Will England, Derek Drummond, and Tony Caruso – Disintermediating Pod Shops (EP.501)

Today's show discusses an innovative joint venture between asset owners and a multi-manager hedge fund that seeks to deliver smooth, equity-like returns at a lower cost than available in the marketplace. My guests are Will England, Derek Drummond, and Tony Caruso. Will is the CEO and CIO of $12 billion multi-strategy hedge fund Walleye Capital. Derek is head of external public markets investing at the State of Wisconsin Investment Board, and Tony Caruso is Managing Director of hedge funds at UTIMCO. Together, they co-founded Dockside Platforms, a managed account platform that gives institutional allocators direct access to portfolio managers using the infrastructure, risk systems, and financing capabilities of a multi-strat underneath. Our conversation traces Dockside's evolution from a barstool brainstorm to a platform with more than 60 managers and billions in assets. We discuss the accessibility of talent through managed accounts, differentiated manager sourcing, due diligence with trade-level transparency, capital efficiency across portfolios, hedging, risk management, and onboarding and exiting managers on the platform. All told, the combined heft of large asset owner capital and the sophisticated infrastructure of a multi-manager hedge fund have created a win-win for everyone involved. 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 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.

• 0:00Speaker 00

  Intra-month volatility is a lot higher than you think. If you get one month snapshots and then you get to see the ride throughout the month, it can be a very different story.

• 0:10Ted Seides?

  Derek and I have joked before, you learn more about a manager on three days on Doc Side than three years if you invested in a fund. You understand what they do, what their portfolio looks like, how it evolves. It's incredible.

• 0:22Speaker 00

  When you see what they're buying and selling every day, we're in the business of buying serial good decision makers. And sometimes I joke that my job is playing fantasy football. You're trying to find the best athlete, put him in the right position. Hopefully they all march down the field. Watching how they trade in a drawdown, you can see it. You can make much more informed decisions about the people that you're putting on the field.

• 0:51Ted Seides?

  I'm Ted Seides and this is Capital Allocators.

• 0:57Ted Seides?

  Today's show discusses an innovative joint venture between asset owners and a multi-manager hedge fund that seeks to deliver smooth equity-like returns at a lower cost than available in the marketplace. My guests are Will England, Derek Drummond, and Tony Caruso. Will is the CEO and CIO of $12 billion multi-strategy hedge fund, Wall-E Capital. Derek is Head of External Public Markets Investing at the State of Wisconsin Investment Board, and Tony is Managing Director of Hedge Funds at UTIMCO. Together, they co-founded Dockside, a managed account platform that gives institutional allocators direct access to portfolio managers using the infrastructure, risk systems, and

• 1:42Ted Seides?

  financing capabilities of a multi-strat underneath. Our conversation traces Dockside's evolution from a barstool brainstorm to a platform with more than 60 managers and billions in assets. We discuss the accessibility of talent through managed accounts, differentiated manager sourcing, due diligence with trade-level transparency, capital efficiency across portfolios, hedging, risk management, and onboarding and exiting managers on the platform. All told, the combined heft of large asset owner capital and the sophisticated infrastructure of a multi-manager hedge fund have created a win-win for everyone involved.

• 2:25Ted Seides?

  Before we get going, it's still travel season. Partner meetings and board meetings, the Capital Allocators CIO Summit, Berkshire and Milken. Across planes, trains and automobiles, you're bound to run into a few snacks. When they're unavoidable, I try to remember Will Gudereau's story of the pilot who lifted everyone's spirits by bringing families into the cockpit. But it's not always easy, which leads to my most recent pet peeve: speed limits. When I travel to certain places, everyone religiously follows the speed limit. In Florida along A1A, if you go much over 35 miles per hour, there's a good chance you'll get a ticket.

• 3:07Ted Seides?

  In Sun Valley, I once got stopped for rolling through a blinking red light at a whopping four miles per hour. Once I adjust, I find it relaxing to drive slowly. It reminds me of the Pixar movie Cars, when the old timers off Route 66 drove low and slow. However, when I'm in Connecticut or New York, I'm a totally different driver. I need to get places, and if I'm running late, I'll end up on a single-lane road for five miles behind someone driving annoyingly slow. That person is probably driving 35 miles per hour, the speed limit. But it's common knowledge in those parts that the flow of traffic is well above the

• 3:49Ted Seides?

  speed limit, with maybe seven miles per hour over as the whisper number statute. For the life of me, I can't reconcile the two. Either we should drive the speed limit or not, or maybe we need a lot more variability in what the safe speed limit should be. So my new pet peeve depends entirely on where I am. If I'm in Florida, get off my tail, I'm already going the speed limit. If I'm in the Northeast, you better hurry up if you're in front of me and you're only driving the speed limit. The only way I know to gain the benefit of such different perspectives is right here on Capital Allocators. Thanks so much for spreading the word. Capital Allocators is brought to you by AlphaSense.

• 4:33Ted Seides?

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• 5:16Ted Seides?

  into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alphasense.com/capital and see what it has ready for you. Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done.

• 5:59Ted Seides?

  You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas.

• 6:45Ted Seides?

  RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajetory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. 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 relationships with LPs are the ones that have both strong returns and strong operations.

• 7:29Ted Seides?

  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. Please enjoy my conversation with Will England, Derek Drummond, and Tony Caruso. Will, Derek, Tony, thanks so much for joining me.

• 8:00Speaker 00

  Thanks for having us. Thanks for having us.

• 8:02Speaker 02

  Thank you.

• 8:03Ted Seides?

  It probably makes sense to start with a little bit of a background on each of your seats and how the Stockside platform fits into that. Derek, why don't you kick it off?

• 8:14Speaker 00

  Here's the state of Wisconsin. We run about half of our assets internally and then half of our assets externally. I head up the team where we allocate the capital to external managers in the public space. We're trying to find managers where we can't manage those assets with either the team or the strategy or the region of the world internally. A lot more of the hedge fund strategies, a lot more of the emerging markets. How Dockside comes into the whole fray is it's a platform for us to be able to be a lot more dynamic about our allocations, to be able to target our risk a lot better, access managers that we might not have been able to access through a traditional GP relationship.

