520 Speaker 1: that has established that they can safely hop over to, 1076 01:00:21,320 --> 01:00:23,720 Speaker 1: and that's where they had fund industry is today. So 1077 01:00:23,760 --> 01:00:25,840 Speaker 1: I go back and I keep reading this because because 1078 01:00:25,880 --> 01:00:29,560 Speaker 1: every year that you know, I still face these these 1079 01:00:29,560 --> 01:00:33,320 Speaker 1: headwinds in the industry. Um uh. But but we see 1080 01:00:33,360 --> 01:00:35,640 Speaker 1: them abating and we see more and more people buying 1081 01:00:35,680 --> 01:00:37,000 Speaker 1: into it. But I keep going back and reading it 1082 01:00:37,000 --> 01:00:38,320 Speaker 1: because I want to make sure that I'm not, you know, 1083 01:00:38,360 --> 01:00:41,800 Speaker 1: completely insane. Um. And then the other thing I did also, 1084 01:00:41,880 --> 01:00:43,480 Speaker 1: and I would encourage people to go back and read 1085 01:00:43,520 --> 01:00:48,440 Speaker 1: books they read twenty years ago, particularly about business, because 1086 01:00:48,480 --> 01:00:52,720 Speaker 1: you see what a different world it was. And I 1087 01:00:52,840 --> 01:00:55,000 Speaker 1: recently reread so I do have a copy of Staff's 1088 01:00:55,000 --> 01:00:58,440 Speaker 1: Margin of Safety that he gave me when I joined UM. 1089 01:00:58,520 --> 01:01:01,760 Speaker 1: And and you know, when you hear what he was 1090 01:01:01,840 --> 01:01:05,120 Speaker 1: writing about UM and the kinds of things, the kind 1091 01:01:05,160 --> 01:01:08,720 Speaker 1: of opportunities that he uses examples, it is so clear 1092 01:01:09,400 --> 01:01:12,720 Speaker 1: that no hedge fund with any meaningful assets could do 1093 01:01:12,720 --> 01:01:15,760 Speaker 1: any of those things today. And if an opportunity like 1094 01:01:15,840 --> 01:01:19,600 Speaker 1: that came about, you know, it would be seventy sophisticated 1095 01:01:19,640 --> 01:01:25,080 Speaker 1: hedge funds competing for for for each trade opportunity, each 1096 01:01:25,120 --> 01:01:28,680 Speaker 1: investment opportunity. UM. So I do think that that. You know, 1097 01:01:28,680 --> 01:01:31,800 Speaker 1: there's another quote that I love. Um My, my great 1098 01:01:31,800 --> 01:01:33,640 Speaker 1: grandfather was very good friends with this guy named George 1099 01:01:33,680 --> 01:01:38,000 Speaker 1: Santayana who famously said those who forget history are doomed 1100 01:01:38,040 --> 01:01:41,240 Speaker 1: to repeat it. And and you know, I think, in 1101 01:01:41,280 --> 01:01:44,280 Speaker 1: the case of people who are in the asset management industry, 1102 01:01:44,560 --> 01:01:47,400 Speaker 1: five years ago is not history. Three years ago is 1103 01:01:47,440 --> 01:01:50,680 Speaker 1: not history. If you want to understand why quant based 1104 01:01:50,760 --> 01:01:54,160 Speaker 1: investment strategies are disappointing you today, you've got to go 1105 01:01:54,160 --> 01:01:56,600 Speaker 1: back and look at the nine nineties. You know and 1106 01:01:56,680 --> 01:01:58,560 Speaker 1: even better. Yet look at what they were saying in 1107 01:01:58,520 --> 01:02:02,160 Speaker 1: the nineties about the nineteen of these and um, and 1108 01:02:02,200 --> 01:02:05,120 Speaker 1: there's not enough of that the industry. Yeah, Ray Dalio 1109 01:02:05,240 --> 01:02:08,320 Speaker 1: has been a big His new book is all about that. 1110 01:02:08,760 --> 01:02:12,400 Speaker 1: Unprecedented doesn't mean it's never occurred. It's just never occurred 1111 01:02:12,400 --> 01:02:14,960 Speaker 1: in your lifetime. And if you go back through history, 1112 01:02:15,120 --> 01:02:17,720 Speaker 1: most of the things that seem to surprise us have 1113 01:02:17,880 --> 01:02:22,640 Speaker 1: happened time and time again after everybody forgets about the 1114 01:02:22,920 --> 01:02:26,760 Speaker 1: previous time. Absolutely, I mean, you know, because Mark Twain 1115 01:02:26,840 --> 01:02:29,880 Speaker 1: said history doesn't repeat itself. It at rhymes. Um. I 1116 01:02:29,880 --> 01:02:32,400 Speaker 1: think you can often find examples and sometimes and sometimes 1117 01:02:32,440 --> 01:02:34,600 Speaker 1: they're alarming examples. And if you look at the political 1118 01:02:34,640 --> 01:02:39,880 Speaker 1: situation today, you can point to very alarming, deserving examples 1119 01:02:40,000 --> 01:02:43,960 Speaker 1: where you had, you not established democracies, but democracies that 1120 01:02:44,000 --> 01:02:47,560 Speaker 1: were under threat in some way. And you can see 1121 01:02:47,600 --> 01:02:50,920 Speaker 1: the same kinds of you know, politicized debate around it. 1122 01:02:51,040 --> 01:02:54,280 Speaker 1: And um uh you know, I think it would do 1123 01:02:54,480 --> 01:02:58,720 Speaker 1: us a lot of good too, uh, focus on on 1124 01:02:58,720 --> 01:03:01,480 Speaker 1: on historical precedents and think about what they mean to do. 1125 01:03:02,440 --> 01:03:04,760 Speaker 1: Let's talk about the sort of advice you might give 1126 01:03:04,800 --> 01:03:08,760 Speaker 1: to a recent college grad who was interested in either 1127 01:03:09,480 --> 01:03:12,560 Speaker 1: hedge funds or liquid alts. What what sort of career 1128 01:03:12,560 --> 01:03:15,320 Speaker 1: advice would you give them? So I think the the 1129 01:03:15,760 --> 01:03:21,120 Speaker 1: I guess I would start with, um uh, the statement 1130 01:03:21,160 --> 01:03:23,480 Speaker 1: that you want to find an area of broadly that's 1131 01:03:23,520 --> 01:03:26,680 Speaker 1: likely to grow over the next twenty years. UM. And 1132 01:03:26,960 --> 01:03:31,400 Speaker 1: that probably has something to do with technology. UM. So. 1133 01:03:31,520 --> 01:03:32,720 Speaker 1: I mean, you know, one of the things I think 1134 01:03:32,800 --> 01:03:37,520 Speaker 1: is so incredibly sad about the coronavirus crisis is that 1135 01:03:37,560 --> 01:03:41,280 Speaker 1: you've had people whose lives were built around retail businesses 1136 01:03:41,440 --> 01:03:45,480 Speaker 1: that were built around um, movie theater chains that were 1137 01:03:45,520 --> 01:03:48,560 Speaker 1: built around things that are probably never coming back in 1138 01:03:49,040 --> 01:03:51,440 Speaker 1: the same way that they were twenty or thirty years 1139 01:03:51,480 --> 01:03:53,320 Speaker 1: ago when they made that decision. So maybe this is 1140 01:03:53,360 --> 01:03:56,440 Speaker 1: kind of a shadow of you know, Seth's original thing 1141 01:03:56,480 --> 01:03:58,640 Speaker 1: that find the right area. So if you're going to 1142 01:03:58,680 --> 01:04:01,600 Speaker 1: the active management this street, have conversations with people about 1143 01:04:01,640 --> 01:04:04,520 Speaker 1: what do they expect to be big and new, and 1144 01:04:04,560 --> 01:04:06,480 Speaker 1: maybe that's