[REPLAY] André Perold – Academic Practitioner (EP.02)

André Perold is the Chief Investment Officer and Co-Managing Partner at HighVista Strategies, where for the last dozen years he has sat at the helm of a now $3 billion fund that takes a multi-asset class, endowment-like approach emphasizing broad diversification and risk management. Over this period, André has definitively rebuffed the cliché that those who can't do, teach. In his prior career, he spent over 30 years teaching at the HBS, where he is the George Gund Professor of Finance and Banking, Emeritus. André had a distinguished career teaching investment management at Harvard and is a legendary master of the case study classroom. Just about everyone in the investment profession with Harvard Business School on their resume took a seat in his classroom at one point in time. André received numerous awards for teaching excellence, including being voted the School's most outstanding professor in a Business Week student survey. While at Harvard, André authored and co-authored 27 articles in financial journals, two books, and over 100 case studies, all relating to investment management, capital markets, and the financial system. He literally chronicled the development of modern finance as it occurred through is work at HBS. Among his directorships and trustee roles over the years, André currently is a Board member at The Vanguard Group. In this episode, we spend the first 11:30 talking about teaching at Harvard, and then turn to the practice of investing: the active vs. passive debate, a risk-based approach to asset allocation, and what makes investing so hard. I found it fascinating hearing how André takes all of his academic experience and knowledge and applies it the practice of investing at HighVista. His wisdom and clarity of thought are second to none, and his soothing South African accent only adds to the allure. 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

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. Here's something for you. Most AI tools today are very good at sounding right. But can you actually trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere in the retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this.

• 0:42Ted Seides?

  They own the content, over 500 million curated documents, from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back to an exact, verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alphasense.com/capital. That's alphasense.com with a hyphen in the middle, slash, capital. Capital Allocators is also brought to you by Morningstar.

• 1:24Ted Seides?

  In a sea of data, you need to know what you can trust. Morningstar's data, analytics, and research helps bring clarity across public and private markets. Connecting independent research and data into the tools and AI platforms you use every day. So insights are easier to spot and act on. Morningstar. Nothing in your way. Visit morningstar.com/gameon to learn more. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable

• 2:07Ted Seides?

  relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 2:42Ted 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 www.capitalallocatorspodcast.com.

• 3:09Speaker 01

  Ted Seides is the Managing Director of Hidden Brook Investments LLC. All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Hidden Brook Investments. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Hidden Brook Investments may maintain positions and securities on managers discussed on this podcast.

• 3:33Ted Seides?

  My guest on today's show is Andre Perold. For those who know Andre, he needs no introduction. Andre is the Chief Investment Officer and co-managing partner at Hi-Vista Strategies, where for the last dozen years, he has sat at the helm of a now $3 billion fund that takes a multi-asset class endowment-like approach emphasizing broad diversification and risk management. Over this period, Andre has definitively rebuffed the cliche that those who can't do, teach. You see, in his prior career, he spent over 30 years teaching at the Harvard Business School, where he is the George Gund Professor of Finance and Banking emeritus. Andre had a distinguished career teaching investment management at Harvard and is a

• 4:16Ted Seides?

  legendary master of the case study classroom. Just about everyone in the investment profession with Harvard Business School on their resume once took a seat in his classroom. Andre received numerous awards for teaching excellence, including being voted the school's most outstanding professor in a Business Week student survey. While at Harvard, Andre authored and co-authored 27 articles in financial journals, two books, and over 100 case studies, all relating to investment management, capital markets, and the financial system. He literally chronicled the development of modern finance as it occurred through his work at Harvard Business School. To give you a sense, some of my favorites among his collection of case studies includes,

• 4:58Ted Seides?

  in 1994, Black Scholes Pricing for the HP12C Calculator. In 1990, the RJR Nabisco LBO. In 1994, Bankers Trust Derivatives. In 1996, Private Equity in Russia. In 1998, The Vanguard Group. In 1999, a series on long-term capital management. In 2007, before the financial crisis, a case on leveraged loans. And over the last decade, cases on the Notre Dame and Harvard endowments. Among his directorships and trustee roles over the years, Andre is currently a board member at The Vanguard Group. In this episode, we spent the first 11 and 1/2 minutes talking about teaching at Harvard,

• 5:42Ted Seides?

  and then turned to the practice of investing. The active versus passive debate, a risk-based approach to asset allocation, and what makes investing so hard. I found it fascinating hearing how Andre takes all of his academic experience and knowledge and applies it to the practice of investing at Hi-Vista. His wisdom and clarity of thought are second to none, and his soothing South African accent only adds to the allure. If you like the show, please subscribe on iTunes and maybe even write a review. You'll help others discover the podcast, and I thank you for it. And with that, I bring you my conversation with Andre Perold. How did you first get interested in investing?

• 6:26Speaker 02

  So I sort of got into investing in a variety of ways. There were two essential aspects to it. One was I was always interested in probability and statistics, and I was always trying to figure out odds. And investing is very much a game of odds. We're always trying to handicap outcomes. And so that was one side of it. Another side of it is I grew up in a family that had no money. And my parents figured out how to make everything, how to knit and sew and carpentry, and there was nothing. We made our own toys. And so I was, from an early age, I did that myself, and I was always interested in how things worked. And that extended over time to how the world works.

