CIO Greatest Hits: Hedge Funds – Dan Fagan (GIC), Craig Bergstrom (Corbin Capital Partners), and Adam Blitz (Evanston Capital)

This week's Summer Series is an asset class twofer covering hedge funds and private equity. The first is a hedge fund panel comprised of Dan Fagan from GIC of Singapore, Craig Bergstrom from Corbin Capital Partners, and Adam Blitz from Evanston Capital. The second is with Mario Giannini, Executive Co-Chairman of Hamilton Lane. Both offer deep dives into what it takes successfully invest as an asset class specialist. Please enjoy my panel with Dan, Craig, and Adam from 2023 and with Mario Giannini from 2022. Hedge Fund Master Class EP. 318 – May 29, 2023 Mario Giannini EP. 262 – July 18, 2022 Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠https://thepodcastconsultant.com⁠ https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

  Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe

• 0:46Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  With eight years and over 500 podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy, so we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 summer series focuses on CIOs.

• 5:03Ted Seides?

  We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven. Instead, we'll share a dozen gems canvassing every type of institutional asset owner. This week's summer series is an asset class twofer covering hedge funds and private equity. The first is a hedge fund panel comprised of Dan Fagan from GIC of Singapore, Craig Bergstrom from Corbin Capital Partners, and Adam Blitz from Evanston Capital. The second is with Mario Giannini, Executive Co-Chairman of Hamilton Lake. Both offer deep dives into what it takes to successfully invest as an asset class specialist.

• 5:47Speaker 02

  Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season, travel starts to wind down, it's right before the holiday crunch time, and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed-door gathering for capital raisers to connect with peers, learn from allocators and other experts, and really share in best practices with each other. You can learn more at capitalallocators.com/university. Thanks so much for spreading the word about

• 6:30Speaker 02

  Capital Allocators University for investor relations and business development professionals.

• 6:36Ted Seides?

  Please enjoy my panel with Dan, Craig, and Adam from 2023, and with Mario from 2022.

• 6:44Ted Seides?

  Great to see you all. Thanks for joining me. I'm looking forward to this geeked-out deep dive into hedge funds. Why don't we kick it off with a quick round on each of your programs? Why don't we touch on assets you're overseeing, longevity of the program, and your objectives in the hedge fund allocation? Dan, why don't you start it out?

• 7:06Speaker 03

  Thanks Ted. GIC is Singapore's sovereign wealth fund. We don't disclose our total assets under management for various reasons, but the program that we have is fairly large in hedge funds, and we've had it for a couple of decades. The GIC framework overall is one that has a very long-term investment horizon and a focus on generating good real returns above inflation, since we're trying to compound real purchasing power for Singapore. And we do that by investing in a diverse set of markets and asset classes, both public and private. I'm a member of what we call the External Managers Department, which essentially is mostly a hedge fund investing team, but we also invest in some other types of liquid

• 7:48Speaker 03

  alternative investment strategies. One thing I might add to this is just from GIC's perspective, since we invest across all types of asset classes and markets globally, not just hedge funds, one of the things about our approach to hedge funds at the more top-down level is that we see hedge funds as very important vehicles in the portfolio of active management. And the big reason for that is That hedge funds can provide very valuable diversification to these large institutional portfolios. And one of the things that we do focus on regardless of which manager we're looking at or which strategy we're considering is the ability to deliver some type of different edge

• 8:31Speaker 03

  or different type of return stream than we're getting elsewhere in the non hedge fund portfolio. And often that comes with having a low stress beta. That's a lens through which we view the program overall.

• 8:43Ted Seides?

  Craig?

• 8:44Speaker 04

  We manage about eight and a half billion dollars at Corbin. About three and a half of that is in various opportunistic and private credit programs. But relevant for today, we manage about $5 billion in what we would call Fund of Hedge Funds 2.0 or 3.0. So allocating to external managers is the principal strategies. And then a bunch of related strategies and technologies that we've built around that. The firm in its current incarnation goes back about 22 years. That's when I joined.

• 9:18Ted Seides?

  Adam?

• 9:19Speaker 05

  Evanston Capital has been around since 2002, been there since inception. We manage about 4.3 billion right now. Most of that is in hedge fund strategies. The objectives are to generate attractive risk adjusted returns.

• 9:34Ted Seides?

  There's a lot of ways of getting at those objectives. So maybe we'll do one more round before we dive in on how you think about your investment approach in the space. Why don't we do the same order? Dan, go ahead.

• 9:47Speaker 03

  I think the right way to think about our investment approach in our team specifically, we are bottoms up. The process does not start with us looking at certain strategies like fundamental equities or quantitative equities or credit, and then setting a budget for how much we want to put into each, then going out and filling that budget. Quite the opposite. We're looking globally at all types of investment opportunities, pretty much strategy agnostic in that sense. And then when we find something that seems truly compelling, we pursue it. The rationale behind all that is we simply don't think there are that many opportunities

• 10:28Speaker 03

  out there that are truly exceptional and truly compelling. So we try not to narrow the spectrum across which we look at first. And that's worked pretty well for us over time. Obviously, you make adjustments at the end of the day if you figure out that you're tilting too heavily in one direction or another.

• 10:46Ted Seides?

  Craig?

• 10:47Speaker 04

  There's not much I would disagree with about that, but would say that we put it into practice in a little bit of a different way. So it is, again, predominantly a bottom up manager selection oriented framework. That's how we're trying to drive most of our excess return. We do think of ourselves in that way as looking a little bit like traditional asset management. There's a universe of hedge fund strategies and we want to add alpha or excess return with manager selection being the principal way to do that. Asset allocation being something we think about episodically, but we think a hard way to add value in hedge fund portfolios. And then I would say we bring a layer of priors

• 11:29Speaker 04

  to the things we focus on. We focus on fundamental strategies. We have a preference for single risk takers. Some of that circles back to things that we think we can develop a really complete understanding of where we're able to bring our experience and our analytical skills to bear effectively.

• 11:49Ted Seides?

  Adam?

• 11:50Speaker 05

  I'd echo a lot of what Dan and Craig said. We just don't think there's that many good hedge funds out there. Our whole job is to identify and gain access to them. That often leads us to early stage managers who aren't managing a lot of money, that the principals of the firm are hungry at that time. And there's not many good ones like that out there, but those are the ones we tend to prefer. It's mostly bottom up. Hopefully, our best skill is in picking managers. Always harder to allocate among the different strategies from a short term perspective. Certainly, we might have a view on that, but we're not going to tilt the portfolio enormously to reflect that view.

• 12:26Ted Seides?

  Craig, you mentioned that your program is maybe version 2.0 or 3.0 at this point in time. What do you mean by that?

