Speaker 1Capital Allocators is brought to you by AlphaSense. Here's something for you. Most AI tools today are very good at sounding right. But can you actually trace it back to a filing, transcript, or specific passage that drove the answer? Or are you just trusting the confidence of the output? For allocators, that's not a minor concern. A missed filing, incorrect source, or context that gets lost somewhere in a retrieval chain aren't edge cases. They're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content. Over 500 million curated documents from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer can link back. Back to an exact, verifiable source. Because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Try a free trial at alpha-sense.com slash capital. That's alpha-sense.com with a hyphen in the middle slash capital. Capital Allocators is also brought to you by Morningstar. In a sea of data, you need to know. What you can trust. Morningstar's data, analytics, and research helps bring clarity across public and private markets. Connecting independent research and data into the tools and AI platforms you use every day. So insights are easier to spot and act on. Morningstar. Nothing in your way. Visit morningstar.com slash game on to learn more. I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Dr. Ashby Monk, the Executive and Research Director of the Stanford University Global Project Center. Ashby is also the Senior Research Associate at the University of Oxford, a Senior Advisor to the Chief Investment Officer of the University of California, and the co-founder of Long Game. Ash advises sovereign wealth funds and large pension funds, and is involved with a bunch of fintech companies, all of which attempt to create innovative solutions to fixing the financial picture for individuals, pensions, and countries in the years ahead. Our conversation starts with Ash's early work experience and path through academia, and flows into an exploration of next-generation, lower-cost approaches to active management for large asset owners. We touch on investing in public equity, private equity, venture capital, and hedge funds, using examples from the Canadian and Australian pensions, New Zealand Superfund, and University of California Endowment. Lastly, we discuss Long Game, an innovative company seeking to improve personal savings in the United States. Ash is a passion-driven, creative thinker who rightfully has the ear of some of the most important pools of capital in the world. His ideas will change the way you think about allocating capital, and what you're willing to do to make the most of it. Please enjoy my conversation with Ashby Monk. Ashby, thanks for joining me.
Speaker 2Well, thank you for having me. It's a pleasure to be here.
Speaker 1Why don't you take us through your background?
Speaker 2My background is a non-traditional path to end up being whatever it is I am today. I guess the way I might start, do you want the two-minute version or the five-minute version? Let's go for the four-and-three-quarter-minute version. Four-and-three-quarter, okay. So it's two-minute. It starts in the country called Canada, in the town of Edmonton. That's where I was born. My dad was in university at University of Alberta, as was my mom. I was born in Edmonton. And that was 1976 in September. And in 1980, my— Happy birthday. Yep. Just crossed my 41st year, which is interesting. The difference between being in your 30s and 20s when your wife buys you sneakers in your 30s and 20s, she buys you running shoes. And at age 41, I received a pair of walking shoes. It literally says walking on the tongue of my new shoes for my 41st birthday. So that was a bit of an eyebrow raise. No, but so 1980, my dad was working at Hewlett-Packard and was invited down to Silicon Valley for a two-year tour of duty. He had sold, I believe, the first— Supercomputer in Canada to the University of Alberta from HP. And they said, young man, it's time to come down to the HQ and see what we're really working on. And he never left. So they still live in the Bay Area 30-plus years later. And so I grew up being a foreigner, a Canadian in America. And then I became an American, I think, at age 18. And then I went off to Princeton. And it was at Princeton that I often describe it, that I majored in— In rowing and minored in economics. And so after Princeton, like all good economics undergrads, I was presented with the two paths that are available, as far as I knew, consulting and banking. And I chose banking. And I went off to Wall Street to do two years of investment banking and then another stint as a financial services venture capitalist, focusing on what we called back then internet finance. What we might call today fintech. And we were also playing around with offshore financial centers and the ability to set up reinsurance companies in places like Bermuda and understanding, you know, how you can generate higher return and not have it taxed in these offshore environments. And it can kind of change the dynamics of a reinsurance company. Anyway, all of that kind of came together to inspire me to understand more and in greater detail the financial services industry. I can't say that I was like, inspired by what I found within the bowels of the financial services industry. How did you go about that? Well, I mean, just the process of, first of all, being an investment banker and learning what it meant to do transactions was not what I thought it meant. I truly did believe that we were at the center of this important institution that was allocating capital between, you know, asset owners and projects. It was much more self-serving than that. And then when I moved over to venture capital, which was, my hope that, you know, this would be much more aligned with long-term value creation, even there, because I was doing financial services venture capital, the focus was as much on fee streams and transactions and extracting rents wherever possible. And so none of that kind of felt like it matched with the idealistic visions I had for the financial services industry graduating from college. And then so after, I don't know, three and a half, four years, I quit. And there was a couple reasons I quit. One was 9-11 happened. My wife was in the towers. She's fine. But she was down there. And she was one of those dust-covered people that you saw on TV. That was her. She had to hide in a parking garage. So there was a stint on that day where I wasn't quite sure if she was alive. I don't want to oversell it. But it was a big enough moment in our lives that when we kind of reunited that day, we were like, what are we doing? We're working 100 hours a day. We're in our early 20s. We don't love what we're doing. And so we both kind of looked at each other and we're like, let's quit and let's go to Europe. And so we did. And so I was racing bicycles at the time. I had been a rower in college, so I understood how to suffer. But cycling was a whole different level of suffering. And so I went and joined an amateur team in Paris and traveled around Europe and raced. Well, my wife, who was still my girlfriend at the time, we had met at Princeton. She taught English at Université de Paris 5, I think, which is Assas. And just kind of lived a dream there for a little while. And then we both got into the Sorbonne to do a master's in international economics. We were the only two Americans in a program of 800 because you had to speak French. And that