Mike Rockefeller on Launching a New Hedge Fund

This is Master's in Business with very rid Holds on Bloomberg Radio.

This week on the podcast, I have an extra special guest. Mike Rockefeller of Woodline Partners launched what was one of the hottest new hedge funds in a long time twenty nineteen. He came out of the gate having previously worked at Citadel, raising about two billion dollars in the new funds. Since then, it's grown to about seven billion dollars. And they are not the typical hedge fund. They run a very specific sector focused type of fund. There are about thirteen different

Thanks for having me, Berry, looking forward to the conversation same here.

In fact, we had a conversation at an Emerging Manager's panel back at Bloomberg invest earlier this year, and I thought you would be great for Masters in Business. So let's dive into your background. How did you get here? Tell us a little bit about the early days of your career.

Sure, so I was a neuroscience major in undergrad so I had no intention of being an investment Yeah, it's you know, a study of the brain and spinal cord. Pretty specific, and you know, I just I love biology. You know, the human body is so complex and will never quite understand it. But I had this really unique experience in between my junior and senior year of college. I got an internship at a investment fund in Baltimore.

So I.

Know, I know it's a big risk, but I did. I went down there and I spent the summer. And you know, I love sports, Barry, and you know, I think they teach you so much about life. I was not good enough to be a pro athlete, but I was amazed how many similarities there were to investing and being an athlete. You know, the competition, the practice, the

So you start at the healthcare group as an analyst in City in the early two thousands. Obviously the background in neuro had to help.

Yeah, So after my experience in Baltimore, I wanted to pivot to finance and came back to school and applied to every major investment bank. That did not go so well. No one called me back. It was late in the process. Most most of the kids that were going into banking at that time already had their jobs, and I didn't have a back around that banks wanted. I had never

What was a job like?

Well, a couple weeks before I joined banking, someone gave me a book called Monkey Business. Have you read that?

I have not.

So that book is about bankers at DLJ in the nineties, you know, Premier investment bank, and it talks about how they worked eighteen hour days, slept under their desk, endless pitch books every weekend. And I thought to myself, there's no way it could be like this anymore. That was back then, and I have to tell you, Barry, it was exactly like that. It was brutal. But I was so grateful because I knew my life could have been different,

Huh. Really interesting. So you go from City, eventually to Millennium and Morgan Stanley. Tell us about what you did at those shops.

So in two thousand and four I joined Morgan Stanley Equity Research. That was great. They had a star studded cast of research analysts Byron Ween who sadly crossed away recently he had retired, but he was still active, Henry McVay who's now at KKR. He was the US strategist. Katie Huberty, who's still there now, was a young, up and coming tech analyst. And I worked for Jamie Rubin,

So now let's talk a little bit about the buy side. Your next stop is Millennium. What was it like there?

So in early two thousand and eight, Millennium was looking for an analyst at one of their funds out in San Francisco, and I jumped at the opportunity. I had never been to San Francisco.

You're working in New York.

I was working in New York and I jumped on a plane and moved to San Francisco. That was my shot, you know, So I was I was in.

Two thousand and eight, the start of the Great Financial Crisis. What was it like being at Millennium as everything kind of melted down?

So Millennium employees a market neutral equity strategy long short in other words, exactly. And when I joined, I frankly didn't appreciate the power of that type of investing. And then the fall of two thousand and eight came and I learned the power of that type of investing. And to the credit of the portfolio manager that I was working with, Josh Fisher, we were actually up that year.

Wow, that's pretty that's pretty impressive. So your next stop is Citadel in twenty eleven and you spend six years there. Citadel also, like Millennium, has a fantastic reputation. What was your Citadel experience like?

So, during my time at Millennium, as my appreciation for proper portfolio construction started to grow, I had heard that Citadel was a pioneer in this type of investing. So in twenty ten when they were looking for someone to start their healthcare team in San Francisco, I jumped at the opportunity. Citadel didn't jump as quickly as I did. That was an eleven month interview process, Yeah, including in all day what you would consider FBI like interview where

So that had to be a fun experience. Had to be a tough decision to make to leave a shop like Citadel.

It was. My partners and I were incredibly fortunate to grow up at Citadel. It was there that we learned a unique and differentiated approach to portfolio construction and investing where the output was an uncorrelated alpha return stream.

What made you decide to say, hey, we really need to do this as a stands alone outside of a big complex fund like Citadel.