• 7:07Speaker 02

  And investing is the best way, or a fantastic way, to think about how the world works. And so the combination of probability and statistics on the one hand, and a sort of deep interest in how the world works combines to make investing a lot of fun.

• 7:22Ted Seides?

  What was the most rewarding thing for you about teaching?

• 7:25Speaker 02

  So I would say, in academia, teaching is, teaching is one of the great privileges in life. I think being able to have a place of honor where you're in front of a large group of very talented, or it doesn't matter if they're talented or not, students, and being able to engage them.

• 7:45Ted Seides?

  There's a side conversation there.

• 7:48Speaker 02

  You know, and I think it's a privilege to be able to teach. And I find, for me, teaching, I think, teaching in the classroom is one part of teaching, but we're always teaching. We're always, we're always helping other people. We're always, if you're selling your teaching, teaching shows up in everything you do. But I found teaching, besides helping others, it was very much a way to understand things. So I always loved to teach things, to teach about things I didn't really understand. Because I found, if you can't explain something, you don't really understand it. And so for me, teaching was a way to learn. I taught myself finance.

• 8:30Speaker 02

  I've taught myself a million things by just going into the classroom and trying to figure it out in the class with students, and that's one of the greatest fun things to do.

• 8:40Ted Seides?

  You started teaching at Harvard Business School at the age of 27, right?

• 8:44Speaker 02

  Yes.

• 8:45Ted Seides?

  What was the average age of the students at the time?

• 8:46Speaker 02

  About the same.

• 8:47Ted Seides?

  So go back to, what was that like, that first year?

• 8:52Speaker 02

  It was the blind leading the blind. Let's start there. When you walk into a Harvard Business School classroom, it's as intimidating as hell. And yet, there's a sense that we're all in this to learn. It was nerve-wracking. I got students who would come and see me. One in particular came to see me midway through the course to tell me what an absolutely terrible teacher I was. And the nice thing is, by the end of the semester, we learned to like each other, and they actually really liked it. And I think it's just because they sort of appreciated that I was trying. And over time, you learn how to do it. You learn how to do it, and you sort of grow into it.

• 9:31Ted Seides?

  What does it take to be a good master of the classroom?

• 9:34Speaker 02

  Look, I think it takes humility, self-awareness. I think it's very interpersonal. You need to understand what they are thinking and struggling with. You need to think of ways to get people to see things. And so I would always spend a lot of time thinking about what questions I wanted to ask. Questions that if I asked them, they would, they could struggle with that question, that, that single question for a long time, and it would shed a lot of light on something. You know, sometimes a very simple question like, what is a P/E ratio and what do you do with it? Sounds easy and you can look it up in textbooks, but in fact, when you peel away the layers of the onion, it's very deep and you can get into any and every aspect of investing

• 10:19Speaker 02

  through that simple little question. So I think, I think that's one. Another one is you, you really have to be willing to challenge your audience and make them think.

• 10:30Ted Seides?

  I vividly remember you doing that. Quite a bit.

• 10:34Speaker 02

  You have to make them think and they respect that. They, they really respect that. And, and when they come to class knowing they're going to be challenged, they prepare that much more. They are deathly afraid of being embarrassed in front of their peers. And, and so when you do that, you could, it's sort of a win, win, win, and it just works.

• 10:54Ted Seides?

  Were you teaching investing from the beginning, investment management, straight through? Or did you evolve into that?

• 10:59Speaker 02

  No, I evolved into it. I taught, so my training was in a field called operations research. It wasn't finance, which is sort of the math of doing stuff in business, scheduling and various things like that. And so I taught a course called managerial economics, which was about decision trees and statistics and game theory. But I was fascinated by investing and asked if they'd let me teach something I didn't know anything about, and they did. And I taught myself and-

• 11:26Ted Seides?

  How many years in was that to your tenure?

• 11:27Speaker 02

  About three years, two years in.

• 11:29Ted Seides?

  You certainly have taught lots of investment managers, hedge fund managers, probably lots of people in private equity as well. Let's start with, what were the characteristics that you found of good students in your classroom? And then the big question is going to be, was there a correlation with success and understanding investing, investment management in the classroom and what people did later in their lives?

• 11:51Speaker 02

  Look, the good students are good students in any setting. They're curious, they work hard, they go beyond what they're asked to do. At Harvard Business School, we demand that people are active learners. And so it's not enough to parrot something, you've got to think hard about what's going on. In so many cases, the good students would draw upon their own experiences and bring it into the classroom and be very reflective about what they were learning and seeing and hearing. And the good students were ones that moved the ball in the conversation, that they, they weren't just trying to make a point. They would understand what we were all struggling with and would help us along.

• 12:32Speaker 02

  Even good didn't mean you knew what was going on, but just being unafraid to ask even a dumb question, they would actually help us all learn. Those were the good students and a lot of them did fabulously in the real world thereafter. These are, these are personality traits that are pretty powerful in, in many settings.

• 12:50Ted Seides?