• 12:35Speaker 04

  We're trying to just build additional capabilities and additional ways to try to capture alpha insight. So a simple, straightforward example would be sometimes we'll participate in things via separately managed accounts to try to capture a subset of what a manager is doing, right? If we think one subset of their strategy is really differentiated and other stuff looks like things we have other exposure to, we'll participate via more focused SMA. I guess that's 2.0. There are markets that we trade internally. We trade CLOs and CBOs facing the street, trying to use our manager selection insights and

• 13:16Speaker 04

  leveraging our relationship and transaction flow. So maybe that's 3.0.

• 13:22Ted Seides?

  I want to take a step back and talk about the outlook for the space in general. Craig, the most obvious change, certainly over the last year, is the rate environment. How does the rate environment affect what you're doing, both on your decisions and what you expect from the portfolio?

• 13:39Speaker 04

  So there's the short-term answer, which was painful last year, but I think driven by disruption caused by how quickly rates moved, in particular, long-term discount rates. Most of our portfolio, we think, has a pretty direct structural relationship to short-term rates. We're active in long-short equity, where people earn short rebate off short rates. Most of our credit portfolio is either truly floating rate or effectively doesn't carry much rate duration because of coupon or price or event-driven characteristics. And even our macro portfolio typically carries a pretty high level of unencumbered cash, which should earn short rates. So if we're moving to an environment of structurally

• 14:24Speaker 04

  higher rates, we would expect our returns to be structurally higher in a highly correlated and direct fashion.

• 14:33Speaker 05

  I would tend to agree with all that. I think the total return expectation for most hedge fund strategies, like Craig said, has gone up linearly with the level of short rates, even without any change in skill from the manager perspective. But that matters. Foundations have a 5% payout requirement every year. Most endowments pay out 5% or 6%. It's very hard to include a hedge fund strategy, even if it has a very high Sharpe ratio or risk-adjusted return, if the total return is only 3% or 4%. But now that we've hopefully cleared that threshold, at least from an expected perspective in most hedge fund strategies, they might have a role again in those endowment foundation portfolios.

• 15:12Ted Seides?

  Are any of you doing anything differently in either your relative allocations across strategies, or how you're thinking about the managers you want to invest in because of the environment?

• 15:24Speaker 03

  These are still problems that we're wrestling with and haven't decided exactly what the game plan is going to be. But I think it's fair to say that compared to 12 to 18 months ago, we are trying to make sure we're positioned for a broader range of economic and market outcomes than we were before. For example, if we do go into a distressed corporate credit cycle, do we have the right relationships to take advantage of that? Do we have the dry powder to take advantage of that? Are there certain ways we might want to think in advance about how to deploy? Do we want to set some pre-agreed trigger levels with managers, for example, based on something like a high-yield index

• 16:07Speaker 03

  spread, or whatever it is that you want to use as your proxy? And then if we don't go into a distressed cycle and we hum along, do we have strategies that can grind it out through environments like that? Whether it's a low-growth and low-inflation environment, a stagflation environment, going back to this bottoms-up idea, we're not going to say, here is what we think is the most likely outcome and second most likely, so let's go invest in stuff based on that. But we do need to think every day about how all the things we have will react in those different outcomes, and if we should be doing things

• 16:46Speaker 03

  on the margin. So it's not very specific, but it definitely has dominated our thinking over the last several months, at least.

• 16:56Ted Seides?

  Craig, let me ask you, how do you think about making those allocation decisions based on the economic environment yourself compared to delegating that allocation decision to a manager to do for you?

• 17:12Speaker 04

  It's one of the big challenges because inevitably, if you're investing in managers that you think are super talented, typically they have a reasonably broad remit. We tend to focus on managers that we would be comfortable with doing a range of things, though there are certainly things that we aren't comfortable with. So, once you're investing that way, it's hard to develop a super narrow view about how something will behave in a certain market environment. And that's really one of the reasons why we think it's so challenging to drive value through asset allocation as opposed to manager selection.

• 17:53Speaker 04

  But to Dan's point, we're always thinking about the economic environment, the market environment at the margin, and it's certainly shaping our portfolios in some way.

• 18:06Ted Seides?

  Adam, any thoughts?

• 18:07Speaker 05

  I agree with the bottom-up focus. The one area we tend to be tactical on, and this is not rocket science, but we tend to increase our allocation to directional credit and distress strategies when rates are higher and defaults are higher. And we tend to do the opposite when they're lower. When the opposite is true, like pre-pandemic, in credit markets, which are very frothy, managers in our view tend to kind of lever their strategies up or sort of push for higher yields and take a lot of risk to do that. And it might work for a while, but ultimately it'll probably get you in trouble. So, credit is really the one area we're tactical on. Certainly, if there's a dislocation or a fat pitch, 2008, right when the pandemic

• 18:52Speaker 05

  struck, would be examples of that, where there were just very micro dislocations in various areas that we sought to quickly take advantage of. But generally, credit is the one area that we're the most tactical on.

• 19:03Speaker 04

  It's exciting, though not too frequent, when you can look at dislocation in sort of a submarket and have a clear view that it's way more dislocated than other closely related things. To Adam's point, during the pandemic, CLOs came under much more stress than very roughly equivalent risk in high yield. So that's exciting because you can say, hey, I don't know exactly what's happening to the global economy, but I know that what we see in CLO double A or triple A is discounting a world far, far, far worse than what we see in high yield bonds or leveraged loans.

• 19:47Ted Seides?

  Adam, I want to turn to something that Dan mentioned earlier, which is positioning your portfolio to have liquidity to take advantage of, whether you're seeing opportunities in the credit market, as you said, or these dislocation opportunities that Craig mentioned. How do you think about managing the portfolio as an LP in a lot of these funds from that liquidity perspective?

• 20:08Speaker 05

  We're always focused on having liquidity that's appropriate for the strategy that we're investing in. So if that's long short equity, generally those are more liquid strategies. There are certain select cases where maybe a manager is of such a high quality or in so much demand that they can demand longer terms, but it would be unusual for us to want to invest in that. It's happened before, but would be unusual. Then you have strategies like many credit strategies where you don't want the manager to offer very liquid terms. If you're in a commingled fund in credit and the manager is very liquid terms, but the underlying assets aren't very liquid, that can get you in trouble very quickly. If they put in a large redemption and start selling at bad prices, that negatively affects

• 20:53Speaker 05

  you as an investor who's sort of sticking with it for the long term. I think liquidity risks right now are underrated and underappreciated. There's a lot of optics of good liquidity in markets, but a lot of that liquidity, especially in equity markets, is just day trading back and forth. And if you need to get out of a fairly sizable position and Fairly short period of time liquidity is just not great. And it even extends to things like bond markets you saw in March of this year, where you had a pretty violent move in the two-year bond, one of the most liquid assets in the world. Many macro managers were positioned in that bond. They had to get out of that position when Silicon Valley Bank news hit. Most macro managers were short the bond, so a pretty violent move down in yields

• 21:37Speaker 05

  in a very short period of time due to the illiquidity. Then quickly, from our standpoint, managing liquidity, we have a pretty elaborate spreadsheet slash database of all of the terms of the underlying managers. And we just wanted so that every quarter, we have substantial liquidity to move the portfolio around, to allocate potentially to these dislocations and not have it that there's any one quarter or one period where we're unable to make adjustments to the portfolio, even though we're trying to be a very long-term investor.