was around the time that we were invading Iraq. So it was quite an interesting time to be an American in a French university. With no other Americans. So I'm just rambling here, man. So if you want to just jump in, yeah, keep going. Go for it. All right. This is almost up to four minutes, though. So Paris, master's in international economics. I kind of got the bug for academia again. Then we went to Oxford. So my wife got in to do a doctorate, an MPhil and then a doctorate in economics. I went to go do a doctorate in economic geography with a guy named Gordon Clark. What is economics? Geography. It's a multi method approach to understanding economic activity that builds theory from the bottom up instead of the top down. And rather than viewing the world through a lens of kind of a top down theoretical model or methodology, we kind of build our understanding of the economic environment and economic systems through big data, but also through interviews. through case studies, I mean, I guess what I had kind of lost the love of was you know we we built these models and these um theoretical constructs that on the surface seem much more elegant and robust than anything we would be doing if we were doing case studies the problem is the assumptions that went into those models were just as suspect as the selection bias that might be in a case study so rational actors and efficient markets i mean i think sitting here today 2017 i think we'd all obviously agree that that's crazy because we are all crazy so we're not rational and and at the time like i didn't want to spend five years doing a doctorate basically embedded in that world i went from there to the center for retirement research at boston college where i was a fellow it's actually a joint fellow program between oxford and boston college and my project there was on now in the u.s in particular oh my god like we are in trouble in terms of our retirement security and with the population aging and and the medical science only getting better and so we're all going to live to 150 years old in 100 years so we are in big trouble and it's really in some people debate with me on this but it's really a funding problem we got to get more money going into these programs and what i learned at boston college is that here in the u.s we don't have a political will to create a mandate like we have in australia and we don't have a political will to create a kind of crown corporation model of pension investment management like we have in canada and so we create these various iterations of defined contribution pension plans that are the equivalent of if we took the parallel into the medical industry it would be like saying here's web md go diagnose yourself and here's the medicine cabinet that you can pull out of and and treat yourself and oh by the way web md is filled with a bunch of baloney it's not just good medical advice it's also snake oil it's also you know tons of things in there that don't make any sense that people are doing day in and day out
Speaker 1so how is it different in australia or canada how is it set up differently and and why can't the u.s evolve in that direction well i
Speaker 2think canada is a little difference because different because they trust their government and so that that creates a different relationship between the crown corporations the people and the government the
Speaker 1crown corporations are
Speaker 2their arms length entities set up by the crown but they run their own budgets they have independent boards kind of the the boards can be sacked but in some cases they're double arms length board where you nominate a nominating committee and that nominating committee picks from a set of standard boards of directors and then that those boards of directors have the right to set the resourcing for the entire organization internal and external including comp and are those the
Speaker 1what we think of as the big pension plans oh
Speaker 2yeah up there oh sorry yeah so the crown corpse it's a it's like a legal structure that has allowed the canadian model to exist because it's quasi private so the boards of directors of these public entities can set comp in such a way that they can recruit and retain very high quality people and the reason they do that is they've done this massive analysis of the fees and costs paid to external managers and they've well listen what if we did this ourselves and stomached the political damage of paying public employees seven million dollars a year i mean we're okay paying football coaches seven million dollars a year in this country that are public but we're not okay paying a chief investment officer that much that's a sacrilege and how about australia australia they did the this incredible mandate that all individuals have to contribute it's going towards 12 percent and it may even go higher than that now that i think of it of their income into a super fund the super funds so already you're getting enough money into the in the door that's important beyond that they also are professionally managed and increasingly professionally managed as you're seeing consolidation among the super funds and so you get this really nice mix of the individuals are putting enough money in and the assets are being managed in a way that it has to be called professional like when you look at australian super or first state super or c bus these are top-notch organizations that are really setting the standard i'd almost say globally for what the next generation of retirement organizations will look like like i think here in the u.s we have a ton to learn from australian
Speaker 1super and how do they organize their teams and manage the money because the active passive debate is so pervasive in the u.s and those are huge pools of money so how do they go about you know organizing presumably it's actively managed they're internally managed right yeah so
Speaker 2there there is active management like if we take the case of australian super and full disclosure i am a consultant to australian super but the organization manages an internal public equities team they manage an internal infrastructure team an internal real estate team i think there's fixed income securities that are now coming online they've set up an office in london there's another global office that's going somewhere that i don't think is public yet and they're going to be so they are building a professional team and what you're going to is where do you choose active and where do you choose passive if you're building this internal fund and the answer to that is where do you have an edge and and i think that is increasingly the question most pension funds are asking themselves is it's not like how do we get access to the best managers it's what is it that's unique about us that could facilitate privileged access either to assets or managers so if i take the example of the university of california where again full disclosure i'm a senior advisor we have this 10 campuses we have five of the biggest hospitals in the world we have three national labs there's 10 billion in r&d it turns out that external managers are fascinated by this ecosystem and so we can go out to external managers and say listen we'll partner with you and we're going to add value in a way that you can't even understand today and over the last three years of watching jagdeep bashir and his team have been doing a lot of work on this and i think we're going to have a lot of value in this and we're going to have a lot of value in this and i think implement on that i can tell you that works like they're getting into managers on terms that i would describe as aligned and i never would have imagined we could actually do it i mean in theory i loved the idea but in practice and is
