May 1, 2025 • 47 mins
Everyone knows by now that college endowment funds have gone big on alternative investing, pouring billions of dollars into private equity and hedge funds. But that investing model now seems to be under pressure and there are reports that Ivy League institutions like Yale and Harvard are looking to unload some of their more illiquid investments. So why did colleges get into alts in the first place? And how do they select which funds to invest in? In this episode, we speak with Joe Dowling, the former head of Brown University's endowment. Joe is now global head of multi-asset investing at Blackstone, one of the biggest institutional investors around. He talks about the rise of alts, how college funds got so invested, the pressures they're facing right now, and the boom in multi-strats.
Read more: Harvard in Talks to Sell $1 Billion of Private Equity Stakes
Blackstone’s King of Hedge Funds Shakes Up Its Lagging Business
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Add Thoughts podcast.
I'm Tracy Alloway and I'm Jill. Why isn't thal so Joe?
You know what I realized two months ago? Just two
months ago, we were still getting a bunch of headlines
about how private credit was the hot new thing on
Wall Street and how multi strategy hedge funds pod shops
(00:39):
were huge and growing. And we've done quite a few
episodes on these respective topics. But you know, just a
couple months later, the headlines are starting to look very different. Yeah,
and there's concern that if we get a substantial economic slowdown,
you're going to get some sort of big blow up
in private assets and things like private credit, private equity.
(01:01):
You know, a lot of people have been predicting that
might happen for a while. And then when it comes
to multi strats, we've already seen a lot of talk
about pain the pod shops given all the recent market volatilities.
So everything is feeling a little different right now.
Speaker 3 (01:18):
Well, we are recording this on April twenty second, and
we got a headline this has been in the news
for a few days, but I guess it's just been confirmed.
So speaking of you know, the asset allocators, where's there, Like,
real money come in from right, and they're like, yeah,
wealthy families and wealthy, but the real big money is
in these huge pots of money that we're talking about teachers,
(01:39):
which if those in the know, the Ontario Teachers Pension
or of course university endowments. We got a headline today
again it's been out in the news for a few days,
Yale considering selling in the secondary market some of its
private equity stakes. So these huge pools of money that
are really upstream from the private credits of the world
(02:00):
and upstream from the hedge fund multi strands of the world.
They're in a new era for all kinds of different reasons.
And so to even understand these various alts, we have
to understand how the people who fund the alts are thinking.
Right now.
Speaker 2 (02:15):
I am so glad that you mentioned all of that,
because that was a perfect intro, but also Yale specifically,
because we all know that the emphasis on alts was
pioneered by David Swanson over at Yale, and since then,
you know, alts have been a big thing, not just
in university endowments, but in lots of different types of
(02:35):
institutional investing. So I'm very pleased to say that we do,
in fact have the perfect guests to talk about all
of this. We're going to be speaking with Joe Dowling,
Blackstone's global head of multi asset investing. He previously ran
Brown University's endowment and this was one of the best
performing endowments at that time. He did that for a
(02:57):
decade before he joined Blackstone about four years ago. He's
been called the King of hedge funds in some of
our own Bloomberg coverage. So really, who better to talk
about things like alternative investing, university endowments, and what's going
on right now in private assets than Joe. So Joe,
Joe d Welcome to the show.
Speaker 3 (03:19):
Thank you, Tracy and Joe, thanks for having me. Can
we make this a four hour episode? I already have
so many questions.
Speaker 2 (03:24):
Anyway, go Tracy, Uh, okay, So first off, I'm going
to have to be very careful in how I address
each Joe respectively. But other than that, okay. So one
of the things, you know, Joe and I have kind
of nibbled at the edges of the university endowment model.
And one of the things that we know for sure
right now is that they are very large pools of capital,
(03:46):
you know, worth billions and billions of dollars. And for
that reason, we often see them compared to things like
pension funds, maybe sovereign wealth funds. In your experience, are
there differences between you know, running a university endowment, investing
for an endowment versus investing for you know, traditional large
(04:07):
institutional funds.
Speaker 4 (04:09):
Absolutely, But let's set the table with just how big
the universe is, because I think that'll help us. Please,
There's six hundred and fifty US endowments with a combined
assets of eight hundred and seventy five billion. That's from Nikubo.
I'm using Nakubo data. But the average endowment is only
(04:29):
one point three billion in assets under management, and the
median is two hundred and thirty five million.
Speaker 2 (04:38):
I appreciate that you came prepared with numbers.
Speaker 3 (04:41):
When you see a headline Yale considering a private equity
stake IMiD, it's funding turmoil. Some reports have set it's
up to six billion dollars. How big of a deal
is this? Like how how much of an earthquake? Is
that this entity which we associate with long term willingness
to hold onto ill liquid stakes, timber so forth. How
big of a deal is this.
Speaker 4 (05:02):
I think it's a big deal because it's showing stress
in the system. And the six billion dollar number is
also a number that I've heard from outside investors who
are actually looking at the portfolio. And what it signals
to me is that Yale, who's been a pioneer, is
being proactive. They have a new CIO. Remember David Swinson,
(05:27):
who you quoted in the beginning, was the person who
really pioneered the endowment model. But they have a new CIO,
and I think it's a sign that he's going to
put his own stamp on the Yale endowment. Not surprising
with what's happening in the political environment with the endowment tax,
which is currently at one point four percent being considered
(05:50):
to go to up to twenty percent. So that's a yeah,
that's a big, big number. So with regards to taxes,
you might remember during Trump's first administration, under the Tax
Cuts and Jobs Act of twenty seventeen, they introduced the
first endowment tax, and it was a one point four
(06:12):
percent excise tax on net investment income for really the
wealthiest endowments, And how did they define that. What they
did was they took the total value of the endowment
and divided it by the number of students, and if
it was over five hundred thousand dollars, then you were
subject to that tax. And now what's been proposed is
(06:35):
an increase from one point four percent to twenty one percent. Now,
what that would result in is seventy billion of extra
revenue over ten years. And I'm assuming they're the average
endowment return is seven and a half percent to get
to those figures, so call it seven billion a year
(06:55):
of additional taxes. And it's going to change really the
way endowments are managed. They're going to need to be
more tax conscious, They're going to need to target higher
rates of return, and I think they're going to have
to continue to use the private markets.
Speaker 2 (07:12):
Huh. So talk to us about how important was that
special tax status to returns over the years, because also,
if I look at returns, you know recently, over the
past three years or so, they've they've already been lackluster.
So I imagine with the additional tax pressure, that's going to
be pretty painful. And then when you say endowments are
(07:34):
going to have to be more tax conscious, what does
that actually mean? Is that like investing in munis I
guess you already mentioned private credit. But what can endowments
actually do here?
Speaker 4 (07:45):
Yep, So a couple things. One I want to address performance,
because you're entirely right. If you look at short term performance.
Over the last three years, a global sixty forty portfolios
out performed US endowments. The average US endowment return okay,
underperformed the global sixty forty by six point eight percent,
(08:09):
or three hundred and forty basis points per annum. The
top coretile endowment returns underperformed by two hundred and fifty
basis points annually. Now that's over three years, and we
all know investors tend to be short term. If you
look at the five year number, okay, the average endowment
has returned eight point three percent and has outperformed a
(08:32):
global sixty forty by one hundred and seventy basis points,
and the top core tile has outperformed by two hundred
and fifty basis points. Over ten years, the numbers are
even more consistent with those figures. So over the past
ten years, the top core tile has outperformed the global
sixty forty by one hundred and sixty basis points and
(08:54):
even ready for this, the bottom core tile okay, has
outperformed a sixty forty poortfolio by thirty basis points annually. Okay,
let's translate that though. Okay, So let's say you have
a billion dollar portfolio. If you have top quartal performance
versus a global sixty forty over the ten year period,
(09:15):
that's a two hundred and eighty eight million dollar difference.
So we're talking big numbers here.
Speaker 3 (09:20):
And this is the nice thing about being an endowment
is that you don't have an LP that's going to withdraw.
You have one captive LP, and so you know, in theory,
this is why they have the capacity to make these
long term, relatively ill liquid alpha generating investments strictly because
(09:41):
there's just none of that sort of like short term
demand for withdrawals.
Speaker 4 (09:45):
Absolutely, and I think that's the advantage of the endowment
model is that you're able to think really long term
about asset allocation and basically to take advantage of force
selling and dislocations in the market. And that's really what
separates the top quartile from really the median and the
(10:07):
bottom quartile.
Speaker 2 (10:08):
But when you were at Brown, for instance, did you
ever feel some sort of short term pressure maybe, you know,
maybe not just because you had to report returns I
think on a yearly basis, but maybe because the university
needed a bunch of money suddenly for some big project
I don't know, a new building or something. I get
(10:30):
the point that endowments are investing on a very long
time horizon, But on the other hand, I feel like
there must be moments where you do have to come
up with the money.
