Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Add Thoughts podcast.
Speaker 2: I'm Tracy Alloway and I'm Jill. Why isn't thal so Joe?
Speaker 2: You know what I realized two months ago? Just two
Speaker 2: months ago, we were still getting a bunch of headlines
Speaker 2: about how private credit was the hot new thing on
Speaker 2: Wall Street and how multi strategy hedge funds pod shops
Speaker 2: were huge and growing. And we've done quite a few
Speaker 2: episodes on these respective topics. But you know, just a
Speaker 2: couple months later, the headlines are starting to look very different. Yeah,
Speaker 2: and there's concern that if we get a substantial economic slowdown,
Speaker 2: you're going to get some sort of big blow up
Speaker 2: in private assets and things like private credit, private equity.
Speaker 2: You know, a lot of people have been predicting that
Speaker 2: might happen for a while. And then when it comes
Speaker 2: to multi strats, we've already seen a lot of talk
Speaker 2: about pain the pod shops given all the recent market volatilities.
Speaker 2: So everything is feeling a little different right now.
Speaker 3: Well, we are recording this on April twenty second, and
Speaker 3: we got a headline this has been in the news
Speaker 3: for a few days, but I guess it's just been confirmed.
Speaker 3: So speaking of you know, the asset allocators, where's there, Like,
Speaker 3: real money come in from right, and they're like, yeah,
Speaker 3: wealthy families and wealthy, but the real big money is
Speaker 3: in these huge pots of money that we're talking about teachers,
Speaker 3: which if those in the know, the Ontario Teachers Pension
Speaker 3: or of course university endowments. We got a headline today
Speaker 3: again it's been out in the news for a few days,
Speaker 3: Yale considering selling in the secondary market some of its
Speaker 3: private equity stakes. So these huge pools of money that
Speaker 3: are really upstream from the private credits of the world
Speaker 3: and upstream from the hedge fund multi strands of the world.
Speaker 3: They're in a new era for all kinds of different reasons.
Speaker 3: And so to even understand these various alts, we have
Speaker 3: to understand how the people who fund the alts are thinking.
Speaker 3: Right now.
Speaker 2: I am so glad that you mentioned all of that,
Speaker 2: because that was a perfect intro, but also Yale specifically,
Speaker 2: because we all know that the emphasis on alts was
Speaker 2: pioneered by David Swanson over at Yale, and since then,
Speaker 2: you know, alts have been a big thing, not just
Speaker 2: in university endowments, but in lots of different types of
Speaker 2: institutional investing. So I'm very pleased to say that we do,
Speaker 2: in fact have the perfect guests to talk about all
Speaker 2: of this. We're going to be speaking with Joe Dowling,
Speaker 2: Blackstone's global head of multi asset investing. He previously ran
Speaker 2: Brown University's endowment and this was one of the best
Speaker 2: performing endowments at that time. He did that for a
Speaker 2: decade before he joined Blackstone about four years ago. He's
Speaker 2: been called the King of hedge funds in some of
Speaker 2: our own Bloomberg coverage. So really, who better to talk
Speaker 2: about things like alternative investing, university endowments, and what's going
Speaker 2: on right now in private assets than Joe. So Joe,
Speaker 2: Joe d Welcome to the show.
Speaker 3: Thank you, Tracy and Joe, thanks for having me. Can
Speaker 3: we make this a four hour episode? I already have
Speaker 3: so many questions.
Speaker 2: Anyway, go Tracy, Uh, okay, So first off, I'm going
Speaker 2: to have to be very careful in how I address
Speaker 2: each Joe respectively. But other than that, okay. So one
Speaker 2: of the things, you know, Joe and I have kind
Speaker 2: of nibbled at the edges of the university endowment model.
Speaker 2: And one of the things that we know for sure
Speaker 2: right now is that they are very large pools of capital,
Speaker 2: you know, worth billions and billions of dollars. And for
Speaker 2: that reason, we often see them compared to things like
Speaker 2: pension funds, maybe sovereign wealth funds. In your experience, are
Speaker 2: there differences between you know, running a university endowment, investing
Speaker 2: for an endowment versus investing for you know, traditional large
Speaker 2: institutional funds.
Speaker 4: Absolutely, But let's set the table with just how big
Speaker 4: the universe is, because I think that'll help us. Please,
Speaker 4: There's six hundred and fifty US endowments with a combined
Speaker 4: assets of eight hundred and seventy five billion. That's from Nikubo.
Speaker 4: I'm using Nakubo data. But the average endowment is only
Speaker 4: one point three billion in assets under management, and the
Speaker 4: median is two hundred and thirty five million.
Speaker 2: I appreciate that you came prepared with numbers.
Speaker 3: When you see a headline Yale considering a private equity
Speaker 3: stake IMiD, it's funding turmoil. Some reports have set it's
Speaker 3: up to six billion dollars. How big of a deal
Speaker 3: is this? Like how how much of an earthquake? Is
Speaker 3: that this entity which we associate with long term willingness
Speaker 3: to hold onto ill liquid stakes, timber so forth. How
Speaker 3: big of a deal is this.
