Quant Hedge Fund Partner: Raising Capital Is Harder Than Generating Returns

In an investment management business, there are two things that are very hard to do. And I think one is harder than the other. So one is really hard to generate returns. What's even harder is raising capital. I can name countless examples of folks who generate stellar returns. And just for what reason have not been successful raising capital. I'm gonna start off what you shouldn't do. Don't say words like uncorlate over and over again. Don't say words like diversification all over and over again. All these bots with AI, don't trip all these words that everybody uses. That's because you use chat TBT. How does it help you generate positive returns? And using chat TBT to help you look at a resource support quicker and afternoon. Okay, great. Everybody does that. How is that added to your portfolio constructor process? How does it add to help you generate more alpha? What is the worst response throughout the entire process? It's apathy. Hey, when I look at the back end of our YouTube statistics, I can see that only around 25% of you guys are subscribed. And I'd like to ask a favor. If you like the content we create and you want to help us grow this show, if you could hit that subscribe button, I would really appreciate it. I promise that in return, I will do my best to give you guys the best content we can with the best guests and best interviews we can do. Thanks and back to the episode. - Duane, thanks so much for coming back on the pod. - Yeah, thanks. I appreciate being on again. This is great. - First off, congrats. You guys at Versaer just raised half a billion dollars for your event-driven strategy. How does it feel? - Feels good. It's certainly, these things that never easy. So it's never easy to raise capital, but it's certainly great to get a win. All right. Never easy. I'm just curious how it worked. What was the first step? - Yeah. So we have this event-driven strategy launched in about two and a half years ago. The first step was really canvassing the universe around folks who enact quite quickly. A strategy, generally, has two and a half years of track record isn't for everybody. So it was really the first step as identifying a universe of investors that we talk at Act pretty quickly. Where we settled on was focusing on people who would allocate through managed accounts. And the world of managed accounts was certainly morphed in. Historically, that had been like the fun of fun community as of late. And this was a pretty recent phenomenon. Refining other hedge funds. So multi-strategy hedge funds have been increasingly allocated in managed accounts in order to get access to talented managers. That's a new area that's really morphing into where the fun historically, the fun to funds used to play. There is this hybridization going on between what is a fun and fun, what's a multi-manager. But that was where we really focused on at the outset. - And so you've identified the funds that you think would be interested in in this event-driven strategy. I guess how do you approach them? What does that whole process look? And I asked that question with a context of, maybe someone in our audience one day would like to raise, call it half a billion, a big chunk of money from a big multi-manager, say like a Citadel or a millennium. Not sure if Citadel does external allocations, but what was that like? What was step one of actually approaching multi-manager funds? You framed that question interesting and from the perspective of someone wanting to raise the first dollar or first hundred million dollars. I think this doesn't apply necessarily just to sort of a couple for multi-managers, but from anywhere. I think an investor manager needs to ask themselves existential question, why should people care? So what is it about you that's different than the thousands of other men and women that are seeking capital in the world? So existential question, why should people care? As it relates to multi-managers, I think it's having an understanding of existing exposures within the multi-manager ecosystem. A lot of multi-managers are focused on equities, whether that's quantitative or fundamental, whether that's long short with some sort of net exposure or some sort of equity market neutral stat, archetype exposure. That seems to be the lion's share of a lot of multi-managers allocation. So to accent their allocating outside of what they have in house, the objective is to find something that's additive, perhaps diversifying to their existing exposure. So that's point number one, why do you exist and why should they care? And that was big for us to really, with the adventurer, Mr. Agina, I'm happy to describe in a little bit more detail, is describing how that is fundamentally complementary to what they have and why we exist and why should our process warrant an allocation from a group of managers who have access to almost every strategy in the world. - I see. And so, me, you mentioned there the lion's share and the biggest chunk of allocation of the multi-strats is these stat-orb strategies. And so you guys come along, you have an event-driven strategy. I guess you asked yourself that question and you said, "Okay, because this thing has a "our strategy in particular provides a differentiated "return stream." I'm imagining that and you can correct me if I'm wrong. And then you go to pitch a bunch of the different multi-strats. What sort of questions are they asking? - Yeah. So, the big part of what the multi-strats are focused on are kind of risk-return characteristics. And a lot of them have these sharp thresholds. I mean, folks have to say that I'm not gonna allocate anything that has a sharp ratio of less than 1.5. Maybe a sharp ratio of less than two. Somewhere there about what they're really focused on is preserving capital and maximizing returns. So, a lot of questions they ask are around how do you go about generate returns? So, what are the forecast models, what are the inputs? And asking questions around why is this part, why, how can this process be repeated in the future? So, what about your process and where about your implementation that something I can expect a high risk-adjusted return going forward? So, that's fundamentally a big part of what they ask. The other thing they wanna understand is around the team structure and dynamic. Who are the folks that are looking after building in these strategies? What's the experience level of the men and women involved? How are they differentiated versus some of the other folks again, going back to what initially is saying? How is this differentiating versus some of the other things they already have and the portfolio already have access to? - How do you know how to answer those questions when you don't actually know all the different strategies they're running? I mean, these funds are famously super secretive. One of my podcast guests who worked at Millennium even told me that he didn't actually even know how well the fund was performing, the way he'd see it is from the news. So, you guys, you don't know what strategies they're running. And you know that the bulk of what they're running is maybe Stat Arb and maybe less something of the event driven sort. But how do you sell to them without that information and without knowing that piece of the puzzle? - Yeah, I think, you know, we didn't describe versus at all. In addition to the event driven strategy, we do some things in the Stat Arb sprays, we'll invest in the future space at our core where quantitative multi-strategy firm, not a multi-strategy fund. One of the benefits of having exposures in participating in various aspects of kind of the hedge fund ecosystem is that we generate streams of returns or risk analytics to help us understand common exposures across various hedge fund strategies. Oftentimes, people refer to these as factor exposures, right? So while I may not know exactly what Millennium or Citadel own in house, I do have an appreciation of common hedge fund factors. And everybody has exposure to things like value, momentum, quality across either equities or futures. Now, if I can fully understand kind of these common exposures that are prevalent in hedge fund space, in the same way that equity beta is common in the traditional long short or the long only space, then I can have a conversation around how is this implementation different than these common hedge fund exposures, right? How are we uncorrelated to say the value factor or momentum factor? Now, I don't know how much value will momentum