May 26, 2025 • 49 mins
Multi-strategy hedge funds have been having a moment with big asset allocators pouring billions of dollars into names like Millennium and Citadel. And given all the growth, multi-strat funds have also been battling each other for talent. But why, exactly, do big investors seem to love multi-strats so much? What actually makes a multi-strat good to invest in? And how do fees and compensation work? In this episode, we speak with Ronan Cosgrave, a partner at Albourne Partners, which advises institutional investors on investing in hedge funds and other alternative asset classes. We talk about key differences between multi-strats and pod shops, plus the importance of pay to the business model.
The Math Powering Profits at Multi-Strategy Hedge Funds
Multistrategy Hedge Funds Delivered Again in 2024
Odd Lots Live is returning to New York City on June 26. Get your tickets here!
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hello, Odd Lots listeners.
Speaker 2 (00:01):
I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, We're doing
another live show and it's right here in New York City.
Speaker 3 (00:07):
Yeah, this one should be our biggest yet, and we're
going to have a bunch of Odd Lots favorites and
do something maybe a little different to some of our
previous live podcast recordings.
Speaker 2 (00:17):
When the guests are revealed, the show is going to
sell out right away, so you should really just go
get your ticket right now.
Speaker 1 (00:24):
It's June twenty sixth.
Speaker 2 (00:25):
It's at Recket, NYC, and you can find a ticket
link at Bloomberg dot com slash odd Lots or Bloomberg
Events dot com slash odd Lots Live and why.
Speaker 3 (00:34):
We hope to see you there.
Speaker 4 (00:38):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 3 (00:53):
Hello and welcome to another episode of the Authoughts podcast.
I'm Tracy Alloway.
Speaker 1 (00:57):
And I'm Joe Wisenthal.
Speaker 3 (00:59):
Joe, did you, at some point last month when markets
were being very, very dramatic, did you maybe hear that
a pod was blowing up? Maybe just maybe.
Speaker 2 (01:11):
I probably saw some tweets, probably tongue in cheek. I
may have sent some dms to people saying jokingly, have
you heard of any pods blowing up? But no, it's
become such a meme. Anytime like the market moves half
a percent, I imagine some pods did blow up. But it
is a funny joke, good intro.
Speaker 3 (01:29):
It's definitely become a thing. But I think it kind
of highlights something something very real, which is there is
this mystique around pod shops, the multi strategy hedge funds,
and whenever something weird is happening in markets now, they
tend to get blamed or people start joking about them.
And also part of the mystique is there's just a
lot of interest in why they seem to be so
(01:51):
hot right now blowing up in a very different way.
And what exactly is the attraction for big allocators of capital,
because I always think it's not like big investors can't
create their own diversified portfolios or invest in a fund
of funds or traditional two and twenty or whatever. So
what exactly is it about the pod shops that makes
(02:14):
them so attractive.
Speaker 2 (02:15):
We've done a lot of episodes on the multistreads at
this point, the pod shops so various flavors.
Speaker 1 (02:21):
There are still a lot of things I don't understand.
Speaker 2 (02:24):
First of all, my understanding is that they sort of
continue to prove their metal. I mean, it seems like
they didn't lose a lot of money in April during
some of that volatility, So they have this promise uncorrelated returns.
We'll get into how they deliver that. So far, it
seems like they continue to more or less do what's advertised.
(02:46):
I have a lot of questions about how and what
is the actual source of alpha and how long can
this go on, and whether there are a lot of
copycats and whether that will cause alpha decay and all
this stuff.
Speaker 3 (02:58):
I have questions about comp the most important thing.
Speaker 2 (03:01):
Well, this is really important, and actually, you know, we
did that episode with the founder of Freestone, Grove dan Morello,
just a lot of the conversation was about comp And
I'm interested in comp because I'm interested in the topic
of making a lot of money, But also I get
the impression that comp and incentive alignment more broadly is
(03:22):
actually one of the key problems that people are trying
to solve for all the time.
Speaker 3 (03:27):
I think that's right. Okay, So I am very pleased
to say we do, in fact have the perfect guest.
We're going to be speaking with Ronan Cosgrave. He is
a partner at Alburn Partners. So Ronan, thank you so
much for coming on all thoughts.
Speaker 5 (03:39):
Thank you very much. I'm really honored to be here.
Speaker 3 (03:41):
First question, what exactly is Alborn Partners because it's not
a pod shop itself.
Speaker 5 (03:47):
No, No, we're so.
Speaker 6 (03:48):
I co lead multi strategy heads fund coverage at Alborn.
We are an advisory only independently owned consultant. We help
institutional investors invest in hedge funds, private equity, real estate,
all across the alternate that spectrum. We have about three
undred and fifty clients worldwide and we advise on greater
than seven hundred and fifty billion dollars in assets.
Speaker 2 (04:08):
Okay, give us a little bit more of your background.
You're the perfect guests to talk about multi strategy hedge
funds and why allocators like allocating to them. Talk to
us about like how you built up your familiarity with
the space and how you've built up your like understanding
of their inner mechanics.
Speaker 6 (04:26):
That's a long answer. I've been over twenty years in
the hedge front industry.
Speaker 5 (04:30):
Okay.
Speaker 6 (04:30):
I worked at a fund of funds called Pamco for
fifteen years or the partner there did a whole lot
of stuff there, covered pretty much kind of the constituent
strategies of many of the multi strats, right, so you're
talking about longstrared equity, long shot credit, convert arab ballarb.
As it got more difficult, I got more involved, you know.
Since then, I've worked with Albourne. I joined Albourne for
(04:51):
four and a bit years ago, and you know, with
my colleague Martina, we cover the multi strategy universe globally.
So part of our job really is to kind of
dig in deep into the multistrats, not just learn about
the people, but the process, the inner mechanisms of what
differentiates one particular multi strat from another. And the really
(05:11):
cool thing is that they're all actually really different, you know.
And one of the fun things listening to you guys
is when you talk about pod shops and so on
and so forth, or multi strats in general, I mean,
there's huge differences in how they're run internally, you know.
And the other thing I distinguish in the multi strategy
space is the pod shops, which are the classic ones
that are you know, you know, with the three layer
(05:32):
of the fees versus the more traditional multi strategy hedge funds,
which are two and twenty.
Speaker 1 (05:38):
Oh.
Speaker 3 (05:38):
That is an important difference, isn't it. Before we get
into that, I want to ask, when you're doing due
diligence on possible hedge fund investments, how do you go
about doing that? Actually, because you just said you dig
into you know, the culture, the people, risk management. How
much access do you have and how do you do that?
Speaker 5 (05:59):
That's another big question.
Speaker 6 (06:01):
So the thing is with the multi strategy hedge fund
space is you start really with the single strategy stuff,
and it's not really fair to ask anybody to cover
multi strategies if they haven't worked hard at understanding the
individual contributions of all the different trades and trade types
that make up a multi strategy. But the critical thing,
and you alluded to this, is that multi strategy hedge
(06:23):
funds are another level of abstraction away from the markets.
Because yes, we do look at trades, at traders and
pms and stuff like that, but almost as important as
you're evaluating them as business models, you're evaluating them as
risk models and investment models, and you know, they're all
super interlinked. And one of the things that we look
(06:43):
at and look for is kind of consistency between all
the strands, because if you have things that are in
conflict internally, you end up with a suboptimal outcome, right,
I mean, we've all lived that in our own personal
and professional lives. But if things aren't in a line,
and you mentioned compensation, competition is a huge part of that,
and I'm you know, one of the things I'd argue
(07:05):
is that comp affects far, far, far more dimensions of
a multi strategy hedge fund than almost any aspect.
Speaker 5 (07:12):
Yeah.
Speaker 2 (07:14):
No, this seems very interesting to me because often it
feels as though, okay, you have some investment strategy and
then make a lot of money and then okay, some
of it goes to the manager and some of it
goes to the outside investor. That's how I conceive of things.
But it really does seem like comp structure is actually
core to the business model. But before we get to that,
(07:36):
why don't you actually go back for listeners, and for
my sake, when you distinguish between the sort of traditional
two and twenty multistrats with the so called podshops, In
my mind, I associate with the millenniums of the world
but talk to us about the differences in these business
models when you use these terms.
Speaker 6 (07:54):
Yeah, so I refer to two and twenty simple it's
a straight management fee of two, but it could be
any fixed number, and a performance fee of twenty percent
on the overall portfolio.
Speaker 5 (08:05):
So the only fees paid.
Speaker 6 (08:06):
By the investor are the management fee, which is idignated
in advance, plus a cut of the gross performance of
the portfolio as the whole. And that's a really critical
distinction between between them and the platforms or pod shops. Right,
so a pod shop has all that right now. First off,
the first thing that happens is that the management fee
(08:27):
may or may not be fixed. It can be what's
known as a pass through fee, where it's kind of
a blank check in many ways. For the most part,
they do take good care of that. But the third
layer of fees that's really important is that there's fees
payable at the level of the PM, not at the
overall fund. And when you get to that level, there's
a lot of things that people take for granted and
(08:47):
investing just simply breakdown, you know. And to go on
to that, like the one thing that I keep getting told,
you know, in my own personal investing life and everybody's
personal investing life, is that diversification is the only fee
launch R. When you are paying performance fees on a
on individual components of a portfolio. Diversification is not a
(09:07):
free launch. It costs you money, real money.
Speaker 3 (09:10):
Wait, can you explain how do clients? How do investors
actually pay individual pms? Like, how does that work?
Speaker 5 (09:18):
Yeah?
Speaker 6 (09:19):
So in a pod shop, what you have you think
about it is you have you know a number of pms,
anything between five to three hundred and something. They each
basically have their own individual P and L. Right, so
they the manager, the overall fund manager track tracks each
PM and their p and L. They'll charge back all
the appropriate stuff that would be charged to that. They
(09:40):
will normally be charged Bloomberg for example, all other trading costs,
the analysts costs perhaps, and then if that number is
above zero, the PM gets a payment from the manager
out of the fund and that's their performance fees. So
the investors themselves don't actually pay them, paid.
Speaker 5 (09:55):
For them by the manager.
Speaker 2 (09:57):
Now, you said that there can be the instances in
when diversification is not a free launch, and so I
take that to mean that you can have situations in
which at the fund level you don't have a good
year and you're not making any money. But some pod
managers had a great year and they still have to
get paid. And so you talk to us a little
(10:19):
bit about these conditions under which that diversification can be costly.
Speaker 6 (10:24):
Yeah, let's use a simple, simple model. So you have
a pod shop, but you want to got two pods,
and at the end of the year, one pod is
up ten dollars and one pod is down ten dollars.
Because it's pod shop, you're paying on the panel of
each individual PM. So let's say it's twenty percent. Right,
So on a gross before fees basis your flat. However,
you're paying the guy who was up ten dollars two dollars, right.
(10:46):
So after this is added together, now your portfolio is
down two dollars. And that is netting risk. And the
interesting thing about netting risk is because to bring it
out further, is that netting risk you could argue, well,
that's you and be an issue for the ones that
pay at the top level.
Speaker 5 (11:03):
Well, the issue is.
Speaker 6 (11:04):
That because they exist in a competitive landscape for pms,
pod shops can go to a PM who didn't get paid.
Speaker 5 (11:11):
Right, So, if you think.
Speaker 6 (11:11):
About it, if that was a traditional two and twenty
multi strat ten dollars up, ten dollars down, flash, nobody
gets paid. The fact is you've got a very very
unhappy PM who's up ten dollars, he's made ten dollars,
who's like sitting there in the corner really angry because
they worked really hard, they made a lot of money
and they get nothing.
Speaker 5 (11:29):
And the pod shop can ring them up.
Speaker 6 (11:31):
And says we'll take you, yeah you know, and will
guarantee if you make money you will get paid it.