• 22:07Ted Seides?

  Dan, the undisclosed amount that you manage is no doubt very large. Curious, how do you think about the size of your footprint? Both in terms of how you want to manage around your portfolio, but also how that then affects the managers you invest with in the underlying markets?

• 22:26Speaker 03

  Yes, if I could cheat a little bit and talk a little bit about the footprint of the industry in general, because following up on Adam's point, I think this is a very important topic today. When you think about the footprint, I think we really mean the total size of positions that hedge funds hold, not their equity capital. I mean, equity capital of the hedge fund space, I believe most people put around $4 trillion today, which maybe that sounds big because there's a trillion involved. But keep in mind, you just combine Apple and Microsoft. Their market cap together is $5 trillion. So I don't think that $4 trillion number should be so scary. And it's distributed across thousands of funds and things like that. But hedge funds are levered.

• 23:09Speaker 03

  Let's just assume two and a half times gross leverage for the industry in aggregate, which is, I think, is probably conservative. That would get you to $10 trillion, which is what I would then call the footprint of the hedge fund industry. $10 trillion is a bigger number. The entire US public equities market is about $40 trillion, I believe. So you're talking about a quarter of that. US Treasury market is only a little over $20 trillion. So using a conservative estimate, we've already gotten the hedge fund footprint to half of the US Treasury market, which incidentally, the Treasury market's about the size of US GDP, so half of GDP. That's a pretty big quantum that we're dealing with. And then we can go a step further. That 10 trillion estimate is just static book size. Hedge funds are also

• 23:53Speaker 03

  very active traders. So if we think about total turnover in the markets, how much of daily equity volume are hedge funds doing? What about in fixed income? That's much harder to pinpoint. But to Adam's point, we see it. We're investing in hedge funds as LPs. We see the activity in their books, how quickly they turn things over, and how difficult it can be to get out of certain positions in markets that are traditionally considered very liquid, like US Treasuries or GILTs. There are certain areas of the market where you might think that they're occurring in a vacuum, or that hedge funds trade around with each other, but it doesn't matter so much. Things like cash futures basis trading,

• 24:38Speaker 03

  index rebalance, stat R, and things like that, liquidity providing strategies. But nothing's really occurring in a vacuum anymore, largely because of the influence of multi-strategy funds and platforms that will trade all of these strategies at the same time, and have aggressive risk-cutting guidelines for when they're losing money in any one book. So it could be today that you have some large hedge fund that loses money and March 2020, say, in a cash futures basis book. But guess what? They're also going to start cutting risk in their stat R book as a result. And then in some other corner of the market, you're going to find that that liquidation hurts a fundamental equities manager, and these things can cascade. And it's a very serious issue that we all deal with. So bringing

• 25:23Speaker 03

  it back to the question about GIC specifically, how do we think about our footprint? We think about the footprint of those managers in which we're investing, how their footprints probably overlap with the biggest risk takers in those spaces. And we try to select only the managers where we think The principals have a keen focus on that problem and are approaching it from the front foot, if you will. It's not always going to work. People are going to get caught up in liquidations and deleveraging episodes, but our job is to try to think about that ahead of time and make sure that when we pick something to do, we're doing the ex-ante

• 26:07Speaker 03

  safest version of it.

• 26:09Ted Seides?

  Curious what that means in practice. So you can talk to someone about how they understand that footprint, their firm, the broader context of who's trading, what they're trading. What do you actually look at, Dan, when you're saying you want to do the safest version of that context?

• 26:30Speaker 03

  I would describe it as most investing, you start by thinking about what the opportunity of the investment is. In this case, I think you want to start it with the risk culture, framework and setup of the business model itself. So what does that mean in practice? If you're dealing with a large fund that has a footprint in fixed income relative value and systematic equities and a bunch of other stuff, don't start by going, well, what do you think about the opportunity in fixed income RV? Start by saying, what are your counterparty relationships like? How long have you known these counterparties?

• 27:10Speaker 03

  Are you a big share of their footprint? Are you a very important client to them? What are the terms like? How have those terms changed over time? You would also want to know, what are your LPs like? Are you going to experience coal holder risk with other LPs who might be faster money? And this is a tricky one because this is actually an area where you have to make a balanced assessment between your own position as an LP in isolation and your position in ecosystem. It's the redemption terms of the fund. It could be that you think, look, I always want the best liquidity I can have. I want to be able to get out in a month with 30 days' notice. But if you're talking about an investment in a fund that runs levered books and might feel

• 27:55Speaker 03

  a lot of mark-to-market stress, you probably don't want other investors to be able to get out with 30 days' notice and monthly liquidity. So you have to strike a balance there, too. And then, I shouldn't save this for last, but that stuff beforehand is more about the business model and the relationships. It's also the frameworks that these places have for their portfolio managers and risk takers, how aggressively they have people cut. Some places really will force people to cut risk at very narrowly defined drawdown thresholds. Others will give more scope. I can't say that one's necessarily better, but you need to understand what that is and why the manager is doing it in the way that they do.

• 28:37Speaker 03

  You will find a very wide range of approaches that firms take.

• 28:41Ted Seides?

  Craig, you mentioned earlier preference for single risk takers. What Dan is talking about is a lot more larger firms, larger footprints. Would love to hear any reflections you have on what Dan said about the importance of that contagion risk and the footprint of the industry.

• 28:58Speaker 04

  One thing that I would just high level tie to what Dan said in that thoughtful analysis and something Adam mentioned earlier about quality of hedge funds, we believe that there are way too many hedge funds. I don't think that hard to identify a lot of firms that have no reason to exist. To your question more directly, we have a preference for a single risk taker model, and typically the PM and sort of the business owner are the same. It's not absolute. We do have investments with bigger businesses that look more like platforms. We will do that if we think the value proposition is there.

• 29:38Speaker 04

  But for us, it's way easier to evaluate and understand alignment in a smaller risk taker model. And a big part of our value proposition is delivering a reasonable degree of idiosyncratic security selection alpha through to our clients. It's typically easier to find that in someone who runs, I'm making this up, 30 positions that are 5% or 6% in single securities.

• 30:11Speaker 04

  Than a firm that runs 2,000 positions with 20 basis points in a single security. It doesn't mean that those are bad investments. It means that it requires a different analysis from the way we tend to make our investments.

• 30:27Ted Seides?

  How do you think about, in a manager that has those more concentrated positions, what they don't know about what's happening at, say, the platforms that are trading those same positions in much bigger size?