Speaker 4: I think it's a big deal because it's showing stress
Speaker 4: in the system. And the six billion dollar number is
Speaker 4: also a number that I've heard from outside investors who
Speaker 4: are actually looking at the portfolio. And what it signals
Speaker 4: to me is that Yale, who's been a pioneer, is
Speaker 4: being proactive. They have a new CIO. Remember David Swinson,
Speaker 4: who you quoted in the beginning, was the person who
Speaker 4: really pioneered the endowment model. But they have a new CIO,
Speaker 4: and I think it's a sign that he's going to
Speaker 4: put his own stamp on the Yale endowment. Not surprising
Speaker 4: with what's happening in the political environment with the endowment tax,
Speaker 4: which is currently at one point four percent being considered
Speaker 4: to go to up to twenty percent. So that's a yeah,
Speaker 4: that's a big, big number. So with regards to taxes,
Speaker 4: you might remember during Trump's first administration, under the Tax
Speaker 4: Cuts and Jobs Act of twenty seventeen, they introduced the
Speaker 4: first endowment tax, and it was a one point four
Speaker 4: percent excise tax on net investment income for really the
Speaker 4: wealthiest endowments, And how did they define that. What they
Speaker 4: did was they took the total value of the endowment
Speaker 4: and divided it by the number of students, and if
Speaker 4: it was over five hundred thousand dollars, then you were
Speaker 4: subject to that tax. And now what's been proposed is
Speaker 4: an increase from one point four percent to twenty one percent. Now,
Speaker 4: what that would result in is seventy billion of extra
Speaker 4: revenue over ten years. And I'm assuming they're the average
Speaker 4: endowment return is seven and a half percent to get
Speaker 4: to those figures, so call it seven billion a year
Speaker 4: of additional taxes. And it's going to change really the
Speaker 4: way endowments are managed. They're going to need to be
Speaker 4: more tax conscious, They're going to need to target higher
Speaker 4: rates of return, and I think they're going to have
Speaker 4: to continue to use the private markets.
Speaker 2: Huh. So talk to us about how important was that
Speaker 2: special tax status to returns over the years, because also,
Speaker 2: if I look at returns, you know recently, over the
Speaker 2: past three years or so, they've they've already been lackluster.
Speaker 2: So I imagine with the additional tax pressure, that's going to
Speaker 2: be pretty painful. And then when you say endowments are
Speaker 2: going to have to be more tax conscious, what does
Speaker 2: that actually mean? Is that like investing in munis I
Speaker 2: guess you already mentioned private credit. But what can endowments
Speaker 2: actually do here?
Speaker 4: Yep, So a couple things. One I want to address performance,
Speaker 4: because you're entirely right. If you look at short term performance.
Speaker 4: Over the last three years, a global sixty forty portfolios
Speaker 4: out performed US endowments. The average US endowment return okay,
Speaker 4: underperformed the global sixty forty by six point eight percent,
Speaker 4: or three hundred and forty basis points per annum. The
Speaker 4: top coretile endowment returns underperformed by two hundred and fifty
Speaker 4: basis points annually. Now that's over three years, and we
Speaker 4: all know investors tend to be short term. If you
Speaker 4: look at the five year number, okay, the average endowment
Speaker 4: has returned eight point three percent and has outperformed a
Speaker 4: global sixty forty by one hundred and seventy basis points,
Speaker 4: and the top core tile has outperformed by two hundred
Speaker 4: and fifty basis points. Over ten years, the numbers are
Speaker 4: even more consistent with those figures. So over the past
Speaker 4: ten years, the top core tile has outperformed the global
Speaker 4: sixty forty by one hundred and sixty basis points and
Speaker 4: even ready for this, the bottom core tile okay, has
Speaker 4: outperformed a sixty forty poortfolio by thirty basis points annually. Okay,
Speaker 4: let's translate that though. Okay, So let's say you have
Speaker 4: a billion dollar portfolio. If you have top quartal performance
Speaker 4: versus a global sixty forty over the ten year period,
Speaker 4: that's a two hundred and eighty eight million dollar difference.
Speaker 4: So we're talking big numbers here.
Speaker 3: And this is the nice thing about being an endowment
Speaker 3: is that you don't have an LP that's going to withdraw.
Speaker 3: You have one captive LP, and so you know, in theory,
Speaker 3: this is why they have the capacity to make these
Speaker 3: long term, relatively ill liquid alpha generating investments strictly because
Speaker 3: there's just none of that sort of like short term
Speaker 3: demand for withdrawals.
Speaker 4: Absolutely, and I think that's the advantage of the endowment
Speaker 4: model is that you're able to think really long term
Speaker 4: about asset allocation and basically to take advantage of force
Speaker 4: selling and dislocations in the market. And that's really what
Speaker 4: separates the top quartile from really the median and the
Speaker 4: bottom quartile.
Speaker 2: But when you were at Brown, for instance, did you
Speaker 2: ever feel some sort of short term pressure maybe, you know,
Speaker 2: maybe not just because you had to report returns I
Speaker 2: think on a yearly basis, but maybe because the university
Speaker 2: needed a bunch of money suddenly for some big project
Speaker 2: I don't know, a new building or something. I get
Speaker 2: the point that endowments are investing on a very long
Speaker 2: time horizon, But on the other hand, I feel like
Speaker 2: there must be moments where you do have to come
Speaker 2: up with the money.
Speaker 4: You know, you're pointing out something that a lot of
Speaker 4: people don't think about, which is that there's a fundamental
Speaker 4: conflict between the administration and then the management of the endowment. Obviously,
Speaker 4: the administration would like to spend the money to work
Speaker 4: on projects, and there are a lot of important projects
Speaker 4: out there. But as a steward of the endowment, you
Speaker 4: actually have to work with your investment committee to show
Speaker 4: them exactly what we were just talking about, which is
Speaker 4: small differences in compounding over long periods of time add
Speaker 4: up to huge, huge numbers. So what I did, and
Speaker 4: with my team, we would constantly show them over ten,
Speaker 4: twenty and thirty years what taking a higher distribution would
Speaker 4: cost the endowment, and that really allowed us to sort
Speaker 4: of do our job long term and think long term.
