Pod Insights Odd Lots Blackstone's King of Hedge Funds on Alt Investing Right Now About this episode Everyone knows by now that college endowment funds have gone big on alternative investing, pouring billions of dollars into private equity and hedge funds. But that investing model now seems to be under pressure and there are reports that Ivy League institutions like Yale and Harvard are looking to unload some of their more illiquid investments. So why did colleges get into alts in the first place? And how do they select which funds to invest in? In this episode, we speak with Joe Dowling, the former head of Brown University's endowment. Joe is now global head of multi-asset investing at Blackstone, one of the biggest institutional investors around. He talks about the rise of alts, how college funds got so invested, the pressures they're facing right now, and the boom in multi-strats. Read more: Harvard in Talks to Sell $1 Billion of Private Equity StakesBlackstone’s King of Hedge Funds Shakes Up Its Lagging BusinessOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.
0:16 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
0:58 Speaker 01 and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.
1:41 Speaker 01 Bloomberg Audio Studios. Podcasts, radio, news.
1:57 Tracy Alloway? Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alockway.
2:01 Joe Weisenthal? And I'm Joe Weisenthal.
2:03 Tracy Alloway? So, Joe, you know what I realized? Two months ago, just two months ago, we were still getting a bunch of headlines about how private credit was the hot new thing on Wall Street and how multi-strategy hedge funds, pod shops were huge and growing. And we've done quite a few episodes on these respective topics, but you know, just a couple of months later, the headlines are starting to look very different. And there's concern that if we get a substantial economic slowdown, you're going to get some sort of big blow up in private assets and things like private credit, private equity. You know, a lot of people have been predicting that might happen for a while. And then when it comes to multi-strats, we've already seen
2:47 Tracy Alloway? a lot of, a lot of talk about pain at the pod shops, given all the recent market volatility. So, everything is feeling a little different right now.
2:58 Joe Weisenthal? Well, we are recording this on April 22nd, and we got a headline. This has been in the news for a few days, but I guess it's just been confirmed. So, speaking of, you know, the asset allocators, where's the like, real money come in from, right? And they're like, wealthy families and wealthy, but the real big money is in these huge pots of money, whether we're talking about teachers, which if those in the know, the Ontario teachers pension, or of course, university endowments. We got a headline today. Again, it's been out in the news for a few days. Yale considering selling in the secondary market, some of its private equity stakes. So, these huge pools of money that are really upstream from the private credits of the world and upstream from the hedge fund multi-strats of the world,
3:44 Joe Weisenthal? they're in a new era for all kinds of different reasons. And so, to even understand these various alts, we have to understand how the people who fund the alts are thinking right now.
3:55 Tracy Alloway? I am so glad that you mentioned all of that because that was a perfect intro, but also Yale specifically, because we all know that the, the emphasis on alts was pioneered by David Swensen over at Yale. And since then, you know, alts have been a big thing, not just in university endowments, but in lots of different types of institutional investing.
4:17 Tracy Alloway? I am very pleased to say that we do, in fact, have the perfect guest to talk about all of this. We're going to be speaking with Joe Dowling, Blackstone's Global Head of Multi-Asset Investing. He previously ran Brown University's Endowment, and this was one of the best performing endowments at that time. He did that for a decade before he joined Blackstone about four years ago. He's been called the "King of Hedge Funds" in some of our own Bloomberg coverage. So really, who better to talk about things like alternative investing, university endowments, and what's going on right now in private assets than Joe? So, Joe, Joe D., welcome to the show.
4:58 Speaker 04 Thank you, Tracy and Joe. Thanks for having me.
5:01 Joe Weisenthal? Can we make this a four-hour episode? I already have so many questions. Anyway, go, Tracy.
5:05 Tracy Alloway? Okay, so first off, I'm going to have to be very careful in how I address each Joe, respectively. But other than that, okay, so one of the things, you know, Joe and I have kind of nibbled at the edges of the university endowment model. And one of the things that we know for sure right now is that they are very large pools of capital, you know, worth billions and billions of dollars. And for that reason, we often see them compared to things like pension funds, maybe sovereign wealth funds. In your experience, are there differences between, you know, running a university endowment, investing for an endowment, versus investing for, you know, traditional, large institutional funds?
5:48 Speaker 04 Absolutely. But let's set the table with just how big the universe is, because I think that'll help us.
5:54 Tracy Alloway? Please.
5:55 Speaker 04 There are 650 U.S. endowments with a combined assets of 875 billion. That's from Nucobo, I'm using Nucobo data. But the average endowment is only 1.3 billion in assets under management, and the median is 235 million.
6:17 Tracy Alloway? I appreciate that you came prepared with numbers.
