[REPLAY] David Zorub - The Path to a Hedge Fund Launch (Capital Allocators, EP.96)

David Zorub is the founder of Parsifal Capital, a new hedge fund he is launching later this year. Before founding Parsifal, Dave spent fifteen years in research and portfolio management at hedge funds and another few in investment banking and private equity. I interviewed David recently at Columbia University's Student Investment Management Conference and that conversation follows. We cover his career path and his insights into the philosophy and structure of a hedge fund business and investment portfolio. It's not easy starting a hedge fund these days, and those eager to try will get a sense of the challenges ahead by listening to an experienced investor who's making a go of it. 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?

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• 0:46Ted Seides?

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• 1:29Ted Seides?

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• 2:14Ted Seides?

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• 2:57Ted 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 keep up to date by visiting capitalallocatorspodcast.com.

• 3:59Ted Seides?

  My guest on today's show is David Zorub, the founder of Parsifal Capital, a new hedge fund that he's launching later this year. Before founding Parsifal, Dave spent 15 years in research and portfolio management at hedge funds, and another few in investment banking and private equity. I interviewed Dave recently at Columbia University's Student Investment Management Conference, and that conversation follows. We cover his career path and insights into the philosophy and structure of a hedge fund business and investment portfolio. It's not easy starting a hedge fund these days, and those eager to try will get a sense of the challenges ahead by listening

• 4:40Ted Seides?

  to an experienced investor who's making a go of it. Columbia Business School's noted Howbrooke Center for Graham and Dodd Investing will soon launch their own podcast entitled "Value Investing with Legends." It'll be hosted by Tano Santos, who's the faculty director at the center. His initial roster of guests is a who's who of value investors, including Mario Gabelli, Tom Russo, David Abrams, and Jean-Marie Eveliard. Check your phone for the release, or join my monthly mailing list, and I'll let you know when it hits the airwaves. Please enjoy my conversation with David Zorub.

• 5:18Speaker 01

  Good morning. I'd just love to thank Columbia and the Student Investment Management Organization for having us. As an alum, it's a real privilege to be here. I'd love to thank Ted for doing this with us. I'm guessing you have a lot of fans in the audience. Your podcast is doing a real public good in the world of investing, so thank you.

• 5:38Ted Seides?

  Thanks, David. I will allow you to use your phones during this. The intention is to take out your iPhone. Look at that little purple app with a microphone. It's called Capital Allocators. If you're not already listening, hit subscribe. Right before we start, I want to give you a little bit of a window on interviewing, and it's really things that I've learned more over the last year and a half than over the last 20 years, but it kind of all comes together. One of the things you'll find in every one of my episodes, and a little hint where we're going to go, I start with people's backgrounds. And part of the reason for doing that is, just like in investing, you want to establish a baseline or a base rate of who the person is.

• 6:19Speaker 02

  Where'd they come from? What are their biases? What's their agenda? And it's really important to do that because I might hear something that David says about his background that then later becomes kind of germane to the question. So whether you're interviewing for a job, you're interviewing CEOs or CFOs or interviewing investment managers, a lot of times people want to jump right into, "How do you think about investing? What do you do?" And they miss who the person is. But ultimately, all of business is a people business. So we're going to kick it right off by me asking Dave, why don't you talk a little bit about your background and maybe some of the key highlights in how you've gotten to being here today?

• 6:57Speaker 01

  Thanks. I feel really blessed, actually, in reflecting on my career and both personally and professionally of having had opportunities to really learn a lot and work with really dynamic people and have great mentors. When I graduated from college, I was like probably most people in this room, you're hungry, you want to get out into the real world, you want to learn, and you're just looking for a good experience. And I was lucky, I went into a traditional two-year banking program at Merrill Lynch doing credit. And I had no idea how formative that experience would be. It was a dynamic time. I did high yield. It wasn't even called leveraged finance back then. We actually worked on some of the very first leveraged loans. But the high-yield market was going through a rebirth after the flame out of Drexel.

• 7:40Speaker 01

  It was being used to fuel then what was a lot of the growth equity needs of the capital markets, so things like the telco boom. And what I learned in being exposed to the credit skill set was hugely formative, which is when you lend someone money, you worry about a lot of different things. But at the end of the day, you worry about one thing above all else, which is, "I lend you money, and I want to get paid back." And so it's really about capital preservation. And the analysis that you do from the mindset of a creditor is really focused on the business that you have today in the here and now, as opposed to the sort of more forward equity-oriented analysis. And that really stayed with me throughout my career. I was fortunate enough to learn that skill set from some very talented bankers, and

• 8:23Speaker 01

  that capital preservation mindset really became foundational to how I think and has served me really well. From there, I had a really unique opportunity to go and work at Texas Pacific Group, which today is TPG Capital. They were sort of the swashbuckling cowboys of private equity back then. Still relatively young organization, less than 10 billion in AUM, 25 investment professionals, but had already made a big name for themselves doing some higher out on the risk curve buyouts. So things like Continental Airlines, for instance. And so they sent me over to Europe, and it was a time when, within a few months, TPG, KKR, Carlyle, all these guys were establishing beachheads in Europe, and they turned us loose on the continent, and there were a lot of deals to be done. And so it was a very dynamic experience, and it was my first taste of life on the principal