Speaker 1there is there a specific example you could think of where jd and his team brought some resources to bear that probably nobody else could have
Speaker 2i mean we're constantly tapping the energy labs for insight of energy laboratories within the uc ecosystem to be able to assess and understand opportunities and deal flow we are tapping the medical science communities for understanding you know the future of gene editing and things like that but even beyond like those let's call that research and due diligence and understanding the market we partnered with bow capital which is in effect the the entity that is uc ventures and that's a guy named vivek ranadive that's running that we partnered with them and we brought the deal flow that is privileged to the university of california to the partnership and so the idea was specifically to say listen everybody's chasing the top venture funds they're hat in hand walking sandhill road like we have all these companies that are coming out of our ecosystem that are being funded by those sandhill investors so we could anchor a new fund and take the rights that we have to participate in those deals and endow this new venture fund with those rights and immediately put that venture fund on the map as a key player in the valley and so that was what we yeah and it was the concept
Speaker 1broad based or meaning there's a lot of deal flow are you trying to be the best venture capitalist or is it hey let's just do a pseudo index of the opportunities that we have and we think that's going to work out really well because of
Speaker 2the access so my what i wanted to do and what happened is a little different so what happened was it's a combination of what you just just described that's what is happening where there's a great entrepreneur who built a company called tibco sold it for many billions of dollars he's recruited this guy who was an early hire at facebook and google and he's building what looks like a very experienced entrepreneurial team to help scale businesses and then they have privileged access to all these deals in the ecosystem if i was going to do it my way i might have designed it like this where we were creating seed funds on each campus those seed funds would then collect rights to deals and at the same time we would collect rights to deals out of the ip office at the university of california those are separate entities in each campus but what i would then do is assign those rights to a broader fund and when a predetermined venture fund of repute does a deal in those we would swoop in and say hi everybody we're the university of california don't bother us, but we're just going to take our 10% pro rata share in this deal. So somebody else's stamp of approval. Sequoia, whatever, is doing the deal. And then literally, we could create a top decile venture portfolio at next to no cost. And to me, that was this deliciously appealing fund structure. But weirdly, the governance kind of prevented us from going down that path exactly. But I think we got close.
Speaker 1So when you're working with, you know, it doesn't matter, California, Australia, how do you think about fees these days? You know, you talked about alignment and everyone's talking about it. But what can people actually do? People are so sick of me talking about fees.
Speaker 2But this is my chance, right, to tell people why the hell I'm on the soapbox. So I spent 10 years trying to figure out how do we change the behavior of the big asset owners? And why did I want to do that? Well, first and foremost, I think the financial services industry is capturing too much value. It's distorting incentives. We have this increasingly short horizon of investment. Despite the fact that we have $100 trillion in long term capital, we have an asset management industry and financial services industry that's capturing about 40% of all after tax corporate profit in America. It's egregious. Even the research shows us that we may now have a 10x fold increase in trading activity from the 1960s. But our financial services industry is less efficient today than it was 100 years ago. The unit cost. The unit cost of intermediation is higher today than it was 100 years ago in the era of steel, automobiles, railroad. And another research paper shows that as your financial services industry gets bloated, your productivity and growth begin to wane because that industry becomes a tax. Well, we're at 40% of corporate profits. Like, it's time for us to realize that the financial services industry is almost dominating the real economy. And it's meant to be the other way around. The financial services industry is meant to be subservient to. And so, I got into this project where I was like, okay, we need to find a way to level the playing field and ignite a new generation of asset owners that can be better stewards of the capital, but more than that, hold the asset management industry accountable and achieve alignment of interests. I didn't actually start with fees. I started by looking at sovereign wealth funds. My first book with Garden. Clark was on the rise of sovereign wealth funds. And we did that project because what seemed like out of nowhere, this class of investor emerged and became almost the most dominant, at least most talked about investor class in the newspapers. And I remember the first time I put the search term sovereign wealth fund into Google Scholar in 2007, zero. It might have been 2006, but literally zero paper. It's been written and that to be fair. Oh, to the fact that like a lot of these entities existed, but we didn't know what to call them. We called them permanent funds. We called them reserve funds. We called them stabilization funds. But then Andrew Rosenoff came along and was like, these are sovereign wealth funds and then didn't really define it kind of catalyzed us to begin thinking about these. But so my initial hypothesis was governments around the world are going to start setting these up. They're going to be big. And what an amazing opportunity to go in with a white sheet of paper and start building brand new investment organizations for the next millennia. And so I started working in the Middle East. I started working in Canada, AIMCO. I was becoming like close buddies with the New Zealand Superfund, all these places that I just found incredibly motivated and doing the right thing. The challenge is just as I saw sovereign wealth funds as the blank sheet of paper upon which we could sketch out the idealized institutional investment organization, the for-profit financial services industry saw them as lambs for slaughter. And so just as we now have the New Zealand Superfund, which just clocked 20% return this year, and I would argue is the single best investment organization on the asset owner side in the planet today, there were also the Libyan Investment Authority. There was also 1MDB in Malaysia. There was countless examples of almost borderline tragedy. Where the financial services industry clearly took advantage of these funds. Ireland being swindled on foreign ex fees by State Street. Goldman Sachs swindling Libya on a billion dollar derivative trade. I mean, we could go on and on, right?