6:20 Joe Weisenthal? When you see a headline, Yale considering a private equity stake amid its funding turmoil. Some reports have said it's up to $6 billion. How big of a deal is this? Like, how much of an earthquake is that? That this entity, which we associate with long-term willingness to hold on to illiquid stakes, timber, so forth, how big of a deal is this?
6:41 Speaker 04 I think it's a big deal because it's showing stress in the system. And the $6 billion number is also a number that I've heard from outside investors who are actually looking at the portfolio. And what it signals to me is that Yale, who's been a pioneer, is being proactive. They have a new CIO. Remember, David Swensen, who you quoted in the beginning, was the person who really pioneered the endowment model. But they have a new CIO. And I think it's a sign that he's going to put his own stamp on the Yale Endowment. Not surprising with what's happening in the political environment with the endowment
7:26 Speaker 04 tax, which is currently at 1.4%, being considered to go to up to 20%.
7:33 Joe Weisenthal? Whoa.
7:34 Speaker 04 So that's a, yeah, that's a big, big number. So with regards to taxes, you might remember during Trump's first administration, under the Tax Cuts and Jobs Act of 2017, they introduced the first endowment tax. And it was a 1.4% excise tax on net investment income for really the wealthiest endowments. And how did they define that? What they did was they took the total value of the endowment and divided it by the number of students. And if it was over $500,000, then you were subject to that tax. And now what's been proposed is an increase from 1.4% to 21%.
8:18 Speaker 04 Now, what that would result in is 70 billion of extra revenue over 10 years. And I'm assuming there the average endowment return is seven and a half percent to get to those figures. So call it 7 billion a year of additional taxes. And it's going to change really the way endowments are managed. They're going to need to be more tax conscious. They're going to need to target higher rates of return. And I think they're going to have to continue to use the private markets.
8:51 Tracy Alloway? Huh. So talk to us about how important was that special tax status to returns over the years? Because also, if I look at returns, you know, recently, over the past three years or so, they've, they've already been lackluster. So I imagine with the additional tax pressure, that's going to be pretty painful. And then when you say endowments are going to have to be more tax conscious, what does that actually mean? Is that like investing in, in munis? I guess you already mentioned private credit, but what can endowments actually do here?
9:24 Speaker 04 Yep. So a couple of things. One, I want to address performance because you're entirely right. If you look at short-term performance over the last three years, a global 6040 portfolios outperformed US endowments. The average US endowment return, okay, underperformed the global 6040 by 6.8% or 340 basis points per annum. The top quartile endowment returns underperformed by 250 basis points annually. Now, that's over three years and we all know investors tend to be short-term. If you look at the five-year number, okay,
10:06 Speaker 04 the average endowment has returned 8.3% and has outperformed a global 6040 by 170 basis points. And the top quartile has outperformed by 250 basis points. Over 10 years, the numbers are even more consistent with those figures. So over the past 10 years, the top quartile has outperformed the global 6040 by 160 basis points. And even, ready for this, the bottom quartile, okay, has outperformed a 6040 portfolio by 30 basis points annually. Okay. Let's translate that, though.
10:44 Joe Weisenthal? Okay.
10:45 Speaker 04 So let's say you have a billion dollar portfolio. If you have top quartile performance versus a global 6040 over the 10-year period, that's a $288 million difference.
10:57 Joe Weisenthal? Wow.
10:58 Speaker 04 So we're talking big numbers here.
10:59 Joe Weisenthal? And this is the nice thing about being an endowment, is that you don't have an LP that's going to withdraw. You have one captive LP. And so, you know, in theory, this is why they have the capacity to make these long-term, relatively illiquid, alpha-generating investments, strictly because there's just none of that sort of like short-term demand for withdrawals.
11:23 Speaker 04 Absolutely. And I think that's the advantage of the endowment model, is that you're able to think really long-term about asset allocation and basically to take advantage of forced selling and dislocations in the market. And that's really what separates the top quartile from really the median and the bottom quartile.
11:48 Tracy Alloway? But when you were at Brown, for instance, did you ever feel some sort of short-term pressure? Maybe, you know, maybe not just because you had to report returns, I think on a yearly basis, but maybe because the university needed a bunch of money suddenly for some big project? I don't know, a new building or something? I get the point that endowments are investing on a very long time horizon. But on the other hand, I feel like there must be moments where you do have to come up with the money.
12:19 Speaker 04 You know, you're pointing out something that a lot of people don't think about, which is that there is a fundamental conflict between the administration and then the management of the endowment. Obviously, the administration would like to spend the money to work on projects, and there are a lot of important projects out there. But as a steward of the endowment, you actually have to work with your investment committee to show them exactly what we were just talking about, which is small differences in compounding over long periods of time add up to huge, huge numbers.