• 9:08Speaker 01

  side. After that, I came here to Columbia Business School, and I had a great experience. Really wanted to come here because of the public markets curriculum in particular, and learned a tremendous amount, and it helped me pivot in my career a little bit to the public markets. And I joined a day zero startup out of Columbia called Hawkshaw Capital. I was introduced to the two principals through John Griffin and his class at the time. Frank Bird, Columbia OO, was one of the co-founders. Keon Ghazi, who's actually an adjunct here, also the other co-founder. That was a tremendous experience, where I really got to experience the public markets for the first time, to learn a very deep process, have great mentorship, get close

• 9:51Speaker 01

  to the capital allocation decisions. And they gave me a huge opportunity, just an amazingly fantastic, unique opportunity over my seven years there. For five of those, I was day to day in charge of our short strategy and portfolio. And so as much as I love investing, I really love shorting stocks. And that was a really unique time, particularly through '08, to be able to do that. And then in 2010, I joined Blue Mountain Capital. And I spent nearly eight years there. Some of you may know Blue Mountain is known as a credit firm, but they wanted to get into equities. And so it was an opportunity to build a de novo equity business from scratch. And we had a great time doing that. And so it's been a really rich experience, as I reflect on my career.

• 10:32Speaker 02

  It seems a bit different than many to have spanned credit, private equity, LBOs. You come here, you then go public equity on the short side, long short. Was that planned from the beginning?

• 10:46Speaker 01

  No, not necessarily. It wasn't planned. I love learning new things. So for me, kind of the juice in what I do, more than anything, is learning. Investing really is learning for me. I think if you were to talk to people I've worked with, or people who've worked for me over the years, and say, "Hey, what's Dave's style like? What is he like as an investor?" I think what you'd hear universally is, "He asks lots of questions." My style is to ask lots of questions, to really drill down. Questions beget questions. That's how I learn, process information. At the end of the day, I think it's a pretty effective way to distill the essence of what we do and don't know. And so I love that process. I love doing research. One look at me, I'm not going to fool anyone in this audience.

• 11:27Speaker 01

  I'm not exactly an endurance athlete. I have yet to experience the so-called runner's high in my life. I've experienced a lot of other things running, but this euphoric high is not one of them. But I get a huge amount of, like, pleasure, satisfaction, from doing research, from sitting, thinking. And so that's how I've modeled my career, is to put myself in a position to do that. In college, I actually did two majors. I did econ. The precision of that, the social sciences, the real-world applicability appeals to one side of my brain. But I also majored in something sort of more esoteric, which is called medieval and Renaissance studies. I went to Duke. They're one of the few departments like that in the country. And it was just because they had this amazing faculty who happened

• 12:12Speaker 01

  to have congregated there. And I had to take coursework in religion, philosophy, art, art history, language, science, politics, and civics. And in that period of history, there was a real fusion. And so what I came to appreciate in college was really the value of multidisciplinary learning, both personally and professionally. And so I've just never been a "stay inside your circle of competence" guy. It just doesn't resonate with me. I understand why it makes sense for some people, but I've been exactly the opposite. I've been an "expand your circle of competence" kind of guy. But that takes time, and putting yourself in sort of different Petri dishes to do it.

• 12:50Speaker 02

  How much of that comes from nature versus nurture?

• 12:58Speaker 01

  I think one of my biggest weaknesses and biggest strengths, it's just two sides of the same coin, is I'm a very patient person. I don't know why that is, it's definitely nature. Maybe it's a little bit of nurture, I guess, you know, maybe it's being a Z in an alphabetical world. I went to a grade school that was modeled off the British form system, and they literally did everything alphabetically there. So for the vast majority of everything that happened during my formative years, I was last, except for when it really mattered, like a book report or something, then they'd start at the back of the alphabet invariably, and I'd get cheated on the other end. And so for better or for worse, I've always been willing to play the long game in life in different situations, thinking about my career.

• 13:42Speaker 01

  And what that helped orient me with early on is that investing is really an apprenticeship business. There's just no doubt about that in my mind. Of course, there are outliers where we can observe people at a very young age succeeding in our business, but for the most part, I think this is a business where you just have to be around for a while. You have to see different situations, see different markets, break some eggs, make mistakes. And so I've always tried to just keep that long view in mind. And you know, when I think about some of the more formative experiences, let me share a couple anecdotes with you. So in 98, I'm in my second year as a high-yield analyst, and Asia currency crisis starts happening. And they get us all into a room, and it's somber.

• 14:27Speaker 01

  It's, we're gonna get through this, there's like Godfather metaphors, we're going to the mattresses, the world will survive. And I'm looking at this and I'm saying, if I recall, S and P's off maybe 15% peak to trough, it feels bad, but kinda it's in a different part of the world. But I'm looking around the room at these senior bankers, and I realize, oh my God, this is the worst thing they've ever seen in their career. And it just wasn't that bad, candidly. And that really resonated with me, because we live in a risky world, things happen, and you've just gotta see different experiences as much as you can. Jim Colter, who was the co-founder of TPG, when I started there, he took me aside and he said, you know, "A big part of the reason that I can do what I do now very effectively

• 15:08Speaker 01

  is because when I was your age, I spent all those nights in a cubicle modeling Continental Airlines, and deep in the spreadsheets, and developing the skills." And that also resonated. So I feel just stupidly lucky, because think about for a second, so I came into the capital markets in 97. I was paying attention to the markets all through college. So from then through today, think about it. Asia currency, Russia currency, long-term capital, telco boom, which is distinct from dot-com boom, nine eleven, housing, oh eight, Europe sovereign and eleven, August eleven, like there were one or two days in there like, oh, my God, I remember them like just getting hit over the head. Q one sixteen, March fourteen, and all these different things.

