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July 9, 2025 64 mins

Cian Walsh, Head of Hedge Funds and Private Debt at Formue, joins Alan Dunne to explore what it means to allocate capital when the macro regime, client expectations, and the structure of markets are all in flux. He explains why the 60/40 model obscures more than it reveals, how he is adapting institutional frameworks for thousands of private clients, and what changes when you view hedge funds not as a bucket, but as a function. From the discipline of sizing trend in a sideways regime to the slow shift from vintage private credit to evergreen, this is a conversation about building portfolios that can hold together when the ground moves.

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Episode TimeStamps:

02:12 - Introduction to Cian Walsh

05:30 - How does institutional asset allocation stand out?

06:39 - Asset allocation in a shifting regime

09:33 - A move towards mass customization

10:26 - The 60/40 portfolio is dying - what is next?

13:28 - The challenges of implementing a total portfolio approach

17:16 - Dealing with underperforming strategies

20:09 - More growth or more all-weather?

23:30 - Why Walsh believes in systematic trading

28:51 - Do Walsh hold any long volatility strategies?

30:04 - Walsh's process for selecting managers

36:55...

Mark as Played
Transcript

Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
It's very much a creditfocused investment mindset about
not making mistakes, beingsufficiently diversified, and putting
together a robust portfoliothat's going to generate income over
time. So, there is aconvergence there which we need to

(00:21):
be aware of. I think that'sthe right approach. You're getting
an extra element ofdiversification there as well.
Imagine spending an hour withthe world's greatest traders. Imagine

(00:43):
learning from theirexperiences, their successes and
their failures. Imagine nomore. Welcome to Top Traders Unplugged,
the place where you can learnfrom the best hedge fund managers

(01:08):
in the world so you can takeyour manager due diligence or investment
career to the next level.Beforewe begin today's conversation,
remember to keep two things inmind. All the discussion we'll have
about investment performanceis about the past and past performance
does not guarantee or eveninfer anything about future performance.
Also understand that there's asignificant risk of financial loss
with all investment strategiesand you need to request and understand
the specific risks from theinvestment manager about their products
before you make investmentdecisions. Here'syour host, veteran
hedge fund manager Niels Kaastrup-Larsen.

(01:30):
Welcome and welcome back toanother conversation in our series
of episodes that focuses onmarkets and investing from a global
macro perspective. This is aseries that I not only find incredibly

(01:54):
interesting as well asintellectually challenging, but also
very important given where weare in the global economy and the
geopolitical cycle. Wewant todig deep into the minds of some of
the most prominent experts tohelp us better understand what this
new global macro-driven worldmay look like. We want to explore
their perspectives on a hostof game changing issues and hopefully
dig out nuances in their workthrough meaningful conversations.
Pleaseenjoy today's episodehosted by Alan Dunne.
Thanks for that introduction,Niels. Today I'm delighted to be

(02:17):
joined by Cian Walsh. Cian isHead of Hedge Funds and Private Debt
at Formue, in Norway. Formueis one of the largest independent
wealth managers in the Nordicregion. In his role, Cian leads a
team responsible for selectingand allocating the hedge fund and
private debt managers. He'sworked in the markets over many years
on the sell side and the buyside. Was previously an emerging

(02:40):
market debt portfolio managerat BlueBay. Cian,great to have you
with us. How are you doing?
Thanks very much Alan. Greatto be here.
Good stuff. Great to get aNordic perspective. We haven't had
that before I don't believe.And you've had an interesting route
to living in the Nordics. Iknow you're a fellow Irishman, but
you've taken along aninteresting route to ending up in
Norway. So, tell us a bitabout your background.

(03:03):
Yeah, it's, it's been, it'sbeen quite a journey. So, as you
say, Irish, grew up inIreland, but only until around 8

(03:25):
years old. Then my familymoved to Africa, to Zimbabwe. So,
I guess that was my firsttaste of emerging markets. Spent

(03:45):
about six odd years there,then back to Ireland, and then on
to Scotland to study. Istudiedactuarial maths and statistics
and found myself working inLondon on the sales side, initially.
I was hired by a client afterabout 18 months/two years and then
moved on from there to astartup firm called BlueBay Asset
Management. So, there was, Iguess, my first sort of real money
management experience. Istarted initially on the hedge fund
and then found myself startinga new fund on the local currency
side.
Good stuff. And obviously atsome point you made the jump from

(04:06):
trading and portfoliomanagement to allocating. Did that
coincide with moving to the Nordics?
Yeah, it did, actually. So, Ispent around 8, 9 years in BlueBay,
in London, and moved around2011 to Norway. I actually ended
up working for one of myprevious clients that was an investor
in my fund. So, taking thestep from being a frontline money

(04:30):
manager to being an allocator.
Good stuff. Give us a sense onFormue and the business there (obviously
it's one of the largestindependent wealth managers in the
region) in terms of the size,and the types of clients, and the
types of portfolios you're running.
Yeah, it's an interestingsetup. It's certainly different to

(04:51):
what I was exposed to in thepast, which is mostly an institutional
client base. Basically, whatwe do very well is repackaging or
introducing a sort ofinstitutional asset class diversification
to private clients. So, thatmeans we do run portfolios that go
everything from liquid publicassets (both debt and equities),

(05:15):
all the way through to vintagestructures in private equity and
real estate. My area today isresponsible, as you said, for the
fund of hedge funds portfolio,but also for the private credit area.
Very good. And I mean you talkabout kind of an institutional approach