  Harvard Business School, like anything else, is a business. And I'm curious if there are any parallels of some of the challenges that a school faces that a student who goes through wouldn't really understand. But what actually happens in a school that makes it successful?

• 13:08Speaker 02

  Look, the first, the single most important thing about Harvard Business School is that Harvard Business School knows who it is. It's grounded in practice. It cares about active learning in the classroom. It's not about lecturing. It's not about being extremely esoteric. And Harvard Business School is excellent at that. To pull it off, you need to attract and train faculty who can do it. It's very hard to do because when you're the only school doing it, when you're doing something very unique, it requires a heroic effort all the time to make sure that you can actually pull it off. And it's a little bit like a religion where you're always fighting to keep the flock coming to church and, and the same thing here.

• 13:51Speaker 02

  And it's, I think Harvard Business School is extremely good at doing that.

• 13:56Ted Seides?

  So one of the things that I guess Harvard Business School professors often have advisory, consulting projects to be active in the real world, as you said, and one of yours has been a long time association with Vanguard. Today, and we'll certainly spend a lot more time talking about this, you are an active manager. And Vanguard has a lot of active products, but is particularly well-known for passive management. It seems that active versus passive is on a lot of people's minds these days. And I was wondering if you could weigh in, given that you're so much deeper in the actual practice of what Vanguard does and understand it so much more than most. And yet you also are an active manager, investing in active managers. How do you feel about all of this?

• 14:38Speaker 02

  So look, I think the first thing to say is Vanguard, as you just said, has a lot of active product. A very significant part of our AUM is in actively managed funds, equities, various kinds of fixed income, things like that. Vanguard is known for indexing, but it's, it's, the key is to understand it's also doing so at very low cost. And so they wring costs out of the system in a very efficient way. And the combination of products that perform as advertised, so when you're tracking an index, you track the index at a low cost, is, is a very powerful idea that gives them a huge advantage. Indexing, the way I think about indexing is it's very simple.

• 15:21Speaker 02

  You either do or don't have an edge in investing. And each of us, most people have no edge ever in investing. And, and some people have an edge some of the time. And the key is to know, when do you have an edge and when do you need? You may have an edge at a particular point in time because you know something about something, you're very familiar or expert in a certain area that happens to be ripe for investing. You may have an industry expertise or something, or knowledge about something where you can take advantage of it. I think some people who think they have an edge all the time, that's a, that's a big mistake. And most people have no edge at any point in time. And so the way I think about it is when you do have an edge, by all means, try and take

• 16:06Speaker 02

  advantage of it. The edge might be also knowing certain managers who are very good, you know, to give money to others who, who actually may have an edge and pay them a fee for it. But most people don't, and if you don't have an edge, you should probably index. It still doesn't answer the question of how you invest because you have to decide how to allocate your, your assets across different asset categories. But as a way of executing well, indexing is very good for folks who don't have an edge. And at High Vista, we do that all the time. When, when, when, when we don't have an edge somewhere and don't see opportunities, we'll totally buy indices as a placeholder until we do. Warren Buffett, I think, said it very nicely.

• 16:49Speaker 02

  He said, when dumb money acknowledges its limitations, it ceases to be dumb. And so folks who index, at least they'll track the index and not be taken advantage of, and that's a very powerful thing to understand.

• 17:03Ted Seides?

  So now, I guess 13-ish years ago, you started High Vista Strategies. What was the light bulb that went off in your head that said, hey, I gotta go do this?

• 17:15Speaker 02

  So I had spent my academic life thinking about many aspects of investing, about asset allocation, about trying to outperform, thinking about where you could get an edge, understanding the business of hedge funds and other investment firms. And you think questions like currency hedging, questions like, how do you minimize execution costs? Questions about how do you reshape the probability distribution? All sorts of questions relating to just about every facet of investing. How do you do securities lending and why would you do it and when?

• 17:55Speaker 02

  And having studied all that, when the idea of High Vista came along, the idea being to invest in a single fund, you know, in everything and everything, anything and everything that moved, the way the large endowments do, it's called unfettered investing. It just really appealed to me because I could draw on everything I'd studied until then, including risk management and, and all those kinds of things, so.

• 18:23Ted Seides?

  And what, what are your core beliefs about investing? Everyone who has an approach, who's allocating capital, has to start with a philosophy. What is yours?

• 18:33Speaker 02

  So look, I think at High Vista, we think about two things. One is we think about how do we, where and how can we outperform by finding extraordinary managers to give money to? Where and how can we outperform by doing things in-house that are fairly simple strategies where we may be able to earn an extra return without being too clever? Think of all of that as how do you execute on trying to earn alpha in the area? And then combine that with sort of trying to think pretty deeply about risk and be very deliberate about the risks we are taking and try and manage to, to those risk targets that we set for ourselves.

• 19:15Ted Seides?

  And so has that started, the, the one fund, does that start with a certain type of asset allocation?

• 19:21Speaker 02

  It starts with a level of risk that we want to take and we try and quantify what that risk is. Risk to us is for, at the level of a portfolio, having, what is the probability of losing X dollars-

• 19:35Ted Seides?

  Over a certain period of time.