• 30:41Speaker 04

  I think that's always a danger. Arguably, the danger might be larger in reverse. When I think about managers of ours that are following a fairly modest number of positions with a high level of experience and engagement, it's not clear to me necessarily that even a talented PM who's turning over the portfolio multiple times a month is going to have that level of insight. There are certainly dangers to be on the wrong side of the information asymmetry in both directions. And I think even really talented investors in public markets aren't right that large a percentage of the time.

• 31:23Speaker 04

  So then you're back to diversification, risk management, and how you handle the downside nodes.

• 31:30Ted Seides?

  Adam, I'd love your thoughts. Maybe a lens on that emerging manager portion of what you do in context of the industry.

• 31:38Speaker 05

  We definitely think that there's a ton of alpha to be had in finding managers early, again, when they're hungry, fully engaged, not managing a ton of money. Time and time again, when you look at significant hedge fund issues, they're caused by some combination of leverage and illiquidity. Those are the things that cause the permanent issues. Leverage causes issues because it can lead to margin calls. It can lead you to have to redeem out of positions quickly and probably at unfavorable prices. Illiquidity, right? If your investors can get out quickly, or you're managing a large footprint, or you change your mind on an individual security. If it's illiquid, it can also cause a lot of damage to your portfolio.

• 32:20Speaker 05

  So, early managers tend to not have issues on that liquidity front. I mean, they're not managing, in most cases, a lot of money. Their investors have locked into their investment. And so, there's a period of time where that illiquidity is not an issue for them for those reasons. Leverage is a real risk. There's no way to overstate it. It really is the thing that can get people in trouble. And I think a lot of the risk systems that have been built over the years in many of these multi-strategy types of managers, some certainly have excellent risk systems. I think some have what optically seem like good risk systems that are very backward looking. You have lots of people using the same risk systems.

• 33:04Speaker 05

  I think it can lull you into a false sense of security that can make you feel like, hey, I can lever up my portfolio. My standard deviation is only X. I feel good about that. But if everyone's in kind of similar positions with similar approaches with similar leverage, the risk is exponentially higher than the system might indicate. Tying it back to the emerging managers, tending to have a smaller footprint, tending to have a locked-in investor base, I think is very, very helpful on all those fronts. And whether it's emerging manager or non-emerging manager, I think the avoidance of high levels of leverage, it's not necessarily an optical risk mitigant. It might not lower your standard deviation of returns,

• 33:46Speaker 05

  but I think it is a mitigant to that permanent loss of capital risk.

• 33:51Ted Seides?

  I'd love to turn to talking about some of the underlying strategies within hedge fund portfolios. And Dan, I think we have to start with the platforms. These platform hedge funds in what's become a pretty concentrated industry by assets have by far the largest footprint. What's the investment case for the platform hedge funds?

• 34:10Speaker 03

  It's an interesting case because the elevator pitch for hedge funds, I think, and Adam alluded to this earlier, is that if you invest in hedge funds, generally, you're not going to get total returns that are quite as high as equity markets. But you'll get something maybe that's between the returns of bonds and equities, and the volatility will be much closer to that of bonds, and you'll have low beta to both. That actually sounds pretty good. Now with these platforms that we're talking about, if you look over the last three, five, 10, or even 20 to 30 years in cases where they've been around for that long, and there are some that have, the platforms have actually outperformed equities on a

• 34:53Speaker 03

  total return basis with volatility and the betas that have been as low or lower than the overall hedge fund industry. So it almost looks like a silver bullet. That's why people have been attracted to this exposure. The results have just been highly compelling on paper. But if you step back and think about what is a platform? A platform, in short, is just a type of hedge fund that's allocating risk-taking across multiple distinct portfolio managers or trading teams. Each of those teams is pursuing a specialized strategy. One could be trading utility stocks, another could do M&A, another could do rates and FX. For the most part, they're running market-neutral, that is, with very little exposure to broad market drivers like equity beta or momentum or CSO1 or whatever.

• 35:37Speaker 03

  And to Adam's point, when you do that and you think you have something that's good, you will lever it up. You actually have to if you think what you're getting is alpha because you're charging high fees and the return on GMV is going to be fairly low. I like to think of good platforms as levered, high-quality alpha. And for people who are familiar with modern portfolio theory, what the platform model essentially is trying to do, it's trying to create the tangency portfolio on the efficient frontier. But instead of combining the different asset classes or securities to do that, they're combining people who are managing money. And once they have what they think is that optimal portfolio of people, they lever it up to the target standard deviation and

• 36:19Speaker 03

  Now, this only works if the people are good. And I think that's something that's being lost in all of this. The proliferation of AUM in the multi-strategy platform space is pretty remarkable. And the amount of talent out there, frankly, I don't think supports where we are today. There's been a lot of hiring of people who are good traders, but aren't probably the few best in their space. And they're being given a lot of money to trade. And I think that's really what Adam hit on, this false sense of security.

• 37:02Speaker 03

  Just because you have a good risk system and you have what you think is an optimal portfolio that you're levering. If you have not really selected exceptional people to be on that model, you are creating vulnerabilities for yourself and for the entire system. There's not much we can do to stop that, other than to not give capital to places where we think that's going on. But that's the reality in which we are currently living.

• 37:29Ted Seides?

  Dan, I have to.

• 37:31Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 38:09Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 38:14Ted Seides?

  And now, back to the show.

• 38:18Ted Seides?

  Follow up by asking, how would you know? Because you might see risk reports that show thousands of positions in market neutral, but how do you get a sense as an investor in these of what's really going on?

• 38:29Speaker 03

  That's a great question. I think it's difficult, but I don't think diligence into multi PM platforms, or quant funds for that matter, is as opaque as it's often made out to be. You have to want to deal with people at a pretty granular level. And what I mean by that is you need to work the network or the ecosystem. If you're allocating to funds like this and you want to do it with confidence, you almost have to wear a second hat of being a pretend recruiter as well. You want to talk to as many people who go in and out of these platforms as you can. You want to understand the different styles that different platforms attract.

• 39:14Speaker 03

  And then you want to cross-reference as much as you can, try to have honest feedback relationships, which takes a long time to develop and frankly, is a lot of work. The other thing is there's an analog with looking at a concentrated equities portfolio. Maybe there's 50 stocks, maybe there's 30 stocks, maybe there's 20 stocks. If there's 20 stocks, maybe though you only need to look at the first seven or eight. But there's something like that in the platform space too. If you find a platform that has 200 portfolio managers, certainly you're not going to go out and get to know 200 people really well. So what you do is you look across the different strategies they have,

• 39:53Speaker 03

  the core business lines, and you try to find the two or three biggest allocations in each. Try to talk to them if you can, try to develop relationships with them if you can. If you can't, spend as much time as you can trying to figure out what other people think of them, people who've worked with them in the past. It's an imperfect process like all of this is, but the longer you do it, I think the easier it becomes and the more enjoyable it becomes. Cause there are really brilliant people and exceptional traders in this ecosystem. And a lot of them are happier than you might expect to talk about what they do.