Speaker 4: But the answer to your question is yes, it's the
Speaker 4: performance derby every year. It's like college sports, and everyone's
Speaker 4: waiting for that those numbers to come out.
Speaker 3: You know so much in finance and these questions, whether
Speaker 3: we're talking about the university's board having a manager or
Speaker 3: having an endowment manager, whether we're talking about the endowment
Speaker 3: manager allocating to multi strategy hedge funds, when we're talking
Speaker 3: about the hedge funds compensating the pms. It's like principal
Speaker 3: agent problems all the way down. And even though you
Speaker 3: have that captive LP and you don't have to worry
Speaker 3: about withdrawals, you still have to worry about career risk,
Speaker 3: right like because an endowment manager can get and so
Speaker 3: it's like it's really like at every chain, it's like
Speaker 3: this constant puzzle of trying to get each link in
Speaker 3: the chain aligned and for some sort of you know,
Speaker 3: everyone's optimal optimal performance.
Speaker 4: But it's interesting in my new seat, I get to
Speaker 4: meet all of the CIOs across the country, and I
Speaker 4: will tell you the talent pool is extremely, extremely deep,
Speaker 4: and so many of them. When I go in and
Speaker 4: talk to them, I'm actually learning just as much as
Speaker 4: I hope i'm educating. It's it's really amazing the level
Speaker 4: of sophistication of these endowments. I've been super impressed. And
Speaker 4: I didn't get that at Brown because you don't have
Speaker 4: that much interaction because you're competing with people.
Speaker 1: Yeah.
Speaker 4: Right, I didn't think David Swinson was going to call
Speaker 4: me up and give me his best, best manager. That
Speaker 4: just is not going to happen.
Speaker 2: Since you brought up Swinson, talk to us, you know,
Speaker 2: let's just go back in time in history and talk
Speaker 2: to us about the rise of all investing at university endowments.
Speaker 2: Is it really just as simple as you know, endowments
Speaker 2: have long term investing horizons, and so illiquid assets that
Speaker 2: need to be held onto for a long time are
Speaker 2: a really good match. Is that? Is that the story that's.
Speaker 4: At the heart of it, which is if you have
Speaker 4: long term money, you should be able to use the
Speaker 4: illiquidity premium and you should be able to earn more.
Speaker 4: And I think that's what David and many of the
Speaker 4: CIOs realized, and they had the long term capital to
Speaker 4: do that, and it's worked. And what's also amazing is
Speaker 4: the percentage of alternatives that these firms own so that
Speaker 4: the endowments invest in. So the average high performing endowment
Speaker 4: has fifty five percent of their assets and alternatives. Wow,
Speaker 4: the top cortile and the IVY leagues all have over
Speaker 4: sixty five percent in alternatives. And they've worked. And I
Speaker 4: think people are trying to call the demise of alternatives
Speaker 4: and especially even the endowment model, and I don't think
Speaker 4: we have the evidence yet that it's broken.
Speaker 2: One thing I all always wanted to ask someone who
Speaker 2: actually works at an endowment, and in fact you led
Speaker 2: the endowment, But do you just have like hedge funds
Speaker 2: and private equity just knocking at your door and constantly
Speaker 2: pitching new things to you? How do you make that
Speaker 2: initial connection between you know, a potential not client or
Speaker 2: a manager between a potential manager.
Speaker 4: That's a great question. So I think that you have
Speaker 4: a choice when you're an allocator and an investor, which
Speaker 4: is you can lead or you can be led. And
Speaker 4: so the answer is we always had people coming and
Speaker 4: trying to pitch us. But what I always encourage my
Speaker 4: team to do was to research deeply markets or big
Speaker 4: deep alpha poonds. So let me give you a specific
Speaker 4: example biotechnology. So what I would say to the team is, wow,
Speaker 4: biotech stocks twenty five percent, some of them are trading
Speaker 4: under cash right now, Let's go do some research on
Speaker 4: that segment. And then they would go out and market
Speaker 4: map biotechnology, giving us all the different types of players
Speaker 4: in their approach. And that's how you get context. How
Speaker 4: you end up being a mediocre investor is just getting
Speaker 4: the flavor of the day, and usually the flavor of
Speaker 4: the day is traveling around the country, and as contrarians,
Speaker 4: what we like to do is to pick things that
Speaker 4: were sort of off consensus, not loved. One of my
Speaker 4: favorite expressions I used to say to my team was
Speaker 4: what would make you really uncomfortable to recommend in front
Speaker 4: of an investment committee. If it makes you really uncomfortable,
Speaker 4: go research it.
Speaker 3: One of the things you mentioned is that, you know,
Speaker 3: one of the nice things about endowment is they can
Speaker 3: be the ones who buy when everyone is selling. And
Speaker 3: typically there's true So let's you know this Yale headline
Speaker 3: that we got and you said, it's a big deal.
Speaker 3: We're in this sort of confluence of events where universities
Speaker 3: are they're you know, they're anxious about their money that's
Speaker 3: coming from the federal government. They're anxious about foreign students
Speaker 3: continuing to come to the US. There's obviously the market
Speaker 3: decline itself. So are we in a moment where there
Speaker 3: is some like inability or some constraints on the endowments
Speaker 3: to be I don't have buyers of last resort, but
Speaker 3: the opportunistic investors of the moment, like, is this actually
Speaker 3: a moment where that's under a threat? And the endowment
Speaker 3: taxes you mentioned.