Yeah. So Woodline was founded by myself, Carl Kraaker our co chief investment officer, Matt Hooker, our chief operating officer, and then a group of us who worked together for many years, and we studied the industry leaders of the past twenty years, and we believed that we could iterate and improve on those learnings and create a durable investment

So what was it like when you had to tell Ken, Hey, this has been great, but I want to I want to hang my own shingle out. How supportive was he?

The whole process was exciting, occult, scary, wonderful, all of those things. And leaving a successful career and starting your own business makes no sense on paper. The chance of failure is so high, and it was a bad decision financially initially, So we had to make a choice between comfort and creation. And I remember reading Jeff Bezos's bio at the time, and it talks about how Jeff was working at d SHAW in the mid nineties, and he had a great job, and he had an idea to

Literally threw all the stuff in a car and drove across country that next Monday.

Yeah, and it was so inspiring. And obviously Amazon is a different scale, But I will say I asked myself a similar question, which is, do I want to go on this journey even if I never get to where I'm going?

Huh? Really really quite fascinating. What was the most surprising thing you learned when you were launching your own firm? What what kind of struck you as Huh? I didn't really expect that to happen.

I think how difficult it was to raise money you know, it was it was a rough first few months.

Didn't you guys launch with a big chunk of cash though, like two billion dollars.

We did, but we had trouble finding investors in the beginning, and we had a lot of people on board who left great jobs who were eyeing on us to get funding and pressure there, a little bit of pressure, yeah, and then you know, it's it's it's a different kind of pressure when you when you're now responsible for so many people. And so we eventually made the decision to fly to the Middle East to meet with a large investor,

Wow, really really interesting. So let's talk a little bit about your launch in twenty nineteen. You come out of the gate pretty fast. Not a lot of emerging managers start with over a billion dollars. You guys were close to two billion. You know you have since really ran that up in the ensuing four years to over seven billion dollars. Tell us a little bit about how you built the firm and how it's structured.

So we structured Woodline to enable our world class decision makers to operate at their very best. And there's a few key elements to that. One is we have a deep specialist approach, so where our teams are experts in the stocks that they cover. We also have a sole coverage model, so that means one person or one team is responsible for their group of names, no overlap. Our teams are also small and autonomous such that they can make decisions. Because we believe that people closest to the

So you started with about twenty five employees, you have since ramped that up to over seventy five people. What's it like managing all those people and that degree of growth.

We set up a Cocio model to deal with that vario issue so that we could attract the best talent, leverage the skills and capabilities of Carl and myself, allowing us to have more time both to invest. And we also set up a management structure of Matt, Carl and myself where every decision is made with a two thirds vote, and that allows us to really delineate our duties to where we see fit and has provided us the ability to manage a very complex infrastructure.

So not ties it takes to you to really move a decision forward. Carl is your cocio, Metta is running operations. So how much does that free you and Carl up toll becus on the.

Investing We get that question a lot, and we tell investors that both Carl and I spend more time now as cocios of Woodline actually investing in our portfolios than we did at Citadel, which is an amazing stat.

And is that because of the structure where you began with someone running operations. It wasn't an afterthought a few years down the road exactly.

Yeah, that structure was thought out so that we could focus on investing rather than having to spend all of our days managing people.

So let's talk about some of those people. You have thirteen portfolio managers plus including you and Carl. You've talked about a player coach model. Explain what that is.

So that's correct. So thirteen pms, including Carl and myself. We also have very seasoned analysts running portfolios, some not These are people truly the best at what they do. And what we mean player Coach is that Carl and I didn't want to just take the traditional chief investment officer role of management. We wanted to invest, and so

And then how much time do you devote to managing the other eleven or so pms.

I would say we spend about seventy five percent of our time on our existing portfolios that we're running, and the remainder of our time managing others and thinking about the business strategically.

So let's talk about your investment process. You come from a biotech background, Carl has a semiconductor background. Tell us a little bit about a process that has a dozen or so different pms, each with a different focus.

We each have a different focus, but we all have the same bottoms up fundamental research process. The teams spend the majority of their time on research and learning about the companies that they cover. Each team covers a small group on average of about fifty to seventy names, so they can understand them better and they come up with unique insights on those stocks in their universe that may not be appreciated by the market, and then structure portfolios around those ideas.

So when we think of the typical bottoms up stockpicker, it seems like there's a whole lot of variation, But lots of funds tend to look like other funds. You guys seem to look very different than the typical either sector focused or bottoms up stockpicking focused fund. What makes Woodline a little different, a little more unique.

It really comes down to our portfolio construction. We hedge out not just market beta, but any factors that we can't predict. We focus solely on what is predictable, and we construct portfolios around that so that we don't succumb to factors that are moving the market on a day in and day out basis. That's a key differentiation.