• 40:29Ted Seides?

  Dan, one more for you, which is, as Adam mentioned earlier, leverage is one of the real left tail risks in the industry. How do you get comfortable with the degree of leverage taken by the platform hedge funds you invest in?

• 40:43Speaker 03

  You don't. I honestly don't think you're ever comfortable with that. If you're comfortable with leverage, you are doing something wrong. It's always about the trade off. You will find that certain managers clearly run too much leverage for their capital base, their LP liquidity terms, the talent they have on their platform and the markets in which they operate. That will happen sometimes and it can be really difficult to not proceed with doing more diligence because the returns can look really good for a long time. The way that I personally get as comfortable as I can with leverage in these strategies

• 41:27Speaker 03

  is by making sure that the things that I propose for investment or ultimately in which I invest are managers that have very good communication with us, answer all our questions very directly, share with us a lot of data, frequent data too. All of the relationships that we have with funds of the type I've been describing are relationships where we can call them up right now and talk to people immediately and pose our questions and have them asked, making sure that we have relationships like that. It's the only way I think it works. And March 2020 was an illuminating experience from that standpoint as well because we went through that in real time, multiple times a day

• 42:10Speaker 03

  on the phone with different people at some of these firms, not even just those with which we have invested relationships, but trying to understand what was going on in the market. And you can do that in a more relaxed fashion. It doesn't have to be amid some 20 standard deviation crisis thing. And the more you do it, I don't want to use the word comfortable, but I suppose the more comfortable you get. You can never have all of your exposure in highly levered strategies. I think that'd be very irresponsible. You have to figure out what the rest of your portfolio looks like, how much stress you can absorb in crisis periods and then go from there.

• 42:43Ted Seides?

  Craig, you certainly have these platforms as part of your remit. So sometimes you're investing in them, sometimes you're not. Would love to hear what it's like when you invest in a platform fund when you're not GIC. So that you're another investor, you might be an important investor, but it might be harder to get access to have that phone call answered when you want it.

• 43:06Speaker 04

  A lot of that, I would sort of echo what Dan said. It's got a relationship element to it. We have an investment with a manager that's a little different than what most people mean by a platform, but has a bunch of those characteristics. Many risk takers, very large AUM, tremendous long-term track record. We've been invested with them for over 20 years. So that's helpful. It means that we've met different senior people at different times, in different market environments. I think if we were to approach that manager today, we wouldn't be able to develop the level of understanding and conviction that I think we have now.

• 43:49Speaker 04

  And I think back to a meeting at another one of those marquee shops where I sat with one of the most senior people and I asked about the distribution of daily returns. Is there serial correlation? What do the tails look like? And he said to me that he didn't look at the dailies. That seems very unlikely to me. My assumption is that he wasn't that interested in talking to me about the dailies. So we move on. If someone is not willing to give us the information, we need to do our due diligence. We need to move on.

• 44:26Ted Seides?

  Adam, what's the case against the platforms?

• 44:30Speaker 05

  They hit on a bunch of things investors say they don't want. I mean, there's high leverage, there's high fees, they're opaque. Certainly there are exceptional traders and portfolio managers within platforms, some who say, you know, I don't want to run my own business and deal with that sort of stuff. And so the platforms are a natural place for them. You're really taking a leap of faith, I think, as an investor. Some of these platforms have exceptionally good margin terms with their prime brokers, very tough terms with their investors. And I think that that's critically important because that helps manage if you have some sort of mark to market performance episode, they're less likely to be a forced seller. There seems to be insatiable investor demand for these platforms, though, and it's spawned

• 45:15Speaker 05

  a bunch of other types of platform firms who might not have as good a margin terms with their prime brokers and might not have as good terms with their investors. And so going back to the contagion risk that we talked about earlier, if call it mediocre platform is forced to delever due to some sort of performance episode, given the similarities probably of what the various platform players are doing, and given the similarities of their risk models and all likelihood, or at least there's a high likelihood of a common thread in those models, you could have a mediocre managers deleveraging start to lead to tough performance episodes even in the better platforms. And even a better platform, if they don't have really tight margin terms and investor terms, could be forced to sell at a bad time.

• 45:57Speaker 05

  And so similar to Craig, our one cardinal rule is just don't invest in something you don't understand. We have no other hard and set rules, but we've just found it very difficult over the years to really understand what is the alpha, what is the edge that these things collectively are bringing. You can certainly look in the rearview mirror and you can't argue with the historical performance, you know, it's excellent, both on an absolute risk adjusted basis. But our job as investors is really to think prospectively, both about return prospects and risk prospects. That would be the argument against.

• 46:32Speaker 04

  One other thing that I would add is that there's a decent amount of survivorship bias here. The ones that we are all talking about that are front of mind are the ones that have the tremendous long-term track records. In my career, a bunch of extremely well-regarded multi-strategy managers that look like platforms roughly went to zero.

• 46:55Ted Seides?

  Adam, I want to follow up on either long short equity or macro. So I'm going to throw out two cases and we'll talk about each. So you talked about really be able to understand how someone drives returns. That's notoriously difficult in the macro space. And yet that's an area of intrigue today. And then on the long short equity side, the platforms are trading in those markets. I know you're a fan of long short equity, but in a slightly different way. So why don't you pick one of those and just go into it?

• 47:25Speaker 05

  Maybe I'll go with long short equity because I feel out on an island as far as liking that strategy right now. And no doubt collectively over the last decade, long short equity has performed in a fairly mediocre fashion. Again, our job is to think prospectively. So what's happened the last 10, 12 years? You've had a lot more money flow into passive investments versus active investments. And you've had a lot of money flow into the platforms, which not to paint a broad brush, but generally are shorter term traders. And so in our view, that's created a real vacuum for active stock pickers who think over the medium and long term and aren't as bothered if there's noise or volatility along the way that might be caused by the short term trading from the platforms.

• 48:09Speaker 05

  And there's certain sectors where there's just a lot of opportunity and inefficiency. In long short equity, we tend to, as a firm, invest in sector specialists who don't manage a lot of money. And so you look at areas like biotech and all the advances there on the long side. And then on the short side, all sorts of companies that came into existence over the last few years of easy money that probably never should have been public companies and are probably quickly going to run out of cash. That's an excellent long short opportunity, but it might not play out over the next month or quarter. And you could go in other sectors, commodities, financials, real estate, software and right on down the line. And we think there's tremendous opportunities, long and short.

• 48:53Speaker 05

  Not a lot of great managers for sure. So it's all about picking the right manager, getting in early, knowing when to get out. But we think the opportunities are absolutely there. And passive versus active, historically passive has outperformed. Active when equities go up, if you look historically and active has tended to perform better in more muted markets. And so through just the rear view lens of the last decade, you'd say, boy, why bother with active management? It's never going to work again. But if you think the next 10 years are going to be a little rockier for equity markets, little more dispersion, we think the opportunity is there. At the same time, the competition, we think is as low as it's been in a very long time to fight for that medium and long term alpha. So bullish on long short equity. And that's definitely, I think, a contrarian view right now.