• 15:51Speaker 01

  And like, that's a very rich palette to draw on. I can remember when the ten-year was close to six percent and what that means for risk and valuation. So it's been great.

• 16:01Speaker 02

  And along the way, did you have important mentors? And what did they teach you?

• 16:07Speaker 01

  I've had so many mentors. And in fact, I can't even overstate the importance of having great mentors, seeking them out. You have to seek out mentors. At some point, as you go through your career, you'll actually outgrow some of your mentors. And that's OK, but you have to find new ones. And so when I think about some of the people that I've been exposed to, whether it was my early job at Merrill, someone, one of my senior bankers, Greg Margulies. Greg taught me the credit skill set. And he really made me think at a young age as opposed to just process. And I saw him take very principled stands on things like extending credit when there were a lot of external pressures. Obviously, I mentioned someone like Jim or David Bonderman. You know, we'd spend months in the trenches on a buyout trying to figure out what mattered.

• 16:52Speaker 01

  And then you'd put that work in front of them and they'd go through all that work and figure out in about an hour what it took you six months to figure out. And that was the experience. I mentioned Frank and Keon at Hawkshaw, a real process orientation, depth of research, and so on.

• 17:07Speaker 02

  You mentioned the word outgrowing mentors in there.

• 17:13Speaker 02

  How do you know when you've outgrown a mentor? And what do you do about it?

• 17:18Speaker 01

  If you have good mentors, they'll tell you when you've outgrown them. They'll acknowledge, "Dave, you know, I've taught you what I can teach you, now go forth." Or you'll come to them and seek their wisdom, and they'll say, "I can't help you on this one, but I know someone who can." And so, I think it comes from a strength and security in that relationship. And in some respects, really good mentor-mentee relationships are bilateral. And so, there's a long list of people who've influenced me, and I really should have pointed out my parents above all, actually. At some point, in most of these relationships, sometimes they come back on each other and you end up helping and mentoring them as well.

• 17:56Speaker 02

  How do you separate that from the more common experience, which I would say you'd call the egocentric model? So you are an analyst at a hedge fund, you start to get frustrated that your portfolio manager isn't listening to you, you suffer from confirmation bias, that your good ideas are the ones you remember and you forget the others, and you decide you've outgrown your mentor.

• 18:17Speaker 01

  It's hard, because it takes...self-awareness is a hard skill to cultivate. It doesn't come naturally to most of us. And if you don't surround yourself with really good external inputs, you can get lost inside your head. And so, I think it's critical for all of us to be self-aware about the kind of environment we put ourselves in. And if it's one where there's a lot of isolation, or just two-way dynamics, you make yourself very vulnerable to that dynamic. If you can put yourself in an environment that's very team-centric, very transparent, very flat, and where you have regular feedback loops, you can insulate. So, and this is something I've tried to be aware about on the teams that I've been a part of and then have led, we're very flat, we're very transparent.

• 18:59Speaker 01

  And one of the things I always say to the team is, "If you disagree, or you have feedback with me or anyone else on the team, you have to share it." I expect it to be done professionally, not personally, but you have to do it. And that's how you can keep yourself honest in those environments.

• 19:13Speaker 02

  Usually, the ultimate expression of outgrowing your mentors is starting your own firm. So I want to turn a little bit from the path to what you're doing today. You've just recently started Parsifal Capital.

• 19:23Speaker 01

  Yeah.

• 19:24Speaker 02

  The name Parsifal, what does that mean?

• 19:27Speaker 01

  Yeah, so Parsifal is a name that I chose many years ago in the event that I ever did this. It derives from the Knights of the Round Table, from King Arthur and the Knights of the Round Table. One of the more famous stories, which I always enjoyed as a child and then obviously dovetailed with my academic interests, is the story of the quest for the Holy Grail. And as the story goes, only the knight of the highest integrity, honor, virtue, humility, charity, I suppose bravery and perseverance, is deemed worthy of finding the Holy Grail. And in certain versions, that knight is Parsifal. And so really, the Grail quest is, it's a metaphor for life's journey and the path that one takes. And I always thought that would be a really nice way to define a de novo culture.

• 20:11Speaker 01

  I would never want my name on the door of anything. Our success ultimately will be determined over a very long period of time, not just whether we perform, which is necessary but not sufficient, but whether we can create a self-perpetuating culture. And so I wanted to imbue that culture with a set of values, day one, that were important to me, that we could attract like-minded people around to build a culture and team together, and then use those values to find external partners who are like-minded.

• 20:39Speaker 02

  How did you decide that now was the time in your career to start your own business?