Speaker 1And so if you circle back to New Zealand, what is the ideal model for the next millennium investment organization?
Speaker 2Well, so let me, I'm going to get to that, but let me finish you on the fees, the whole point of me telling the sovereign. Fund story was to say, why am I focusing on fees? Well, I focused on sovereign funds for five years and realized that I was not going to get the perfect role models out of there that we needed to change the pension sphere. And so then you're like, all right, well, if we're not going to get these new role models, then you begin to scratch your head and say, how are we going to catalyze change? How are we going to get the boards of directors of these organizations to change the way they invest? And yes, New Zealand, which we'll talk about in a second helps because they're generating such high performance with entirely new model. That is not purely passive and it is not purely driven by external managers. And so when I got to the fee and cost argument, I realized that if you could take the fees that were being paid to external managers and present them back to the board alongside the internal budgets that were being paid to staff, the inevitable question time and time again that came out of the mouths of the board members was, is there another way? Because the fees were so high. And what was even worse?
Speaker 1The fees were so high externally. Oh, yeah, externally.
Speaker 2Internally is a joke. Internally, it was a joke. I mean, here in New York, you had this private equity role of $90,000 a year with a requirement to live in the five boroughs to manage a $7 billion private equity portfolio. I mean, obviously, that's going to sit vacant for three years, which it did. But on the flip side, you're finding out that you're spending billions upon billions funding private equity managers. And you didn't even realize that. And so until you had a sense for what the true cost of producing those returns were, you actually didn't have a decision to either build it internally, make it or externalize it, buy it, you know, in the in the Williamson terms, make or buy. And so what the Canadians did is they got transparency around the fees and they said, all right, well, maybe we'll make these returns internally. In America, we're still about to have this fee moment. CalPERS is having it now. They realize they what was it, $4 billion in private equity carry was paid to GPs alone over a five year period. That's one line item of fees. And then, of course, they're going to say, maybe we should just give it all to BlackRock. I mean, I don't know if that's true. I don't have any inside information. But, yeah, I think the fee and cost issue, the reason why I go off on this constantly is because it is a way of improving the resourcing at the asset owners. It's not a way of shaming or shutting down the asset management industry. It's about catalyzing boards of directors and trustees and fiduciaries to think of their organization in the broader context of producing a return stream and then resourcing them appropriately.
Speaker 1So one of the tricky aspects of that, if you started in the endowment world, and even if you have what's considered a big team at an endowment, it's not a lot of people. And yet you're trying to create global diversification across asset classes. So it's hard to look at that. You might be able to develop pattern recognition to find great practitioners, but you're not going to be able to compete with great practitioners that are covering all these different areas around the world. So how has, you know, maybe we go to New Zealand, how have they changed that model so they can participate and compete in global markets?
Speaker 2Well, I think you'll find if you dig in there, a lot of the value add that it's generated over time has been based on three, four. Five big, high conviction bets for which they have spent an inordinate amount of time on and for which they are actively seeking to use their comparative advantages to get and to tilt the deck, tilt the table, whatever it is in their interest. So they're extremely good at strategic tilting.
Speaker 1And how broad are those bets? Are we talking about a country bet, a style bet or a security bet?
Speaker 2Well, so I don't know what I can. I don't speak to in the public domain, but I mean, you'll notice like they were holding all this Portuguese debt, which then they had trouble with because the Portuguese bank defaulted and then the insurance company didn't cover it. So they got a short straw on that. But like, truth be told, New Zealand did everything right and they'll probably get their 200 million back. But you'll see if you look at the structure of the deal, which is interesting because you can now go in and look at it. They were getting an exposure to kind of a unique banking asset in Portugal. And how did they source that? deal, you know, it probably came through a set of trusted intermediaries, but they owned it directly. And so I think that's part of it. I think part of- But for a big bet, so $200 million, how big is that pool? It's huge, right? Well, I mean, when they made that investment, it was probably $22 billion.
Speaker 1All right. So you're talking about a less than 1%.
Speaker 2Yeah. Yeah. Okay. But so like in my world, if you can have 100 positions, you are a highly concentrated fund. Like at UC, when we got there three years ago- I think this is all public, but we had about 340 fund relationships. And now Jagdeep and the team has whittled that down to something like 120. And it's about concentrating the bets, having higher conviction. And so I would push back on you on your question about how do you get global diversification? Who says you need it? Does Norway, who is basically a global index fund, they own 1% of the global stock market. Do they understand all of the underlying assets they own? Of course not. But Canada pension plan, do they understand it? Probably pretty deeply because they're just taking a different model. One is about active management and adding value and investing in liquids. And the other is investing in liquids and hoping to get broad diversification and just participate in the global growth. And by the way, global diversification through index funds is a fake diversification. Index funds and ETFs are often calculated on a cap weighted basis, which is a fundamentally flawed way to calculate indices. And frankly, it's even worse in the emerging markets where you have single or multiple companies making up a huge portion of the index. So it's not like you're getting an exposure that anybody would describe as representative of the underlying economy.
