Will England, Derek Drummond, and Tony Caruso – Disintermediating Pod Shops

Intro month volatility is a lot higher than you think. If you get one month snap shots and then you get to see the ride throughout the month, it can be a very different story. There could I have joked before you learn more about manager of three days on dioxide than three years if you invest in a fund. You understand what they do what they're portfolio looks like how it evolves. It's incredible. When you see what they're buying and selling every day, we're in the business of buying cereal good decision makers and sometimes I joke that my job is playing fancy football. You're trying to find the best athlete put them in the right position. Hopefully they all marched on the field watching how they trade in a drawdown. You can see it. You can make much more informed decisions about the people that you're putting on the field. I'm Ted Cites and this is Capital Allocators. Today's show discusses an innovative joint venture between asset owners and a multi manager hedge fund that seeks to deliver smooth equity like returns at a lower cost than available in the marketplace. My guests are Will England Derek Drummond and Tony Caruso. Will is the CEO and CIO of $12 billion multi strategy hedge fund walleye capital. Derek is head of external public markets investing at the state of Wisconsin Investment Board and Tony is managing director of hedge funds at UTIMCO. Together they co founded Docside a managed account platform that gives institutional allocators direct access to portfolio managers using the infrastructure risk systems and financing capabilities of a multi strat underneath our conversation traces Docsides evolution from a bar stool brainstorm to a platform with more than 60 managers and billions in assets. We discussed the accessibility of talent through managed accounts differentiated manager sourcing due diligence with trade level transparency capital efficiency across portfolios hedging risk management and onboarding and exiting managers on the platform all told the combined heft of large asset owner capital and the sophisticated infrastructure of a multi manager hedge fund have created a win win for everyone involved. Before we get going it's still travel season partner meetings and board meetings that capital allocator CIO summit Berkshire and milkin across plain strains automobiles you're bound to run into a few snacks when they're unavoidable I try to remember will get a story of the pilot who lifted everyone spirits by bringing families into the cockpit. But it's not always easy which leads to my most recent pet peeve speed limits when I traveled a certain places everyone religiously follows the speed limit in Florida along a one a if you go much over 35 miles per hour there's a good chance you'll get a ticket in Sun Valley I once got stopped for rolling through a blinking red light at a whopping four miles per hour once I adjust I find it relaxing to drive slowly. It reminds me of the Pixar movie cars when the old timers off route 66 drove low and slow however when I'm in Connecticut or New York I'm a totally different driver I need to get places and if I'm running late I'll end up on a single lane road for five miles behind someone driving annoyingly slow. That person is probably driving 35 miles per hour the speed limit but it's common knowledge in those parts that the flow of traffic is well above the speed limit with maybe seven miles per hour over as the whisper number statue for the life of me I can't reconcile the two either we should drive the speed limit or not or maybe we need a lot more variability in what the safe speed limit should be. So my new pet peeve depends entirely on where I am if I'm in Florida get off my tail I'm already going to speed limit if I'm in the Northeast you better hurry up if you're in front of me and you're only driving the speed limit the only way I know to gain the benefit of such different perspectives is right here on capital allocators thanks so much for spreading the word capital allocators is brought to you by alpha sense. 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So leave the days of disjointed deal management behind and define your future with s r s aquarium the smartest way to run a deal learn more at s r s aquarium dot com that s r s a c u i m dot com please enjoy my conversation with will England Derek Drummond and Tony Caruso well Derek Tony thanks for joining me thanks for having us thanks for having a bank year it probably makes sense to start with a little bit of a background on each of your seats and how this doxide platform fits into that Derek want you kick it off here's the state of Wisconsin we run about half of our assets internally and then half of our assets externally I had up the team where we allocate to capital external standards in the public space we're trying to find managers where we can't manage those assets with either the team or the strategy or the region of the world internally a lot more of the hedge fund strategies a lot more of the emerging markets how doxide comes into the whole fray is is your platform for us to be able to be a lot more dynamic about our allocations to be able to target our risk a lot better access managers that we might not have been able to access through a traditional gp relationship don't I work for you Timco it's $88 billion dollar endowment manages money for 22 academic and health institutions I manage zero beta hedge fund portfolio it's roughly 11 billion in size but consists of the multi managers at a lot of equity market value strategies the rate we use doxide is to access the single PM equity market neutral managers while we invest in the multi PM models we also want to access those talented single PM models that don't work for the pods that's how we're using it it's currently around seven billion of GMV it's the alpha pool that we use that tap into portable alpha as well well I run wall I CEO CEO most you will know that context is running our multi business which is a $12 billion full pass through I hate to turn pod shop but I'll say it's pod shop for the person this conversation when most people think of walleye that's what we do they're not the main scale multi strats that that's a core business doxide is a subsidiary of walleye parent company very separate business building ultimately does roll up it to me so think of me as chairman shareholder chief cheerleader of doxide back times manage account platform that we started with Tony and Derek a few years ago it provides enormous amount of value to everyone involved is to one of those two businesses for everyone wins it's really fun to be a part of and to build out with these guys with best careers where did this idea for doxide come from there's been this huge trend in the edge of the community towards centralization of investment programs the multi strat model has been a big beneficiary of that there's a lot of infrastructure alpha and putting together returns dreams on one balance sheet back in 2022 was talking both with Derek and Tony