13:00 Speaker 04 So what I did, and with my team, we would constantly show them over 10, 20, and 30 years what taking a higher distribution would cost the endowment. And that really allowed us to sort of do our job long term and think long term. But the answer to your question is, yes, it's the performance derby every year. It's like college sports, and everyone's waiting for that, those numbers to come out.
13:46 Speaker 00 What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from the Dubai-based Virtual Assets Regulatory Authority has this to say.
14:02 Speaker 05 We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.
14:11 Speaker 00 As more capital enters the market, adaptive regulation is likely to become increasingly key. Rees, America Ripple says.
14:19 Speaker 06 Globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80 year old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.
14:38 Speaker 00 Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.
14:48 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,
15:31 Speaker 01 but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote must be willing to work extended hours and weekends as needed. One major perk for all that hard work? Employees access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.
16:12 Joe Weisenthal? You know, so much in finance and these questions, whether we're talking about the university's board having a manager or having an endowment manager, whether we're talking about the endowment manager allocated to multi-strategy hedge funds, when we're talking about the hedge funds compensating the PMs, it's like principal agent problems all the way down. And even though you have that captive LP and you don't have to worry about withdrawals, you still have to worry about career risk, right? Like, because an endowment manager can get
16:45 Speaker 04 100%.
16:46 Joe Weisenthal? And so it's like, it's really, at every chain, it's like this constant puzzle of trying to get each link in the chain aligned and for some sort of, you know, everyone's optimal, optimal performance.
16:59 Speaker 04 But it's interesting, in my new seat, I get to meet all of the CIOs across the country. And I will tell you, the talent pool is extremely, extremely deep. And so many of them, when I go in and talk to them, I'm actually learning just as much as I, I hope I'm educating. It's, it's really amazing, the level of sophistication of, of these endowments. I've been super impressed. And I didn't get that at Brown, because you don't have that much interaction, because you're competing with people.
17:33 Joe Weisenthal? Yeah.
17:33 Speaker 04 Right? I didn't think David Swenson was going to call me up and give me his best, best man. That just is not going to happen.
17:40 Tracy Alloway? All right. Since you brought up Swenson, talk to us, you know, let's just go back in time in history and talk to us about the rise of all investing at university endowments. Is it really just as simple as, you know, endowments have long-term investing horizons? And so illiquid assets that need to be held on to for a long time are a really good match? Is that, is that the story?
18:04 Speaker 04 That's at the heart of it, which is, if you have long-term money, you should be able to use the illiquidity premium. And you should be able to earn more. And I think that's what David and many of the CIOs realized. And they had the long-term capital to do that. And it's worked. And what's also amazing is the percentage of alternatives that these firms own. So that the endowments invest in. So the average high-performing endowment has 55% of their assets in alternatives.
18:41 Tracy Alloway? Wow.
18:41 Speaker 04 The top quartile and the Ivy Leagues all have over 65% in alternatives. And they've worked. And I think people are trying to call the demise of alternatives, and especially even the endowment model. And I don't think we have the evidence yet that it's broken.
19:03 Tracy Alloway? One thing I always wanted to ask someone who actually works at an endowment, and in fact, you led the endowment, but do you just have like hedge funds and private equity just knocking at your door and constantly pitching new things to you? How do you make that initial connection between, you know, a potential, not client?
19:24 Speaker 04 Manager.
19:25 Tracy Alloway? Manager, between a potential manager?
19:28 Speaker 04 That's a great question. So I think that you have a choice when you're an allocator and an investor, which is you can lead, or you can be led. And so the answer is, we always had people coming and trying to pitch us. But what I always encouraged my team to do was to research deeply markets or big, deep alpha pawns. So let me give you a specific example, biotechnology. So what I would say to the team is, wow, biotech stocks, 25% of them are trading under cash right now. Let's go do some research on that segment.
20:09 Speaker 04 And then they would go out and market map biotechnology, giving us all the different types of players and their approach. And that's how you get context. How you end up being a mediocre investor is just getting the flavor of the day. And usually, the flavor of the day is traveling around the country. And as contrarians, what we like to do is to pick things that were sort of off consensus, not loved. One of my favorite expressions I used to say to my team was, what would make you really uncomfortable to recommend in front of an investment committee? If it makes you really uncomfortable, go research it.