The other thing to remember as regards netting risk is
it's actually we've modeled it at Albourne. We've worked it
out and using various simulations, it averages for a just
a regular set of managers and pms around one percent
a year.
Speaker 5 (11:49):
Right.
Speaker 6 (11:50):
When you think about a two and twenty hedge fund,
yeah you might, you kind of expectationally, should expect to
pay one percent of that two percent management fee to
people who've made money when everybody halse has lost money.
And it can be way more than that, and that's
a real business risk.
Speaker 3 (12:20):
So one thing I wanted to ask is I get
the impression that podshops are very, very competitive, and you know,
the talent is competitive, but the pod shop itself is
supposed to kind of work together, right and the positions
are supposed to diversify and even each other out and
all of that. So I guess my question is how
(12:42):
cutthroat is it actually working at a pod shop?
Speaker 5 (12:46):
It varies.
Speaker 6 (12:47):
The fact is that a podshop is an entity that
can make certain decisions to create either competition or cooperation.
Any multistract can do this in a pure eat what
you kill and vironment. Obviously there's no incentive to do cooperation,
but people do recognize this, right, And what I would
(13:07):
say for that is that it's all about what do
you want as what does the manager want to produce?
And one of the things what I would say is
there's a real choice that you have to make between
kind of talent and structure. And what do I mean
by that? What I mean by that is to use
the sports context. There's kind of two ways assemble professional
(13:30):
sports teams. The first is to get a big pilot
cash and go hire the best players in this position
and put them on the field and hope for the best. Right,
that's a focus on talent. The other way is to
hire a really really good coach with a really good
system and to have him or her go with their
team kind of a moneyball system where you put together
(13:50):
people who fit in the structure. And what that means
is the first one is like the emphasis on the individual,
and the second one of the emphasises on it on
the whole. And when you talk about competition, one of
the main ways you enforce competition.
Speaker 5 (14:04):
Is probably obviously compensation.
Speaker 6 (14:06):
If you have a situation where it's purely what you
kill and you get a presentive of your own P
and L and that's it, it's very very hard to
enforce that level of That's where you get those cutthroat stories, right.
But there are many others out there who have other
ways of doing this who recognize that. You know, if
you just have everybody in it for themselves, you produce
(14:27):
a portfolio that's actually suboptimal at the top level.
Speaker 3 (14:30):
This is what I was going to ask. Have you
noticed a difference in performance between the sort of cutthroat
competitive firms versus the more cooperative ones.
Speaker 6 (14:38):
That's a really good question, and the short answer is
it's really hard to distinguish between them. On the outside
The interesting thing really is more around what happens when
things are going badly for both that you're more likely
to have people kind of like quickly leave the more
competitive and cut throat one. Ah then you would have
then maybe they're more cooperative, you know. I mean the
(14:59):
cool thing about the pod shop and the platform space
is there's literally no right way to do this. There's
a real series of trade offs, right, and there's choices
you make have cost many different different dimensions. Because, for example,
if you choose to do cooperation right and you incentivize everybody,
you typically would do it in a kind of a
traditional multi strategy context, right. What that means is that
(15:20):
you're not going to have the eat what you kill mentality.
You may have certain bits around that, but if you
use that thing, you have a very good place to work,
but you.
Speaker 5 (15:31):
End up with a situation.
Speaker 6 (15:32):
Where As we talked about earlier, netting risk is a
real cost. So what that often means is that compensation
choice drives you to be a bit more correlated within
your own portfolio and be a bit bit less, bit less,
little lower sharp ratio. Why is that Because if netting
risk or the cost of netting is a real business risk.
You choose to minimize it, and the way easily to
minimize it has had everybody kind of make money at
(15:54):
the same time everybody kind of lose money at the
same time, and then you won't be picked off by
the pod Shopsimilarly, if you have competition, right, competition is
an incredibly powerful human thing, but it gets out of
control and you end up with a situation where people
just burn out and just leave you. People are unhappy.
You know, you have to kind of keep feeding people
(16:15):
into it, and you know that that's totally fine because
there are many other industries out there besides finance that
does this, you know. But at the same time, you know,
you end up with a whole lot of scenarios that
are kind of you end up with a kind of
a team of rivals, you know, and then that's it's
a dynamic, but it is the one that you have
to really control zooming out.
Speaker 2 (16:34):
Obviously, the performance of a lot of the well known
names has done really well. You're talking to institutional allocators
other than I guess the fact that the top line
performance is good and everyone likes making money, what is
the general pitch? And we've seen this trend obviously from
allocation to single fund managers. You know your traditional guys
(16:56):
who would like go on TV and they unveil their
long or whatever. As a digression. I always think it's
funny when you see these pod managers on TV and
they get asked about their thoughts about the market, because
it's clearly that's not really even what their focus is
on in terms of business structure design. So I'm always
sort of raise an eyebrow when I see these conversations.
Talk to us about what it is about these entities
(17:18):
in general that holds so much an appeal for an
institutional allocator.
Speaker 6 (17:23):
They hold appeal for a variety of different reasons, and
obviously it will depend on the individual mandate of the allocator,
but there's a couple of fundamental things that really hold
true across all multi threats. The first one is that
it's interesting that we talk about pods like there's something new,
But if you actually if all three of us decided
to go out and invest into twenty individual hedge funds,
(17:44):
we'd have the same issue. A. They would be paid
on what they eat, what they kill. Yeah, B we
would have to hire and fire people. By the way,
hiring and firing people. Hiring is fun, Firing sucks.
Speaker 5 (17:55):
Yeah, But the point, but the.
Speaker 6 (17:57):
Overall thing is that each individual pe in that set
of single strategy hedge funds is allocating according to what
two things, what they think in their set of investors
want and be what they're willing to bear because it's
their only job and their name on the above the door.
And so what you end up is is your set
of allocations that when you're roll them up together, are
(18:19):
individually way under risked, right, and you're not making as
much money as you should given the talent that you're
paying for and the amount of fees you're paying. So
when you hire a multistrats, and part of the thesis
of multi strats, which which is true, is that because
they're a unitary portfolio with somebody atop in charge of
it driving the risk of the individual pms, not the
individual pms themselves, you can and you really should end
(18:43):
up with a better return stream because you've coalested all
together under a single unitary authority and they can put
them to you know, they put leverage to work, risk
to work, so that the individual PM might be more
risky than they really really want to be or maybe
it's probably obscured from them usually, but at the end
of the day, that rolls up into an appropriately risk
portfolio return. Right, And you know, having somebody who worked
(19:04):
in fund of funds, one of the issues of fund
of funds is just that you had fantastic sharp ratios,
but the returns were low.
Speaker 3 (19:10):
That's a really important point. One other thing I wanted
to ask just on the why allocators are interested in
multi strats. Point One thing you sometimes hear is that, well,
multistrats or pod shops they can dip in and out
of positions really really fast, and they can react to
the market very very quickly. How true is that?
Speaker 6 (19:31):
So let's go back to two and twenty funds versus
pod shops, because it's differently.
Speaker 5 (19:35):
True for both of them.
Speaker 6 (19:36):
Let's talk about pod shops first, right in the kind
of the stylized pod shop, you get to set up,
you get money, you ale, you invested as a PM,
and you get paid on that. If you get cut,
if your capital you get cut substantially. Even with the
best will in the world and the promises from above
saying it'll come back to you, your pay has been cut.
And I mean we're all professionals here. If your pay
(19:57):
is cut by fifty percent, your updated your CV and
you're checking the job market. Okay, So in the context
of responding to opportunities in the market, it's hard to
move too much too quickly in the context of a
pod shop, why because of that reason, and be because
that person may not be there to do when it's
an opportunity there. So it's kind of hard. They do
(20:20):
do it, They absolutely do do it. They will lever
up into opportunity. But when you think about what people's
kind of perception in their heads of what it is,
it's completely more static than you'd imagine. In the context
of a traditional fee structure, the two and twenty, it's different, right,
everybody is incentivized to get the top line to be
the highest number it can be. And so if I'm
(20:42):
a convert manager and your merger art manager, I'm cool
with being my capital be given away. I assume I
get it back eventually. But if it makes the overall
proibly larger, I can benefit in the long run too.
So the ability and then quite frankly, the willingness to
move capital in size around it is really that's where
(21:02):
camp comes in. Camp has now led us to the
situation where it's hard to move capital right, and you
think about, like we talked about it, kind of the
theme of this for me is comp kind of drives everything.
How you structure your camp is one of the principal
underlying features or a and how multi strategies work.
Speaker 2 (21:18):
I think this is such an important point because again
I think, like comp structure.
Speaker 7 (21:23):
You hear about it like people love.
Speaker 2 (21:25):
Reading stories about bonuses, et cetera. And people love reading
stories about people getting paid a lot of money, or
maybe they hate read these stories about people love getting
mayde but this idea that no, this is the business
you know people. I think when people hear bonuses, they're like, oh,
you get some extra money. But the business is design.
I mean, to hear you describe it. The business is
(21:46):
the design of the bonus. The business is the design
of the comp.
Speaker 6 (21:50):
It kind of is you know, it drives so much
if you just think about, like we talked about, how
a capital allocation is basically held back or you know,
you're the way you can do it is changed by
how you compensate people, you know, or constrained is the
better world. There's other things like I mean you think
about in the context I going back to like the
story about the single strategy hedge funds, you also have
(22:11):
the similar problems. Were given too much leeway in an
e EQ what you kill environment, pms will start to
set risk to suit themselves than they do for the
overall portfolio, because after all, why should they care, you know,
why should they care about the overall portfolio performance? If
if I can you know, if I've made money for
the first nine months of the year, you know, the
(22:31):
temptation is a lockdown risk and have Christmas, you know,
enjoy Christmas rather than take more risks where at the
portfolio at the top level may not want that, you know,
So you have all these other things that drive others,
drive these decisions of people, you know, across so many
different dimensions. It's one of the most fascinating things because
you know, at Albourn we've done a huge amount of
(22:53):
work trying to understand this.
Speaker 5 (22:54):
But I learned Python to do this. God help me. Yeah,
it's just one of those things.
Speaker 7 (23:00):
How does the what.
Speaker 2 (23:02):
You kill environment solve for the problem of the PM
who's made money for nine months of the year and
then want to lock it down? What types of risk
controls or I guess controls for under risk because in
a way, the thing that they don't want is someone
taking some risk or you know, getting too conservative. What
(23:22):
are the approaches that they have to align those incentives
so that you have to keep going for those final
three months of the year, even if it means risking
your great year.
Speaker 6 (23:31):
I mean, sometimes it's very simple minimum amounts of capital
deployment requiring. You know, it's kind of hard, right because
at the end of the day, if you've got successful
PM on the year, yeah, and you want to keep
them or her, it's not an easy question to answer.
And like there are more hybrid approaches to these what
you kill right for example, partnership so you know, many
(23:51):
funds offer partnership to the pms where they do participate
in the overall fund fund profits. You know, there's other
kind of you know, fancier trade ways to make you know,
increase say the payoffs to the PM depending on the
fund's performance.
Speaker 5 (24:04):
It fun's overall performance.
Speaker 6 (24:06):
But yeah, it's a really hard problem because it's a camp.
It's a personal relations problem, you know. I mean sometimes
you just got to accept it. You got a guy
who's up coming to the end of the year and
they're just going to de risking. Look, the thing beyond
camp is really culture, right, and you can say comp
drives culture.
Speaker 5 (24:22):
But it's not quite that simple.
Speaker 6 (24:24):
You couldn't just hire the sort of individual who won't
do that, you know, and a lot of funds will
talk about we talked about the war for talent. I
often call it the war on talent. But people go
to places they want to work with, people who they
want to work for, and you do try to just
hire professionals, regular people like us who work through the holidays,
you know, and stuff like that, you know, just to
finish off top for the year. You know, you've got
(24:45):
to hire the right people.