around this concept maybe we could put together a product and service leveraging capabilities of walleye has built on our business we've been doing manage accounts through our multi strat fund going back to 2014 could we make that available directly to Tony because the end owners of Capital to start a managed account platform. It seemed like a great idea and a great way to add value to these guys. Let's go out and build a business together. Free fortune that these guys were entrepreneurial in that respect. You don't always find that on the allocator side of the table. We were sitting around having a beer with each other and say, hey, what if we did this together? Everyone says, yeah, yeah, that sounds amazing. Let's do it the next day. You follow through and you do the thing that you talked about. It's very rare. Would that happen with us? We would sit around. We'd be talking, well, isn't that going to caramelize your business? Will it say something like, well, I know you baked sophisticated allocators are going to figure this out somehow some way. Why don't I provide that service to you all? It's going to naturally be different than his multi-stract pod business. It's not going to cannibalize that because he can do things that we can. But also, we can do things that he might not be able to capture assets from managers that want to face a state pension plan and maybe don't want to have a direct relationship with one of these shops. We had these initial worries, but they all faded away over time. It was a lot of trying by doing. There were very few paddles in the road along the way. We almost had to pinch yourself. Does this really happen like this? It's this easy to do. And it really was. We didn't invent the SMA platform service provider model. There were other SMA platform service providers. When you go through the risk systems, you ask about their financing terms, you ask about everything that you would want in a multi-stract. They didn't really have it. They didn't understand how the multi-manager modeled worked. Here's this unique situation where we're partnering with Walleye, who gets the game. We're leveraging everything that they built for the multi-manager platform and we're able to use it. That was completely unique. And you couldn't find that with anybody else that was out there. Tony, what's the core thesis of why this makes sense? There's cash efficiency, transparency, better control over the cash, more flexibility, so many different things. When we're investing in hedge funds, if you don't have extreme diversification, you're doing things in a cash inefficient way. What we're looking for is specialists that have an edge, putting it together into one portfolio, applying some leverage, getting this alpha engine, and you could port it on to public equities and whatever asset class you want. Simply to not show what is a multi-strat business ball trying to do. You're putting together uncorrelated turn streams, which gives you a dampening effect of volatility, and gives you the confidence to use leverage. The real unlock, when you think of an overall plan like Utimco or Swib, you're implicitly borrowing money at Fed funds plus like 20 basis points. Holy shit, you talk to the treasurers in these organizations, you're telling me that you can borrow money at Fed funds plus 20 to think the cheapest source of funding available. That is super cheap and super valuable. In the context of an overall through broad business, is that's a real unlock. Things like that that might sound nuanced or in the background, really, really important to making the model work. When you started discussing the next day after the initial beer, how did you think about who was gonna do what? Initially it was saying, how do we structure this in a way that's advantageous. Docside is ultimately an advisor to a fund. There's a fund that's set up for Utimco's fund that's set up for Swib. Docside sets up the sandbox, and then makes it really easy for someone like Tony or someone like Derek to select managers and then not have to do all the other work to make it work. Docside the name, I live in a lake. There's restaurants that you can go to to get Docside service, White Glove Type service. That was the idea. We built out a fully separate team to do this, had a background in client service and operations and finding and staying in accounting, differentiating your hearers, make it really easy, understanding the nuances of how all these charges work on the hood at the primes, pretty much the entire Docside team to come from the sell side. The work's in private brokerals 24. My core piece was, how does the technology work? You have this fancy little front end. These pms are going to plug in their order management system and then it all shows up. There are no trade breaks. At the end of the month, all the accounting's done. T plus one, you're getting your statements. Yeah, Derek, that's how it's going to go. I was like, that doesn't really happen. It sounds great. Technology never works as seamlessly. And then you start plugging some people in. You do trade testing over a week and they're trading for you the next week. You're getting pms up and running in a matter of days and weeks, not months. Numbers are flowing through. The risk is flowing through. The most surprising thing about this whole thing was how seamless the technology worked. We poured it over a number of our technology assets hard just to buy building that technology through just starting a managed conflats from scratch. That was an advantage. The business is effectively setting up a fund of one for each client providing a technology product and effectively an operating service for a bring your own managers type of a model. It's one of those businesses where the doxide team when they're talking to on-boarding a new client relationship, new with the element or pension, can legitimately go to them and say, we're going to charge you money, but you're going to pay less at the end of the day versus what you're doing right now. That's a great business. Going back to the notion of doxide being a white glove service. A big portion of that was risk service. We have risk managers within doxide that work with Tony and Derek and their teams because there's no right or wrong way to do this. When you have a new manager, it was a marginal contribution to risk and it's very different to mentions. They're actively in dialogue with doxide risk folks of saying, this is a live living breathing exercise. You step on one area, it goes into the other area, having risk practitioners at the center, I think it was pretty helpful part of the model. The unknowns were the operational model. How is it actually going to work? Fortunately, we were able to go through the guinea pig period without a lot of pickups, which was great. But there are other unknowns too. It's doing this as a subsidiary of a big hedge fund. People were asking, is that going to be a problem? How do you set up information barriers to respect the fact that this is IP, it's being clear on these balance sheets? Fortunately, that