that each of these managers might own, but I know they have something. And I know that most of these folks are seeking return streams, they're not common. So by not going to articulate that through kind of quantitative rigor and analysis, that this is turn stream, but we're doing in the event of in space, it's truly different than these common factors, these common exposures, then we can have a dialogue around how you different. What is a process that makes you different and how is this implementation truly complimentary to some of the other things I have? - If you're a student who wants to work at a great trading firm, listen up. Our brand partner, Onyx, the largest oil derivatives trading firm in the world, is hiring junior rust developers. They're opening this up to people who haven't written the line of rust in their lives, because they'll train you from the ground up. From day one, you're on a small team working on real projects, learning from senior engineers who built the systems. If you're self-taught with serious projects to show for it, apply it the link below. - Let's say I'm Izzy Englander and I'm sitting in front of you right now and I say great to meet you doing, love to hear about your strategy. What makes differentiated? make. to different, why do we need it in our portfolio? - Yeah, so if you're easy, I don't know if as you would ask that question, right? It's just time for fatiguing. - Yeah, yeah, yeah, yeah. - You know, no, so I think that goes into me describing kind of the implementation. So the event driven strategy, traditionally is thought of as a discretionary strategy, where there is a man or woman who is evaluating hard-cales events, maybe is emerged, arbitrage change acts and maybe is a spin-off, or other announced corporate event, and doing kind of deep fundamental analysis and understanding the aspects of a trade and understanding the aspects of it and give them deal. Maybe they have a conversation with management, maybe they have a conversation with other influences on the street, folks at banks and research analysts. Our implementation is taking that approach, taking the approach of a fundamental analyst, a fundamental researcher, and quantifying that, and creating a systematic process around that. So what that allows us to do? So we'll take what we've done in order to develop our process is examine every announce hard-cales catalyst event in North America, Europe, Japan, and Australia, going back to the last 26 years. So by analyzing this data set, we ask ourselves some initial questions. So what are the problems that I'm seeking to solve? If I use M&A as an example transaction, and merge Robert Shaw's, some of the questions that you're seeking to solve are, is this deal going to happen or not? If it happens, is it going to happen at the price that's stated, or will there be some upside? If this deal fails, how much am I going to lose? Am I going to lose that? I'm going to go back to the original price or is going to be some deviation away from that? So we're asking ourselves a series of questions. The next step for what we do is then, we've asked these questions, we want curated data. So the data creation is creating this database. That's a painstaking process. You can't buy an off-the-shelf merger or Robert Shaw's database. You have to go out and source the data. So I was going back looking at fundamental data, looking at market data, looking at alternative data. Alternative data is news and events. Things that don't fit in nice, neat rows and tables across the entire universe. So once you have this data set, next up is our, I'm still need to answer this initial question. What are the features within this data that helps me answer the question? Some things are somewhat obvious. When people evaluate a merger deal, they'll oftentimes look at deal spread. But deal spread at announcement doesn't really give you good picture whether or not this deal is going to happen or not. The other things that are obvious, if a deal is domiciled in Europe, it fails at a much higher rate than the US. What's the debt loon of the transaction? How much does the company does the acquire or own at announcement? And some other features. I'm just naming some of the obvious features, but there are thousands of these features. And from these features, we're able to train models. So we build models that are seeking to answer the questions that I've stated out of the outset. What this systematic process allows us to do is one, get in and out of deals much more efficiently. Identify deals that we want to invest in or not invest in much more efficiently. It allows us to have much more diversification. The work it takes our models to look at a billion dollar transaction is the exact same it takes us look at a 10 billion dollar transaction. In fact, we much rather have 10 billion dollar transaction to one 10 billion dollar transaction. So the diversification bit is quite important. And the last aspect, and I think this quite important to multi managers and folks that are concerned about market risk beta in particular, is we can train models to understand the dynamics of any given transaction. How a particular deal behaves in various market regimes and really understand volatility of individual deals, understanding the correlation structure of individual deals, and increasing and decreasing exposures in real time as market dynamics change. While the last point is important, is that what we're really focused on in kind of this dynamic increasing or decreasing exposure is managing for beta and really reducing exposure to risk that we don't want to own. We want to own the risk of what an ideal is going to happen or not. We don't want to own the risk of the variance of the markets. - Metal. - And I imagine that's music to the multi managers' ears of, I mean, obviously they want to be taking a lot of orthogonal bets back to the analogy or the role play. Let's say I like everything you're saying. I think the return stream seems promising. It's the first meeting. How does that process evolve? - Yeah. So the first meeting is, I would say before we enter the room, there's probably some initial quantitative screening. So you don't have to spend a lot of time talking about formats. We obviously talk about performance. But before you have this conversation, people would have looked at some track record. The next step after initial meeting, once, or performance is decent, we like the story. There's a tremendous amount of quantitative analysis that would happen in house at the multi manager or the magic account platform. And through that quantitative analysis, what they're trying to make an assessment on is how this is compared to what I already have. I don't want to double up on like risk I already own. If this is something I already have and is similar, then I don't want this. What they're really trying to assess is this something that's fundamentally different and complementary to what I have. And going back to where I was describing where a large portion of exposures tends to traffic in this equity space, whether that's fundamental or quantitative, whether that's some sort of net long bias or market neutral, is really the examination is how is this different? And how is the return stream going to be different than, say, a march of this year, where there might have been a hiccup in some of these more systematic stat-arptive strategies? How does a strategy like R is compare? And that's sort of a environment. How does a compare in a Q1 in 2020? Or some other episode where there is maybe hiccup in some other strategies? And then let's say they look at that. And as they have here, they clearly thought it was different. It was differentiated. The return stream doesn't behave at least exactly like the existing strategies. How does the process evolve from that moment? So you had the first meeting. They've done the deep rigorous quantitative analysis on your return stream and how it compares to the other stuff they have. They like-- I imagine you tell some sort of a story as well. I guess how does that evolve? Yeah. So then the next step was then taking a-- I guess it's in the weeds of the due diligence process, but it's really taking a deep dive into how do you generate the returns? So it was really walking through forecast models, how they're constructed, what are the data inputs-- I alluded to some of the data inputs, but going deeper into what are the data inputs, how do you use technology to assess this data? How do you then build forecast models from the features that you extract