Speaker 4 (10:40):
You know, you're pointing out something that a lot of
people don't think about, which is that there's a fundamental
conflict between the administration and then the management of the endowment. Obviously,
the administration would like to spend the money to work
(11:01):
on projects, and there are a lot of important projects
out there. But as a steward of the endowment, you
actually have to work with your investment committee to show
them exactly what we were just talking about, which is
small differences in compounding over long periods of time add
up to huge, huge numbers. So what I did, and
(11:22):
with my team, we would constantly show them over ten,
twenty and thirty years what taking a higher distribution would
cost the endowment, and that really allowed us to sort
of do our job long term and think long term.
But the answer to your question is yes, it's the
(11:43):
performance derby every year. It's like college sports, and everyone's
waiting for that those numbers to come out.
Speaker 3 (12:08):
You know so much in finance and these questions, whether
we're talking about the university's board having a manager or
having an endowment manager, whether we're talking about the endowment
manager allocating to multi strategy hedge funds, when we're talking
about the hedge funds compensating the pms. It's like principal
(12:30):
agent problems all the way down. And even though you
have that captive LP and you don't have to worry
about withdrawals, you still have to worry about career risk,
right like because an endowment manager can get and so
it's like it's really like at every chain, it's like
this constant puzzle of trying to get each link in
the chain aligned and for some sort of you know,
(12:53):
everyone's optimal optimal performance.
Speaker 4 (12:55):
But it's interesting in my new seat, I get to
meet all of the CIOs across the country, and I
will tell you the talent pool is extremely, extremely deep,
and so many of them. When I go in and
talk to them, I'm actually learning just as much as
I hope i'm educating. It's it's really amazing the level
(13:20):
of sophistication of these endowments. I've been super impressed. And
I didn't get that at Brown because you don't have
that much interaction because you're competing with people.
Speaker 1 (13:29):
Yeah.
Speaker 4 (13:30):
Right, I didn't think David Swinson was going to call
me up and give me his best, best manager. That
just is not going to happen.
Speaker 2 (13:36):
Since you brought up Swinson, talk to us, you know,
let's just go back in time in history and talk
to us about the rise of all investing at university endowments.
Is it really just as simple as you know, endowments
have long term investing horizons, and so illiquid assets that
need to be held onto for a long time are
(13:57):
a really good match. Is that? Is that the story that's.
Speaker 4 (14:01):
At the heart of it, which is if you have
long term money, you should be able to use the
illiquidity premium and you should be able to earn more.
And I think that's what David and many of the
CIOs realized, and they had the long term capital to
do that, and it's worked. And what's also amazing is
(14:24):
the percentage of alternatives that these firms own so that
the endowments invest in. So the average high performing endowment
has fifty five percent of their assets and alternatives. Wow,
the top cortile and the IVY leagues all have over
sixty five percent in alternatives. And they've worked. And I
(14:47):
think people are trying to call the demise of alternatives
and especially even the endowment model, and I don't think
we have the evidence yet that it's broken.
Speaker 2 (14:59):
One thing I all always wanted to ask someone who
actually works at an endowment, and in fact you led
the endowment, But do you just have like hedge funds
and private equity just knocking at your door and constantly
pitching new things to you? How do you make that
initial connection between you know, a potential not client or
(15:20):
a manager between a potential manager.
Speaker 4 (15:24):
That's a great question. So I think that you have
a choice when you're an allocator and an investor, which
is you can lead or you can be led. And
so the answer is we always had people coming and
trying to pitch us. But what I always encourage my
team to do was to research deeply markets or big
(15:49):
deep alpha poonds. So let me give you a specific
example biotechnology. So what I would say to the team is, wow,
biotech stocks twenty five percent, some of them are trading
under cash right now, Let's go do some research on
that segment. And then they would go out and market
map biotechnology, giving us all the different types of players
(16:13):
in their approach. And that's how you get context. How
you end up being a mediocre investor is just getting
the flavor of the day, and usually the flavor of
the day is traveling around the country, and as contrarians,
what we like to do is to pick things that
were sort of off consensus, not loved. One of my
(16:38):
favorite expressions I used to say to my team was
what would make you really uncomfortable to recommend in front
of an investment committee. If it makes you really uncomfortable,
go research it.
Speaker 3 (16:50):
One of the things you mentioned is that, you know,
one of the nice things about endowment is they can
be the ones who buy when everyone is selling. And
typically there's true So let's you know this Yale headline
that we got and you said, it's a big deal.
We're in this sort of confluence of events where universities
(17:11):
are they're you know, they're anxious about their money that's
coming from the federal government. They're anxious about foreign students
continuing to come to the US. There's obviously the market
decline itself. So are we in a moment where there
is some like inability or some constraints on the endowments
(17:33):
to be I don't have buyers of last resort, but
the opportunistic investors of the moment, like, is this actually
a moment where that's under a threat? And the endowment
taxes you mentioned.
Speaker 4 (17:43):
Well, I think it's endowment tax I think it's a
lot of the NIH funding at these schools combined with
the perfect storm of markets receding, and so these models
are being challenged, right, So I think the people who
are playing offense and are being proactive, and I would
probably put Yale in that category, are going out and
(18:06):
testing the market and saying, you know, where is my liquidity.
I just take a step back on private equity because
that's what they've They've gone out and are trying to sell.
If you look at the asset class, I think it
is a fantastic asset class. And I want I want
to just talk about this. I don't work in private
(18:28):
equity at Blackstone, so I'm have my endowment hat on.
But I want you to think about the value proposition.
The value proposition is that I'm investing in the largest
universe of companies out there, which are private companies with
experts who I'm lending money to in terms of a
(18:50):
management fee, because that management fee comes back to me,
the investor, and then we calculate an eight percent preferred
return before the manager makes any money. And if you
think about it, eight to ten percent is about what
the stock market has done over the last fifty years.
So the value proposition is I, the manager, until I
(19:14):
add value over that public market, will not earn any
incentive fees, and I will pay you back. That structure
in itself protects investors. And even in the fourth coretile
and I'm quoting Cambridge and Associate's data now, even in
the fourth coretile of buyout managers, and the Cambridge database
(19:35):
changes every you know month, but call it over twelve
hundred managers. Even the fourth coretile is positive over a
rolling ten year basis. It's a good asset class. But
what I always hear is the doubters and they want
to say there's too much dry powder and things, you
know things. Capital is not being returned, no pot.
Speaker 2 (19:58):
It's hard to deploy, it's hard to deploy.
Speaker 4 (20:00):
And the reality is it has been hard to get
capital back for the last three years. Public markets are closed,
mergers are not accelerating like we thought they were. So
the longer this goes on, the more this endowment model, Joe,
to your point, is going to be challenged. It is
definitely challenging. But I think the smart endowments are already
(20:23):
taking action to grab for that liquidity. And think about it,
ten years ago, there was no deep secondary market. The
thought that you could sell, okay, six billion dollars of
private equity assets, it's pretty amazing.
Speaker 2 (20:40):
It's definitely different to how it used to be. But
just on the pe point. You described your sort of
research process earlier, and you gave an example in the
case of biotech. But if you're researching those ideas, your
team is trying to find alpha itself. What's the benefit
of investing in a third party like private equity or
(21:03):
like hedge fund a hedge fund, versus just investing directly.
Speaker 4 (21:07):
Yeah, it would be almost impossible to recreate the type
of competitive advantage that the managers that we invested in
Brown had, and I think that trying to do it
direct at an endowment, you have a smaller team, you
have less resources, you have one investment committee. At Blackstone,
(21:29):
you're constantly iterating, you have multiple investment committees, you have
multiple oversight, you have a risk committee, and you have
just so much more data, so much more information. That's
why it's such a competitive advantage. The concept of scale
is so powerful. So when I transitioned from Brown to Blackstone,
(21:52):
I was overwhelmed at the power of the scale, the data,
the manager access. If I could have run the Brown
endowment portfolio on the Blackstone platform, I would have really
made money.
Speaker 2 (22:06):
Oh you did make real money. I mean while you
were a Brown, even without the Blackstone platform.
Speaker 3 (22:11):
Let's talk about hedge funds real big picture. How would
you describe the reasons for the rise of the multi
strategy model. Why has that model even more than the
single manager, How would you characterize it? Why that particular
flavor of hedge fund has become so popular.
Speaker 4 (22:28):
Sure, I think that when I think about the multi
strap world, I think about a tiering of talent, and
it's clear to me that that Millennium, Citadel and the
top players have really distinguished themselves. And they've done that
by providing a very, very consistent return with a high
(22:50):
sharp that is completely uncorrelated to stocks and bonds, which
is nirvana for a manager because what people realized and Joe,
the wake up call was in twenty twenty two when
stocks and bonds were both down high teens and the
(23:11):
Millenniums and Citadels of the world earned their you know,
standard returns, which are you know, call it twelve percent plus.
That is what you want in your portfolio as a
true diversifier and something that provides a ballast. So they
have unlimited tomas.