• 49:39Ted Seides?

  Adam, one of the tricky things you run into is this distinction between the stock selection opportunities and rigorous portfolio construction. So we know, like as Dan talked about on the platforms, you have this very rigorous risk management. How do you think about a manager who you think does a great job of finding individual stock inefficiencies, but also has to have this lens of sensible portfolio construction discipline?

• 50:07Speaker 05

  Yeah, you really need to thread the needle. A lot of long short equity managers actually run at too low of an exposure, both gross and net exposure. And you need such a tremendous amount of stock picking alpha to overcome that cash drag, to overcome the fees that they charge in order to generate something that net of fees is interesting, even if the stock picking alpha is excellent. Conversely, though, if you run at too high an exposure, you run into that risk of, boy, now there's a mark to market event that's hurting my portfolio this month because I'm running at such a large exposure. Now I'm getting a call from my prime broker, or for some reason I need to de-risk my portfolio. And I'm turning what could have just been a annoying mark to market into a permanent loss of capital

• 50:50Speaker 05

  as I'm getting out of these bad prices. So there's kind of a sweet spot in the middle where there's enough exposure. And let's call this 100 long by 60 short as sort of a sweet spot, if you will. Depends a little on the volatility and dispersion of the area. You can probably go a little lower than that in higher volatility sectors, maybe a little higher and lower volatility sectors. But that's a sweet spot where the stock picking can be Rewarded on a net of fee basis, but you're not taking so much risk that you face that margin call risk. And we generally like concentration in portfolios. I mean, we want the best ideas to matter. You know, if you see someone talk with high conviction about a handful of names, but then you see a tale of 30 names at 1% each, even if they're right

• 51:35Speaker 05

  on those top couple of positions, again, the likelihood that all that skill is not diluted at the end of the day is low. And so again, not many good long, short equity managers, but we really view our job is to find them. And we think the opportunity right now is very good, both from the stock picking perspective, and if you can find the manager who really is thoughtful on the portfolio construction part. Craig, Dan, any additional thoughts on fundamental long, short equity?

• 52:02Speaker 03

  I've spoken about platforms a lot because that's an area of interest, but certainly don't want to give the impression that we at GIC, any of us on our team, really have abandoned fundamental long, short equity in the more traditional implementation. If anything, I think it's critical to make sure that you're looking in areas that might be a little bit unloved at the current moment. I think we'd probably all agree with that. One of the things that I would criticize platforms for, in contrast to some of the positive things that I said about them earlier, they are, like Adam said, short-term oriented.

• 52:45Speaker 03

  That's the design. They have to run high sharps at the individual team level to make that whole portfolio construction exercise work. So if you just invest in platforms, or even if you put a really big portion of your hedge fund portfolio in platforms, you abandon some very valuable potential sources of return.

• 53:08Speaker 03

  People simply who can hold concentrated stock portfolios through multiple earning cycles. If all you're doing is platforms or quant, you're going to miss that. You can argue about how to find the right managers in that space, but to say that you shouldn't be in that space just because it's had some apparent difficulties from high-profile funds that have struggled, I think that would be really short-sighted. So when we think of long-short equity at GIC, we think about the different styles that managers have. And ideally, we'd like to have some allocation to all types of styles.

• 53:49Ted Seides?

  Craig, there's a lot of talk about credit investing and the pending cycle. Would love to get your thoughts of what you're seeing and how you're participating in it.

• 54:00Speaker 04

  The pending cycle is a little bit like the annual article saying that this will be a stock picker's year in the Wall Street Journal. I think we've had, what? Five pending distressed cycles in the last 10 years? And maybe we realized one of them, and it was about six weeks. So you needed to put your money to work fairly quickly. That is not to say that there won't be significantly higher defaults going forward. We see defaults heading up pretty sharply, even the last, let's call it, six weeks. I think that we are not going to see a golden age of distress. Oh, these are great businesses that happen to have not the right cap structure. Those days are gone.

• 54:44Speaker 04

  The markets are too competitive. They're too multifaceted. There's too much dry powder. And in particular, the reorganization process has gotten, in our opinion, too sharp-elbowed, too expensive, in some ways, too value-destructive just because of all that competition. So I think broadly, we are trying to be ready for a higher default environment. We're trying to be defensive to a lower recovery environment. That's, I think, a trend that we see as even more dramatic than defaults. To Adam's point, it is a place where you want to have some flexibility to increase your exposure when the opportunity set is increasing.

• 55:27Ted Seides?

  And where are we today?

• 55:29Speaker 04

  Well, if I had that perfect crystal ball, that would be great. I think broadly, we think that the opportunity set in credit is reasonably good, simply because I think a fair amount of prices are discounting a reasonably recessionary environment. And I think that's probably still a likely outcome. But I think it's that likely outcome, but not certain outcome is pretty well reflected in prices of a lot of credit assets already.

• 55:58Ted Seides?

  Adam, I'd love to circle back on macro. Never quite understood when it's a good time of macro. Hear about it, it comes and goes. Well, love your thoughts.

• 56:08Speaker 05

  Yeah, it's a hard strategy to be tactical on. I mean, I think the one correlation is when there's volatility and uncertainty in markets, there tends to be more opportunities for macro managers. And when you have a period like the 2010s, when volatility is low, there tends to be less opportunity. Having said that, finding managers who can take advantage of that opportunity is always challenging. And we just don't think there's many good macro managers. And it's often hard to distinguish who's actually good and has a repeatable process and edge versus someone who might've gotten lucky one day and got a call on the euro, right? And they're sort of riding that for a decade. So the thing that we think is repeatable is having an edge in trade structuring and implementation.

• 56:51Speaker 05

  So basically, instead of saying, I'm going to put all my eggs in the euro basket or put all my eggs in the basket of the 10 years going up, sort of view things through a probabilistic lens and say, you know what? I think that there's an 80% chance of this outcome and the market's going to move like this. And a 20% chance of that outcome and the market's going to move like that. And try to structure a trade maybe through options or something that kind of reflects that probabilistic view. And see, you know, are there parts of the market that are mispriced? Whether it's the cash market like the euro or the bonds or the options related to those instruments. So that to us is more of a repeatable, sustainable edge. It offers more opportunity than trying to make one big bet and hopefully get it right. And hopefully it can.

• 57:36Speaker 05

  Also be a risk management tool where if you're wrong, it naturally reduces your risk as opposed to amplifying it. But also look for the fat tails on the right side of the distribution where it's like, boy, the market is not putting a high probability on this outcome of, let's say, rates falling a lot. I can buy an option for that very cheaply. And even though that's not my expected outcome, the market would reward me for taking that bet. So that's kind of how we view it. We think, given all the volatility right now in markets, the uncertainty, geopolitical risk, there's certainly the opportunity for dispersion among markets, movements in rates and things like that, currencies that should present good opportunities for macro managers to hopefully do well.