from data? That's where the conversation goes. That can happen about a course of a couple of weeks, could be months, but those are several conversations around really coming a deep grasp for what we're doing and how we're achieving returns. How do they do the deep due diligence without, I guess, uncovering all the secrets? Yeah, you elaborate. Yeah. So obviously, we have intellectual property that we're seeking to protect. If we're doing a good job of describing the process through storytelling, through case studies, I think most can get a good appreciation for how we generate returns. So one of the things that we oftentimes do is we'll describe the forecast models and we describe the inputs and how we go about building them. But what people care about is the output. So we'll describe the output through different case studies. So a case study you might describe, there was about a year ago, there was a deal we looked at, two industrial companies in the UK, where there was a competing bid situation and we accurately predicted this competing bid. Now, how do we go about accurately predict this competing bid? So now we describe the scores of every forecast model. So for one of our forecast models we're seeking to predict, is this deal going to happen or not? The probability of success or failure, that score particularly high. The next forecast that we care about and this is a meaningful forecast for us, is the probability that a deal at announcement date, what's the probability that it's actually close at the price announced or something higher? That's a very important one for us. Why that competing bid or that upside that we capture enables us to generate substantial alpha, it also enables us to completely mitigate. And it's actually two extra returns of deals that we're going to often have, they're going to fail. So we pay careful attention in these competing bids. We pay attention to how long deals we're going to take to close. We pay attention to the liquidity of a stock. We pay attention to spreads and forecast volatility. From all these inputs, and we will describe that story about how we generate these probabilities and these forecasts. We come up with an expected return in a risk. That's the worry around how do we go about accessing a transaction, how we go about thinking about upside, how we go about thinking about downside, how do you get the size? And then, the output, I think it's helpful. And understanding that through a course of a series of transactions, and then how we go about blending the portfolio is meaningful. And I think helps people understand the process a little bit more intimately. They do their due diligence. The stories consistent. They like the process. They like the team. How is the, what do the mechanics of the allocation look like? The mechanics of it in terms of how they actually are. Yeah, so let's say, yeah, awesome. And I know we've gone through the process and we've oversimplified a lot of stuff. And I'm sure there's a lot of meetings and it's, it's not as simple as, here are returns, one meeting, due diligence, bang. Right? I doubt it. I doubt it. It's like, obviously, you know, there's a lot more. But just let's say all those steps have happened. And then they've done their due diligence. They like the product. They want to allocate. And in this case, they say, hey, yeah, we'd love to chuck in half a billion. What does that look like? Do they give you a little bit to start? Does it, you know, just, just curious about that? Yeah, I'm going to, I'm going to address something you said. It's so the process and we as a firm, and I think perhaps your listeners might want to hear this and I think a lot of folks would agree in an investment management business, there are two things that are very hard to do. That's it's a competitive space. A lot of there are a lot of smart people in the world. There's a lot of smart machines that are working with smart people. And it's really hard. It's competitive space. Was it even harder? It's raising capital. And that is, it's almost an impossible task to actually raise money. And doing that, it requires a tremendous amount of work. And you're right. It's not, it's not just sending a return stream, sending a debt, capital conversation, writing it, and somebody's going to write to you, check that doesn't happen. Half a billion. There you go. That doesn't happen. And there's certainly more knows than there's yeses in that regard. In terms of when you win the allocation, it depends on the structure, the multi-manager, the multi-strider, the magic account platform that you, you may be engaging with. So there are two types of allocations that can happen in this space. They're what refer to, some refer to them as internal and external. I'll start with external first because it kind of, that's a little bit more intuitive and kind of, it applies across a number of different manager types. External allocations are magic counts. So you know, you have a segregated account that that you manage for a client, but you're in charge of that account. That account is owned by the client. They may appoint a, the counter parties, so the auditors and the prime brokers and, other counter parties that are involved in a magic account. But you trade that account as if it were a fund that existed outside of your coal mingle fund. You know, think of it as a separately magic account, a separate managed fund in its bespoke vehicle. The internal magic accounts or relationships with managers where you effectively trade a portion of an entity's balance sheet. So they, they segregate a portion of their internal balance sheet in this x amount of dollars. You instruct the trades on how that that portion of the balance sheet runs. But the execution takes place at the multi-manager himself. So they would be in charge of executing those trade orders and reconcile the trades, but you're instructing that portion of the balance sheet to, and how you like it to trade. Typically that allocation, so, you know, it's a five-per-million dollar allocation, it depends on the structure. Typically, folks are not allocating that all at once. It's hard to put that amount of capital at work. So I'm, you know, instantaneously, they're probably legging into that trade over the period of, of months. And, you know, the allocation structure is something that might be pre-ranged with between the manager and the, the allocator. But you say that, you know, you want to leg into that over the course of six to 12 months. It's typically kind of the cadence around how that might be put to work. You touched on external versus internal allocations. And with internal managers, the way, at least the picture that's painted online is, they have the risk limits and they decide to, you know, the fund decides to side-up and size down on different managers. And, you know, in some sense, treat them as positions. You know, if someone, you know, if someone is doing great, uncorrelated, has a great return stream, someone else is not performing like that. It's, it just, it does, it just makes sense to size one guy up and one guy down or one girl down. How does it work for external allocations? Is it the same in that regard? Can they size up and size down basically discretionarily? I guess, how does that work? Is it a draw-down limit? Would love to hear it. Yeah. I would say there's no one size fits all into, and I hate to answer a question, but it depends because I said not an answer. But it depends, right? So I think there are certainly platforms that are more mechanical and how they think about draw-down limits and how they think about sizing positions up or down. That certainly exists. There are other platforms where there are, the constraints are not as rigid. And I would say the, the allocations that I could manage are not necessarily formulaic, but may more be a bit more discretionary. There, I don't know if there is a, the platform, a mechanism that's better or worse, but it certainly depends. You know, I think from the perspective of the, the multi-strategy bond or the, you know, the multi-magic platform, or a magic count platform, I suspect many of them don't at their core don't have a, a diversion view as how they might treat a extolar manager or an internal manager, right? I think the, the end goal when they think about the product that they're offering their client is to maximize return and risk, and how they go about achieving that goal is selecting talented men and women to manage portions of their, their, their fund and portions of their balance sheet, whether that