20:54 Joe Weisenthal? One of the things you mentioned is that, you know, one of the nice things about endowments is they can be the ones who buy when everyone is selling. And typically, that's true. So let's, you know, this Yale headline that we got, and you said it's a big deal. We're in this sort of confluence of events where universities are, they're, you know, they're anxious about their money that's coming from the federal government. They're anxious about foreign students continuing to come to the US. There's obviously the market decline itself. So are we in a moment where there is some like inability or some constraints on the
21:36 Joe Weisenthal? endowment to be, I don't know if buyers of last resort, but the opportunistic investors of the moment, like, is this actually a moment where that's under a threat? And the endowment tax, as you mentioned.
21:47 Speaker 04 Well, I think it's endowment tax. I think it's a lot of the NIH funding at these schools, combined with a perfect storm of markets receding. And so these models are being challenged, right? So I think the people who are playing offense and are being proactive, and I would probably put Yale in that, that category, are going out and testing the market and saying, you know, where is my liquidity? I just take a step back on private equity, because that's what they've, they've gone out and, and, and are trying to sell. If you look at the asset class, I think it is a fantastic asset class. And I want, I want to just talk about this.
22:31 Speaker 04 I don't work in private equity at Blackstone, so I'm, I have my endowment hat on. But I want you to think about the value proposition. The value proposition is that I'm investing in the largest universe of companies out there, which are private companies with experts who I'm lending money to in terms of a management fee, because that management fee comes back to me, the investor. And then we calculate an 8% preferred return before the manager makes any money. And if you think about it, 8% to 10% is about what the stock market has done over the last 50 years.
23:14 Speaker 04 So the value proposition is I, the manager, until I add value over that public market, will not earn any incentive fees and I will pay you back. That structure in itself protects investors. And even in the fourth quartile, and I'm quoting Cambridge and Associates data now, even in the fourth quartile of buyout managers, and the Cambridge database changes every, you know, month, but call it over 1,200 managers, even the fourth quartile is positive over a rolling 10-year basis. It's a good asset class, but what I always hear is the doubters.
23:54 Speaker 04 And they want to say there's too much dry powder and things, you know, things, capital's not being returned. Nope. Or it's hard to deploy. Or it's hard to deploy. And the reality is, it has been hard to get capital back for the last three years. Public markets are closed. Yep. Mergers are, are not accelerating like we thought they were. So the longer this goes on, the more this endowment model, Joe, to your point, is going to be challenged. It is definitely challenging, but I think the smart endowments are already taking action. To to grab for that liquidity and think about it 10 years ago, there was no
24:35 Speaker 04 deep secondary market. The thought that you could sell, okay, $6 billion of private equity assets. It's pretty amazing.
24:44 Tracy Alloway? It's definitely different to how it used to be, but just on the PE point, you described, you know, your sort of research process earlier and you gave an example in the case of biotech. But if you're researching those ideas, your team is trying to find alpha itself. What's the benefit of investing in a third party like private equity or like hedge fund, a hedge fund versus just investing directly?
25:11 Speaker 04 Yeah, it would be almost impossible to recreate the type of competitive advantage that the managers that we invested in Brown had. And I think that trying to do it direct at an endowment, you have a smaller team, you have less resources, you have one investment committee. At Blackstone, you're constantly iterating, you have multiple investment committees, you have multiple oversight, you have a risk committee, and you have just so much more data, so much more information. That's why it's such a competitive advantage. The concept
25:49 Speaker 04 of scale is so powerful. So when I transitioned from Brown to Blackstone, I was overwhelmed at the power of the scale, the data, the manager access. If I could have run the Brown Endowment portfolio on the Blackstone platform, I would have really made money.
26:10 Tracy Alloway? Well, you did make real money. I mean, while you were at Brown, even without the Blackstone platform.
26:15 Joe Weisenthal? Let's talk about hedge funds, real big picture. How would you describe the reasons for the rise of the multi-strategy model? Why has that model even more than the single manage? How would you characterize it? Why that particular flavor of hedge fund has become so popular?
26:31 Speaker 04 Sure. I think that when I think about the multi-strat world, I think about a tiering of talent. And it's clear to me that that millennium citadel and the top players have really distinguished themselves.
26:47 Speaker 04 And they've done that by providing a very, very consistent return with a high sharp that is completely uncorrelated to stocks and bonds, which is nirvana for a manager. Because what people realized, and Joe, the wake up call was in 2022, when stocks and bonds were both down high teens, and the millennials and citadels of the world earned their, you know, standard returns, which are, you know, call it 12% plus. That is what you want in your portfolio as a true diversifier and something that provides a
27:31 Speaker 04 ballast. So they have unlimited demand.
27:34 Joe Weisenthal? So the results have spoke for themselves.
27:36 Speaker 04 Results have spoke for themselves. And, you know, these are not easy things to recreate. If you look at Millennium, it has more employees than Blackstone.