(05:37):
to asset allocation, etc., Imean, would you see the approach
being different to what youget maybe from other management?
Is that kind of by-design?
Yeah, you know, there are alot of interesting things happening

(06:03):
at the moment in terms ofdemocratization of asset classes,
specifically the alternativespace. So, it's not an easy one to

(06:33):
find the right solutionseither. Youknow, there is the colored
distributor model which, youknow, you basically white label or
you find a fund that you cansell to retail and you distribute
it accordingly. And then theother approach, which we tend to
favor, is by being aninstitutional investor diversifying
a portfolio. So, for example,be it in hedge funds or be it in
private credit, puttingtogether four or five top managers
and selling the sort ofpackage solution, or distributing
the package solution to ourprivate clients.
Very good. So obviously you'vegiven a sense on the kind of the
asset allocation approach. Imean, there's a lot of talk in the

(06:53):
markets about a new regime inmarkets, a potential regime shift.
Obviously, we had a higherinflation environment for a few years
there, but that's come down alittle bit. Imean,from your perspective,
do you think the macrobackdrop now calls for a different
approach to asset allocation?
Yeah, certainly from myperspective. I mean, it's not to

(07:23):
say that we're doing anythingright-here, right-now, but it's under
consideration and on thedrawing board in terms of what is

(07:53):
the actual right framework?You know, I think we have had a sort
of classic strategic assetallocation model in the past which,

(08:26):
as you well know, and you'vewritten about as well, is that it's
quite a siloed approach.So,you have, you know, private equity
is just there. There's noconsideration for the common risk
factors that you will findacross the equity markets, be it
private, be it public;similarly for credit. So,I think
those areas are areas forimprovement, areas to explore. You
can see, from the likes of ManGroup and others, that they're trying
to adopt or are adopting atotal portfolio approach which will
consider all the risks. Whichin a sense should make a portfolio,
from an asset allocationperspective, far more flexible than
what we've used to in thepast. Typicallyspeaking, you've
had a 30%, 40% allocation offixed income, similar to equities,
and then a bucket of 30%, 40%to alternatives. And that's the model
we've run for many years. Buttherein lies the first problem, right?
Ifyou bucket all thealternatives together, then you're
assuming the liquidity is thesame, you're assuming the risks are
the same. They're clearly not.You can go everything from asset
backed investment grade debtto venture capital on the equity
side. And you've got two very,very different risks and two very,
very different liquidityprofiles. So, in that sense it doesn't
really make a lot of sense tobucket them together.

(08:51):
That's kind of a change thatyou've gone through in recent times,
is that fair to say?
I would say we're in the midstof it and figuring out the right
way to do this. You know, ifwe had a client of one, it will be
a fairly simple andstraightforward discussion. We don't.
We have five, six, seventhousand different clients with each

(09:13):
with their own risk profile,all looking to express their own
preferences both for liquidityand for risk and return.
And obviously, you know,you've mentioned a large number of
clients, do you have modelportfolios presumably, and categorize
clients that way, or try andcustomize as much as possible?

(09:34):
Yeah, I think the market hasmoved in a direction of, call it,
mass customization. Whichbasically means that in order to
succeed, from the commercialaspect, you need to have that menu

(10:04):
approach where people have thefull suites at their disposal. At
the same time that can end upwith a very complex portfolio building

(10:25):
exercise. Veryoften that'sbeyond the expertise of the clients
in question. They might want asimpler approach. And you can certainly
see that out there in the sortof larger private banks, be it a
JP Morgan or Morgan Stanley.That's the approach they tend to
go down, after a while, whereyou have the menu option for anyone
that wants to choose thatroute and you have the kind of one
stop portfolio solutions ormodel portfolios as you'd point towards.
Interesting. And I mean yououtline, at a high level, the asset
allocation with still a decentallocation say to fixed income, 30%,
40%. And obviously a lot'sbeen written about the 60/40 portfolio.

(10:48):
It was the standard for a longtime. And obviously, 2022 was particularly
challenging for that kind ofapproach. Obviouslyyields are higher
around the world now, sothere's certainly an attraction for
fixed income. But at the sametime there are questions around the
kind of the role of durationin portfolios. So, what's your thoughts
on all of that?
Yeah, I think, you know, youtouched on it earlier, we believe

(11:16):
we're in a different macroenvironment, a sort of new economic
era, which probably requires adifferent set of assumptions than

(11:43):
what we've been used to. Youknow, what we've been used to, there,
I'm referring really from the‘90s all the way through to 2020

(12:15):
when you've had effectivelydeclining yields, and you've had
that diversification benefitfrom bonds and equities. That's really

(12:38):
where the 60/40 portfolio wasborn. And so, post that, now we're
in a period where we haveinflation slightly higher than, I

(13:07):
guess, comfort zones (for wantof a better word), a bit more volatile
and less clear. Ifyou lookthrough financial markets, and the
history there, what you findis bonds and equities (specifically
duration within bonds) tend tocorrelate quite highly in those periods
when you've got more and moreuncertain path than inflation. So,
what that does say is that youneed to really think about your diversification.
The reason bonds are in that60/40 portfolio, specifically duration,
is really to do thatdiversification job. And if that's
not doing that job that well,then you need to find other things
that are going to do that joba bit better. Anotherthing can be
a fund of hedge fundsportfolios, for example. You can
also look towards, you know,higher yielding credit - floating
rate credit, which willgenerate that income or that yield
without the risks of havingthat underlying duration component.
So,in terms of the assetallocation model, I think if you
start thinking about a totalportfolio approach, essentially,
you've got your equity on oneside, you got your debt or credit
on the other side, and inbetween you have these, what I term
as diversifiers. Anddiversifiers can be that fund of
hedge fund strategies. It canalso be duration. It can be things
like gold or things thatreally don't correlate with either
debt or equities. ButI liketo separate both the credit and the
equity side of things simplybecause the investment approach for
each one of those isinherently different. Credit is all
about avoiding losses andgenerating income. With equities,
you're looking for growth,you're looking for compounding returns,
you're looking for the upside.