has not been a problem. There's over 60 managers today. The IPPs, we take extremely seriously, that's not just from a business practice standpoint, there's real compliance reasons for that, so you can't screw around with those infobarial rules. That was an unknown. Those are some initial questions that we faced. Derek, Tony, I want to turn to how you turn this into an investment strategy. You have to start with finding the managers to put on the platform. How'd you go about that process? That was one of the most difficult things, because our typical sourcing prior to this was build relationships with the blue chip firms fight for capacity. Think about the funds that everybody wants to access to. They're already closed. You develop a relationship. You explain why you think it goes to great partner and you get that incremental capacity. These are the PMs that would likely join those firms. This is an alternative to joining a Ballyasne, the Aoe point 72, et cetera. They may not want to join for whatever reason. Maybe they want diversification in their capital base. Maybe they want complete independence. Maybe they don't want to be subject to stop losses. It was finding those PMs who are considering, do I join the platform or create a single PM, SMA, business, pound in the pavement, talking to PBs, attending conferences, speaking with peers, finding out who's out there, mapping it all out, putting together a portfolio. What we're looking to do is find the best specialists in every sector, every region, and put it in this wrapper that's really cash efficient. This is a different business model. Use the SWIB edge to get access to a walleye or to some of these blue chip shops. Go, make nice with the big shops, get capacity. We're going to be price takers on fees and liquidity. They're three sharps, so it's okay. That's a long-term investment. I now have a person on my team looks like a business development person. Their job is to know who's spinning out of where, what managers on the way up, down, beating the streets. We're long-term investors with these PMs, but we set the risk box. Part of the reason these businesses are successful is because they can hire 200 of these guys and they capture the upside. You have to have the transparency and liquidity in the risk box to cut off your left tail. You get these high sharps because you can cut off the left tail very quickly. We're not going to go and hire 200 of these guys. We're going to hire 20 or 30 of them. Our risk box looks fairly similar to some of these other risk box. We want to be long-term investors, absolutely. If you go outside that box, we can move quickly. We're trying to capture that right-hand skew. That's a bit of a different change in our business model as opposed to managers where you have a three-year lockup, you have limited transparency, and you're not 100% sure what's going on. So we had to change our team to accommodate sourcing the managers, getting them to like us enough to take the account, setting up the risk box and the infrastructure, managing that on a day-to-day basis. The diligence process is a little bit shorter. We have so much more transparency, much deeper and more thoughtful conversations with these guys. It happened this morning. We had somebody go outside the risk box. We had to have a tough conversation. Our business has evolved. This is the direction of travel overall within the industry, particularly for certain segments of called the hedge fund landscape, which people would generally think of as the long-short environment. It's not just long-short, but let's sort of use that as an example. The rise of the managed account funding format is very much a real thing. If you have this thesis that Tony and Derek are going to want to take some of the best practices from a structured standpoint, from a risk management standpoint, that we as the multistrats have utilized to build our businesses and do some of that themselves that is going to happen. Let's participate in having that happen because of the question along the lines of sourcing good ideas in the same way in which sourcing in any investment industry is critical. As the platform reached scale, that ultimately could come back and be benefited. to wall like even trends in the industry. Now that Docs really has reached, so there's 60 managers on the platform, there's billions and billions of assets. There's this notion also that's developing of the co-invest that's becoming a real thing and helpful for all parties involved. That gets to the heart of historically, why were managed accounts have a negative stigma? There definitely was some adverse selection. What's happening now is given how easy it is for both the manager and the source of capital who have a managed account relationship, the availability of talent that is participating in running managed accounts. This whole notion of the adverse selection has been dispelled and if anything goes the other way up, we're trying to think about how do we create positive selection. - 10 years ago you would have a manager that would take a managed account. That was their last resort. You didn't wanna go with a manager that was giving you a managed account because they really needed the assets. Now you have PMs that have worked at some of these shops for five, 10 years, profitably. You have their track record and they wanna go beyond topreneurs. It's a positive sign that they're rolling out. They didn't get fired from these shops. I wanna go build this business now. I wanna put my shingle on the door. They don't want 50 different clients. If they can come to one place and they get Derek and Tony, 3,400, 500 million on day one with real end investors, their long-term asset owners, that's huge for them. So everyone wins at the same time. - There's also stigma of running a managed account. Part of that was due to the fact that portfolio managers thought because you had this ability to pull the rip cord that you would choose to do so. Just get your money back. Our average hedge fund relationship is 10 plus years. We're sticking with these PMs even through difficult periods. If we need the cash, the hedge fund, we'd have to put in for redemption and get the cash. With a managed account, we have the unencumbered sitting there. We don't have to be disruptive at all. We sweep the unencumbered. We put that cash elsewhere. We don't need to disrupt anybody's business. There's a dichotomy that you talked about, the model allowing you to cut off the left tail, moving faster than Tony saying, we have average life attend your relationships. - How have you put those two things together in DocSight? - We all set up the arrangement on day one. We all know exactly what the rules are. As long as we're all in the rule box, we're not nearly as tight as others out there as some of the rumors that you hear you're down to and you're down. We just set up the rules of the road. You can't sell naked options. You're a healthcare trader. You shouldn't be in TMT names. But as long as we're all in the same group, we're looking to grow relationships