• 20:44Speaker 01

  You never know for sure in these things. In my case, it was a confluence of a few events. I had spent nearly eight years at Blue Mountain, building that business from scratch, and it was really a, almost a hedge fund within a hedge fund. It was a multi-billion dollar strategy where I'd literally done everything I would need to do to start a new investment firm, and there was a logical transition point. But also, my investing style...

• 21:08Speaker 01

  Is global, it's concentrated, it's cross asset. So we do traditional long short with an emphasis on short selling. But we also do event driven, special situations, equity, credit, aspects of volatility. And so for that style of investing, I wasn't ready before this. You need to have a long apprenticeship period to do that. If I was maybe doing some sub aspect of that, like just long short, I maybe could have done it earlier, even much earlier and hung that shingle. But to really get to the point where I felt like I had the confidence and the exposure and then all the other skills that go with it. So managing talent is maybe the hardest thing, actually, harder than investing in many respects.

• 21:52Speaker 01

  The operational skills, the risk management, portfolio construction, it all came together now.

• 21:58Speaker 02

  When you're trying to canvas the investment landscape globally across the capital structure and you need to build a team that probably doesn't have your level of experience in doing that, how do you think about acquiring the right talent?

• 22:12Speaker 01

  I think talent acquisition management is the cornerstone of investment management because ours is a human capital business. Your assets ride the elevator every day, so to speak, and so getting it right is essential. And the hardest part is not finding smart people. Everyone in this room is smart. Lots of smart people are walking up and down the street. The hardest part is finding kind of the people have the intangibles in their head. And so what do we worry about or what are we trying to find? Well, we're trying to find people who have a certain work ethic. And so, you know, when I was at Duke, I was fortunate enough to be able to have a small group lunch with Coach K. He did this a couple of times a year.

• 22:56Speaker 01

  It was almost like a lottery system, a couple of students. You'd go to Cameron, have lunch with him, and he would talk about his philosophy. And one of the things he said really resonated with me. He said, "When we go out to meet kids, when we go out to recruit them, we're looking for kids who are their own harshest self critics." We want kids who are simply more demanding of themselves than we as coaches, the university, their parents can be. And that always resonated with me. I think I have some attributes to that. And so in working with people and building my own teams, I've always looked for people, first and foremost, who simply demand more of themselves than I or anyone else can. We need to find people who are team players, who are very process-driven. This is an industry where you can do great if you're not a team player, but you just

• 23:41Speaker 01

  won't work well in our system, and that's important. We have to find people who can admit that they don't know the answer to something, which is actually really hard. And so I gear the interview process towards really trying to force that. And if someone simply can't just say, "Hey, Dave, I don't know the answer to this. Let me come back to you," like, they're probably not going to be a good fit. Similarly, we need to find people who can deal with being wrong. And if you think about it, our population on Wall Street does not screen well for that, Ted. We're all, in many respects, super-type A. We've been the best at everything we've ever done, school, sports, drama, whatever. And we generally haven't failed very much. And so bringing someone into an environment where day-to-day, we fail constantly.

• 24:23Speaker 01

  So I fail over half the time in my professional adult life, and we have to be able to deal with that and move on. And then there's really just the pursuit of excellence. So maybe one other vignette for you. When I was a senior in high school, the author David McCullough came to speak. He was an alumnus of my high school. You'll know him. He's a very famous writer, biographer, John Adams, Truman. He gave a talk one day, and I literally can't remember anything he said from the talk. It was unremarkable. But in the Q and A, a student got up and said, "Mr. McCullough, how do you write these books?" And what the student was really asking is, from the perspective of a junior who finds a 10-page term paper daunting, how do you write a book that's this thick?

• 25:08Speaker 01

  That's what the student was asking. And McCullough paused, and he thought about it, and he said, "Look, I try to get out of bed every day and write one good page. Some days, I'm a little bit better, and I write a few better pages, and some days, I fall short of that goal. But that's the goal." And that always stuck with me, because I'm sitting there thinking, "Man, this guy's one of the best at what he does in the world, and if he's got to work that hard, it probably doesn't bode well for the rest of us." And so, you know, I try to get out of bed and write one good page a day, and I look for people who try to write one good page a day.

• 25:40Ted 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. This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 26:24Ted Seides?

  And now, back to the show.

• 26:28Speaker 02

  As you distill everything you've learned from your career and now you're on your own and you can set the table as you want, what beliefs do you have about investing? The drive, the investment philosophy of Parsful?

• 26:41Speaker 01

  Yeah, you know, we're all kind of the sum product of our experiences. And at this point in my career, one of my most deeply held convictions and really the cornerstone, one of the couple of cornerstones for what we're doing at Parsful is this. I think the institutionalization of alternatives. It's been great for alternatives, like let's make no mistake about it. It's been good for me and for many of the people in this room. I don't think it's been good at all for returns. And the reason is, as we've institutionalized, we've put managers in narrower and narrower boxes in terms of what will allow them to do. And we've given them very strong financial incentives. And when you put someone in a box and pay them a lot to do something, they're going

• 27:24Speaker 01

  to do it and they're going to make bad decisions along the way. So if you think about certain strategies, and I don't want to pick on any one strategy, but there are just certain strategies out there that they're good one or two out of 10 years. And the rest of the time, they're not to be trifled with. But when you say to someone, hey, you're a dedicated manager in that strategy, they somehow find something to do all the time, everywhere in the world. And so one of my deeply held convictions, and when I look at The managers who I identify the most with over my career, they all make money in very different ways, but what they all have in common is this. They took advantage of the inherent flexibility of the hedge fund model to allow them to go to where the best opportunities in the world are in a given market opportunity set and invest with conviction.