Speaker 4: Well, I think it's endowment tax I think it's a
Speaker 4: lot of the NIH funding at these schools combined with
Speaker 4: the perfect storm of markets receding, and so these models
Speaker 4: are being challenged, right, So I think the people who
Speaker 4: are playing offense and are being proactive, and I would
Speaker 4: probably put Yale in that category, are going out and
Speaker 4: testing the market and saying, you know, where is my liquidity.
Speaker 4: I just take a step back on private equity because
Speaker 4: that's what they've They've gone out and are trying to sell.
Speaker 4: If you look at the asset class, I think it
Speaker 4: is a fantastic asset class. And I want I want
Speaker 4: to just talk about this. I don't work in private
Speaker 4: equity at Blackstone, so I'm have my endowment hat on.
Speaker 4: But I want you to think about the value proposition.
Speaker 4: The value proposition is that I'm investing in the largest
Speaker 4: universe of companies out there, which are private companies with
Speaker 4: experts who I'm lending money to in terms of a
Speaker 4: management fee, because that management fee comes back to me,
Speaker 4: the investor, and then we calculate an eight percent preferred
Speaker 4: return before the manager makes any money. And if you
Speaker 4: think about it, eight to ten percent is about what
Speaker 4: the stock market has done over the last fifty years.
Speaker 4: So the value proposition is I, the manager, until I
Speaker 4: add value over that public market, will not earn any
Speaker 4: incentive fees, and I will pay you back. That structure
Speaker 4: in itself protects investors. And even in the fourth coretile
Speaker 4: and I'm quoting Cambridge and Associate's data now, even in
Speaker 4: the fourth coretile of buyout managers, and the Cambridge database
Speaker 4: changes every you know month, but call it over twelve
Speaker 4: hundred managers. Even the fourth coretile is positive over a
Speaker 4: rolling ten year basis. It's a good asset class. But
Speaker 4: what I always hear is the doubters and they want
Speaker 4: to say there's too much dry powder and things, you
Speaker 4: know things. Capital is not being returned, no pot.
Speaker 2: It's hard to deploy, it's hard to deploy.
Speaker 4: And the reality is it has been hard to get
Speaker 4: capital back for the last three years. Public markets are closed,
Speaker 4: mergers are not accelerating like we thought they were. So
Speaker 4: the longer this goes on, the more this endowment model, Joe,
Speaker 4: to your point, is going to be challenged. It is
Speaker 4: definitely challenging. But I think the smart endowments are already
Speaker 4: taking action to grab for that liquidity. And think about it,
Speaker 4: ten years ago, there was no deep secondary market. The
Speaker 4: thought that you could sell, okay, six billion dollars of
Speaker 4: private equity assets, it's pretty amazing.
Speaker 2: It's definitely different to how it used to be. But
Speaker 2: just on the pe point. You described your sort of
Speaker 2: research process earlier, and you gave an example in the
Speaker 2: case of biotech. But if you're researching those ideas, your
Speaker 2: team is trying to find alpha itself. What's the benefit
Speaker 2: of investing in a third party like private equity or
Speaker 2: like hedge fund a hedge fund, versus just investing directly.
Speaker 4: Yeah, it would be almost impossible to recreate the type
Speaker 4: of competitive advantage that the managers that we invested in
Speaker 4: Brown had, and I think that trying to do it
Speaker 4: direct at an endowment, you have a smaller team, you
Speaker 4: have less resources, you have one investment committee. At Blackstone,
Speaker 4: you're constantly iterating, you have multiple investment committees, you have
Speaker 4: multiple oversight, you have a risk committee, and you have
Speaker 4: just so much more data, so much more information. That's
Speaker 4: why it's such a competitive advantage. The concept of scale
Speaker 4: is so powerful. So when I transitioned from Brown to Blackstone,
Speaker 4: I was overwhelmed at the power of the scale, the data,
Speaker 4: the manager access. If I could have run the Brown
Speaker 4: endowment portfolio on the Blackstone platform, I would have really
Speaker 4: made money.
Speaker 2: Oh you did make real money. I mean while you
Speaker 2: were a Brown, even without the Blackstone platform.
Speaker 3: Let's talk about hedge funds real big picture. How would
Speaker 3: you describe the reasons for the rise of the multi
Speaker 3: strategy model. Why has that model even more than the
Speaker 3: single manager, How would you characterize it? Why that particular
Speaker 3: flavor of hedge fund has become so popular.
Speaker 4: Sure, I think that when I think about the multi
Speaker 4: strap world, I think about a tiering of talent, and
Speaker 4: it's clear to me that that Millennium, Citadel and the
Speaker 4: top players have really distinguished themselves. And they've done that
Speaker 4: by providing a very, very consistent return with a high
Speaker 4: sharp that is completely uncorrelated to stocks and bonds, which
Speaker 4: is nirvana for a manager because what people realized and Joe,
Speaker 4: the wake up call was in twenty twenty two when
Speaker 4: stocks and bonds were both down high teens and the
Speaker 4: Millenniums and Citadels of the world earned their you know,
Speaker 4: standard returns, which are you know, call it twelve percent plus.
Speaker 4: That is what you want in your portfolio as a
Speaker 4: true diversifier and something that provides a ballast. So they
Speaker 4: have unlimited tomas.
Speaker 3: Results have spoke for themselves.