• 8:56Ted Seides?

  Tony?

• 8:57Speaker 02

  I work for you, Tim Ko. It's an $88 billion endowment, manages money for 22 academic and health institutions. I manage zero beta hedge fund portfolio.

• 9:07Speaker 02

  It's roughly 11 billion in size, but consists of the multi-managers and a lot of equity market neutral and relative value strategies. The way that we use Dockside is to access the single PM equity market neutral managers. While we invest in the multi PM models, we also want to access those talented single PM models that don't work for the pods. That's how we're using it. It's currently around 7 billion of GMV. It's the alpha pool that we use to tap into portable alpha as well.

• 9:35Speaker 03

  Well, I run Wally, CEO, CIO. Most people know that context is running our multi-strat business, which is a $12 billion full pass through. I hate the term pod shop, but I'll say it's a pod shop for the purpose of this conversation. When most people think of Wally, that's what we do. There's not that many scale of multi-strats. That's a core business. Dockside is a subsidiary of Wally's parent company, very separate business, separate building, ultimately does roll up into me. So think of me as a chairman, shareholder, chief cheerleader of Dockside. Dockside is a managed account platform that we started with Tony and Derek a few years ago. It provides enormous amount of value to everyone involved. It's one of those few businesses where everyone wins. It's really fun to be a part of and to build out with these guys over the past couple

• 10:20Speaker 03

  of years.

• 10:21Speaker 02

  Where did this idea for Dockside come from?

• 10:25Speaker 03

  There's been this huge trend in the hedge fund community towards the centralization of investment programs. The multi-strat model has been a big beneficiary of that. There's a lot of infrastructure alpha and putting together return streams on one balance sheet. Back in 2022, I was talking both with Derek and Tony around this concept. Maybe we could put together a product and service leveraging capabilities that Wally has built to run our business. We've been doing managed accounts through our multi-strat fund going back to 2014. Could we make that available directly to Tony and Derek as the end owners of capital to start a managed account platform? It seemed like a great idea and a great way to add value to these guys. Let's go out and build a business together. Pretty fortunate that these guys were entrepreneurial in that respect. You don't always find that on the allocator side of the table.

• 11:11Speaker 00

  We were sitting around having a beer with each other and saying, hey, what if we did this together? Everyone says, yeah, yeah, that sounds amazing. Let's do it. The next day you follow through and you do the thing that you talked about. It's very, very rare, but that happened with us. We would sit around, we'd be talking, well, isn't that going to cannibalize your business? Will, Will would say something like, well, I know you bake sophisticated allocators are going to figure this out somehow, some way. Why don't I provide that service to you all? It's going to naturally be different than his multi-strat pod business. It's not going to cannibalize that because he can do things that we can't. But also we can do things that he might not be able to capture assets from managers that want to face a state pension plan and maybe don't want to have a direct relationship with one of these shops.

• 11:56Speaker 00

  We had these initial worries, but they all faded away over time. It was a lot of trying by doing. There were very few potholes in the road along the way. We almost had to pinch yourself. Does this really happen like this? It's this easy to do? And it really was.

• 12:11Speaker 02

  We didn't invent the SMA platform service provider model. There were other SMA platform service providers. When you go through their risk systems, you ask about their financing terms, you ask about everything that you would want in a multi-strat. They didn't really have it. They didn't understand how the multi-manager model worked. Here's this unique situation where we're partnering with Wally, who gets the game. We're leveraging everything that they built for the multi-manager platform and we're able to use it. That was completely unique and you couldn't find that with anybody else that was out there.

• 12:42Ted Seides?

  Tony, what's the core thesis of why this makes sense?

• 12:46Speaker 02

  There's cash efficiency, transparency, better control over the cash, more flexibility, so many different things. When we're investing in hedge funds, if you don't have extreme diversification, you're doing things in a cash inefficient way. What we're looking for is specialists that have an edge, putting it together into one portfolio, applying some leverage, getting this alpha engine. You could port it on to public equities and whatever asset class you want.

• 13:14Speaker 03

  Simply in a nutshell, what is a multi-strat business model trying to do? You're putting together uncorrelated return streams, which gives you a dampening effect of volatility, gives you the confidence to use leverage. The real unlock, when you think of an overall plan like UTIMCO or SWIV, you're implicitly borrowing money at Fed funds plus like 20 basis points. Holy shit, you talk to the treasurers in these organizations. You're telling me that you can borrow money at Fed funds plus 20? That's like the cheapest source of funding available. That is super cheap and super valuable. In the context of an overall, sort of broad business, that's a real unlock. Things like that, that might sound nuanced or in the background, really, really important to making the model work.

• 13:53Ted Seides?

  When you started discussing the next day after the initial beer, how did you think about who was going to do what?

• 14:02Speaker 03

  Initially, it was saying, how do we structure this in a way that's advantageous? Doc side is ultimately an advisor to a fund. There's a fund that's set up for UTIMCO, there's a fund that's set up for SWIV. Doc side sets up the sandbox and then makes it really easy for someone like Tony or someone like Derek to select managers and then not have to do all the other work to make it work. Doc side, the name, I live in a lake. There's restaurants you can go to get dockside service, white glove type service. That was the idea. We built out a fully separate team to do this. Had a background in client service and operations and financing and accounting to differentiate here. Make it really easy. Understanding the nuances of how all these charges work under hood at the primes.

• 14:45Speaker 03

  Pretty much the entire dockside team to come from the sell side that worked in private brokerage roles before.

• 14:50Speaker 00

  My core piece was, how does the technology work? You have this fancy little front end. These PMs are going to plug in their order management system and then it all shows up. There are no trade breaks. At the end of the month, all the accounting is done. T plus one, you're getting your statements. Yeah, Derek, that's how it's going to go. I was like, that doesn't really happen. It sounds great. Technology never works as seamlessly and then you start plugging some people in. You do trade testing over a week and they're trading for you the next week. You're getting PMs up and running in a matter of days and weeks, not months. Numbers are flowing through, the risk is flowing through. The most surprising thing with this whole thing was how seamless the technology worked.