• 19:37Speaker 02

  Over a given period of time, something like a year or, you know, and then try and quantify those risks based on how we're invested. And the world is a very dynamic place. And as risks evolve in the, in the markets, it was pretty a risky time in the world in 08. It's a lot calmer time in the world today. And you think very differently about risk when you're in different kinds of market environments and trying to be very cognizant of those environments and reflect that in the portfolio as we think about risk is pretty important.

• 20:07Ted Seides?

  So a lot of people, if you think about how Warren Buffett might talk about risk, the time horizon- Really impacts what that means to say you're going to lose money over a specified period of time. When you set that up for HiVista, is that tied to the business and therefore the liquidity that you provide your investors as the metric of risk?

• 20:29Speaker 02

  Absolutely. I think we all have to understand that our capital is from a given source at any point in time. Any firm has capital from some source and capital often moves for good reasons and sometimes for not so good reasons. The good reasons are people need to spend, they want to buy a house, they want to buy something, make a capital investment, and they need the money. And those are good reasons. The less good reasons are when people are afraid, they suddenly get fearful, they suddenly get very euphoric and optimistic about markets and want to chase returns, and they move around for psychological reasons that sometimes are not so good. So one has to understand your client base,

• 21:12Speaker 02

  you always want to educate your client base as to what you do and keep the clients, you know, confident that the kinds of things you're trying to do for them are really in their best interests. But it isn't always the case. Warren Buffett has the absolutely wonderful benefit that he has permanent capital and it completely changes what he can do because he has permanent capital than any other investor can do who does not have permanent capital.

• 21:38Ted Seides?

  Risk, if you're measuring it in the markets, commonly volatility, lots of investors think that's not a great metric of risk. And yet, I'm not sure if you're trying to calculate risks across different asset classes, what else you would use. How do you think about that?

• 21:55Speaker 02

  So we've done a lot of research on risk at the portfolio level versus at the individual security level. And I think the first thing to say is at the individual security level, volatility need not be a good measure of risk at all. You know, a strategy that sells options and has limited upside and big downside, you're not going to detect that from volatility statistics. Examples might be credit investments that give you a small, nice return for a long time and then suddenly blow up. I think at the portfolio level, your biggest, if you're diversified, your biggest exposures are to the broad markets, usually the equity markets. Exposure to the equity markets is your biggest risk. And there,

• 22:40Speaker 02

  there's very strong evidence that when things are volatile, thereafter, the risk of a big drawdown is much higher than when things are calm.

• 22:50Ted Seides?

  Thereafter?

• 22:52Speaker 02

  Thereafter. So it's not, so usually volatility is associated with times of stress. That's correct. But what happens, what is so striking is that, once you have volatility, it tends to continue. And if there's, if things are volatile today, the risk of a big drawdown are much higher tomorrow than if things are not so volatile today. A very simple idea. It's very effective. We use that idea as part of what we do. There are related ideas that go with that, ideas like correlation, how are things moving together? How are they moving together today? Maybe versus, could be different from how they may have moved together in the past. The idea of correlation, the idea of volatility

• 23:35Speaker 02

  as a predictor of risk, these are all very useful concepts that work at the portfolio level. They may or may not be helpful.

• 23:42Ted Seides?

  A lot of that, those metrics are tied to public markets. Volatility doesn't matter if someone's investing in private equity and giving them their money for 10 years. So how do you balance the, the public market where you can measure those risks and investments in private markets where you're kind of setting it and forgetting it for a while?

• 24:00Speaker 02

  So I think one has to think of illiquid investments as risky in many ways. So something can be illiquid, yet the underlying assets can be in public instruments. For example, a hedge fund with long dated lockups is an example of an illiquid asset, your investment in the hedge fund, but the underlying is liquid. So you can get a sense for the risk of your investment with that hedge fund. But the fact is, there are other factors that affect the risk of the hedge fund. Their clients may suddenly want to redeem, or the person may want to change their mind as to what they really want to do. There's a variety of risks that could occur. There could be a ban on short selling like we saw in 2008.

• 24:42Speaker 02

  You've got to think about all of those risks, even though the underlying assets are liquid. Then of course, there are assets that are illiquid, inherently liquid, such as in private equity, private loans, private many things. And there, you need to understand, you're making a bet that something will work over a long period of time. And a lot of things have to go right for those things to work over a long period of time. They may seem great today, but you're, when you, when you make a long dated commitment, you're assuming that things will be in place for the duration. And at the very least, there's an opportunity cost. You can't change your mind very easily. The world is very dynamic and changes and you may find that you're stuck. And it's pretty costly that you tied your hands. On

• 25:25Speaker 02

  the other hand, often, you tie your hands and you get handsomely rewarded for that. And you always have to balance those two concerns.

• 25:32Ted Seides?

  This is ultimately a people business. And you've worked with, you've taught lots of people over the years. How do you get inside the heads of the people you're thinking of investing in to really get comfort that you're ready to commit capital to them?