Speaker 3 (25:03):
So listening to talk on pass throughs versus traditional fees
the two and twenty, I'm kind of wondering why would
you ever invest in a pass through because when you
describe the downsides, it's like you don't have as much cooperation.
Maybe it's harder to move capital around. It seems like
the traditional fee structure might be the better choice here.
(25:25):
But tell me why I'm wrong.
Speaker 6 (25:27):
Well, we've been taking I mean that this is partially
my training, taking the side of the alligator here and
you're right, like superficially at the top level, a pass
through it seems like a bad idea for the allocator,
but there's kind of three people, three entities getting commed.
Here is the alligator, they're the manager and they're the PM.
And the thing is one of the one of the
(25:48):
standout features phychologically of most pms is they all think
they're really good. That's how you become a PM. You
become ambitious, you press yourself to test yourself against the market.
A pass through manager will give you the max compensation
if you're a good PM, right, And at the end
of the day, what we're describing is an industry that
relies on pms to do good work and who are
(26:10):
really smart. And if you have a situation where they're
going to get paid in a particular entity more than
another sort, they will gravitate towards that. So the answer
to your question is, if alligators had their way, they
probably wouldn't.
Speaker 5 (26:22):
Want to invest in pass throughs.
Speaker 6 (26:23):
But the fact is that they don't have a choice,
and pass throughs are you know. The other thing to
remember is past throughs are good for pms. But the
interesting thing and people do forget about. This is in
a past through situation in a pod shop, the PM
is getting paid from their own P and L. The
manager themselves is fully aligned with the investor, with the
(26:45):
allocator because they're only getting paid off the netted of
all the pass throughs. They're paying off the same P
and L at the top line as the investor. So
there is somebody and I mean people do talk about
how much has been paid, how much they make and whatever.
It's a an like I've heard it described as the
worst best job in the world, but it's an incredible
(27:06):
thing of coordination and getting people together. But they're actually
incentivized and in aligned within allocator and to give them
their due. They do their best to do that because
they are conscious of keeping costs under control because that's
their profit margin that's eating into I mean the other
I mean, the other thing is which is kind of
scary for allocators is the extra layer of.
Speaker 5 (27:22):
Fees, right, and it does cost money.
Speaker 6 (27:25):
And fundamentally speaking, the other thing that camp is driving
in that case is risk. Right, they're driving leverage. We've
done simulations and a pass through manager has to be
around one third more leverage than then the two layer
of fees two and twenty manager. I mean they have
to be because they have to make more money to
pay that extra cache out and it costs.
Speaker 5 (27:46):
Real money to do that.
Speaker 6 (27:48):
And you know, you know, in one sense, price is
what you pay, values what you get. Returns have been
really good because of the pass through manager has been
a really effective business model investing side. Yeah, but yeah,
I mean alecators do complain about the cost.
Speaker 2 (28:02):
It's something I'm curious about with the very traditional hedge
fund model, which you described very a good articulation. If
I'm an institutional allocator, I'm diversified. Therefore, I want my
allocations to take max risk. The individual hedge fund manager
might not want to take mask max risk because it's
their whole career and name on the line. What is
(28:24):
actually the expectation in the sort of traditional hedge fund
model for like, how much of the manager's net worth
is in the fund and how do you establish that?
And by the way, if I were a hedge fund
manager had done really well, I would buy a lot
of mansions and yachts and stuff so that if my
fund ever went to zero, I still have a lot
of wealth.
Speaker 6 (28:44):
You've thought this through, jah, Yeah, mentions where in particular.
Speaker 2 (28:48):
Miami, Aspen, the Golf States, New York City and anyway.
But like, how do they like, how do you how
do they actually establish that the man is fully aligned
with the performance of their fund.
Speaker 6 (29:03):
So that is a really really good question because opinions
really vary there, right, And the standard answer to that
question is the majority of the manager's liquid net worth
and you can define that whichever way you want.
Speaker 1 (29:18):
Is their way to audit there. I mean, I say, hey, look,
I have it all on my fund.
Speaker 5 (29:22):
You can, you can have to admin.
Speaker 6 (29:24):
The manager can authorize the administrator of the fund to
disclod their investment in the fund to you if you
ask them nicely.
Speaker 1 (29:31):
They don't know that I have.
Speaker 2 (29:32):
They wouldn't know if I had a billion dollars in
bitcoin on a private wallet.
Speaker 1 (29:36):
That's not any any key.
Speaker 2 (29:37):
I'm just saying I would when I hear this, I
saw this in your notes. When I hear this, my
first mind goes to how can I pocket net worth
and places that aren't easily visible, and so I'm not
fully exposed to my own fund.
Speaker 5 (29:50):
Sorry, look, I mean they actually big They's a bigger question.
Speaker 6 (29:55):
There, okay, In which you mentioned at the starter your
question before you went on about the nice mansion an
aspect which is kind of distracting me right now. But
to be clear, the fact is that if you have
all your money in a fund, yeah, you're kind of
going to mind it differently, yeah right.
Speaker 5 (30:10):
Yeah. And if I'm an investor who's got a hundred
of funds like that, I don't want.
Speaker 6 (30:14):
Yeah, yeah, you're going to be You're going to under
risk it relative what I want as an investor, and
so it's a real dance.
Speaker 2 (30:21):
Right.
Speaker 6 (30:21):
Again, it goes back to the character the person you're hiring,
which we talked about earlier on about the pad shot
with the similar scenario. It really depends on how you
want to risk manage your investments as an alligator, right
because at the end of the day, when you're asking
a manager to put their own capital in the fund,
you're signing them a certain role as a risk manager
because and you have to assess honestly, my answer is,
(30:45):
it really depends on the person who I'm dealing with
and the sort of person who I think we're dealing with.
Speaker 4 (30:49):
Right.
Speaker 6 (30:49):
If I think it's somebody who is just really professional
and good, I'm not so sure. That having all their
money in the fund is necessary, you know, if I
think it's somebody where.
Speaker 2 (30:59):
They see other funds too, you know, big fund managers
see they do.
Speaker 6 (31:03):
Yeah, I mean I used to see that at my
former job, you know, and it was a real issue
because you did have people who, you know, they had
made decent money. But like, what we really wanted to
see at the time that PAMCO was people putting their
money into the business, you know, paying for Bloomberg, paying
for office space, you know, all that over over putting
money in the fund, because that was commitment to the business. Interesting, right,
(31:23):
I mean that's something that we're you know, we were
comfortable more as comfortable with them putting working capital into
a functioning business.
Speaker 5 (31:30):
Interesting.
Speaker 6 (31:31):
We then maybe putting more an extra five hundred thousand,
a million, two million million dollars into a fund.
Speaker 1 (31:36):
Very interesting.
Speaker 3 (31:37):
So much of what you're describing it sounds very very granular,
like the idea of looking at individual talent to see
how they operate, looking at something like culture, which tends
to be difficult to define. If I'm an allocator, how
much transparency or how much information am I actually getting
from one of these funds? And I realized allocators will
(31:59):
hire your company Albourne to actually do a lot of
this due diligence for them. But if Albourne was out
of the picture, what would I be seeing if I'm
a potential allocator.
Speaker 6 (32:10):
So that's a a long there's a long answer to
that question, and it really does depend on a if
you're a certain size of an alligator.
Speaker 5 (32:18):
There's there's kind of the fast lane.
Speaker 3 (32:19):
Ah so if I'm PIMCO or something, if.
Speaker 6 (32:22):
You're in you get in the executive lounge, you know,
you'll get treated more, you know, get more access. You
know that, and there's nothing wrong with that because simply
these people have limited time, you know, and somebody who's
going to be a larger client will get more in
almost any line of business, you know, in terms of access,
it does vary, I think, you know if I you know,
speaking of an allocator's shoes. You know, basic stuff is
(32:43):
regular meetings, good substantial risk reports, helping me understand where
and how risk is our plays, you know, updates when necessary,
and then you know, just it's really it is granular.
It's multi strategies are a combination of both zooming out
and taking the big But we talked about what camp
means in the global scale and how it's all that,
but it's also super super granular, so understanding you really
(33:06):
want to understand, like where their real competency is as
the multi strated, because many places start off with a
particular kind of thing.
Speaker 5 (33:13):
They're good at.
Speaker 6 (33:14):
Equities, Yeah, right, you know, at the end of the day,
most multi strategies make most of their money from kind
of I would call it equity alpha for lack of
a better word, which can include traditional long short equity,
quant equities index rebaal. We've heard about that a couple
of times. You know, all this sort of stuff that's
kind of equity alpha. Then you have other ones who
have more focused on kind of fixed income and credit,
(33:36):
you know, and you've got to understand what you're getting.
And I mean, then you've got to think about, given
what I think that my heuristic or my mental map
of what these guys are, does each incremental change what
they do. Does that makes sense because you know, I
mean one of the things I like to think about
is making sure that the stories are aligned.
Speaker 5 (33:54):
Very simple stuff.
Speaker 6 (33:55):
Right, Let's say I'm a pod shot manager, you're an
allocator in here, and.
Speaker 5 (33:59):
I go on you know to ask a constructure, Well,
my pms.
Speaker 6 (34:03):
You know, we put them in a room, give them Bloomberg,
We give them all the facility they need.
Speaker 5 (34:07):
We charge them for that, and they just get paid
on their own P and L. Yeah.
Speaker 6 (34:10):
Oh okay, you say, I find good And then you say, okay,
well talk to me about you know what sort of
culture you have? Oh yeah, well, actually you know what
we also, you know, we have a real cooperative culture
becomes loved here. You know, they all get back massages
and we all work together as across the team as well,
you know, and you're kind of going answer one and
answer to don't make sense together, right, And you see
(34:31):
this in all sorts of sort of ways, you know,
And the thing is that what happened is that people
have you know, the successful funds are the ones who's
answered made answer one and answer to come I line
up together, you know, in whichever way it needs to be.
Speaker 5 (34:44):
They've worked on ways.
Speaker 6 (34:45):
That makes sense that they're kind of I hate to
say about like a narrative alignment and how they do things.
They know what they're good at, you know, like what
for example, you don't have somebody who's really really got
an equities background to suddenly decide to hire some you know,
rockstar and allocate forty percent into commodities. You know, that
would be kind of a weird thing.
Speaker 2 (35:05):
Well, so I know you're not going to like name
any specific names. I will name some names, but you
don't have to talk about them directly, you know, like
I mentioned someone like Ken Griffin or in Izy England
or at Millennium. When you look at the managers who
have done really well in this space, what are they
(35:26):
good at?
Speaker 6 (35:27):
They are good at what I said, kind of bringing
alignment to finding that align, finding that solvement for align,
you know, solving for kind of the business issues, the
risk issues, the investment issues, and the personnel issues, and
making sure that they all work together.
Speaker 5 (35:43):
You know, they're really successful.
Speaker 6 (35:45):
People are just not that they are in it for
the money, but now they're in it for the competition
to improve because like I said, it's the best worst
job in the world.
Speaker 5 (35:55):
You know, I would like.
Speaker 1 (35:56):
To try it out at least for a little bit
see how good it is.
Speaker 7 (35:59):
I have a question.
Speaker 2 (36:00):
Part of the appeal of any multi strategy hedge fund
is the internal diversification. Obviously, whether we're talking about the
two and twenty or whether we're talking about the pure
pod model. You have these periods where one trade more
or less works out very well for a long time.
In the twenty tens, it was the disinflationary trade, which
(36:20):
represented in rates, and it was the tech trade or
various flavors of that. What do you see when you
do due diligence on a fund? What do you look for?
Speaker 7 (36:30):
Because I would just.
Speaker 2 (36:31):
Think, yeah, here's a bunch of people, but all you
all want to make money, so y'all put on the
same trade in different clothing, right, and there's different ways
to play the same trade. How do the good funds
actually establish diversification?