(13:28):
Yeah, interesting. And, I meanobviously, you kind of make the case
for a total portfolio approachand it is something that we're hearing
a lot more about lately frominstitutions. I mean, practically
it sounds like common sense,and I think it is. But I think the

(13:56):
challenge with executing totalportfolio is just maybe more organizational
in terms of often you havemore siloed approaches. So,a firm
like Formue, is that achallenge to kind of be nimble enough
to execute that totalportfolio where you're kind of literally
deciding between, say, privateequity and something very different,
such as a hedge fund strategy?
Yeah, I think it is difficult.It's not easy and I think it's difficult

(14:25):
for everyone. You have someinvestment communities where the
board is setting theirinvestment lineup or strategic asset

(14:48):
allocation. And in that sense,you really don't have that ability
to look towards a totalportfolio approach. ButI think when
you distill it down andseparate out the risks into that
(as I touched on) sort ofthree asset class, be it bonds, equities
and then diversifiers (andthat encompasses both public and
private in each section), thenI think you're some ways along the
road. Maybe the event eventualoptimal solution is a hybrid somewhere
between the two, where youhave the rigid framework of the SAA
which anchors your portfolios,if you will. But at the same time,
you're acknowledging that themarket environment has changed, and
you need to really tilt oralter your exposures to reflect that.

(15:12):
And obviously, alternativesare a key part of the portfolio,
as you mentioned, and that'severything from kind of privates
to public markets. I mean, Iguess dealing with high network clients
and private clients, there aredifferent degrees of sophistication.
So, is there a big educationchallenge in executing that side
of the portfolio for clients?

(15:34):
Yeah, there is. I mean thereis, call it, a knowledge gap. And
you have this competingproduct as well. You know, you give

(15:59):
them menu approach to privateclients. Initially they're going
to be comparing you againsteveryone. And very often you end

(16:19):
up comparing apples andoranges or apples and bananas, for
want of a better expression.So,it's not as simple as, you know,
going to, call it, aninstitutional level investor and
basically distilling all thenumbers into risk and return and
presenting them accordingly.Here you're more about, okay, what
is the function of this in theportfolio? What is it going to do
for you? And focus on thatside of the equation. So,there is
storytelling involved, thereis educational involved, but it's
more about customizing thatportfolio and that risk profile for
each individual client so thatthey understand the risks and the
type of volatility they shouldexpect around the portfolio.
And I mean, fair to say, then,the clients wouldn't necessarily
understand or have a strongappreciation for all of the various

(16:43):
strategies that you allocateto, but it's more understanding where
they fit from a roleperspective. Is that it?
Correct, yeah, it's afunction. So, I like to use the expression,
you know, if you think of yourhedge fund portfolio, to use that
as an example, that's theforest. You don't start talking about
the trees. That's theindividual components of that portfolio.

(17:04):
But more the forest is thereto do this for your portfolio. And
I think once you startfocusing a lot on that, then I think
the sort of educational aspectbecomes inherently easier.
How about when strategiesbecome more challenged, or maybe
are not fulfilling the rolethat you were hoping for them to

(17:27):
play in the portfolio? Doesthat create challenges from that
perspective?
For sure. I mean this is upyour back alley now, in terms of
trend and systematic. Youknow, that's probably the most challenging

(17:53):
strategy to explain. It is ablack box for most people. And, you
know, questions will always beraised when it underperforms as it

(18:14):
has done since 2022, in fact.And our results have been okay. We've
had solid results inproductive capital in ’22, and generated
decent returns in ’23, ‘24.So,the vast majority of our clients
weren't really aware of thedrag that we've had from, call it,
the systematic exposure, whichwe believe is one of the few areas
which can really benefit from,call it, a higher inflationary backdrop.
But we have to be patient, asyou well know. I mean the odds are
you will throw in the toweland then suddenly it starts to work.
And that's absolutely thething you cannot do in this role.

(18:38):
And obviously, as you say,it's been challenging since ‘22.
2022 was a good year,obviously, for trend following and
many strategies like that, andeven 2021 as well. Is it easier if
clients have been through thatjourney for a number of years, and
then is it more difficult ifit's people have just come into allocating
to a strategy that theyhaven't seen work? Is that part of
the challenge?