• 25:49Speaker 02

  So that's a really hard question. I think, I think talent, identifying talent is really hard. Sometimes you know there's talent, you know they're exactly what you want, but they're so good, you can't get in. So the issue is, so the hardest cases are usually the ones where someone will take your money. You always have to ask why you're so lucky. But they'll take your money, you think they're very talented, but you have to convince yourself. But it's not just talent. It's, are they talented? What is the opportunity that they're pursuing? Is that opportunity still in place? Do they have a team that can execute? Remember, this talent is also running a business. Are they good business

• 26:31Speaker 02

  managers? They have to worry about their clients and keep them happy. They need to attract a talent to work for them and mentor and keep those folks happy. And you're asking an awful lot of somebody. So you need multifaceted talent, at the very least, where you're making a commitment to them. I would say it's, it's pretty hard. It's pretty hard. After the fact, it's of course always easy. But there are a lot of folks who are on paper extraordinarily talented, who end up not performing so well after the fact, as we all know. So you need to make judgments. I think the ability to judge people is an essential skill that one needs, and it's very hard.

• 27:15Ted Seides?

  Everything seems like it's hard today. Markets, you talk to people, everybody says markets are expensive, asset classes are expensive. You are tasked with making money for your clients. Where are you seeing opportunities?

• 27:28Speaker 02

  So firstly, let's understand why it's hard. It's hard because the world's competitive. It's also hard because the world doesn't stand still. And so the industry is always evolving. If you have a good idea, the odds are high. Others have that same idea. So I think investing is always hard. It's harder than you think. It's the same as any other aspect of business. If you try and compete as a firm, it doesn't matter who you are, this competition, it's seldom easy. And, and so I would just say, this idea that there are times when it's easy and there are times that it's hard, no, I think it's hard all

• 28:06Speaker 02

  the time. I think in today's world, I think it's, it is hard. It's hard to see anything obvious. Equity markets are high. It's hard to sort of have a belief that equity market returns will be fantastic over the next 10 years. I think, we sort of think about it in sort of, along two dimensions. One is, there's a very dynamic aspect to the world. And it may be that there may not be great places to put money today, but they will be in the future and you need to prepare yourself for those instances. So we think of managers who have flexible mandates, for example, as being a prime candidate for, for

• 28:48Speaker 02

  folks we want to partner with. Folks that are prepared for things. Being prepared takes work. Being prepared and not investing is very hard because it looks like you're not doing anything. But, but the fact is, you need to be good enough to guess where the opportunities might be. And then the minute they occur, you have to jump and pounce on them. So finding firms that are good at that is one of the things that we, we're always looking for. On the basis that the world's very dynamic and it's, it's, the day you buy is when you make your money, not the day you sell. And being ready for those buying opportunities is sort of critical. That's one kind. The other kind is looking for niches

• 29:30Speaker 02

  where specialists can outperform and just thinking about very nichey, off the run areas. Example might be direct lending, for example. The lending space is interesting because banks have exited vast swaths of the lending space. And I think there's money to be made there. And there are other areas, nichey areas that are a little off the run, where you find a team that can do well. And, and then you just have to keep reaffirming, A, that it's the right team, and B, that the opportunity set is still there.

• 30:00Ted Seides?

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• 30:45Ted Seides?

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• 31:20Speaker 02

  And I think there are ways to make money there, too.

• 31:22Ted Seides?

  Are there any particular niches that you're excited about today?

• 31:25Speaker 02

  I think, you know, I think if you look at areas like biotech, there are a lot of smaller biotech companies that are not well understood at all. It's a people love, it's sort of faddish and people chase things based on psychology. It's a particularly nice area to be able to, to try and play that game. I think smaller banks are an area as well where you see they, they just not very glamorous kinds of things. And you just need to go from one to the next and try to understand what they're doing. And but there's a, there's just a very broad range of these, of these things. Small cap activism is another one where these are again, off the run things.

• 32:07Speaker 02

  They not buying the large caps and doing things like that, although the large caps themselves are not, not all of them are that expensive. And, and there are opportunities, it seems there as well.

• 32:18Ted Seides?

  So you and your team spend all this time exploring these niches, trying to find these great opportunities. You're hunting where other people aren't. And at the same time, the studies all say that asset allocation drives returns. So if you step back from the biotech investing, the small cap banks, small cap activism, the banks, what does your overall asset allocation look like today? And does it jive with sort of, how much time do you spend at that level as opposed to really looking at the underneath the corners to execute as well as you can?

• 32:56Speaker 02

  Look, so I think of it very differently. I would say, you know, people, I think there's a bit of a false dichotomy that people draw between what's more important, manager selection or asset allocation. So let me first say, if you're selecting managers who can't outperform.

• 33:11Ted Seides?

  That's a problem.

• 33:12Speaker 02

  Then it's, then it's a problem. You should just index and be done. And then it's all about asset allocation. If you can find managers who can add a lot of alpha, it changes the game completely. And then it's a function of how many of those do you have? If you have all your money split between three managers who are very active in what they do, but really good, I think it's all about managers. And I think, so it's, you know, if you're highly diversified across managers, it's a different story, then most of what they do cancels out and you're left with beta risk, which is about asset allocation. We sort of think about it as, look, we, finding alpha is, alpha is scarce. Finding alpha is hard and you need to find it where it is.