• 15:30Speaker 03

  We ported over a number of our technology assets. Hard to justify building that technology through just turning a management platform from scratch. That was an advantage. The business is effectively setting up a fund of one for each client, providing a technology product and effectively an operating service for a bring your own managers type of a model. It's one of those businesses where the DocSight team, when they're talking to onboarding a new client relationship, new installment or pension, can legitimately go to them and say, we're going to charge you money, but you're going to pay less at the end of the day versus what you're doing right now. That's a great business. Going back to the notion of DocSight being a white glove service, a big portion of that was risk

• 16:12Speaker 03

  service. We have risk managers within DocSight that work with Tony and Derek and their teams. Cause there's no right or wrong way to do this. When you have a new manager, was there marginal contribution to risk in serious different dimensions? They are actively in dialogue with the DocSight risk folks of saying, this is a live, living, breathing exercise. You step on one area, it goes in the other area. Having risk practitioners at the center, I think was a pretty helpful part of the model.

• 16:40Speaker 03

  The unknowns were the operational model. How is it actually going to work? Fortunately, we were able to go through the guinea pig period without a lot of hiccups, which was great. But there are other unknowns too. It's doing this as a subsidiary of a big hedge fund. People were asking, is that going to be a problem? How do you set up information barriers to respect the fact that this is IP that's being cleared off these balance sheets? Fortunately, that has not been a problem. There's over 60 managers today. The IPPs, we take extremely seriously. That's not just from a business practice standpoint. There's real compliance reasons for that. So you can't screw around with those info barrier rules. That was an unknown. Those are some of the initial questions we faced.

• 17:16Ted Seides?

  Derek, Tony, I want to turn to how you turn this into an investment strategy. You have to start with finding the managers to put on the platform. How'd you go about that process?

• 17:28Speaker 02

  That was one of the most difficult things because our typical sourcing prior to this was build relationships with the blue chip firms, fight for capacity. Think about the funds that everybody wants access to, they're already closed. You develop a relationship, you explain why UTEMCO is a great partner and you get that incremental capacity. These are the PMs that would likely join those firms. This is an alternative to joining a Ballyasney or a Point 72, et cetera. They may not want to join for whatever reason. Maybe they want diversification in their capital base. Maybe they want complete independence. Maybe they don't want to be subject to stop losses. It was finding those PMs who are considering, do I join the platform or create a single PM SMA business?

• 18:13Speaker 02

  Pounding the pavement, talking to PBs, attending conferences, speaking with peers, finding out who's out there, mapping it all out, putting together a portfolio. What we're looking to do is find the best specialists in every sector, every region, and put it in this wrapper that's really cash efficient.

• 18:31Speaker 00

  This is a different business model. Use this, we manage to get access to a wall eye or to some of these blue chip shops. Go make nice with the big shops, get capacity. We're going to be price takers on fees and liquidity. There are three sharps, so it's okay. That's a long-term investment. I now have a person on my team, looks like a business development person. Their job is to know who's spinning out of where, what managers on the way up, down, beating the streets. We're long-term investors with these PMs, but we set the risk box. Part of the reason these businesses are successful is because they can hire 200 of these guys and they capture the upside. You have to have the transparency and liquidity in the risk box to cut off your left tail.

• 19:14Speaker 00

  You get these high sharps because you can cut off the left tail very quickly. We're not going to go and hire 200 of these guys. We're going to hire 20 or 30 of them. Our risk box looks fairly similar to some of these other risk box. We want to be long-term investors, absolutely. If you go outside that box, we can move quickly. We're trying to capture that right-hand skew. That's a bit of a different change in our business model as opposed to managers where you have a three-year lockup. You have limited transparency and you're not 100% sure what's going on. So we had to change our team to accommodate sourcing the managers, getting them to like us enough to take the account, setting up the risk box and the infrastructure, managing that on a day-to-day basis.

• 19:58Speaker 00

  The diligence process is a little bit shorter. We have so much more transparency, much deeper and more thoughtful conversations with these guys. It happened this morning. We had somebody go outside the risk box. We had to have a tough conversation. Our business has evolved.

• 20:13Speaker 03

  This is the direction of travel overall within the industry, particularly for certain segments of called the hedge fund landscape, which people would generally think of as the long short environment. It's not just long short, but let's sort of use that as an example. The rise of the managed account funding format is very much a real thing. If you have this thesis that Tony and Derek are going to want to take some of the best practices from a structured standpoint, from a risk management standpoint, that we as the multi-strats have utilized to build our businesses and do some of that themselves, that is going to happen, let's participate in having that happen. Because of the question along the lines of sourcing good ideas, the same way in which sourcing in any investment industry is critical. As the platform reached scale, that ultimately could come back and be beneficial to all, like given trends in the industry.

• 20:57Speaker 03

  Now that Doc said really has reached scale, that there's 60 managers on the platform, there's billions and billions of assets. There's this notion also that's developing of the co-invest that's becoming a real thing and helpful for all parties involved. That gets to the heart of historically why we're managed accounts have a negative stigma. There definitely was some adverse selection. What's happening now is given how easy it is for both the manager and the source of capital to have a managed account relationship, the availability of talent that is participating in running managed accounts, this whole notion of adverse selection has been dispelled. And if anything goes the other way, we're trying to think about how do we create positive selection?

• 21:36Speaker 00

  10 years ago, you would have a manager that would take a managed account. That was their last resort. You didn't want to go with a manager that was giving you a managed account because they really needed the assets. Now you have PMs that have worked at some of these shops for five, 10 years profitably. You have their track record and they want to go be entrepreneurs. It's a positive sign that they're rolling out. They didn't get fired from these shops. I want to go build this business now. I want to put my shingle on the door. They don't want 50 different clients. If they can come to one place and they get Derek and Tony 300, 400, 500 million on day one with real end investors that are long-term asset owners, that's huge for them. So everyone wins at the same time.