• 58:19Speaker 04

  I would say we agree with a lot of what Adam said. It's an interesting portfolio fit. It's the lowest beta to both risk assets and other parts of our portfolio. It has an imperfect, but something of a long volatility profile. So we like that as a component of our portfolio. We also like that while it's challenging to find good managers, we've been able to generate a decent amount of manager selection alpha in the space. But it's unquestionably challenging. There are relatively few players. There are relatively few training grounds producing strong new players.

• 58:59Speaker 04

  There's sort of a structural bid, as best as I can tell, for the strategy. So it means that credible new things get traction more quickly and do so, for example, on unfavorable terms or fees quicker than they should.

• 59:17Ted Seides?

  Dan, there's a lot of head nodding about the strategy, a lot of head nodding about how hard it is to find the right managers. How do you go about picking the macro managers you want to invest in?

• 59:30Speaker 03

  In the macro space specifically, I completely agree with what Craig and Adam have been saying. The point that Adam made about trying to find an edge with respect to trade structuring and expressions as opposed to simply looking for people who appear to have good thematic judgment is something that I agree with. I would add to it that another way you can try to get at a similar result is by looking for people who turn over positions more frequently. They could

• 1:00:09Speaker 03

  be Delta One positions, but they're just not sticky. People who will be very tactical in the way that they trade and will not get married to themes because so much from our perspective of the value that's added in macro is actually done while you're waiting for the themes to play out. It's not capturing the big breakout of a theme. And frankly, if that's what you're trying to do, I don't think you pay someone 2 and 20 or 1 and 10 to do that. I think you think about buying some CTAs or something. The macro space is very valuable

• 1:00:48Speaker 03

  because of the diversification benefits. It's kind of doing for the hedge fund portfolio, what the hedge fund portfolio is doing for the broader asset allocation at an institution.

• 1:01:00Ted Seides?

  I'd love to touch on some of the structural issues with hedge funds. With rates going up, there's a lot of buzz that hedge funds should have hurdles before they capture their incentives. That should is always a tough word. What are you guys seeing on fees and fee structures?

• 1:01:15Speaker 05

  You've definitely touched on a hot button there, Ted. We're big believers in hurdles. I should start by saying we always keep our eye on the prize meta fee performance. There's no demand on our part that a fee structure has to be X or Y. But with short rates going up, especially in the long short equity space where people are earning short rebates now of, call it 4% to 5%, macro strategies where people are earning that on unencumbered cash, really without any skill, the manager is off to a 4% or 5% start. And so if you're paying a 20% incentive fee, you're effectively paying another 80 basis points to 1% of fees for no particular reason. We tend to view our manager relationships as partnerships.

• 1:02:00Speaker 05

  We don't try to be just customers of managers or hey, here's the clearing price for my strategy. So let me charge whatever fee I can. So we're definitely in conversations with the managers right now where either, you know, we don't have a hurdle or we seem to be paying what's still a full incentive fee and just talking through that structure. And I think that there's cases where managers have very robust teams where you feel like your fee dollars are really directly benefiting the underlying strategy. And then there's other managers where there's clearly a lot of profit in that management fee and you're effectively boosting that profit by giving them another 20% on the risk-free rate. And so it's definitely a conversation we're having with managers. We want to be aligned with them.

• 1:02:45Speaker 05

  We want to pay for skill. We're happy to pay for skill or alpha for sure, but we don't want to pay extra fees just for them walking in the door because the fee environment is different. Dan?

• 1:02:58Speaker 03

  So far is 5% right now. That's a very big deal. We haven't had cash rates for a long time and managers today are very reluctant to offer hurdles on incentive fees. I understand that, but times are changing and come the end of this year, people are going to be up 3%, they're going to be up 4% and we're going to say, no, actually you were down 2% or down 1% because we could easily just have you in cash instead. And the negotiations are ongoing from our end. I will say that there's a lot of demand for top hedge fund capacity.

• 1:03:41Speaker 03

  So even with large tickets, the negotiating leverage isn't always great, but there are ways you can get around that. I think the best way to try to get around that is to anchor new products with managers if you can. If you're there at the outset and you can help them structure the product from day one, then you're starting from scratch. You're not asking for someone to go and change their fee structure on all the capital they hold. You can get them to make something with a fee structure that you like where you're the first dollar of capital. That's one way you can try to do this. When it comes to Credit strategies, things that might be more long biased. A lot of strategies do already have some concept of preferred return baked in there.

• 1:04:25Speaker 03

  Maybe you try to get the preferred return raised a little bit. Every little bit helps and every allocator is going to be increasingly searching for that little bit and the space should react to that sooner rather than later.

• 1:04:43Ted Seides?

  Dan, let me just follow up with that. And the reason I ask the question is should, is it's really easy for us to say, well, yeah, if you're starting from scratch, you're starting a new product, you want that to be a fair deal. But all these investments shook hands on the deal before rates were up, in theory, with the knowledge that rates could go up. So much capital is already invested in these agreements where there isn't a hurdle rate. How much success do you think you'll actually have in getting those fees changed on your existing portfolio of hedge fund investments?

• 1:05:18Speaker 03

  I think it depends very much on how hard other LPs are also pushing. If it's just us doing it, I think your intuition is right that we probably won't have as much success as we would like, probably nowhere close to it, frankly. But if you have the four or five largest LPs at a fund saying this, I don't really view it as trying to re-trade these managers. I view it as trying to make the partnership more constructive and more robust going forward. Managers who are honest about this understand the problem. And I think that for those who care about the longevity of their businesses and keeping

• 1:06:00Speaker 03

  their partners in good standing, they'll at least have an open mind about it. Maybe we don't land exactly where we want, but maybe we meet somewhere in the middle and that's a good outcome for everyone.

• 1:06:11Ted Seides?

  Craig, as Dan's talking about this, it strikes me as there's a little bit of a prisoner's dilemma. Yes, collectively, if everyone did this, the fees would change. But of course, there's capacity constraints and every individual wants to stay invested with those managers. How have you addressed this?

• 1:06:24Speaker 04

  One way that we like to address it because we're not the size of GIC is doing things via separately managed account where it's often fairly easy to embed a structure of a hurdle rate. But I also think we're a little bit in our hedge fund box here, missing what's happening in particular more broadly in credit, which is the open-ended credit hedge fund business as we believe in in secular decline, not going away this month or this year, but shrinking significantly in favor of closed-end structures. A big, long-term part of that is hurdle rates, as you mentioned. And another important part of it is that in particular on credit

• 1:07:05Speaker 04

  assets, you don't want to pay incentive fees on an annual basis and potentially end up in a situation where you don't get back your loss carry forward. So I think there are other reasons as well around asset liability matching around being able to time entry points better. But I think more aligned fee structures are one of the long-term trends in favor of closed-end structures in credit investing.