Speaker 3 (23:30):
Results have spoke for themselves.
Speaker 4 (23:32):
Results have spoke for themselves, and you know, these are
not easy things to recreate. If you look at Millennium,
it has more employees than Blackstone.
Speaker 2 (23:41):
Wow, that's crazy. Okay, then give us some give us
some color on the past couple of weeks. I can't
believe it's only been twenty days since Liberation Day on
April second, But what's your impression of what it was
like at the multi strats over the past month or so.
Speaker 4 (23:59):
Yeah, it's interesting thing. Obviously it's in the headlines that
they're down, but they're really not down that much. If
being down one percent is a crime in this environment,
I'll take that asset class all day long. But what
has happened is it's been the fastest growing asset class
among hedge funds. Goldman Sachs quotes that that multistrat universe
(24:22):
has been growing sixteen percent year over year, and their
data is pretty good at matches ours pretty closely. But
what's happened is that there's been a lot of new entrants.
And the new entrants are the area that I worry
about because in order to get the type of diversification
(24:42):
that you need, you need amazing technology, You need a
lot of teams. Okay, let me be specific. There's over
three hundred teams at Millennium Trading. That is a very
hard thing to recreate. Risk management systems and a culture
of performance and excellence, they're really hard to recreate. So
(25:04):
I think if there's a problem, it's going to be
in these new emerging managers, it's not going to be
with the top tier.
Speaker 3 (25:13):
Can you talk a little bit more about the due
diligence process on a multistrat because okay, you have the
top line returns, and there's a line, and as you said,
it's been a really good line, and it's extraordinary. Even
outside of the Veria leads, it's been just extremely impressive.
And then you could point to okay, even in twenty
twenty two when stocks and bonds were both down, they
(25:35):
produced good returns, So again further impressive. Is there a
further level where when you're probing a multistret manager that
you can look to discover whether the pods themselves are
truly uncorrelated and can be expected to deliver uncorrelated returns
in the future.
Speaker 4 (25:54):
Yes, and that's our job. And I mean, when you
think about the quality of earnings of a company, let's say, uh,
you know, the the average S and P company that reports.
The analysts all focus on quality of earnings. We focus
on quality of return. How diversified is that return, what
sub sectors is it coming from. How many managers have
(26:17):
been on the platform for x period of time, how
many of them account for the you know what, what's
the breakdown of the of who's making the profit? How
diversified is that across strategies, et cetera. So that's what
we spend a lot of time doing.
Speaker 3 (26:52):
When you're doing the due diligence, can you talk to
pod managers like how much pro how deep into the
system are you? Is it an outside investor able to get.
Speaker 4 (26:59):
If if you have a good long term relationship and
you're a large allocator of capital, we get a lot
of information to make a very very good decision. I
think if you're just trying to do it on your own,
you have no shot.
Speaker 2 (27:13):
It sounds like you're trying to build a diversified portfolio
of multistrat exposure. How do you get a good sense
of what each multi strategy firm, each pod shop is
actually good at doing.
Speaker 4 (27:26):
Ironically, they have very different approaches, so it's not as
hard as you think. The differences between a citadel and
a millennium are extensive interesting, and so when you start
peeling back all of the different avenues of how they
make money, you start to see really how different they
(27:47):
are fundamentally. And I think you can see that as
an outsider if you examine thirteen f's and you see
after periods of volatility, who's adding to positions and who's
subtracting to positions. So if you look at march of
twenty twenty, you get a pretty good insight into who's doing.
Speaker 3 (28:08):
Can you say a little bit more, what are the
different like, what are those differences that look like.
Speaker 4 (28:11):
So for the more trading oriented managers, they're shrinking their
balance sheet, they're they're cutting their balance sheet. And then
there's a group of managers that are calculating intrinsic values,
so they're actually as those investments are going down, they're
actually adding to them. And if you look at a
historical vol you can see it in historical VALL. So
(28:31):
some of the multi strap managers are very tight in
their VALL calculations and they stay around four percent. Others
that are more intrinsic value oriented are up as high
as eight percent. It's just two different ways of getting
at the same thing. Some people hedge from the top
of the house, some people don't. Again, the styles when
(28:53):
you really get down into it, very different methodologies.
Speaker 3 (28:58):
So you mentioned that, you know one of your concerns
is in the new you know, it's very hard to
recreate a three hundred pod. You know, a team of
three hundred quality pods. It's really hard to recreate that tech.
But you know, some might do it, and some might try.
I'm trying to think of like the science equivalent a
concert a law of the conservation of alpha. Somehow that
(29:20):
the structure of these multi strat hedge funds have been
able to deliver superior returns on a range of market environments.
Is there some sort of intrinsic limit to how many
entities can try to capture this alpha such that it
all degrades, or is it really just a matter of
some just won't have the skills to do it.
Speaker 4 (29:41):
I think it's a combination of both. But look, there
are pockets of alpha in the market that get overcrowded,
and we've seen this in the area of index editions
and subtractions, where a lot of capital gets thrown at
the area and they don't make money money, or they
lose a lot of money, but then the capital quickly
(30:03):
retreats and goes and finds a new pocket. And one
thing about these organizations is they are very innovative. And
if you look at senior management, this is some of
the best investment talent that I've seen. They're coming from
very high quality firms and they are innovating all of
(30:23):
the time, both in technology, in scope of markets, in
how they're joint venturing with people. They're very, very innovative,
but obviously their capacity is constrained, right, but they have
unlimited demand and that's why they've been able to lengthen
their terms. So they've many of them gone from quarterly
(30:46):
liquidity to five year liquidity. And that's a testament, Joe,
to the fact that the model's working.
Speaker 2 (30:54):
Can you give us a concrete example of innovation because
I feel like people use that word a lot and
it's sort of, you know, nebulous in many ways, but like,
what are you saying that is actually innovative or what
has struck you as particularly original and creative recently?
Speaker 4 (31:11):
I think there's a ton of examples on the quant side,
and quant will be something we should return to when
we talk about Brown because one of the traditional David
Swinson tenants was not to invest in quant, and yet
Brown was the largest investor in the Ivy League in quant.
And that's one of the big differences when people ask me,
(31:33):
where did you differentiate yourself? So what's going on in quant?
Just in the systems using AI at these firms would
is absolutely unbelievable. And there are firms out there that
while their capacity constrain. They make money every day. We're
invested in some managers that make money every single day,
(31:56):
and it always blows my mind.
Speaker 3 (31:57):
What is quant mean? Tracy knows that sometimes I don't
know the basic definitions of words, Like how many times
I've asked Tracy to define what fintech means?
Speaker 2 (32:06):
Joe's being very modest. He knows what all these things are.
You choose like the terms that actually don't have a
good definition, right, What does mean?
Speaker 4 (32:14):
I think it's it's the application of quantitative methodologies towards
markets to analyze large sets of data and come up
with patterns or correlations or anomalies of things that happen
divergences between say the futures and you know the cash market.
(32:41):
So everyone talks about the basis trade, right, So the
basis trade is simply I'm going to buy a treasury,
I'm going to sell the future, and I'm going to
capture that convergence because the future should trade at a
premium to capture that convergence. And I'm allowed to lever
that trade because the convergence I'm capturing a very small,
(33:02):
like absolute spread. So I'm levering that sixty to eighty times.
So the ability to rapidly identify those alphas some people
call them alphas, you can call monomalies in the market
that can be exploited. Some of them are high frequency
beating someone to a trade, serving as a market maker.
Speaker 2 (33:26):
So you mentioned that when you were Brown, you didn't
follow the Swinson model when it came to quantitative investing.
Speaker 4 (33:35):
Why was that, Well, I think to put up really
good returns, you have to figure out one what your
competitive advantage is, and two you have to be an
independent thinker and not follow the herd. And that's what
we did at Brown. And I'll tell you how we
created our competitive advantage because I owe it to the alumni.
(33:58):
We we did a really good job was creating a
network of alumni in each asset class. So we would
work with our investment committee, but we would also reach
out to some of the best investors on the planet
by industry, and I would actually go and present our
(34:19):
portfolio in that asset class and say, what do you
think where can we do better? Who would you recommend
we look at? How would you structure this? And so
that was one of the secrets I think of us,
which is using that network effect now, Joe, back to
your comment. Most people don't like to do that because
(34:40):
they're exposing themselves the same way that they feel pressure.
They don't want people opining on what they were doing.
But I was willing philosophically to have that kind of
open transparency so that I could learn and benefit from
the Brown ecosystem. And I always used to have this
expression was I would go to people and I would say,
(35:01):
what do you have to feed the bear? Because it's
the brown bear, So feed the bear. Give us your
best co investments. And I have an unbelievable all star
alumni cast, and they carried Brown to greatness. I happened
to shepherd the process with an incredible team.
Speaker 2 (35:18):
Joe, what was your college mascot? Out of curiosity? The
Texas Longhorns, of course.