those managers reside in house and, you know, in houses, figurative, it's not literal in many cases, whether that they reside in house or externally, I'm not necessarily sure that the average platform fundamentally views those exposures differently, because the goal at any of the days is to servicing their client. What is the typical fee structure look like for an external allocation? Is it the, the two in 20? And I know two in 20 is hard to get these days, but yeah, what's, what's it generally like? Yeah. So it's certainly there is a, I think the fee arrangements are, are similar to other allocations. So there's, there's a cost to run in these strategies. There's just a baseline cost in terms of data, infrastructure, people, technology that's oftentimes captured in the management fee. So that's a portion of fee. Some, some portion of fee is dedicated towards just the managing, the day-to-day operations and managing of the strategy. And there's a portion of the compensation that comes from generating positive returns. So the mix between kind of flat fee of some sort, call of management fee and some reward for generating positive returns is similar to that of any other client-account relationship. The amounts and, you know, that's a little bit more nuanced. So they got what that ratio looks like. I think it's reflective of, quite frankly, kind of the amounts that you might charge on your co-mingled vehicle. And I guess now, which is a great time and, and I want to talk about the difference between allocations in a typical fund of strung structure, a typical allocator, call it an endowment or a pension fund versus multi-managers. I guess what are the differences in the way they think? Yeah. So now there's, if you talk about the comparing a traditional fund of fund versus a multi-strategy fund, I think they're very different in their approach. A traditional fund of fund is allocating to, you know, several managers across various asset, or reservoir strategies across various asset classes. They may or may not be allocated to a co-mingled fund. Oftentimes they're, they're not having, you know, day-to-day control and transparency into what the managers are doing. So it's an arms length allocation to the fund that the manager is trading and in the behaves like any other arms engagement. In the case of a multi-strategy, the relationship is a little more intimate in regards to there is likely daily transparency on what's happening, understand what I say what's happening, the trades that managers are taking, the exposures to managers are taking, how they're increasing or decreasing leverage on a day-by-day basis, on a minute-by-minute basis. So it's complete transparency in terms of the execution of this strategy. That's diametrically opposed, very different. The other aspect is with regards to what the points you were making, how the fluidity around increase or decrease in exposures. So our fund fund, a traditional fund fund, increase or decrease in exposure to a manager is really contingent upon the liquidity constraints of that manager's allocation. So if it's quarterly liquidity with 60 days notice, that's a period in which you can increase a decreased exposure to any given manager. There are some constraints around capacity, maybe takes a little longer. If there's a lock up or a gate, maybe it takes a longer still. That liquidity or lack of fluidity does not exist in the typical multi manager account where you would have pre-negotiated capacity as I'm sort. And within those capacity limits, you have a lot more access to increase or decrease exposure based on your asset allocation and portfolio construction requirements. Now there is this hybrid world where there are fund fund that have manager account platforms or launch things that optically resemble what's happening with multi managers that have these external allocations. So fund funds and I'm using this term very broadly, hopefully I'm out of fending anybody. That might not describe themselves as fund fund. But fund funds who have manager account platforms that increasingly have more transparency, have control of the assets. Now these structures can closely resemble to what we're seeing in the multi manager space. I think there's some nuances and difference there, but there is this, they started this conversation about talking about the morphing of these two worlds. We're certainly seeing that today. I want to go back to one of the things you said earlier in the conversation about the two things any successful hedge fund has to do. Well, first is make money, generate good returns, second is raise money. And I found it crazy how you said raising money is much harder than making money. You talked a bit about that. I would say the, it is, you know, so when and I don't mean to be disparaging to folks who focus on one or the other and not trying to favor one or the other. But I would say there are thousands and thousands of people in the world who have put a single on the door and try to raise capital and haven't been successful. And I think your listeners, I can name countless examples of folks who generate stellar returns and just for one reason have not been successful raising capital. Now you got to ask yourself that question, why? And there and also have been a few players who've generated very decent returns have done a great job of protecting risks and preserving capital. But not necessarily stellar returns. You know, if I compare that to some of the folks that generate stellar returns and have a raise money and have raised all the large share of the capital, significant amounts of capital. I think if you were asked me, I think one of the reasons for that is the really successful firms in my observation have done a really good job of distinguishing between the marketing, branding and sales. So there's marketing, branding and then there's sales. And I think oftentimes investment managers try to conflate those activities into one. So now I've identified what marketing, branding versus sales is. Marketing branding is the voice. What do you want people to think about you? How do you exist? What is your edge? When you think of Coca-Cola, Coca-Cola is not a brown liquid in a bottle. Coca-Cola is enjoyment at the Olympics. It's like sitting at the beach with your family and friends. It's hanging around your friends around a poker game. Coca-Cola is this brand, this image, something that evokes an emotional connection that you feel with it. I'm not saying that in the investment management space, you need to be so, you know, so grand heels is having this emotional connection. But then there needs to be a brand. What is it that people should feel about you? What is your messaging? Why do you exist in the world? That's distinctly different than going around saying, hey, I'm a great hedge for manager. I think you should invest in this one. Both those things are important. You need what aids in the process of going around to many women around the world institutions. When you walk in the room and they have some semblance of who you are before you walk in the room, what is it that you stand for, what's your messaging, how you're optically different, that leads to success. So now if I look around the world and you could probably think of examples of investment management firms that have strong brands, there's no coincidence that they have strong brands also manage substantial amounts of capital. That branding is critical in terms of raising capital and really being a successful investor manager firm. Other businesses do it really well. I have no idea why we don't do it as well in the investment management space. So why not? It seems like any other business you have a product, you have customers, you have fund, you have validators, why aren't more managers investing the time and resources into building brand, I guess coming on odds on open. No, we're on odds on open talking about our brand. I don't know the answer to that question. And I will not say folks are clearly doing it. You think of Blackstone, you think of a brand, you think of Bridgewater, there's certainly a brand there. You think of BlackRock. Certainly brand Goldman Sachs as a brand. There's certainly firms that do a really good job of the branding. Why is it not more pervasive? I don't know. It's certainly hard. Right. It's not easy by an extra imagination. We're a versus investment, we're relatively mid-sized hedge fund. We're trying to develop our voice in our brand. I think the folks that know us, I hope that there is this idea that we're experts in quantitative equities