How to Think About Alternatives with JPMorgan's Alternative Asset Management CIO Paul Zummo

Barry sits down with Paul Zummo, Chief Investment Officer of J.P. Morgan Alternative Asset Management. They discuss the state of alternatives and Paul's "30 Pearls of Investment Wisdom." They also discuss the early days of hedge funds, investing in the 90's and building a hedge fund division.

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.

Speaker 2 (00:17):
On the latest Masters in Business podcast, I sit down
with Paul Zumo. He's chief investment officer at JP Morgan's
alternative Asset Management. He co founded this group back in
nineteen ninety four with essentially pocket change. It now runs
over thirty five billion dollars in assets for institutions and

(00:37):
high net worth investors at JP Morgan. Really just a
fascinating concept of everything about how to stand up a
division within a large company, how to think about alternatives,
how to recognize when an industry may be average, but
the best players in that industry generate significant alpha. I

(01:00):
thought this was fascinating, and I think you will also
with no further ado, JP Morgan's Paul Zumo, Paul Zumo,
Welcome to Bloomberg.

Speaker 3 (01:09):
Thanks for having me. Great to be here.

Speaker 2 (01:11):
I'm so excited about this because I just fell in
love with your thirty pearls of wisdom. We'll get to
that later. Let's start with your background. Sure, bachelors from
Sunny Albany and then an MBA from New York University.

Speaker 4 (01:26):
What was the original career plan.

Speaker 3 (01:28):
Sure.

Speaker 5 (01:28):
So yeah, when I was young, I was always into
always into investments, or at least intrigued by investments, but
also into technology as well, like arguably to the extent
we have a gift in life. It was probably technology,
but the technology was so early stage I didn't exactly
know what it was.

Speaker 3 (01:45):
So I wound up.

Speaker 5 (01:47):
I wound up pursuing obviously the investments side, but kind
of use that technology from time to time, especially as
we were.

Speaker 3 (01:53):
Building a group.

Speaker 5 (01:54):
But originally I really wanted to get into equity research,
and not that I knew exactly what it was, but
it was the most like tangible and aligned with who
I am in terms of, you know, problem solving and
analytics and things like that, and wound up instead falling
into the hedge fund.

Speaker 3 (02:12):
World and doing what I do today's hedge fund.

Speaker 5 (02:14):
Solutions, which actually has a lot of elements in a
sense of what equity research is. Again, you know, your
your problem solving at its core and doing analytical work.

Speaker 2 (02:24):
You get the Chartered Financial Analyst designation and you start
at Chase as an analyst.

Speaker 4 (02:29):
What sort of work were you doing there?

Speaker 3 (02:31):
Yeah? Sot.

Speaker 5 (02:32):
Out of school, I was in a pension Fune consulting group.
And so really what you're doing is a couple of things.
I mean, one performance measurement across client accounts and you
know also you're doing some some research stock rather manager
selection on a traditional side. But I think what was
hopeful about it is it kind of gave you a
really good purview of all different asset classes and all

(02:54):
different styles of management. And I remember in an early
days really appreciating like this the importance of stylistic differences.

Speaker 3 (03:02):
And equities as an example.

Speaker 5 (03:03):
This was again early days, but like recognizing you know,
small cup world versus small cup value and a drastic differences.
But it really it really just set the stage to
understand the industry and styles and types and approaches at
at a much deeper level.

Speaker 2 (03:19):
So you were a manager of retirement plans at the
inter Public Group. Tell us a little bit about that.

Speaker 5 (03:23):
Yeah, So after Chase, I spent about two years at
Chase and then went to the Anti Public Group. So
this is a plan sponsor and maybe a somewhat unusual
move at that stage in my career. And what attracted
me to it was they were at a point where
they were so again this is an advertising agency. But
I worked in the Pension Funk Group and they were

(03:46):
they were looking to revise their asset a location materially,
so you know, changed the whole ass allocation, change the
manager lineup, and importantly they didn't have a consultant, so
they were doing an in house So they were affording me,
i mean, not solely, but awarding me a lot of
responsibility to help restructure the whole plan terminate managers, on
board managers. What year was that, So I was nineteen

(04:09):
ninety two to nineteen ninety four, and interesting, I'm curious
what led them to say, hey, we're just gonna well
that was over, yeah, I mean that was before I mean,
that was the kind of a decision I had already
been made, you know, and they were changing, you know again,
changing their rest location and looking at the whole manager holistically.
And interestingly, that's when I first got involved in hedge funds,

(04:31):
or at least first med hedge funds. So this is again,
you know, early days, right nineteen nineteen ninety everybody was
producing back then, right well then, yeah, I mean then
it was, that's true, but it was so unknown, you know.
So I met with a number of kind of market
neutral equity managers, a couple of long short matages, and
then importantly David Askin so if you know, David asking

(04:54):
for those that don't know, was one of the really
the first hedge fund for lack of a better word
blow ups where it was a mortgage backed derivative manager
and you know, obviously a quirky ish market and and
and wound up having significant problems. So it was you know,
we did not invest with them, but it was really

(05:15):
a very you know, valuable early kind of lesson from
a due diligence standpoint that you know, obviously we didn't
pay for us all all the better, but it really,
like i know, maybe tells you two things. I mean, one,
if you don't completely understand something, and admittedly at age
twenty four I didn't at the time, then you know,

(05:38):
still way don't put money there, and then just have
the courage to say to say no, you know, there's
there's a lot of choices out there and you need
to be disciplined and walk away.

Speaker 3 (05:47):
But we did invest in an equi market neutral fund
and again that was nineteen ninety three.

Speaker 2 (05:52):
So that's the initial exposure to hedge funds. How did
you go from there to JP Morgan. Yeah, so this
is probably another you know, never burn your bridges, which
which I'll come to.

Speaker 5 (06:07):
So I had, as I mentioned, I'd worked at Chase
once before, and at the time, I was looking to
lead because once you restructure the plan, there's only so
much to do, especially when you when you're young.

Speaker 3 (06:19):
So it was ready, you know, it was ready to
do something.

Speaker 2 (06:21):
Do you literally put yourself out of a job through
the restructuring process.

Speaker 5 (06:25):
Well, I mean I could have stayed, but then you're
just you know, you're just overseeing the investments as opposed
to active it's a little less interesting. And so any
any case, I was interviewing at a hedge fund Solutions,
a fund of funds out of Long Island, and you know,
really like the guys, a couple of great guys that

(06:46):
were there. But at the end of the day, I
decided I didn't want to go. You know, I didn't
want to reverse commune because I was living in a
city and when I go out to Long Island. So
I wound up not pursuing it. But the relevance of
that is that what would become my boss. Joel Katsman
was distributing that fund of funds, and he was a Chase,

(07:06):
So when it came time to do a reference check
on me, they asked Joel to do a reference check
with me because he was at Chase.

Speaker 3 (07:12):
I used to work at Chase, and the reference.

Speaker 5 (07:14):
Check I assume was good, But it turned out I
didn't pursue it any further, and Joel, who was distributing
the fund of funds at the time, got the idea of,
you know what, rather than distributing it, maybe we should
start this up anew and if you want to work
in a city, why don't you come work for me.

Speaker 2 (07:30):
So you're at Chase, which even back in the early
nineties is still a very large bank. This seems very entrepreneurial,
very startup. Like, what was it like building this division
inside a giant money center bank?

Speaker 5 (07:45):
Yeah, no, it was great, you know, I mean, you know,
bear in mind it was a different world back then
in many ways, not only from an investment standpoint, but
like what it takes to launch a new business. So yeah,
we launched with a whopping seven point four million dollars,
which is, you know, which is unusual at least walking
around pocket money. And I'd say, yeah, maybe a couple

(08:06):
of days. So like from an investment standpoint, it was
the perfect time to start. You had, you know, Orange
County issues, you had, you had rates going up, you
had well David Askin, as I mentioned before, you had dislocation,
and that created opportunities. The problem was, you know, not
many people knew about hedge funds, and I'd say three
quarters of the people that did had a negative view.

Speaker 3 (08:29):
So even in the early nineties.

Speaker 2 (08:30):
Because my bias is that the golden era of hedge
funds was from the early nineties right up to the
financial crisis, there's been far more challenging period post financial
crisis for alpha Generating the nineties, it seemed like everybody
was making money.