with these PMs over long periods of time. We started this almost three years ago. Huge chunk of our managers are still with us. We maybe have turned over once or twice a year during higher sigma periods, like we're having right now, as volatile period in the first quarter. You get to see the reaction function of some of these managers. If they go outside of those risk targets, you sit down, you have a conversation with them. You come up with a plan. If they can't execute the plan, then it's time to move on. Part of the success of this model is having those risk controls to be able to capture the right side of the distribution. But the managers coming in fully aware of exactly what the rules of the road are. - The average length of our relationships 10 plus years, we spent a lot of time on our diligence. Our hit rates really high. For the Vagicount platform, we're not looking for 350 PMs. We're looking for 20 to 30. We're gonna do a lot of work on them. Our drawdown guidelines are relatively loose compared to the likes of other platforms. Because we keep it manageable at 20 to 30 PMs, we can have the conversations with each PM, understand what is driving that drawdown. The other thing that cuts the tail is, we have the ability to hedge. Doxat has a dynamic hedger, like a zap factor risk. There's a position that's too big for a particular manager. And we've been able to have a targeted hedge to bring that position lower so that it fits within our overall risk construct. - Tony, you mentioned you do a lot of work on these managers. Derek earlier said, "Well, in this platform, you do a little less because you have to compete with people that are hiring lots of these PMs. How do you retain the confidence you can be long term when you're not doing as much work?" We're doing as much work. We're doing different work though. We're doing a lot more reference work, speaking with anybody who had access to their P&L, any analyst who have worked with the PM. To see what the PM was like working for and if he was able to actually manage a team and train his analysts. Lots of conversations with the analysts and PMs to understand the investment strategy. We ask for daily returns and like portfolio snapshots. We put that through our system, the bar attributions. We do our work fast, so we do all of the work that we would otherwise do. The only thing that requires less work on our part is the ODD. We control the cash. You can invest in younger firms that aren't as polished or super institutional. You cut off that operational risk with a mesh account. - We have this engine and this tool, this managed account platform. We have some overlap in some names, but everyone's on their own. So we're all the rest of the clients on the outside. Our process is faster for these PMs. If I have a codified risk box that I'm putting around the manager, if I'm allocating smaller than maybe I would, it takes us a long time to write a $400 or $500 million check. If I'm writing a smaller check faster to a younger manager, I have full transparency and full control. We still do our work. Tony's right, the work you do is different. I'm getting full portfolios. If I can get to level of detail and put it into my systems to watch their trading over time and see how they made decisions through different periods, I can be a little bit faster. And I know that they understand what the risk box is. My dollar size is a little bit smaller. Our typical write up is about 40 pages plus and probably takes us three months to get a deal done in our main hedge fund portfolio. Here, if we find somebody we really like, we could probably get three, four weeks, a 10 to 15 page write up and is much more looking at the decisions they've made over time. References are huge because you need to be in the network. It's uncanny the number of PMs in our portfolio where we got a reference from someone that, hey, I know this guy wants to spin a sit-down. I worked with him for seven years. He's a good risk taker you should talk to him. We get more of our ideas that way. What's different and what you've learned from having that level of transparency than what you see in your pre-doc site at your own portfolio? Intermonth volatility is a lot higher than you think. If you get one month's snapshots and then you get to see the ride throughout the month, it can be a very different story. Derek and I have joke before. You learn more about a manager a three days on Docshead than three years if you invest in a fund. You understand what they do, what their portfolio looks like, how it evolves. It's incredible. When you see what they're buying and selling every day, we're in the business of buying cereal good decision-makers. And sometimes I joke that my job is playing fancy football. You're trying to find the best athlete. You put them in the right position. Hopefully they all march down the field. Watching how they trade in a drawdown, we gave an example to my CIO yesterday. Two different managers, similar drawdown, one got small, regrouped, and started digging themselves out of a hole. Another one with add to losers, you can see it. Once you have these several managers on the platform, how have you thought about capital allocation across the manager? It could be a bit clunky. Sometimes you want more exposure to the guys who won't accept more capital. Sometimes you don't want to be as big with some folks who've required you to run a minimum amount. Ideally, how I would have it is equal risk allocations, incorporating some correlation matrix, changes at the margins based on the conviction level that you have with each manager. We're trying to guess their sharp ratio going forward, trying to get it, using their experience, sharp ratio, trying to understand what they need to do to deliver the returns that we expect. One thing that was difficult for us and still difficult to this day, is this a product or a line item in our portfolio, or is it a tool within your broader hedge fund portfolio? Say we have 25 line items, is this line I am 26, all these PMs you're managing as a portfolio? Am I trying to optimize that P&L? Or is this a capital efficiency tool for my broader hedge fund business? We recently had a manager that was in our hedge fund business and they've moved on to the platform. They are throwing off the risk budget of everybody else and we were like, well, we had the same amount of money with them before. So what's different, why are we trying to manage this P&L number? We came up with this heuristic, so we have 17 PMs and we're managing like it's a portfolio, but if we get confidence in that manager enough, they can graduate and become their own line item in our hedge fund portfolio. As we get more and more confidence, we can give them more capital. They come out of our emerging manager pod program. They've graduated to a line item in the book. Tony, how have you tackled that? We're not investing in single PM funds. Our allocations to the multi managers can be much larger. It's a very diversified portfolio, much higher sharp ratio expectation. We can size then