crypto. You know, I don't I'm not a 1145 01:04:07,680 --> 01:04:10,200 Speaker 1: I don't know an awful lot about crypto, but but 1146 01:04:10,440 --> 01:04:12,280 Speaker 1: I think you can point to it and say, crypto 1147 01:04:12,320 --> 01:04:14,120 Speaker 1: in twenty years or ten years is going to be 1148 01:04:14,360 --> 01:04:18,320 Speaker 1: bigger in some way, shape or form. Interestingly, the and 1149 01:04:18,320 --> 01:04:19,840 Speaker 1: I said, the only way you're gonna be able to 1150 01:04:19,880 --> 01:04:21,320 Speaker 1: figure that out is by doing a day to day 1151 01:04:22,280 --> 01:04:24,880 Speaker 1: One of the most interesting pieces of business advice I 1152 01:04:24,920 --> 01:04:30,200 Speaker 1: got was was ironically from from Mark Cuban in twenty 1153 01:04:30,240 --> 01:04:33,600 Speaker 1: two thousand one or two thousand two, UM, when I 1154 01:04:33,600 --> 01:04:36,120 Speaker 1: met with him and we're talking about the future of 1155 01:04:36,800 --> 01:04:38,160 Speaker 1: UH what. I said, what you know, how are you 1156 01:04:38,200 --> 01:04:39,880 Speaker 1: investing your money today? And he said that he was 1157 01:04:39,880 --> 01:04:42,720 Speaker 1: gonna willing to spend the hundred million dollars is money 1158 01:04:42,760 --> 01:04:46,240 Speaker 1: to invest in high definition television. And I asked him 1159 01:04:46,280 --> 01:04:48,160 Speaker 1: what that meant, and he said, I have no idea, 1160 01:04:48,640 --> 01:04:51,360 Speaker 1: I said. He said. It could be producing, it could 1161 01:04:51,400 --> 01:04:54,160 Speaker 1: be better pipes into the homes, it could be all 1162 01:04:54,200 --> 01:04:55,760 Speaker 1: the different things that But what I can tell you 1163 01:04:55,800 --> 01:04:58,360 Speaker 1: with certainty is that ten years from now, people are 1164 01:04:58,400 --> 01:05:02,840 Speaker 1: gonna want much better quality than the grainy TV that 1165 01:05:02,920 --> 01:05:06,680 Speaker 1: they have today. And and the only way that I'm 1166 01:05:06,680 --> 01:05:09,200 Speaker 1: going to know where the real opportunities are is by 1167 01:05:09,240 --> 01:05:12,040 Speaker 1: by doing it every day. It's not an academic exercise, 1168 01:05:12,760 --> 01:05:14,760 Speaker 1: and so I think when people are going into it, 1169 01:05:14,840 --> 01:05:17,840 Speaker 1: they should have that that that view of trying to 1170 01:05:17,880 --> 01:05:20,040 Speaker 1: think about what's going on around them and how it's changing, 1171 01:05:20,120 --> 01:05:22,960 Speaker 1: because if they're entrepreneurial, that's where they're going to see 1172 01:05:22,960 --> 01:05:25,760 Speaker 1: the opportunities. If not by writing a business plan, you know, 1173 01:05:25,800 --> 01:05:28,560 Speaker 1: by pulling down Wikipedia. And I think that you don't. 1174 01:05:28,840 --> 01:05:32,160 Speaker 1: Alongside that, I would stay flexible. You know, it's not 1175 01:05:32,320 --> 01:05:35,400 Speaker 1: it's it's um, it's not clear at at age twenty 1176 01:05:35,440 --> 01:05:38,560 Speaker 1: five or twenty seven or however old you are. UM, 1177 01:05:38,560 --> 01:05:40,600 Speaker 1: it's not clear where the opportunities are going to be. 1178 01:05:40,680 --> 01:05:42,919 Speaker 1: We know that things will look very different in five 1179 01:05:43,000 --> 01:05:46,800 Speaker 1: or ten years, and so you know, keep financial flexibility, 1180 