Speaker 4: Results have spoke for themselves, and you know, these are
Speaker 4: not easy things to recreate. If you look at Millennium,
Speaker 4: it has more employees than Blackstone.
Speaker 2: Wow, that's crazy. Okay, then give us some give us
Speaker 2: some color on the past couple of weeks. I can't
Speaker 2: believe it's only been twenty days since Liberation Day on
Speaker 2: April second, But what's your impression of what it was
Speaker 2: like at the multi strats over the past month or so.
Speaker 4: Yeah, it's interesting thing. Obviously it's in the headlines that
Speaker 4: they're down, but they're really not down that much. If
Speaker 4: being down one percent is a crime in this environment,
Speaker 4: I'll take that asset class all day long. But what
Speaker 4: has happened is it's been the fastest growing asset class
Speaker 4: among hedge funds. Goldman Sachs quotes that that multistrat universe
Speaker 4: has been growing sixteen percent year over year, and their
Speaker 4: data is pretty good at matches ours pretty closely. But
Speaker 4: what's happened is that there's been a lot of new entrants.
Speaker 4: And the new entrants are the area that I worry
Speaker 4: about because in order to get the type of diversification
Speaker 4: that you need, you need amazing technology, You need a
Speaker 4: lot of teams. Okay, let me be specific. There's over
Speaker 4: three hundred teams at Millennium Trading. That is a very
Speaker 4: hard thing to recreate. Risk management systems and a culture
Speaker 4: of performance and excellence, they're really hard to recreate. So
Speaker 4: I think if there's a problem, it's going to be
Speaker 4: in these new emerging managers, it's not going to be
Speaker 4: with the top tier.
Speaker 3: Can you talk a little bit more about the due
Speaker 3: diligence process on a multistrat because okay, you have the
Speaker 3: top line returns, and there's a line, and as you said,
Speaker 3: it's been a really good line, and it's extraordinary. Even
Speaker 3: outside of the Veria leads, it's been just extremely impressive.
Speaker 3: And then you could point to okay, even in twenty
Speaker 3: twenty two when stocks and bonds were both down, they
Speaker 3: produced good returns, So again further impressive. Is there a
Speaker 3: further level where when you're probing a multistret manager that
Speaker 3: you can look to discover whether the pods themselves are
Speaker 3: truly uncorrelated and can be expected to deliver uncorrelated returns
Speaker 3: in the future.
Speaker 4: Yes, and that's our job. And I mean, when you
Speaker 4: think about the quality of earnings of a company, let's say, uh,
Speaker 4: you know, the the average S and P company that reports.
Speaker 4: The analysts all focus on quality of earnings. We focus
Speaker 4: on quality of return. How diversified is that return, what
Speaker 4: sub sectors is it coming from. How many managers have
Speaker 4: been on the platform for x period of time, how
Speaker 4: many of them account for the you know what, what's
Speaker 4: the breakdown of the of who's making the profit? How
Speaker 4: diversified is that across strategies, et cetera. So that's what
Speaker 4: we spend a lot of time doing.
Speaker 3: When you're doing the due diligence, can you talk to
Speaker 3: pod managers like how much pro how deep into the
Speaker 3: system are you? Is it an outside investor able to get.
Speaker 4: If if you have a good long term relationship and
Speaker 4: you're a large allocator of capital, we get a lot
Speaker 4: of information to make a very very good decision. I
Speaker 4: think if you're just trying to do it on your own,
Speaker 4: you have no shot.
Speaker 2: It sounds like you're trying to build a diversified portfolio
Speaker 2: of multistrat exposure. How do you get a good sense
Speaker 2: of what each multi strategy firm, each pod shop is
Speaker 2: actually good at doing.
Speaker 4: Ironically, they have very different approaches, so it's not as
Speaker 4: hard as you think. The differences between a citadel and
Speaker 4: a millennium are extensive interesting, and so when you start
Speaker 4: peeling back all of the different avenues of how they
Speaker 4: make money, you start to see really how different they
Speaker 4: are fundamentally. And I think you can see that as
Speaker 4: an outsider if you examine thirteen f's and you see
Speaker 4: after periods of volatility, who's adding to positions and who's
Speaker 4: subtracting to positions. So if you look at march of
Speaker 4: twenty twenty, you get a pretty good insight into who's doing.
Speaker 3: Can you say a little bit more, what are the
Speaker 3: different like, what are those differences that look like.
Speaker 4: So for the more trading oriented managers, they're shrinking their
Speaker 4: balance sheet, they're they're cutting their balance sheet. And then
Speaker 4: there's a group of managers that are calculating intrinsic values,
Speaker 4: so they're actually as those investments are going down, they're
Speaker 4: actually adding to them. And if you look at a
Speaker 4: historical vol you can see it in historical VALL. So
Speaker 4: some of the multi strap managers are very tight in
Speaker 4: their VALL calculations and they stay around four percent. Others
Speaker 4: that are more intrinsic value oriented are up as high
Speaker 4: as eight percent. It's just two different ways of getting
Speaker 4: at the same thing. Some people hedge from the top
Speaker 4: of the house, some people don't. Again, the styles when
Speaker 4: you really get down into it, very different methodologies.
Speaker 3: So you mentioned that, you know one of your concerns
Speaker 3: is in the new you know, it's very hard to
Speaker 3: recreate a three hundred pod. You know, a team of
Speaker 3: three hundred quality pods. It's really hard to recreate that tech.
Speaker 3: But you know, some might do it, and some might try.