27:45 Tracy Alloway? Wow. That's crazy. Okay, then, give us some, give us some color on the past couple of weeks. I can't believe it's only been 20 days since Liberation Day on April 2nd. But what's your impression of what it was like at the multi-strats over the past month or so?
28:03 Speaker 04 Yeah, it's interesting. Obviously, it's in the headlines that they're down, but they're really not down that much. If being down 1% is a crime in this environment, I'll take that, that asset class all day long. But what has happened is it's been the fastest growing asset class among hedge funds. Goldman Sachs quotes that, that multi-strat universe has been growing 16% year over year. And their data is pretty good. It matches ours pretty closely. But what's happened is that there've been a lot of new entrants. And the new entrants are the area that I worry about. Because in order to get the type of diversification
28:46 Speaker 04 that you need, you need amazing technology, you need a lot of teams. Okay, let me be specific. There's over 300 teams at Millennium Trading. That is a very hard thing to recreate.
29:00 Speaker 04 Risk management systems and a culture of performance and excellence, they're really hard to recreate. So I think if there's a problem, it's going to be in these new emerging managers. It's not going to be with the top tier.
29:17 Joe Weisenthal? Can you talk a little bit more about the due diligence process on a multi-strat? Because, okay, you have the top line returns and there's a line. And as you said, it's been a really good line and it's extraordinary, even outside of the very elites. It's been just extremely impressive. And then you can point to, okay, even in 2022, when stocks and bonds were both down, they produced good returns. So again, further impressive. Is there a further level where when you're probing a multi-strat manager that you can look to discover whether the pods themselves are truly uncorrelated and can be expected to deliver uncorrelated returns in the future?
29:58 Speaker 04 Yes, and that's our job. And I mean, when you think about the quality of earnings of a company, let's say, you know, the the average S and P company that reports, the analysts all focus on quality of earnings. We focus on quality of return. How diversified is that return? What subsectors is it coming from? How many managers have been on the platform for X period of time? How many of them account for the, you know, what's the breakdown of the of who's making the profit? How diversified is that across strategies, et cetera? So that's what we spend a lot of time doing.
30:57 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek. Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices, but according to recruiters,
31:41 Speaker 01 advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.
32:20 Joe Weisenthal? When you're doing the due diligence, could you talk to pod managers? Like, how much pro, how deep into the system are you, is an outside investor able to get?
32:27 Speaker 04 If you have a good, long-term relationship and you're a large allocator of capital, we get a lot of information to make a very, very good decision. I think if you're just trying to do it on your own, you have no shot.
32:40 Joe Weisenthal? Yeah.
32:41 Tracy Alloway? It sounds like you're trying to build a diversified portfolio of multi-strat exposure. How do you get a good sense of what, like, each multi-strategy firm, each pod shop, is actually good at doing?
32:54 Speaker 04 Ironically, they have very different approaches, so it's not as hard as you think. The differences between a Citadel and a Millennium are extensive.
33:05 Joe Weisenthal? Interesting.
33:05 Speaker 04 And so, when you start peeling back all of the different avenues of how they make money, you start to see how really, how different they are fundamentally. And I think you can see that as an outsider, if you examine 13 F's, and you see after periods of volatility...
33:28 Speaker 04 Who's adding to positions and who's subtracting to positions? So if you look at March of 2020, you get a pretty good insight into who's doing.
33:36 Joe Weisenthal? Can you say a little bit more? What are the different, like, what do those differences look like?
33:39 Speaker 04 So for the more trading oriented managers, they're shrinking their balance sheet. They're, they're cutting their balance sheet. And then there's a group of managers that are calculating intrinsic values. So they're actually, as those investments are going down, they're actually adding to them. And if you look at a historical vol, you can see it in historical vol. So some of the multi-strat managers are very tight in, in their vol calculations and they stay around 4%. Others that are more intrinsic value oriented are up as high as 8%. It's just two different ways of, of, of getting at the same thing. Some people hedge from the top of the house. Some people don't.
34:20 Speaker 04 Again, the styles, when you really get down into it, it, it, very different methodologies.
34:26 Joe Weisenthal? So you mentioned that, you know, one of your concerns is in the new, you know, it's very hard to recreate a 300, a po, you know, a team of 300 quality pods. It's really hard to recreate that tech. But, you know, some might do it and some might try, trying to think of like the, the science equivalent, a concert, a law of the conservation of alpha. Somehow that the structure of these multi-strat hedge funds have been able to deliver superior returns in a range of market environments. Is there some sort of intrinsic limit to how many entities can try to capture this alpha such that it all degrades? Or is it really just a matter of some just won't have the skills to do it?