• 22:18Speaker 03

  This whole stigma of running a managed account, part of that was due to the fact that

• 22:24Speaker 02

  Portfolio managers thought because you had this ability to pull the ripcord, that you would choose to do so, just get your money back. Our average hedge fund relationship is 10 plus years. We're sticking with these PMs even through difficult periods. If we need the cash, in a hedge fund, we have to put in for redemption and get the cash. With a managed account, we have the unencumbered sitting there. We don't have to be disruptive at all. We sweep the unencumbered, we put that cash elsewhere. We don't need to disrupt anybody's business.

• 22:54Ted Seides?

  There's a dichotomy that you talked about. A model allowing you to cut off the left tail, moving faster. And then Tony saying, we have average life of 10 year relationships. How have you put those two things together in DocSight?

• 23:09Speaker 00

  We all set up the arrangement on day one. We all know exactly what the rules are. As long as we're all in the rule box, we're not nearly as tight as others out there. Some of the rumors that you hear, you're down two and you're done. We just set up the rules of the road. You can't sell naked options. You're a healthcare trader, you shouldn't be in TMT names. But as long as we're all in the same group, we're looking to grow relationships with these PMs over long periods of time. We started this almost three years ago. Huge chunk of our managers are still with us. We maybe have turnover once or twice a year during higher sigma periods like we're having right now as volatile period in the first quarter. You get to see the reaction function of some of these managers.

• 23:53Speaker 00

  If they go outside of those risk targets, you sit down, you have a conversation with them, you come up with a plan. If they can't execute the plan, then it's time to move on. Part of the success of this model is having those risk controls to be able to capture the right side of the distribution. But the manager's coming in fully aware of exactly what the rules of the road are.

• 24:15Speaker 02

  The average length of our relationships, 10 plus years. We spend a lot of time on our diligence. Our hit rate's really high. For the managed account platform, we're not looking for 350 PMs. We're looking for 20 to 30. We're going to do a lot of work on them. Our drawdown guidelines are relatively loose compared to the likes of other platforms. Because we keep it manageable at 20 to 30 PMs, we can have the conversations with each PM, understand what is driving that drawdown. The other thing that cuts the tail is we have the ability to hedge. DocSight has a dynamic hedger, like a zap factor risk. There's a position that's too big for a particular manager and we've been able to have a targeted hedge

• 24:57Speaker 02

  to bring that position lower so that it fits within our overall risk construct.

• 25:02Ted Seides?

  Tony, you mentioned you do a lot of work on these managers. Derek earlier said, well, in this platform, you do a little less because you have to compete with people that are hiring lots of these PMs. How do you retain the confidence you can be long-term when you're not doing as much work?

• 25:21Speaker 02

  We're doing as much work. We're doing different work, though. We're doing a lot more reference work, speaking with anybody who had access to their P and L, any analysts who have worked with the PM to see what the PM was like working for. And if he was able to actually manage a team and train his analysts. Lots of conversations with the analysts and PMs to understand the investment strategy. We ask for daily returns and like portfolio snapshots. We put that through our system, the bar attributions. We do our work fast, but we do all of the work that we would otherwise do. The only thing that requires less work on our part is the ODD. We control the cash. You can invest in younger firms that aren't as polished or super institutional.

• 26:04Speaker 02

  You cut off that operational risk with a managed account.

• 26:07Speaker 00

  We have this engine and this tool, this managed account platform. We have some overlap and some names, but everyone's on their own. So are all the rest of the clients on DocSight. Our process is faster for these PMs. If I have a codified risk box that I'm putting around the manager, if I'm allocating smaller than maybe I would. It takes us a long time to write a four or $500 million check. If I'm writing a smaller check faster to a younger manager, I have full transparency and full control. We still do our work. Tony's right. The work you do is different. I'm getting full portfolios. If I can get to level of detail and put it into my systems to watch their trading over time

• 26:49Speaker 00

  and see how they made decisions through different periods, I can be a little bit faster. And I know that they understand what the risk box is. My dollar size is a little bit smaller. Our typical write-up is about 40 pages plus and probably takes us three months to get a deal done in our main hedge fund portfolio. Here, if we find somebody we really like, we could probably get three, four weeks, a 10 to 15 page write-up, and it's much more looking at the decisions they've made over time. References are huge because you need to be in the network. It's uncanny, the number of PMs in our portfolio, where we got a reference from someone said, "Hey, I know this guy wants to spin out a citadel. I worked with him for seven years.

• 27:33Speaker 00

  He's a good risk taker. You should talk to him." We get more of our ideas that way.

• 27:38Ted Seides?

  What's different than what you've learned from having that level of transparency than what you see in your pre-doc side hedge fund portfolio?

• 27:48Speaker 00

  Intra-month volatility is a lot higher than you think. If you get one-month snapshots and then you get to see the ride throughout the month, it can be a very different story.

• 27:58Speaker 02

  Derek and I have joked before, you learn more about a manager on three days on Doc's side than three years if you invested in a fund. You understand what they do, what their portfolio looks like, how it evolves. It's incredible.

• 28:11Speaker 00

  When you see what they're buying and selling every day, we're in the business of buying serial good decision makers. And sometimes I joke that my job is playing fantasy football. You're trying to find the best athlete, put him in the right position. Hopefully, they all march down the field. Watching how they trade in a drawdown, we gave an example to my CIO yesterday. Two different managers, similar drawdown. One got small, regrouped, and started digging themselves out of a hole. Another one would add to losers. You can see it. You can make much more informed decisions about the people that you're putting on the field.

• 28:46Ted Seides?

  Once you have these several managers on the platform, how have you thought about capital allocation across the manager?

• 28:53Speaker 02

  It could be a bit clunky. Sometimes you want more exposure to the guys who won't accept more capital. Sometimes you don't want to be as big with some folks who required you to run a minimum amount. Ideally, how I would have it is equal risk allocations, incorporating some correlation matrix, changes at the margins based on the conviction level that you have with each manager. We're trying to guess their sharp ratio going forward, triangulating it using their experienced sharp ratio, trying to understand what they need to do to deliver the returns that we expect.