Speaker 3 (08:49):
Well, so two things.

Speaker 5 (08:51):
I mean, maybe we'll get to those points later about
about different different cycles. But again from an investment standpoint,
there were people were making money. There's no quot us
about I think the public's view, and partially like what
had often been written in the press was the negative
side of you know, hedgehunds going after this currency or
that currency, and I think the perception was one of

(09:15):
you know, I either it was negative or just a
lack of understanding. So a lot of what we did
early days was just educationally, like we would write newsletters
internally and educate people on alternatives. But eventually, you know,
eventually you put it together and performance kind of speaks
for itself, and you you know, you build it, you
build it over time. But it was great from an

(09:36):
entrepreneur entrepreneurial standpoint. This kind of goes back to my
tech side as well. I mean, one, building infrastructure broadly
in process, but you know, early days building technology as well,
Like there was no per track, which is something people
use like, so you know, we and I kind of
built it all, you know, so built a research database,

(09:59):
built a built a system to analyze returns, and yeah,
that was that was great.

Speaker 3 (10:05):
It was a lot, a lot of fun.

Speaker 2 (10:07):
So today it looks like the industry is much better known.
There's been a giant movement to try try and democratize
access to all sorts of alternatives, from edge funds to
private credit, private equity, real assets. What do you think
led to this massive interest in alternatives. It's not like

(10:28):
it's been a terrible equity market for the past fifteen years.

Speaker 4 (10:31):
It's been great.

Speaker 3 (10:32):
So yeah, two things.

Speaker 5 (10:33):
I mean, i'd say, even let's go back early days,
like part of the vision this is really you know
Joel's vision first and foremost. That was that alternatives were
going to become mainstream, which you know, sitting back and
hedge funds, we're going to become mainstream eventually. And then
you know, back in nineteen ninety four, that was a
novel concept. You know, it was just this little thing
off to the side. And look, we've more or less

(10:56):
kind of arrived at that, right, So I think the
vision is true. And then the second part is, well,
why not retail investors? Right, And if you think about
twenty twenty two and you think about rising stock bond correlations,
you know there's so many investors, many of them more
retail oriented or you know, high networth oriented, that just

(11:18):
don't have alternatives or enough alternatives in a portfolios. So yeah,
that's led to the democratization and you know launch of
interval funds and tender off of funds, which is I
think really interesting. So it's giving those investors access to
alternatives which are really valuable.

Speaker 3 (11:37):
In overall portfolio contexts.

Speaker 5 (11:39):
And so it's about building yeah, I mean, yeah, just
to respond, like, sure, equity markets are going up today,
but they didn't in twenty twenty two, And I think
the takeaway is that you need to build a more
resilient portfolio rather than just look at these things in isolation.

Speaker 2 (11:54):
So you start with barely seven million dollars, today you
have over thirty five billion dollars that you're directly overseeing.
JP Morgan Chase is giant with trillions of dollars. It
sounds like there's a whole lot more headroom for alternatives
at JP Morgan to continue growing.

Speaker 4 (12:14):
Like where do you see this going?

Speaker 3 (12:16):
Yeah?

Speaker 5 (12:16):
I mean, you know, alternatives are definitely the fastest growing
or one of the fastest growing areas within and not
not just hedgehunds, but more broadly and as a tremendous
amount of support for it. So yeah, like I think,
you know, for us and for other alternatives, we're going
to you know, continue to build, continue to launch your product,
continue to you know, get get a larger reach into

(12:39):
you know, into other client types and and geographies.

Speaker 3 (12:43):
So yeah, the future is extremely exciting.

Speaker 2 (12:46):
So I mentioned earlier thirty pearls of wisdom for thirty years.
I want to dive into that in a moment. I
have to start with one quote that kind of quote
my eye and we talk about this all the time.

Speaker 4 (13:00):
Culture is king.

Speaker 2 (13:01):
The road to failure is paved with poor cultures. Explain
what led you to that conclusion.

Speaker 5 (13:09):
Well, experience, I mean you, I don't know, I mean
hedge funts fail for and succeed for different reasons. But
culture is definitely at the heart of many of it.
And I'd say more importantly, like sometimes people ask what
are you know? What's like? What do you think about
most as your takeaway? Haven't been doing over thirty years?

(13:30):
Like for us, it's for me it's culture. Like the
culture that we've built as an organization has been spectacular
and clearly a differentiator.

Speaker 2 (13:38):
Is that what's kept you with JP Morgan Chase for
thirty years? That's kind of rare these days most people
don't stay at one shop almost their entire career.

Speaker 3 (13:46):
Yeah, it's a couple of things. I mean culture and
the team.

Speaker 5 (13:51):
You know, it's like a family for sure, and we
make each other better, We challenge each other respectfully, We
really enjoy each other this company and appreciate our differences.
So yeah, that that's been that's been great. Leadership of
Jamie is unparalleled. So Jamie, Jamie diamonds. Oh, I've heard

(14:12):
of him. Remind me to tell you a funny story
about him later. And then lastly, like you know, the
job itself allows you obviously to meet with some of
the you know, best investment minds in the world, right,
which is just such a privilege. And then to be
able to like dig in deep on so many different

(14:32):
asset classes, so many different geographies you're constantly learning.

Speaker 3 (14:36):
So those those three things for sure.

Speaker 2 (14:38):
I mentioned you're not exactly very public facing, you're a
little below the radar, but you publish these really interesting things.
And one of my favorite pieces you wrote was thirty
Pearls of Wisdom from our last thirty years. We don't
have time to go through all thirty, but I picked
a few that they're just so simple and yet some insightful,

(15:04):
and we tend to overlook things like this. This one
just jumped out. Don't buy the portfolio by the process.
Stories change positions are fleeting, but a robust investment process
should endure. Like that just sums up so much in
two sentences. Tell us about that.

Speaker 3 (15:25):
Yeah, No, it's definitely one of my favorites as well.

Speaker 5 (15:27):
I mean, it applies to like all different types of hedgehunds,
but I'd say especially discretionary macro. Right, So you're interviewing
discretionary macro manager and the vast majority of more are
very smart, they tell a very good story, they have
great views, but it doesn't necessarily.

Speaker 3 (15:41):
Mean they were a money maker, right.

Speaker 5 (15:42):
And again I think sometimes people make the mistake of
agreeing with a view, agreeing with the manager, getting you know,
seduced by someone having insight. And obviously it's really important,
but again it doesn't necessarily speak to the profit. And
especially in something like discretetion y macro where it's it's

(16:03):
not a high sharp strategy, it tends to be more
volatile strategy. And if you don't develop that conviction, and again,
first and foremost in the process, you can get shaken
from you know, from that idea. Right, the ideas change,
the process should endure. So really really important.

Speaker 2 (16:21):
For sure, have the courage to make mistakes, mitigate unnecessary risk,
but take calculated bets.

Speaker 4 (16:28):
Again, two simple sentences. So much involved in that.

Speaker 2 (16:31):
Yeah, I find a lot of people in our business
don't like to admit mistakes.

Speaker 3 (16:35):
Yeah, I think it's.

Speaker 5 (16:36):
It's it's something not the admitting mistakes so much, but
the courage to make mistakes.

Speaker 4 (16:43):
When I think about the risk of calculator, but.

Speaker 5 (16:45):
When I think about like things that I've done better
over the years, that is definitely one of them that
comes to mind. Where I've given myself more freedom to
to to make mistakes and to maybe size and lean
into themes or high conviction managers to a greater degree
as well, where I think, you know, maybe there's a

(17:05):
perfectionist in many of many of us, and sometimes the
flip side of that or the problem with that is
you're become too conservative. Right So now, yeah, if you
make a mistake, you need to figure it out quickly
and change course. But allowing yourself to maybe make mistakes
is definitely helpful.

Speaker 2 (17:24):
Coming up, we continue our conversation with Paul Zumo, chief
investment Officer at JP Morgan Alternative Asset Management, discussing thirty
pearls of wisdom from our last thirty years.

Speaker 4 (17:38):
I'm Barry Ritolts.

Speaker 2 (17:39):
You're listening to Masters in Business on Bloomberg Radio.

Speaker 4 (18:05):
I'm Barry Redults.