Speaker 3: I'm trying to think of like the science equivalent a
Speaker 3: concert a law of the conservation of alpha. Somehow that
Speaker 3: the structure of these multi strat hedge funds have been
Speaker 3: able to deliver superior returns on a range of market environments.
Speaker 3: Is there some sort of intrinsic limit to how many
Speaker 3: entities can try to capture this alpha such that it
Speaker 3: all degrades, or is it really just a matter of
Speaker 3: some just won't have the skills to do it.
Speaker 4: I think it's a combination of both. But look, there
Speaker 4: are pockets of alpha in the market that get overcrowded,
Speaker 4: and we've seen this in the area of index editions
Speaker 4: and subtractions, where a lot of capital gets thrown at
Speaker 4: the area and they don't make money money, or they
Speaker 4: lose a lot of money, but then the capital quickly
Speaker 4: retreats and goes and finds a new pocket. And one
Speaker 4: thing about these organizations is they are very innovative. And
Speaker 4: if you look at senior management, this is some of
Speaker 4: the best investment talent that I've seen. They're coming from
Speaker 4: very high quality firms and they are innovating all of
Speaker 4: the time, both in technology, in scope of markets, in
Speaker 4: how they're joint venturing with people. They're very, very innovative,
Speaker 4: but obviously their capacity is constrained, right, but they have
Speaker 4: unlimited demand and that's why they've been able to lengthen
Speaker 4: their terms. So they've many of them gone from quarterly
Speaker 4: liquidity to five year liquidity. And that's a testament, Joe,
Speaker 4: to the fact that the model's working.
Speaker 2: Can you give us a concrete example of innovation because
Speaker 2: I feel like people use that word a lot and
Speaker 2: it's sort of, you know, nebulous in many ways, but like,
Speaker 2: what are you saying that is actually innovative or what
Speaker 2: has struck you as particularly original and creative recently?
Speaker 4: I think there's a ton of examples on the quant side,
Speaker 4: and quant will be something we should return to when
Speaker 4: we talk about Brown because one of the traditional David
Speaker 4: Swinson tenants was not to invest in quant, and yet
Speaker 4: Brown was the largest investor in the Ivy League in quant.
Speaker 4: And that's one of the big differences when people ask me,
Speaker 4: where did you differentiate yourself? So what's going on in quant?
Speaker 4: Just in the systems using AI at these firms would
Speaker 4: is absolutely unbelievable. And there are firms out there that
Speaker 4: while their capacity constrain. They make money every day. We're
Speaker 4: invested in some managers that make money every single day,
Speaker 4: and it always blows my mind.
Speaker 3: What is quant mean? Tracy knows that sometimes I don't
Speaker 3: know the basic definitions of words, Like how many times
Speaker 3: I've asked Tracy to define what fintech means?
Speaker 2: Joe's being very modest. He knows what all these things are.
Speaker 2: You choose like the terms that actually don't have a
Speaker 2: good definition, right, What does mean?
Speaker 4: I think it's it's the application of quantitative methodologies towards
Speaker 4: markets to analyze large sets of data and come up
Speaker 4: with patterns or correlations or anomalies of things that happen
Speaker 4: divergences between say the futures and you know the cash market.
Speaker 4: So everyone talks about the basis trade, right, So the
Speaker 4: basis trade is simply I'm going to buy a treasury,
Speaker 4: I'm going to sell the future, and I'm going to
Speaker 4: capture that convergence because the future should trade at a
Speaker 4: premium to capture that convergence. And I'm allowed to lever
Speaker 4: that trade because the convergence I'm capturing a very small,
Speaker 4: like absolute spread. So I'm levering that sixty to eighty times.
Speaker 4: So the ability to rapidly identify those alphas some people
Speaker 4: call them alphas, you can call monomalies in the market
Speaker 4: that can be exploited. Some of them are high frequency
Speaker 4: beating someone to a trade, serving as a market maker.
Speaker 2: So you mentioned that when you were Brown, you didn't
Speaker 2: follow the Swinson model when it came to quantitative investing.
Speaker 4: Why was that, Well, I think to put up really
Speaker 4: good returns, you have to figure out one what your
Speaker 4: competitive advantage is, and two you have to be an
Speaker 4: independent thinker and not follow the herd. And that's what
Speaker 4: we did at Brown. And I'll tell you how we
Speaker 4: created our competitive advantage because I owe it to the alumni.
Speaker 4: We we did a really good job was creating a
Speaker 4: network of alumni in each asset class. So we would
Speaker 4: work with our investment committee, but we would also reach
Speaker 4: out to some of the best investors on the planet
Speaker 4: by industry, and I would actually go and present our
Speaker 4: portfolio in that asset class and say, what do you
Speaker 4: think where can we do better? Who would you recommend
Speaker 4: we look at? How would you structure this? And so
Speaker 4: that was one of the secrets I think of us,
Speaker 4: which is using that network effect now, Joe, back to
Speaker 4: your comment. Most people don't like to do that because
Speaker 4: they're exposing themselves the same way that they feel pressure.
Speaker 4: They don't want people opining on what they were doing.
Speaker 4: But I was willing philosophically to have that kind of
Speaker 4: open transparency so that I could learn and benefit from
Speaker 4: the Brown ecosystem. And I always used to have this
Speaker 4: expression was I would go to people and I would say,
Speaker 4: what do you have to feed the bear? Because it's
Speaker 4: the brown bear, So feed the bear. Give us your
Speaker 4: best co investments. And I have an unbelievable all star
Speaker 4: alumni cast, and they carried Brown to greatness. I happened
Speaker 4: to shepherd the process with an incredible team.