• 29:26Speaker 00

  One thing that was difficult for us, and it's still difficult to this day. Is this a product or a line item in our portfolio? Or is it a tool within your broader hedge fund portfolio? Say we have 25 line items. Is this line item 26? All these PMs you're managing as a portfolio? Am I trying to optimize that P and L? Or is this a capital efficiency tool for my broader hedge fund business? We recently had a manager that was in our hedge fund business and they've moved on to the platform. They were thrown off the risk budget of everybody else. And we were like, well, we had the same amount of money with them before. So what's different? Why are we trying to manage this P and L number? We came up with this heuristic.

• 30:08Speaker 00

  So we have 17 PMs and we're managing it like it's a portfolio. But if we get confidence in that manager enough, they can graduate and become their own line item in our hedge fund portfolio. As we get more and more confidence, we can give them more capital. They come out of our emerging manager pod program. They've graduated to a line item in the book.

• 30:29Ted Seides?

  Tony, how have you tackled that?

• 30:31Speaker 02

  We're not investing in single PM funds. Our allocations to the multi-managers can be much larger. It's a very diversified portfolio, much higher sharp ratio expectation. We can size them multiples higher than we would for a single PM. The goal of Doc's side is to be able to create that same profile that a multi PM fund would have. Any individual PM is going to have a lower sharp at Citadel. From their experience, I think they've said like a point seven to point eight. Gross sharp is what you should expect out of any PM, but the magic of it is if you can find these managers that run at very low correlations, highly idiosyncratic in nature, not clinging on to any factor risk, hopefully not too floating on crowding either.

• 31:13Speaker 02

  Across a number of lowish sharps, you get a good net final sharp. The overall portfolio sharp can grow from any single PM is 0.9, but the overall portfolio is 2.5 plus. That's what we're trying to do. Our allocation to Dockside is sized about the same as any kind of multi-manager fund.

• 31:31Ted Seides?

  How do you leverage the expertise that Wally is bringing on the risk side in your hedging program?

• 31:39Speaker 00

  We implement single name hedges. We have the full factor model. We have crowding models. Deleveraging risk is one of our bigger risk factors. We're trying to proactively allocate to PMs that are doing different things. Once you get everything together, we do have the tools and we have the team over at Dockside that can build the views. We used to have daily calls and that became a little bit too much. Now we have weekly calls with the risk team. Go through the risk budget, what we're seeing, how crowded are we? How liquid are we? How that hedging overlay we have is affecting the overall book? We try and do surveillance. Am I using the same factor model as Citadel? And is Citadel using the same stock to hedge that I am? And if this goes against us, how bad could that be?

• 32:23Speaker 00

  One of the benefits is that we have the same tools as everybody else. One of the detriments is we have the same tools as everybody else.

• 32:30Speaker 02

  Clearly Dockside Edge isn't the fact that they have access to BARA models. Everybody has access to BARA. One of the things that's been helpful is everything that the BARA factors don't explain, we try to figure out what that is. What factor is driving markets not being explained by momentum or quality or any standard risk factor? But maybe it is artificial intelligence, the war. Take that factor and see how much sensitivity your portfolio has to that. Being able to be creative and create custom factors, that's been very helpful. I've done a lot of work with that with the Dockside team. I don't know if any other platform service provider can dynamically hedge. Basically I give them some factor constraints. Say I don't want any style factor to be north of X percent.

• 33:15Speaker 02

  The hedger will zap everything and construct a portfolio that has that target idio in those factor constraints.

• 33:22Ted Seides?

  How do you think about exiting managers?

• 33:25Speaker 00

  Yesterday and today, we had a manager, they were outside of their bounds, they continue to be outside of their bounds. Over the last week, we developed a playbook. These are the catalysts you're playing for, these are the stocks you're looking for. If this happens, this will be my reaction function. Then we say, when would you fire yourself? They give us a level and they hit that level. In a weird way, it's a much easier conversation than sending a redemption form and the marketing guy's gotta go talk to the CIO or something. We all knew exactly what was happening. They pick up the phone, they're like, yep, I can't hold it against you. Yes, you're exactly right. How would you like to liquidate the account? We're all still friends. We all knew exactly what happened and there's no bad feelings. It was way more transparent. It's an easier process.

• 34:11Speaker 02

  That's why we set these risk guidelines when we finalize the IMA, before they start trading. What risk guidelines should be appropriate for your strategy? We don't want to change a thing. We want you to be able to do whatever you're gonna do, but tell us what are the bands? Net exposure, GMV, concentration risk. What is a crazy drawdown that you never expect to hit? We monitor these and if they go out of bounds, it's an easy conversation. You said you were gonna do one thing and this is what happened. Of course, we'll have the conversation, figure out how are you gonna get back in bounds? Or what's the solution to this issue that we're dealing with?

• 34:47Speaker 00

  Typically speaking, there isn't a lot of group think. Tony and I have had positions where the managers have had a drawdown and we've treated those drawdowns differently. He gets to choose how he interacts with that manager. We don't get them to do something different than their commingled fund. I'm not trying to get them to run some special account, lower beta, higher beta. We want it to be parapet soon. In 99.9% of the cases, the PM doesn't want to do anything special. They want everyone to be on the same terms and the same strategy. How Tony reacts to a certain drawdown might be different than I react. Every once in a while, we'll talk, but we're not coordinated because everyone's risk tolerance are different.

• 35:24Speaker 03

  I've run hundreds of managers over the years, a lot of different types of conversations. That's just the nature of the business. The most adult conversations are when there's transparency. Everyone's an adult in the business, know what we're doing here. If things didn't work out, that's fine, no hard feelings and let's move on here. What people really hate in our industry is when they get surprised. The whole point of Dockside is to be able to provide the level of information intelligence, situational awareness so that no one's surprised. If everyone's reading off of the same playbook, here's where the line is, you cross the line, no one's fault, no harm, no foul, let's move on. Thanks for such an easy conversation. That's the exact mentality that I take in running our multi-strat business is just be upfront with people.