and best across ask class and understanding of that in technology. I hope that's coming across. But our brand is certainly not as large as some others. What are some specific mistakes you think from being in the industry for quite some time? What are some specific mistakes that call it emerging managers or even mid-sized managers make with regards to brand and their process for approaching allocators and raising money? I think, not to be redundant, I think mistake number one, I can't overstate this enough. Not differentiating between marketing and sales. Can you give specifically the differentiation and lay that out clearly for our audience? So let me take a step back. I think there is a fear of if I talk about myself, I might reveal some secret. The brand is my voice. If I talk about myself too much, perhaps I might reveal something I shouldn't in my competitor in my hair. That's a legitimate concern. You need to protect your IP. But I think what's important, if you're starting out or even mid-sized, is that people buy stories, true stories. But people want to hear who you are and why you exist. I think every investor manager, whether you're fundamental or quantitative, you have a story about how you developed your views on the market. How you developed a view on a market. You don't need to talk about a trade, you don't need to talk about specific entry points. But how you developed a view on a market? It was successful. That's an interesting story. When we talk about merge, we'll talk about individual deals. What's the deal with closed? I gave an example of this UK industrial company and how we were overweight because we acquired predictive competing bid. To some people, that's pretty interesting. How do you identify this? How do you forecast it ahead of time? I think telling that story, that's part of our brand. We use data and technology to make what we think are interesting vets. The reward is having strong returns. I think that to extend your afraid of telling your story, because you think you're going to reveal something to the market that may hinder your ability to generate returns going forward, that might be challenging. The worst thing that can happen is that you walk into a room and you meet with an allocator and they have 30 minutes, maybe an hour, maybe 90 minutes to talk of you. That period of time, in that conversation, they might retain, if you're lucky, 20% of what you said. More likely, like 10% of what you said. If you don't talk to that person again for another three months, in that three month period, they might retain 2% of what you said the first time. Now the only touch points are our meeting number one and meeting number two How long do you think is gonna take you to get an allocation for them to understand? 50% of more what you said That's gonna be almost an impossible process and I think that's historically how people have gone about raising capital And the best of managed space and particularly henchman space is having these one-on-one conversations where people retain 2% of the whatever you set to them from meeting to meeting and you expect them to Come up with the conviction to make an allocation The brand helps to bridge the gap the brand helps that that 10% that you articulate the 10% that it retained in the first meeting Couple with strong branding branding is a white paper branding is going on a podcast branding is Demo like my social media Impose branding is having a blog. That's what that 10% that you share in the first meeting supported by strong brand That's your your your your feeding out in the marketplace consistently helps to Jumpstart that next allocation next the next interaction so that 10% becomes 20% that 20% becomes 40% Now they have a little bit of conviction not they can make an allocation a lot quicker than kind of historical one meeting two meetings Let's figure out where it goes and so you'd say most managers they don't focus at all on The brand the story and I imagine yeah, I'm even just thinking right now you're a meeting in one month and I Guess booked for three months down the road I guess if you're telling that story and if you're publishing white papers and showing a process and and how you You know some some bets you made and how the the process behind those and how you made money I guess I'm just thinking you can send that to the allocator and and they read it because they're passionate about this stuff and and they and they enjoy it Yeah So that's what what most managers do And I guess what are the? When you're meeting the allocators What are some of the small things that are important to do to? Make them I guess retain more make them feel a certain way I guess it's broadly about how to raise money and do it well What does that look like for a mid-sized quant fund? Yeah, I think a lot of people Use buzzwords and I'm gonna start off what you shouldn't do don't say words like uncorrelated over and over again Don't say words I diversification all over and over again. Don't say words like Yeah, I'm talking this words all these buzzer AI. Don't don't trip all these words that everybody uses because ever you hear these words that everybody uses if I'm an allocator and I hear the words oh This other guy said it's not saying words. He's five times as large as the other this person I'm talking to There were times about the same. I'm gonna allocate to this other guy because he's bigger What I think folks should do is? tell stories Story stick stories have this emotional connection borrow from the world of Coca-Cola people buy Coca-Cola and they think of this brand because when I'm on the beach I want to have this sweaty glass and I want to sit next to my loved ones and join my Coca-Cola Right, I want to have that feeling Tell a story that evokes an emotional connection Tell a story that when they go when the person you meet goes in front of their colleagues They can recite that story much quicker than talking about uncorrelated structure your returns versus all the asset classes blah blah blah blah The story something I resonate stories some that stick stories of something that people remember Yeah, I mean, I imagine going from the allocator and saying Equities that orb AI alternative data all in the span of two sentences is Not exactly a recipe for success the worst word is quantum mental Sorry, the quantum. What's so bad about the word quantum? What does it mean? What is it mean? What is it? I appreciate that people will use quantum mental that word I'm not quite sure what that means and how that's differentiated anyway, but people use these type of words, right? Yeah, I don't mean to sound too provocative. It's like, you know, the the white washing of AI Across everything. That's because you use chat GBT That's not an AI system. I mean, yeah, chat GBT is a large language model. That is AI But what does that mean to your investment process? I'm using chat GBT to help you Look at a research report quicker in afternoon. Okay, great. That doesn't make you different anybody else everybody does that how is that? Added to your portfolio construction process. How is it additive to help you generate more alpha? That's the story and I can think of a story how Perhaps using large language models allows you to leverage or access 10 times amount of information than previous times. Okay, that's interesting Now tell the story around how that enables you to identify security or not Increase or decrease exposure or not. I think the case studies and stories of things that people remember and so at verse Where you say the way you tell the stories is through the case studies is through the the you know on a podcast and Being as serious about that part of your process as you are about Making money and generating returns. Yes Absolutely and I think Both are important You know, we we we we're very very serious about serving the needs of our clients and preserving capital a lot of our clients are You know public pet your plans and their constituents and and the folks invest in and those type of instruments. So it's important to us On the managing capital front But how we grow as a firm and and become a successful business It's really contention upon being able to race capital and it's very competitive and and I think the nuance Of how one is successful on a capital raising in front You have to pay attention to how you perceived the brand um And how that ultimately lends leads to potential allocators getting comfortable enough With you and your institution to write you a check. That's a hard process in a world that's extremely competitive