Give us some examples of those factors that you're looking to hedge out.

Yes, So in addition to beta, you know, there's many factors that are moving stocks outside of what is idiosyncratic to a particular company. In fact, you can model these factors and their influence on stocks, so momentum, value, growth, short interest, and like other macro cross currents, we don't have a unique advantage in predicting these factors, so we hedge them out.

Huh. So you describe your key overwriting strategy as market neutral equity focus on the global healthcare sector. Let's break that down. Market neutral means most of the time you're running long short. Is it long short against the market or long short within the sector?

We run neutral to the market and to the sub sector that we're in both.

Yes, So that's got to be a challenging strategy to create for hedging both at the same time.

And that's why we have a specialist structure. So we instead of having a healthcare PM or a tech PM, we have a semiconductors PM, we have a medical device PM. Just focusing on those fifty to seventy names within those sub sectors and then structuring portfolios within those sub sectors. So you have to be a specialist to take this approach.

And a lot of funds that have found success seem to have run some pretty concentrated portfolios they hit a couple of big winners and it's worked out. You don't take that approach. Woodline has about twelve hundred positions. That seems almost like a closet index, but your performance doesn't track an index. You guys are absolutely not closet indexers. Why so many positions?

The reason why it exists is because of our twenty individually constructed subsector portfolios that feed up into a master fund and the end result of that is over one thousand unique positions.

So less concentrated exposure. What does that big of a set of holdings? Due to the funds of volatility and return patterns.

So we offer investors and uncorrelated diversified return stream. Investors can expect us to be up or down one percent a month and our vall is around five percent annually.

Huh, not too bad. What do you do in terms of risk management? How do you stay on top of Obviously you don't have a whole lot of concentration risk, but just generally speaking, what's the risk management process like?

So each of the portfolios are running a high idiosyncratic ball portfolio on their own, and it all feeds up into the master fund, which creates a great product, but we also monitor that from a top level, both Carl and Matt and myself. You know, we'll meet weekly and look daily at our exposures and make any adjustments so that we continue to make sure that we are completely neutral to any macro factors.

H quite intriguing. So let's talk about some of those sectors you focus on, tech, healthcare, industrials, energy, and consumer. Why these sectors they almost seem unrelated.

Well, the primary driver in deciding where to invest is great talent. That's what we look at first. The secondary component is that we look for sub sectors that have the most disruption, innovation, and stock specific idiosyncratic volatility.

Those sectors that you're focusing on, there's the greatest mispricing versus what the market believes. How do you how do you look at these sub sectors versus the general consensus.

Usually they have the greatest complexity and the greatest disruption, and therefore there's a larger spread between winners and losers. And that's what's required to have a portfolio where the performance is really driven by our relative stock picking.

Huh. That's interesting. In the past, you've mentioned that Woodline established a network of corporate execs and industry relationships. Tell us how you're using this network to generate alpha.

So we're very fortunate to spend our days building relationships with some of the world's leading executives. And these executives have a full plate of managing complex businesses, and so we're appreciative of the time that they spend with us and the members of the Woodline team. We have a responsibility to create a mutually beneficial engagement, and so we need to be well prepared, ask thoughtful questions and hopefully find ways to add value in terms of what we're

Huh interesting. So, in the way you structured the firm, you Woodline does not have a full pass through. Tell us a little bit about firms that do have a pass through and why you elected not to go that way.

That was one of the most important questions to answer when setting up the firm. We believed that establishing a partnership model more akin to what you would find with a private equity shop, as the best approach. And we're called Woodline partners for a reason. The partnership structure, coupled with our sole coverage model has allowed us to compete effectively for talent.

So let's talk a little bit about that. On a pass through model, if you're a fund manager that's doing well and the firm is doing poorly, you still get full bonuses and everything else. Everybody else takes a hit. This is more of a all for one and one for all, sort of a three Musketeers approach. Everybody is a partner in the firm, not just running their own independent fiefdom.

That's correct, and it really aligns incentives with our employees and our LPs so that we're all driving for the same goal.

What does the lack of a pay us through do when you're competing for talent?

So far, it has not impacted us because the partnership model has been an attractive component to candidates looking at Woodline. And also the sole coverage is an important component. When you are looking at a platform and you join, you know, another multi manager, you're one of two, three, four, six, eight, twenty teams covering the same stocks, and it's more of a mercenary type of approach. At Woodline, we only have one software PM, that's Elliott Wilson. You know, we only

So given that, let's talk about some of those sub sectors. When you say you cover tech, how many different subsectors are under technology?