(18:59):
Yeah, that is definitely partof it. So, the way we tend to look

(19:21):
at our hedge fund portfolio iswe'll focus always on the sort of

(19:42):
mid-cycle horizon. And that,for us, is a sort of 3 to 5 year

(20:04):
rolling period of returns.Andif we run the numbers on that
and show the history, I meanwe've been running the portfolio,
I guess it's coming up on 20years in the next couple of years.
So, it's got a fairlylong-term track. And what you see
very clearly is that the sortof 5 year rolling returns, annualized
rolling returns, sits prettystable over time. The 12 month rolling
returns can be anything from a-4, -5 up to a +25. And then 3 year
is somewhere in between.Thereare very, very few periods
where we've had a sort ofnegative 3 year rolling return period.
We're actually in one of thoseright now. And there the question
is, should you exit a manager,should you double down on a manager?
There's a whole lot of, theycall it, asset allocation or manager
selection discussions that goaround in that type of period.
Yeah. And is it fair to saythat, at a high level, you're trying
to achieve an all-weather typeexposure? I mean it's an expression
that gets bandied about a lotand maybe is not exactly how portfolios

(20:26):
are designed because obviouslysome portfolios are inherently more
growth oriented. So, would yousay it's more growth or more all-weather
in nature?
Yeah, I would say it's moreall-weather. We have elements of

(21:10):
everything in there. So, theway the portfolio has been set up

(21:47):
and run, the last, call it,the last decade, since I've been

(22:24):
here, has been it's there tobe both a complement to a traditional

(23:04):
60/40 public bonds andequities portfolio and a substitute.
Thereare a couple of ways youcan think about that. So, one is
the complement. You can add iton in a sort of, 20% of the hedge
funds funding, equally from a60/40 portfolio. So, funding both
from your bonds and yourequity side of things. And you improve
the risk/reward in youroverall book. And that's one way
of doing it. Anotherway ofthinking about it, which I prefer
to think about it, is let'sjust start with your bonds or your
equities. And if you startbuilding out your exposure in bonds
and equities, you start withyour passive index exposure, typically,
in order to control your costlevels. You move into your long-only
active both on the bonds andequities. Andthen there's a step
three there, which I believeis where hedge funds can really come
into their own (specificallylooking forward rather than looking
back), and that is utilizinghedge funds as your active public
market exposure. So, what thatwould mean is replacing your long-only
active equity manager with along/short 130/30 type set up within

(23:29):
equities. That,in itself, forme, if you look at it in terms of
potential alpha, it's aboutfive, six times what you would expect
from a low money manager. Andthe same is true on the bond side.
So,if you start thinking (andthis is again back to the sort of
a total portfolio approach),about, in that sense, an allocation
to hedge funds, for me,(specifically hedge funds that are
operating within credit orwithin equities, which are more kind
of risk taking type of hedgefunds or growth focus or higher return
focused), that's an allocationto active management. That's it.
It's not a specific allocationto hedge funds. Andthen the rest
of the hedge fund portfoliocan be geared more towards qualitative,
discretionary, macro orsystematic macro side of things,
which can really give you thatdiversification benefit when you
want it. So, I think the issuewith blending in both the equity
risks and the credit riskscomes down to that. So,your systematic
portfolio, your macroportfolio starts to work really well,
for example in ‘22. But yourreturn profile is going to be dampened
by the fact that you stillhave some credit hedge funds or still
have some equity hedge fundsin that mix. So again, separating
out those risks into thedifferent components aids portfolio
construction. It doesn'thinder it.
Yeah, and obviously you're anadvocate and a believer in the likes
of trend following, macro,quant, macro. I mean, do you think
the fact that you come from atrading background, you've been on

(23:54):
the sell side where you'veseen those kinds of trading strategies
work, is that part of thebelief? Iaskedthat question because,
obviously, not everybodyembraces these types of strategies
and often there's someskepticism about the durability of
the returns. But I mean, isthat part of it or is it just the
kind of empirical evidencesupporting them?
I think the empirical evidenceis one thing. I don't think you can

(24:38):
argue with that. I think theother part, I mean, the questions

will always come up (25:08):
Are there too many people doing it? Is the

(25:41):
alpha being taken away? I meanthe evolution of signals, the evolution

(26:11):
of trading models, itcontinues. The research continues.
So,I think anyone who wantsto really think about how things
evolve, about how markets andhow durable some strategies are,
and how not. I mean, I thinkthe book from Jim Simons, or by,
was it Gregory Zuckerman thatwrote it, The Man Who Solved the
Market, that illustratesactually the history pretty well.
And that history is stillwhat's happening today. So,a model
that delivered alpha, it mighthave a half-life of 6 months and
then a new model comes in andreplaces that. So, there's a continual
evolution. Andthen when itcomes to systematic and trend, I
mean, it's an unemotionalstrategy. There are no emotions involved.
So, the data is what it is.There are always trends. There are
always things happening. Thereare always price signals. They're
not going to go away. So,Ithink when you distill it down to
the sort of basic facts, allthat happens in a drawdown like this
is that the risk levels dropuntil the models get a more sort
of conference signal and aclearer way forward. And I think
they're better. And I go backto, to ‘22 as another example. Systematic
and models, if you get adrawdown, or even in 2020 during
Covid, if you got hit on that,in those type of sort of systemic
shocks, the recovery from yoursystematic fund versus a discretionary
macro fund, the recovery fromthe systematic tends to be quicker
than what you'd see from amacro fund that has suffered a similar
drawdown. Obviously, there’spsychological impact as well. So,
that's a very interesting wayto sort of think about these things.
Soobviously, discretionarymacro has done better the last two
years or so, significantlybetter. So, they're on the front
foot, so to speak, whereas themodels are on the back foot. But
the models can tolerate that.They're not going to be hindered
psychologically, if you will,in terms of the opportunity set going
forward.