Speaker 6 (36:46):
So there's actually April is a really good example of
the versification at work and what it means for how
funds work. And I'm going to loosely describe April very loosely,
and I'm sure somebody in your audience will go completely wrong,
but loosely, April was mostly in equity story, right, And
what we had, what we saw was equity only focused
(37:09):
managers had a much tougher time of it than the
diversified managers. Okay, so diverse fight I being cross commodities
rates converts other stuff.
Speaker 5 (37:17):
And why is that important?
Speaker 6 (37:18):
Because last year one of the biggest trades that worked
with equities, right, And so the way you stay and
so the way you stay diversified is really disciplined, right.
And you know, in the context of what you're trying
to do. One of the interesting things about running simulations
around multistrats, right is you actually don't need to have
such great pms or great trades to have a really
(37:40):
good multi strat if you risk manage it right. Okay,
if you actually have a set of people who are
very lowly correlated with each other and you put them together,
you lever them up, you can have a very good business.
So to your question is, like, the answer is, you
got to be disciplined, You got to have like you
put the right amount of risk into your twenty ten
different inflationary trade, put the right amount of risk into
(38:02):
fundamental fundamental equity market neutral last year. But you make
sure that you're not over the limit, right, and you
stay disciplined so.
Speaker 7 (38:09):
That our equity market neutral.
Speaker 2 (38:11):
I would still find a way to make it long
tech and disguise there.
Speaker 5 (38:14):
Well, people totally do. Yeah.
Speaker 6 (38:16):
I mean, look, we haven't even got into factor factor
controls and stuff like that, and so on and so forth. Look,
the fact is that and there's multiple answers to that
question across how multi strates have implemented this in terms
of what they're willing to take in terms of factor
risk or sector risk and stuff like that and when.
But when you get down to it, look, the job
of an investor, any investor is to take risk in
(38:39):
the way they're supposed to. And multi strategy funds they
take risk. You know, there's no getting around that. Key
is is how you take it, how disciplined you stay
with it, the quality of the people, the quality of
the structure around that, and just you know, sometimes some
look as well.
Speaker 3 (38:55):
Just on the risk management side, it sounds like a
lot depends on historical core correlations when it comes to diversification,
and what we've seen in recent years and in April
is some of those historic correlations breaking down, So for instance,
bonds not being a good hedge for equities, or more
recently the dollars selling off at the same time that
(39:16):
bonds were selling off. How are people managing or judging
that correlation risk because that seems to be a potential
area of weakness for multi strats.
Speaker 6 (39:25):
It's a weakness for everybody, potential area weakness for everybody.
I think, look, management of correlation is super fundamental to
management of risk. In the context of any multi strategy
hedge fund. There's tremendous benefits to keeping your correlation low
between your strategies, in terms of risk management, in terms
of how much you can lever, in terms of everything.
(39:46):
When I look at managers, when I test managers, when
they you know, when I simulate managers, I look at
kind of two regimes, low and high correlation, and everything
that works in low is punishes you in high correlation. Right.
For example, when you're creating diversified portfolio of really cool
trades that have nothing to do with each other, is great.
When it works in a high correlation environment is a
(40:06):
nightmare because it's things you've never heard of blowing up.
Because I mean, there's a limited amount of things that
any any one person can know, right, So every choice
you make at a low correlation environment will come back
to bite you in a high correlation environment. Correlations between
asset classes is a fundamental part of that. But the
critical thing around that is the and this is one
(40:26):
of my managers said to this, it's like, when you're
sufficiently diversified, each individual line it him you ad makes
no difference to the portfolio risk or innd like that,
except what you're actually looking to allocate when you're at
that diversified is how much of a loss you can
make in that high correlational environment, how much of a
loss you're willing to bear, And so if that individual
component is something that's additive to that loss or makes
(40:48):
it worse, that's where you judge it. Right, when you're
sufficiently diversified, so you try to insulate yourself from breakdown
and correlation by having a budget for that breakdown and
correlation and making sure that you're individ you a components.
You know what each individual component for portfolio is going
to do for that and if you do that, then
you're kind of that's how you kind of figure that
one out.
Speaker 1 (41:08):
Look.
Speaker 6 (41:08):
You can buy hedges as well, and people do explicitly
do tail hedging to provide kind of return and cash
in those sorts of scenarios. But allocating that tail risk,
especially in a pod shot because they're more diversified, is
probably the most important job that these guys have.
Speaker 2 (41:23):
One of the things that I'm interested in is you know,
there's still new multistrats being launched. A lot of them
continue to make a lot of money, but there has
to be some limit to the alpha generated capacity of
these vehicles. I would think, and I'm trying to wrap
around my head about what happened. Does more and more
(41:44):
funds launch and what is the capacity? And based on
this conversation, if I had to.
Speaker 1 (41:49):
Guess about what degrades alpha over.
Speaker 2 (41:51):
Time, it would be something to do with compensation, where
just like all the money accruise at the PM level
because there's such competition with more talk to us about
like how you would articulate the source of alpha and
how much can realistically be captured as more and more
people and more and more money flows into this space.
Speaker 6 (42:12):
Okay, so articulating a source of alpha, that's probably the
biggest question there is.
Speaker 5 (42:17):
An investing for hedge funds. Can I cope with a metric?
Speaker 6 (42:20):
I probably could in terms of just volatility and markets extract,
you know, you know, alpha extraction from that, you know,
I mean for me that they're kind of critical things
in terms of understanding what alpha is. Is most of
the time in most markets there's a large number of
people with different mandates, different things going on their head,
different things going on their institutions. As long as there's
(42:41):
a sufficient ecosystem of time horizons, capital constraints, there's always
going to be the alpha. And the interesting thing about
you know, certain markets, for example, is like alpha and
this may sound a little bit of philosophical, alpha can
be something other than money. For example, if you take
a tap simple tail edging situation, buying puts on the
(43:02):
S and P, right, they're notoriously expensive, right, But the
alpha that the people who buy puts get is the
kind of the alpha of a peace of mind for
the rest of their portfolio.
Speaker 5 (43:12):
Right.
Speaker 6 (43:12):
So I mean, if you're a hard edged to hedge funds,
you're monetizing the alpha by doing a dispersion trade. But
like for people who are like feel can they can
sleep at night by buying puts, that's fine. You know
they're taking their alpha and kind of non manatory form.
Now that I said that's philosophical. In other cases, you know,
the hedge fund space, they're the pushing the pull going
(43:33):
on here, right, And so you talk about multi strategies
hedge funds, but they're not the only sort of hedge
funds the whole set of other hedge funds doing other things.
And so you know, if you just what's been happening,
and that's why we're talking about multi strategy hedge funds.
Is broadly speaking, hedge fund investing is more or less
the same size for the past couple of years. But
this share of multi strategies have gone up because, like
(43:55):
as I said, they kind of offer a pretty good
deal to a PM. You know, they take away all
the business risks that they have to deal with. They
don't talk to me, you know, they just get to
INVESTI trade, thank you. But you know, they take away
all that sort of risk, and so the pms they
kind of have a different maybe better life, depending on
what their admissions are and stuff. And as I said,
for investors, the underlying risk taking inside of a multi
(44:17):
strat makes for a better kind of return and level
at the top level. You know, I think this will reverse,
you know, over time, but like for the moment, like multistrats,
and you ask about how big individual multi strats can
get it as well, which is an interesting question. Empirically,
kap is around fifty fifty to seventy billion dollars right
now you know, whether that's liquidit in markets, whether that's
share of Wall Street's bank's credit book, you know that's
(44:41):
or where it's just organizational sites because you know they're
hard to manage, you know, hundreds of pms right, physically
and mathematically different to do that.
Speaker 3 (44:50):
Is prime brokerage a factor as well, because I imagine,
you know, if you have a multi strat that suddenly
becomes as big as JP Morgan or something that's unrealistic,
but just as an extreme example, I can't imagine the
prime brokers.
Speaker 5 (45:04):
Are going to be okay with that, with what exactly.
Speaker 3 (45:07):
With the size and the risk of a giant multi
of having a relationship with a giant multi strat.
Speaker 6 (45:14):
They would not love it because you know it just
put it's this famous story. If a few ten dollars
to the bank, it's your problem. Yeah, billion dollars the bank,
it's their problem. So you know, banks across the world
avoid try to avoid having customers so large that they
it becomes their problem.
Speaker 5 (45:30):
So yes, the answer is yes.
Speaker 3 (45:33):
Ronan Cosgrave, thank you so much for coming on all
thoughts and explaining to us why comp is important.
Speaker 2 (45:38):
That was fantastic come back on the podcast again for
a further conversation.
Speaker 1 (45:42):
But that's great, Thank.
Speaker 8 (45:43):
You guys, Joe.
Speaker 3 (45:57):
That was fun.
Speaker 7 (45:58):
That was great. Yeah.
Speaker 3 (45:59):
I like digging in to the business model of these things.
One thing I hadn't come to appreciate is the idea
of how difficult it might be to actually move around
capital because no one wants to be firing pms that
you fought like tooth and nail to actually hire in
a competitive environment.
Speaker 2 (46:17):
I mean, so this gets to something that actually I
thought about after we did that recent episode with Scott
back on boutique investment banks.
Speaker 7 (46:25):
Which is the idea of where.
Speaker 2 (46:27):
Does franchise value come in in a talent driven business? Yeah,
in boutique investment banking, there's another area where it's like, Okay,
you build this talent, but is there any franchise value
external that? And so it was really interesting to hear
Ronan talk about at any hedge fund, not just the
degree to which the manager has actual money tied to
(46:48):
the investments in this space, but to which they're invested
in the business as a business, as opposed to just
the fund. I thought that was a super fantastic Yeah.
Speaker 3 (46:57):
And also like the idea of looking at over head
spending as like an indication how much people care about
the business.
Speaker 2 (47:05):
Yeah, I hadn't thought of that. You know, I would
like to be in this space one day. That's never
going to happen for obvious reasons. But it's very fun
thinking about ways in which, depending on what seat we have,
we're gaming the system.
Speaker 1 (47:19):
You know.
Speaker 2 (47:20):
So it's like, if I'm at the manager level, I'm
thinking about how I can have personal wealth that is
visible to me.
Speaker 3 (47:27):
But is it not that your mind immediately goes to
gaming the system.
Speaker 2 (47:30):
It's not visible to the LPs. I think about how
if I were at the PM level, I was like, yeah,
of course I'm taking a market neutral long short book,
but I'm really just finding a closet way to go
long in video. During the AI bull market, it does
feel though that like part of the entire game is here.
You have these parameters and risk constraints and so forth,
(47:52):
and this cat and mouse game between those who want
to essentially find a way out of the constraints and
those who want to put them back in the box.
Speaker 3 (48:01):
Yeah, that seems to be a fundamental tension, although I
imagine it exists, you know, in some other funds as well.
Speaker 2 (48:07):
And I just like the fact that all this bonus
money is the business itself. I think that's a really
important idea when you hear about bonuses, et cetera. This
is not just like someone getting their Christmas bonus.
Speaker 1 (48:17):
This is the business. This is the business.
Speaker 3 (48:20):
Shall we leave it there?
Speaker 1 (48:21):
Let's leave it there.
Speaker 3 (48:22):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1 (48:28):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2 (48:31):
Follow our producers Carmen Rodriguez at Carmen Ermint, dash Ol
Bennett at Dashbot and kill Brooks at Kilbrooks. More Odd
Lots content, go to Bloomberg dot com slash odd Lots,
where we have a daily newsletter and all of our episodes,
and you can chat about all of these topics twenty
four seven in our discord Discord dot gg slash od Loots.