Speaker 3 (35:23):
Which one day if, by the way, if the if,
one day, we'll do a proper interview with the head
of you, Timco. It does seem like an investing and
this includes VC investing too, like you'd probably want you
want to see a lot of pitches, don't you, right,
like hit a home run, and so it sounds like
they had alumni network or whatever it is. It's like
(35:45):
you don't have to say. You might just say yes
to one out of every thousand or whatever, but you
want to see a lot.
Speaker 4 (35:49):
It sounds like you want to see it.
Speaker 3 (35:50):
Seems like it's a huge part of the game, just
waiting for that fastball down the middle and until you
see it.
Speaker 4 (35:55):
One hundred percent. And you know, each asset class has
so many nuances, and you know, to have someone who
can help out their endowment as an alumnus, it's rewarding,
but you also have to you know, their risks associated
that with that also, so saying no became an art.
Speaker 2 (36:17):
So you are now head of multi asset investing at Blackstone,
as we've mentioned, and I think when you were initially hired,
you were head or cohaed maybe of Blackstone Alternative asset management.
And my impression of what you were hired to do
was basically try to make that group more competitive, which
you know, when we're talking about nebulous words, I think
(36:39):
competitive is up there with innovation or innovative. Probably what
does that mean exactly? If someone says, I want to
make our alternative asset investing business or our hedge fund
business more competitive, what do you do?
Speaker 4 (36:53):
So I think about it, as going from good to great,
and you do that not by making dramatic changes, but
like James Clear and atomic habits. I don't know if
either of you have read that it's actually worth it,
but he talks in his book about how it's the
little constant improvements, all stacked on each other that create greatness.
(37:16):
And and really our group embraces that principle and that's
embedded in our culture. And so what does great mean?
Great means, you know, top quartile returns. Great means top
quartile risk statistics, a high sharp consistency, and you know,
(37:38):
knock on wood, we're delivering that over you know, since
I've been there, and it's it's really the result of
the great team that I have. I have an amazing team.
Speaker 3 (37:50):
By the way, Tracy Richard Hall is the CEO and
the CIO of you, Timco. I couldn't remember his name
for a second, but putting it out there. If anyone
at you Tim is listening to this episode, he has
a standing invite to come on. To come on.
Speaker 4 (38:05):
Rich would be a great guest. I know him personally,
super smart. You should call him out.
Speaker 3 (38:10):
Joe, Joe has and we would join you enjoy that'd
be such a blast. The call has been put out, Rich,
let's make this happen. I just have one last question.
You know, you talk about your team and how important
that is, and I like to ask this someone maybe
they're in college, maybe they're studying finance, maybe they think
(38:31):
about studying finance. What is the path for someone who
wants to be on one of these teams, maybe they
want to work for their own university's team or whatever
it is. What should someone be studying and try to
try to do right now?
Speaker 4 (38:44):
Yeah, Joe, it's a great question. I think the number
one trait is to be really, really curious. And I
know that sounds trite, but I had no idea that
I would be at Blackstone. I had no idea that
I would be at Brown University. But everything that I
did I was fundamentally curious about and wanted to really
(39:05):
be good at it. And so when you're curious and
you go deep and you learn and you're a practitioner,
people will tap you on the shoulder. You know. I
had never met John Gray. I was at Brown University
and I got a phone call that John Gray wanted
to have dinner with me. And it was after an
(39:27):
article had come out in the Wall Street Journal on
the success of the Brown team and how we had
gone to number one in the Ivy League over every
time period. So I wasn't expecting that that wasn't in
the game plan. And I had dinner with John and
the next thing, you know, in January of twenty twenty one,
(39:47):
I started at Blackstone and it's been incredible. My advice
to people is, I tell this to all of our
younger people. Try to be a nine or a ten
out of ten every day. Don't overly plan out your career.
Be really curious because if you're curious and passionate, no
one will beat you, no one will outwork you, and
(40:09):
no one will. You know, have more depth of knowledge
and a topic.
Speaker 2 (40:14):
This is the thing, Joe. People sometimes think there's like
a shortcut to success, but actually the real secret is
just be very good every day.
Speaker 1 (40:23):
And knowing a lot.
Speaker 3 (40:24):
You know. I love hearing that phrase. I think I've
said it about all of our good depth of knowledge,
depth of knowledge, depth of knowledge. There's no substitute for
actually knowing stuff.
Speaker 2 (40:32):
Yeah, okay, so you've been at Blackstone now for four years.
What's been the biggest challenge over that time horizon, so
four years. And what's your biggest challenge right now in
the short term given all the market volatility that we've seen.
Speaker 4 (40:49):
Yeah, I think going from an organization where you had
a small team where you present it to your investment
committee to then going to you know, we have our
division as eighty eight billion over three hundred people. So
obviously the biggest change for me was becoming a better
(41:12):
manager of large groups of people and still having maintaining
a high standard of care and everything that we do,
but also not getting in the backswing whether you're a
tennis player or a golf player. Of my very talented
partners who are helping me drive, and I got some
very good advice from John Gray and Brian Gavin, who's
(41:35):
our COO, about delegating the importance of delegating the importance
of clear communication. So I got a lot of help
along the way. This is a great environment right now
in the market for us because we're in the absolute
return business and we have a lot of volatility. We
have a lot of stock dispersion, and that's great for
(41:55):
our strategies. Quant loves that, Macro loves that, our low
net equity guys love that, and then our credit is
insulated because we're in very, very specialized credits. So it's
a good environment. I would say that I haven't seen
volatility like this since like two thousand and eight. I mean,
(42:18):
and it's the market doesn't like uncertainty. Our products like
uncertainty and volatility.
Speaker 2 (42:26):
Are you deploying more risk at the moment or taking
on more risk?
Speaker 4 (42:29):
Absolutely. One of the things that our team is really
good at is rebalancing into things that are down and
trimming those that have done really well. And it's that
rebalancing that leads to a lot of consistency. I know.
John Gray on our earnings call said that mentioned that
(42:50):
our group had been up twenty straight quarters in a
row and twenty four months in a row, and I
think that's a function of that rebalancing and really really
bust portfolio construction.
Speaker 2 (43:02):
All right, Joe Dowling, thank you so much for coming
on a laws Yeah, Joe, that was that was an
(43:23):
enjoyable conversation. The one thing that really struck me is
it is such a It strikes me as like such
a competitive advantage if you can just buy and hold
for a really, really long time like that seems to
maybe this is simplistic, but that seems to be such
a key difference.
Speaker 3 (43:41):
No, I mean that's that's huge.
Speaker 2 (43:43):
And then you can monetize that like liquidity premium, as
Joe Dee was saying.
Speaker 3 (43:48):
You know, individuals can do that too, which is you
just invest in a range of things and then not
ever look at your four one K First's right, we're
just really bad at it as humans.
Speaker 2 (43:58):
It's particularly difficult moment.
Speaker 3 (44:00):
I would say, No, that was one of those conversations.
I mean I really enjoyed that where each specific question
could have obviously been an hour long episode, right, because
we could have talked more about what is the value
creation of PE, what is the due diligence process for
hedge funds to establish that the multi threat is truly uncorrelated?
(44:22):
How stressful are these times for university endowments which thought
they had really stable environments, and so it's like a
very there's a lot to go on. I really do
feel like it's like all of these are episodes within themselves.
But I thought that was a great overview.
Speaker 2 (44:37):
Absolutely, and the alumni network points really interesting. I hadn't
heard that before, but it absolutely makes sense, right because
your resource basically all of your resources kind of well,
except for government funding, most of your resources come from
your alumni, so why not throw in I guess knowledge
and expertise in addition to actual donations.
Speaker 3 (44:58):
People love their universities, you know, this is I don't know, Tracy.
In Europe, is it the same way where like people
I mean, I'm sure like an Oxford and Cambridge, but like, yeah,
there's that same thing where like people wear sweatshirts to
their universities until they're like in their fifties.
Speaker 2 (45:12):
Well, I personally enjoyed my university. I don't think it's
as intense I feel it is.
Speaker 3 (45:17):
In the US, Americans really build their identity, but really,
like I went to you know, ut or I went
to you know, Eastern Iowa State or whatever it is,
and then their entire personality is like, you know, go
redbird to whatever the team.
Speaker 2 (45:31):
You never asked me what our college mascot was.
Speaker 4 (45:33):
Well, this true.
Speaker 3 (45:34):
What did did you guys have one?
Speaker 2 (45:36):
I think this might be one of the reasons why
people aren't wearing like LC sweatshirts for the rest of
their lives. But our mascot was the beaver. This one
because we're industrious that's a great one. It's admirable for sure.
All right, shall we leave it there.
Speaker 3 (45:52):
Let's leave it there.