• 28:09Speaker 01

  And to do so in a manner that was consistent with their process and not force them to be, to make decisions they didn't want to make. And that's really powerful, but there's a paradox at work there, which is our industry, and I think that's a very powerful way to make money, but paradoxically, a strategy that is a very powerful way to make money is the one that our industry is now least willing or capable of underwriting. And that's sobering in many respects. I don't think it's a coincidence, by the way, that if you look at '08, the guys who tended to preserve capital and thrive through that period were really the gray hairs in our industry who'd come up and built those kind of flexible models that allowed them to position, protect, and do something about it.

• 28:53Speaker 01

  Because the other thing that happens when someone puts you in a box is you stare at that box and you lose sight of risks and opportunities that are percolating in different markets. And you also lose sight of really how good or bad your own opportunity set is. So that's why at Parsifal, I've really set it up to cut across all these different risk premia. We're never going to be an institutional business. That's okay. We don't want it. When an allocator says to me, "Dave, we don't know where to put you in our model. We don't even know who should cover you." I'm like, "That's great. That's exactly the point. Now let's see if we can figure it out, or we're just not going to be a good fit for each other." So that's one of the key cornerstones. The other one is, everything we're doing at Parsifal is focused around one goal,

• 29:37Speaker 01

  which is generating outstanding performance and doing it with a like-minded group of partners. It may seem silly for me to say that, and I'm a hedge fund manager. What else am I going to say? Except that my experience over 20-some years is that actually many firms are not set up to focus and prioritize on performance. Their focus on optimizing a bunch of different things, and performance may or may not be at the top of that list. I get out of bed every day wanting to put up great returns and so we've literally built our business in every aspect, whether it's the strategy, the team, the incentives, how we choose to partner with people, our AUM, everything is about enabling us to, we think, generate performance.

• 30:17Speaker 02

  You're now in the thick of talking to prospective investors about investing in Parceval and as you said, the challenge of a more flexible model is setting expectations. So if I'm sitting across the table from you, one of the first things I'm going to think is, okay, great, I'm giving you this flexibility and this mandate, what should I expect? And let's just break that down into what should I expect your portfolio to look like?

• 30:42Speaker 01

  Yeah. I should point out that I have sat on the other side of you as an allocator once upon a time and so I have been on the other side of your grilling. So there's an algorithm for doing this effectively out there and some of you may be familiar with the work of someone like Martin Kramer's at Notre Dame, Mike Mobison, who's, you know, sitting here in the front, has written extensively about this. If you want to outperform, you construct your portfolios with high active share, which means your portfolio doesn't look like an index. You concentrate within that, you underwrite medium, longer-term horizons, and you take a very fundamental approach. The rub of all that is, is that I can do all those things and still not succeed because

• 31:25Speaker 01

  you need to have a capital base that's aligned with you and that's what the research shows. So for us to be successful, first and foremost, it starts with finding the right partner, like, hands down. Setting the expectation of this is what we're trying to do, this is what our return, our volatility objectives are, this is what a good year looks like, this is what a bad year looks like. If we make money, it should be for these reasons and by the way, if we make you money for not these reasons, that's as bad as losing you money, et cetera. When you dig down beyond that, our portfolio, it's really the concentration that drives it. So we're only going to be long, say, about 20 securities. The top 10 will be 60 to 70% of what we do and then those will cut across all those different risk premiums, so traditional long, event-driven, special situations, equity,

• 32:10Speaker 01

  credit. And so now, if you think about my global opportunity set, I have much more raw material to work with, now I have to filter it, but we're looking for one or two or three really high conviction opportunities and that's exciting to me. I think people look at that In two different ways. Some people say, whoa, Dave, that's really daunting. How do you filter your opportunity set? Fair. We think we can do it effectively. I look at it just the opposite. I say, my task is to make money and I have an opportunity set in front of me and I know the solution to the puzzle is here. I just have to find it. So it's really how you want to look at the puzzle.

• 32:43Speaker 02

  And when you break down the two sides of your balance sheet, do you have on the long side, a hurdle in your mind that if you don't think a prospective investment makes you a 20% rate of return, or 25, or 12?

• 32:56Speaker 01

  Yeah.

• 32:57Speaker 02

  That it's not worth putting in the portfolio?

• 32:59Speaker 01

  So we underwrite positions that we think can double over a three-year period with about 25, 30% downside. So if you back out that IRR, you know, it puts you somewhere closer to 30. Now, we're obviously not annualizing at those rates, so why do I do that? Two reasons. One, we're going to be wrong a lot, as I mentioned earlier, and I have to embed that margin of error in everything we do. If I sent the team and myself out looking for lower returns, we wouldn't compensate for our margin of error. But the second is variant view. So I'm a big believer in the importance of variant view. Expectations drive securities prices. Revisions to expectations drive revisions to security prices. So we need to be starting in places where we're looking for big variant views. And chances

• 33:43Speaker 01

  are, if we think that something can double, or go down by 50 or 70%, that we're starting in the right place. Now, there's a whole process that has to come in behind that, but we really want to make that the starting point.