35:10 Speaker 04 I think it's a combination of both, but look, there are pockets of alpha in the market that get overcrowded. And we've seen this in the area of index additions and subtractions where a lot of capital gets thrown at the area and they don't make money or they lose a lot of money. But then the capital quickly retreats and goes and finds a, a new pocket. And one thing about these organizations. Is they are very innovative. And if you look at senior management, this is some of the best investment talent that I've seen. They're coming from very high quality firms and they're innovating all of the time, both
35:53 Speaker 04 in technology, in scope of markets, in how they're joint venturing with people. They're very, very innovative, but obviously their capacity is constrained, right? But they have unlimited demand and that's why they've been able to lengthen their terms. So they've, many of them gone from quarterly liquidity to five-year liquidity. And that's a testament, Joe, to the fact that the model's working.
36:22 Tracy Alloway? Can you give us a concrete example of innovation? Cause I feel like people use that word a lot and it's sort of, you know, nebulous in many ways, but like, what are you seeing that is actually innovative or what has struck you as particularly original and creative recently?
36:40 Speaker 04 I think there's a ton of examples on the quant side and quant will be something we should return to when we talk about Brown, because one of the traditional David Swensen tenants was not to invest in quant and yet Brown was the largest investor in the Ivy League in quant. And that's one of the big differences when people ask me, where did you differentiate yourself? So what's going on in, in quant, just in the systems using AI at these firms would, is absolutely unbelievable. And there are firms out there that while their capacity constrained, they make money every day. We're invested in some managers that make money every single day and it always blows my mind.
37:25 Joe Weisenthal? What does quant mean? Tracy knows that sometimes I don't know the basic definitions of word, like how many times I've asked Tracy to define what fintech means? What does quant mean?
37:34 Tracy Alloway? Joe's being very modest. He knows what all these things are, but you choose like the, the terms that actually don't have a good definition, right?
37:41 Joe Weisenthal? What does, what does quant mean?
37:42 Speaker 04 I think it's, it's the application of quantitative methodologies towards markets to. Analyze large sets of data and come up with patterns or correlations or anomalies of things that happen, divergences between, say, the futures and, you know, the cash market. So everyone talks about the basis trade. Yeah. Right? So the basis trade is simply, I'm going to buy a treasury, I'm going to sell the future, and I'm going to capture that convergence because the future should trade at a premium. I'm going to capture that convergence and I'm allowed to lever that trade.
38:26 Tracy Alloway? Yeah.
38:26 Speaker 04 Because the convergence, I'm capturing a very small, like, absolute spread. So I'm levering that 60 to 80 times. So the ability to rapidly identify those alphas, some people call them alphas, you can call them anomalies in the market, that can be exploited. Some of them are high-frequency, beating someone to a trade, serving as a market maker.
38:53 Tracy Alloway? So you mentioned that when you were at Brown, you didn't follow the Swenson model when it came to quantitative investing. Why was that?
39:04 Speaker 04 Well, I think to put up really good returns, you have to figure out, one, what your competitive advantage is, and, two, you have to be an independent thinker and not follow the herd. And that's what we did at Brown. And I'll tell you how we created our competitive advantage because I owe it to the alumni. What we did a really good job was creating a network of alumni in each asset class. So we would work with our investment committee, but we would also reach out to some of the best investors on the planet. By industry and I would actually go and present our portfolio in that asset class and
39:49 Speaker 04 say, what do you think? Where can we do better? Who would you recommend we look at? How would you structure this? And so that was one of the secrets, I think of us, which is using that network effect. Now, Joe, back to your comment, most people don't like to do that because they're exposing themselves, the same way that they feel pressure. They don't want people opining on what they were doing. But I was willing philosophically to have that kind of open transparency so that I could learn and benefit from the Brown ecosystem. And I always used to have this expression was, I would go to people and I would say, what do you have to feed the bear? Because it's the Brown bear. So feed the bear. Give
40:33 Speaker 04 us your best co-investments. And I have an unbelievable all-star alumni cast and they carried Brown to greatness. I happened to shepherd the process with an incredible team.
40:46 Tracy Alloway? Joe, what was your college mascot? Out of curiosity?
40:50 Joe Weisenthal? The Texas Longhorns.
40:51 Tracy Alloway? Of course.
40:52 Joe Weisenthal? Which one day, if by the way, if the, if one day we'll do a proper interview with the, the head of you, Tim Ko. It does seem like an investing, and this includes VC investing too. Like, you probably, you want to see a lot of pitches, don't you? Right? Like, you can't hit a homerun. And so it sounds like that alumni network or whatever it is, it's like, you don't have to say, you might just say yes to one out of every thousand, whatever. But you want to see a lot. It sounds like, it seems like that's a huge part of the game, just waiting for that fastball down the middle until you see it.