01:05:46,880 --> 01:05:49,240 Speaker 1: keep yourself on your balls, balls of your feet so 1181 01:05:49,320 --> 01:05:53,160 Speaker 1: you can pivot as necessary. Quite interesting, and our final question, 1182 01:05:53,640 --> 01:05:56,680 Speaker 1: what do you know about the world investing today? You 1183 01:05:56,720 --> 01:06:00,200 Speaker 1: wish you knew twenty five years or so ago when 1184 01:06:00,200 --> 01:06:02,800 Speaker 1: you were first starting out. So I wish that I 1185 01:06:02,840 --> 01:06:10,280 Speaker 1: had understood how institutionalization of the alternatives business would play out. UM. 1186 01:06:10,360 --> 01:06:12,800 Speaker 1: So you know, we started this by talking about whether 1187 01:06:12,840 --> 01:06:15,560 Speaker 1: I was going to go into the LBO business or 1188 01:06:15,680 --> 01:06:20,040 Speaker 1: go into the hedge fund business. And my in one 1189 01:06:20,040 --> 01:06:23,160 Speaker 1: of in a shockingly bad conclusion, I thought the LBO 1190 01:06:23,240 --> 01:06:26,720 Speaker 1: business had probably seen its best days because the things 1191 01:06:26,760 --> 01:06:31,520 Speaker 1: that had made LBOs these profit generating machines, was a 1192 01:06:31,600 --> 01:06:35,360 Speaker 1: function of the nine eighties. It was a junk bond market. 1193 01:06:35,480 --> 01:06:37,960 Speaker 1: You could buy things with you know, five percent equity 1194 01:06:38,000 --> 01:06:40,480 Speaker 1: down and you go buy a reasonable company with it. 1195 01:06:40,520 --> 01:06:44,320 Speaker 1: Because of distortions in the junk bond market. You had 1196 01:06:44,520 --> 01:06:47,520 Speaker 1: terribly won companies with inactive boards that you could take 1197 01:06:47,560 --> 01:06:50,600 Speaker 1: over and clean up and and double their cash flow. 1198 01:06:50,640 --> 01:06:54,560 Speaker 1: And you had um uh, you know, companies had gone 1199 01:06:54,600 --> 01:06:58,440 Speaker 1: through conglomerization phases in the seventies and eighties, and we're 1200 01:06:58,480 --> 01:07:03,040 Speaker 1: selling off subsidiaries because you know x y Z hedge fund. Baron, 1201 01:07:03,160 --> 01:07:05,880 Speaker 1: I mean LBO Baron had dinner with the CEO and 1202 01:07:05,960 --> 01:07:07,840 Speaker 1: convinced them to sell it at six times cash flow. 1203 01:07:07,880 --> 01:07:11,240 Speaker 1: I mean, it was all of these things were you 1204 01:07:11,280 --> 01:07:14,080 Speaker 1: know that made LBOs in the ninet eighties. It's really 1205 01:07:14,120 --> 01:07:18,880 Speaker 1: really these great investments, um huge, huge, huge access returns 1206 01:07:19,800 --> 01:07:21,760 Speaker 1: what I didn't see. And by the way, when I 1207 01:07:21,800 --> 01:07:24,040 Speaker 1: was looking at this, you know KKR had bought r 1208 01:07:24,120 --> 01:07:25,960 Speaker 1: j R Nibisco and that it turned into kind of 1209 01:07:25,960 --> 01:07:27,840 Speaker 1: a fiasco and people thought, no one's ever gonna be 1210 01:07:27,880 --> 01:07:29,840 Speaker 1: able to raise a five billion dollar fund again. Today 1211 01:07:31,160 --> 01:07:35,120 Speaker 1: What I didn't understand was that institutions and consultants around 1212 01:07:35,120 --> 01:07:39,840 Speaker 1: institutions UM once that they had their own reasons for 1213 01:07:40,320 --> 01:07:44,240 Speaker 1: having these new asset class categories. So once they labeled 1214 01:07:44,560 --> 01:07:49,520 