• 33:57Speaker 02

  You find alpha most of the time where there are dislocations, where there are capital shortages in the world. You don't find alpha all the time, but on the corner of Fifth Avenue and 47th. It just doesn't sit there all the time. You may occasionally, but it doesn't sit there all the time. So you need to go where it is. And it may be it's there in Japan. It may be there, it's there in distressed investing. It may be it's in some place and you need to go there. So, so our view is alpha, the pursuit of alpha is always opportunistic and you must go where it is, not where you'd like it to be conveniently. When you find it, invest in it, unless there's some reason it doesn't make sense.

• 34:37Speaker 02

  And that always leaves you with an idiosyncratic set of managers and an idiosyncratic exposures to the broad markets. Cause each place you find, each pond you find, has its own set of exposures to the broad markets. So you can get pretty lopsided exposures if you follow money opportunistically, if you follow the opportunities where they are. And so our view is look for the opportunities where they are and then true up the exposures you get so that your overall exposures make sense. So how much US equity exposure am I getting by virtue of these terrific opportunities? And if it's less than I, than I would like, add to it, perhaps in a passive way. And if it's more than I really want, I can hedge it out.

• 35:22Ted Seides?

  And that bounds, is that sort of, there's ranges that you're comfortable with?

• 35:27Speaker 02

  That's where the risk target really matters. So, you know, we are very risk conscious and a portion of our capital is in a very low risk fund. And there, the, there, the ranges are much lower for equity exposure than they would be in a higher risk version. So we set those based on a broad sense of risk and just depends on the risk target.

• 35:48Ted Seides?

  You know, I found in my time at Protege that when you're looking for the great opportunities, you'd like your team who's out talking to people to also be looking at. But I also found there was a lot more art than science into being able to spot what is a great opportunity. And that takes a lot of experience and there's only, you only have a limited bandwidth. How do you try to get the people on your team to be looking opportunistically across, around the world?

• 36:21Speaker 02

  Look, I think it's, it's hard and it's easy. The, the easy part is it's amazing, the inbound traffic that, that we get.

• 36:29Ted Seides?

  Wait, when you have money, people want to talk to you?

• 36:30Speaker 02

  It's shocking that, that when we have money, people want to talk to us. And so that, that's one of the things. So the issue is you are chasing down a whole range of things. Often there are opportunities you can't find the team. Often there are opportunities and you can find the team, but the terms don't work. It's too long a lockup or it's too expensive along some dimension. Sometimes it's too expensive because of taxes. And so even though you might see something, you don't have a way to execute on it. And we work hard to try and find ways to execute. Sometimes there are ways to execute through derivatives or some other way of doing something or create a sort of an LP friendly structure that sort of helps.

• 37:10Speaker 02

  But I think in each case, one just has to, this is where being an investor really helps and having an investment mindset where you have to put yourself in the shoes of the folks making these investments and ask yourself, if you were doing these, would you, would you see it the same way? And it's very much the same kind of work that someone would do is actually doing it and making those investment decisions.

• 37:35Ted Seides?

  So we all learn from our mistakes. Can you talk about what you've learned in this period of time over the last decade that's different from what you thought investment firms did or had to do to execute well when you were teaching and studying firms?

• 37:53Speaker 02

  I think the biggest lesson has been that the world is extremely competitive and that competitiveness is not something you see until later in a given area. So you think you found something, you think you're the first to see it, or maybe the second or the third, and you realize later that you were just one of many and it's already competed away before you can actually take advantage of it. It is so surprising to see after the fact, how things almost always don't work out nearly as well as you thought they did before the fact. You're always disappointed. It's a bit like golf. You're always disappointed. You keep, you hope springs eternal.

• 38:36Ted Seides?

  You know, go outside of story, it goes both ways because I remember being involved in the subprime short and it was a perfect trade. And you looked at it and you mapped it out and you said, boy, if this goes as we think, we're going to pay eight percent and we're going to make 10 times our money. And then it worked. And one of the things you saw afterwards with some of the people who were in that trade without pointing to any particular manager is that it almost changed the way they thought. They, they did something that was perfect. And then they proceeded to search for the next thing that was perfect. And if it wasn't the big grand slam home run, they couldn't do it the same way anymore.

• 39:19Speaker 02

  Look, I couldn't agree more. And what that says is that there's a huge amount of luck in our business. So subprime worked in two ways. One, it was just a good trade where if housing did badly, you could do well. What I don't think people understood at the time was it was also a huge macro trade. So if you got it right, it was a hedge on your overall portfolio. The benefits of being short subprime were extraordinary at the time. The other thing is I think timing really mattered. We did subprime and it really worked well for us. Our predecessors in the trade, meaning others in the industry who tried it earlier, did not do so well and some got shut down because they were too early.

• 40:02Speaker 02

  Just read Michael Lewis's Big Short and it's, it's all in there. And I think, I think people don't understand the role of luck is huge. And I think we in the industry and society at large celebrate as skill, what really is luck, often, not always. And when you're lucky, you, you can be lucky and come across like a genius. And the mistake we make as investors is to assume it was skill and not luck or not, not correctly or sufficiently adjusting for the fact that there's a lot of luck in this business and in investing. And, and that's really hard to sort out. So subprime is a great example of trying to parse that out.

• 40:45Ted Seides?