What are some of the specific things you do to take the capital raising process super seriously because I think with managing money um I'm not saying it's simple. I straightforward, but it's very easy to conjure up an image of what that looks like It's the research process. It's the execution. There are all these different levers. It's the The data, you know cleaning that and and so I think taking that part seriously It's very easy to conjure up an image of of what that looks like. Yeah, but taking capital raising seriously I mean just in my head Maybe you can have some tracker is maybe you can Hey Siri give me a reminder to shoot this allocator an email and ask him how he's doing. Yeah What does that look like? I guess What's the magic in that process? Yeah, so it's a systematic shop. I think we fundamentally believe on on systematic processes and and You gave the if I described this this how our our event has been portfolio and you know it starts with an idea So a problem that we're seeking to solve then we're curating data We're identifying features in the data That we're building Forkast models based on those features I don't see how that's much different than raising capital, right? So there's a problem we're trying to solve so in the case where we're on the podcast Initially you you asked asked about kind of how do we go about Sourcing capital from multi-managers and magic account platforms. No, that's a problem That we're seeking to solve Now there's a data set Who are the multi-strategy firms that are allocating? How do they think about allocating? What type of strategies do they allocate to? What are the things they care about? You ask the question around How does a multi-strike get comfortable? They care about Exposures existing exposures how you complement and understanding factors so on this and that's data right Then you understand features of that data. So some of the features of that data is how we Question ultimately what they're what a lot of folks are trying to ask. How do you complement what they already have? Evercries to do some a little bit of research on the standing kind of The fact the sort of factors we talked about factors these common exposures. How are different those common exposures And that we develop an approach the forecast model would be an approach now How do we go about developing a message and a plan that addresses? That problem that we're seeking to ask identifies the features and packages the messaging is such a way That resonates well with that demographic those are the forecast models. That's a process right and I don't think of that I think we as a firm. We don't think of that much differently than how we go about generating returns in the markets is Finding a problem identifying a problem getting data looking at features of the data building a forecast and Excusing based on those forecasts Not going to hit everyone, but that's that's a general idea of that makes sense and so Let's say You have the problem right here is the we want to raise money for this particular strategy you look at the data Here are the allocators we can target. Okay as an example millennium right just for hypothetical or Sean felt or point 72 right you're looking at the multi-matter shops and then it'll maybe a couple pension funds, a couple of fund of funds. When you want to zero in on a specific fund, and so this is, I guess, forecast, right, you want to understand this, how you can extract insight from this particularly data set. In this case, how to figure out how to target a specific fund. What does your research process look like? Example, millennium, top multi-manager, what are you thinking about? How do you think about what's in it for them? Yeah. I don't know millennium that well, so it's weird, but let's just talk about hypothetical. I think there's a few different pieces of data that you need coming into it, right? One data point is, what's your entry? How do you have an access to multi-manage? How do you access them? Who's the person that you want to contact? How? Exactly. How do you go about that? How? Who was the person, right? Or the people? The other data point you need to really understand is, what is the evaluation process? Is there one person that ultimately decide, is it done on committee? Is it a collection of different disparate groups around the world that are all working together? What's the process by which you're trying to figure out whether or not they want to allocate? The other data point you want to sort out is, what's the quantitative review look like? And everybody has their own separate quantitative review. I'm just giving a few different data points. So these are things that you want to understand. I don't think there is one formula that fits across all platforms, but there are some similarities. I think that's generally speaking is part of that. I think there is a, from those similarities, you can develop a general messaging that might would apply across 80% of kind of the conversations you might have across these platforms. But I think a true differentiator is understanding the unique attributes of each platform and where you fit within that. Now most folks are going to say, no, most folks are going to say, you know, this is not right for going out and fit for us. That's okay. What I was describing kind of in the branding and developing a voice and kind of what I'm describing in this systematic process, identifying a problem and looking at data is evoking a positive or negative response. And I, that's critical. Like having someone feel good or bad about you, I think that's, you want that. What is the worst response throughout this entire process? It's apathy. Somebody who says, I'll just keep on watching for a while. That's not the outcome you want. You want to somebody say, yeah, this is great. You want more people say this great. But you also want people to have, you know, I don't know. It's not for us. That, that, that, that a gray area in the middle is a disaster, particularly for like smaller and emerging managers. This is a disaster being that gray area. Gray areas of disaster. You want them to love you or hate you, I guess. I don't know if they really hate a hedge fund product. Yeah. But you want to vote for emotional response. So people don't love Coke and some people love Pepsi. Yeah. You want that. You want somebody to feel something about you. Apathy is just the kiss of death. Yeah. And then the way you get there is by understanding, hopefully they love you. The way you find out that is by figuring out the attributes of each particular funder allocator. I guess two questions loaded into one. How do you, first off, what is the, call it general similarities that all multi-managers have? How should one approach the general multi-strat multi-manager hedge fund? And then I guess extended from that, how do you figure out the, you know, the specific attributes? Yeah. I'm saying a lot of multi-managers have asked me to join them a very strong in terms of kind of the understanding of risk, like quantifying risk, understanding risk, and understanding how blend and risk together to achieve a pretty compelling return stream. So they, they think at their core, a lot of multi-managers understand that, I think. So speaking to them in that language, understanding what risk you present and what a return characteristic of sociality, that risk is critical. Don't remember the second half of your question though. No worries, no worries. I'll ask it again. And my bad for loading two into one. How do you figure out the specific attributes or traits for each multi-manager? Do you talk to people curious? Yeah, yeah. So I think that's where the research comes in. I think having conversations, perhaps the right conversation with the multi-manager itself, that's initial conversation. Conversations with, yeah, cap and show. We lean very heavily on cap and show. And various kind of parties understand that dynamic. And some, some folks, some multi-managers really articulate themselves well in the marketplace in terms of what they're looking for and how, what they're looking for from the perspective of how the clients, how they, how they portray themselves at their clients. What sort of stuff are you reading? Like, what, yeah, stuff they put out, stuff they put out, how they present to a public pension plan before. If they presented a public-principle plan, was a consultant write-up about the strategy itself. Was a presentation that's available in the public domain. Sometimes there is sometimes there's. But I think that's key