There are four sub sectors currently under technology. There are four sub sectors currently under healthcare, and we break them up biotech services, pharma, semiconductors. We have a Japanese Tech PM, we have a Japanese consumer PM, we have a consumer Health and Wellness PM. These are all very specialized sub sectors.

When you say Japanese tech, we're talking about companies in Japan that you're buying here. That's right, huh, really interesting. So each PM works for a specific fund, it's not part of a whole pulled fund. How does that.

Break down, It's a good question. It's all one fund that provides diversified access to all of our subsector portfolios. Part of the challenge for sector specific funds over the past decade is the higher volatility and lower sharp associated with that approach.

So one of the sectors you cover is energy. It's been a kind of odd space the past couple of years. The Russian invasion of Ukraine, oil spikes and by the end of the year it's below where it was when the invasion starts. Now we have the war in the Middle East, oil fools below eighty dollars. How do you contextualize oil? And what other energy subsectors do you do you look at? Do you look at non carbon energy? What else is in that area?

So energy was one of those sectors that we didn't initially launch with, and the reason why was because there was a lot of correlation among the companies within energy, and with all that's gone on in the world, including clean energy, there's been a lot more dispersion among energy companies and have allowed us to first of all, find a great analyst covering those names, also to run a high idiosyncratic portfolio. So that's why we entered the sector.

Hey, it's a really exciting time in healthcare. The mRNA drugs have been applied to all sorts of different things beyond COVID. The obesity drugs like ozembic and wagovi are finding amazing traction and having great results. This is your space, the healthcare sector. What's it like in this area these days?

It's an incredibly exciting time to be a healthcare investor. Science has gotten to the point where we are understanding biology and how to target areas that we hadn't known for decades, and we're seeing some incredible results. You know, we've made some breakthroughs in Alzheimer's disease, We've made some breakthroughs in obesity and in diabetes, in cancer, and so to be a healthcare investor right now is probably the best time that I've seen in the last twenty years.

Huh, really interesting. So you mentioned cancer cell therapeutics looks like it's a fascinating area. What's happening in that medical space.

Self therapy is very exciting. You basically take a patient's cells out, you infuse them, and put them back in the patient's body to fight the cancer. And we've had remarkable results, particularly in types of blood cancer. But now we are starting to see the promise to work on solid tumors using this approach. And it comes down to the industrial complex around these because you have to manufacture these cells for each individual patient.

It has to match their own genetics.

You have to take the cells out of a person's body and align it just for that individual person and then and put them back in. And so this is not something that you can do like a pill where you're manufacturing millions of these. This is a one by one approach, and so we have to figure out a way to make it more efficient, less costly. But I'm confident we'll do that.

So let's talk a little bit about what's going on in terms of the hedge fund industry. Eleven thousand hedge funds today, go back twenty five years, there were I don't know a couple of hundred. Are there too many hedge funds? Has it gotten too crowded? Tell us about what the space is like.

The growth in the number of hedge funds has slowed recently, and we think that'll likely continue as the consolidation of talent into the large Platform models appear structural, and like any fast growing business, there will be winners and losers, but the platforms offer a material value proposition to their portfolio managers and limited partners alike and will likely survive various market regimes.

So define what you mean by platform business models. I think a lot of people may not be familiar with that term.

So when I talk about the platforms, some people refer to them as the multi managers. The big market leaders are Citadel and Millennium.

And coincidentally, two places you happen to have worked.

That's right. That's right, And what the platforms offer is two things. One, from a PM and analyst standpoint, they allow pms and analysts to invest in their portfolios and not worry about the operational complexities of running a business.

So when you we were at both Citadel and Millennium, you didn't have to deal with any of the operational challenges. What has it been like pivoting to running a business, hiring people, dealing with regulations, managing people, dealing with clients and LPs. How different is this experience from what you had previously.

It's complex and it's critically important to have a fully built out infrastructure to support your investment team and manage the operations of your business. And we're fortunate to have Matt Hooker and his team doing that for us very effectively and allows our investment team to invest even more than we were at Citadel, which is incredible.

So we've talked about a lot of different funds. We mentioned d Show, we mentioned Millennium, we mentioned Citadel. Each of those have a very specific corporate culture driven by the founder. How do you create a corporate culture at your own fund?

I just watched an interview where Ray Dalyo was speaking to Bill Belichick, the head coach of the Patriots.

Huh.