• 36:04Speaker 03

  The hard part is with the traditional redemption cycle that you get in combing of vehicles, there's a lot of guesswork that's involved.

• 36:12Ted Seides?

  When someone's thinking about engaging with Dockside to create their own account, how do you think about the differences between this and the multi-manager pod shop?

• 36:23Speaker 03

  There's probably a dozen scaled multi-strats in the world. So those are relatively small numbers we're talking about. Those are premium products. There's businesses that we run that can't be run either as a managed account or as a standalone business. We have a large equity vol business as part of what we do. That's not something that would be run by a single manager, not something we've lent itself to a managed account. Same thing with a lot of quant strategies or things that are letting fixed income. That's a big part of what multi-strats do is strategies that benefit from true scale. The thesis originally was a lot of the businesses that Derek and Tony run, especially in long short hedge funds, still want exposure to those type of strategies, doing it in

• 37:06Speaker 03

  a structurally advantageous format for all the reasons that we've talked about. I don't view it as replacing the allocations in terms of giving to managers like us. It's more saying there's a better way to run this business and a better way to get exposure to some of these traditional single manager funds in a way that everyone wins and everyone does win. We are large allocators to the multi-managers. That's probably not going to change. We have great relationships with them. They're phenomenal, the best hedge funds in the world. Dockside is a way to gain access to certain PMs that don't want to join.

• 37:41Speaker 02

  A multi-manager platform. We know that there's talent out there. We want to be able to access that talent in a similar fashion as those multi-manager platforms by tapping into an SMA platform and having it be super cash efficient. This is our way to expand. We can't grow much more with these multi-managers, A, because they're closed, B, because their liquidity terms are a three-year or five-year slow pay. There's a portion of the portfolio that needs to be liquid. This is our way of being able to have unencumbered cash, modulate the overall leverage of the platform, and use that cash to fulfill our cash needs.

• 38:17Speaker 00

  Will has comparative advantages. He can pay for data for his quants that I just can't, I'm not saying Will does, but others might pay garden leave. I can't afford to pay for a guy to sit on a beach for 12 months or something like that. But those are costs, too. He can run a two, three sharp. Some of these groups have 6% pass-throughs. You have to run more leverage to be able to do that. All that math works. When you have 200 PMs, you can turn them over and capture that right to the distribution. We're playing a slightly different game where maybe I only have 15 to 25 PMs. I get to use a little bit less leverage. I don't have a 6% pass-through. I'm taking the netting. My cost structure is a lot lower.

• 38:58Speaker 00

  Maybe my sharp ratio might be a little bit lower because I can't capture the quants that Will can. Because I'm not paying those fees, my sharp ratio is unlikely to get exactly where Will is. It gets closer, and I have the liquidity, and I get to target my vol. The average hedge fund out there, down the fairway hedge fund, us dump pensions, did the wrong thing by incentivizing them to run lower vol and take in more assets, and collect that management fee. If you're running a $10 billion book like I am, and you have 30 line items and they're all 0.1 correlated, I can't get my vol high enough to beat my cost of capital without running a superstar sharp. Knock on wood,

• 39:40Speaker 00

  we have been, because Alpha's been pretty good the last couple of years, three sharps don't last forever. This solves an important problem for me where I can have this risk-controlled, transparent, liquid pool where I can lever it.

• 39:55Speaker 00

  Cue my volatility target and get my total portfolio of all where I need to be to be competitive out there, but I'm not giving up on quality of PMs anymore.

• 40:03Ted Seides?

  As you look at acquiring the talent you want, putting them on the dockside platform and dockside as a business, when you add it all up, what does the cost structure look like to the next investor compared to a pass through multi-manager shop?

• 40:20Speaker 03

  This war for talent, it's a real thing. It's becoming illogical in many cases. The participants in it know it's illogical and they're just doing it for personal competitive reasons. The cool part about targeting people that are largely in a post-economic phase of their life, they want to run their own business. There's a personal motivation that extends beyond effectively someone pay them a large check for hazard pay. By definition, the managers that Tony and Derek and others are fishing into the dockside pool, it is a different conversation. They aren't the single source of capital. By design, it's more structurally advantageous.

• 40:55Speaker 00

  It became apparent to me when we had one of our first managers, we set him up on day one. We walk into his office. His wife was at Costco getting the snacks to put in the snack room. He was like, Derek, come over here, come over here. He had the name of the firm on the wall. We got the sign up. It's amazing. He's showing me every office and he's introducing me. These PMs take real pride in opening up their own business. They were inside some pod that didn't get to talk to other pods at some of these firms where there wasn't a level of communication and community and culture for a large number of RPMs. That's the case. They have a culture they want to grow, a business they want to grow. They want to grow this next layer of talent below them and give them something to work towards. It's palpable.

• 41:39Speaker 03

  There's truth to some of these cost inflation things. Path of models are necessary to be competitive. That's the reality of the world that we live in. The math does work at the end of the day. If you're good, it's hard to run these businesses. The investor is the one that loses when you make non-economic decisions. I love the model because access to talent directly and you don't have to pay these fees at which you have no control over deciding what they should actually be. That's a good thing at the end of the day for the holders of capital.

• 42:05Ted Seides?

  Derek, Tony, when you're talking to your boards, how do you describe the expected fee savings of the dockside platform compared to one of your multi-manager investments?

• 42:19Speaker 02

  It's so simple. We know what the fixed expenses are, the variable expenses every year. Put that in the spreadsheet and then we could actually say, here's dockside's fees. You were saving on this, that, and the other thing. We're not paying the second layer of performance fees. Estimate the financing terms. Here's what leverage we'd run at. It's math. This is what we're going to do and here's the expected cost savings and it's meaningful.

• 42:41Speaker 00

  It's explicit. For every dollar that I borrow from the house, because we were in full Porter-Walff, we have to lever up the entire firm. We have a thing called the fleet rate. I'm the biggest consumer of the fleet rate at Swiv right now and I borrow 10, 11 billion dollars. Every month I get a bill for what my interest expense was. I can go to the board and say, instead of borrowing 10 billion, I borrowed 9 billion now because I can be capital efficient. My returns are higher and everyone's better off. I calculate my interest expense savings from those managers. At one of our last board meetings, we brought in one of our PMs and they talked about it. The board got to ask him questions. Why are you doing this? Oh, you set up your own business? Why did you want to set up your business?