(26:31):
Yeah, but it sounds likeyou're a believer in having both
types of approaches in the portfolio.
Correct, yeah. Our macro bookis pretty much evenly split between
discretionary and systematic today.
Yeah, interesting. And I meanplaying devil's advocate, I mean
people say to me, oh, maybetrend following won't work in this

(26:51):
environment. Look, we've goton/off on tariffs, we've got tweet
risk, we've got policies thatlast for a day or two and then are
reversed, you've gotgeopolitical risk spikes and a reverse.
And obviously, we've seen thatchallenging trend following and people
say, oh, maybe that's thereason not to allocate to it. But

(27:12):
I mean obviously, that's notyour view but how do you kind of
park that risk or park thatscenario and retain your conviction
in these strategies?
Yeah, I think it comes down tosizing. You need to have the sizing

(27:36):
of your trend exposure can'tbe too big for the portfolio, can't
be too big (the risks or theway you put together a portfolio)

(28:01):
for individual clients. And aslong as you can control that side
of things you can toleratemost… You know, it’s not an easy

(28:25):
question to answer. There isno really right or wrong answer either.
I do think it's something thatcan work. I think you need to be

(28:51):
extremely patient. Wesawtrend following, in particular, it
took a while to work in Covidas well. It didn't work instantly.
It took a long time to workduring the financial crisis, in addition.
So, I think if you look backat the data, I think trend following,
if you look at the SocGenindex or something like that, it
was down 15% to 20% in 2007,and up 20% or 25% in 2008 when equities
were down 50%. And in the samefashion, in this question remark,
or risk taking or proprietarytrading that went on in those times.
Iknowseveral people who wereout of a job in 2007 by being short
the market. So, you know, youhave to respect the market and the
price action. I think trendsand models do that better than most.
And you can't be pigheadedabout it either. You need to be humble
and maintain that sort ofsensible, balanced risk approach.
Yeah, and it sounds like, onthis side of the book, it's all about
finding diversifiers, like asyou say, discretionary quant macro
CTAs. I mean, do you hold anykind of long vol strategies or protection
strategies or. again, is thata challenge, having a bleed when
you present that to clients?

(29:11):
Yeah, that is a biggerchallenge. I think when you start
pairing them with theirunderlying exposures, then you can

(29:35):
start talking a little bitmore, or being a little bit more
sophisticated in how you dothat sort of thing. So,examples
like I touched on earlier, ifyou have an equity allocation and
you want an active equityallocation, you could actually overlay
a trend or CTA with yourequity exposure. So, whether you
want to term that as portablealpha or whether you want to term
that as return stacking, Ithink you can call it one or the
other. But for me it's juststraightforward capital efficiency.
Obviously,that's not going tobe for everyone. That's for, call
it, the more sophisticatedlevel of investors, both on the private
and on the institutional side.

(30:06):
I mean, obviously you're veryactive in terms of the hedge fund
side selecting managers. Imean, give us a sense on the process
for manager selection. How doyou kind of survey the universe and
then go from having a broaduniverse of potential managers then

(30:26):
to bringing those through toactual allocation?
Yeah, I think it's the biggestchallenge. And I describe this as

(31:49):
the hedge fund manager Scurve. So, this is like your standard

(33:08):
product development S curve.So,you see the initial idea or initial
product start to be developed.The biggest risks you have are in
the first sort of 12 to 18months. And you know, a hedge fund
at that point is literallylike a small business. So, 9 out
of 10 small businesses go outbusiness and hedge funds are no different.
So,you need to have all theoperational investments, compliance,
regulatory, all those need tobe in place. So, that requires a
decent size to begin, to startwith. And then, you know, assuming
all those are done, you havethe sort of, call it, what we call
the growth period. So, thenext three to five years are crucial.
Obviously, your investmentreturns have to be delivered. Very
often you can get some verysizable risk adjusted returns in
that period. And then, whathappens after that? Thereare two
routes to go. Either yousuccessfully recruit, and develop,
and diversify your businessinto different areas or (and this
is kind of looking back thelast 10, 20 years) you assume that
you are the best ateverything, and you take on more
and more risks withoutdelegating those risks. And there
are a number of high-profilenames that have struggled on that

(33:31):
basis. So,there are very,very few firms that have managed
to grow from the, call it,single strategy into a multi strategy
and continually push andcontinually develop their internal
personnel in order to managemoney successfully in the future
as well as how they started.So, it's very much a sort of a psychological
evaluation as well. So,ahedge fund manager that starts out
often isn't that wealthy. Theyhave some money and, by all comparisons,
are very wealthy compared tothe average citizen. But in hedge
fund terms, he's pretty poor.After three to five years of success,
he can be pretty wealthy. Andthat, itself, results in a changed
risk profile for most people.They're no longer looking to shoot
the lights out. They'resuddenly looking to just conserve
and preserve capital. And yousee that very, very often as well.
So,there are a lot of factorsthere. I think that, to sum up, hedge
fund exposure to a particularhedge fund is not for life. It is
something that has ahalf-life. And that half-life is
somewhere between three andfive years, which, again, means in
a portfolio that we tend torun a fairly concentrated portfolio
which is around 10 to 12 namesthat will take up 80% of the capital.
And then we have a turnover ofmaybe one to two names per year,
which, again, ties back tothat sort of lifespan or half-life
of a hedge fund manager.
And for those one to two peryear, I mean, does it tend to be
top down or bottom up or a bitof the both? Or do you go out and
say, okay, you know, we coulddo it adding a new global macro manager,
or we could do it a bit moreon the quant directional side, or