Speaker 2: Joe, what was your college mascot? Out of curiosity? The
Speaker 2: Texas Longhorns, of course.
Speaker 3: Which one day if, by the way, if the if,
Speaker 3: one day, we'll do a proper interview with the head
Speaker 3: of you, Timco. It does seem like an investing and
Speaker 3: this includes VC investing too, like you'd probably want you
Speaker 3: want to see a lot of pitches, don't you, right,
Speaker 3: like hit a home run, and so it sounds like
Speaker 3: they had alumni network or whatever it is. It's like
Speaker 3: you don't have to say. You might just say yes
Speaker 3: to one out of every thousand or whatever, but you
Speaker 3: want to see a lot.
Speaker 4: It sounds like you want to see it.
Speaker 3: Seems like it's a huge part of the game, just
Speaker 3: waiting for that fastball down the middle and until you
Speaker 3: see it.
Speaker 4: One hundred percent. And you know, each asset class has
Speaker 4: so many nuances, and you know, to have someone who
Speaker 4: can help out their endowment as an alumnus, it's rewarding,
Speaker 4: but you also have to you know, their risks associated
Speaker 4: that with that also, so saying no became an art.
Speaker 2: So you are now head of multi asset investing at Blackstone,
Speaker 2: as we've mentioned, and I think when you were initially hired,
Speaker 2: you were head or cohaed maybe of Blackstone Alternative asset management.
Speaker 2: And my impression of what you were hired to do
Speaker 2: was basically try to make that group more competitive, which
Speaker 2: you know, when we're talking about nebulous words, I think
Speaker 2: competitive is up there with innovation or innovative. Probably what
Speaker 2: does that mean exactly? If someone says, I want to
Speaker 2: make our alternative asset investing business or our hedge fund
Speaker 2: business more competitive, what do you do?
Speaker 4: So I think about it, as going from good to great,
Speaker 4: and you do that not by making dramatic changes, but
Speaker 4: like James Clear and atomic habits. I don't know if
Speaker 4: either of you have read that it's actually worth it,
Speaker 4: but he talks in his book about how it's the
Speaker 4: little constant improvements, all stacked on each other that create greatness.
Speaker 4: And and really our group embraces that principle and that's
Speaker 4: embedded in our culture. And so what does great mean?
Speaker 4: Great means, you know, top quartile returns. Great means top
Speaker 4: quartile risk statistics, a high sharp consistency, and you know,
Speaker 4: knock on wood, we're delivering that over you know, since
Speaker 4: I've been there, and it's it's really the result of
Speaker 4: the great team that I have. I have an amazing team.
Speaker 3: By the way, Tracy Richard Hall is the CEO and
Speaker 3: the CIO of you, Timco. I couldn't remember his name
Speaker 3: for a second, but putting it out there. If anyone
Speaker 3: at you Tim is listening to this episode, he has
Speaker 3: a standing invite to come on. To come on.
Speaker 4: Rich would be a great guest. I know him personally,
Speaker 4: super smart. You should call him out.
Speaker 3: Joe, Joe has and we would join you enjoy that'd
Speaker 3: be such a blast. The call has been put out, Rich,
Speaker 3: let's make this happen. I just have one last question.
Speaker 3: You know, you talk about your team and how important
Speaker 3: that is, and I like to ask this someone maybe
Speaker 3: they're in college, maybe they're studying finance, maybe they think
Speaker 3: about studying finance. What is the path for someone who
Speaker 3: wants to be on one of these teams, maybe they
Speaker 3: want to work for their own university's team or whatever
Speaker 3: it is. What should someone be studying and try to
Speaker 3: try to do right now?
Speaker 4: Yeah, Joe, it's a great question. I think the number
Speaker 4: one trait is to be really, really curious. And I
Speaker 4: know that sounds trite, but I had no idea that
Speaker 4: I would be at Blackstone. I had no idea that
Speaker 4: I would be at Brown University. But everything that I
Speaker 4: did I was fundamentally curious about and wanted to really
Speaker 4: be good at it. And so when you're curious and
Speaker 4: you go deep and you learn and you're a practitioner,
Speaker 4: people will tap you on the shoulder. You know. I
Speaker 4: had never met John Gray. I was at Brown University
Speaker 4: and I got a phone call that John Gray wanted
Speaker 4: to have dinner with me. And it was after an
Speaker 4: article had come out in the Wall Street Journal on
Speaker 4: the success of the Brown team and how we had
Speaker 4: gone to number one in the Ivy League over every
Speaker 4: time period. So I wasn't expecting that that wasn't in
Speaker 4: the game plan. And I had dinner with John and
Speaker 4: the next thing, you know, in January of twenty twenty one,
Speaker 4: I started at Blackstone and it's been incredible. My advice
Speaker 4: to people is, I tell this to all of our
Speaker 4: younger people. Try to be a nine or a ten
Speaker 4: out of ten every day. Don't overly plan out your career.
Speaker 4: Be really curious because if you're curious and passionate, no
Speaker 4: one will beat you, no one will outwork you, and
Speaker 4: no one will. You know, have more depth of knowledge
Speaker 4: and a topic.
Speaker 2: This is the thing, Joe. People sometimes think there's like
Speaker 2: a shortcut to success, but actually the real secret is
Speaker 2: just be very good every day.
Speaker 1: And knowing a lot.
Speaker 3: You know. I love hearing that phrase. I think I've
Speaker 3: said it about all of our good depth of knowledge,
Speaker 3: depth of knowledge, depth of knowledge. There's no substitute for
Speaker 3: actually knowing stuff.