multiples higher than we would for a single PM. The goal of DocSide is to be able to create that same profile that a multi PM fund would have. Any individual PM is going to have a lower sharp It's citadel. from their experience, I think they've said like a 0.7 to 0.8. Gross sharp is what you should expect out of any PM, but the magic of it is if you could find these managers that run at very low correlations, highly idiosyncratic in nature, not clinging onto any factor risk, hopefully not too loading on crowding either. Across a number of low-ish sharps, you get a good net final sharp. The overall portfolio sharp can grow from any single PMs, 0.9, but the overall portfolio is 2.5 plus. That's what we're trying to do. Our allocation to doxide is size about the same as any kind of multi-manager fund. We're going to take a quick break in the action to tell you about BIP sync. One pattern I hear consistently in conversations with allocators and managers is that research and diligence workflows tend to outgrow general purpose productivity tools. Share drives, spreadsheets, even traditional CRMs work for a while, but they weren't built for the nuances of an institutional investment process. Trinity Church in New York is a good example of a firm that addressed that head on. They've been stewarding capital for over 300 years, and like many longstanding institutions, they're deliberate about the partners they choose. Trinity Church sought a platform that could keep pace with their investment process and found that in BIP sync. With Trinity Church and a growing number of their peers have found, is they capturing and using a team's collective intelligence at scale requires a system designed for that purpose. BIP sync is a system of action for investment intelligence, structured, searchable, and secure. Every insight gets captured, and every decision is traceable. It's built for institutional investment teams and trusted by asset owners and managers overseeing $4 trillion in assets. The workflows, integrations, and support are all shaped by the specific demands of institutional investing, not adapted from tools built for a different industry. Learn how organizations like Trinity Church in New York are modernizing their investment research process at bip sync.com/capitalallicators. And now back to the show. How do you leverage the expertise that walleye is bringing on the risk side in your hedging program? We implement single name hedges. We have the full factor model. We have crowding models. Deleveraging risk is one of our bigger risk factors. We're trying to proactively allocate to PMs that are doing different things. Once you get everything together, we do have the tools and we have the team over at Doxide that can build the views. We use to have daily calls, and that became a little bit too much. Now we have weekly calls with the risk team. Go through the risk budget. What we're seeing, how crowded are we, how liquid are we? How that hedging overlay we have is affecting the overall book. We try and do surveillance. Am I using the same factor model as Citadel? And as Citadel using the same stock to hedge that I am. And if this goes against us, how about could that be? One of the benefits is that we have the same tools as everybody else. One of the detriment is we have the same tools as everybody else. Clearly, Doxide Edge isn't the fact that they have access to BARA models. Everybody has access to BARA. One of the things that's been helpful is everything that the BARA factors don't explain, we try to figure out what that is. What factor is driving markets, not being explained by momentum or quality or any standard risk factor, but maybe it is artificial intelligence. The war. Take that factor and see how much sensitivity or portfolio has to that. Being able to be creative and create custom factors, that's been very helpful. I've done a lot of work with that with the Doxide team. I don't know if any other platform service provider can dynamically hedge. Basically, I'd give them some factor constraints. They don't want any style factor to be north of X percent. The hedger will zap everything and construct a portfolio that has that target idio in those factor constraints. How do you think about exiting managers? Yesterday and today, we had a manor. They were outside of their bounds. They continue to be outside that rounds over the last week. We developed the playbook. These are the catalysts you're playing for. These are the things you're looking for. If this happens, this will be my reaction function. Then we say, "Woon would you fire yourself?" They give us a level and they hit that level. In a weird way, it's a much easier conversation than sending a redemption form and the marketing guys got to go talk to the CIO or something. We all knew exactly what was happening. They pick up the phone and they're like, "Yep, I can't hold it against you." "Yes, you're exactly right. How would you like to liquidate the account?" "We're all still friends. We all knew exactly what happened and there's no bad feelings. It was way more transparent. It's an easier process." That's why we set these risk guidelines when we finalize the IMA. Before they start trading, what risk guidelines should be appropriate for your strategy? We don't want to change a thing. We want you to be able to do whatever you're going to do. But tell us what are the bans? Net exposure, GMV concentration risk. What is a crazy drawdown that you never expected to hit? We monitor these. And if they go out of bounds, it's an easy conversation. You said you were going to do one thing and this is what happened. Of course, we'll have the conversation, figure out how are you going to get back in bounds or what's the solution to this issue that we're dealing with. Typically speaking, there's a lot of groups think. Tony and I have had positions where the manager had a drawdown and we've treated those drawdowns differently. He gets to choose how he interacts with that manager. We don't get them to do something different than their combing old fund. I'm not trying to get them to run some special account, lower beta, higher beta. We want it to be parapasune. In 99.9% of the cases, the PM doesn't want to do anything special. They want everyone to be on the same terms and the same strategy. How Tony reacts to a certain drawdown might be different than I react. Everyone's well-walled talk, but we're not coordinated because everyone's risk tolerance are different. I run hundreds of managers over the years, a lot of different ASEC conversations as there's the nature of the business. The most adult conversations are when there's transparency. Everyone's an adult in the business, but no we're doing here. If things didn't work out, that's fine. No hard feelings, and let's move on here. What people really hate in our industry is when they get surprised. The whole point of dioxide is to be able to provide the level of information, intelligence, and situational awareness. So that no one's surprised. If everyone's reading off of the same playbook, here's where the line