(33:53):
is it more good managerspresent themselves to you?
It's a bit of both. I’ve seena typical situation when we might

(34:20):
exit a manager or considerexiting a manager is if they've deviated

(34:41):
from their strategy, that'slike, that's a no-go for us. Then
it's a straightforward exit.But if they've continued doing their

(35:19):
strategy and just caughtoffside by the markets. This happened
in Covid with one of ourdiscretionary macro managers. They

(35:55):
got it wrong. They were veryupfront, “We got it wrong guys. We

(36:19):
didn't think it would be asbig as a deal as it is.” They cleaned

(36:46):
out their portfolio the nextday. Wehad a long conversation with
them. We believed in theirprocess, the area they were focusing
on was emerging markets, butthey had built out a very nice portfolio
of pretty safe investments, inour view, which were heavily discounted
after Covid. So, what we endedup doing in that situation was doubling
down on our capital whilstrespecting the high watermark that
we had in place before.So,that's the type of decision we
have to take in a sense. Do weexit that manager and pick a new
guy at the bottom of themarket and pay full performance fees
or do we double down on themanager we believe is being a bit
humbled, is still a goodmanager (that doesn't change), and
come in on a very low sort offee deal, if you will. We'rein the
same situation now on thesystematic side. So, we have a number
of systematic managers whichare doing various different forms
of systematic trend across amultitude of markets. And then the
question for us would be,well, this guy has done much better,
their trend performance ismuch better. Should we just replace
one for the other? Butthen itbecomes more a question of well,
these guys are 20% under theirhigh watermark. I'm going to come
in and pay a new guy 20% or25% of their performance fees from
day one. And then once youstart backing out and working out
the math and the fees, youkind of figure out, well, I don't
really want to do that, atleast not here or not now. But are
there parts of this strategythat have worked particularly well,
of this new manager we'reconsidering? Infact, there is. There
is an equity piece, an equitymarket neutral piece that works extremely
well in this environment andit's a type of exposure we don't
have. So, maybe the rightdecision for us is to just focus
on that part of the portfolioright here and now whilst keeping
the rest of our systematictrend, which effectively has no performance
fees until they regain thehighwater marks. So,I think those,
the sort of capitalefficiency, the fees, fee net things,
being conscious of when youexit, why you exit, and what are
the alternatives. Is it betterto stay or is it better to be quit
and we want to move on tonewer pastures? Sothose are all
very valid questions and, aseverybody knows, I think costs can
really eat your returns very,very quickly if you're not careful.
But it does sound like, I meanit's absolutely valid, that fee sensitivity,
but maybe does that keep youallocated or at least it's an incentive

(37:07):
to stick with a manager. Ifyou didn't have that performance
fee element it might changenumbers, but it is still valid, obviously,
because if you need to findsomebody else, they have to be that
much better on a forwardbasis, isn't that right?
That's correct, yeah. So,suddenly they need to be 20% better

(37:29):
than what you have. That justmatches your returns.
Exactly, yeah.
So, there is a very strongargument for sticking with a manager.
I mean, you invested with themin the first place, so there must

(37:52):
have been something good aboutthem. Has anything changed? And that's
where I go back to the earliercomment. If their strategy has changed,
if they've deviated, ifthey've gone a little bit off piste,

(38:15):
then that's more of anargument for exiting than actually
poor performance.Poorperformance should be expected
from everyone from time totime. Otherwise you're running a
bit of a Madoff, or a Ponzitype scheme. So, we don't need to
go into those. ButI think youshould expect, on a portfolio of
10 managers, I fully expecttwo or three of those managers every
year to be having a poor yearand that poor year means like way
below their expected return profiles.
And I mean, obviously, feesensitivity is important. We've seen
the growth of the multi stratpod shops, multi manager pod shops
in recent times, which areobviously unapologetically expensive,

(38:36):
I guess it's fair to say. Imean, is that an impediment allocating
to those fees?
Yeah, I would say, actually,it's not an impediment because it's

(39:02):
the net of fee return streamthat you're really looking for. But

(39:23):
what is an impediment to thepod shops or the multi PMs for us

(39:47):
is the liquidity profile.So,the fees are one and paying away
half your fees. Nobody reallylikes to do that. But if you're getting
a very stable return stream of10% to 12% to 13% every year, you're
not really going to complaintoo hard about it. Butwhen you're
running a portfolio ofrelatively liquids hedge funds, and
by relatively liquid, I meanwe run a fund that has monthly subscriptions
and quarterly redemptions. Wecan't do that with an allegation
to the multi PM pod shops.Their liquidity profile is annual,
even less than that for anumber of the bigger ones. Sothat's
a bigger impediment to us thanthe actual fees. But fees are sensitive
as well. I mean, we're fullytransparent with our end clients.
And again, if we startreporting a big chunk of our portfolio
as 40%, 50% of your totalreturns are going away in fees, you're
not going to get a lot oftakers on that type of argument either.
Yeah, and I mean, youmentioned the S curve for, you know,
the hedge funds, their growthfrom early stage to more established
and more diversified managers.I mean, at what stage are you happy
to allocate? I mean there'sobviously pros and cons at each stage.