component, just understanding that pit, to extent that they've done a good job with their branding. And they have white papers or blogs that they put out. And they have a decent presence on social media where that's Twitter or LinkedIn. I think all these bits of information are useful in developing kind of that message to that multi-manager. You mentioned looking at, if they've presented to a public pension plan as low-hanging fruit, is there any other stuff that's low-hanging fruit that you went approaching multi-managers? This is the first stuff we go for. This is bang, bang, bang, we target this. Yeah. So I think the low-hanging fruit is on a Sunday universe, which maybe is not as transparent as growing and as evolving. So on a setting, the nuances of how do you define a multi-manager. So we talked about this fund of fund versus multi-strategy firm, multi-manager versus a magic out platform. That universe is growing in as large. So, lowering fruit is understanding who the folks that think of themselves in this way. And how can you assess? Who are the people that are open to external allocations? That's pretty low-hanging fruit. You've been actually have conversations with them and understand that. Most are now, it seems that way. It's certainly trending in that direction. You mentioned trouble-around returns, but I think you can do some work understanding the return stream of these funds. That's very hard to find. Some a little more secret than others, but a lot of them do publish to databases. They accentuate access to those databases. On a set of returns, on a set of returns, the returns of your strategy compare and how my complement at the overall portfolio level. I think those are the simple things that one can do. More broadly about the industry. Wire SMA is becoming so popular. Wire external allocations becoming so popular. I see it in the news all the time. What's the context? I feel like people always want to say this time is different. I don't think this time is much different. Mark Twain's history doesn't repeat itself, but it rhymes a little bit. I'm dating myself, but I remember pre-crisis that separately manage accounts or quite popular. I worked at a previous shop in Veskor. We had a large fund of fund platform, big portion of our fund of funds were managed to separately manage accounts. We wrote lots of white papers on the benefits of using separately manage accounts. Perhaps they went out of bold a little bit. Post-global financial crisis, hedge fund allocations came down a bit. I think the general idea of separately manage accounts isn't new. I think the way that folks are going about implementing them, using them is different. Historically, several magic accounts would be I'm a large pension plan. I have a large allocation. I would like my own separately because it's large. Perhaps there are some terms associated with this vehicle, perhaps there's some liquidity, whatever the case may be, the special terms. That's historically designed to be to bespoke vehicles for institutions. Now I think this is where you go on with the question is there are separately manage accounts that happen in that space. And increasing in there are separately manage accounts that are housed within existing investment managers. I think in the multi-strategy space, and it's been well documented, this warfare talent, there seems to be increased competition. As our competition has increased over time, I think finding unique strategies has been more challenging. So I think a lot of multi-strats and some fund of funds are opening themselves up to allocating externally to other managers in a way that feels very familiar in a way that feels like an allocation to make to a pod by using these separately-magic count vehicles. I think that's what's different. Kind of the use of it. I don't know the structure itself is new at all. I think it's just a continuation or evolution of kind of on a path that we've been all for a long time. Yes and I guess to go deeper into this story why is it now specifically the multi-strat funds that are I guess doing this sort of thing when before it was different group of investors? I suspect it goes back to where we have anecdotally just getting access to talent. The multi-strats have done a great job on their branding. They've done a decent job on their sales. They've raised a fair amount of capital. The capital they raised they've been able to do, you know, generally speaking, done a good job of generating positive returns. So they're grown. As they've grown and a number of them have grown, finding areas to deploy that capital has been come hard. If you're going out and trying to find folks that are spinning out of banks or other hedge funds, that increasingly becomes harder and harder to do. When there are, you know, small and mid-sized funds that perhaps have been running strategies. Maybe they haven't done a great job on their branding and marketing. They haven't been able to grow as much as the multi-strats have. But they still offer compelling return streams and really interesting risk characteristics. Why not allocate to those things by my way of a separate magic count and maintain some of the control, the structure and control and transparency that you have with your other parts. I think it's just a natural growth of the business and growth of that space for that to occur. What makes the multi-strat fund special in that they're able to do this. Clearly they're allocating to firms that are smaller, smaller, mid-sized funds who theoretically could raise the same amount of money from the LPs of the multi-managers. But the multi-managers because their brands are so good because they've built such, you know, businesses with an insane moat with all these different sources of alpha all mostly uncorrelated. Obviously there's some debate around that. How are they able to do it? It seems ridiculous that these funds can get so big, gobble up all the talent. Pay managers hundreds of millions of dollars a year. Why? How? So that I don't know. No, I can guess. You know, so I don't know how their their compensation structure I can't I can't apply it on. No, no. And by the way, like the hundreds of millions is just from like, you know, yeah, not that. That's just public domain stuff. Yeah. I am a podcaster. I am. Yeah. So I just so I yeah. I and they're not paying us that certainly. So I don't know of kind of that aspect of it. I think where they've been successful is. If I'm an allocator and I have limited resources and you know, I'm a pension plan. I have a team of 20 people. I have like four or five people covering hedge funds. In addition to the hedge fund responsibilities are also coming covering long only equities and maybe they're doing another asset class. So limited hours in a day. If I want to get some. An exposure to something that's different than my fixed income, maybe credit. And I want it to be liquid. These things. So hedge funds are pretty interesting. I could build my own hedge fund portfolio, bespoke of individual managers and evaluating 10 long short managers, 10 credit managers, 10 fix some folks on a full worth. That requires hundreds of man hours and you know, and I'm not saying that folks are not doing that they clearly are. If I can find a solution that provides me diversified exposure costs and other different asset classes and strategies gives me return stream that's compelling and differentiated from those things I have in my portfolio. It's reasonably liquid that's changing clearly, but historically kind of liquid list more liquid than say private equity. I like that. If that manager has been a long round a long time and they have an institutional infrastructure and institutional client base. That's a pretty compelling argument that I can make in front of my investment committee, my board. I can see why folks allocate to them and it makes sense. If I'm a single strategy hedge fund. And you know, say I'm long short credit and that's all I do. It's as hard as sell. Naturally, because you're just not as diversifying. You have to find folks that are looking for that sort of exposure. If somebody's looking for a diversified hedge fund exposure, which a lot of people are having a kind of core allocation to multi strat that gives you there are couple multi strats that gives you that and then spotting bespoke solutions here and there. I think that's approach a lot of investors have taken. And again, this is not necessary new. I think, you know, back in the early 2000s, the fund funds play that role. So people had allocations to kind of large