Speaker 1Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs. The ones that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com slash capital allocator. So a lot of what you're talking about with New Zealand, Canada, is just a different model from the traditional model, in this case, asset management and retirement systems. We were talking earlier about your interest in just financial disruption and innovation. I want to talk a little bit about some of the projects you're involved with more broadly. Oh, man. So few things.
Speaker 2I love to work on projects. I love to work on projects where we're bringing long-term investors around a kind of an investment thesis and then designing a new investment vehicle to facilitate some unique access point. I mean, I have this hypothesis with this notion that we could unlock so much capital for things that are societally beneficial if we simply change the way we intermediated between the capital and the project. So if you take this example of Aligned Intermediate. So Aligned Intermediate, which is what I would describe as a kind of a next generation deal sourcing, deal vetting platform for long-term investors, the whole idea was to say, actually, these long-term investors, they have deep pockets. They're interested in positioning their portfolios for an energy paradigm in the future that will have the energy inputs into the economy being more clean. Everybody kind of sees the writing on the wall, but they don't know how to get access to these assets. And when they look to the traditional, they don't know how to get access to these assets. And when they look to the traditional private equity funds or infrastructure funds to see if there are exciting products there, they don't see any because the fee structures are too high for the underlying assets. Those assets won't support a two and 20 structure. They just aren't built for that. And so when I was working with Jagdeep and New Zealand and a few others, we just came to realize that if we could design something from scratch where we could source deals on a no-fee basis. Almost build this as an extension of the long-term investment teams, we could begin to move a lot more capital into climate solutions, what we call climate infrastructure, wind, water, solar, et cetera. And because we were going to be moving this capital, which is purely commercial and seeking out the highest possible risk return, we could go to the philanthropists that had for mission to catalyze the clean energy capital market. And so weirdly, it was this really interesting syndicate of partners where we had these pension funds, fiduciary bound pension funds saying, I want to invest in those assets. I can't, but I see the potential for my portfolio to generate high returns with cash flow. And then we had the philanthropists who were saying, God, I would love to see these pension funds investing in these darn assets. We've been doing all these research projects, trying to figure out how to get that to happen. But all these pension plans shut the door on us when we walk in. And this entity. It was basically a way to say, philanthropists, stop funding research, fund a platform that we can build incredible talent within, and that talent will then bring deal flow to the long-term investors. And so that's what we did. We launched it a year ago. We've got six employees at the AI. And so who does the due diligence on the deals then? Well, right now, the fiduciary obligation remains with the pension plan. And so the scope of funds that we can work with, they have to have some in terms of
Speaker 1internal capability. But isn't that the problem in the U.S., that because of the $80,000 a year private equity guy, they don't have that capability?
Speaker 2Yeah. So we have one American plan. And it happens to be UC Regents. We have New Zealand Superfund. We have Welcome Trust. We have CBUS. We have WAFRA. I mean, we have like a bunch of OP Trust up north. But the reality is you need a little bit of an internal capability.
Speaker 1I want to talk about a couple of different kind of more traditional asset classes in the asset managers and what you think it looks like out a couple of years. So, you know, start with hedge funds, which on the one hand, we've never seen more fee scrutiny. And yet assets and hedge funds are all time high, north of $3 trillion. What's that puzzle? And what does it look like, you know, five or 10 years from now?
Speaker 2Yeah. I mean, I have I have like an interesting love-hate relationship with the hedge fund space because it appalls me that we are dragging some of the best and brightest minds in society, chemists. Physicists, mathematicians, away from, you know, what I would describe as more traditionally value-adding activities and into the pursuit of basis points through a black box that is barely socially valuable, if at all. And so we're we are dragging all these remarkable people into this space and they're not generating value. So, I mean, I think to the institutional investor. Investors need hedge funds. Maybe they need it for uncorrelated returns. I don't think they want it necessarily for alpha anymore. So in that sense, I think there is a future for hedge funds. And I'll define it in two ways for me when I think about what do I want to see hedge funds doing? One, uncorrelated return streams, very valuable. And especially if the hedge funds and the CIOs can develop working relationships whereby the hedge funds who are spending all this time understanding the sources of uncorrelated return can communicate that back into the long-term investment community in such a way that might affect the way they are allocating their risk buckets. Right. Right. So that's that's very valuable. And frankly, It's a
Speaker 1huge challenge and probably won't happen, but
Speaker 2It's a huge freaking challenge and probably won't happen. But my the other dream I have is that somebody is going to build a knowledge management platform that can kind of better interact or interface between, you know, the knowledge of the hedge funds and the knowledge of the pension funds, because, oh, by the way, the pension funds, they are at the center of so much knowledge. They just aren't capturing it. So the first thing is uncorrelated returns. The second thing is I have been working with countless entrepreneurs that want to build technology for investing. And the traditional model, if you're a technologist interested in investing, is go start a fund. Why don't you start a fund? You know, the economics are incredible. And I am in pursuit of a business model for technologists that want to focus on investing that is not a two and 20 fund that is maybe not Bloomberg, but is something they're selling a signal, selling a risk management product, doing something that just isn't about locking it away in a black box and charging a fee stream. And so I want to find a way to have the current hedge fund industry cultivate the knowledge and the knowledge that it needs to innovate this industry of entrepreneurs that are using technology to draw new insight out of the world we live in. Orbital Insight is a company in Silicon Valley that does satellite data of parking lots of oil wells and all those things. It will be profoundly interesting to long term investors. It will be profoundly interesting to energy companies and governments. But guess who its first clients are? Yeah. Well, so all these alternative forms of data. And I can probably rattle off a hundred startups doing alternative forms of data are now flowing through into the hedge fund community in new ways. And I think that's exciting. I think the hedge funds can play a role in building this industry of what I describe as invest tech without being threatened by it. Some will be threatened by it, but the really good ones won't. And so I think those are two places where I'd love to see hedge funds double down. working more closely with you know entrepreneurs outside of their organization the problem that i have with hedge funds is you know they just have so much darn money they can do it themselves