41:23 Speaker 04 A hundred percent. And, you know, each asset class has so many nuances. And, you know, to have someone who can help out their endowment as an alumnus, it's, it's rewarding. But you also have to, you know, there are risks associated with that also. So saying no became an art.
41:44 Tracy Alloway? So you are now head of multi-asset investing at Blackstone, as we've mentioned. And I think when you were initially hired- You were head or co head maybe of Blackstone Alternative Asset Management. And my impression of what you were hired to do was basically try to make that group more competitive, which, you know, when we're talking about nebulous words, I think competitive is up there with innovation or innovative probably. What does that mean exactly? If someone says, I want to make our alternative asset investing business or our hedge fund business more competitive, what do you do?
42:21 Speaker 04 So I think about it as going from good to great. And you do that not by making dramatic changes, but like James Clear and Atomic Habits. I don't know if either of you have read that.
42:33 Joe Weisenthal? Haven't read it yet.
42:34 Speaker 04 It's actually worth it, but he talks in his book about how it's the little constant improvements all stacked on each other that create greatness. And, and really our group embraces that principle. And that's embedded in, in our culture. And so what does great mean? Great means, you know, top quartile returns. Great means top quartile risk statistics, a high sharp consistency. And, um, you know, knock on wood, we're delivering that, uh, over, you know, since I've been there. And it's, it's really the result of the great team that I have. I have an amazing team.
43:18 Joe Weisenthal? By the way, Tracy, uh, Richard Hall is the CEO and CIO of UTIMCO. I couldn't remember his name for a second, but putting it out there. If anyone at UTIMCO is listening to this episode, he has a standing invite to come on, uh, to come on.
43:33 Speaker 04 Rich would be a great guest. I know him personally.
43:36 Joe Weisenthal? Okay.
43:36 Speaker 04 He's super smart. You should call him out.
43:39 Joe Weisenthal? Joe has, uh, Joe has.
43:41 Speaker 04 I'll come and join. I'll come and join.
43:43 Tracy Alloway? That'd be fun.
43:43 Joe Weisenthal? That'd be such a blast. All right. The call has been, been put out, Rich. Let's make this happen. I just have one last question. You know, you talk about your team and how important that is. And I like to ask this, someone maybe they're in college, um, maybe they're studying finance. Maybe they're thinking about studying finance. What is the? For someone who wants to be on one of these teams, maybe they want to work for their own university's team or whatever it is. What should someone be studying and try to try to do right now?
44:12 Speaker 04 Yeah, Joe, it's a great question. I think the number one trait is to be really, really curious. And I know that sounds trite, but I had no idea that I would be at Blackstone. I had no idea that I would be at Brown University, but everything that I did, I was fundamentally curious about and wanted to really be good at it. And so when you're curious and you go deep and you learn and and you're a practitioner, people will tap you on the shoulder, you know, I I had never met John Gray. I was at Brown University and I got a phone call that John Gray wanted to have dinner with me.
44:53 Speaker 04 And it was after an article had come out in the Wall Street Journal on the success of the Brown team and and how we had gone to number one in the Ivy League over a time period. You know, so I wasn't expecting that. That wasn't in the game plan. And I had dinner with John and the next thing you know, in January of 2021, I started at Blackstone and it's been incredible. My advice to people is I tell this to all of our younger people, try to be a nine or a 10 out of 10 every day. Don't overly plan out your career. Be really curious because if you're curious and passionate, no one will beat you, no one will outwork you
45:37 Speaker 04 and no one will, you know, have more depth of knowledge in a topic.
45:42 Tracy Alloway? This is the thing, Joe, people sometimes think there's like a shortcut to success, but actually the real secret is just be very good every day.
45:51 Joe Weisenthal? And knowing a lot, I, you know, I love to use that phrase. I I think I've said it about all of our good depth of knowledge, depth of knowledge, depth of knowledge. There is no substitute for actually knowing stuff.
46:00 Tracy Alloway? Yeah. Okay, so you've been at Blackstone now for four years. What's been the biggest challenge over that time horizon? So four years? And what's your biggest challenge right now in the short term, given all the market volatility that we've seen?