• 33:52Speaker 02

  And then if you flip, we talked earlier a little bit about your training in short selling. Shorting for a long time now, hasn't done much for investors. And there's a lot of competition, rates are low. How do you think about adding value from shorting?

• 34:09Speaker 01

  Yeah. Everything about shorting is unfortunately bad, most of the time. The risk management, the tax, the trading, the costs. So why do I love it? I love it because it makes me a better investor. You simply just have to be sharper, more objective, more dispassionate. I probably have a bit of a righteous streak in me, and so the idea that you're part of a market mechanism that's creating efficiency, because guess what? Regulators don't find frauds. Auditors don't find frauds. It's the market that finds frauds. And so when I watch, for instance, what's going down with something like Wirecard right now and some other companies. We did a lot of work on Wirecard and the market hasn't cared for a while and now it's

• 34:51Speaker 01

  caring again and it's caring because you've got some really great, actually, reporters. There are some great reporters who uncover frauds. But shorting is hard and it's been really hard this cycle because of where rates are. When there's no rates, you don't get a short rebate for lending your short book. You'll know, you know, having worked at Yale, in David Swensen's book, I think in his model long-short portfolio, this is going back to, what, late 90s when he wrote it, I think he was modeling a 4% short rebate and then stacking another four points of alpha on his short portfolio and getting to something like an 8% return. Well, like, I wish, like, in my, literally in my wildest dreams. So, shorting has been hard this cycle because rates have really distorted the costs and

• 35:33Speaker 01

  made it very punitive and then they've distorted price signals fundamentally. As I sit here today, one of the things we're most excited about is the short opportunity set because rates have come up, so the frictional costs have gotten a lot better. Price signals are starting to normalize, or they were, and then, as best I can tell, about three or four weeks ago, Fed Chair Powell woke up with, like, the cutoff head of a horse in his bed and, you know, someone had clearly made him an offer he couldn't refuse and they got to him. So, the feds put a little bit of a putback in here for the time being. But fundamentals are normalizing again and then, there's a lot less competition. This cycle has driven a lot of short sellers out of the market. Guys have retired who are really good or closed.

• 36:16Speaker 01

  And so, even though I'm not that old, I'm 44, I guess that qualifies me for having some gray hairs, a short seller, and I'm really excited to attack this market.

• 36:24Speaker 02

  I imagine there are a bunch of people here that one day want to launch their own fund and you've had a lot of experience leading into this. What's been the most surprising aspect of getting ready to launch?

• 36:38Speaker 01

  I think the most surprising thing, having built a business over eight years, is I knew exactly how hard it would be and prepared for it, and it's been even that much harder. The demands to start a business today, a hedge fund today, are, I think, just harder than it's ever been. I think what's changed is a few things. One, the institutional demands on the business side. So the days of just kind of hanging a shingle, investing, making money, and kind of pulling your business behind you, those days are over. Today, we're putting in place a best-in-class infrastructure, day one. And so we have to have amazing partners, which we do.

• 37:18Speaker 01

  My partner, Luke Orford, who came over from Bridger, he spent seven years as a best-in-class chief operating officer. We've partnered with Blackstone on the institutional side to leverage their experience in starting a fund. Right now, I'm the choke point. I have to wear so many different hats, whether it's the team, the research, the marketing, all these things have to come together, and it's very demanding. One of the things that probably doesn't get enough discussion also in that it takes a real commitment in your personal life as well, and it's something in general that I think people don't appreciate about investing over long careers. It's a seven-day-a-week job. You don't turn this job off, ever. That's your fiduciary.

• 38:02Speaker 01

  And so you have to have a very stable personal life, and I'm lucky, and if you'll indulge me for a minute, you know, my wife is here today, Katie. I've spoken a lot of times over the years, she's never come to see me speak, this is the first time, but I won the wife lottery, literally like, Super Bowl, not like, scratch-off, Super Bowl. And we have four awesome kids, but she creates that stability in my personal life that allows me to then make this kind of commitment professionally.

• 38:27Speaker 02

  All right, Dave, I want to ask you one more question before we open it up a little bit. For someone as calm, patient, and mild-mannered as you, what's your biggest pet peeve?

• 38:38Speaker 01

  I have a lot of pet peeves, for sure. I have very low tolerance for bad manners and behavior. I just think that we all should have a real basic respect for each other, and so when people fail to respect each other, that gets me upset. I'd put things like bullying in that category, and professional and personal bullying. You know, I've been known to sort of... Stand my ground on principle in the investing world with a company or something just because they've ruffled that pet peeve and sometimes maybe to my own detriment. So those are a couple of things I'd probably put at the top of the list.

• 39:14Speaker 02

  What's your biggest investment pet peeve?