Speaker 3 (48:49):
And if you enjoy odd Lots, if you like it
when we talk about why bonuses are the business, then
please leave us a positive review on your favorite podcast platform.
And remember, if if you are a Bloomberg subscriber, you
can listen to all of our episodes absolutely ad free.
All you need to do is find the Bloomberg channel
on Apple Podcasts and follow the instructions there. Thanks for listening.
Hello, Odd Lots listeners.
Speaker 2 (00:01):
I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, We're doing
another live show and it's right here in New York City.
Speaker 3 (00:07):
Yeah, this one should be our biggest yet, and we're
going to have a bunch of Odd Lots favorites and
do something maybe a little different to some of our
previous live podcast recordings.
Speaker 2 (00:17):
When the guests are revealed, the show is going to
sell out right away, so you should really just go
get your ticket right now.
Speaker 1 (00:24):
It's June twenty sixth.
Speaker 2 (00:25):
It's at Recket, NYC, and you can find a ticket
link at Bloomberg dot com slash odd Lots or Bloomberg
Events dot com slash odd Lots Live and why.
Speaker 3 (00:34):
We hope to see you there.
Speaker 4 (00:38):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 3 (00:53):
Hello and welcome to another episode of the Authoughts podcast.
I'm Tracy Alloway.
Speaker 1 (00:57):
And I'm Joe Wisenthal.
Speaker 3 (00:59):
Joe, did you, at some point last month when markets
were being very, very dramatic, did you maybe hear that
a pod was blowing up? Maybe just maybe.
Speaker 2 (01:11):
I probably saw some tweets, probably tongue in cheek. I
may have sent some dms to people saying jokingly, have
you heard of any pods blowing up? But no, it's
become such a meme. Anytime like the market moves half
a percent, I imagine some pods did blow up. But it
is a funny joke, good intro.
Speaker 3 (01:29):
It's definitely become a thing. But I think it kind
of highlights something something very real, which is there is
this mystique around pod shops, the multi strategy hedge funds,
and whenever something weird is happening in markets now, they
tend to get blamed or people start joking about them.
And also part of the mystique is there's just a
lot of interest in why they seem to be so
(01:51):
hot right now blowing up in a very different way.
And what exactly is the attraction for big allocators of capital,
because I always think it's not like big investors can't
create their own diversified portfolios or invest in a fund
of funds or traditional two and twenty or whatever. So
what exactly is it about the pod shops that makes
(02:14):
them so attractive.
Speaker 2 (02:15):
We've done a lot of episodes on the multistreads at
this point, the pod shops so various flavors.
Speaker 1 (02:21):
There are still a lot of things I don't understand.
Speaker 2 (02:24):
First of all, my understanding is that they sort of
continue to prove their metal. I mean, it seems like
they didn't lose a lot of money in April during
some of that volatility, So they have this promise uncorrelated returns.
We'll get into how they deliver that. So far, it
seems like they continue to more or less do what's advertised.
(02:46):
I have a lot of questions about how and what
is the actual source of alpha and how long can
this go on, and whether there are a lot of
copycats and whether that will cause alpha decay and all
this stuff.
Speaker 3 (02:58):
I have questions about comp the most important thing.
Speaker 2 (03:01):
Well, this is really important, and actually, you know, we
did that episode with the founder of Freestone, Grove dan Morello,
just a lot of the conversation was about comp And
I'm interested in comp because I'm interested in the topic
of making a lot of money, But also I get
the impression that comp and incentive alignment more broadly is
(03:22):
actually one of the key problems that people are trying
to solve for all the time.
Speaker 3 (03:27):
I think that's right. Okay, So I am very pleased
to say we do, in fact have the perfect guest.
We're going to be speaking with Ronan Cosgrave. He is
a partner at Alburn Partners. So Ronan, thank you so
much for coming on all thoughts.
Speaker 5 (03:39):
Thank you very much. I'm really honored to be here.
Speaker 3 (03:41):
First question, what exactly is Alborn Partners because it's not
a pod shop itself.
Speaker 5 (03:47):
No, No, we're so.
Speaker 6 (03:48):
I co lead multi strategy heads fund coverage at Alborn.
We are an advisory only independently owned consultant. We help
institutional investors invest in hedge funds, private equity, real estate,
all across the alternate that spectrum. We have about three
undred and fifty clients worldwide and we advise on greater
than seven hundred and fifty billion dollars in assets.
Speaker 2 (04:08):
Okay, give us a little bit more of your background.
You're the perfect guests to talk about multi strategy hedge
funds and why allocators like allocating to them. Talk to
us about like how you built up your familiarity with
the space and how you've built up your like understanding
of their inner mechanics.
Speaker 6 (04:26):
That's a long answer. I've been over twenty years in
the hedge front industry.
Speaker 5 (04:30):
Okay.
Speaker 6 (04:30):
I worked at a fund of funds called Pamco for
fifteen years or the partner there did a whole lot
of stuff there, covered pretty much kind of the constituent
strategies of many of the multi strats, right, so you're
talking about longstrared equity, long shot credit, convert arab ballarb.
As it got more difficult, I got more involved, you know.
Since then, I've worked with Albourne. I joined Albourne for
(04:51):
four and a bit years ago, and you know, with
my colleague Martina, we cover the multi strategy universe globally.
So part of our job really is to kind of
dig in deep into the multistrats, not just learn about
the people, but the process, the inner mechanisms of what
differentiates one particular multi strat from another. And the really
(05:11):
cool thing is that they're all actually really different, you know.
And one of the fun things listening to you guys
is when you talk about pod shops and so on
and so forth, or multi strats in general, I mean,
there's huge differences in how they're run internally, you know.
And the other thing I distinguish in the multi strategy
space is the pod shops, which are the classic ones
that are you know, you know, with the three layer
(05:32):
of the fees versus the more traditional multi strategy hedge funds,
which are two and twenty.
Speaker 1 (05:38):
Oh.
Speaker 3 (05:38):
That is an important difference, isn't it. Before we get
into that, I want to ask, when you're doing due
diligence on possible hedge fund investments, how do you go
about doing that? Actually, because you just said you dig
into you know, the culture, the people, risk management. How
much access do you have and how do you do that?
Speaker 5 (05:59):
That's another big question.
Speaker 6 (06:01):
So the thing is with the multi strategy hedge fund
space is you start really with the single strategy stuff,
and it's not really fair to ask anybody to cover
multi strategies if they haven't worked hard at understanding the
individual contributions of all the different trades and trade types
that make up a multi strategy. But the critical thing,
and you alluded to this, is that multi strategy hedge
(06:23):
funds are another level of abstraction away from the markets.
Because yes, we do look at trades, at traders and
pms and stuff like that, but almost as important as
you're evaluating them as business models, you're evaluating them as
risk models and investment models, and you know, they're all
super interlinked. And one of the things that we look
(06:43):
at and look for is kind of consistency between all
the strands, because if you have things that are in
conflict internally, you end up with a suboptimal outcome, right,
I mean, we've all lived that in our own personal
and professional lives. But if things aren't in a line,
and you mentioned compensation, competition is a huge part of that,
and I'm you know, one of the things I'd argue
(07:05):
is that comp affects far, far, far more dimensions of
a multi strategy hedge fund than almost any aspect.
Speaker 5 (07:12):
Yeah.
Speaker 2 (07:14):
No, this seems very interesting to me because often it
feels as though, okay, you have some investment strategy and
then make a lot of money and then okay, some
of it goes to the manager and some of it
goes to the outside investor. That's how I conceive of things.
But it really does seem like comp structure is actually
core to the business model. But before we get to that,
(07:36):
why don't you actually go back for listeners, and for
my sake, when you distinguish between the sort of traditional
two and twenty multistrats with the so called podshops, In
my mind, I associate with the millenniums of the world
but talk to us about the differences in these business
models when you use these terms.
Speaker 6 (07:54):
Yeah, so I refer to two and twenty simple it's
a straight management fee of two, but it could be
any fixed number, and a performance fee of twenty percent
on the overall portfolio.
Speaker 5 (08:05):
So the only fees paid.
Speaker 6 (08:06):
By the investor are the management fee, which is idignated
in advance, plus a cut of the gross performance of
the portfolio as the whole. And that's a really critical
distinction between between them and the platforms or pod shops. Right,
so a pod shop has all that right now. First off,
the first thing that happens is that the management fee
(08:27):
may or may not be fixed. It can be what's
known as a pass through fee, where it's kind of
a blank check in many ways. For the most part,
they do take good care of that. But the third
layer of fees that's really important is that there's fees
payable at the level of the PM, not at the
overall fund. And when you get to that level, there's
a lot of things that people take for granted and
(08:47):
investing just simply breakdown, you know. And to go on
to that, like the one thing that I keep getting told,
you know, in my own personal investing life and everybody's
personal investing life, is that diversification is the only fee
launch R. When you are paying performance fees on a
on individual components of a portfolio. Diversification is not a
(09:07):
free launch. It costs you money, real money.
Speaker 3 (09:10):
Wait, can you explain how do clients? How do investors
actually pay individual pms? Like, how does that work?
Speaker 5 (09:18):
Yeah?
Speaker 6 (09:19):
So in a pod shop, what you have you think
about it is you have you know a number of pms,
anything between five to three hundred and something. They each
basically have their own individual P and L. Right, so
they the manager, the overall fund manager track tracks each
PM and their p and L. They'll charge back all
the appropriate stuff that would be charged to that. They
(09:40):
will normally be charged Bloomberg for example, all other trading costs,
the analysts costs perhaps, and then if that number is
above zero, the PM gets a payment from the manager
out of the fund and that's their performance fees. So
the investors themselves don't actually pay them, paid.
Speaker 5 (09:55):
For them by the manager.
Speaker 2 (09:57):
Now, you said that there can be the instances in
when diversification is not a free launch, and so I
take that to mean that you can have situations in
which at the fund level you don't have a good
year and you're not making any money. But some pod
managers had a great year and they still have to
get paid. And so you talk to us a little
(10:19):
bit about these conditions under which that diversification can be costly.
Speaker 6 (10:24):
Yeah, let's use a simple, simple model. So you have
a pod shop, but you want to got two pods,
and at the end of the year, one pod is
up ten dollars and one pod is down ten dollars.
Because it's pod shop, you're paying on the panel of
each individual PM. So let's say it's twenty percent. Right,
So on a gross before fees basis your flat. However,
you're paying the guy who was up ten dollars two dollars, right.
(10:46):
So after this is added together, now your portfolio is
down two dollars. And that is netting risk. And the
interesting thing about netting risk is because to bring it
out further, is that netting risk you could argue, well,
that's you and be an issue for the ones that
pay at the top level.
Speaker 5 (11:03):
Well, the issue is.
Speaker 6 (11:04):
That because they exist in a competitive landscape for pms,
pod shops can go to a PM who didn't get paid.
Speaker 5 (11:11):
Right, So, if you think.
Speaker 6 (11:11):
About it, if that was a traditional two and twenty
multi strat ten dollars up, ten dollars down, flash, nobody
gets paid. The fact is you've got a very very
unhappy PM who's up ten dollars, he's made ten dollars,
who's like sitting there in the corner really angry because
they worked really hard, they made a lot of money
and they get nothing.
Speaker 5 (11:29):
And the pod shop can ring them up.
Speaker 6 (11:31):
And says we'll take you, yeah you know, and will
guarantee if you make money you will get paid it.
The other thing to remember as regards netting risk is
it's actually we've modeled it at Albourne. We've worked it
out and using various simulations, it averages for a just
a regular set of managers and pms around one percent
a year.
Speaker 5 (11:49):
Right.
Speaker 6 (11:50):
When you think about a two and twenty hedge fund,
yeah you might, you kind of expectationally, should expect to
pay one percent of that two percent management fee to
people who've made money when everybody halse has lost money.
And it can be way more than that, and that's
a real business risk.