Speaker 1the hedge funds initially are effectively funding the research of this data science but maybe when the signal no longer impacts the market those companies then can take the the lessons from it and either bring it to industry or bring it to broader dissemination i guess i'm hoping that
Speaker 2we're pulling a judo move on the hedge funds in the sense that they are so good at funding research and building unique insight and identifying that insight in all these places around the world that they will in effect now i'm really putting my cards on the table back you know plant the seeds of their own demise by educating and communicating to all these technologists what it means to identify inefficiencies in the marketplace what it means to build a portfolio that is you know perfectly exposed to this idiosyncratic risk factor i mean we're already seeing it in exotic betas and things like that and then the hedge funds that survive are truly unique and you know the one or two percent you disagree with me but i think one or two percent probably deserve to be making all the money they're making that's usually like that
Speaker 1in any industry right
Speaker 2yeah and that's
Speaker 1kind of i mean would you
Speaker 2say that about lawyers i don't know it's not like any industry i
Speaker 1don't know what the dispersion is but my guess is there probably are a few lawyers i mean it's definitely like that not quite in the same way in financial service i
Speaker 2mean it's not like any industry i don't know what the dispersion is but my guess is there probably are in silicon valley that are worth 10 times the average engineer because that's just they're creative and you treat them like artists yeah yeah how about private equity well i think private equity is only going to become more important because all of the big institutions around the world have this bogey this expected return target they're looking at and they're wondering how in the world am i going to meet that one of the answers that they get from the lawyers is that their trusted consultants is fill your boots full of private equity and maybe hedge funds and so we are going to see this giant wall of money coming into private equity in the next five years which is going to be very difficult to manage i mean my hope is this leads to the seeding of a whole bunch of new private equity funds i hope it leads to experiments like the one we're seeing with soft banks vision fund i mean say what you will about it you might think it's crazy to put 45 billion if you're pif into a single fund but at least it's innovative you know pif is saying we're long term we're big and that's about it right now in terms of technology in terms of the competitive advantages and so somebody said well shoot why don't we write a 45 billion dollar check get great terms and go out and acquire stakes and all the top companies my hope is we'll see more experiments like that just by the fact that they're going to have to experiment but by the fact that we've seen so much just sheer chasing of past returns by lps and and begging for access to top gps it's it's hard to see how this doesn't end poorly but then again there's you know i know this company up in seattle that's doing big data and artificial intelligence for creating and assessing private equity track records and that's really exciting the idea that you can create on the fly indices that literally benchmark each company in a portfolio to show whether or not a gp actually added value there are things like that emerging which give me hope that the lps won't be completely swallowed by the gp selling machine but you have to be thoughtful and you have to have like the gumption to be innovative to do any of this stuff if all you're relying on is a fund of funds or a traditional consultant access point to a traditional gp i don't think you're going to get the outcomes you want so what's the most interesting company you're involved with today the most interesting company is the is a company i started so i started a company with lindsey holden called long game and long game is about trying to help people save money who struggle to save money we started this company about a year and a half maybe two years ago and i met lindsey she was the first hire at formation eight which was a venture capital fund out in uh silicon valley i'm friends with the was one of the managing partners there joe lonsdale and joe introduced me to lindsey and we hit it off and and then she left f8 to go build an auction company that used this kind of behavioral trick to capture this gtld space which is the top level domains like dot ventures and they did i don't know what the exact number is but it's 500 million or a billion dollars in auctions on this platform that she started and she sold that and she came to me at stanford and said listen my next big project is to try to convert the money people are wasting playing the lottery and gambling into a savings account and i was like that'd be pretty cool if you could pull that off and she said well there's a way it's called a prize link savings account and the congress just passed something called the american savings and promotion act republican-led law signed by obama that legalizes prize link savings in america and i was like my goodness so not only do you have this opportunity to reward people with variable prizes for putting some money in a savings account but like if you just overlay on it a little bit of creativity you could see how a huge amount of capital could be shifted from state lotteries and casinos and sports betting and beyond into people's personal savings accounts and having worked at boston college and seen the tragedy that is the personal finance landscape and the defined contribution pension woes this was incredibly appealing sixty-three percent of americans don't have five hundred dollars to their name it's astounding to think that but you know you wonder where the american dream is gone well that's where it went nobody has any money to invest in themselves you need some risk capital to be able to capture the american dream and the average american debt is about seventeen thousand dollars so what are we going to do well we're not going to mandate them to save because that's not how we operate as a country we're going to have to make sure that we're not going to have to make sure that we're not going to have to make sure that we're not going to have to show up in the country our defined contribution plans aren't working our auto enrollment into pension plans through corporate sponsors only work if you work for the kind of company that has a plan but in the era of the gig economy and you know lyft and airbnb and all these things that doesn't exist so what are we going to do and so when lindsey came to me and was like i want to do this prize like savings company and step one