Speaker 2 (45:53):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (45:59):
I'm just Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Arman, Dashel Bennett
at Dashbot, and Kilbrooks at Kalebrooks. More Oddlovs content, go
to Bloomberg dot com slash odd lots, where we have
all of our episodes and a daily newsletter that you
should subscribe to, and you can chat about all of
these topics twenty four to seven in our discord Discord
(46:20):
dot gg slash online.
Speaker 2 (46:22):
And if you enjoy Odd Thoughts, if you like it
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(46:43):
the instructions there. Thanks for listening
Speaker 3 (47:00):
The stood in a
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Add Thoughts podcast.
I'm Tracy Alloway and I'm Jill. Why isn't thal so Joe?
You know what I realized two months ago? Just two
months ago, we were still getting a bunch of headlines
about how private credit was the hot new thing on
Wall Street and how multi strategy hedge funds pod shops
(00:39):
were huge and growing. And we've done quite a few
episodes on these respective topics. But you know, just a
couple months later, the headlines are starting to look very different. Yeah,
and there's concern that if we get a substantial economic slowdown,
you're going to get some sort of big blow up
in private assets and things like private credit, private equity.
(01:01):
You know, a lot of people have been predicting that
might happen for a while. And then when it comes
to multi strats, we've already seen a lot of talk
about pain the pod shops given all the recent market volatilities.
So everything is feeling a little different right now.
Speaker 3 (01:18):
Well, we are recording this on April twenty second, and
we got a headline this has been in the news
for a few days, but I guess it's just been confirmed.
So speaking of you know, the asset allocators, where's there, Like,
real money come in from right, and they're like, yeah,
wealthy families and wealthy, but the real big money is
in these huge pots of money that we're talking about teachers,
(01:39):
which if those in the know, the Ontario Teachers Pension
or of course university endowments. We got a headline today
again it's been out in the news for a few days,
Yale considering selling in the secondary market some of its
private equity stakes. So these huge pools of money that
are really upstream from the private credits of the world
(02:00):
and upstream from the hedge fund multi strands of the world.
They're in a new era for all kinds of different reasons.
And so to even understand these various alts, we have
to understand how the people who fund the alts are thinking.
Right now.
Speaker 2 (02:15):
I am so glad that you mentioned all of that,
because that was a perfect intro, but also Yale specifically,
because we all know that the emphasis on alts was
pioneered by David Swanson over at Yale, and since then,
you know, alts have been a big thing, not just
in university endowments, but in lots of different types of
(02:35):
institutional investing. So I'm very pleased to say that we do,
in fact have the perfect guests to talk about all
of this. We're going to be speaking with Joe Dowling,
Blackstone's global head of multi asset investing. He previously ran
Brown University's endowment and this was one of the best
performing endowments at that time. He did that for a
(02:57):
decade before he joined Blackstone about four years ago. He's
been called the King of hedge funds in some of
our own Bloomberg coverage. So really, who better to talk
about things like alternative investing, university endowments, and what's going
on right now in private assets than Joe. So Joe,
Joe d Welcome to the show.
Speaker 3 (03:19):
Thank you, Tracy and Joe, thanks for having me. Can
we make this a four hour episode? I already have
so many questions.
Speaker 2 (03:24):
Anyway, go Tracy, Uh, okay, So first off, I'm going
to have to be very careful in how I address
each Joe respectively. But other than that, okay. So one
of the things, you know, Joe and I have kind
of nibbled at the edges of the university endowment model.
And one of the things that we know for sure
right now is that they are very large pools of capital,
(03:46):
you know, worth billions and billions of dollars. And for
that reason, we often see them compared to things like
pension funds, maybe sovereign wealth funds. In your experience, are
there differences between you know, running a university endowment, investing
for an endowment versus investing for you know, traditional large
(04:07):
institutional funds.
Speaker 4 (04:09):
Absolutely, But let's set the table with just how big
the universe is, because I think that'll help us. Please,
There's six hundred and fifty US endowments with a combined
assets of eight hundred and seventy five billion. That's from Nikubo.
I'm using Nakubo data. But the average endowment is only
(04:29):
one point three billion in assets under management, and the
median is two hundred and thirty five million.
Speaker 2 (04:38):
I appreciate that you came prepared with numbers.
Speaker 3 (04:41):
When you see a headline Yale considering a private equity
stake IMiD, it's funding turmoil. Some reports have set it's
up to six billion dollars. How big of a deal
is this? Like how how much of an earthquake? Is
that this entity which we associate with long term willingness
to hold onto ill liquid stakes, timber so forth. How
big of a deal is this.
Speaker 4 (05:02):
I think it's a big deal because it's showing stress
in the system. And the six billion dollar number is
also a number that I've heard from outside investors who
are actually looking at the portfolio. And what it signals
to me is that Yale, who's been a pioneer, is
being proactive. They have a new CIO. Remember David Swinson,
(05:27):
who you quoted in the beginning, was the person who
really pioneered the endowment model. But they have a new CIO,
and I think it's a sign that he's going to
put his own stamp on the Yale endowment. Not surprising
with what's happening in the political environment with the endowment tax,
which is currently at one point four percent being considered
(05:50):
to go to up to twenty percent. So that's a yeah,
that's a big, big number. So with regards to taxes,
you might remember during Trump's first administration, under the Tax
Cuts and Jobs Act of twenty seventeen, they introduced the
first endowment tax, and it was a one point four
(06:12):
percent excise tax on net investment income for really the
wealthiest endowments, And how did they define that. What they
did was they took the total value of the endowment
and divided it by the number of students, and if
it was over five hundred thousand dollars, then you were
subject to that tax. And now what's been proposed is
(06:35):
an increase from one point four percent to twenty one percent. Now,
what that would result in is seventy billion of extra
revenue over ten years. And I'm assuming they're the average
endowment return is seven and a half percent to get
to those figures, so call it seven billion a year
(06:55):
of additional taxes. And it's going to change really the
way endowments are managed. They're going to need to be
more tax conscious, They're going to need to target higher
rates of return, and I think they're going to have
to continue to use the private markets.
Speaker 2 (07:12):
Huh. So talk to us about how important was that
special tax status to returns over the years, because also,
if I look at returns, you know recently, over the
past three years or so, they've they've already been lackluster.
So I imagine with the additional tax pressure, that's going to
be pretty painful. And then when you say endowments are
(07:34):
going to have to be more tax conscious, what does
that actually mean? Is that like investing in munis I
guess you already mentioned private credit. But what can endowments
actually do here?
Speaker 4 (07:45):
Yep, So a couple things. One I want to address performance,
because you're entirely right. If you look at short term performance.
Over the last three years, a global sixty forty portfolios
out performed US endowments. The average US endowment return okay,
underperformed the global sixty forty by six point eight percent,
(08:09):
or three hundred and forty basis points per annum. The
top coretile endowment returns underperformed by two hundred and fifty
basis points annually. Now that's over three years, and we
all know investors tend to be short term. If you
look at the five year number, okay, the average endowment
has returned eight point three percent and has outperformed a
(08:32):
global sixty forty by one hundred and seventy basis points,
and the top core tile has outperformed by two hundred
and fifty basis points. Over ten years, the numbers are
even more consistent with those figures. So over the past
ten years, the top core tile has outperformed the global
sixty forty by one hundred and sixty basis points and
(08:54):
even ready for this, the bottom core tile okay, has
outperformed a sixty forty poortfolio by thirty basis points annually. Okay,
let's translate that though. Okay, So let's say you have
a billion dollar portfolio. If you have top quartal performance
versus a global sixty forty over the ten year period,
(09:15):
that's a two hundred and eighty eight million dollar difference.
So we're talking big numbers here.
Speaker 3 (09:20):
And this is the nice thing about being an endowment
is that you don't have an LP that's going to withdraw.
You have one captive LP, and so you know, in theory,
this is why they have the capacity to make these
long term, relatively ill liquid alpha generating investments strictly because
(09:41):
there's just none of that sort of like short term
demand for withdrawals.
Speaker 4 (09:45):
Absolutely, and I think that's the advantage of the endowment
model is that you're able to think really long term
about asset allocation and basically to take advantage of force
selling and dislocations in the market. And that's really what
separates the top quartile from really the median and the
(10:07):
bottom quartile.
Speaker 2 (10:08):
But when you were at Brown, for instance, did you
ever feel some sort of short term pressure maybe, you know,
maybe not just because you had to report returns I
think on a yearly basis, but maybe because the university
needed a bunch of money suddenly for some big project
I don't know, a new building or something. I get
(10:30):
the point that endowments are investing on a very long
time horizon, But on the other hand, I feel like
there must be moments where you do have to come
up with the money.
Speaker 4 (10:40):
You know, you're pointing out something that a lot of
people don't think about, which is that there's a fundamental
conflict between the administration and then the management of the endowment. Obviously,
the administration would like to spend the money to work
(11:01):
on projects, and there are a lot of important projects
out there. But as a steward of the endowment, you
actually have to work with your investment committee to show
them exactly what we were just talking about, which is
small differences in compounding over long periods of time add
up to huge, huge numbers. So what I did, and
(11:22):
with my team, we would constantly show them over ten,
twenty and thirty years what taking a higher distribution would
cost the endowment, and that really allowed us to sort
of do our job long term and think long term.