Speaker 2 (18:06):
You're listening to Masters in Business on Bloomberg Radio. My
extra special guest today is Paul Zumo. He is chief
investment officer at JP Morgan Alternative Asset Manager, helping to
oversee thirty five billion dollars in external hedge fund assets.
He's also chair of the Alternative Asset Management Investment Committee.

(18:27):
He co founded the group back in nineteen ninety four.
I really like this. Don't be afraid to run into fires.
Some of the greatest investment opportunities and manager access are
sourced during this location.

Speaker 4 (18:40):
Tell us about running into fires.

Speaker 3 (18:43):
Yeah, so this, you know, is obviously really important.

Speaker 5 (18:48):
Like I love behavioral issues and behavioral finance, and like
the challenges.

Speaker 3 (18:53):
That come to that.

Speaker 5 (18:53):
Of course, we're all wired, you know, inappropriately from an
investment standpoint, and that where you know, we wired to
avoid pain, which is why many people make the wrong
decisions during you know, periods of crisis or periods of
heightened volatility. I think some managers do a great job,
you know, I wrote it about you know, I guess
the manager had in mind was David Temper, you know,

(19:16):
like runs into fires all the time, you know, Yeah,
I mean it's got you know, let's so these days,
but certainly certainly over his moved.

Speaker 4 (19:23):
To Florida kind of chilled out a little bit, but
he you.

Speaker 5 (19:26):
Know, like he always again, having watched things play out
over thirty years, I always thought he did.

Speaker 3 (19:31):
You know, he's done a really good job.

Speaker 5 (19:33):
But and again, like this is something I think we've
done a better job at over time as well when
I think about, you know, the crisis is nineteen ninety eight,
two thousand and eight, twenty twenty. Like you know, as
I say, many of these things rhyme, and you've seen
it before, like you know, you know what it feels
like kind of coming out of it and going in
and if you're playing appropriate defense, like you should afford

(19:55):
yourself the opportunity to really lean into where you think
there is dislocation, especially a technical oriented dislocation.

Speaker 3 (20:01):
So yeah, it's critically important.

Speaker 5 (20:03):
Mean, that's where you make outsize returns during those inflection points.

Speaker 2 (20:07):
So let's talk about outsized returns. Success can be a
dangerous achievement. Complacency distractions and misalignments can be silent killers.

Speaker 3 (20:18):
Yeah, so.

Speaker 5 (20:21):
I guess you could come at that one from a
couple of different ways, but one of one of which
the most important, is like when you find success, sometimes
people you know, the firm grows, the number of analysts grow,
the complexity of business grows and the portfolio manager you know,
goes from managing portfolios to managing people.

Speaker 3 (20:41):
And yeah, like I've seen that movie so many times.

Speaker 4 (20:43):
Like maybe they have that skill set, maybe they don't.

Speaker 5 (20:45):
And maybe they don't and that's probably not where you
want them to spend their time, you know. So I think,
like if you think about the hedge Funt Graveyard and
like what the issues have been over the like that
there's a big.

Speaker 3 (20:57):
Area that kind of has that footprint, if you will.

Speaker 5 (21:01):
So yeah, people, you know, the stario portfolio manager no
longer spending the appropriate time on a portfolio managing people
getting distracted or the second piece of it is just
quite frankly, making too much money.

Speaker 3 (21:13):
Right. So you know, when I when I've bought the third.

Speaker 5 (21:16):
Yacht, it's that that's time to leave, you know, it's
time to leave after before the first yacht.

Speaker 2 (21:23):
But the first time I heard that has to be
like twenty twenty five years ago. Hey, when your fund
manager buys a forty foot or a fifty foot boat,
it's time to move on.

Speaker 5 (21:33):
Yeah, I mean it's more than app but yes, you
have to you have to watch the personal lifestyle at
times as well, and it make sure people are focused.

Speaker 1 (21:41):
Now.

Speaker 5 (21:42):
You know, there are people that are billion as and
they're still in the office seventy hours a week, right,
and it's it's just an eight They don't they couldn't
do anything but that. But yeah, you have to, you know,
you have to understand what.

Speaker 3 (21:56):
What am I buying? And maybe a change.

Speaker 5 (22:00):
Right, so maybe that star portfolio matage is built out
enough of a team and you're not buying anyone singularly,
you're buying something broader and that process earlier. But but yeah,
it's it's it's a risk for sure, and it's and
it's an area where many of successful hedge funds have
kind of either become, you know, potentially mediocre or have

(22:20):
had challenges because they've taken our eye off the ball
in one way or another.

Speaker 2 (22:24):
Huh, really really interesting. I love this one. The opposite
of long is in short. Great short sellers are wired differently.
Don't expect success on the long side to necessarily translate
to a successful short book. First, I love the quote. Second,
are there really getting short sellers left? I think this

(22:44):
last run feels like it they steamrolled over everybody.

Speaker 3 (22:47):
So yeah, maybe a couple of things.

Speaker 5 (22:49):
So I mean, just on the quote itself, I have
to like, of all the lessons learned and all the
mistakes we've seen people make, that that one has probably
right at the top or certainly right toward the top.
Like the opposite of a long is definitely not a short,
and you know sometimes people will suggest it is. I mean,
the math is different, risk management is different, like the

(23:12):
timing is different, and like I would even say, like
successful shorting is about risk management first and stock picking second.

Speaker 3 (23:20):
And you see that.

Speaker 5 (23:21):
I mean you've seen that when he you know, nineteen
ninety nine when the internet is blowing is you know,
go nuts. You see that in the meme stocks. You
see that today with quantum computing and some of the
AI names. Again it's risk management first, stock picking second.
Timing is timing, and sizing is just critically critically important.

Speaker 2 (23:44):
God, I was gonna say, I have a buddy who
used to run ahead fun trading desk, and he always
used to say, the opposite of.

Speaker 4 (23:50):
Love is in hate.

Speaker 2 (23:51):
The opposite of love is in difference. There you go,
and it's the same basic kind And he was talking
about stocks, but it's the same sort of thing.

Speaker 4 (24:00):
They're not mirror images, are.

Speaker 3 (24:01):
They no, definitely not.

Speaker 2 (24:03):
Are there any short sellers around? I know, like one
thirty thirties have become popular. Yeah, and a lot of
quants approach it that way.

Speaker 5 (24:10):
So maybe there's two, you know, two different aspects of it.
So there are successful and good short sellers out there.
I'd say there there are you know, less that are
dedicated short cells. So from nineteen ninety five to two
thousand and eight, we use dedicated short sellers and short
bias managers, and it was really interesting and actually a
tremendous source of overall alpha. After two thousand and eight,

(24:31):
we no longer use dedicated short cells and short bias managers.
So I don't follow the space nearly as much. But
there are you know, there are certainly good ones within
long short equities, you know, maybe you know, I'm sure
there is someone a standalone basis.

Speaker 3 (24:45):
It's a very difficult business model.

Speaker 5 (24:48):
And one of the interesting things in short sell which
I think people don't you know, I don't know, I've
never heard it spoken about before. Is you know this
again this is dated, but when you looked at it
and let's say pre two thousand and eight, where they
were probably I don't know, I don't know, there's you know,
certainly a few dozen dedicated short cells and short bias managers.

(25:10):
I want to say, like forty percent of them women really,
which which people don't that's fascinating, you know, so Charlotte Us,
Stephanie Ross, Dina Galante, like all these you know, very
successful short cells and in an industry that was more
male dominated.

Speaker 3 (25:26):
It always struck me as just really interesting.

Speaker 5 (25:29):
That in that segment that you know, an overwhelming amount
at least on a percentage basis maybe you know, maybe
it wasn't great than fifty percent, but like.

Speaker 2 (25:38):
But compared to the rest it was, it was outsized.

Speaker 5 (25:41):
You know.

Speaker 3 (25:42):
It's just it's just interesting.

Speaker 2 (25:43):
There have been a number of academic studies that say
female fund managers outperform their male counterparts by anywhere between
fifteen one hundred basis points. And it's always you know,
the joke is testosterone poisoning, but it's fast learning to hear.
I'm curious as to why female short sellers. Is it

(26:07):
an objectivity, is it just a different approach.

Speaker 4 (26:10):
It's kind of really intriguing.