• 39:15Speaker 01

  Gosh, I have a lot of these. So probably my biggest one and something we really work hard to weed out is, this is going to sound like kind of an overblown generalization. Most people don't know how to properly use valuation multiples. And the idea that multiples flow from proper valuation and DCF technique and are not a driver of it. And therefore, what happens is people make a lot of mistakes. They do maybe good quantitative or qualitative analysis of a situation and then they just kind of blow the valuation badly. And it's because they haven't really internalized what those valuation scenarios and implications are. It's a little bit like if you think back to your grade school algebra days, you know,

• 39:59Speaker 01

  you get these word problems and they say, you know, train A leaves town going west and train B doing this and you have to solve that problem. But then the question was, is if your teacher gave you that problem in a different construct where it wasn't train A and train B, did you understand it and could you solve it? And that's really what I'm talking about in terms of an understanding. So that's a big one. When I hear about a management team's buying back stock to offset dilution, it almost gives me an aneurysm and I want to reach through the phone or across the table and choke someone. And so, you know, I have a whole list of things like that, but those are some of the big ones.

• 40:32Speaker 02

  Well, we have a few minutes for questions. So I think there's a microphone there and over there if anyone wants to hop up to the mic.

• 40:41Speaker 03

  Morning. Thanks for the talk. I was curious to just drill down more on your comments about portfolio concentration. I think you said you like 20 stocks and maybe the top 10 would be at 60 to 70. So just curious as to what the utility of the second 10 stocks are to you and perhaps maybe your 20th weighting is like 1% or something like that. So what is it? What is the utility of the bottom half of your portfolio for you?

• 41:05Speaker 01

  Not to get overly technical, but it bears on the answer. So I construct our portfolios to be about 100% long when we're fully invested and 60% to 70% short. The reason I do that is, is I'm not a big fan of leverage and so I kind of cap it at where I wouldn't have to borrow over 100%. We're also shorting to make money and I think if anyone's being honest with you, it's really hard to populate a portfolio at much more than 60% to 70%. And so that construction is kind of what falls out. But the implication is, is that we're not going to generate excess returns through leverage or beta to the market and so we have to do it through concentration. Now, when I think about taking a 20 security portfolio, the question is, is if I equal weighted it, okay?

• 41:50Speaker 01

  Let's just say 5% each. Can I do better than that for making active decisions off of that equal weighting? And I think it's a really fair question for most people. But the way I think about it is, we then take every IRR and we weight it for a variety of factors that would move us above or beyond that weighting. And it's a non-stationary analysis, so my top 10 are not always going to be my top 10. We want to flex up at points in time when we think it's most attractive and then kind of revert to that equal weighting. And we want to flex down at points in time where we think there's still an attractive skew, but maybe there are reasons around timing or other factors. So that's why you have a distribution. The second issue is, you don't always know what your best ideas are going to be.

• 42:32Speaker 01

  And so you have to, at times, live with these and make sure they are what you think you are. We have a process that's basically three things. We have to be able to identify opportunities, we have to be able to analyze them, and we have to be able to monetize them. And it turns out that those are three very, very different skillsets. And so just because something goes through each sub-discrete process in those areas and gets through to the end, it doesn't stop there. It just starts all over again continuously. And that's kind of how I think about a portfolio, in that sense.

• 43:00Speaker 03

  Awesome. Thanks.

• 43:03Speaker 04

  Thank you, David. Can you talk a little bit about global exposure, some of the different parts of the world? China, India, Africa? What's happening in those different regions of the globe? Does that influence your thinking about where you want to invest?

• 43:15Speaker 01

  Yep. So, we're very bottoms up. And so, the way we filter our global opportunity set is we are screening for very specific fact patterns on a global basis. And if our bottoms up takes us into these markets, we're happy to go there. But if it doesn't, we don't have like a top-down view of, hey, I want to be this global. When I think about the global opportunity set in general, I filter it a little more precisely. So, there are some markets I just don't do. We don't do Russia. It's just the property, law, rights, et cetera, are too difficult. Generally, don't do heavy lift EM, but we will do developed EM, particularly during dislocations, because you can usually buy best-in-class or quasi-monopoly businesses at bargain prices when you have a dislocation in developed EM.

• 43:59Speaker 01

  India is a very interesting market, but it's also set up in a market structure that is set up to advantage local investors at the expense of the foreign, and so that's very tricky. China, I think, is similar in certain respects. So, for us, our global is North America, South America, Western Europe, aspects of China, Japan is probably where we ply our trade. When I think about the global outlook today, there's a real tension. You saw last year that most global indices sold off and were somewhere between correction and bear market. The U.S. was the outlier for most of the year. And what global markets were telegraphing very clearly is that growth is slowing. And I've seen nothing anywhere to suggest that that's not, in fact, still the case. As I said, I think we've gotten a bit of a put here from the U.S.

• 44:44Speaker 01

  I think China's probably followed, even if it hasn't been announced formally. It wouldn't shock me if the Europeans got on board, if Mario, on his way out, reduces the pace of the balance sheet reduction. So, we might get one more shot of stimulus, but again, we're just so late in the cycle here that I do think global growth is slowing, and so we need to be careful. Thank you.

• 45:05Speaker 02

  And I think we have time for one more.

• 45:06Speaker 05

  Thank you for being here. You mentioned that institutionals tend to pigeonhole managers, and that has been very detrimental for returns. Do you have any suggestions on how managers can push back on institutionals so that you maintain that flexibility that you just mentioned before?