Bill had just earned his three hundredth career win, and Ray is all about principles, and so he asked Bill what his principles as a head coach are and Bill said, put your team first, do your job, and continually focus on improvement. And these are the key principles to any successful organization, and they're certainly part of the DNA of Woodline. But a football team has a lot in common with

Let's talk a little bit about return quality. You've discussed this previously. How do you define return quality and what do you have to do to deliver it?

So, ultimately, the goal for all investors across strategies public private is to generate uncorrelated alpha, and it starts with good risk management and optimal portfolio construction. If you look at the average investment fund, it has a risk profile of around thirty percent idiosyncratic risk. So let's flip that around. That means the average investment firm has seventy percent of their performance that will be influenced by macro and market factors.

And you cover North America, Europe and Asia. Are you seeing more opportunities in one geography versus another? The world really is pretty uncorrelated these days.

We see opportunities for our strategy in the US, Japan, and Europe.

Japan especially has been a house of fire lately. The Nike is up substantially. I don't think we're all that far from the prior peaks before their big collapse in eighty nine. What is it that's driving Japan despite all of their demographic problems and everything else.

What's happening over there, Well, what makes a good market for US is breath of companies, liquidity, and having rules based system. And in any of these markets, the market being up or down really doesn't matter to us. If tomorrow you told me the market was going to be up five percent or down five percent, it would likely

So, if I say to you, US has been really strong economically and Japan has been doing well, but Europe has been limping along. They've been rolling recessions from the UK to Germany to France. They can't get out of their own way. You don't care about that macro stuff. You want to find the right company at the right price.

And we want to pick the winners and the losers, and we want to structure portfolios around those winners and losers, and the market just does not matter.

Huh. That's really quite fascinating. All right, we only have you for a limited amount of time, so I'm going to jump to my favorite questions. I ask all of my guests starting with what have you been streaming these days? Tell us what you're either watching or listening to, either video or podcasts, or whatever's keeping you entertained.

Most recently, I've been listening to Founders, where David Cenra summarizes the biographies of path leaders and entrepreneurs.

Interesting. Let's talk about your mentors who helped shape your career.

Well. Ken Griffin is a larger than life figure and teacher that leaves it imprint about how you think about things your entire life. I'd also say that Brandon Haley, who started Holosecene. He was the first of our group at Citadel to launch his own fund and he blazed a path for Woodline and others and was critical in helping all of us get started. Woodline wouldn't be year without him. And then on a personal level level, my father for teaching me the value of loyalty and hard

Let's talk a little about books, some of your favorites and what you're reading right now. You mentioned Monkey Business. What other books are you enjoying.

One of my all time favorites is Shoe Dog by Phil Knight. Have you read that?

Yes? Really interesting?

Yeah, it's so great. What I love about that is, after a long and sometimes grueling road for him building Nike, he said he could he wished he could go back and do it all over again.

I recall that I thought that was the most bonkers thing in the whole book. Ye, after literally selling shoes out of the trunk of his car and not knowing if they're gonna have enough money to pay vendors, and constantly getting by on the skin of their teeth. The first third of that book is like, I know the outcome, and it still feels like they're not going to make it. They're just skating by.

Yeah, I know it's it's amazing and it's inspiring for any entrepreneur.

Any of the books you want to mention or.

I'm reading Musk right now and that's.

Uh Walter Isaacson. Yes, that looks that's that. That looks like it's too big to read. It's a giant tone.

I'm a third of the way through.

Yeah.

What I didn't know, Maybe I should have known this was that Elon actually started SpaceX before he took over Tesla.

Right, He didn't start Tesla, he joined it, didn't start PayPal, he joined it, But SpaceX was.

Basactly Yeah, he was thinking about space travel, you know, from a very early age.

Huh. Quite interesting. Uh. And our final two questions, what sort of advice would you give to a college grad interested in a career in investing or hedge funds?

Place learning and experience over salary entitle.

No matter what, No matter what, you got to get those fundamentals down, the money will take care of itself.

Later, exactly.

And our final question, what do you know about the world of investing today that you wish you knew when you were first starting out fifteen twenty years ago.

So I was fortunate enough to spend time with Will I Am from The Black Eyed Peas a couple of years ago, and I was asking him, Will what was it that really made you so successful? And he said that at a very early age, when he was in high school, he started looking forward ten years, twenty years, thirty years, and then he would envision himself then and

Out really interesting Mike, Thanks for being so generous with your time. We have been speaking with Mike Rockefeller, co chief investment officer and co founder of Woodline Partners. If you enjoy this conversation, well, be sure and check out any of the previous five hundred discussions we've had over the past nine years. You can find those at Apple Podcasts, Spotify, YouTube,