is convert lottery money into personal savings step two is gamify the process so people don't have to be so afraid of their personal finances that they actually want to engage with their personal finances i was completely convinced and so i told lindsey her idea was brilliant and if she wanted me to get involved i would go on leave from stanford and start the company with her and i did and she invited me to join his co-founder so i went down to 50 time at stanford i kept going with my phd students and master students but i was in san francisco with her three four days a week making copies and taking out the trash as one does in an early stage startup and i did that in an incredibly intense way for over a year and today you know we have a mobile app that's on both platforms we have tens of thousands of people who are saving through the platform and how does it work what's a prize yeah savings yeah so a prize like savings account is basically the more money you save the more chances you get to win a prize and the art here isn't never ever ever touching the principal the principal is sacrosanct you know we just don't ever play with the principal and so what we do is we partnered with blue ridge bank in virginia they pay our account holders i think it's 10 basis points for their savings account which at the time was more than the national average and i think it is around that national average now and they pay us a little bit of money and when we take that money they're going to pay us a little bit of money and we're going to pay them a little bit of money they pay us and turn it into prizes and there's a few prizes one prize is like every week we do a million dollar drawing and we ensure that prize you have a 1 in 240 million chance of winning which by the way is better than the state lottery but the idea is very simple that if your numbers hit your life will forever be changed through random luck and that as we learned from prospect theory and the amazing work work is critical for low-income people who see the lottery as literally their only path to wealth we've done all these focus groups it is it's astounding you talk to these focus groups and you say okay i want you all to picture yourselves as millionaires picture it you have the house you have the car all right got it now how did you get there without a doubt the occasional person will say something other than i won the lottery but 90 say i won the lottery nobody says i saved my money and invested it wisely some people because we're in silicon valley are like my stock options you know and you're like oh you're done you're not the guy we're talking to and so the idea here is you have these you put money in the account you earn coins in the long game currency those coins can be exchanged for games and we have i think six games right now one of them is a social game one is like a long game and the other one is like a long game and the other one is like a like a slot, one is like a card case, game and one is a traditional kind of ball lottery game and they're they all offer real cash prizes that if you hit you'll change your life now i think we've had something like 40 or 50 500 and thousand dollar winners so far nobody's hit the million we're actually rooting for somebody to hit the million because we've insured the prize how's the company grown is it word of mouth so we we're lucky in the sense that like we're taking such a unique take on financial preparedness that the big newspapers have written about us so i don't know if you're familiar with like a bunch of companies like digit or acorns or some of these other fintech apps so they're doing a great job but their model is set it and forget it or trust us we'll do it for you it's not engagement so that is appealing to people who are busy and they're not going to be able to do it for you so i think it's appealing to people who know they need to they're financial optimizers they know they need to do something but they don't quite know what and this is nice every time i swipe a credit card they'll round up and they'll put some of my money into an index fund beautiful the problem is 80 percent of americans don't even want to engage they're afraid they're stressed out i mean these are 63 percent of americans don't have 500 they're going to the pawn shop when they have a you know a car problem well so like how do we get these people to engage and rather than push financial literacy at them which the research now shows does not work we want to educate through doing so we make it fun we make it engaging we build these opportunities for you to change your life through luck but in the process we put you on this path to develop a rainy day fund and the rainy day fund is just step one i mean we have other products coming that will help you take control of a variety of areas of your financial life to put it that way how do you manage your
Speaker 1time it seems like you're involved in a lot of things and you're not involved in a lot of things you're involved deeply and broadly in so many different
Speaker 2things so i could only do all of these things if if the core thematic it has to revolve around fixing finance for individuals for pension funds it has to be innovation in finance and the end of that innovation has to be a better deal for the companies and asset owners that rely on the industry if you look at every single thing i'm doing stanford long game and there's a whole bunch of other companies that i started which we didn't get into and then companies i've invested in sovereign funds and pension funds that i advise in all of it it's about fixing finance for them and so the the thing that is first and foremost is like that's my passion like it's so fun to help you know i helped wafra rail pen and alaska permanent like launch a new private equity seating platform called constellation it is my joy that's my passion like it's so fun to help you know i've invested so much time doing that i didn't even get paid for it it's projects like that that kind of get me up in the morning i mean you know i think if we had a more holistic and long-term financial services industry would the country be as fractured and disconnected as it is today i mean you know that that's a question that flows through my brain which is like imagine the forty percent of corporate profit captured by finance was fifteen percent and that other twenty-five percent was simply invested in communities to create actual value for people would everybody feel left behind i don't know if i have the answer but i know i know
Speaker 1that it's a question worth asking i want to turn to a couple of fun closing questions right what was your favorite sports moment could be as a participant or a