But the answer to your question is yes, it's the
(11:43):
performance derby every year. It's like college sports, and everyone's
waiting for that those numbers to come out.
Speaker 3 (12:08):
You know so much in finance and these questions, whether
we're talking about the university's board having a manager or
having an endowment manager, whether we're talking about the endowment
manager allocating to multi strategy hedge funds, when we're talking
about the hedge funds compensating the pms. It's like principal
(12:30):
agent problems all the way down. And even though you
have that captive LP and you don't have to worry
about withdrawals, you still have to worry about career risk,
right like because an endowment manager can get and so
it's like it's really like at every chain, it's like
this constant puzzle of trying to get each link in
the chain aligned and for some sort of you know,
(12:53):
everyone's optimal optimal performance.
Speaker 4 (12:55):
But it's interesting in my new seat, I get to
meet all of the CIOs across the country, and I
will tell you the talent pool is extremely, extremely deep,
and so many of them. When I go in and
talk to them, I'm actually learning just as much as
I hope i'm educating. It's it's really amazing the level
(13:20):
of sophistication of these endowments. I've been super impressed. And
I didn't get that at Brown because you don't have
that much interaction because you're competing with people.
Speaker 1 (13:29):
Yeah.
Speaker 4 (13:30):
Right, I didn't think David Swinson was going to call
me up and give me his best, best manager. That
just is not going to happen.
Speaker 2 (13:36):
Since you brought up Swinson, talk to us, you know,
let's just go back in time in history and talk
to us about the rise of all investing at university endowments.
Is it really just as simple as you know, endowments
have long term investing horizons, and so illiquid assets that
need to be held onto for a long time are
(13:57):
a really good match. Is that? Is that the story that's.
Speaker 4 (14:01):
At the heart of it, which is if you have
long term money, you should be able to use the
illiquidity premium and you should be able to earn more.
And I think that's what David and many of the
CIOs realized, and they had the long term capital to
do that, and it's worked. And what's also amazing is
(14:24):
the percentage of alternatives that these firms own so that
the endowments invest in. So the average high performing endowment
has fifty five percent of their assets and alternatives. Wow,
the top cortile and the IVY leagues all have over
sixty five percent in alternatives. And they've worked. And I
(14:47):
think people are trying to call the demise of alternatives
and especially even the endowment model, and I don't think
we have the evidence yet that it's broken.
Speaker 2 (14:59):
One thing I all always wanted to ask someone who
actually works at an endowment, and in fact you led
the endowment, But do you just have like hedge funds
and private equity just knocking at your door and constantly
pitching new things to you? How do you make that
initial connection between you know, a potential not client or
(15:20):
a manager between a potential manager.
Speaker 4 (15:24):
That's a great question. So I think that you have
a choice when you're an allocator and an investor, which
is you can lead or you can be led. And
so the answer is we always had people coming and
trying to pitch us. But what I always encourage my
team to do was to research deeply markets or big
(15:49):
deep alpha poonds. So let me give you a specific
example biotechnology. So what I would say to the team is, wow,
biotech stocks twenty five percent, some of them are trading
under cash right now, Let's go do some research on
that segment. And then they would go out and market
map biotechnology, giving us all the different types of players
(16:13):
in their approach. And that's how you get context. How
you end up being a mediocre investor is just getting
the flavor of the day, and usually the flavor of
the day is traveling around the country, and as contrarians,
what we like to do is to pick things that
were sort of off consensus, not loved. One of my
(16:38):
favorite expressions I used to say to my team was
what would make you really uncomfortable to recommend in front
of an investment committee. If it makes you really uncomfortable,
go research it.
Speaker 3 (16:50):
One of the things you mentioned is that, you know,
one of the nice things about endowment is they can
be the ones who buy when everyone is selling. And
typically there's true So let's you know this Yale headline
that we got and you said, it's a big deal.
We're in this sort of confluence of events where universities
(17:11):
are they're you know, they're anxious about their money that's
coming from the federal government. They're anxious about foreign students
continuing to come to the US. There's obviously the market
decline itself. So are we in a moment where there
is some like inability or some constraints on the endowments
(17:33):
to be I don't have buyers of last resort, but
the opportunistic investors of the moment, like, is this actually
a moment where that's under a threat? And the endowment
taxes you mentioned.
Speaker 4 (17:43):
Well, I think it's endowment tax I think it's a
lot of the NIH funding at these schools combined with
the perfect storm of markets receding, and so these models
are being challenged, right, So I think the people who
are playing offense and are being proactive, and I would
probably put Yale in that category, are going out and
(18:06):
testing the market and saying, you know, where is my liquidity.
I just take a step back on private equity because
that's what they've They've gone out and are trying to sell.
If you look at the asset class, I think it
is a fantastic asset class. And I want I want
to just talk about this. I don't work in private
(18:28):
equity at Blackstone, so I'm have my endowment hat on.
But I want you to think about the value proposition.
The value proposition is that I'm investing in the largest
universe of companies out there, which are private companies with
experts who I'm lending money to in terms of a
(18:50):
management fee, because that management fee comes back to me,
the investor, and then we calculate an eight percent preferred
return before the manager makes any money. And if you
think about it, eight to ten percent is about what
the stock market has done over the last fifty years.
So the value proposition is I, the manager, until I
(19:14):
add value over that public market, will not earn any
incentive fees, and I will pay you back. That structure
in itself protects investors. And even in the fourth coretile
and I'm quoting Cambridge and Associate's data now, even in
the fourth coretile of buyout managers, and the Cambridge database
(19:35):
changes every you know month, but call it over twelve
hundred managers. Even the fourth coretile is positive over a
rolling ten year basis. It's a good asset class. But
what I always hear is the doubters and they want
to say there's too much dry powder and things, you
know things. Capital is not being returned, no pot.
Speaker 2 (19:58):
It's hard to deploy, it's hard to deploy.
Speaker 4 (20:00):
And the reality is it has been hard to get
capital back for the last three years. Public markets are closed,
mergers are not accelerating like we thought they were. So
the longer this goes on, the more this endowment model, Joe,
to your point, is going to be challenged. It is
definitely challenging. But I think the smart endowments are already
(20:23):
taking action to grab for that liquidity. And think about it,
ten years ago, there was no deep secondary market. The
thought that you could sell, okay, six billion dollars of
private equity assets, it's pretty amazing.
Speaker 2 (20:40):
It's definitely different to how it used to be. But
just on the pe point. You described your sort of
research process earlier, and you gave an example in the
case of biotech. But if you're researching those ideas, your
team is trying to find alpha itself. What's the benefit
of investing in a third party like private equity or
(21:03):
like hedge fund a hedge fund, versus just investing directly.
Speaker 4 (21:07):
Yeah, it would be almost impossible to recreate the type
of competitive advantage that the managers that we invested in
Brown had, and I think that trying to do it
direct at an endowment, you have a smaller team, you
have less resources, you have one investment committee. At Blackstone,
(21:29):
you're constantly iterating, you have multiple investment committees, you have
multiple oversight, you have a risk committee, and you have
just so much more data, so much more information. That's
why it's such a competitive advantage. The concept of scale
is so powerful. So when I transitioned from Brown to Blackstone,
(21:52):
I was overwhelmed at the power of the scale, the data,
the manager access. If I could have run the Brown
endowment portfolio on the Blackstone platform, I would have really
made money.
Speaker 2 (22:06):
Oh you did make real money. I mean while you
were a Brown, even without the Blackstone platform.
Speaker 3 (22:11):
Let's talk about hedge funds real big picture. How would
you describe the reasons for the rise of the multi
strategy model. Why has that model even more than the
single manager, How would you characterize it? Why that particular
flavor of hedge fund has become so popular.
Speaker 4 (22:28):
Sure, I think that when I think about the multi
strap world, I think about a tiering of talent, and
it's clear to me that that Millennium, Citadel and the
top players have really distinguished themselves. And they've done that
by providing a very, very consistent return with a high
(22:50):
sharp that is completely uncorrelated to stocks and bonds, which
is nirvana for a manager because what people realized and Joe,
the wake up call was in twenty twenty two when
stocks and bonds were both down high teens and the
(23:11):
Millenniums and Citadels of the world earned their you know,
standard returns, which are you know, call it twelve percent plus.
That is what you want in your portfolio as a
true diversifier and something that provides a ballast. So they
have unlimited tomas.
Speaker 3 (23:30):
Results have spoke for themselves.
Speaker 4 (23:32):
Results have spoke for themselves, and you know, these are
not easy things to recreate. If you look at Millennium,
it has more employees than Blackstone.
Speaker 2 (23:41):
Wow, that's crazy. Okay, then give us some give us
some color on the past couple of weeks. I can't
believe it's only been twenty days since Liberation Day on
April second, But what's your impression of what it was
like at the multi strats over the past month or so.