Speaker 5 (26:12):
Yeah, well, my wife would probably say it's it's because
they don't have the egos of the men right the poison.

Speaker 2 (26:18):
Yeah, absolutely, if it doesn't work out, they cover it
and move on.

Speaker 5 (26:22):
Yeah, you know, I think there's probably you know, of
course there's great examples of both. But you know, again,
risk management and discipline is definitely is definitely the key
toest successful short selling soles.

Speaker 3 (26:34):
That has to be something about.

Speaker 2 (26:36):
Let's let's go with another bullet point that speaks directly
to that. I love this one. Avoid casinos. Black isn't
on a roll and red isn't due Very few managers
add value over time through timing the market, even if
it sometimes look like looks like it. Don't reward a
manager for gambling. Again, so much insight in two sentences

(27:00):
explain how you reach this conclusion, which I just think
is brilliant.

Speaker 5 (27:05):
Yeah. So I give credit to Chris Marshall on the team.
I think he's the one that came up with that quote.
But it really, again is the observation that the vast
majority of managers are are the vast majority of them
good stock pickers, but bad portfolio managers, and serve the
skills and timing decisions. You know, the vast majority of

(27:28):
managers are are subtracting value from the portfolio matag.

Speaker 2 (27:32):
Really the you're gonna say top quartile, top death style,
Where where's the alpha coming from?

Speaker 5 (27:37):
I mean the alpha is coming from like if if
you look at let's put this, if you look at
fundamental long short equities that live within the pods and
you look at alpha generation with them on you know,
turnal leverage or whatever you want to say, and then
you look at the standalone long short universe and the
alpha that's generated. There there's a disconnect, right, And it's

(27:58):
not because they're not good stock pick is The disconnect,
I think is because the portfolio management, you know, bad
portfolio management or sub poorer portfolio management is subtracting value
from their stock picking. So maybe they're adding you know,
five percent of out front of stock picking and it's
decaying and that by three percent from.

Speaker 3 (28:19):
From portfolio management decisions. And I just think it's it's difficult.

Speaker 5 (28:23):
And you know that there's been tremendous factor moves in
the last number of years.

Speaker 3 (28:29):
There's also issues.

Speaker 5 (28:30):
When you're operating on a standalone basis, Like there's business
considerations rightly or wrongly. Right, So if someone's operating in
a ten boll and markets are going down and they're
you know, in a hole by eight percent. Now are
they acting differently from a you know, they should be
buying a lot more because the markets are down and
things look interesting, But are they?

Speaker 3 (28:49):
Are they things playing scared?

Speaker 5 (28:51):
You know? And I think it's again it's not It's
not everybody for sure, and there's some that do it well.
I just think it is very challenging to do.

Speaker 2 (29:00):
You know.

Speaker 5 (29:00):
It's it's much easier to find good stock pickers that
are adding alpha than it is for someone to consistently
be able to make you know, I don't.

Speaker 3 (29:11):
Know, contrarying or or correct portfolio magic.

Speaker 2 (29:15):
Well. See, the old joke is the crowd is right
most of the time. So if you're if you're constantly
finding the crowd, you're on the wrong side of the trend.

Speaker 3 (29:22):
Yeah, you go.

Speaker 2 (29:23):
Last one and again another another brilliant one. Dinosaurs go extinct.
Innovation must be constant.

Speaker 5 (29:31):
Yeah, And this is for you know, this is for
hedge funds as well as us. And you know, part
of it relates to the managers themselves, part of relates
to strategies, and again part of part of it is
business model. But when I think about you know, I
think about strategies that we used to invest in in
nineteen ninety five where you can make a lot of money,
like sig merger arbitrage, you know, like merger obtrage again

(29:52):
you could you can make double jus at returns. It
was less competitive. Plus you need mergers and.

Speaker 3 (29:58):
Well you have that that helps for sure.

Speaker 5 (30:00):
But now like the strategy, I mean, there are some
very successful people that do it on a standalone basis.
Usually they do it with credit or other events. But like,
it's a much more difficult place to make money. It's
it's become largely commoditized. When it becomes interesting, there's a
swarm of money that will kind of go into it.
Isn't that true for every which is why you need
well eventually, which is why you need to innovate. You

(30:22):
need to you know, so let's take you know, machine
learning quant right, Like machine learning quant start investing ten
years ago, like that was novel and and you know
today it's obviously gaining a lot momentum.

Speaker 3 (30:35):
People understand it more.

Speaker 5 (30:37):
But you have to kind of continue to reinvent, like
from our perspective, need to continue to do look after
different strategies, different types of managers to find kind of
high alpha. And then from a manager's standpoint again, let's
think about quant again. The managers need to read, reinvent themselves,
and refine themselves from an alpha standpoint. So like alpha's

(30:59):
de kay, you know, yesterday's alpha's tomorrow's beta, right, and
you know a lot of what has made them successful
from an alpha standpoint is going to decay. So if
you don't, you know, maybe it's fifteen to twenty percent
is going to decay and be irrelevant each year.

Speaker 3 (31:17):
So you need to constantly kind of reinvent yourself.

Speaker 2 (31:19):
So when you start putting together the next thirty over
the next thirty years, yesterday's alpha is tomorrow's beta.

Speaker 4 (31:26):
That's number thirty one for me.

Speaker 3 (31:28):
There you go, that's the right.

Speaker 2 (31:29):
So let's talk about what's going on today. Hedge funds
have had to adapt to a very challenging era, certainly
since the financial crisis. I've heard financial repression and all
sorts of reasons for why some funds have been underperforming.

(31:50):
Less volatility, increased dispersion, inequity returns.

Speaker 4 (31:55):
What's going on in the world of hedge funds today.

Speaker 3 (31:58):
So, yeah, the last.

Speaker 5 (32:00):
Five years especially have been a great time for hedge funds.
So let me, let me, let me maybe frame it.
And actually we just came out with a paper called
Hedge Funds and the end of the Alpha Winter, And
I should do a shout out for Emmy Hodges who
did a great job on on putting the piece together.
But maybe just taking a step back there, there were
we identify kind of three big picture variables that really

(32:23):
drive excess return and hedge funds.

Speaker 3 (32:26):
So one of them is volatility.

Speaker 5 (32:27):
Everything else you if you want vol higher, that creates dislocation,
sloppy trading. You know, it's opportunity. It's the fuel, the
fuel of what drives alpha.

Speaker 1 (32:36):
Right.

Speaker 5 (32:37):
The second is dispersion, So equity dispersion first and foremost,
but why the dispersion as well, so we'll winners and losers,
you know, obviously if you're a stock picker, that's hopeful.
And the third is is rates being higher than two percent,
And higher rates.

Speaker 3 (32:54):
Help in a number of ways, but both kind of mechanically.

Speaker 5 (32:57):
If you obviously, if you have floating rate debt's hopeful.

Speaker 3 (33:00):
High rates.

Speaker 5 (33:01):
But also again we've seen this like in a period
of rising inflation, rates are going higher. That's going to
fuel increase volatility, so it's a little circular, right, but
elevated volatility or at least normal volatility, elevated dispersion, and
rates that are graded than two percent. When you have
those three elements, so even two of those three variables

(33:22):
kind of as a tailwind rather than a headwind, alpha
generation is really really strong. So what we've done is,
like we looked at three different periods. The first starting
with two thousand ish, kind of a ten year period.
You know, I forgot exact percentage, but like a large
percentage at a time, two of those three variables were.

Speaker 3 (33:44):
At your back.

Speaker 5 (33:44):
They were helpful, and you saw excess return that was
very very high.

Speaker 3 (33:49):
The middle period, which is the alpha winter had tens.

Speaker 4 (33:52):
Is that what we're talking about essentially.

Speaker 5 (33:54):
Yeah, two thousand and ten, right, the middle period, this
is I think you know nine ish or you know,
eight nine year period, which admittedly is quite long, was
one that where you saw a lot of central bank intervention,
where those variables were generally you.

Speaker 3 (34:11):
Know, depressed.

Speaker 5 (34:11):
You could think about twenty seventeen realized well being really low.
Obviously we had rates of zero for a chunk of
that period as well. That was difficult to generate alpha,
not only for hedge fronts but broadly, and that's kind of.

Speaker 3 (34:24):
The alpha winter.