46:18 Speaker 04 Yeah, I think. Going from an organization where you had a small team, where you presented to your investment committee to then going to, you know, we have, our division is 88 billion, over 300 people. So obviously, the biggest change for me was becoming a better manager of large groups of people and still having, maintaining a high standard of care on everything that we do, but also not getting in the backswing, whether you're a tennis player or a golf player, of my very talented partners who are helping me drive. And I got some very good advice from, from John Gray and Brian Gavin,
47:03 Speaker 04 who's our COO, about delegating, the importance of delegating, the importance of clear communication. So I got a lot of help along the way. This is a great environment right now in the market for us because we're in the absolute return business and we have a lot of volatility. We have a lot of stock dispersion and that's great for our strategies. Quant loves that. Macro loves that. Our low net equity guys love that. And then our credit is insulated because we're in very, very specialized credit. So it's a good environment. I would say that I haven't seen volatility like this since like 2008.
47:46 Speaker 04 I mean, and it's, it's, the market doesn't like uncertainty. Our products like uncertainty and volatility.
47:54 Tracy Alloway? Are you deploying more risk at the moment or taking on more risk?
47:58 Speaker 04 Absolutely. One of the things that our team is really good at is rebalancing into things that are down and trimming those that have done really well. And it's that rebalancing that leads to a lot of consistency. I know John Gray on our earnings call said, that mentioned that our group had been up 20 straight quarters in a row and 24 months in a row. And I think that's a function of that rebalancing and really robust portfolio construction.
48:31 Tracy Alloway? All right. Joe Dowling, thank you so much for coming on.
48:33 Speaker 04 Thanks for having me.
48:50 Tracy Alloway? Joe, that was a, that was an enjoyable conversation. The one thing that really struck me is it is such a, it strikes me as like such a competitive advantage if you can just buy and hold for a really, really long time. Like, that seems to, maybe this is simplistic, but that seems to be such a key difference.
49:09 Joe Weisenthal? No, I mean, that's, that's huge.
49:11 Tracy Alloway? And then you can monetize that liquidity premium, as Joe D was saying.
49:16 Joe Weisenthal? You know, individuals can do that, too, which is you just invest in a range of things and then never look at your 401K forever.
49:23 Tracy Alloway? That's right.
49:24 Joe Weisenthal? We're just really bad at it as humans.
49:26 Tracy Alloway? It's particularly difficult at the moment, I would say.
49:29 Joe Weisenthal? No, that was one of those conversations, I mean, I really enjoyed that, where each specific question could have obviously been an hour long episode, right? Because we could have talked more about what is the value creation of PE? What is the due diligence process for hedge funds to establish that the multi-strat is truly uncorrelated? How stressful are these times for university endowments, which thought they had really stable environments? And so it's like a very, there's a lot to go on. I really do feel like it's some, like, all of these are episodes within themselves. But I thought that was a great overview.
50:05 Tracy Alloway? Absolutely. And the alumni network point was really interesting. I hadn't heard that before, but it absolutely makes sense, right? Because your resource, basically, all of your resources, kind of, well, except for government funding, most of your resources come from your alumni. So why not throw in, I guess, knowledge and expertise in addition to actual donations?
50:26 Joe Weisenthal? People love their universities. You know, this is, I don't know, Tracy, in Europe, is it the same way where, like, people, I mean, I'm sure, like, at Oxford and Cambridge, but like, there's that same thing where, like, people wear sweatshirts to their universities until they're, like, in their 50s?
50:40 Tracy Alloway? Well, I personally enjoyed my university. I don't think it's as intense as it is in the US.
50:46 Joe Weisenthal? Americans really build their identity around, like, oh, I went to, you know, UT, or I went to, you know, Eastern Iowa State, or whatever it is. And then their entire personality is like, you know. Go Redbirds or whatever the team.
50:59 Tracy Alloway? You never asked me what our college mascot was.
51:02 Joe Weisenthal? Oh, that's true. What did you guys have one?
51:03 Tracy Alloway? So I think this might be one of the reasons why people aren't wearing like LSE sweatshirts for the rest of their lives, but our mascot was the Beaver.
51:13 Joe Weisenthal? That's a good one.
51:14 Tracy Alloway? Cause we're industrious.
51:15 Joe Weisenthal? That's a great one.
51:17 Tracy Alloway? It's admirable, for sure. All right. Shall we leave it there?
51:21 Joe Weisenthal? Let's leave it there.
51:21 Tracy Alloway? This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
51:27 Joe Weisenthal? And I'm Joe Weisenthal. You can follow me at thestalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashell Bennett at Dashbot, and Kale Brooks at KaleBrooks. More Odd Lots content, go to Bloomberg.com/oddlots, where we have all of our episodes and a daily newsletter that you should subscribe to. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.
51:50 Tracy Alloway? And if you enjoy Odd Lots, if you like it when we talk about how people are actually running these huge pools of capital, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
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