is, you cross the line. No one's fallen, no harm to fall. Let's move on. Thanks for such an easy conversation. That's exactly the mentality that I take in running our multi-strep businesses. Just be a friend to people. The hard part is with the traditional redemption cycle that you get in coming of vehicles. There's a lot of guesswork that's involved. When someone's thinking about engaging with dioxide to create their own account, how do you think about the differences between this and the multi-manager podchub? There's probably a dozen scale multi-strats in the world, so there are also a lot of small numbers we're talking about. Those are premium products. There are businesses that we run that can't be run either as a managed account or as a standalone business. We have a large equity-volved business as part of what we do. That's not something that would be run by a single manager, not something we've wanted to self-tune as you count. Same thing with a lot of quant strategy or things that are going to fix income. That's a big part of what multi-strats do is strategies that benefit from true scale. The thesis originally was a lot of the businesses that Derek and Tony run, especially in long short hedge funds still want exposure to those type of strategies, doing it in a structurally advantageous format for all the reasons that we've talked about. I don't view it as replacing the allocations in terms of giving to managers like us. It's more saying there's a better way to run this business and a better way to get exposure to some of these traditional single manager funds in a way that everyone wins and everyone does win. We are large allocators to the multi-managers that's probably not going to change. We have great relationships with them. They're phenomenal the best hedge funds in the world. Docside is a way to gain access to certain PMs that don't want to join a multi-manager platform. We know that there's talent out there. We want to be able to access that talent in a similar fashion as those multi-manager platforms by tapping into an SMA platform and having the be super cash efficient. This is our way to expand. We can't grow much more with these multi-managers A because they're closed B because of liquidity terms are three year or five year slow pay. There's a portion of the portfolio that needs to be liquid. This is our way of being able to have unencumbered cash modulate the overall leverage of the platform and use that cash to fulfill our cash needs. Will has comparative advantages. He can pay for data for his quants that I just can't. I'm not saying Will does but others might pay, garden leave. I can't afford to pay for a guy to sit on a beach for 12 months or something like that. But those are costs too. He can run a two, three sharp. Some of these groups have six plus percent passers. You have to run more leverage to be able to do that. All that math works when you have 200 pms. You can turn them over and capture that right to the distribution. We're playing a slightly different game or maybe I only have 15 to 25 pms. I get to use a little bit less leverage. I don't have a six percent pass through. I'm taking the netting. My cost structure is a lot lower. Maybe my sharp ratio might be a little bit lower because I can't capture the quants that Will can. Because I'm not paying those fees, my sharp ratio is unlikely to get exactly where Will is. It gets closer and I have the liquidity and I get the target my vault. The average hedge fund out there down the fairway hedge fund, on stomp pensions, did the wrong thing by incentivizing them to run lower vault and take in more assets and collect that management fee. If you're running a $10 billion book like I am and you have 30 line items and they're all 0.1 correlated, I can't get my vault high enough to beat my cost to capital without running a superstar sharp knock on wood. We have been because Alpha has been pretty good the last couple years. Three sharp still lasts forever. This solves a important problem for me where I can have this risk control transparent liquid pool where I can lever it to my volatility target and get my total portfolio of all where I need to be to be competitive out there, but I'm not giving up on quality of PM's anymore. As you look at acquiring the talent you want, putting them on the doxide platform and doxide as a business when you add it all up, what does the cost structure look like to the next investor compared to a pass through multi manager shop. This war for talent is a real thing. It's become illogical in many cases. The participants in it know it's illogical and they're just doing it for personal competitive reasons. The cool part about targeting people that are largely a post economic phase of their life, they want to run their own business. There's a person motivation that extends beyond. Effectively someone pay them a large check for hazard pay. By definition, the managers that Tony and Derek knows are fishing into the doxide pool, it is different conversation. They aren't the single source of capital. Why design is a strictly advantageous. It became apparent to me when we had one of our first managers, we set them up on day one. We walk into his office. His wife was at Costco getting the snacks to put in the snack room. He was like, Derek, come over here, come over here. He had a name of the firm on the wall. We got to sign up. It's amazing. He's showing me every office and he's introducing me. These pms take real pride in opening up their own business. They were inside some pod that didn't get to talk to other pods at some of these firms where there was a level communication and community and culture for a large number of our pms. That's the case. They have a culture they want to grow, a business they want to grow. They want to grow this next layer of talent below them and give them something to work towards. It's palpable. There's truth to some of these cost inflation things. Pads or models are necessary to be competitive. That's the reality of the world that we live in. The mass does work at the end of the day. If you're good, it's hard to run these businesses. The investor is the one that loses when you make non-economic decisions. I love the bottle because access to talent directly. You don't have to pay these fees, which you have no control over deciding what they should actually be. This is a good thing at the end of the day for the holders of capital. There are Tony, when you're talking to your boards, how do you describe the expected fee savings of the doxide platform compared to one of your multi-manager investments? It's so simple. We know what the fixed expenses are. The variable expenses every year. That and the spreadsheet, then we get to actually say, here's doxides fees. You were saving on this that and the other thing. We're not paying the second layer of performance fees. Estimate the financing terms. Here's what leverage we'd run at. It's math. This is what we're going to do and here's the expected cost savings and it's meaningful. It's explicit. For every dollar that I borrow from