• 43:23Speaker 00

  And he's like, there's no way I could have gotten an account from the state of Wisconsin otherwise, without being on this platform. Our board are huge evaluators of this program. They love it. They see the cost savings, how we're accessing younger, hungrier talent, the risk management. Our risk manager loves us, gets up there and talks to the board. It's good for the board.

• 43:43Ted Seides?

  What does that add up to in terms of basis points?

• 43:46Speaker 00

  It's tens and tens of millions of dollars for us a year.

• 43:50Ted Seides?

  I'd love to hear, since you've rolled this out, what were some of the challenges that you didn't expect you'd face?

• 43:59Speaker 02

  Learning the lingo. Typically allocators invest and they think about AUM as a concept, right? A $200 million AUM ticket. In the SMA world, it's an arbitrary concept. We're choosing the denominator. We allocate in terms of GMV, long market value plus the absolute value, the short market value. Here's the GMV that you're going to run at. We choose the denominator to get to the risk profile that we want. That was a bit confusing going to the investment committee and saying, hey, we're doing a 700 million GMV ticket and everybody didn't understand what was going on.

• 44:33Speaker 00

  We don't typically have to deal with the financing side of things. Managing PBs, managing our excess cash. Do we take some risk with that excess cash? Do we do something cute with that cash? I don't want to take too much risk. Should we move balances from here to there? We are now a material client of one PB in particular. Who gets to use that goodwill with that PB? Is it State of Wisconsin? Is it Dockside? Oh, there's a new issue coming out. I want to talk to the UCM desk. Well, who's speaking for them? Is it Dockside? Is it SWIB? That whole world of the stuff opens up to you because typically I don't get to talk to the PBs. They don't care about me. They care about Millennium and Citadel. Now I'm a participant in the markets. I want all the stuff.

• 45:17Speaker 00

  I want the research, capital markets access. I want to start doing some other things. You better know what you're talking about. The first time I walked in there, I was like, I want the things. They're like, that's not how that works, Derek. Don't I get more things? And they're like, no. Well, who gets to say that those are my flows? Or I paid you this much. Sometimes it's Dockside, sometimes it's PM, sometimes it's SWIB. Learning all that was a new experience for us.

• 45:43Ted Seides?

  How did you reconcile the centralization of the potential benefits that you get on the platform? When there are so many constituents within the platform?

• 45:52Speaker 00

  I don't think we've figured it out yet. I did a whole trip to New York and met with all of our PBs. And I said, who owns these flows? Is it Tony? Is it me? Is it Dockside as a whole? It's a gray area. If you're the one directing that PM to go and trade at XYZ firm, you can kind of attribute it. Maybe those are your flows. If it's the PM that's saying, hey, no, I need this execution to be at this place because I've had a longstanding relationship. Maybe it's that guy's flows. It's not as clean cut as I thought it was. The State of Wisconsin has a large internal trading desk. Trying to combine all those flows with the Dockside flows. It gets messy, but it does get figured out.

• 46:32Speaker 02

  The partnership has been mutually beneficial. Out of the gates, we were able to get financing terms that were good. And that wasn't because of our small account that we started with. It was because of Wally's activity. We benefited from that. At this point, we're very large. We're giving back to Wally in terms of the GMV.

• 46:51Speaker 03

  There's an economy of scale argument to this. The smoky back rooms of how things work in the sell side, as Derek was referring to. But what's very clear is that as Doc's side gets bigger, everyone involved participates from larger heft to be able to consider better rates and reduce the cost for everyone involved.

• 47:07Ted Seides?

  When you three came together to create this platform and now it's turned into a significant business with other clients. How did you think about who owns Doc's side?

• 47:19Speaker 03

  We're all partners in doing this.

• 47:20Speaker 00

  They've become true partners of ours. We pick up the phone and talk to them multiple times a week. They're unbelievable. Faso and Michelle are just amazing. It's integral to our business. We want to see that business grow and thrive. Even if we don't bring in other clients, this is going to be core to our strategy for as far as I can see.

• 47:41Speaker 02

  This is the case with Wally. I hate the notion of limited partners. We aren't limited partners. We are true partners.

• 47:49Speaker 03

  It feels good as a participant in the world to do stuff like that. That is a practical matter. All three of us participate in the cash flows generated by Doc's side. That's a good thing, too.

• 47:58Ted Seides?

  Where do you hope it goes from here?

• 48:00Speaker 03

  We want it to grow. This overall trend that's happening of managers wanting to put up their own shingle and realizing that they can access pools of capital that Tony and Derek represent through this format. Doc's side is a classic economy of scale type business. As it grows, as it grows in the right way, it gets better to everyone involved. And even from a cost sharing type structure, it's meant to grow with the right partners on both the client and the manager side.

• 48:26Ted Seides?

  Derek, Tony, you've lived in a world for a long time where the growth of a manager doesn't necessarily accrue to you as an investor, a client of that manager. Now you sit on both sides of that. I'm curious how you think about Dockside from that perspective.

• 48:42Speaker 02

  When it comes to investing in hedge funds, typically it's performance attracts assets. Assets ruin performance. This is not the case here. Obviously with any kind of PM that we invest in, as they grow, the alpha is going to deteriorate. We try to find PMs that are going to be disciplined. We incentivize them too, to not leave off the management fee. We're going to pay you less in terms of fix, but we're going to pay you more in terms of incentive. They eat what they kill. That's not going to change. We're going to find PMs who don't manage too much money, but we're going to be able to access it via this Dockside platform. And as it grows, we should reap the benefits as well.