(40:11):
But are you happy tounderwrite kind of early stage risk
with emerging managers?
Yeah, we have done so and we,in fact, run a sort of an early stage

(40:43):
seeding program. That programwe're running via an investment in
Blackstone today. AndBlackstone has a seeding vehicle

(41:13):
for new starts. Wedon't havethe manpower, the capacity to do
all of that ourselves, but,back to the S curve, that sort of
early stage return stream isparticularly attractive. So, there
are a number of things thereto unpick, but you do need the capacity
and network to do that jobsuccessfully. But,early-stage managers,
we have invested off our ownhands. Very often it's been sort
of a very good team that we'veknown very well spinning out and
looking to form their ownfund, you know, managers. So, we
have had some early-stage andsuccessful spin outs from larger
enterprises.
Interesting. And I mean, youmentioned the experience with the
Blackrock industry. Are theremanagers that have kind of graduated
from being in kind of anearly-stage allocation into being
more of, you know, a fullallocation in the portfolio?

(41:35):
Yeah, we tier them, so we havea sort of entry level for us is a
2%, 3% sort of, call it, astakeholder position, if you will.
And then we move up into, callit, a tier 2, and that's somewhere
between a 4% to 7% allocation.And lastly, we have our tier ones,
and they're up to sort of 7%to 10% type allocation. Some of them

(41:59):
do go up to 11%, 12% dependingon performance etc., but those three
tiers tend to be how we run things.
I mean, the process ofselecting managers is, you know,
subject to a lot of differentbehavioral biases. To my mind it's
quite a different skill toasset allocation or trading but curious
to get your perspective on that.

(42:21):
Yeah, it definitely is. Thereare a lot of things to cover there.
The due diligence, operationaldue diligence can be quite intensive.

(42:50):
We do use Auburn and theirdata and analytics. If we feel the
need to run an operational duediligence in conjunction with them,

(43:20):
that's something we happilypay for. So, it is a different skill
set. It requires a little bitmore time. Ithinkthe way we like
to approach it is, you know,let's just take equity long/short
to start somewhere. So, theequity long/short universe, you know,
we have tended to go away fromthe global long/short managers and
focus much more on sectorspecific where we believe there is
a greater alpha potential.Andwithin the sector specific we've
looked at the likes of energytransition, health care, you know,
basically subsectors of theequity market where we see mega trends
in place or structural trendsin place. Then it's about finding
the right manager. Theyprobably are running a low net beta
which we're happy to take, inthat scenario, because it sort of
aligns with our sort of macro,or backdrop, or other longer term
structural trends in the market.

(43:44):
And, I mean, it sounds quiteintuitive and compelling. You know,
you have these structuraltrends at play which should throw
out better opportunities. Imean, do you think your experience
supports that?
Yeah, certainly the lastdecade or so it's paid a dividend.
You know, we have hadinvestments since 2013, ‘14 in a

(44:10):
manager running a sort of 40%net in long/short tech. We've had
a similar experience withinhealthcare. And latterly, since around
2018, ‘19 we've had a managerfocused on (a little bit more market
neutral) the energytransition. And all of those have

(44:30):
been very profitableinvestments for us.
Okay, interesting. I mean interms of, I suppose, the main challenges,
we did touch on some of thebehavioral biases briefly. You mentioned
some of the decisions to exit,style drift, etc. I guess there's
always the obvious ones likechanges of PMs. But I mean, it's

(44:52):
one thing saying you shouldexpect a drawdown, you know, and,
but presumably when it's init, managers in the drawdown, it
can be challenging. I mean howdo you reconcile that kind of qualitative
perspective with thequantitative? Do you have hard stop
loss limits, that kind ofthing for managers?

(45:12):
We don't run hard stop losslimits, but, typically speaking,
reviews would occur when wesee a manager running, you know,

(45:53):
one to two standard deviationsaway from our expected returns. And

(46:15):
you know, just to clarify howwe would view our expected returns,

(46:39):
we tend to run it on a riskbasis. Youknow, this sort of hurdle
to come into the portfolio forus is a Sharpe or a risk/reward of
1. So, your returns are goingto match your risk on a one-for-one
basis. Andso, that kind ofgives us an oversight as to what
we should expect and then, youknow, 1 to 2 standard deviation from
then, depending on the market,is it a sort of systematic shock
or system wide shock or is itsomething a bit more manager specific
or market specific? Andtheytend to create reviews first, conversations
around that, why it'shappened, what the approach is from
the manager, what they'relooking to know do, does that view
from that manager align withour view on our interpretation of
the market environment? Wewill always cross check, find out
more. Imean,if it's an eventdriven European manager involved
in a few sort of mid capsituations, we have a number of others
we can call to fact check, toclarify, to verify is this the right
approach or not and is this aninvestment still suitable for us
or not? So,all thoseconversations take place around,
you know, specific drawdownsand that's in addition to the sort
of monthly quarterly catch-upwith managers that we tend to run
regularly.
Okay, maybe just switchinggears a little bit. I mean obviously

(47:01):
you have responsibility forhedge fund allocations and private
debt, private credit, which Imean are quite different from trading
strategies. Does that requirea different mindset, a different
perspective when you'relooking at that universe than when
you're looking at trading strategies?
Yeah, it does. And it's acontinually evolving space on the

(47:38):
private credit side of things.So, on the trading side it's a bit

(48:01):
more, sort of, you're lookingmore on the risk - how do they manage

(48:25):
risk on the portfolio level?How do they control in terms of drawdowns?
Onthe private credit side,that has to be done at the investment
level. You obviously don'thave the liquidity to manage around
any specific events. So, it'svery much a credit focused investment
mindset about not makingmistakes, being sufficiently diversified
and putting together a robustportfolio that's going to generate
income over time. Andthereinis a little bit of the problem set
with competing products frombe it high yields which offer daily
liquidity. Even though I thinkmost people in markets realize that
that daily liquidity is alittle bit of an illusion at times.
Andnow we have the likes ofApollo and the likes of a number
of other bigger firms, on theprivate side, claiming that the liquidity
on the private side for sizeis coming close to matching that
on the public size. So, thereis a convergence there which we need
to be aware of. Andthere isalso, you know, as I said, the competing
products between public versusprivate, which is the right one?
Should you have a combinationof both? I think that's the right
approach. You're getting anextra element of diversification
there as well.