Speaker 5 (34:25):
We would suggest that that period is abnormal. And you know,
even if rates go down, even if all comes down like,
you're not likely to go back to a period that's
so dominated by that period of central bank intervention. And
you know, most importantly the PostScript to that is, for
the last five ish years, you've gone back to kind

(34:46):
of the good old days of alpha generation. Right, So
the last five years you've had volatility that's you know,
generally normal or higher, dispersion that's really high, and rates
that are are combinative as well, and excess return in
alpha has resumed and looks very much like what it
looked like twenty years ago versus that kind of middle

(35:09):
alpha winter period.

Speaker 2 (35:10):
So the past five years have been really interesting. Twenty
twenty two obviously, stocks and bonds down double digits. That
seems to happen once every forty years or so. Ye,
what about twenty twenty five. What sort of role is
the globalization and shifting trade policies playing in shaping hedge
fund returns?

Speaker 5 (35:30):
Yeah, I mean, obviously you have a lot of different
so you know, it's a lot of strategies, a lot
of different substrides. So it's very difficult to talk about
the whole hedge fund industry as one thing. But like
when I think about excess return, you know, all the
things that you mentioned are generally good for hedge funds, right,
So in the rest of the world is getting worried
like that is again the fuel of.

Speaker 3 (35:50):
What drives hedge fund returns.

Speaker 2 (35:52):
Right.

Speaker 3 (35:52):
So when you see when you see.

Speaker 5 (35:55):
You know, rising rising voll and, that's that's going to
be good from Cisco arbatrage is going to be good
generally for balanced stock pickers. It's going to be good
for discretion a macro managers. When you see deglobalization and
some of the trends that come out of that, whether
it's on shuring, whether you see some of the moves
in you know, in gold and like that, that's good

(36:17):
from a trend file and standpoint.

Speaker 3 (36:19):
It's good for discrettion a macro managers.

Speaker 5 (36:21):
When you see Japan right increasing rates the US decreasing rates,
that's hopeful because it's two bets to scratch my macro
managers the place. It's not just like everyone operating in
the same way. So those things are good. I mean
generally because it gives people more of a palette to,
you know, an alpha palette to which to choose from

(36:43):
place more bets, diversify more and also heightened volatility and
heightened uncertainty is going to be positive for the vast
majority of strategies, especially from an excess return alpha standpoint.

Speaker 4 (36:55):
So you mentioned Japan.

Speaker 2 (36:56):
I'm curious what regions around the world are attracted the
most new capital. We've seen Europe suddenly catch a bid,
you know, obviously, Japan has been doing well, the rest
of Asia, in the Middle East, and even the US.
You know, what what areas are attracting new capital and
what's driving that trend?

Speaker 5 (37:13):
Yeah, I mean, what are the areas that we're most
excited about for sure and have been leaning in for
the last three years.

Speaker 3 (37:18):
Is Japanese corporate governance.

Speaker 5 (37:19):
Now, interestingly, if you look at dollar flows into Japan,
it's actually not I mean, it is positive, but it's
kind of modest in a grand scheme of things, which
kind of shocks me honestly, and like, I don't I
don't mind because we're playing events first and foremost, but
you really haven't seen that many dollar flows in which,
again is unusual given like everyone in the world and

(37:40):
in every way, shape or form, is probably underway Japan
and it's and it's obviously inexpensive, but most importantly you
have a material, dramatic catalyst that's driving value through through Japan.

Speaker 3 (37:53):
And yeah, we're excited about it.

Speaker 5 (37:54):
I mean, corporate corporate governance has been talked about in
Japan for decades.

Speaker 3 (37:58):
The reality is until you.

Speaker 5 (38:01):
Know, Abe had his third Arrow and you've you know,
which really set off a number of regulatory and policy
changes and importantly, like cross shareholder relationships started to unwind,
that really set the stage for increased corporate governance. So
it's you know, we we again, we've been there for
three years. I think we're maybe halfway through what needs

(38:23):
to be done and and there's still a very very
fertile opportunity set.

Speaker 3 (38:27):
So that's that. That's one.

Speaker 5 (38:30):
The other thing I would point out is just the
Middle East. Now, obviously, you know, it's not it's not
to say that there's a lot of money from an
investment standpoint going into the Middle East, but it just
come back from a you know, a week long trip
in the Middle East and you know, got there maybe
eighteen months prior, and it's really exciting what's going on.
I mean, clearly there's a lot of interest from an

(38:51):
investment standpoint in hedge funds and alternatives in the Middle East.

Speaker 2 (38:54):
There's no question about is this because all the sovereign
wealth funds located in Pata and Arab Emirates and down
the list.

Speaker 5 (39:03):
It's coming it's certainly coming from from them, but it's
brought it's broader as well. I mean, it's it's family
office money in addition to the sovereigns, and they're interested
in alternatives or interested in hedge funds, local.

Speaker 2 (39:16):
Family office or europe and American family office in the middle.

Speaker 3 (39:20):
All of the above, you know.

Speaker 5 (39:21):
I mean there's also been rich is a maybe to
tie together one other part. I mean, there's also been
a lot of movement of people of hedge funds setting
up businesses in Dubai and Abu Dhabi and people moving
there with wealth and in turn they become you know,
potential investors in alternatives. So that's definitely a prominent story
as well, the number of people that are setting up

(39:42):
in the region or open up offices.

Speaker 2 (39:45):
So when we used to talk about New York, London, Tokyo,
Hong Kong as centers.

Speaker 4 (39:51):
Do you put Abu, Dhabi or Dubai in that list as.

Speaker 5 (39:54):
Actually it's you know, for the larger for the larger
hedge funds, for sure, I think it's becoming you know,
the vast majority of them or.

Speaker 3 (40:02):
Opening offices or have offices in regions.

Speaker 5 (40:05):
So it is definitely an area that is attracting a
lot of a lot of interest. And then from an
investment standpoint, you know, again it's a much smaller market,
but there I think that you know, the policy changes
and regulatory changes which allow foreign ownership and a derivative
market starting is encouraging as well. It's early days, and

(40:25):
again it's not you know, the breadth and depth of
the market still needs to improve, but again it's exciting
for that standpoint as well.

Speaker 4 (40:32):
Really kind of intriguing.

Speaker 2 (40:34):
What are hedge funds thinking about with assets like crypto
or gold? How are they dealing with What are some
of the biggest winners past couple of years.

Speaker 5 (40:44):
So you've seen I mean on golden and pressures, but
I mean discretion macro managers have you know, many have
had that bet on It's been a very successful bet
and theme given you.

Speaker 3 (40:55):
Know, concerns on inflation and debt levels, so you know,
you can you continue to see that that theme in
people's portfolios. Crypto is a little more you know, interesting
and specific.

Speaker 5 (41:08):
Some managers, again mostly discretion and macro managers have invested
in crypto mostly you know, mostly big bigcoin or eth
more from that inflationary, you know, debt standpoint, although others
have from other standpoint as well, from a you know,
from like a trend Fhong standpoint on futures.

Speaker 3 (41:27):
People have done it a bid on statistical arbitrary side.

Speaker 5 (41:31):
Some people play from like a cash future standpoint, from
an ORB standpoint as well, but it's still small, at
least let's say, the traditional hedge funds investing in crypto.

Speaker 3 (41:41):
It's still small.

Speaker 5 (41:43):
That being said, obviously you have a large number of
like dedicated crypto funds that are trading both directionally as
well as as as well as in the ORB side
as well.

Speaker 2 (41:52):
Coming up, we continue our conversation with Paul Zumo, chief
investment officer at JP Morgan Alternative Asset Management, just the
state of hedge fund investing today.

Speaker 4 (42:03):
I'm Barry Ridults.

Speaker 2 (42:04):
You're listening to Masters in Business on Bloomberg Radio. I'm
Barry Redults. You're listening to Masters in Business on Bloomberg Radio.

(42:27):
My extra special guest today is Paul Zumo. He is
Chief investment officer at JP Morgan, Alternative Asset Manager, helping
to oversee thirty five billion dollars in external hedge fund assets.
He's also chair of the Alternative Asset Management Investment Committee.
He co founded the group back in nineteen ninety four.