• 49:18Speaker 00

  Tony, Will and myself, we're entrepreneurs. We like to build things. There's a number of things that we have on our docket to build on Dockside. We're in a commodity super cycle. I would like to have a multi PM commodity complex. I'm actively trying to find additional ways to keep growing the relationship. This space is getting more competitive. Now, the big platforms are allocating external managers. Getting access to that next talent coming out the door is getting a little bit harder. Getting a separate account for $100 million on day one. They're starting to get 200, 300, $400 million tickets. Could we cobble together $500 billion and get a PM to manage just our capital for the first couple of years?

• 50:03Speaker 00

  Lock down that high-end talent that's spinning out? So we can keep that alpha stream higher for longer? There's something about that. There's some ability for us who as like-minded, sophisticated allocators. If we all see someone we like, can we put up a big enough ticket to be able to lock down that alpha for a little bit? That's interesting. Our team's constantly trying to evolve and use this tool in new inventive ways.

• 50:30Speaker 00

  There's a lot of things that we have at SWIV as a big pension that might be able to be additive to platforms like this. Now that we have control over the assets and the trading and the PBE accounts, the example I use is I have a very large long-only equity index account. I know a lot of guys that need stocks to short. Couldn't they borrow them from me? There are things that you can vertically integrate in your business that's beneficial to both sides. So maybe I'm lending out more stock at SWIV. My PMs get to have certainty over their borrowers. Financing arrangements. There are a lot of things us big asset owners have as assets that we might not be utilizing nearly as much. But

• 51:14Speaker 00

  once you're in the mix and once you're in this whole world of financing and pipes and everything, you can start using them. It makes everyone better off.

• 51:22Ted Seides?

  Well, guys, I want to make sure I get a chance to ask you a couple of fun closing questions before we wrap up. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few, and each are working on a product or service we think will be valuable to our community. One is Oldwell Labs, or OWL. OWL is the very best software I've seen for allocators to find and track managers, and I've seen a lot of them. Trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. Tony, what was your first paid job and what'd you learn from it?

• 51:59Speaker 02

  I'm the son of an Italian immigrant who came to this country without any money. The value of the dollar was driven into my head at a young age. I didn't get an allowance for being cute or for existing. It was paint the fence or any kind of odd job around the house and I'd get money for it. It's kind of like our microeconomy. I remember I was at my friend's house. They had a window washer do all the windows. The mom paid $300 for this professional window washer to do all the windows. I was like, oh, man, that's a lot of money. I decided to become a window washer, created my own window washing business. Ended up recruiting some of my friends. We ended up washing all the windows in the neighborhood. We washed 100 different houses in one summer. That gave me this sense of

• 52:42Speaker 02

  entrepreneurialism that I applied to when I was a proprietary prop trader in Chicago, when I worked for Bridgewater, when I joined the allocator community. I've always had that entrepreneurial spirit. It was that first job that lit it.

• 52:55Ted Seides?

  Will, how would you spend your ideal work day from wake up to bedtime?

• 52:59Speaker 03

  To the extent I have a superpower is that I don't require a variety. I'm happy doing the same thing every single day. I'm pretty boring, too. I get up real early. I go and beat the hell out of myself in the gym, like moving heavy objects. I go to work. What makes for a rewarding work day is not sitting at a computer looking at numbers all day. That's fun, too. But running a business with 100, 100 people, there's leadership aspects. Building things, that's why probably this group has worked together well is I like building stuff, too. So if I could spend my day working with like-minded people on how to move our business forward, that's really fun. Then I go home, I got three kids. We've been married for over a dozen years and we hang out as a family and do fun things. Go to bed and do it all over again.

• 53:38Ted Seides?

  Derek, what's the best advice you ever received?

• 53:41Speaker 00

  I learned this a little bit too late in life. Invest in those that invest in you. You have finite time. You want to invest in people where you're getting a return on that investment. As an allocator, you're not short on friends. Everyone likes you, but finding those real people. I've been doing this for 25 years now. I feel like I've gotten my core group of friends where I trust them. I trust their opinions. If I reach out and put time into them, I'm getting something back from them. That's been a huge change in my life over the last five or six years. My friend group has gotten a little bit smaller, but the quality has gotten a lot better.

• 54:16Ted Seides?

  Tony, what's your biggest investment pet peeve?

• 54:19Speaker 02

  Overconfidence. People who think they can predict the unpredictable. If you've read any books by Nate Silver or Philip Tetlock, they call it the hedgehogs. The great storytellers, not the ones who actually assign probabilities and understand that there's uncertainty with any prediction. They call them the foxes. I try to find foxes when I invest in PMs. They don't tell as great of a story. They understand that my hit rate is 53%. I'm wrong 47% of the time. I don't have 100% confidence in anything, but if I can keep on hitting that 53% over time, that's going to be a great business.

• 54:52Ted Seides?

  Derek, how's your life turned out differently than you expected it to?

• 54:56Speaker 00

  I wanted to be a hedge fund manager when I was 16 years old. My grandmother gave me the book, Peter's Ball, the Michael Milken book. This sounds amazing. She's like, what's a bond? I'm like, I have no idea, but it sounds awesome. So I set up my life to be on this trajectory. I never thought I would spend 16 years at a pension plan. I thought I was going to do the New York hedge funny thing. I'm doing the pension fund hedge funny thing. It's been better than I ever could have imagined.

• 55:23Ted Seides?

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

• 55:27Speaker 03

  Jim McCall came out with a book recently where he has this phrase of live life looking forward in the saddle. And I've used that concept a lot more recently, which is live your life and move forward, not backwards. I'm a mathematician academically. There's concepts in math which evolve around a memoryless process. The only thing that matters is the current state. A lot of people live life trying to fix the problems of the past. That's a natural human bias. What makes sense is a goal forward basis. And that's kind of the only thing that matters, which by definition it is. You can only control the future. Wish I had a little more clarity around that earlier on.

• 55:58Ted Seides?

  Well, Will, Derek, Tony, thanks so much for sharing this innovative new approach for head access to assets and managers.

• 56:05Speaker 03

  Yeah, thank you.

• 56:06Speaker 00

  Thank you.

• 56:07Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list and sign up for premium content. Have a good one and see you next time.

• 56:23Speaker 04

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