Speaker 2fan so i was at the palestra which is the university of pennsylvania basketball stadium and at the time i was a Princeton basketball fan i met my wife at a princeton basketball game that was our first date in nineteen ninety eight i traveled with the team to north carolina who at the time was the number one ranked team in the country and i sat in the north carolina student section painted orange and at the half we were up by six so that's the level of commitment pen at the time was our chief rival and we had traveled from princeton to philly and there was probably about five of us and at the half we were down i think it was like thirty six to twelve and then about eight minutes into the second half we were down forty two to eighteen i was sick i felt physically ill to the point where i was like i might just leave and courtney my wife was like we are not leaving be a quitter we're going to stick this out if we need to suffer we're you know we're going to suffer and they turned it around they went on a run like you would not believe literally espn when they did the highlight that night they stopped the game at with thirteen minutes to go in the second half and they were like in princeton is down twenty eight you know to pen looks like pens going to go on oh wait this just in the game is now over and then they showed the second half it was a joke right yeah but they won fifty three fifty two princeton at the palestra i mean i don't think i've ever been that happy uh i mean like children being born getting married like i'd love to say those were happier moments than that moment but it was just a
Speaker 1different type of pleasure who's your favorite person outside of your family and
Speaker 2why oh my god who is my favorite person i mean i have so i'm not one of these people who can like easily just be like jet like steve jabs is you know i'm not that type of person i think in my life i have people that i respect for different things and you'll note that like i drag them into my lives and don't let go so like i have a profound respect for lindsey holden female ceo of a startup fintech startup in silicon valley navigating that world and watching her do it with grace and poise and leading the engineering team that is you know practically all male and it's incredible to watch jagdeep bashir i think is a profoundly unique human being in that he can do things in the context of bureaucracies and public agencies that i didn't believe possible if you want to see somebody who takes stakeholder engagement and and makes it real not just like lip service to it but actually creates a value out of engaging with stakeholders and making them feel loved and and not being fake about it it's unbelievable and there's a few other people like that in my life like gordon clark at our oxford who dragged me into the pension fund space and served as a as a mentor and help me and my wife get through two phds at the same time with relatively little debt i mean there are people like that for whom i owe an endless debt of gratitude
Speaker 1what teaching from your parents has most stayed with you
Speaker 2you know my parents were incredible role models in the sense that incredible loyalty honesty and integrity you know i think my dad when i was young would often talk about the higher interest and he would invoke the steve jobs quote all the time in our family you know you just got to put a dent in the universe you know like if you really want to have an impact in this world go out and find something you're good at but make sure it's socially you know useful and so you know i think in terms of the thing i'm most grateful for it is having this broader longer term vision and mission that is about building a better society ecosystem planet whatever uh you know that comes from my parents in terms of parenting when my dad forced me and he forced me i did not want to go row that was like a black belt parenting move because when you're rowing you can't drink you can't smoke you can't go out late and at first i hated it and then obviously i fell in love with it and so for all those parents out there there's sort of struggling with unruly teens which i was i was like a skater flying off cliffs and skis and things like that rowing was this incredible and oh by the way like if you want to row at a high level you got to go to like an amazing school so it completely reshifts your
Speaker 1your focus what life lesson have you learned that you wish you knew a lot earlier in your life
Speaker 2how hard i mean how hard kids are so if i if i had known i don't i don't know what i might have done differently but i have two kids that are amazing kids you know seven year old boy and a five year old girl and my wife and i both work so both of us are kind of on uh you know she runs like a data science team at a public company so it's not like i trump her and in many ways she trumps me and so it's this constant negotiation and challenge and i think i would have just loved to have known that this insane part of your life is coming and you should sleep in and you should go to the movies and you should probably get ready for you know do do a couple of volunteer gigs travel the world a bit more do those things because getting married doesn't change your life i didn't find i mean i i started dating courtney when i was twenty she was eighteen we were princeton we lived together for thirteen years and then we had children it was like this is a totally new world this is totally new everything thing changes once the children come and and it it doesn't help that like my kids are extremely stubborn and i don't know where they get it but um you know it's uh that's what something i might have liked to have been
Speaker 1told yeah all right last question you are in your waning days i guess now we're talking about 150 years old because we're gonna live a long time yeah nanobots what advice would you give
Speaker 2yourself today oh i don't know i mean how did it go um i mean i you know there's all these things that get said in those to those questions like hey nobody's ever gonna regret spending time with their family or you know nobody's gonna say i wish i worked more but i would interestingly why don't i just do like the counterfactual like i feel uniquely privileged to be sitting um you know in a seat where for whatever reason this community of pensions and sovereign funds and endowments and foundations seems to trust the words coming out of my mouth as being in their interest and i don't want to screw that up because i don't see a lot of people out there that are unconflicted in their thinking or remarks and so i i feel whether it's true or not and i could be a complete windbag but like when i do get to the point where i'm like i don't want to get to the point where i'm like i don't want to get to the point where i'm like i don't get the opportunity to meet with these people i get the sense like i can have an actual influence on them and so i think in a weird way the 150 year old talking to the 41 year old would say take that seriously and if you really do want to transform capital markets don't forget don't ever forget who sit at the base of capital markets and it's the asset owners and there's you know sit here we are in new york city surrounded by beautiful skyscrapers filled with hedge funds and private equity funds and every moment of every day there is a temptation to cash it in and so i you know what i'm constantly reminding myself is there's a broader project and fine to go build companies fine but never forget who you're serving and i am serving the asset owners great ashby thanks
Speaker 1so much really enjoyed it thank you for having me thanks for listening to the show if you like what you heard hop on our website at capitalallocators.com where you can access past shows join our mailing list and sign up for premium content have a good one and see you next time
Speaker 3all opinions expressed by ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms this podcast is for informational purposes only and should not be relied upon as a basis for investment decisions clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast you
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