Speaker 3 (12:20):
So one thing I wanted to ask is I get
the impression that podshops are very, very competitive, and you know,
the talent is competitive, but the pod shop itself is
supposed to kind of work together, right and the positions
are supposed to diversify and even each other out and
all of that. So I guess my question is how
(12:42):
cutthroat is it actually working at a pod shop?
Speaker 5 (12:46):
It varies.
Speaker 6 (12:47):
The fact is that a podshop is an entity that
can make certain decisions to create either competition or cooperation.
Any multistract can do this in a pure eat what
you kill and vironment. Obviously there's no incentive to do cooperation,
but people do recognize this, right, And what I would
(13:07):
say for that is that it's all about what do
you want as what does the manager want to produce?
And one of the things what I would say is
there's a real choice that you have to make between
kind of talent and structure. And what do I mean
by that? What I mean by that is to use
the sports context. There's kind of two ways assemble professional
(13:30):
sports teams. The first is to get a big pilot
cash and go hire the best players in this position
and put them on the field and hope for the best. Right,
that's a focus on talent. The other way is to
hire a really really good coach with a really good
system and to have him or her go with their
team kind of a moneyball system where you put together
(13:50):
people who fit in the structure. And what that means
is the first one is like the emphasis on the individual,
and the second one of the emphasises on it on
the whole. And when you talk about competition, one of
the main ways you enforce competition.
Speaker 5 (14:04):
Is probably obviously compensation.
Speaker 6 (14:06):
If you have a situation where it's purely what you
kill and you get a presentive of your own P
and L and that's it, it's very very hard to
enforce that level of That's where you get those cutthroat stories, right.
But there are many others out there who have other
ways of doing this who recognize that. You know, if
you just have everybody in it for themselves, you produce
(14:27):
a portfolio that's actually suboptimal at the top level.
Speaker 3 (14:30):
This is what I was going to ask. Have you
noticed a difference in performance between the sort of cutthroat
competitive firms versus the more cooperative ones.
Speaker 6 (14:38):
That's a really good question, and the short answer is
it's really hard to distinguish between them. On the outside
The interesting thing really is more around what happens when
things are going badly for both that you're more likely
to have people kind of like quickly leave the more
competitive and cut throat one. Ah then you would have
then maybe they're more cooperative, you know. I mean the
(14:59):
cool thing about the pod shop and the platform space
is there's literally no right way to do this. There's
a real series of trade offs, right, and there's choices
you make have cost many different different dimensions. Because, for example,
if you choose to do cooperation right and you incentivize everybody,
you typically would do it in a kind of a
traditional multi strategy context, right. What that means is that
(15:20):
you're not going to have the eat what you kill mentality.
You may have certain bits around that, but if you
use that thing, you have a very good place to work,
but you.
Speaker 5 (15:31):
End up with a situation.
Speaker 6 (15:32):
Where As we talked about earlier, netting risk is a
real cost. So what that often means is that compensation
choice drives you to be a bit more correlated within
your own portfolio and be a bit bit less, bit less,
little lower sharp ratio. Why is that Because if netting
risk or the cost of netting is a real business risk.
You choose to minimize it, and the way easily to
minimize it has had everybody kind of make money at
(15:54):
the same time everybody kind of lose money at the
same time, and then you won't be picked off by
the pod Shopsimilarly, if you have competition, right, competition is
an incredibly powerful human thing, but it gets out of
control and you end up with a situation where people
just burn out and just leave you. People are unhappy.
You know, you have to kind of keep feeding people
(16:15):
into it, and you know that that's totally fine because
there are many other industries out there besides finance that
does this, you know. But at the same time, you know,
you end up with a whole lot of scenarios that
are kind of you end up with a kind of
a team of rivals, you know, and then that's it's
a dynamic, but it is the one that you have
to really control zooming out.
Speaker 2 (16:34):
Obviously, the performance of a lot of the well known
names has done really well. You're talking to institutional allocators
other than I guess the fact that the top line
performance is good and everyone likes making money, what is
the general pitch? And we've seen this trend obviously from
allocation to single fund managers. You know your traditional guys
(16:56):
who would like go on TV and they unveil their
long or whatever. As a digression. I always think it's
funny when you see these pod managers on TV and
they get asked about their thoughts about the market, because
it's clearly that's not really even what their focus is
on in terms of business structure design. So I'm always
sort of raise an eyebrow when I see these conversations.
Talk to us about what it is about these entities
(17:18):
in general that holds so much an appeal for an
institutional allocator.
Speaker 6 (17:23):
They hold appeal for a variety of different reasons, and
obviously it will depend on the individual mandate of the allocator,
but there's a couple of fundamental things that really hold
true across all multi threats. The first one is that
it's interesting that we talk about pods like there's something new,
But if you actually if all three of us decided
to go out and invest into twenty individual hedge funds,
(17:44):
we'd have the same issue. A. They would be paid
on what they eat, what they kill. Yeah, B we
would have to hire and fire people. By the way,
hiring and firing people. Hiring is fun, Firing sucks.
Speaker 5 (17:55):
Yeah, But the point, but the.
Speaker 6 (17:57):
Overall thing is that each individual pe in that set
of single strategy hedge funds is allocating according to what
two things, what they think in their set of investors
want and be what they're willing to bear because it's
their only job and their name on the above the door.
And so what you end up is is your set
of allocations that when you're roll them up together, are
(18:19):
individually way under risked, right, and you're not making as
much money as you should given the talent that you're
paying for and the amount of fees you're paying. So
when you hire a multistrats, and part of the thesis
of multi strats, which which is true, is that because
they're a unitary portfolio with somebody atop in charge of
it driving the risk of the individual pms, not the
individual pms themselves, you can and you really should end
(18:43):
up with a better return stream because you've coalested all
together under a single unitary authority and they can put
them to you know, they put leverage to work, risk
to work, so that the individual PM might be more
risky than they really really want to be or maybe
it's probably obscured from them usually, but at the end
of the day, that rolls up into an appropriately risk
portfolio return. Right, And you know, having somebody who worked
(19:04):
in fund of funds, one of the issues of fund
of funds is just that you had fantastic sharp ratios,
but the returns were low.
Speaker 3 (19:10):
That's a really important point. One other thing I wanted
to ask just on the why allocators are interested in
multi strats. Point One thing you sometimes hear is that, well,
multistrats or pod shops they can dip in and out
of positions really really fast, and they can react to
the market very very quickly. How true is that?
Speaker 6 (19:31):
So let's go back to two and twenty funds versus
pod shops, because it's differently.
Speaker 5 (19:35):
True for both of them.
Speaker 6 (19:36):
Let's talk about pod shops first, right in the kind
of the stylized pod shop, you get to set up,
you get money, you ale, you invested as a PM,
and you get paid on that. If you get cut,
if your capital you get cut substantially. Even with the
best will in the world and the promises from above
saying it'll come back to you, your pay has been cut.
And I mean we're all professionals here. If your pay
(19:57):
is cut by fifty percent, your updated your CV and
you're checking the job market. Okay, So in the context
of responding to opportunities in the market, it's hard to
move too much too quickly in the context of a
pod shop, why because of that reason, and be because
that person may not be there to do when it's
an opportunity there. So it's kind of hard. They do
(20:20):
do it, They absolutely do do it. They will lever
up into opportunity. But when you think about what people's
kind of perception in their heads of what it is,
it's completely more static than you'd imagine. In the context
of a traditional fee structure, the two and twenty, it's different, right,
everybody is incentivized to get the top line to be
the highest number it can be. And so if I'm
(20:42):
a convert manager and your merger art manager, I'm cool
with being my capital be given away. I assume I
get it back eventually. But if it makes the overall
proibly larger, I can benefit in the long run too.
So the ability and then quite frankly, the willingness to
move capital in size around it is really that's where
(21:02):
camp comes in. Camp has now led us to the
situation where it's hard to move capital right, and you
think about, like we talked about it, kind of the
theme of this for me is comp kind of drives everything.
How you structure your camp is one of the principal
underlying features or a and how multi strategies work.
Speaker 2 (21:18):
I think this is such an important point because again
I think, like comp structure.
Speaker 7 (21:23):
You hear about it like people love.
Speaker 2 (21:25):
Reading stories about bonuses, et cetera. And people love reading
stories about people getting paid a lot of money, or
maybe they hate read these stories about people love getting
mayde but this idea that no, this is the business
you know people. I think when people hear bonuses, they're like, oh,
you get some extra money. But the business is design.
I mean, to hear you describe it. The business is
(21:46):
the design of the bonus. The business is the design
of the comp.
Speaker 6 (21:50):
It kind of is you know, it drives so much
if you just think about, like we talked about, how
a capital allocation is basically held back or you know,
you're the way you can do it is changed by
how you compensate people, you know, or constrained is the
better world. There's other things like I mean you think
about in the context I going back to like the
story about the single strategy hedge funds, you also have
(22:11):
the similar problems. Were given too much leeway in an
e EQ what you kill environment, pms will start to
set risk to suit themselves than they do for the
overall portfolio, because after all, why should they care, you know,
why should they care about the overall portfolio performance? If
if I can you know, if I've made money for
the first nine months of the year, you know, the
(22:31):
temptation is a lockdown risk and have Christmas, you know,
enjoy Christmas rather than take more risks where at the
portfolio at the top level may not want that, you know,
So you have all these other things that drive others,
drive these decisions of people, you know, across so many
different dimensions. It's one of the most fascinating things because
you know, at Albourn we've done a huge amount of
(22:53):
work trying to understand this.
Speaker 5 (22:54):
But I learned Python to do this. God help me. Yeah,
it's just one of those things.
Speaker 7 (23:00):
How does the what.
Speaker 2 (23:02):
You kill environment solve for the problem of the PM
who's made money for nine months of the year and
then want to lock it down? What types of risk
controls or I guess controls for under risk because in
a way, the thing that they don't want is someone
taking some risk or you know, getting too conservative. What
(23:22):
are the approaches that they have to align those incentives
so that you have to keep going for those final
three months of the year, even if it means risking
your great year.
Speaker 6 (23:31):
I mean, sometimes it's very simple minimum amounts of capital
deployment requiring. You know, it's kind of hard, right because
at the end of the day, if you've got successful
PM on the year, yeah, and you want to keep
them or her, it's not an easy question to answer.
And like there are more hybrid approaches to these what
you kill right for example, partnership so you know, many
(23:51):
funds offer partnership to the pms where they do participate
in the overall fund fund profits. You know, there's other
kind of you know, fancier trade ways to make you know,
increase say the payoffs to the PM depending on the
fund's performance.
Speaker 5 (24:04):
It fun's overall performance.
Speaker 6 (24:06):
But yeah, it's a really hard problem because it's a camp.
It's a personal relations problem, you know. I mean sometimes
you just got to accept it. You got a guy
who's up coming to the end of the year and
they're just going to de risking. Look, the thing beyond
camp is really culture, right, and you can say comp
drives culture.
Speaker 5 (24:22):
But it's not quite that simple.
Speaker 6 (24:24):
You couldn't just hire the sort of individual who won't
do that, you know, and a lot of funds will
talk about we talked about the war for talent. I
often call it the war on talent. But people go
to places they want to work with, people who they
want to work for, and you do try to just
hire professionals, regular people like us who work through the holidays,
you know, and stuff like that, you know, just to
finish off top for the year. You know, you've got
(24:45):
to hire the right people.
Speaker 3 (25:03):
So listening to talk on pass throughs versus traditional fees
the two and twenty, I'm kind of wondering why would
you ever invest in a pass through because when you
describe the downsides, it's like you don't have as much cooperation.
Maybe it's harder to move capital around. It seems like
the traditional fee structure might be the better choice here.
(25:25):
But tell me why I'm wrong.