fund of funds that give you diversified exposure. That's changed a bit. And where that diversified exposure today is coming from the multi strats, but it was similar. Right. The mechanisms are different and the execution was a lot different, but it was similar in terms of from the allocators perspective, having this core diversifying exposure to liquid alternative hedge funds and doing things around the side. I think there's also a lot of talk and I think about this a lot of how well the multi strat multi manager businesses are run. I think you mentioned the general way to package a product and the general things they look for is they have a very strong understanding of the risk profile and how each individual individual strategy can fit into the broader portfolio. And I think, you know, I've attended a can of different talk once when I was when I was studying in London. He says the same thing in every talk talks about recruiting the most talented people and then it's so that all they try to do that. And I think that these businesses, these CEOs. In terms of understanding the asset management game and building businesses with extremely strong modes that are resilient. They're unmatched. Not speculating, but just from what you've seen what makes a great hedge fund operator manager. What would you bucket the skill sets into and what do you think? You know, if you can or if you don't know that that's fun too as well. What do you think makes these businesses robust and profitable? Yeah. I'm going to go back to this branding thing. The fact that you mentioned you went to Ken Griffin, you've seen him speak a couple times. He says the same thing open over again and you actually remember that? That's great. Right. That's actually a vocabum motion and it makes something going back to that. Some of like Ken Griffin, I don't know him at all, but he has a very strong brand. And he has this message in this message. If you like him, you tell that story. Just like you told me that like, like you said, the story. You're not the first person that's told me this story. Right. So I've heard this story over again. That's powerful. I think that's key to make your business resilient. Going back to this branding mechanism. I think managing people, that's both art and science. And when you have these large, disparate organizations that are today or global, the managers impose all around the world. Being able to manage that in a thoughtful way in having the technology infrastructure to do that in a cohesive way is important. Getting execution without getting the words, getting the weeds of this. I think these, a lot of the multi-strats have done a phenomenal job of managing their trades, executing trades and financing and developing relationships with their counterparties that are favorable to their clients. I think that's done a great job. And in result, we talked about risk and exposures. I think they've done a great job of managing risk and exposures over time. And it's been quite resilient. They've been tested across a number of different crisis type periods. And they've generally proven to be quite added to people's portfolios. I think I read an article recently from 2008, or as it was someone talking about an article from 2008 that enlisted Citadel as one of the hedge funds most likely to collapse during the Great Financial Crisis. And Ken Griffin talks about this. What makes an asset-managered business, a hedge fund business robust? And I asked that question with the context of knowing that it's not just about returns. I think AQR before called this year, last year, didn't have the easiest group of years. They weren't performing. And yet, as a business, the robust, they've held strong. What are the things that make a moti hedge fund business? Yeah. So I think, my folks invest in the hedge fund is to buy stream returns and some protection on their capital. And hopefully that stream returns at the birth of buying. I think making sure that you articulate what that stream returns is, being brutally honest about kind of the risk you're assuming and really having an open dialogue with your underlying investor base about what you do. So real quick, what happens if you're not honest? So yeah, there might be a temptation for a fund manager to pitch to an allocator and say, you know, our stream of returns. Here's how we make it, but then they make it in a different way. What happens in that case? So that's what I was getting at. So I think that's very dangerous. So I think during those periods of uncertainty that every strategy will go through inevitably, it is not clear to the investor why the portfolio is behaving the way it is. That's a reason to pull your capital, right? And I think most investors understand market variance, understand cycles. But if you've articulated that I'm going to do well, there are periods of heightened dispersion and there's a period of heightened dispersion and you tank, that's going to be challenging for investors to understand why that might be the case, right? So I think those type of conversations around really articulating how you, what are your exposures, how you generate returns, what are the risk you're assuming is helpful to make them understand kind of what you might not do well. So in the strategy that will do well, then periods of heightened dispersion, if there's an extended period of no dispersion at all, and you're not performing well, I think an investor can understand that as long as you do well or do somewhat well during those periods of increased dispersion. Not inverse of true people are going to be upset. Rightfully so, rightfully so. And so would you say that building a successful hedge fund is just as much about communicating very, very clearly with your investors and making sure that your capital base is robust as it is focusing on returns? 100%. Yeah. So that's what I was, you know, when I talked about, as I was looting to with regards to this raising capital, retaining capital, the same as raising capital, but that this capital preservation and raising capital is probably the hardest and most important part of the business, that's what I was looting to. When I was talking about the brand and how people feel in emotion, native folks, I was describing kind of that story. There's a story around how you generate returns. There's a story that a true story, not a novel we're talking about, like a documentary about your process, a story that you're articulating, that should be a party of voice that shouldn't be left for the investor to conjure on it on his own. There should be something that you're articulating and that they understand will help you through those more challenging periods. Because the story is true. The story will resonate. The story will have these paths and peaks and valleys. That's going to happen. Articulate that. That's part of your brand. Last question. We've talked about a lot from, you started talking about the allocation you got from a multi-manager, raising 500 million. Talked about what makes a hedge fund business robust. Also talked a bit about your driven strategy, which you raised money for. You're very unique in that you're a partner to quant fund, but your focus is much more so on capital raising, less so on research. I think you see things from a very different angle. If there's a manager watching right now, maybe they're doing something as well, maybe they're not. But what is the number one mistake that you see managers make over and over again can be with regards to strategy, can be with regards to raising money, can be with regards to retaining money. One thing. What is it? I think what I observation of some managers is trying to conform to some mean. So trying to be articulate yourself like everybody else. When I was getting at using these Bud word, it was like correlation or AI. Doing the thing that everybody else is doing in order to kind of fit in the box is a problem. Because again, from the allocators perspective, if they hear that and you're in the box with everybody else, it's going to allocate to the guy who they've known for the last 20 years and not to you. Because you sound just like the guy known for 20 years. Now, if you sound a little different than the other guy and your returns are better. All right, that's interesting story. If you sound the same and your returns are a little better than, no, I'm not going to take that gamble. I love that. Seller differentiated product. You just make money. Maybe. Thank you so much for coming on the podcast. Thanks. Thanks for having me. This was awesome. Yeah.