• 45:26Speaker 01

  I have to tell you, it's really, really hard. The only obvious way to me is to not actually push back is to say, this is how I'm going to set up my business and see if you can find a handful of like-minded allocators and build your business that way. The institutions are tremendously powerful gatekeepers. And by the way, that system works for a lot of their end constituencies. It exists for a reason. That's where the efficient market has taken it. But it's a very significant barrier to overcome. It's not obvious. I think what it takes is a leadership at the top of an institutional allocator who recognizes this issue and is willing to organize their setup in a way that can take advantage of it. And by the way, they do exist.

• 46:10Speaker 01

  There are a significant number of super thoughtful allocators across all the different, whether it's pension, endowment, fund of funds, family office. There are people, you just have to find them. But by and large, the industry itself has gravitated to a model of highly specialization. So long, short, and within long, short sectors, and even within sectors. You know, there are front-of-the-eye biotech specialists and there are back-of-the-eye biotech specialists. So, I mean, we're talking about very meaningful segregation here. It's challenging.

• 46:42Speaker 05

  Just a follow-up. Can you properly scale without the institutionals?

• 46:45Speaker 01

  It depends on what your objectives are. Again, I think if you're prioritizing performance, you recognize that asset growth is the enemy of performance. There's no question about that. But if you can get to a proper level of scale to ensure business stability and being able to stay competitive with the evolution of talent, data, compliance, the business costs, you can absolutely scale through natural returns and having a group of like-minded partners.

• 47:11Speaker 02

  All right, Dave. Well, it's a week later, and now we're sitting in your offices. So we said we should sit down and finish up some of the closing questions. We'll do that while we're going to tack that on. Dave, what's your favorite hobby or activity outside of work and family?

• 47:27Speaker 01

  I grew up in a sporting family. My father was a sportsman from a young age and so he took me out into the woods and nature from a pretty young age and so when I can sneak away, I like to get out into the woods, take a walk, take a walk with the dog, have some fun. Particularly in the winter months, it's a great way to be outside and have made some really nice friendships because when you're walking around in the woods all day, you tend to find some interesting things to talk about. And it's very meditative, too. It's quite restorative.

• 47:55Speaker 02

  Yeah, great. What reading do you almost never miss?

• 47:59Speaker 01

  So, reading is just truly one of my passions. I'm one of these people that at any given point in time is reading five or six different books. You know, there's something on my nightstand, something in my office at home, on my Kindle for when I'm commuting, that kind of thing. When I think about our business, really the one thing that I try not to miss is Mike Semblis at JP Morgan's Private Bank. They put out a piece, When They Feel Like It, so it's not on a regular interval, called Eye on the Market. And I just think he and his team do a really great job in five or six pages of distilling key issues and making it very accessible. I actually really try to make time in my reading for fiction because I find that it relaxes me and it accesses a different part of my brain and so a lot

• 48:42Speaker 01

  of my creativity and insights come from when I'm reading fiction. And then I also just love to read, kind of going back to some of the comments earlier about Coach K or David McCullough, anytime you can find someone who's willing to talk about their craft, I love it. And so right now, for instance, I'm reading, Stephen King has a book that he wrote called On Writing a number of years ago, where he really talks through his development of a writer and then how he applies his craft and it's just fascinating.

• 49:08Speaker 02

  Cool. What teaching from your parents has most stayed with you?

• 49:11Speaker 01

  I'm really blessed when it comes to kind of the family thing. My parents are by far my role models in life. I'm sort of the classic first generation. Both my parents came to this country from different parts of the world, very modest origins, and have had a really blessed family experience. And when I think about my parents and what they taught us, it was be humble, help others. Work hard, the value of work ethic, and just be willing to stand up for what you believe in. You know, be willing to stand on one side of the room, even if everyone is standing on the other side of the room, which is not an easy thing, but they imparted that to us very young. And in particular, you know, as I've gotten a little bit older, they've also imparted something else on me,

• 49:56Speaker 01

  which I didn't really appreciate many years ago. My father is going to be 75. Actually, both my parents will be 75 this year. But my father still, he's a neurosurgeon in Pittsburgh, and he still practices full-time, 60-some hours a week, full caseload. There was a time when we all wanted him to pull back, even as much as 20 years ago. And what I came to realize is that actually, that work, that engagement, that passion, is like the fountain of youth for him. And it's shown me the value of staying engaged and doing something I love for a very, very long time. And so when I think about investing in particular, this is something I can do for a very, very long time. Yeah.

• 50:33Ted Seides?

  All right, one more. What life lesson have you learned that you wish you knew a lot earlier in your life?

• 50:41Speaker 01

  As you get into sort of the middle part of your life, you really start to appreciate when all the people who told you along the way, you know, hey, slow down, enjoy the moment, it won't last, and all these key moments that happen in your life, whether it's your first job, or when you get married, or the birth of each of your children. You know, I'm coming through a phase now where the youngest of my four is no longer a young child. She's getting on. And all of a sudden, that phase of our life is over, and I'm quite nostalgic about it. So, not that I have any regrets, but if I had to do it over again, really just trying to be as much in the moment at these key points in your life.

• 51:15Ted Seides?

  Great. Dave, thanks so much.

• 51:17Speaker 01

  Well, thank you. Really enjoyed it.

• 51:20Ted Seides?

  Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you'd like what you heard, please tell a friend and maybe even write a review on iTunes. You'll help others discover the show, and I thank you for it. Have a good one, and see you next time.