Speaker 6 (25:27):
Well, we've been taking I mean that this is partially
my training, taking the side of the alligator here and
you're right, like superficially at the top level, a pass
through it seems like a bad idea for the allocator,
but there's kind of three people, three entities getting commed.
Here is the alligator, they're the manager and they're the PM.
And the thing is one of the one of the
(25:48):
standout features phychologically of most pms is they all think
they're really good. That's how you become a PM. You
become ambitious, you press yourself to test yourself against the market.
A pass through manager will give you the max compensation
if you're a good PM, right, And at the end
of the day, what we're describing is an industry that
relies on pms to do good work and who are
(26:10):
really smart. And if you have a situation where they're
going to get paid in a particular entity more than
another sort, they will gravitate towards that. So the answer
to your question is, if alligators had their way, they
probably wouldn't.
Speaker 5 (26:22):
Want to invest in pass throughs.
Speaker 6 (26:23):
But the fact is that they don't have a choice,
and pass throughs are you know. The other thing to
remember is past throughs are good for pms. But the
interesting thing and people do forget about. This is in
a past through situation in a pod shop, the PM
is getting paid from their own P and L. The
manager themselves is fully aligned with the investor, with the
(26:45):
allocator because they're only getting paid off the netted of
all the pass throughs. They're paying off the same P
and L at the top line as the investor. So
there is somebody and I mean people do talk about
how much has been paid, how much they make and whatever.
It's a an like I've heard it described as the
worst best job in the world, but it's an incredible
(27:06):
thing of coordination and getting people together. But they're actually
incentivized and in aligned within allocator and to give them
their due. They do their best to do that because
they are conscious of keeping costs under control because that's
their profit margin that's eating into I mean the other
I mean, the other thing is which is kind of
scary for allocators is the extra layer of.
Speaker 5 (27:22):
Fees, right, and it does cost money.
Speaker 6 (27:25):
And fundamentally speaking, the other thing that camp is driving
in that case is risk. Right, they're driving leverage. We've
done simulations and a pass through manager has to be
around one third more leverage than then the two layer
of fees two and twenty manager. I mean they have
to be because they have to make more money to
pay that extra cache out and it costs.
Speaker 5 (27:46):
Real money to do that.
Speaker 6 (27:48):
And you know, you know, in one sense, price is
what you pay, values what you get. Returns have been
really good because of the pass through manager has been
a really effective business model investing side. Yeah, but yeah,
I mean alecators do complain about the cost.
Speaker 2 (28:02):
It's something I'm curious about with the very traditional hedge
fund model, which you described very a good articulation. If
I'm an institutional allocator, I'm diversified. Therefore, I want my
allocations to take max risk. The individual hedge fund manager
might not want to take mask max risk because it's
their whole career and name on the line. What is
(28:24):
actually the expectation in the sort of traditional hedge fund
model for like, how much of the manager's net worth
is in the fund and how do you establish that?
And by the way, if I were a hedge fund
manager had done really well, I would buy a lot
of mansions and yachts and stuff so that if my
fund ever went to zero, I still have a lot
of wealth.
Speaker 6 (28:44):
You've thought this through, jah, Yeah, mentions where in particular.
Speaker 2 (28:48):
Miami, Aspen, the Golf States, New York City and anyway.
But like, how do they like, how do you how
do they actually establish that the man is fully aligned
with the performance of their fund.
Speaker 6 (29:03):
So that is a really really good question because opinions
really vary there, right, And the standard answer to that
question is the majority of the manager's liquid net worth
and you can define that whichever way you want.
Speaker 1 (29:18):
Is their way to audit there. I mean, I say, hey, look,
I have it all on my fund.
Speaker 5 (29:22):
You can, you can have to admin.
Speaker 6 (29:24):
The manager can authorize the administrator of the fund to
disclod their investment in the fund to you if you
ask them nicely.
Speaker 1 (29:31):
They don't know that I have.
Speaker 2 (29:32):
They wouldn't know if I had a billion dollars in
bitcoin on a private wallet.
Speaker 1 (29:36):
That's not any any key.
Speaker 2 (29:37):
I'm just saying I would when I hear this, I
saw this in your notes. When I hear this, my
first mind goes to how can I pocket net worth
and places that aren't easily visible, and so I'm not
fully exposed to my own fund.
Speaker 5 (29:50):
Sorry, look, I mean they actually big They's a bigger question.
Speaker 6 (29:55):
There, okay, In which you mentioned at the starter your
question before you went on about the nice mansion an
aspect which is kind of distracting me right now. But
to be clear, the fact is that if you have
all your money in a fund, yeah, you're kind of
going to mind it differently, yeah right.
Speaker 5 (30:10):
Yeah. And if I'm an investor who's got a hundred
of funds like that, I don't want.
Speaker 6 (30:14):
Yeah, yeah, you're going to be You're going to under
risk it relative what I want as an investor, and
so it's a real dance.
Speaker 2 (30:21):
Right.
Speaker 6 (30:21):
Again, it goes back to the character the person you're hiring,
which we talked about earlier on about the pad shot
with the similar scenario. It really depends on how you
want to risk manage your investments as an alligator, right
because at the end of the day, when you're asking
a manager to put their own capital in the fund,
you're signing them a certain role as a risk manager
because and you have to assess honestly, my answer is,
(30:45):
it really depends on the person who I'm dealing with
and the sort of person who I think we're dealing with.
Speaker 4 (30:49):
Right.
Speaker 6 (30:49):
If I think it's somebody who is just really professional
and good, I'm not so sure. That having all their
money in the fund is necessary, you know, if I
think it's somebody where.
Speaker 2 (30:59):
They see other funds too, you know, big fund managers
see they do.
Speaker 6 (31:03):
Yeah, I mean I used to see that at my
former job, you know, and it was a real issue
because you did have people who, you know, they had
made decent money. But like, what we really wanted to
see at the time that PAMCO was people putting their
money into the business, you know, paying for Bloomberg, paying
for office space, you know, all that over over putting
money in the fund, because that was commitment to the business. Interesting, right,
(31:23):
I mean that's something that we're you know, we were
comfortable more as comfortable with them putting working capital into
a functioning business.
Speaker 5 (31:30):
Interesting.
Speaker 6 (31:31):
We then maybe putting more an extra five hundred thousand,
a million, two million million dollars into a fund.
Speaker 1 (31:36):
Very interesting.
Speaker 3 (31:37):
So much of what you're describing it sounds very very granular,
like the idea of looking at individual talent to see
how they operate, looking at something like culture, which tends
to be difficult to define. If I'm an allocator, how
much transparency or how much information am I actually getting
from one of these funds? And I realized allocators will
(31:59):
hire your company Albourne to actually do a lot of
this due diligence for them. But if Albourne was out
of the picture, what would I be seeing if I'm
a potential allocator.
Speaker 6 (32:10):
So that's a a long there's a long answer to
that question, and it really does depend on a if
you're a certain size of an alligator.
Speaker 5 (32:18):
There's there's kind of the fast lane.
Speaker 3 (32:19):
Ah so if I'm PIMCO or something, if.
Speaker 6 (32:22):
You're in you get in the executive lounge, you know,
you'll get treated more, you know, get more access. You
know that, and there's nothing wrong with that because simply
these people have limited time, you know, and somebody who's
going to be a larger client will get more in
almost any line of business, you know, in terms of access,
it does vary, I think, you know if I you know,
speaking of an allocator's shoes. You know, basic stuff is
(32:43):
regular meetings, good substantial risk reports, helping me understand where
and how risk is our plays, you know, updates when necessary,
and then you know, just it's really it is granular.
It's multi strategies are a combination of both zooming out
and taking the big But we talked about what camp
means in the global scale and how it's all that,
but it's also super super granular, so understanding you really
(33:06):
want to understand, like where their real competency is as
the multi strated, because many places start off with a
particular kind of thing.
Speaker 5 (33:13):
They're good at.
Speaker 6 (33:14):
Equities, Yeah, right, you know, at the end of the day,
most multi strategies make most of their money from kind
of I would call it equity alpha for lack of
a better word, which can include traditional long short equity,
quant equities index rebaal. We've heard about that a couple
of times. You know, all this sort of stuff that's
kind of equity alpha. Then you have other ones who
have more focused on kind of fixed income and credit,
(33:36):
you know, and you've got to understand what you're getting.
And I mean, then you've got to think about, given
what I think that my heuristic or my mental map
of what these guys are, does each incremental change what
they do. Does that makes sense because you know, I
mean one of the things I like to think about
is making sure that the stories are aligned.
Speaker 5 (33:54):
Very simple stuff.
Speaker 6 (33:55):
Right, Let's say I'm a pod shot manager, you're an
allocator in here, and.
Speaker 5 (33:59):
I go on you know to ask a constructure, Well,
my pms.
Speaker 6 (34:03):
You know, we put them in a room, give them Bloomberg,
We give them all the facility they need.
Speaker 5 (34:07):
We charge them for that, and they just get paid
on their own P and L. Yeah.
Speaker 6 (34:10):
Oh okay, you say, I find good And then you say, okay,
well talk to me about you know what sort of
culture you have? Oh yeah, well, actually you know what
we also, you know, we have a real cooperative culture
becomes loved here. You know, they all get back massages
and we all work together as across the team as well,
you know, and you're kind of going answer one and
answer to don't make sense together, right, And you see
(34:31):
this in all sorts of sort of ways, you know,
And the thing is that what happened is that people
have you know, the successful funds are the ones who's
answered made answer one and answer to come I line
up together, you know, in whichever way it needs to be.
Speaker 5 (34:44):
They've worked on ways.
Speaker 6 (34:45):
That makes sense that they're kind of I hate to
say about like a narrative alignment and how they do things.
They know what they're good at, you know, like what
for example, you don't have somebody who's really really got
an equities background to suddenly decide to hire some you know,
rockstar and allocate forty percent into commodities. You know, that
would be kind of a weird thing.
Speaker 2 (35:05):
Well, so I know you're not going to like name
any specific names. I will name some names, but you
don't have to talk about them directly, you know, like
I mentioned someone like Ken Griffin or in Izy England
or at Millennium. When you look at the managers who
have done really well in this space, what are they
(35:26):
good at?
Speaker 6 (35:27):
They are good at what I said, kind of bringing
alignment to finding that align, finding that solvement for align,
you know, solving for kind of the business issues, the
risk issues, the investment issues, and the personnel issues, and
making sure that they all work together.
Speaker 5 (35:43):
You know, they're really successful.
Speaker 6 (35:45):
People are just not that they are in it for
the money, but now they're in it for the competition
to improve because like I said, it's the best worst
job in the world.
Speaker 5 (35:55):
You know, I would like.
Speaker 1 (35:56):
To try it out at least for a little bit
see how good it is.
Speaker 7 (35:59):
I have a question.
Speaker 2 (36:00):
Part of the appeal of any multi strategy hedge fund
is the internal diversification. Obviously, whether we're talking about the
two and twenty or whether we're talking about the pure
pod model. You have these periods where one trade more
or less works out very well for a long time.
In the twenty tens, it was the disinflationary trade, which
(36:20):
represented in rates, and it was the tech trade or
various flavors of that. What do you see when you
do due diligence on a fund? What do you look for?
Speaker 7 (36:30):
Because I would just.
Speaker 2 (36:31):
Think, yeah, here's a bunch of people, but all you
all want to make money, so y'all put on the
same trade in different clothing, right, and there's different ways
to play the same trade. How do the good funds
actually establish diversification?
Speaker 6 (36:46):
So there's actually April is a really good example of
the versification at work and what it means for how
funds work. And I'm going to loosely describe April very loosely,
and I'm sure somebody in your audience will go completely wrong,
but loosely, April was mostly in equity story, right, And
what we had, what we saw was equity only focused
(37:09):
managers had a much tougher time of it than the
diversified managers. Okay, so diverse fight I being cross commodities
rates converts other stuff.