(42:48):
So what styles and hedge fund worlds are doing well
in twenty twenty five. I've noticed over the past few
years emerging managers have made some consistent gains. Quants have
done well well, some of the multi strats have done well.
What what are you seeing in in the rest of
the field, some of which, even in this high volatility,

(43:08):
high alpha market, have been struggling.

Speaker 5 (43:11):
Yeah, I'd say so we we look at pivotal path
as you know, their industry's first and foremost. I think
it's they're the they're very very good quality industries and
I think paints a very good picture.

Speaker 3 (43:22):
And that's kind of what I have in mind.

Speaker 5 (43:24):
So like when you when you look at it, you'd
find that most strategies and substrategies.

Speaker 3 (43:29):
Have done pretty well this year in the grand scheme
of things.

Speaker 2 (43:31):
You know.

Speaker 5 (43:31):
The one exception to that is is ctias, which have struggled.

Speaker 4 (43:35):
Even with gold running away and.

Speaker 5 (43:38):
CTAs got heard in in April where they were very
very long equities and yet you know, Liberation Day and
markets correct a lot. So you saw you know a
bit of a retrenchment in CTIA's performance in April that
get hit pretty hard, and they've been trying to like
piece it together and they and they have the last

(43:58):
couple of months have been have been stronger.

Speaker 2 (44:01):
To be fair, it's very challenging to follow a trend
when the trends is dependent on the whims.

Speaker 4 (44:07):
Of one person.

Speaker 5 (44:08):
That that is true for you, right, doesn't show up
what the good news is, most other strategies actually are
doing quite well. Right, So if you look at across
relative value, as you mentioned quant the multi strip pause,
convertible bond arbitrage has been good with strong issuance discretion.

Speaker 3 (44:25):
Macro as we talked about some of the themes.

Speaker 5 (44:27):
Whether it's you know, whether it's gold or you know
or rates themes has done well as well. You might say, okay, well,
the markets are up but it's not just beta, it's alpha.
So a couple of people have come up with you know,
if you if you look at the alpha generation this year,
it's about five percent five and a half percent in
long short which is quite healthy. And even you know,

(44:49):
Merger Arbertrage events done well. You know, credit's done fine.
So I'd say it's been a good year overall, with
most strategies generating you know, strong kind of single mid
single digit to high single digit returns or high single
digit returns, and you know, overall, definitely good year for
the industry.

Speaker 2 (45:07):
So we've seen the rise of multi strategy managers over
the past few years and there have been a number
of very large multistrats and uh it seems to be
a direction a lot of funds are heading. How has
that changed competition within the industry or is there more
collaboration within a multi strategy shop amongst all the different pods.

Speaker 4 (45:29):
How is that playing out?

Speaker 3 (45:30):
Uh?

Speaker 5 (45:31):
Well, I think collaboration amongst themselves, I think I think
there's a proble.

Speaker 2 (45:35):
I'm assuming they're not competing, They're not collaborating with the
fund across the street.

Speaker 4 (45:40):
It's all internal, right.

Speaker 3 (45:42):
I'm sorry.

Speaker 5 (45:42):
Collaboration for the pods pots or within the pods.

Speaker 2 (45:46):
Collaboration within a multi strat from Hey, here's the macro,
here's the long short, here's the quant group, here's the
trend group.

Speaker 5 (45:55):
What are we are we seeing that cross polinization across
across teams? I think it's depends in the model, you know,
like if you if you look at the pods. Obviously
there's some prominent ones out there. They differ materially from
the strategies that they pursue, They differ materially from the
culture that they pursue. They know, they just different. The
risk management approaches is different. So it really depends. There

(46:19):
are some managers where you know, whether they are benefiting
from maybe cross polarization, you know, across teams or a
cent a book that's maybe drawing upon best ideas. So,
but it's really going to differ kind of pod to
pod based on the style and how they how they operate.

Speaker 4 (46:38):
Fair enough, let's talk about risk management.

Speaker 2 (46:42):
There were obviously some lessons learned this year in April,
and plenty of lessons learned in twenty twenty two. What
do you think are going to be the most impactful
lessons for managers looking forward?

Speaker 5 (46:54):
Looking forward, I mean things you're worried about today is
just complacency, you know. I mean, mark time you have
markets going up for you know, for for a while, inevitably,
complacency develops in some way, shape or form. So we're
certainly being you know, front footed and having discussions whereas
that and whether it's credit or equity markets, and like

(47:14):
how do we or or specific areas with.

Speaker 3 (47:17):
Hedge fronts and how do we guard against that a
little bit.

Speaker 5 (47:19):
But I think some of the events last year, like
we're talking about, you know, Liberation Day or maybe a
deep Seek event and some managers being you know.

Speaker 2 (47:26):
God was Deep Seek twenty twenty five, It seems like
decade years now, maybe it was, you know, it was
January this year, and then everybody's minds.

Speaker 5 (47:36):
I mean, I think it really underscores a couple of things.
I mean one, risk management first and foremost right, And
it's certainly, you know, certainly on Liberation Day, I think
a lot of people were caught off balance in their
books and then again oftentimes kind of retrench after that
lock and losses. It's not a great recipe. So like

(47:56):
sizing positions and sizing risk across areas you know, in
which people investor are obviously always critically important. And then
on deep see a cliok ai is extremely exciting. It
creates tremendous opportunities. But going back to what we're saying
about short selling before, it also creates tremendous risk and
you know, risk of just being one sided bet but

(48:17):
also a risk of again operating in a long short
fashion and getting thinking about like offsetting risks and basis
and sizing so thoi things are critically important.

Speaker 2 (48:31):
So, speaking of AI, I just overheard pull tutor Jones
speaking to somebody on Bloomberg saying, you know, maybe AI
might be developing into a small bubble, but it's not
a giant headache. How are you looking at all this
bubble chatter, high valuation, concentrated markets. This seems to be

(48:54):
part of the wall of worry that markets are climbing.

Speaker 4 (48:58):
What's your perspective on this?

Speaker 3 (48:59):
I mean, Paul said it, it must be right, so you
could do worse. Yeah, that's right, that's right.

Speaker 5 (49:07):
I mean, look, is it a bubbles And obviously it's real,
it's going to be impactful, it's you know.

Speaker 3 (49:13):
It's going to be enormously important.

Speaker 5 (49:14):
It's going to reshape how we do so many, so
many things.

Speaker 3 (49:18):
For sure?

Speaker 5 (49:19):
Is there excess in certain areas related to it? There
has to be for sure. Again, I think it comes
down to risk management first and form. You know, assuming
you want to set up a balanced book, it comes
down to risk management first and foremost, and if you don't,
if you just want to play it from a thematic standpoint, Again,
it also comes down to risk managers from a sizing standpoint.

(49:39):
You need to size it to be able to handle
the inherent volatility of it.

Speaker 3 (49:44):
But is it rich, Well, of course it's rich. Is
it a bubble? I don't know.

Speaker 5 (49:49):
I'm not the best one to say, but it certainly
is real.

Speaker 3 (49:52):
It's certainly going to revolutionize and change our lives.

Speaker 2 (49:56):
Every time someone asked me about it, I like to
remind them Greenspan's irrational, a zuberant speech was ninety six.
You still have a long way to go before that
really became a bubble.

Speaker 5 (50:07):
But also, look look at you know, we're talking about
you know, dot com, right, So I mean as a
little bit of your you know, your model and your playbook, right,
So I mean obviously Amazon came out of that, but
there's a lot you know, pets dot Com, you know,
dating myself, but you know, and.

Speaker 2 (50:24):
I have Star Network on my desk.

Speaker 5 (50:28):
You know, like, really it's gonna be when, it's gonna
be winners and losers and and it is extremely important,
extremely powerful, but it's not gonna lift all boats at
all times.

Speaker 3 (50:38):
So you need to be selective and you need to
size it right.

Speaker 2 (50:41):
Huh makes great sense. Last question before we get to
our favorite questions. What do you think hedge fund managers
investors are not talking about.

Speaker 4 (50:51):
But really should be.

Speaker 2 (50:52):
What what topics assets policies are getting overlooked but shouldn't.