Speaker 4 (23:59):
Yeah, it's interesting thing. Obviously it's in the headlines that
they're down, but they're really not down that much. If
being down one percent is a crime in this environment,
I'll take that asset class all day long. But what
has happened is it's been the fastest growing asset class
among hedge funds. Goldman Sachs quotes that that multistrat universe
(24:22):
has been growing sixteen percent year over year, and their
data is pretty good at matches ours pretty closely. But
what's happened is that there's been a lot of new entrants.
And the new entrants are the area that I worry
about because in order to get the type of diversification
(24:42):
that you need, you need amazing technology, You need a
lot of teams. Okay, let me be specific. There's over
three hundred teams at Millennium Trading. That is a very
hard thing to recreate. Risk management systems and a culture
of performance and excellence, they're really hard to recreate. So
(25:04):
I think if there's a problem, it's going to be
in these new emerging managers, it's not going to be
with the top tier.
Speaker 3 (25:13):
Can you talk a little bit more about the due
diligence process on a multistrat because okay, you have the
top line returns, and there's a line, and as you said,
it's been a really good line, and it's extraordinary. Even
outside of the Veria leads, it's been just extremely impressive.
And then you could point to okay, even in twenty
twenty two when stocks and bonds were both down, they
(25:35):
produced good returns, So again further impressive. Is there a
further level where when you're probing a multistret manager that
you can look to discover whether the pods themselves are
truly uncorrelated and can be expected to deliver uncorrelated returns
in the future.
Speaker 4 (25:54):
Yes, and that's our job. And I mean, when you
think about the quality of earnings of a company, let's say, uh,
you know, the the average S and P company that reports.
The analysts all focus on quality of earnings. We focus
on quality of return. How diversified is that return, what
sub sectors is it coming from. How many managers have
(26:17):
been on the platform for x period of time, how
many of them account for the you know what, what's
the breakdown of the of who's making the profit? How
diversified is that across strategies, et cetera. So that's what
we spend a lot of time doing.
Speaker 3 (26:52):
When you're doing the due diligence, can you talk to
pod managers like how much pro how deep into the
system are you? Is it an outside investor able to get.
Speaker 4 (26:59):
If if you have a good long term relationship and
you're a large allocator of capital, we get a lot
of information to make a very very good decision. I
think if you're just trying to do it on your own,
you have no shot.
Speaker 2 (27:13):
It sounds like you're trying to build a diversified portfolio
of multistrat exposure. How do you get a good sense
of what each multi strategy firm, each pod shop is
actually good at doing.
Speaker 4 (27:26):
Ironically, they have very different approaches, so it's not as
hard as you think. The differences between a citadel and
a millennium are extensive interesting, and so when you start
peeling back all of the different avenues of how they
make money, you start to see really how different they
(27:47):
are fundamentally. And I think you can see that as
an outsider if you examine thirteen f's and you see
after periods of volatility, who's adding to positions and who's
subtracting to positions. So if you look at march of
twenty twenty, you get a pretty good insight into who's doing.
Speaker 3 (28:08):
Can you say a little bit more, what are the
different like, what are those differences that look like.
Speaker 4 (28:11):
So for the more trading oriented managers, they're shrinking their
balance sheet, they're they're cutting their balance sheet. And then
there's a group of managers that are calculating intrinsic values,
so they're actually as those investments are going down, they're
actually adding to them. And if you look at a
historical vol you can see it in historical VALL. So
(28:31):
some of the multi strap managers are very tight in
their VALL calculations and they stay around four percent. Others
that are more intrinsic value oriented are up as high
as eight percent. It's just two different ways of getting
at the same thing. Some people hedge from the top
of the house, some people don't. Again, the styles when
(28:53):
you really get down into it, very different methodologies.
Speaker 3 (28:58):
So you mentioned that, you know one of your concerns
is in the new you know, it's very hard to
recreate a three hundred pod. You know, a team of
three hundred quality pods. It's really hard to recreate that tech.
But you know, some might do it, and some might try.
I'm trying to think of like the science equivalent a
concert a law of the conservation of alpha. Somehow that
(29:20):
the structure of these multi strat hedge funds have been
able to deliver superior returns on a range of market environments.
Is there some sort of intrinsic limit to how many
entities can try to capture this alpha such that it
all degrades, or is it really just a matter of
some just won't have the skills to do it.
Speaker 4 (29:41):
I think it's a combination of both. But look, there
are pockets of alpha in the market that get overcrowded,
and we've seen this in the area of index editions
and subtractions, where a lot of capital gets thrown at
the area and they don't make money money, or they
lose a lot of money, but then the capital quickly
(30:03):
retreats and goes and finds a new pocket. And one
thing about these organizations is they are very innovative. And
if you look at senior management, this is some of
the best investment talent that I've seen. They're coming from
very high quality firms and they are innovating all of
(30:23):
the time, both in technology, in scope of markets, in
how they're joint venturing with people. They're very, very innovative,
but obviously their capacity is constrained, right, but they have
unlimited demand and that's why they've been able to lengthen
their terms. So they've many of them gone from quarterly
(30:46):
liquidity to five year liquidity. And that's a testament, Joe,
to the fact that the model's working.
Speaker 2 (30:54):
Can you give us a concrete example of innovation because
I feel like people use that word a lot and
it's sort of, you know, nebulous in many ways, but like,
what are you saying that is actually innovative or what
has struck you as particularly original and creative recently?
Speaker 4 (31:11):
I think there's a ton of examples on the quant side,
and quant will be something we should return to when
we talk about Brown because one of the traditional David
Swinson tenants was not to invest in quant, and yet
Brown was the largest investor in the Ivy League in quant.
And that's one of the big differences when people ask me,
(31:33):
where did you differentiate yourself? So what's going on in quant?
Just in the systems using AI at these firms would
is absolutely unbelievable. And there are firms out there that
while their capacity constrain. They make money every day. We're
invested in some managers that make money every single day,
(31:56):
and it always blows my mind.
Speaker 3 (31:57):
What is quant mean? Tracy knows that sometimes I don't
know the basic definitions of words, Like how many times
I've asked Tracy to define what fintech means?
Speaker 2 (32:06):
Joe's being very modest. He knows what all these things are.
You choose like the terms that actually don't have a
good definition, right, What does mean?
Speaker 4 (32:14):
I think it's it's the application of quantitative methodologies towards
markets to analyze large sets of data and come up
with patterns or correlations or anomalies of things that happen
divergences between say the futures and you know the cash market.
(32:41):
So everyone talks about the basis trade, right, So the
basis trade is simply I'm going to buy a treasury,
I'm going to sell the future, and I'm going to
capture that convergence because the future should trade at a
premium to capture that convergence. And I'm allowed to lever
that trade because the convergence I'm capturing a very small,
(33:02):
like absolute spread. So I'm levering that sixty to eighty times.
So the ability to rapidly identify those alphas some people
call them alphas, you can call monomalies in the market
that can be exploited. Some of them are high frequency
beating someone to a trade, serving as a market maker.
Speaker 2 (33:26):
So you mentioned that when you were Brown, you didn't
follow the Swinson model when it came to quantitative investing.
Speaker 4 (33:35):
Why was that, Well, I think to put up really
good returns, you have to figure out one what your
competitive advantage is, and two you have to be an
independent thinker and not follow the herd. And that's what
we did at Brown. And I'll tell you how we
created our competitive advantage because I owe it to the alumni.
(33:58):
We we did a really good job was creating a
network of alumni in each asset class. So we would
work with our investment committee, but we would also reach
out to some of the best investors on the planet
by industry, and I would actually go and present our
(34:19):
portfolio in that asset class and say, what do you
think where can we do better? Who would you recommend
we look at? How would you structure this? And so
that was one of the secrets I think of us,
which is using that network effect now, Joe, back to
your comment. Most people don't like to do that because
(34:40):
they're exposing themselves the same way that they feel pressure.
They don't want people opining on what they were doing.
But I was willing philosophically to have that kind of
open transparency so that I could learn and benefit from
the Brown ecosystem. And I always used to have this
expression was I would go to people and I would say,
(35:01):
what do you have to feed the bear? Because it's
the brown bear, So feed the bear. Give us your
best co investments. And I have an unbelievable all star
alumni cast, and they carried Brown to greatness. I happened
to shepherd the process with an incredible team.
Speaker 2 (35:18):
Joe, what was your college mascot? Out of curiosity? The
Texas Longhorns, of course.
Speaker 3 (35:23):
Which one day if, by the way, if the if,
one day, we'll do a proper interview with the head
of you, Timco. It does seem like an investing and
this includes VC investing too, like you'd probably want you
want to see a lot of pitches, don't you, right,
like hit a home run, and so it sounds like
they had alumni network or whatever it is. It's like
(35:45):
you don't have to say. You might just say yes
to one out of every thousand or whatever, but you
want to see a lot.