the house because we run full-ported while we have to lever up the entire firm, we have a thing called the fleet rate. I'm the biggest consumer of the fleet rate at the SWIB right now and I borrow $10, $11 billion every month. I get a bill for what my interest expense was. I can go to the board and say instead of borrowing $10 billion, I borrow $9 billion now because I can be capital-efficient. My returns are higher and everyone's better off. I calculate my interest expense savings from those managers. At one of our last board meetings, we brought in one of our PMs. They talked about it. The board got to ask him questions. Why are you doing this? Oh, you set up your own business. Why did you want to set up your business? He's like, there's no way I could have gotten an account from the state of Wisconsin otherwise without being on this platform. Are borrower huge of analysts of this program? They love it. They see the cost savings. How we're accessing younger, hunger-ear talent. The risk management. Our risk manager loves us. It gets up there and talks to the board. It's good for the board. What does that add up to in terms of basis points? It's tens and tens of millions of dollars for us. I hear. I'd love to hear since you've rolled this out. What were some of the challenges that you didn't expect you'd face? Learning the lingo. Typically, allocators invest and they think about AUM as a concept. Right? A $200 million AUM ticket. In the SMA world, it's an arbitrary concept. We're choosing the denominator. We allocate in terms of GMV, long market value, plus the absolute value, the short market value. Here's the GMV that you're going to run at. We choose the denominator to get to the risk profile that we want. That was a bit confusing, going to investment committee and saying, hey, we're doing a $700 million GMV ticket, never even understand what was going on. We don't typically have to deal with the financing side of things. Managing PVs, managing our excess cash. Do we take some risk with that excess cash? Do we do something cute with that cash? I don't want to take too much risk. Should we move balances from here to there? We are now a material client of one PV in particular. Who gets to use that good will with that PV? Is it state of Wisconsin? Is it Toxide? Oh, there's a new issue coming out. I want to talk to the UCM desk. While who's speaking for them? Is it Toxide? Is it Swift? That whole world of the stuff opens up to you because typically I don't get to talk to the PVs. They don't care about me. They care about Millennium and Citadel. Now, I'm participating in the markets. I want all the stuff. I want the research. Capital markets access. I want to start doing some other things. You better know what you're talking about. The first time I walked in there, I was like, I want the things. They're like, that's how that works there. Don't I get more things? And they're like, no. Well, who gets to say that those are my flows? Or I paid you this much? Sometimes it's Toxide. Sometimes it's PM. Sometimes it's Swift. Learning all that with a new experience for us. How did you reconcile the centralization of the potential benefits that you get on the platform when there are so many constituents within the platform? I don't think we figured it out yet. I did a whole trip to New York and met with all of our PVs. And I said, who owns these flows? Is it Tony? Is it me? Is it Toxide as a whole? It's a gray area. If you're the one directing that PM to go and trade at XYZ firm, you can kind of attribute it. Maybe those are your flows. If it's the PM that's saying, hey, no, I need this execution to be at this place because I've had a long-term relationship. Maybe a second flows is not as clean cut as I thought it was. The state of Wisconsin has a large internal trading desk trying to combine all those flows with the Toxide flows. It gets messy, but it does get figured out. The partnership has been mutually beneficial. Out of the gates, we were able to get financing terms that were good. That wasn't because of our small account that we started with. It was because of walleye activity. We benefited from that. At this point, we're very large. We're giving back to walleye in terms of the GMV. There's an economy of scale arguments at this. The smokey back rooms of how things work on the cell side as Derek was referring to, but what's very clear is that as Toxide gets bigger, everyone involved participates from larger heft to be able to cause there's been a rate somewhere to cost for everyone involved. When you three came together to create this platform and now it's turned into the significant business with other clients, how did you think about who owns Toxide? We're all partners in doing this. They become true partners of ours. We pick up the phone and talk to them multiple times a week. They're unbelievable. Faso and Michelle are just amazing. It's integral to our business. We want to see that business grown thrive. Even if we don't bring in other clients, this is going to be core, tors strategy for as far as I can see. This is the case with walleye. I hate the notion of limited partners. We aren't limited partners. We are true partners. Feels good. I've just been the world to do stuff like that. That is a practical matter. All three of us participate in the cash flows generally by Toxide. That's a good thing too. Where do you hope it goes from here? We want it to grow. This overall trend that's happening is managers wanting to put up their own shingle and realizing that they can access pools of capital to Tony and Derek, represent to his format. Toxide's a classic economy of scale type business. As it grows, it grows in the right way. It gets better to everyone involved. Even from a cost-sharing type structure, it's meant to grow with the right partners on both the client and the manager side. Derek, Tony, you've lived in a world for a long time where the growth of a manager doesn't necessarily accrue to you as an investor, a client of that manager. Now you sit on both sides of that. I'm curious how you think about Doxide from that perspective. When it comes to investing in hedge funds. Typically, it's performance attracts assets, assets ruin performance. This is not the case here. Obviously with any kind of PM that we invest in as they grow, the health is going to deteriorate. We try to find PMs that are going to be disciplined. We incentivize them to not leave off the management fee. We're going to pay you less in terms of fix, but we're going to pay you more in terms of incentive. They eat what they kill. That's not going to change. We're going to find PMs who don't manage too much money, but we're going to be able to access it via this stock. platform and as it grows, we should reap the benefits as well. Tony Will and myself, we're entrepreneurs. We like to build things. There's a number of things that we have on our docket to build on doxide. We're in a commodity super cycle. I would like to have a multi-PM commodity complex. I'm actively trying to find additional ways to keep growing the