Speaker 5 (50:59):
Well, I mentioned compcency a little bit just because where
we are in a cycle. But maybe if it's okay
taking a different direction to say like it's more of
a misnomer about the hedge fund industry, which is if
that's okay, it's a little little different. So like one
thing I would say, that's that's frustrating. I think a
lot of people get wrong is they look at the
hedge fund industry as an asset class. And what I

(51:20):
mean by that is if you have an asset class,
then you know, everything in an asset class should be
more or less you know, highly correlated to each other.

Speaker 3 (51:29):
Right, it's the same. It's the same thing.

Speaker 5 (51:31):
And if you take the ten thousand or so hedge
funds that are out there, the correlation across correlation pairwise
correlation is is something like.

Speaker 3 (51:38):
Point point two or point twenty.

Speaker 4 (51:40):
Five near one.

Speaker 5 (51:41):
It's nowhere near one, right, So what you really have
is a collection of strategies, a collection of substrategies. Importantly,
the characteristics of those strategies are just vastly different from
each other in many cases, and the way you use
them and a portfolio.

Speaker 3 (51:57):
Is vastly different.

Speaker 5 (51:58):
So when people think about the hedgephone industry and they're
looking at like a hedge fund benchmark, which is or
you know, like ten thousand funds cobbled together, oftentimes they
look at it and they're like, well, I don't know
what to make of this.

Speaker 3 (52:13):
It has an.

Speaker 5 (52:13):
Okay return and an okay volatility with okay characteristics. Maybe
I don't need it. And it's the right conclusion to
the wrong answer, right and and oh, I'm sorry, the
right conclusion for the wrong question, right, And like again,
the observation is correct, But really the question is can

(52:34):
I look at subsets of this industry that are deeply valuable,
rather than just looking at the whole thing as a whole.
And we would strongly suggest that if people are just
looking at the aggregate industry, they're missing the point that
beneath that there are strategies and substrategies and certainly managers

(52:56):
that are add an enormous, enormous value that's being overlooked by,
you know, someone who's plugging the average into an optimizer.

Speaker 2 (53:04):
I'm so glad you said that, because over the course
of twenty five thirty years, I've watched the hedge fund
industry change so dramatically, and my own views on it
have evolved. It's very easy to look at a broad
index and say, gee, this is expensive and doesn't generate
great returns. But again, depending on what you want to

(53:25):
draw the line, top quartile, top decile, when you look
at the top performing funds, there is genuine alpha generation.

Speaker 3 (53:32):
Yeah, for sure.

Speaker 5 (53:33):
And interestingly, like if we would have met, you know,
twenty five years ago, fifteen years ago, like I would
have said the same thing is that, Like I'm not
here to say the hedge fund industry as a whole
is such a tremendous value proposition Like that was never
the thesis.

Speaker 2 (53:50):
You know.

Speaker 3 (53:50):
The thesis is more.

Speaker 5 (53:52):
Are there one hundred or two hundred managers out there
that are adding enormous value? Yes, and you know ken
through great due diligence. I can myself and other people
find them if they if they spend a time and
do a great job.

Speaker 3 (54:05):
Yes.

Speaker 5 (54:06):
And is that tremendously value in portfolios, yes, you know,
but it's not about the hedge fund industry as a whole,
and the averages are gonna knock the lights out.

Speaker 2 (54:18):
Jim Jim Chanos has this quota of He says, you know,
when he started out in the late eighties early nineties,
there were a couple of hundred hedge funds and the
all generated alpha. Today there's eleven thousand hedge funds and
it's the same two hundred hedge funds generating alpha. Which
do you know, there's a lot of truth to Sturgeon's law.
There's a lot of truth to ninety percent of everything's

(54:40):
not great.

Speaker 3 (54:41):
Yeah, yeah, I don't know if it's the same two hundred.

Speaker 2 (54:44):
But he said the same number, not necessarily the same funds.

Speaker 5 (54:48):
They come and go, yeah, Look, it's it's an industry
and an asset class and a fee structure that attracts
a lot of people. But and you know, and and
many of them deserve that fee structure, and many of
them are are great. But yeah, you know, obviously you
need to be selective.

Speaker 4 (55:08):
Absolutely.

Speaker 2 (55:08):
All right, let's jump to our favorite questions that we
ask all of our guests, starting with tell us about
your mentors who helped shape your career.

Speaker 3 (55:18):
Sure, I think so to to come to mind.

Speaker 5 (55:21):
I mean, if I go back, really, you know, back
to high school, and I'm forgetting I'm forgetting his name.

Speaker 3 (55:27):
It's my wrestling coach.

Speaker 4 (55:28):
I swear to god, I knew you to say that.

Speaker 5 (55:30):
Is my Yes, my wrestling coach who was my economics professor.
And this is when I first started getting interested in
in investments and started reading you know, uh, I don't know,
some of like the classic books from from way way back.
When one I'm in street stockture, you know, and he

(55:52):
was the one I kind of encourage and we actually
played this game at the end of the year, which
was like a stock market game, and I actually found
an arbitrage and we've made more money than anyone had
ever made, you know, And he's like, you know, that's
kind of like real life finance, you should you know,
if it's that interesting, you should exploit. So I credit
him for kind of pushing helping push me in that direction.

(56:13):
And then from a career standpoint, I mentioned Joel Katzman,
who you know, hired me to you know, start to
visit with him, and yeah, here was really instrumental.

Speaker 3 (56:22):
I mean one of the things.

Speaker 5 (56:24):
I don't think we spend as much time, but like,
skepticism is really important. I'm a deeply skeptical person. I
think it helps you navigate things. It's one of the
pearls of wisdom.

Speaker 2 (56:35):
Be a skeptic approach due diligence from the perspective where
does this break?

Speaker 3 (56:39):
What does it break?

Speaker 5 (56:40):
Yeah, and I mean it's like approaching due diligence. I
give an analogy of like thinking about a balance sheet
where people again behavioral biases you. You you know, too
many people say, approach it from the asset side?

Speaker 3 (56:52):
How much can I make? What's the story?

Speaker 5 (56:55):
You need to approach it from the liability side, like
what can go wrong with this manager?

Speaker 3 (56:58):
What can go wrong with the strategy?

Speaker 5 (57:00):
As a break, and then turn to the assets side
and effectively say, am I getting compensated for that, right,
and you could teach people some of that, but part
of it has to be innate as well, like you
need to be innate skeptic maybe so any case, Joel.
You know, Joel, I think shared my skepticism for sure.
He certainly taught me a lot about the business and

(57:21):
you know, running a business.

Speaker 3 (57:23):
So yeah, you know, props of Joel. Let's talk about books.

Speaker 4 (57:28):
Since you mentioned some books, what are some of your favorites.
What are you reading currently?

Speaker 3 (57:32):
Yeah? So books.

Speaker 5 (57:33):
So I have a so we investment around one hundred
and twenty hedge funds, and that's what you read. Vast
majority of what I'm reading is their letters, their research,
you know, my my analyst research, and that's the very
you know, it's a vast majority. And then like Michael
Simblest does great work, really really good work. So I
have to say that's consuming the vast majority of my time. Last,

(57:56):
the only thing that stands out there is a book.

Speaker 3 (58:00):
What is it?

Speaker 5 (58:01):
Speak like Churchill and Stand like Lincoln that my old
boss Jamie Kramer, gave it to me. It's about public speaking,
which actually really really good, andsightful like easy easy read books.

Speaker 2 (58:11):
Speak like Churchill stand like Lincoln.

Speaker 5 (58:14):
Yeah, and it's a real, real easy read to you know,
just some like reinforcing some good lessons of public speaking.

Speaker 2 (58:24):
You mentioned Michael Semblist, so I consume his regular output.
And then the JP Morgan Quarterly Guide to the Markets
is just a spectacular, spectacular resource, really really fine.

Speaker 4 (58:41):
It amazing. Let's let's talk about what's keeping you entertained
these days.

Speaker 2 (58:44):
Are you watching or listening to anything well interesting like Netflix?

Speaker 3 (58:49):
And you know, so, uh yeah, well I.

Speaker 5 (58:53):
About five and a half year old, and so she's
she's dominating the Netflix account.

Speaker 3 (59:00):
Usually it's a K pop Demon Hunters.

Speaker 4 (59:03):
That's the number one thing like that.

Speaker 3 (59:05):
That's kind of said, I don't know if you know
what that is.

Speaker 2 (59:07):
Every time I'm searching for anything, I put it on
for thirty seconds and my wife is.

Speaker 4 (59:13):
What are we watching? Can you take this?

Speaker 5 (59:14):
Yeah? So, unfortunately it's it's a little it's it's a
little too much of K pop Demon Hunters. But you know,
away from away from work, I like wine, So it's
probably some podcasts or or related to wine, just to
when I'm not reading the you know the right, you know,
it's so, but there's a there's a great one called

(59:36):
Wine with Jimmy, which is uh wine with if you
want to do a deep dive on Yeah.

Speaker 2 (59:42):
Yeah, I literally just bought the I forgot the name
of it. But during Amazon Prime it was on my
wish list and it was like ninety eight bucks and
it showed up for thirty books, the thirty bucks the
atlass gund.

Speaker 4 (59:59):
Oh yeah, win on the world.

Speaker 3 (01:00:00):
That's a fat book.

Speaker 2 (01:00:02):
Fat And I'm like, all right, that's absolutely worth having
on the on the dry bar.

Speaker 3 (01:00:06):
Now you have to read it. You look, you look
look good, look smart.

Speaker 2 (01:00:10):
It's more of a reference guy. But give us some
of your favorite wines. If you're not gonna give us
more books, give us some wines.

Speaker 4 (01:00:17):
What do you what do you drink?

Speaker 2 (01:00:18):
What do you like? Well?

Speaker 3 (01:00:19):
This is I mean, I like I like red more
than white.

Speaker 5 (01:00:22):
I like, you know, a I don't know, like a
barollo so a nice tannic red red wine. So I
you know, I drink a Barolos temporaneo.

Speaker 2 (01:00:35):
So we're always looking for a house wine, just like
something reasonable that you could pop open anytime.

Speaker 4 (01:00:42):
This this.

Speaker 2 (01:00:45):
Entray Natali Virgo is about a twenty dollars bottle and
it drinks like a fifty dollars.

Speaker 3 (01:00:50):
Nice finding those values. Where's it from Italy? Okay?

Speaker 4 (01:00:54):
But they only like it's a small winery.

Speaker 2 (01:00:57):
They make, you know, a few thousand cases you can't
get like I'll get a case and that's it.

Speaker 4 (01:01:02):
It's you're done till next year.

Speaker 3 (01:01:04):
Well we'll swap great value wines.

Speaker 2 (01:01:06):
After there was another one called Xanthos that was a
maritage X A. N. T.

Speaker 3 (01:01:12):
Joe s.

Speaker 2 (01:01:13):
And the twenty seventeen was spectacular. You can't find any Yeah,
it was like a fifteen dollars bottle of wine. Drink
like a fifty dollars bottle of wine. I don't feel
like I have a palette to go much beyond that.
Like all right, I appreciate.

Speaker 5 (01:01:27):
Listen if you could find twenty dollars bottles of wine
and drink like sixty dollars wine.

Speaker 3 (01:01:30):
But you know, my I'm forgetting a name. But I
have a sanchoves like that, which I founded, one of
the ones. You know, you go to these like.

Speaker 5 (01:01:38):
Wine tasting events, but you go around and you could
taste wine. A bunch of it could be blind, but
this is like a games suckling one. You taste all
different types of wines and.

Speaker 3 (01:01:49):
Then you you know, you I don't know.

Speaker 5 (01:01:51):
For me, I take pictures and the ones I like,
and then you go back and then you look it
up and some of them are like one hundred and
fifty dollars and you're like, oh, I didn't find anything.
And then you you know, you see one that's like
twenty bucks, and you're like, all right, maybe I maybe
I found the jewel.

Speaker 2 (01:02:04):
Right, it's easy to get disappointed in one hundred and
fifty dollars.

Speaker 4 (01:02:08):
Well one it's twenty dollars.

Speaker 3 (01:02:09):
It's there's a lot of great wine.

Speaker 2 (01:02:11):
And then you go to Italy and you sit at
a cafe and you get an eight dollar caref and
it's thank you fatacular.

Speaker 5 (01:02:17):
Right.

Speaker 2 (01:02:17):
It's just so crazy trying to figure figure that out.
So our final two questions, what sort of advice would
you give to a recent college grad interest in the
career in either investing or hedge funds or alternatives.

Speaker 5 (01:02:34):
Yeah, so, I mean, first, you know, and I guess
it's it's a cliche, but like the like do what
you love thing is so real and valuable, but I
think you have to like find what you love first,
like when you're when you're twenty years old, I don't
know that anyone the big world like has a great
vision on it. I would say, like, trust your instinct,
you know. So like it's obvious to me today why

(01:02:56):
I'm doing what I'm doing. It's like this is I
don't know. I'm I'm skeptical, I'm structured, I'm creative, I'm
like curious, Like it makes sense today. It didn't make
sense completely at the time, but like you follow your instinct.
You're like, oh, I love to do this, So I'm
working on the weekend every week because like this really

(01:03:18):
intrigues me and it's interesting, and like, you know, I
don't know, they not pay me and I'm still doing
this right, So, like I think being true to yourself
and really exploring, like what makes you happy, what makes you,
you know, intrigued, what really makes you dive deep on things,
and then continue to lean in and continue to pursue.

Speaker 3 (01:03:36):
It and learn learn more and more.

Speaker 5 (01:03:39):
Maybe the second part of it is just be a
student of history, so whether you are, so I like baseball,
and you know, I think like when I was young,
like how much I learned about the you know, Tay
Cobs and Tamasio and Ruths and everybody. Like I think
if you're a baseball player, like you should know the history.
If you're going into the edgemand industry, like, you should
know the history. When I say, David Askin, you know

(01:03:59):
you should know it. You know, so like take the
time to understand the history because I mean a number
of reasons. One it gives you context, but two like
the mistakes and the opportunity is often you know, often
rhyme with each other, right, So like, how do you
like investing in twenty twenty? And watch twenty twenty? Turns
out it looked a lot like twenty eighteen, two thousand

(01:04:20):
and eight, nineteen ninety eight, Like there were elements that
are very very similar, and being a student of history
helps you navigate much better in the future.

Speaker 2 (01:04:30):
To say, the very least final question, what do you
know about the world of investing in hedge funds today?
That would have been useful back in nineteen ninety four
when you were first launching JP Morgan alternative asset.

Speaker 5 (01:04:44):
Well, I mean there's no Internet, right, so back in
nineteen ninety five, I mean I don't know. You like,
we knew a fraction, we knew five percent of what
we knew today, but it was fifty percent more than
next person knew, right, So I mean it's all about
it's all about getting you know, it's all about getting
an edge and continue to reinvent yourself. I think the

(01:05:06):
biggest the biggest lessons learned for you know, for us,
but for the industry is and what I would have
taken back if I could, is just the depth of
understanding on financing. So you know, in financing agreements right
like prime broken agreements and term and triggers and all
sorts of things that have caused problems over the years.

(01:05:30):
If you could take that one, you know, and it's
caused a lot of you know, pain historically from time
to time. And if you had that knowledge and you
pull that back to nineteen ninety five, wow, you would
be able to you know, navigate.

Speaker 3 (01:05:43):
You seamlessly.

Speaker 5 (01:05:45):
Across the industry in a way that you know was
much bumpier for everybody along the way.

Speaker 4 (01:05:52):
Paul, Thank you.

Speaker 2 (01:05:53):
This has been absolutely fascinating, and thank you for being
so generous with your time. We have been speaking with
Paul's he's chief investment officer at JP Morgan Alternative Asset Management.
If you enjoy this conversation, well, check out any of
the six hundred we've done over the past twelve years.
You can find those that Spotify, iTunes, Bloomberg YouTube, wherever

(01:06:16):
you find your favorite podcasts, and be sure and check
out my new book, How Not to Invest The Ideas, numbers,
and behaviors that destroy Wealth and How to avoid them
wherever you buy your favorite books. I would be remiss
if I did not thank the Crack team that helps
put these conversations together each week. Alexis Noriega is my

(01:06:38):
video producer. Anna Luke is my regular producer. Sage Bauman
is the head of podcasts here at Bloomberg. Sean Russo
is my researcher. I'm Barry Ritolts. You've been listening to
Masters in Business on Bloomberg Radio.