Speaker 2: Yeah, okay, so you've been at Blackstone now for four years.
Speaker 2: What's been the biggest challenge over that time horizon, so
Speaker 2: four years. And what's your biggest challenge right now in
Speaker 2: the short term given all the market volatility that we've seen.
Speaker 4: Yeah, I think going from an organization where you had
Speaker 4: a small team where you present it to your investment
Speaker 4: committee to then going to you know, we have our
Speaker 4: division as eighty eight billion over three hundred people. So
Speaker 4: obviously the biggest change for me was becoming a better
Speaker 4: manager of large groups of people and still having maintaining
Speaker 4: a high standard of care and everything that we do,
Speaker 4: but also not getting in the backswing whether you're a
Speaker 4: tennis player or a golf player. Of my very talented
Speaker 4: partners who are helping me drive, and I got some
Speaker 4: very good advice from John Gray and Brian Gavin, who's
Speaker 4: our COO, about delegating the importance of delegating the importance
Speaker 4: of clear communication. So I got a lot of help
Speaker 4: along the way. This is a great environment right now
Speaker 4: in the market for us because we're in the absolute
Speaker 4: return business and we have a lot of volatility. We
Speaker 4: have a lot of stock dispersion, and that's great for
Speaker 4: our strategies. Quant loves that, Macro loves that, our low
Speaker 4: net equity guys love that, and then our credit is
Speaker 4: insulated because we're in very, very specialized credits. So it's
Speaker 4: a good environment. I would say that I haven't seen
Speaker 4: volatility like this since like two thousand and eight. I mean,
Speaker 4: and it's the market doesn't like uncertainty. Our products like
Speaker 4: uncertainty and volatility.
Speaker 2: Are you deploying more risk at the moment or taking
Speaker 2: on more risk?
Speaker 4: Absolutely. One of the things that our team is really
Speaker 4: good at is rebalancing into things that are down and
Speaker 4: trimming those that have done really well. And it's that
Speaker 4: rebalancing that leads to a lot of consistency. I know.
Speaker 4: John Gray on our earnings call said that mentioned that
Speaker 4: our group had been up twenty straight quarters in a
Speaker 4: row and twenty four months in a row, and I
Speaker 4: think that's a function of that rebalancing and really really
Speaker 4: bust portfolio construction.
Speaker 2: All right, Joe Dowling, thank you so much for coming
Speaker 2: on a laws Yeah, Joe, that was that was an
Speaker 2: enjoyable conversation. The one thing that really struck me is
Speaker 2: it is such a It strikes me as like such
Speaker 2: a competitive advantage if you can just buy and hold
Speaker 2: for a really, really long time like that seems to
Speaker 2: maybe this is simplistic, but that seems to be such
Speaker 2: a key difference.
Speaker 3: No, I mean that's that's huge.
Speaker 2: And then you can monetize that like liquidity premium, as
Speaker 2: Joe Dee was saying.
Speaker 3: You know, individuals can do that too, which is you
Speaker 3: just invest in a range of things and then not
Speaker 3: ever look at your four one K First's right, we're
Speaker 3: just really bad at it as humans.
Speaker 2: It's particularly difficult moment.
Speaker 3: I would say, No, that was one of those conversations.
Speaker 3: I mean I really enjoyed that where each specific question
Speaker 3: could have obviously been an hour long episode, right, because
Speaker 3: we could have talked more about what is the value
Speaker 3: creation of PE, what is the due diligence process for
Speaker 3: hedge funds to establish that the multi threat is truly uncorrelated?
Speaker 3: How stressful are these times for university endowments which thought
Speaker 3: they had really stable environments, and so it's like a
Speaker 3: very there's a lot to go on. I really do
Speaker 3: feel like it's like all of these are episodes within themselves.
Speaker 3: But I thought that was a great overview.
Speaker 2: Absolutely, and the alumni network points really interesting. I hadn't
Speaker 2: heard that before, but it absolutely makes sense, right because
Speaker 2: your resource basically all of your resources kind of well,
Speaker 2: except for government funding, most of your resources come from
Speaker 2: your alumni, so why not throw in I guess knowledge
Speaker 2: and expertise in addition to actual donations.
Speaker 3: People love their universities, you know, this is I don't know, Tracy.
Speaker 3: In Europe, is it the same way where like people
Speaker 3: I mean, I'm sure like an Oxford and Cambridge, but like, yeah,
Speaker 3: there's that same thing where like people wear sweatshirts to
Speaker 3: their universities until they're like in their fifties.
Speaker 2: Well, I personally enjoyed my university. I don't think it's
Speaker 2: as intense I feel it is.
Speaker 3: In the US, Americans really build their identity, but really,
Speaker 3: like I went to you know, ut or I went
Speaker 3: to you know, Eastern Iowa State or whatever it is,
Speaker 3: and then their entire personality is like, you know, go
Speaker 3: redbird to whatever the team.
Speaker 2: You never asked me what our college mascot was.
Speaker 4: Well, this true.
Speaker 3: What did did you guys have one?
Speaker 2: I think this might be one of the reasons why
Speaker 2: people aren't wearing like LC sweatshirts for the rest of
Speaker 2: their lives. But our mascot was the beaver. This one
Speaker 2: because we're industrious that's a great one. It's admirable for sure.
Speaker 2: All right, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3: I'm just Joe Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our producers Carmen Rodriguez at Carmen Arman, Dashel Bennett
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