• 1:07:33Ted Seides?

  I'd love to do one last round on the most interesting opportunities you're seeing. So Craig, you mentioned dislocations, whether that's the case, some niche strategies that we didn't cover in equity credit macro platform. Just thoughts on what you're finding most exciting today?

• 1:07:53Speaker 05

  The niche strategy that's interesting right now is in catastrophe reinsurance. So you've had a lot of hurricanes and other perils over the last five years, obviously for good reason, a lot of concern about climate change. So the demand to sort of reinsure against some of these catastrophes has gone down significantly. And that's led to pricing this year that we think is quite compelling relative to the risks and really distinguishing between how much of the increased perils in recent years have been due to climate change versus other factors causing it. So the bottom line is, we think you're getting paid a premium relative to

• 1:08:34Speaker 05

  To the risk right now should be completely uncorrelated with other risks that you're taking. And we think that there's been some structural advances in the way the strategy is compiled and constructed that are to the favor of investors in terms of shortening the period during which the size of the outcome is determined. You used to have to wait many years, let's say, for everything to kind of wrap up. And now that's much shorter. So that's kind of a differentiated strategy.

• 1:09:02Speaker 04

  Craig? Right now, we really like the opportunity to invest on a secondary basis in private credit funds. The private credit market grew a ton the last five, six years. And now you're seeing small funds, some investor not re-upping, the consultant has changed, the staff has changed. The denominator effect is coming into play. So you see highly motivated sellers, relatively few buyers. The opportunity to not have a J curve at all, to have a shorter duration asset that you can access at a significant discount. And we think drive both interesting IRRs and MOICs. Dan?

• 1:09:45Speaker 03

  I don't know if this is the most compelling in terms of the returns that we expect from it. But the most interesting area in which I'm currently engaged is the emerging managers space generally. The reason that I say that is the environment right now is one in which it's difficult to raise a lot of money when you're going out on your own as a small firm. And the people you see trying to do it are not the type of people, for whatever reason, who want to go and join one of these platforms that we talked about. So it's almost like we're able to skip a step.

• 1:10:27Speaker 03

  And look at emerging managers that have pre-screened themselves to be entrepreneurial business builders, people who care a little bit more about having a really long-term business and developing meaningful partnerships with LPs. It's a little bit early to say if this is going to materialize into numerous opportunities or great opportunities, but we are seeing it and it's an area that I'm excited to spend a lot more time in because it's very rewarding if you can help develop a business from day one or day 300. And when you just deal with large tickets and large mature managers, that's never happening.

• 1:11:12Speaker 03

  So I think the emerging manager space and meeting and working with a lot of these people who are trying to strike out on their own, that's quite interesting in an environment that's going to provide many challenges and opportunities for us to assess their skill.

• 1:11:27Ted Seides?

  What either manager strategies or at a more micro lateral and trades investments, are you avoiding like the plague?

• 1:11:35Speaker 05

  Anything with a high level of leverage and or illiquidity. We have a higher tolerance for mark-to-market volatility and think that is risk. I mean, things moving around a lot is definitely a risk, but it's a different risk than at permanent loss of capital risk that leverage and or illiquidity can cause. And just think a lot of strategies that look good in the rearview mirror, look very risk-controlled, often have a lot of leverage and we think are at real risk of having a major issue even though they haven't had it. Just really avoiding any strategy with that type of characteristic.

• 1:12:10Ted Seides?

  Craig?

• 1:12:11Speaker 04

  There are things that we've always found distasteful, like life settlements. That hasn't changed. One has a reminder at times of market stress that there are some people who are good partners and some people who are not good partners. I think that was a lesson that we learned most sharply in 08, but we get reminded of occasionally that you want to have good partners. In terms of markets of things that are investable, CRE as a place where we are really nervous about valuations in the medium term. But again, some of that is at least in the market and it

• 1:12:51Speaker 04

  feels like there may be, as much as I pooh-poohed the corporate distress cycle, I think there will be a real distress cycle in commercial real estate. And I think that will produce pain, but also likely interesting opportunities.

• 1:13:05Ted Seides?

  Great. Well, let's finish it off with just one closing question for each of you, which is, what's your biggest investment pet peeve? Dan, why don't we start with you?

• 1:13:15Speaker 03

  I really dislike the use of the term black box when referring to certain investment strategies. Usually, these will be quantitative investment strategies. And the reason I say that, there is a good reason to not like that term. I understand why people use the term, and I do use it myself sometimes, too, because it's fun to say and it's easy to incorporate into conversations. But while it's true that you have to diligence quantitative or systematic strategies differently than you do other strategies, it's simply not true that you can't gain as much confidence in an investment in that space as you can in investment in a

• 1:13:55Speaker 03

  discretionary space, whether that's in equities or credit or something else. If anything, I would make the argument that you can actually get more comfortable with certain quant managers than you can with most discretionary ones for the obvious reason that they adhere to clear systematic processes. The real black box is the human investor who's subject to all the emotions and behavioral biases that come with not being a machine, although that may be changing, right? If you ask certain people, the machines may very soon have all of those emotions and behavioral biases as well. But that would be my biggest pet peeve. I think we need to give the quants a little bit more credit. Craig?

• 1:14:38Speaker 04

  In particular around hedge fund investing, it's around transparency, openness, and we have our process. We've been doing this for a long time. If we're asking a question, it's for a reason. Don't tell us, as a manager did not that long ago, that I don't need to know about the details of cap stack XYZ to evaluate him. I've been doing this longer than you have. I'll ask my questions. You wouldn't like it if company management said, oh, you don't need to know about our capital allocation policy. If it's something you can't share, tell me that and maybe we can work around that. But we're trying to understand your process.

• 1:15:21Speaker 04

  You need to respect our process and how we go about it.

• 1:15:25Ted Seides?

  Adam, why don't you take us home?

• 1:15:27Speaker 05

  Somewhere along the way, the last five years or so, the illiquidity premium somehow turned into an illiquidity discount. And I don't really understand it. It used to be you demanded a higher return to lock up your capital, to lose the ability to make a change in manager. Now it actually feels like investors are willingly taking a lower return for the illiquidity. Maybe it's structural reasons, masking volatility, career risk. If a manager's not working out, it's going to take years and years for that to become apparent versus the quarterly marks. But absolutely, there's a lot of merit to illiquid investing and private investing, but not every manager doing it is good. Many managers have come out recently to meet this demand,

• 1:16:10Speaker 05

  and we just don't think the results collectively are going to be what people want, but they might not really care because the people in the seats making those decisions might change by the time the poor results are realized. It's a real change, though, over the last five-ish years or so that I don't think is necessarily in the best interest of the end investor, but it might be in the best interest of the people in the seats making the investments.

• 1:16:38Ted Seides?

  Adam, Craig, Dan, thanks so much for this great deep dive on hedge funds in the modern era.

• 1:16:45Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.