Speaker 1: LBO slash Private Equity and Asset Allocation UM, it was 1215 01:07:49,560 --> 01:07:53,360 Speaker 1: the first movers into that ended up getting new clients 1216 01:07:53,400 --> 01:07:55,440 Speaker 1: because they could say, we have special access, we know 1217 01:07:55,480 --> 01:07:57,960 Speaker 1: how they invest in this area, and their business would 1218 01:07:57,960 --> 01:08:00,240 Speaker 1: grow and then somebody else would look at them and say, 1219 01:08:00,240 --> 01:08:01,680 Speaker 1: oh my god, look at that. They just won that 1220 01:08:01,720 --> 01:08:03,880 Speaker 1: new client. And it seems to be in part because 1221 01:08:04,280 --> 01:08:05,920 Speaker 1: they know how to get invested in l b O 1222 01:08:06,000 --> 01:08:07,920 Speaker 1: s and we don't have that capabilities. Let's hire some 1223 01:08:07,960 --> 01:08:11,360 Speaker 1: people to do it. And this whole process builds on itself. 1224 01:08:11,960 --> 01:08:16,639 Speaker 1: And so now you have you know and and so 1225 01:08:16,920 --> 01:08:18,800 Speaker 1: you know, now this is why you have thirty billion 1226 01:08:18,840 --> 01:08:20,800 Speaker 1: dollar hedge funds, which people would have said was for 1227 01:08:20,840 --> 01:08:24,880 Speaker 1: posterous years ago, or people routinely raising ten or twenty 1228 01:08:24,880 --> 01:08:29,400 Speaker 1: billion dollar private equity funds and so UM. So I 1229 01:08:29,400 --> 01:08:31,760 Speaker 1: think if I'd known, if I'd understood that, I think 1230 01:08:32,120 --> 01:08:34,600 Speaker 1: there would have been different ways that I would have 1231 01:08:34,640 --> 01:08:37,360 Speaker 1: managed some of my businesses. But you know, next life 1232 01:08:38,720 --> 01:08:41,200 Speaker 1: Thank you Andrew for being so generous with your time. 1233 01:08:41,880 --> 01:08:45,599 Speaker 1: We have been speaking with Andrew Beer, managing member at 1234 01:08:45,720 --> 01:08:50,760 Speaker 1: Dynamic Beta Investments. If you enjoy this conversation, well be 1235 01:08:50,840 --> 01:08:53,400 Speaker 1: sure and check out any of our previous I don't 1236 01:08:53,439 --> 01:08:58,040 Speaker 1: know three nine such prior conversations. You can find those 1237 01:08:58,120 --> 01:09:02,600 Speaker 1: at iTunes, Spotify, wherever you feed your podcast fix. We 1238 01:09:02,720 --> 01:09:06,519 Speaker 1: love your comments, feedback and suggestions right to us at 1239 01:09:07,160 --> 01:09:10,120 Speaker 1: m IB podcast at Bloomberg dot net. Give us a 1240 01:09:10,160 --> 01:09:13,680 Speaker 1: review on Apple iTunes. You can sign up from my 1241 01:09:13,760 --> 01:09:17,120 Speaker 1: daily reads at Rid Halts dot com. Check out my 1242 01:09:17,200 --> 01:09:21,360 Speaker 1: weekly column at Bloomberg dot com slash Opinion. Follow me 1243 01:09:21,400 --> 01:09:25,400 Speaker 1: on Twitter at rit Halts. I would be remiss if 1244 01:09:25,439 --> 01:09:27,559 Speaker 1: I did not thank the crack staff that helps put 1245 01:09:27,600 --> 01:09:32,840 Speaker 1: these conversations together each week. Reggie Brazil is my audio engineer, 1246 01:09:33,080 --> 01:09:37,799 Speaker 1: Michael Boyle is my producer. Tracy Walsh is our project manager. 1247 01:09:37,960 --> 01:09:41,920 Speaker 1: Michael Batnick is my head of research. I'm Barry Ridults. 1248 01:09:42,160 --> 01:09:45,599 Speaker 1: You've been listening to Master's Business on Bloomberg Radio.