Speaker 4 (35:49):
It sounds like you want to see it.
Speaker 3 (35:50):
Seems like it's a huge part of the game, just
waiting for that fastball down the middle and until you
see it.
Speaker 4 (35:55):
One hundred percent. And you know, each asset class has
so many nuances, and you know, to have someone who
can help out their endowment as an alumnus, it's rewarding,
but you also have to you know, their risks associated
that with that also, so saying no became an art.
Speaker 2 (36:17):
So you are now head of multi asset investing at Blackstone,
as we've mentioned, and I think when you were initially hired,
you were head or cohaed maybe of Blackstone Alternative asset management.
And my impression of what you were hired to do
was basically try to make that group more competitive, which
you know, when we're talking about nebulous words, I think
(36:39):
competitive is up there with innovation or innovative. Probably what
does that mean exactly? If someone says, I want to
make our alternative asset investing business or our hedge fund
business more competitive, what do you do?
Speaker 4 (36:53):
So I think about it, as going from good to great,
and you do that not by making dramatic changes, but
like James Clear and atomic habits. I don't know if
either of you have read that it's actually worth it,
but he talks in his book about how it's the
little constant improvements, all stacked on each other that create greatness.
(37:16):
And and really our group embraces that principle and that's
embedded in our culture. And so what does great mean?
Great means, you know, top quartile returns. Great means top
quartile risk statistics, a high sharp consistency, and you know,
(37:38):
knock on wood, we're delivering that over you know, since
I've been there, and it's it's really the result of
the great team that I have. I have an amazing team.
Speaker 3 (37:50):
By the way, Tracy Richard Hall is the CEO and
the CIO of you, Timco. I couldn't remember his name
for a second, but putting it out there. If anyone
at you Tim is listening to this episode, he has
a standing invite to come on. To come on.
Speaker 4 (38:05):
Rich would be a great guest. I know him personally,
super smart. You should call him out.
Speaker 3 (38:10):
Joe, Joe has and we would join you enjoy that'd
be such a blast. The call has been put out, Rich,
let's make this happen. I just have one last question.
You know, you talk about your team and how important
that is, and I like to ask this someone maybe
they're in college, maybe they're studying finance, maybe they think
(38:31):
about studying finance. What is the path for someone who
wants to be on one of these teams, maybe they
want to work for their own university's team or whatever
it is. What should someone be studying and try to
try to do right now?
Speaker 4 (38:44):
Yeah, Joe, it's a great question. I think the number
one trait is to be really, really curious. And I
know that sounds trite, but I had no idea that
I would be at Blackstone. I had no idea that
I would be at Brown University. But everything that I
did I was fundamentally curious about and wanted to really
(39:05):
be good at it. And so when you're curious and
you go deep and you learn and you're a practitioner,
people will tap you on the shoulder. You know. I
had never met John Gray. I was at Brown University
and I got a phone call that John Gray wanted
to have dinner with me. And it was after an
(39:27):
article had come out in the Wall Street Journal on
the success of the Brown team and how we had
gone to number one in the Ivy League over every
time period. So I wasn't expecting that that wasn't in
the game plan. And I had dinner with John and
the next thing, you know, in January of twenty twenty one,
(39:47):
I started at Blackstone and it's been incredible. My advice
to people is, I tell this to all of our
younger people. Try to be a nine or a ten
out of ten every day. Don't overly plan out your career.
Be really curious because if you're curious and passionate, no
one will beat you, no one will outwork you, and
(40:09):
no one will. You know, have more depth of knowledge
and a topic.
Speaker 2 (40:14):
This is the thing, Joe. People sometimes think there's like
a shortcut to success, but actually the real secret is
just be very good every day.
Speaker 1 (40:23):
And knowing a lot.
Speaker 3 (40:24):
You know. I love hearing that phrase. I think I've
said it about all of our good depth of knowledge,
depth of knowledge, depth of knowledge. There's no substitute for
actually knowing stuff.
Speaker 2 (40:32):
Yeah, okay, so you've been at Blackstone now for four years.
What's been the biggest challenge over that time horizon, so
four years. And what's your biggest challenge right now in
the short term given all the market volatility that we've seen.
Speaker 4 (40:49):
Yeah, I think going from an organization where you had
a small team where you present it to your investment
committee to then going to you know, we have our
division as eighty eight billion over three hundred people. So
obviously the biggest change for me was becoming a better
(41:12):
manager of large groups of people and still having maintaining
a high standard of care and everything that we do,
but also not getting in the backswing whether you're a
tennis player or a golf player. Of my very talented
partners who are helping me drive, and I got some
very good advice from John Gray and Brian Gavin, who's
(41:35):
our COO, about delegating the importance of delegating the importance
of clear communication. So I got a lot of help
along the way. This is a great environment right now
in the market for us because we're in the absolute
return business and we have a lot of volatility. We
have a lot of stock dispersion, and that's great for
(41:55):
our strategies. Quant loves that, Macro loves that, our low
net equity guys love that, and then our credit is
insulated because we're in very, very specialized credits. So it's
a good environment. I would say that I haven't seen
volatility like this since like two thousand and eight. I mean,
(42:18):
and it's the market doesn't like uncertainty. Our products like
uncertainty and volatility.
Speaker 2 (42:26):
Are you deploying more risk at the moment or taking
on more risk?
Speaker 4 (42:29):
Absolutely. One of the things that our team is really
good at is rebalancing into things that are down and
trimming those that have done really well. And it's that
rebalancing that leads to a lot of consistency. I know.
John Gray on our earnings call said that mentioned that
(42:50):
our group had been up twenty straight quarters in a
row and twenty four months in a row, and I
think that's a function of that rebalancing and really really
bust portfolio construction.
Speaker 2 (43:02):
All right, Joe Dowling, thank you so much for coming
on a laws Yeah, Joe, that was that was an
(43:23):
enjoyable conversation. The one thing that really struck me is
it is such a It strikes me as like such
a competitive advantage if you can just buy and hold
for a really, really long time like that seems to
maybe this is simplistic, but that seems to be such
a key difference.
Speaker 3 (43:41):
No, I mean that's that's huge.
Speaker 2 (43:43):
And then you can monetize that like liquidity premium, as
Joe Dee was saying.
Speaker 3 (43:48):
You know, individuals can do that too, which is you
just invest in a range of things and then not
ever look at your four one K First's right, we're
just really bad at it as humans.
Speaker 2 (43:58):
It's particularly difficult moment.
Speaker 3 (44:00):
I would say, No, that was one of those conversations.
I mean I really enjoyed that where each specific question
could have obviously been an hour long episode, right, because
we could have talked more about what is the value
creation of PE, what is the due diligence process for
hedge funds to establish that the multi threat is truly uncorrelated?
(44:22):
How stressful are these times for university endowments which thought
they had really stable environments, and so it's like a
very there's a lot to go on. I really do
feel like it's like all of these are episodes within themselves.
But I thought that was a great overview.
Speaker 2 (44:37):
Absolutely, and the alumni network points really interesting. I hadn't
heard that before, but it absolutely makes sense, right because
your resource basically all of your resources kind of well,
except for government funding, most of your resources come from
your alumni, so why not throw in I guess knowledge
and expertise in addition to actual donations.
Speaker 3 (44:58):
People love their universities, you know, this is I don't know, Tracy.
In Europe, is it the same way where like people
I mean, I'm sure like an Oxford and Cambridge, but like, yeah,
there's that same thing where like people wear sweatshirts to
their universities until they're like in their fifties.
Speaker 2 (45:12):
Well, I personally enjoyed my university. I don't think it's
as intense I feel it is.
Speaker 3 (45:17):
In the US, Americans really build their identity, but really,
like I went to you know, ut or I went
to you know, Eastern Iowa State or whatever it is,
and then their entire personality is like, you know, go
redbird to whatever the team.
Speaker 2 (45:31):
You never asked me what our college mascot was.
Speaker 4 (45:33):
Well, this true.
Speaker 3 (45:34):
What did did you guys have one?
Speaker 2 (45:36):
I think this might be one of the reasons why
people aren't wearing like LC sweatshirts for the rest of
their lives. But our mascot was the beaver. This one
because we're industrious that's a great one. It's admirable for sure.
All right, shall we leave it there.
Speaker 3 (45:52):
Let's leave it there.
Speaker 2 (45:53):
This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (45:59):
I'm just Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Arman, Dashel Bennett
at Dashbot, and Kilbrooks at Kalebrooks. More Oddlovs content, go
to Bloomberg dot com slash odd lots, where we have
all of our episodes and a daily newsletter that you
should subscribe to, and you can chat about all of
these topics twenty four to seven in our discord Discord
(46:20):
dot gg slash online.
Speaker 2 (46:22):
And if you enjoy Odd Thoughts, if you like it
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(46:43):
the instructions there. Thanks for listening
Speaker 3 (47:00):
The stood in a
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On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!