Speaker 5 (37:17):
And why is that important?
Speaker 6 (37:18):
Because last year one of the biggest trades that worked
with equities, right, And so the way you stay and
so the way you stay diversified is really disciplined, right.
And you know, in the context of what you're trying
to do. One of the interesting things about running simulations
around multistrats, right is you actually don't need to have
such great pms or great trades to have a really
(37:40):
good multi strat if you risk manage it right. Okay,
if you actually have a set of people who are
very lowly correlated with each other and you put them together,
you lever them up, you can have a very good business.
So to your question is, like, the answer is, you
got to be disciplined, You got to have like you
put the right amount of risk into your twenty ten
different inflationary trade, put the right amount of risk into
(38:02):
fundamental fundamental equity market neutral last year. But you make
sure that you're not over the limit, right, and you
stay disciplined so.
Speaker 7 (38:09):
That our equity market neutral.
Speaker 2 (38:11):
I would still find a way to make it long
tech and disguise there.
Speaker 5 (38:14):
Well, people totally do. Yeah.
Speaker 6 (38:16):
I mean, look, we haven't even got into factor factor
controls and stuff like that, and so on and so forth. Look,
the fact is that and there's multiple answers to that
question across how multi strates have implemented this in terms
of what they're willing to take in terms of factor
risk or sector risk and stuff like that and when.
But when you get down to it, look, the job
of an investor, any investor is to take risk in
(38:39):
the way they're supposed to. And multi strategy funds they
take risk. You know, there's no getting around that. Key
is is how you take it, how disciplined you stay
with it, the quality of the people, the quality of
the structure around that, and just you know, sometimes some
look as well.
Speaker 3 (38:55):
Just on the risk management side, it sounds like a
lot depends on historical core correlations when it comes to diversification,
and what we've seen in recent years and in April
is some of those historic correlations breaking down, So for instance,
bonds not being a good hedge for equities, or more
recently the dollars selling off at the same time that
(39:16):
bonds were selling off. How are people managing or judging
that correlation risk because that seems to be a potential
area of weakness for multi strats.
Speaker 6 (39:25):
It's a weakness for everybody, potential area weakness for everybody.
I think, look, management of correlation is super fundamental to
management of risk. In the context of any multi strategy
hedge fund. There's tremendous benefits to keeping your correlation low
between your strategies, in terms of risk management, in terms
of how much you can lever, in terms of everything.
(39:46):
When I look at managers, when I test managers, when
they you know, when I simulate managers, I look at
kind of two regimes, low and high correlation, and everything
that works in low is punishes you in high correlation. Right.
For example, when you're creating diversified portfolio of really cool
trades that have nothing to do with each other, is great.
When it works in a high correlation environment is a
(40:06):
nightmare because it's things you've never heard of blowing up.
Because I mean, there's a limited amount of things that
any any one person can know, right, So every choice
you make at a low correlation environment will come back
to bite you in a high correlation environment. Correlations between
asset classes is a fundamental part of that. But the
critical thing around that is the and this is one
(40:26):
of my managers said to this, it's like, when you're
sufficiently diversified, each individual line it him you ad makes
no difference to the portfolio risk or innd like that,
except what you're actually looking to allocate when you're at
that diversified is how much of a loss you can
make in that high correlational environment, how much of a
loss you're willing to bear, And so if that individual
component is something that's additive to that loss or makes
(40:48):
it worse, that's where you judge it. Right, when you're
sufficiently diversified, so you try to insulate yourself from breakdown
and correlation by having a budget for that breakdown and
correlation and making sure that you're individ you a components.
You know what each individual component for portfolio is going
to do for that and if you do that, then
you're kind of that's how you kind of figure that
one out.
Speaker 1 (41:08):
Look.
Speaker 6 (41:08):
You can buy hedges as well, and people do explicitly
do tail hedging to provide kind of return and cash
in those sorts of scenarios. But allocating that tail risk,
especially in a pod shot because they're more diversified, is
probably the most important job that these guys have.
Speaker 2 (41:23):
One of the things that I'm interested in is you know,
there's still new multistrats being launched. A lot of them
continue to make a lot of money, but there has
to be some limit to the alpha generated capacity of
these vehicles. I would think, and I'm trying to wrap
around my head about what happened. Does more and more
(41:44):
funds launch and what is the capacity? And based on
this conversation, if I had to.
Speaker 1 (41:49):
Guess about what degrades alpha over.
Speaker 2 (41:51):
Time, it would be something to do with compensation, where
just like all the money accruise at the PM level
because there's such competition with more talk to us about
like how you would articulate the source of alpha and
how much can realistically be captured as more and more
people and more and more money flows into this space.
Speaker 6 (42:12):
Okay, so articulating a source of alpha, that's probably the
biggest question there is.
Speaker 5 (42:17):
An investing for hedge funds. Can I cope with a metric?
Speaker 6 (42:20):
I probably could in terms of just volatility and markets extract,
you know, you know, alpha extraction from that, you know,
I mean for me that they're kind of critical things
in terms of understanding what alpha is. Is most of
the time in most markets there's a large number of
people with different mandates, different things going on their head,
different things going on their institutions. As long as there's
(42:41):
a sufficient ecosystem of time horizons, capital constraints, there's always
going to be the alpha. And the interesting thing about
you know, certain markets, for example, is like alpha and
this may sound a little bit of philosophical, alpha can
be something other than money. For example, if you take
a tap simple tail edging situation, buying puts on the
(43:02):
S and P, right, they're notoriously expensive, right, But the
alpha that the people who buy puts get is the
kind of the alpha of a peace of mind for
the rest of their portfolio.
Speaker 5 (43:12):
Right.
Speaker 6 (43:12):
So I mean, if you're a hard edged to hedge funds,
you're monetizing the alpha by doing a dispersion trade. But
like for people who are like feel can they can
sleep at night by buying puts, that's fine. You know
they're taking their alpha and kind of non manatory form.
Now that I said that's philosophical. In other cases, you know,
the hedge fund space, they're the pushing the pull going
(43:33):
on here, right, And so you talk about multi strategies
hedge funds, but they're not the only sort of hedge
funds the whole set of other hedge funds doing other things.
And so you know, if you just what's been happening,
and that's why we're talking about multi strategy hedge funds.
Is broadly speaking, hedge fund investing is more or less
the same size for the past couple of years. But
this share of multi strategies have gone up because, like
(43:55):
as I said, they kind of offer a pretty good
deal to a PM. You know, they take away all
the business risks that they have to deal with. They
don't talk to me, you know, they just get to
INVESTI trade, thank you. But you know, they take away
all that sort of risk, and so the pms they
kind of have a different maybe better life, depending on
what their admissions are and stuff. And as I said,
for investors, the underlying risk taking inside of a multi
(44:17):
strat makes for a better kind of return and level
at the top level. You know, I think this will reverse,
you know, over time, but like for the moment, like multistrats,
and you ask about how big individual multi strats can
get it as well, which is an interesting question. Empirically,
kap is around fifty fifty to seventy billion dollars right
now you know, whether that's liquidit in markets, whether that's
share of Wall Street's bank's credit book, you know that's
(44:41):
or where it's just organizational sites because you know they're
hard to manage, you know, hundreds of pms right, physically
and mathematically different to do that.
Speaker 3 (44:50):
Is prime brokerage a factor as well, because I imagine,
you know, if you have a multi strat that suddenly
becomes as big as JP Morgan or something that's unrealistic,
but just as an extreme example, I can't imagine the
prime brokers.
Speaker 5 (45:04):
Are going to be okay with that, with what exactly.
Speaker 3 (45:07):
With the size and the risk of a giant multi
of having a relationship with a giant multi strat.
Speaker 6 (45:14):
They would not love it because you know it just
put it's this famous story. If a few ten dollars
to the bank, it's your problem. Yeah, billion dollars the bank,
it's their problem. So you know, banks across the world
avoid try to avoid having customers so large that they
it becomes their problem.
Speaker 5 (45:30):
So yes, the answer is yes.
Speaker 3 (45:33):
Ronan Cosgrave, thank you so much for coming on all
thoughts and explaining to us why comp is important.
Speaker 2 (45:38):
That was fantastic come back on the podcast again for
a further conversation.
Speaker 1 (45:42):
But that's great, Thank.
Speaker 8 (45:43):
You guys, Joe.
Speaker 3 (45:57):
That was fun.
Speaker 7 (45:58):
That was great. Yeah.
Speaker 3 (45:59):
I like digging in to the business model of these things.
One thing I hadn't come to appreciate is the idea
of how difficult it might be to actually move around
capital because no one wants to be firing pms that
you fought like tooth and nail to actually hire in
a competitive environment.
Speaker 2 (46:17):
I mean, so this gets to something that actually I
thought about after we did that recent episode with Scott
back on boutique investment banks.
Speaker 7 (46:25):
Which is the idea of where.
Speaker 2 (46:27):
Does franchise value come in in a talent driven business? Yeah,
in boutique investment banking, there's another area where it's like, Okay,
you build this talent, but is there any franchise value
external that? And so it was really interesting to hear
Ronan talk about at any hedge fund, not just the
degree to which the manager has actual money tied to
(46:48):
the investments in this space, but to which they're invested
in the business as a business, as opposed to just
the fund. I thought that was a super fantastic Yeah.
Speaker 3 (46:57):
And also like the idea of looking at over head
spending as like an indication how much people care about
the business.
Speaker 2 (47:05):
Yeah, I hadn't thought of that. You know, I would
like to be in this space one day. That's never
going to happen for obvious reasons. But it's very fun
thinking about ways in which, depending on what seat we have,
we're gaming the system.
Speaker 1 (47:19):
You know.
Speaker 2 (47:20):
So it's like, if I'm at the manager level, I'm
thinking about how I can have personal wealth that is
visible to me.
Speaker 3 (47:27):
But is it not that your mind immediately goes to
gaming the system.
Speaker 2 (47:30):
It's not visible to the LPs. I think about how
if I were at the PM level, I was like, yeah,
of course I'm taking a market neutral long short book,
but I'm really just finding a closet way to go
long in video. During the AI bull market, it does
feel though that like part of the entire game is here.
You have these parameters and risk constraints and so forth,
(47:52):
and this cat and mouse game between those who want
to essentially find a way out of the constraints and
those who want to put them back in the box.
Speaker 3 (48:01):
Yeah, that seems to be a fundamental tension, although I
imagine it exists, you know, in some other funds as well.
Speaker 2 (48:07):
And I just like the fact that all this bonus
money is the business itself. I think that's a really
important idea when you hear about bonuses, et cetera. This
is not just like someone getting their Christmas bonus.
Speaker 1 (48:17):
This is the business. This is the business.
Speaker 3 (48:20):
Shall we leave it there?
Speaker 1 (48:21):
Let's leave it there.
Speaker 3 (48:22):
This has been another episode of the Odd Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1 (48:28):
And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2 (48:31):
Follow our producers Carmen Rodriguez at Carmen Ermint, dash Ol
Bennett at Dashbot and kill Brooks at Kilbrooks. More Odd
Lots content, go to Bloomberg dot com slash odd Lots,
where we have a daily newsletter and all of our episodes,
and you can chat about all of these topics twenty
four seven in our discord Discord dot gg slash od Loots.
Speaker 3 (48:49):
And if you enjoy odd Lots, if you like it
when we talk about why bonuses are the business, then
please leave us a positive review on your favorite podcast platform.
And remember, if if you are a Bloomberg subscriber, you
can listen to all of our episodes absolutely ad free.
All you need to do is find the Bloomberg channel
on Apple Podcasts and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Special Summer Offer: Exclusively on Apple Podcasts, try our Dateline Premium subscription completely free for one month! With Dateline Premium, you get every episode ad-free plus exclusive bonus content.