relationship. This space is getting more competitive. Now, the big platforms are allocating external managers. Getting access to that next talent coming out the door is getting a little bit harder, getting a separate account for $100 million on day one. They're starting to get $2, 3, $400 million tickets. Could we cobble together $500 billion and get a PM to manage just our capital for the first couple of years, lock down that high end talent that's spinning out so we can keep that alpha stream higher for longer. There's something about that. There's some ability for us who as like-minded sophisticated allocators. If we all see someone we like, can we put up a big enough ticket to be able to lock down that alpha for a little bit? That's interesting. Our team's constantly trying to evolve and use this tool in new inventive ways. There's a lot of things that we have at Swift as a big pension that might be able to be additive to platforms like this. Now that we have control over the assets and the trading and the PVE accounts, the example I use is I have a very large long only equity index account. I know a lot of guys that need stocks to short couldn't they borrow on from me. There are things that you can vertically integrate in your business. That's beneficial to both sides. So maybe I'm the lending out more stock at Swift. My PMs get to have certainty over their borrowers. Financing oranges. There are a lot of things as big asset owners have as assets that we might not be utilizing nearly as much. But once you're in the mix and once you're in this whole world of financing and pipes and everything, you can start using them. It makes everyone better off. Well, guys, I want to make sure I get a chance to ask your couple of fun closing questions before we wrap up. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few and each are working on a product or service. We think will be valuable to our community. One is old well labs or owl. Owl is the very best software I've seen for allocators defined and track managers. And I've seen a lot of them. Trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. Tony, what was your first paid job and what did you learn from it? I'm a son of an Italian immigrant who came to this country without any money. The value of the dollar was driven into my head at a young age. I didn't get an allowance for being cute or for existing. It was paint the fence or any kind of odd job around the house. And I get money for it. It's kind of like my career economy. I remember I was at my friend's house. They had a window washer. Do all the windows. The mom paid $300 for this professional window washer to do all the windows. I was like, oh, man, that's a lot of money. I decided to become a window washer, created my own window washing business, ended up recruiting some of my friends. We ended up washing all the windows in the neighborhood. We washed a hundred different houses in one summer. That gave me this sense of entrepreneurialism that I applied to when I was a proprietary prop trader in Chicago. When I worked for Bridgewater, when I joined the allocator community, I've always had that entrepreneurial spirit. And it was that first job that lit it. Well, how would you spend your ideal work day from wake up to bedtime? To the extent I have superpowers, I don't require a variety. I'm happy doing the same thing every single day. I'm pretty boring too. I get up real early. I go on beat to hell out of myself and gym, like moving heavy objects. I go to work. What makes for a working work day is not sitting at a computer looking at numbers all day. That's fun too. But running a business with a hundred and a hundred people, there's leadership aspects. Building things, that's why probably this group has worked together well. It's like building stuff too. So if I could spend my day working with like-minded people on how to move our business forward, that's really fun. And I go home, I got three kids. We married for over a dozen years and we hang out as a family and do fun things, go to bed and do it all over again. Derek, what's the best advice you ever received? I learned this a little bit too late in life. Investing those that invest in you. Do you have finite time? You want to invest in people where you're getting a return on that investment. As an allocator, you're not short on friends. Everyone likes you. But finding those real people, I've been doing this for 25 years now. I feel like I've gotten my core group of friends where I trust them, I trust their opinions. If I reach out and put time into them, I'm getting something back from them. That's been a huge change in my life over the last five or six years. My friend group has gotten a little bit smaller, but the quality has gotten a lot better. Tony, what's your biggest investment pet peeve? Overconfidence. People who think they can predict the unpredictable. If you've read any books by Nate Silver or Phil Teppock, they call it the Hedgehogs. The great storytellers. Not the ones who actually assign probabilities and understand that there's uncertainty with any prediction they call them the foxes. I try to find foxes when I invest in PMs. They don't tell us great of a story. They understand that my hit rate is 53%. Now I'm wrong 47% of the time. I don't have 100% confidence in anything. But if I can keep on hitting that 53% over time, that's gonna be a great business. Derek, how's your life turned out differently than you expected it to? I wanted to be a hedge fund manager when I was 16 years old. My grandmother gave me the book, "Pernor's Ball," the Michael Milken book. This sounds amazing. She's like, "What's a bond?" I'm like, "I have no idea, but it sounds awesome." So I set up my life to be on this trajectory. I never thought I would spend 16 years at a pension plan. I thought I was gonna do the New York Hedge Funny thing. I'm doing the pension fun hedge funny thing. It's been better than I ever could have imagined. I will ask one, what life lesson have you learned that you wish you knew a lot earlier in life? Jim McCall came out of the book recently where he has this phrase of live life looking forward in this at all. I've used that concept a lot more recently, which is, with your life moving forward, not backwards. I'm a mathematician academically, which concepts in math, which evolved around a memory less process, the only thing that matters to the current state. A lot of people live life trying to fix the problems over the past. That's a natural even bias. What makes sense is that you go for basis and that's kind of the only thing that matters, which by definition it is, you can only control the future. I wish I had a little more clarity around that earlier on. Well, well, Derek Tony, thanks so much for sharing this innovative new approach for how to access these assets and managers. Yeah, thank you. Thank you. Thanks for listening to the show. If you like what you heard, hop on our website at capitaliselcators.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. All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast.