This is Master's in Business with Barry rid Hoolds on Bloomberg Radio.
We have an extra special Masters in Business live panel that I recorded last month at Bloomberg's Hedge fund startup conference, and Wow, what a tremendous lineup. This was Alana Weinstein from IDW, probably the most prominent headhunter in the hedge fund industry. Additionally, we had a series of rock star advisors as part of the panel. Mike Rockefeller, he runs Woodline Partners there about six billion dollars. Previously he was at Citadel and Millennium. He really is one of the
up and comers in the world of hedge funds. Thomas Wagner has been running a credit fund for about a decade. They run about over at Nighthead Capital. He runs about ten billion dollars. Really insightful stuff. Brennan Diaz probably runs the newest of these hedge funds. He's a little over a billion dollars. He launched right into the teeth of the pandemic, a long only billion dollar hedge fund. And this panel was absolutely fascinating.
If you're thinking.
About going out on your own, hanging your own shingle, just trying to do it, yourself. These folks can tell you exactly how challenging it is and the tools you're gonna need to succeed. I thought this was a really fascinating conversation with no Ado my panel discussion at Masters in Business Live The Emerging Manager Playbook. It's been a crazy couple of years, from the pandemic to the new
regime of rate increases. Frame what's going on in today's environment and what's it like managing a fund in this sort of circumstances.
Start with you sure so.
I think one theme is that allocators are becoming more sophisticated about the return quality that they are receiving and what they're willing to pay for and what they want is uncorrelated alpha.
And you take that.
Concept, but then you look at the traditional long short hedge fund and they are running portfolios of less than thirty percent idio, which means that those returns are highly dependent on macro factors, very unpredictable factors that you'll be subject to. And what I think is an increasing appreciation is that a high idio portfolio is what is predictive for an uncorrelated alpha stream, and that is why you're seeing the massive increase in multimanager assets, and those assets
have more than doubled since twenty seventeen. If you look at some of the top launches that are coming out in twenty twenty three, Ilex and Freestone, that trend looks to be continuing. And the reason why is that a multi manager provides a one stop shop for an allocator where you can get a high IDEO, lowvall durable return stream and you can do it in one single investment where you could have scale and you eliminate.
Complexity, diversification built in right from the good go.
That's right, Alana, Let's.
Talk a little bit about this current environment. You see it from the perspective of talent.
Tell us what you're seeing.
Well, I'm going to zoom out, because if you all want to start a hedge fund, I think we need to kind of start at the top and I'm going to give you the macro and then we'll go quickly strategy by strategy. Barry, you and I talked about this recently. There was to me at least an amazing article that the FT put out a couple months ago which said this was news to me. I knew there were a lot of hedge funds, but apparently there are more hedge
funds than burger kings. Okay, true, thirty thousand hedge funds.
The other thing you should keep.
In mind is that the average lifespan of a hedge fund is three years. So if you guys want to start a fund and you don't want it to be just another Burger king that goes out of business, you need to understand what the lay of the land is
within each of those strategies. Mike talked a little bit about long short equities not to be like the grim reaper, but the reality is, if you're not a multi manager and you're not aggressively managing market risk, then you fall into the category of a long short single manager that
probably takes concentrated more concentrated directional risk. And if you look at how these funds have performed over the last two full years twenty one and twenty two, the average the cumulative return of these funds is down forty percent, okay, with some funds down as high as sixty percent, like Tiger Global.
So if you think about the dollars loss.
To LPs, and it's important you understand this because forty percent of the hedge fund universe is long short equities, so I'm betting there's a decent percentage of you here that is thinking about starting a long short equity fund.
There was a tremendous amount of AUM.
Lost, so Tiger Global pre twenty twenty one was one hundred billion, Maverick fourteen billion, d one thirty billion, and then non Tiger cubs like Alkeon thirty billion, Perceptive ten billion. When you're down forty percent on average, it's a huge loss to the industry. More than fifty percent of total losses into in twenty twenty two came from long short equity funds, and half of hedge fund liquidations came from
long short equity funds. So you really need to think about if you don't fall into a all alpha non correlated category like Mike does, what is the value that you're providing. Macro very volatile return stream. Twenty twenty one
crappy year for most macro funds. Twenty twenty two, great year, twenty three again not such a good year, and you see again brand name funds like Rocos, Castle, Hook, Element Element charged forty percent fees was able to up it to that in twenty twenty shrinking and trying to stem the bleeding from negative returns.
Credit a bright spot.
But I think, and I'm sure Tom will talk more about this, you really need scale to compete. And then there's the multi managers, and that's going to be your biggest problem as a new emerging manager, how you're going to compete for talent within a paradigm that has everything to offer from.
Analysts up through to pms.
They have scale, they have capital, they have resources, they have a pathway to be a PM. They have an aggressive payout. They have that and they are like, it's like mitosis. You know, we used to have we have the tiger cubs. Now we have the multi manager cubs.
Mike is one of them. He mentioned Islex. I hope it's okay. I share that you. He is now.
Providing strategic investments to multi manager funds.
Islex.
Are two guys from Citadel that Mike and his team gave capital too, and they're going to launch with two billion. Freestone Grove, another Citadel guy, is going to launch with many billions. Andrew Comery, who came out of D E. Shaw is launching with three billion. So into the fray. So this is the environment you're entering into and I as someone who has been recruiting in this industry for the past twenty years with my team, and we're working
with the biggest, most successful funds in the world. It's tough, Talent is scarce, it's they have many options, and I think the multi manager dynamic just makes it that much more intense.
So let me see what Brennan has to say about this. You're the only long only person on the panel. Is it that challenging to be long only or how are you finding this environment from your investment style?
Well, I mean, I think all the points Mike made are right, and I think that the whole rationale behind launching along only, coming from a long short background, was the realization that market structure was changing. The ability to access short alpha and short alpha curs were changing.
In us.
The ability to maintain short gross exposure with the same investment style and generate that level of alpha wasn't there as much, and so I kind of felt that pressure on the short side of the portfolio, forcing shorts or a running higher net kind of too bad options for an absolute return product. But looked at alongside a ledger and still felt very strongly that the pool of alpha.
We were accessing there looking out you know, basically eighteen to eighteen to thirty six months, so not looking out five to ten years, but eighteen to thirty six months forward, looking forward to what underlying businesses are going to be earning, and thinking about absolute value and intrinsic value and taking big,
concentrated bets on opportunities that were really attractive. That window was not only kind of as attractive as it ever been, but in some ways it is getting more attracted, kind of driven by the underlying short term volatility in the market. And so I don't think managing along only is more difficult to managing along shore. I think it's actually materially materially easier, which is kind of why we went down that route.
And I also think that there's material demand.
I think my expoint is one hundred percent right that allocators want to pay for value, right. You know, investors historically have not been you know, invested in hedge funds just to pay fees on beta. They've been willing to pay the fees on beta because the underlying assumption would be that you would deliver them enough OUTFA to cover.
The beta costs.
However, there are you know, large pools of capital in the world that want data exposure, very very large pools of capital that will always have beta exposure.
And so I think the.
Message of going to people and saying I will take that beta exposure, I personally want that beta exposure for my own capital, like over time, I want the beta because the beta collecting that risk premium should be positive and you only pay me when I generate value for you, value being defined as excess returns relative to the S and P.
I think that has a lot of resonance with.
With with a lot of capital providers out there, And I think that it's it's it's an opportunity for people who invest like me, who think like me, to to to go out and uh to go out and execute on if they so choose. But you know, you have to have the right model, you have to have a truly aligned fee structure and you and you have to kind of be willing to go down that road. So I I, you know, I think it's in many ways
the same. It's it's it's it's responding to the same trend that Mike is talking about and taking it in a different direction.
So so to clarify, some people have called them pivot fees. The profit participation is only on returns over and above.
What the SPX is generally, so it's actually I would say even more advantageous in that our management fees are are a pre payment on future alpha, So we have to generate alpha before we get to any type of incentive, right, so that the idea is over time, over the life of the fund, which hopefully is a very long life.
When you when we when we end at the end, we will look back and seventy percent of the economics of the alpha that has been generated will flow to the investors, in thirty percent will crew demander, and we try to make that as clean and transparent as possible.
That creates more.
Volatility in our in our and our overall incentive fee income relative to to other models. But I think that's very solvable from a talent perspective. HOWLD you kind of talk about that, but that's the underlying model.
Really interesting, Tom, What do you make of this current environment and how are you finding the world of credit within within the headphones realm?
Well, I, first of all, thank you Barry for having me here and for everyone tending appreciate it.
You know, credit is.
Relative to every other asset class we see today, and we invest we have of our ten billion, six of it is permanent capital, so we do a lot beyond just credit. We can do basically anything anywhere in the world we want. But credit today, and particularly private structured credit, so rescue financings, bridge loans, financings, to provide growth capital, all structured as credit offer the greatest amount of alpha relative to the risk I've ever seen.
In the twenty five years have been doing this.
It's extraordinary excess return and that's because that's not liquid. And one thing that I think all of you, or of those of you in the room that are contemplating launching a hedge fund, is there is an extreme push pull presently for liquidity visa V returns. Investors are allocators, are not liquid, and they need to generate returns, particularly in a context of higher rates where their hurdles have all gone up and they're stuck in older investments, particularly
private equity. They're probably going to take a period of time to recover to the alpha generative returns that they had historically produced. So they want you to be liquid and generate returns. That's not really possible today. So you've got to find a niche that fits you. And I think the best advice that I could give for folks thinking about launching is forget all the noise, Forget what the markets want, forget what the LPs want.
Do what you're going to be good at.
It doesn't matter what your strategy is, doesn't matter what your structure is, doesn't matter what your fees are. If you're good relative to whatever benchmark you're posted against, you'll do just fine.
Your business will.
Grow, you'll make plenty of money, you'll retire a happy person, your kids will do never have to work if they don't want to.
You'll do just fine.
But if you try to shoehorn yourself into something that doesn't fit, it'll go terribly wrong.
And I think the second most valuable piece of advice I can give you is.
Separate from all the examples you're hearing up here, of all these multi billion dollar launches, that's not normal, right, It's not normal. And you might think you're gonna launch with billion dollars. A lot of helped us get started. We thought we were going to launch with a billion five as of March sixteenth, two thousand and eight.
We had just come out of the Emerging Manager's Conference.
Going was perfect.
I was like, this is so easy.
Then eight weeks we raised a billion and a half. We're going to launch with three billion. Ken Griffin was backing us. It was like the greatest thing ever. Next day bear Stearns went bankrupt and by the time we launched on June third, two thousand and eight, we had four hundred and thirteen million of caple and the world just changed. Nothing happened with us. All the investments we were pursuing was good. Our first couple years were spectacular,
like everything went great and things turned out okay. But that second piece of advice is you can't bank on being a multi billion dollar launch, And so what does that mean.
That means you have to do everything.
You stand how to set up a computer on a phone, You better know how to debug your computer, you better know how to answer the phones politely, you should know how to make good coffee for your LPs when we stop by.
You're going to be doing all of it, Like, don't kid yourself.
And if you don't launch with billions of dollars of capital locked up for a multi year period. You run a lot of risk that you create a cost structure that' seemed compatible with where your capital could be, not where it is today. So I would advise that you do what you're good at and learn how to do everything well, and work really, really hard and stick to it for a period of time and if you love it, it'll work out.
So let's address the issue you just touched on that subscale operations. How do you compete for talent in the most competitive market in the world when you can't write giant checks and you're running subscale.
Let's start with you.
He ran subscale. That's good, clear, but on.
A relative basis, Yeah, it was only two billions.
Well, you know, there's a great movie that came out in nineteen eighty nine, so some of you might not have known it, but Fielded Dreams and if you haven't seen it, the main character Ray Kinsella who's played by Kevin Costner. He's out in the middle of his cornfield and he hears a voice.
If you build it, he will come.
And he doesn't know what build it is, but he decides to build a baseball field in his cornfield and lo and behold a bunch of dead baseball players show up at his house and start playing baseball. And you should have the mindset of what that movie tells you, which is, if you build it, they will come. If you have a differentiated value proposition, people will invest. And you know, this panel is a great representation because it's
all different strategies. We're all but what we have and what people forget is what we're offering is a product. And so you have to ask yourself, Okay, why am I here, what is the product that I'm offering, and what customer base is going to want this product? And if you invest early in your infrastructure, if you hire before you have capital, not after, then I think that
you will get that capital. You know, my good friend Brandon Haley, who launched holisne He in twenty seventeen, had over two dozen employees without a zero with zero dollars and he ended up being a gigantic launch because he sold that story to investors. So that's the mindset I would take lot.
I think the difference, though, Mike, is you were coming from Citadel.
Brandon was coming from Citadel.
People were willing to come before you built it because they knew what each of you represented. We as a firm are very loath I'll be candied with you to do work with emerging managers because the truth is, most of you are.
Not launching with millions of dollars. You're probably not even launching with hundreds of millions of dollars. And given how competitive the talent market is, it's very hard for really talented people to get behind you with no proof of concept because they're making two bets on you that are beyond the.
Scope of what they're the bets they're normally making. They're making a bet on you as a new founder, you've never done this before, and they're making a bet that you can scale, that you are worth getting in the trenches with, and that you can grow.
And I guess the.
Good news bad news about my Unfortunately, it's not a prediction, it's just a fact of life.
Very few of you will launch with scale.
Is if you're under two hundred and fifty million, I actually don't think you need to worry about this.
You guys may disagree with me, but if you're a.
Really small fund, and many of you may start with twenty five million, or fifty million or one hundred million, you can hire junior people. You can hire people out of the cell side. You can hire people at a banking and they're moldable and will be thrilled to have a seat at the table. And I also think it's difficult unless people.
Know you and have worked with you before.
You know, the whole other set of things is are you a good mentor can you develop them? Are you going to pay them fairly? Are they joining something special with a great culture? Is there a runway? These are all the sets of things we deal with in helping people cross the divide to go from where they are to a large, established manager and get them comfortable on all those points.
And so that's also there. And if they haven't.
Worked with you, you know, they don't really know what the odds are that it's going to be a good fit. And you in turn also don't want to bring on board senior people that you don't really know and have to give them substantial points in the fund and then it may not work out. And if you end up with the high class problem of achieving scale, then we get into the setting up an economic structure which is
going to be attractive to your investment staff. And I'd say the one guiding principle on that is, and it's.
A good thing.
As a newer fund, the value creation for everyone working there should come at a massively different pace than sitting at a large, established player where much of that value has already been created.
So what do I mean by that?
If let's call it twenty five to thirty percent gets paid out to the investment and leadership team.
This is on average, and.
This is a back of the envelope thought, but I think directionally it's true here you should be talking about thirty percent at going to fifty percent to the extent that the people you hire. And again this is further on down the road. Once you have scale and can attract more and your credible people to the extent that they put up great performance, they can hire and develop people, then you're able to take on more capital and.
You're creating more value.
But at the end of the day, everyone is going to reference you within an inch of your life, and the same way LPs are going to want to get a point of view on you, talent will too. And there's what you're telling them upfront, which hopefully is attractive, But even more attractive is the path forward and you don't want them discounting any of the promises or vision that you're giving them because of what they're hearing in
the market. So that's something to bear in mind, and I think really critical as you ad both in the less so maybe in the immediate term, but certainly as you progress and are trying to reach out to really talented establish people, right.
And you're finding the same sort of circumstances when you're competing for talent.
What's your journey been like?
Well, I think it's a little bit focused on the type of talent recruiting, right. So I come from a world and a lineage of funds where we don't hire experience people. Where there's a kind of fundamental viewpoint in the firms I've worked at that we hire people that are less experienced and we train and develop them. And that obviously aligns easier when you're subscale, but that that's not I didn't make the decision because of scale. That's
just how the world I come from does things. I think though, to a honest point, you have to be realistic about what the envelope of what you can spend is, what that looks like, and that what the talent you can get with that in a line against that. So you have to be really kind of thoughtful about, you know, Tom twin earlier, what am I, what do I want to do?
What does my strategy look like? What does that business plan look like?
What am I capable of doing from a development and a mentoring and a leadership perspective? And then how does that work from an economic perspective, both in terms of day one but also to a honest point, what does it look like over time? What does that economic trajectory look like with success as you go? And I think you want to be transparent with people around what day one looks like, what that evolved to over time, and
what are the parameters that trigger that evolution. And I would say the other thing that's you know, fundamentally different is that the analysts I would guess at all of our firms are probably doing you know, they're all being analysts, but they're probably doing slightly different things. That the job
is not the same at every firm. And I think that you want to be clear in terms of the way you're going to invest the types of things that the analysts will be expected to do, and that will there'll be some natural self selection of firms that individuals that want to have that think they can be more or less successful in different environments.
And let me follow up, when you talk about hiring people and mentoring them and shaping them, is it just analysts or is it traders and pms and others within within the funds?
I would say my general point of view is that it's it's pretty much true across the entirety of the firm. That when I think about the firms that I've worked with and I work with in the past that have been successful, and you look at the people that have been highly successful there, none of them were really senior hires coming in. They were hired pretty junior, and they were trained and developed within those firms. And in a lot of those firms, some of the biggest hiring mistakes
they've ever made were more senior. Now, that's that's true for our process, that's not true for everyone else's process. And so I think that there's always been a natural pull towards going younger and less experienced and training and developing those people. And that just makes it easier for me in the current environment because I'm not competing against you know, the type of people that aligned.
Well, you're also not injecting a fully formed human so to speak, and our business into the ecosystem, and you don't know if the tissue is going to reject the organism.
It almost certainly will.
The one other thing, though, is as a new manager without much capital, just bear in mind, LPs are making a bet on you. They're making a bet on you as a manager not on the bench yet if you're launching with just a small amount of capital.
Interesting point, Tom, you've been doing this for a while. What's your experience been competing for talent and either hiring or building at all.
Yeah, it's it's really challenging. It's always the toughest part of the business.
I think.
Well, second in raising the money, that's that's probably you know, parting dollars from people. We have long lockups and a lot of it's really long, so that's that's always the longest process. But you know, I think it's an it's a unique challenge today because there's been a shift over the last you know, fifteen years that we've run Nighthead where a new generation of professionals are coming into the industry or have come into the industry. They expect a
lot more sooner. And I think this is you know, this is pretty common across the you know generation of folks that are say twenty five to late thirties years. And that's difficult because if you think about the last fifteen years, we've gone fifteen years without a recession, really, and that means you really don't know what you're doing because if you have, yes, you invested in one year with rate rise, okay, but you still haven't invested in
a recession. So it's really hard to get people that have experienced that are relatively junior, that have a perspective of how bad things can be. Right, and we've learned what happens with higher rates, or we're beginning to learn what happens with higher rates, which not even I or people substantially more experienced than I am, have contended with. It hasn't happened since the late seventies, and so you know,
we're seeing new things. Well that means that if you have folks that haven't experienced those things, even if they can imagine them, it's different to actually experience them. And so managing people that haven't yet had the experience the challenge and for you, as emerging managers. You need to do that in a way that controls risks and keeps
people motivated. That's challenging, right, They when they believe that they deserve more, they have a genuine view that they should have more responsibility, more seniority, more economics, but they haven't yet been battle tested. That's a tough dynamic, and it's one that you really need to be very thoughtful about and how you manage. I would say, don't cave to the pressure. You know, find the right people that
understand that it's a process. They've got to be committed to building the business alongside you, or it's going to come crumbling in upon itself. I think the other thing that's notable that we've seen recently is there's some really high cost structures in the hedge fund world, you know, like eight percent eight percent fixed costs. Like that's insane, like insane that that is not the way to start
and run a business. If you have your fixed costs meaningfully above your guaranteed fees and then you adjust for loss of capital, right, if you can't build that cushion in, you're at risk. Like just look at yourself, like a business, would you invest in that business because your LPs are going to look at it the same way. They say, what happens if I allocate this business like I don't want to be like everybody, you know, running for the door. And if I'm the you know, the ant and the
elephants behind me, it's not going to be a good day. So, you know, you have to think about the cost structure, which aligns with how you manage the people, which aligns with what type of people to hire. So it's a it's a multi variable analysis which I'm definitely not smart enough to solve, but it's you know, for me, it's a feel you know, the types of folks that you
can hire they think will be a good fit. And I think it's incumbent on new managers to think about, Okay, who do I want to have effectively in the trenches, you know, with you because I think the reason that a lot of firms fail in that first three to five year period is because they build themselves or they expect stratospheric growth, and the reality is it can be really lumpy, right, you just don't know, you know, our experience is a good one. We launched, we thought we
were gonna have tons of capital we had less. The markets fall off a cliff, and I mean like fell, like really really off a cliff, and no one we didn't expect that, but we built the business to be able to withstand that, and then we grew, you know, really rapidly after that because we set up for you know what if everything goes wrong.
So I threw a lot into the mix there.
But I think all of these things are important considerations when you're hiring. It can go great, you can build for huge success and have it, and that's fantastic, But the odds are that that won't happen either.
The markets won't give it.
To you, the personnel won't be there, you know, the capital won't come in the way that you expect. So if you build for a sense of conservatism and you build a buffer around your business, you know you'll get to escape velocity.
Really interesting.
I'm intrigued by anyone who's working for you who was born after before, if they were born after nineteen eighty seven, they've never experienced the recession in their professional career.
It's pretty right, pretty amazing.
So let's talk a little bit about you mentioned your LPs. How do each of you differentiate yourself what you're selling. Point when you're either trying to bring in capital or hire somebody, or in any other way, make yourself differentiated from the masses that are out there.
Let's start with you, Mike.
Sure.
So our view is and was that the successful funds in the next decade are those that will be durably built businesses. As Tom mentioned, you know, you have to think about this as a business and those that can attract, retain and develop talent with a competitive advantage. And you know this past weekend there was a Formula one race in Monaco, so I'll use that as an example because a durable successful hedge fund is a lot like an
F one racing team. Right, you have the racers, you have your investment team, that's the DNA of your business. But without a great car, you can't win races. And behind those cars, okay, you have mechanics, engineers, strategists, teams
of people that are helping. And similarly, the hedge fund of today and for the next decade will be a hedge fund that has an infrastructure that can support their investment team, allow them to operate at peak performance, and then run the business of a fund and that's a different job than what all of us here as investment
managers do. That's not our expertise. So you have to have that infrastructure, those experts in house to help you do that, and that I think that has been a big selling point for our LPs in the beginning, but also the talent that we bring in knowing that we've built this to last.
What I'm hearing from you, Mike, is that generating alpha. That's table stakes.
That's just what you need to sit down.
Everything beyond that seems to be where you separate yourself.
From the crowd. Absolutely.
LPs want to know that they can put capital and they know it's going to be an I liquid investment and know that they are putting capital into a stable, durable business. And that's what you have to provide them when.
You launch Alana.
You have a unique perspective on differentiators and hedge funds.
Tell us what you see from your vantage.
Point, Well, people come in and they meet with us and they talk about what they're going to do. And I will tell you, having seen a gazillion presentations, investor materials letters, it's great to have that stuff done in a way which obviously you're going to put time into it, you want to feel proud of it, but at the end of the day, my feeling is this industry is
for the most part, very commoditized. And the reason I went through the different strategies is to let you know that to the extent you're launching a strategy that has not performed well in the last couple of years, LPs are not going to give you the benefit of the doubt. It doesn't matter what your presentation materials look like. It just doesn't. You're going to have to put up performance. And the biggest piece of advice I can give you is maybe you know you can say you're differentiated all
of this stuff. You've got to start investing as quickly as possible. You bang the tin cup for capital for the first three to six months, You do what you can, and then stop literally stop. As counterintuitive as that sounds, what you want to do is start to prove show some proof of concept because unless you are coming from a fund that is a top multi manager, or you're coming from a great a fund that is pedigreed, and LPs want more of that DNA like I'll give you another example.
Last year, braid Well launched.
That was a fund started by Alex Carnal that came out of Deerfield and had a huge reputation in healthcare, and he launched with.
Over three billion dollars.
So unless there's something that LPs can see sink their teeth into in terms of the DNA that you carry, you're going to have to show.
Them what you can do.
And then yes, it becomes a question of how do you beg borrow and steal to fund the enterprise while you're putting off performance so that.
You can then go back to LPs raise capital and.
Also get better talent, because now this field of dreams has some skin on the bones.
Brennon, what do you think what is the differentiator for you as a long only fund manager?
I mean, I think the easy answer is that we're a long only head manager that's doing concentrated hedge fund like investing, and there's people that do that, so I like. But the field there is a lot smaller, and the pools of capital allocated.
Against long only or are pretty large.
There's a lot of money in passes, there's a lot of money and other long only strategies, So it's different than launching, you know, a higher fee product like a long short product where you're competing against you know, the mics of the world, where they're making those trade offs, it's a little bit different. I would also echo the idea that my experience and not every allocator is the same. Allocators want it to invest in what they perceive as
institutional scale managers. It doesn't necessarily mean you need to have thirty employees, but they want to. They want to look at it as a real business. They want to understand the plan, They want to understand how you think about the growth of the business, the contingencies of the business. But your strategy is how you're building the culture. Because to be perfectly frank that I think that's the that's the easiest thing to kind of underwrite from an outside.
Perspective's always there to underwrite stock pitches.
I find it hard to underwrite stock pitches if I don't know the stock really really well. And so I think you want to you want to invest in that part of the business, and what that investment looks like is going to be, you know, specific to your strategy. Right, it looks very different for a multimanager than it does
for a smaller organization. But you can still I would say get to that level of institutional scale as a smaller manager if you if you make it a priority and you're thoughtful around how that looks both day one and what your communication looks like for what it should be over time.
Tom, what's your big differentiator?
I don't think we really have one. No.
I think there's a great quote pickable that's not picking out.
We're yeah, random sports investments. Seth Klarman. I read a great quote.
By him, I think two weeks ago, and he said, we're fortunate to be unconstrained by a specific investment strategy.
Remember the quote.
Directly, that's so beautiful, right, because what are you paying bao posts for. You're paying them to go out and find great investments where there's downside protection. So the way that we present what we do is that we can invest anywhere in the world really in anything, but everything we do we.
Take a credit approach to which is we have an extreme focus on.
Capital preservation and we try to structure for the best possible return. Sometimes it's an equity like return or linked return or convertible or warrants, so.
We can gain an equity return, but that's really the approach. So every investment that we pursue we take that approach.
With the investment that we made in the football team in the UK was structured as a secured loan with you know, the ability to eventually you know, gain full control.
You know.
A lot of the investing that we've pursued has been structured in that way. And I think that's a differentiator because it's a little different than investing in somebody that's going to go trade hyal bonds or you know.
Do public distress.
And I think the second thing is, at least from my core business, which we started as a distressed debt fund, the distress debt funds just went off the rails the last fifteen years. The way that they operate is they look at a business as a carcass and then approach it to fight over the carcass.
Right.
We look at a business that might be a carcass and say, can we revive that thing?
Right? Because if you.
Can, the pie that you're fighting over grows, And that's a lost art for a lot of investors in turnarounds, like there aren't many real turnaround experts anymore, and that is how you make tons of money, at least in my sub sector. And so I think we've done that pretty well. Like we've invested in a few businesses the last few years where we had control that we've turned around. You know, our biggest short going into the COVID was Hurts.
It's now our largest long we've ever had in the history of the firm, and it was a turnaround plate you know, centered around electrifications. So you know, I think you've got again. It goes back to what I said the very beginning. You got to find what you're good at and what you love and then apply it to your strategy and do that.
Like, just do that, forget all the noise.
Just do what you love and what you're good that and the rest of it should should be okay.
But also having a structure that supports what you do is very advantageous. I mean, I don't want this to be lost on you. Of that ten billion, four billion is in an insurance company, and you have what another.
Four two and a half that's in draw down.
Right, so there's no timeline for returning capital.
Some of our capital is literally the insurance company is permanent, permanent, and then one of the drawdown funds the investor. It's a really like uber wealthy family. When we draw the capital, we never have to give it back. Now, we don't get paid until we give it back, but we don't actually have to give it back. And our fee is a sliding don't steal this, by the way, it's like a really good idea. It took a long time to come up with this. The fee is a sliding scale
based on the IRR. So there's this weird push pull because sometimes you do a great investment, you compound at forty or thirty five or thirty for the first eighteen months, and then you know you're not going to continue compounding.
At that rate. You're probably going to slide to a lower level.
Well, we have to decide do we want to ca after the higher and send a fee, or do we want to hold it and make it a larger moike. I always go for the larger moik, right, Like, the worst thing you can do is try to live off of IRRs. It's not possible. It can't eat those moik is what you want. So that duration of capital is hard. But the dumbest decision I ever made was pursuing long duration capital. We would be three times larger, four times larger.
If I had just you know, built a colo business and listened to Alanta and like hired people to do direct lending and do these other things.
I wouldn't tell you to do that.
No, but you were like you always had these good ideas, like this is what your peers are doing, and you had very very good advice over time that I listened to none of and I'm much poorer for it.
Well, but friend's it ten million dollar fun. So there you go.
No, but I said, you're going way back. I want permanent capital because if I just said, if we can have permanent capital, we could do whatever we want, Like we could buy English soccer teams. Now what I said we could do we could make investments that really compound for a long period of time. And so we focused on doing that. Maybe it was a good decision and maybe it wasn't. Time will tell, But again it went back to like that's what we love, that's.
What we wanted to do.
Being it's not just the strategy, it's also the structure.
You wrap that up.
You created a structure which is like I mean, it's almost a mini Apollo. You created a structure where you just charge on alpha. LPs can get behind that. It may be long only, but you're just charging on alpha and you're all alpha. So and you have all of the DNA from one of the greatest hedge funds in the world. These are things that make each of these
guys differentiated to your question and unique. And the reality is there are very few individuals that come to market with that skill set and that foresight.
So since that brought up site back, then that's true.
Since we've brought.
Up LPs and allocators, I want to skip ahead to this question. What's the hardest question that you get asked by your limited partners or allocators? What's the most challenging question they throw it?
You will start with you again mine.
Yeah, I think there are two hard questions. One is on the topic of exiting people. And you know that is you know, mostly an objective decision, but there's a lot of subjectivity to it as well. And I think you know, LPs want it to be you know, objective, and it's sometimes you know, hard to explain explain some of the background to why we might keep somebody versus versus exits to them. I think the second question that they ask and we have a tough time with is
just on adapting any strategy that we have. You know, LPs don't want you to adapt and change the business model that you promised and that and that's and I think that's completely fair. But there are times that are critical in a fund's life that you need to adapt or you'll die.
And so for example, right, so.
You know, whatever it may be, that that is a hard question to answer because you know, most of the time what they want to hear is don't change your.
Path at all.
Alana, you want to, well, I do want to, but I also want to comment on what.
Mike said, I do. That's true.
But when you have, however, many years of putting up great performance and delivering exactly what you promised LPs, there's a higher receptivity I think, to then whatever you see the pivot points, as I've seen this with other clients as well that maybe started as one thing and as long as they didn't stray too far from their core DNA.
I have one client that is now fifty billion. He was thirty billion two years ago, and he's done it through us thinking through create other strategies and other products that are tangential. But still related and he's got credibility with his LPs because of what he's delivered turnover.
Okay, I just have to comment on this because.
You know, like it's such as the bane of my existence, and I think it's one of the biggest problems in our industry. People are terrified. LPs are terrified to fire people. They think somehow it's.
Going to reflect poorly on their ability to retain a team, their culture, something bad's going on at the fund.
You mean gps are terrified of fire people.
Yeah, but they're terrified of l people.
Well think, Sorry, that's what I meant.
You have to be You have to give people room to fail or to succeed rather give give them runway, give them tools, help them develop. But at a certain point you need to graciously exit them if they're not cutting it. Because the majority of you will not have a pass through model. Okay, I mean.
That's just the truth.
And you're gonna have a little problem called netting, which is Peter over here. I'm going to use just simple illustration his ideas put up one hundred million of piano p and L and Paul over here lost one hundred million, and you're zero and which you don't want to do.
Who is Peter and Paul?
You don't want to pay from You don want to take from this guy to pay that guy. Sorry, take from this guy to pay that guy. Because you're gonna end up losing your best people. And you also don't want your a's to feel like they're surrounded by a bunch of bees or worse yet, c's. So you need to manage people who are not cutting it and give them time to succeed.
You need to manage them out and don't worry about about your LPs because at the end of the day you're going to have a much bigger problem if your stars leave.
The appreciate you cutting your losses.
I just you have to manage talent the way you manage your portfolio. That's how you have to approach it.
You have to be you have to be rigorous, you have to be you know, you have to make tough decisions and you can't worry about anything else.
This is the biggest problem.
It's not just emerging managers, but in general that I see in our industry and the best founders, okay.
Are the ones who do this really really well.
And sometimes you know, people sort of they get a bad rep for it, but they're also the best at developing people and giving people the most runway.
It's about creating an environment which attracts rock stars. On your question toughest question, one of the things you mentioned mentioned is how you're going to pay for resources. So, if you have a two percent management fee and you're an one hundred million dollar fund and you come from a fund we're used to having tens of millions of dollars spent on research and software, in data and corporate access, you have to answer the question.
To LPs as to how you're going to fund that. You can't have you touched on this. You can't have as one hundred million dollar fund two percent management fee and then one million dollars spent on fund expenses because that's a three percent dragon returns out of the gate, and it's even higher if you're less.
And the answer to that question really has to come back to how are you special? Okay, you don't need all these data sources. I'm going to do X. I'm going to do it really well, and here's what I need.
And be very precise about what you're bringing to the table and the resources you need. To support that. The reality is you're not competing head on with these funds that spend tens of millions of dollars or even hundreds of millions of dollars on research.
Brandon, what's the toughest question you get asked by potential LPs?
I'd say during the fundraising process. For me, the toughest is always what what's your target that you're going to raise to which my answer is, I have no idea. You tell me, we'll see. I'm going to launch it and we're going to see what it is, and it'll be what it is now. I would say that the hardest question I always it's a little bit like the last question is how do you how do you differentiate
yourself versus other funds? Because I always inherent in that question is you have to know what that other fund is doing. And like I'm a strong believer that unless you're in the walls and unless you understand.
Exactly how the investment process works, it's really hard to compare yourself to another fund.
And so I try to turn it back to this, you know, this is how we invest, this is how we do things. You compare that to the other people, you kind of see in the market, but during the fundraising process for kind of everyone in this room that's about to go through it, you know, the how what what's your target for raising? I always found somewhat music because I don't think anybody really knows until last minute.
Tom, how about you, I'm looking for a doozy from you.
It's I love the question, like what do you see as the great opportunities over the next six months?
You're literally like really you know the answer to that question.
I wouldn't need you as an LP, right, I'd already be retired.
Like managing my own money and somebody else being managing my money in the family office. I'd be a professional flight fisherman, you know.
Like March, you know, sixteenth, twenty oh eight, no one knew that we were about to embark in the greatest run of distressed financials we've ever seen.
Right September tenth, two.
Thousand and one, no one knew there'd be a huge opportunity in airlines. You know, we just kind of go through history like you just don't know. So I think my answer to this question generally, and playing off a little bit of the other comments, is don't worry about what the LPs think. Okay, just say what you do, what you believe is right for generating returns. Because I'll tell you, particularly as a distressed in, the LP's are always wrong, always, like very very rarely do we make
a new investment and people go, Wow, that's great. Usually they're like, oh my god, really, like you really think that's a good investment? Yes, like this is what's going to happen, Like, oh my god, who lost his mind? So I think you have to balance the fact that you're the asset manager, you're the business builder. Just be honest, right and stick to your strategy, but don't get swayed by what the crowd thinks.
That's a surefireway to fail.
Let's stay on that end of the panel for this question. Tell us the biggest surprise or lesson learned over the years, what really sticks with you.
And I'm still doing it now. I think the fact that I like it so much.
Yeah, I came from you know, I was on a sell side trading floor with a thousand people and it was sort of like, you know, very collegial, lots of interpersonal reaction, interaction, very loud, boisterous.
I love that and thrived in it.
I know it's super surprising and the you know, when you go to run your own firm and you start, particularly you're small, it's just totally different.
And I wasn't sure that it would give me the same.
Level of satisfaction and that that get energized every day. It's been way better. You know, my afro's gone and I lost all my hair.
Which probably means to stress levels up.
But it definitely has been, you know, a pleasure and far exceeding what I ever anticipated.
Brendan, what's the biggest lesson or biggest surprise that you learned over the past few years.
I think the biggest surprise, and I think it's not intellectually a surprise, but it's a little bit like having kids. You don't really know what it's like until you've got them. If you've worked, if your background is working at other funds, working with other people, you have peers. You work with other people, you have peers if something's going wrong, and go complain to those peers. When it's yours. It's you and the way you behave and the way you act
and who you talk. It all matters because you're setting the culture for the entire organization. And that's, you know, the thing Jim Parsons, who who I worked with before, showed me before I started. You know, the highs are higher and the lows or lower, and you kind of feel it more internally, and the ability to socialize it out is less.
There and so it's one of those things.
It's not obviously I would say that I think everyone in the room be like Again, of course it is, but until you go through it, you don't know what it's like.
And again, highser higher, lowers or lower. I think it nets out to being awesome, but.
Prepare yourself for that, and prepare yourself that it's different and how you behave matters.
A lot you've seen, You've seen so much from your vantage point. Tell us what was the biggest surprise was for you. We'll save the biggest lesson for the last question, but was.
I just want to answer it this way.
I mean, it nets out that it's awesome when you're successful.
But the common the most common one thing I hear.
I mean I get this literally at least once a week from real managers.
These aren't guys who couldn't cut it.
These are guys who got to at least two three four hundred million. They had actually good returns even with the volatility of the last.
Couple of years.
And they are either closing shop and you just need to be aware of this, or they're just not having fun anymore. You talked about having fun and loving it. You go into this business, you go into the idea of starting a fund. You're all emerging managers for two reasons. You believe in your strategy and you want to put it out into the world with your own imprimature and which you don't really realize or maybe you realize it, but yes, like the having kids analogy, it's not until
you're in the seat that it's really tangible. These two things investor and entrepreneur, these two hats you need to wear, are actually in conflict with each other. And every moment you spend, particularly as a new manager, not investing, and many of you will not be able to afford out of the gate the same infrastructure that these guys could.
So you're going to get pulled into HR issues and legal issues and administration issues, and god, you're going to be dealing with LP sometimes one hundred percent of your time, and you're going to be trying to put up great performance, and that's exhausting and it's sad, But there are many I just have to tell the truth. There are many examples of individuals who got to a point where one might call them successful. They're running four hundred million, five
hundred million. I have one guy who's running a billion and a half. His returns have suffered because of the distraction, or they're just not having fun anymore, because the thing that got them into this in the first place was a love of investing, and they find themselves actually focused on a whole host of other issues which really are not how they want to spend their time. So if this is what you really want to do, and it's an itch you want to scratch, you should go do it.
But to the extent what you really want to do is have autonomy, invest have scale out of the gate, have great resources, and not that fus necessarily about all the rest of it. We should have that conversation, and if you do launch, and you launch successfully, we'll have that conversation too.
Mike, what was the biggest lesson, biggest surprise to you?
Yeah, you know, I bear You asked this question when I was on another panel with you A couple of years ago, and interesting, Michael, Interestingly, it's the same answer. And you know, this is a talent driven business, and what's been most surprising is the compounding effect of great talent. You always think about it in financial terms, but people who hire great people and keep the bar high, it's amazing what it does to your business.
And so that's been the biggest surprise continues to be.
So we're just about out of time.
We don't have time for audience questions, but let me just throw one last question ten second response from each of you, and we'll.
Start with Tom.
One piece of advice for someone about to launch a new fund, Just.
As I said earlier, just do what you love, surround yourself with people that you really want to work with, and stay true to your initial objectives, one of which has to be to work as hard as you possibly can.
Right.
Yeah, I would kind of a correlaria to that.
Don't try to sell people on what you think that you want to hear. You have to come to market with a perspective. You have to have a strong point of view, and that either works or it doesn't. And that's the that you have to kind of underlying make. But it won't work if you try to go if you try to shoehorn it into something that it's not.
Alana, take your time with respect to hiring people, build this in the right way. LPs would rather see a longer and slower ramp. With respect to optimizing your investment team and your non investment team and performance.
First, focus on putting up the numbers.
Final word, Mike, what do you got?
I'd have to say in honor of the late Sam Zell who said this, go for greatness.
Truthic Mike Rockefeller, Alana Einstein, Tom Wivener, Brennan Diaz, thank you so much for your time in your insights, and you're out of here again. So that was the entire panel. You heard the whole thing in its entirety.
We ran late, didn't get to.
Get questions from the audience, and it was really just all Diaz, Rockefeller, Wagner, and Weinstein discussing how challenging it is launching your own fund, especially in this environment. Special thanks to my audio engineer, Rob Bragg for putting this together. Michael Boyle was the producer of this event. And if you ever get a chance to attend any of these Bloomberg Live events, they're really quite special, really really worthwhile.
Take the time and spend a couple hours and watch some of these folks tell you what they've done to succeed.
You won't be disappointed.
Thanks for listening to this podcast. Extra Master's in Business Life