  I think a lot about the question of luck and skill. And when you're investing in managers, things change inside the organizations. I, you know, I remember leaving business school and going to work for a manager that Yale had money with. And so my prior training taught me that anybody Yale had money with was a superstar. And it was a great story. It was a small, average buyout shop. And I went there the first day, I was the first associate they'd ever hired. And there were four or five partners and the first week, like one or two of the partners were in the office and the other guys weren't. And then the next week, there was a different guy in the office. And the third week, the other guys were in the office. And it took me till the fourth week to realize that that was happening because the guys hated each other. And then my big lesson was, wow, the people at Yale had no idea this was going on and

• 41:30Ted Seides?

  they had, you know, they entrusted their money with them. How do you, over time, when you have a relationship with the manager, their life circumstances change and this business, their wealth changes? How do you stay in touch with them enough to detect if what was, let's say, skill or luck turns into something else because the person changes or their temperament changes or their motivation changes?

• 41:55Speaker 02

  Again, a great question. I think the way we think about it is firstly, investing with a manager is.

• 42:03Speaker 02

  It's only the starting point for the relationship. That it's really about partnership, that you want to give folks money that you can be in constant dialogue with and learn from. And hopefully, you can be of help to them as well. Those are the best. So when you have a real relationship with a firm, where you're always talking about various things, they get to know you pretty well, but you get to know them pretty well. And I think when you have that kind of relationship, it's a lot easier to get a sense for what is the cadence of the firm, how is it changing? You can look at what they own, you can better interpret the things that you're seeing in their portfolios, as to how they got into the portfolio in the first place, and who might be driving decisions.

• 42:48Speaker 02

  And I think that's helpful. Nothing's perfect in this world, but I think that's absolutely one way to think about it.

• 42:56Ted Seides?

  There's a lot of talk today about fees across active management. How have you thought about it differently in your relationships with your managers, if you have in the last couple of years than before that? And what, if anything, are you doing differently?

• 43:10Speaker 02

  So, look, I think the first thing to say about fees is, we always think of the returns we're getting from our managers net of fees. Very simply, if they can generate great returns net of fees, so be it. And if they can't, that's a problem. And so, that's the starting point. All else equal, obviously, we would prefer lower fees, if all else is equal. The question is, is all else equal? I think, and the answer often is no. For the kinds of skill we're looking for, you need talent. And talent is expensive. So, the idea that you can generate high alpha for low fees, I think is a complete misnomer. Very hard to do.

• 43:51Speaker 02

  I think, I can see how there are certain firms where the fee levels are needed to be high, or maybe are egregiously high, and it wipes out the value they can add, and you just don't need to invest for them. That's very easy. But when you find true talent, you've got to pay them. And I think you're kidding yourself if you think you can get the combination of extraordinary performance and talent for very low fees. I don't see how that works.

• 44:17Ted Seides?

  What are you concerned most about in the capital markets today?

• 44:19Speaker 02

  It's crowded. I think it's crowded. There's a lot of money chasing, seems like fewer opportunities. You need to go further and further afield to find things. So, for example, as I said earlier, we're looking to give folks more specialized mandates in areas, but you have to go further afield to find those.

• 44:39Ted Seides?

  When you do go further afield for those, do you find you tend to gravitate to smaller cap and less liquid necessarily?

• 44:48Speaker 02

  I think a lot of the time, it is that, because that's where it's harder to put money to work. But you also find there are smaller firms, they're not well-known. You need to better understand the people. You're often one of a very small number of investors with that firm, and you just can't take, there's no such thing as safety in numbers, where you can hope and rely on other people doing the work. You have to absolutely do your own work and have confidence that you can identify these things. I think it's crowded. I do worry a lot about the political system today. I do worry about protectionism. I do worry about the freedom of the press. Things that go well beyond investing, but I think these things all hang together.

• 45:33Speaker 02

  The economy seems to be doing fine, but valuations are high. And so, the question always is, valuations are high, my sincere hope is that they're high because things are going to be great, and that would be awesome. But you always have to worry, they may be high because there's a little more exuberance in the markets today than is justified by the fundamentals. And so, one has to be cautious and always be prepared for downturns. But part of being prepared for a downturn is thinking about where will there be opportunities and having dry powder to put to work on those days.

• 46:06Ted Seides?

  You know, I guess we all hope that we're going to be able to make America great again, but at the same time, the political, the populism, everything you mentioned, it's hard not to wake up some days and sort of be worried that the world we're looking at for the next, I don't know, 10, 20 years is so different and a lot less comfortable than the world we've been living in. Or maybe that we, in the financial markets, were a little bit blind to what the rest of the country was really feeling all along. How do you take that awareness and apply it, certainly in your investment portfolios, but also in how you think about both the business and investing, and then in life?

• 46:49Speaker 02

  Look, I think in life, the hardest question is, we all know how this could evolve. We can all see the beginnings of authoritarianism, nationalism, economic nationalism, and we all know where that could lead. And there, I worry about, you know, it may not be in my lifetime, but in my kids' lifetime, and I worry a lot about that. I think for investing, I think, I think one has to take the view that good things can happen. Certainly, I see a lot of good things that could happen if society has, and today, we have the extraordinary ability to make good things happen if we would just work together. And so, there's upside, and we may come to our senses, and things could be fantastic.

• 47:34Speaker 02

  But I think the tail risks are high today. I think one has to think about tail risk. Small probability, but big impact events, including, I would say, I wouldn't, you know, I think whatever probability you put on having a major war in the world, I think it's always been small in recent years, but however small it is, it's probably double that small. Still small, but maybe a little bigger than it was before. It's a tail risk. It's something we need to think about and just be a little more conscious of as we make investment decisions.

• 48:06Ted Seides?

  At the end of these podcasts, I always try to ask some fun closing questions. My first question, what was your favorite sports moment as a participant or an observer?

• 48:17Speaker 02

  I think, you should know, I love to play golf. I'm a golf nut, and--

• 48:21Ted Seides?

  Apparently, you have a great short game. Is that, is that right?

• 48:24Speaker 02

  I let others be the judge of that, but every now and then, I'm able to really score. A lot of the time, it's useless, but every now and then, I can really score, and those have been, and I've had a couple of fantastic rounds, and those you never forget. Those are very special and last forever in your mind.

• 48:41Ted Seides?

  So, one of those was at the Masters, and that was your favorite moment?

• 48:44Speaker 02

  One of those was at the Masters, and you can never forget playing Augusta and having a good time.

• 48:50Ted Seides?

  How about recommending a recent book, TV show, or podcast that you've enjoyed?

• 48:55Speaker 02

  So, I love, I love Michael Lewis's writings. I think he's someone who thinks about the world in a way that is very unique. He has a way of seeing through what's really going on and developing a framework. So, I like all his books. The one I think is most profound is Moneyball. I think it's not that recent, but it's an example of how he wrote about applying techniques of investing to talent management and finding great players on a team, and it extends to so many aspects of life. I just love the guy.

• 49:28Ted Seides?

  What is your favorite thing to do that is a complete waste of time?

• 49:32Speaker 02

  Back to golf. I love, I'm always struggling. It's, as any golfer knows, it's a struggle, and putting often just doesn't work. And I will go and research new putters, buy new putters, and find the problem is the six inches between the ears, not the putter, and talk about it, waste of time. That's what it is, but it's great fun to always imagine.

• 49:52Ted Seides?

  Wait, are you saying it's the magician and not the wand?

• 49:54Speaker 02

  Exactly, exactly.

• 49:55Ted Seides?

  What do you know today that you wish you knew 10 years ago?

• 49:59Speaker 02

  You know, well, obviously, I'd like to know where markets have gone. That's always nice to know. In the 10 years--

• 50:06Ted Seides?

  There's a movie, there's that Back to the Future--

• 50:07Speaker 02

  I think something like that, exactly.

• 50:10Ted Seides?

  Yeah.

• 50:11Speaker 02

  You know, I think, I think in the last 10 years, if you think what's happened, we've had a terrible year and a bit during the financial crisis, where extraordinary things happened far beyond anything we could imagine. And then likewise, we've had a recovery in the markets that's been unbelievable, including US equities in particular. I wish I'd known then how bad it could be, but also how resilient the world could be, and how we've come back. So, things like that, but that's always in hindsight. It's always easier to think back what you'd like to have known.

• 50:45Ted Seides?

  You are now 110 years old. You are sitting in your rocking chair, which is your favorite passion at the time. What advice would you give yourself looking back at your life today?

• 50:57Speaker 02

  You mean, what advice would I give myself for the next phase in my life, starting now?

• 51:04Ted Seides?

  Correct.

• 51:05Speaker 02

  And I would say, firstly, I think the beauty of life is, there's no such thing as being too old. I think, there's no such thing as retirement. I think you should never retire. There's no such thing as think small. You should always think big. You should always try and have an impact, and think about what can you do to have an impact? Have energy. I think, basic things like the power of networking. It's critical to do anything in this world without, you have to be able to network well. And you can never rest on an old network. You have to keep refreshing, replenishing, and that takes hard work.

• 51:49Speaker 02

  It's all about relationships. And I would, so, you know, I would say, those things never, never get old. They never stop. And those are the things that make life interesting, work-life interesting, and just, just keep doing them. You know, you realize as you get older that life's about family, family, family. Never forget that. And I think, we talked about luck. Luck really matters. So, if you can make your luck, you're that much better off. And, you know, it's a version of, you can't win the lottery if you don't buy a lottery ticket. You've got to find ways to make luck for yourself.

• 52:29Ted Seides?

  Are you recommending buying lottery tickets? I'm just trying to clarify that.

• 52:33Speaker 02

  So, I think you should always be taking risks. You want to manage your risks, but you want to take risk, because good things happen when you take risks. Not crazy risks. I'm not saying not be prudent, but you want to take risk. If you don't take risk-- Taking risk is interesting. You learn, it's exciting, it works, if you're thoughtful about it, and you always have a chance when you do that.

• 52:59Ted Seides?

  Fantastic. Andre, this is so much fun. Thanks for doing this.

• 53:02Speaker 02

  Thanks, Ted. Appreciate it.

• 53:04Ted 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've liked what you've heard, please write a review on iTunes or Google Play to help others find out about the show. Have a good one, and see you next time.