(48:48):
And obviously you've gotresponsibility for the private debt,
private credit side of theportfolio as well as the public market
hedge funds. Does that requirea different approach, a different
mindset when you're thinkingabout allocating on that side?
Yeah, it does. I think, justto summarize that very quickly, on

(49:19):
the hedge fund side you'retypically going to be looking for
or evaluating the sort ofability to manage risk. Whereas,

(49:50):
on the private credit side Ithink it's more of the ability to
manage the sort of thebusiness, if you will. So,you need
to ensure that you have theloan demand on one side or the ability
to originate all your loans.And that's really where the alpha
component is. So, what I wouldsay on the private credit side, the
key difference is that there'sless of a quantitative approach.
There's far more of aqualitative assessment and, obviously,
the usual sort of bells andwhistles in terms alignment of incentives
from the managers, analysts,all the way through to the whole

(50:11):
organization. So, it is adifferent ball game when it comes
to that. Youknow, the other,I guess, key aspect is, once you're
in a private credit fund,particularly a drawdown, you are
there for a considerableperiod of time. So, your time horizon
is not as flexible as it is onthe hedge fund side where you might
have a turnover every fewyears. Onthe private credit side,
it's a much longer-termbusiness building aspect. So, you'll
typically be around for, orhave that relationship, or increase
the value of that relationshipover the better part of a decade.
So, as you say, it's notsomething you can exit very quickly
in some situations. So, it'smuch more of a long-term relationship,

(50:31):
I guess. Does that make you alittle bit more cautious when it
comes to manager selection,would you say?
Yeah, I think that's correct.You know, a hedge fund investment

(50:54):
for me would be more, if youthink of your classic sort of equity

(51:15):
analysis, equity investments,whereas on the private credit side
you're going to be lookingmore as a credit investment. And

(51:44):
in credit investments you wantto avoid losses at all costs. So,
you want to ensure you've gotenough structural protection to manage

(52:17):
the downside, the ability ofthe organization to run workouts
when there's a need to runworkouts and avoiding the simple

(52:47):
mistakes. I'mnot going to saywe're perfect. We have made mistakes
in the past. We've learnedfrom them. The private credit markets
are evolving, have beenevolving for the better part of the
last 10 years. I mean, theybasically didn't really exist pre
the financial crisis. It wasessentially a financial crisis, baby,
if you want to put it in thoseterms, for outside allocators. Andobviously,
the evolution of the marketstructures, I mean, they've started
with the sort of vintageclosed end structure. And even back
in 2017, when we first begandipping our toes in private credit,
we were pushing pretty hardbecause we saw no reason why there
shouldn't be an evergreensolution to private credit. Whenyou
add up all the costs of duediligence processes, and to re-up
into the next vintage, andthen the sort of frequency that those
come around, and they're muchhigher frequency than you'd see from
a private equity player. So,in that sense, there's a huge sort
of business burden in terms ofcosts of doing that type of approach
from a vintage structure whichis basically, you know, removed from
the liability side of theequation for people looking at more
semi-liquid structures orevergreen instructions for private
credit. Andobviously, youknow, the key thing there is you're
avoiding your J curve. You'recoming into either a relatively new
portfolio or a portfoliothat's already ramped up pretty well.
So, you know what you'regetting at the outset.
Yeah, and I mean the termevergreen obviously reflects the
fact that there is liquidityin these structures. I mean, is there
a question about what is the,I suppose, validity of the valuations
that you're getting out atwhen it comes to getting out, or
how do you think about thatrisk and what's been your experience
in that respect?

(53:08):
Yeah, I mean they're prettynew. So, the semi liquid structures
have been around the betterpart of three years. So, we are evolving

(53:44):
our business, as well, interms of how we do that and how we

(54:04):
construct a diversifiedportfolio of that type of asset.
I think the simplest way iswhere you start balancing the liquidity

(54:35):
that is automaticallygenerated from a portfolio of private
debt. So,that means thecoupon income, the amortizations,
when they're in place. And ifyou can match that with your gates,
investor level gates of 5% arepretty common on a sort of quarterly
basis. So, you know, you cando the math. You're investing for
the better part of 5 yearsfrom start to finish. Andif you
think of the average life of aprivate credit loan, it's going to
be around 3.5, 4, 4.5 years.So, in that sense, when you put together
a portfolio then you can seethat the cash generation in the portfolio
will allow for that type ofliquidity. Nowwhere you have to
be cautious, obviously, is ifyou don't have investor level gates
and you have fund level gates,then you can be sitting with investors
or a particularly largeinvestor that might take up the full
5% on one gate or one quarterand then you don't have that liquidity.
So,I think it's a veryimportant part of the due diligence
process in order to ensurethat you're not sitting short on
liquidity when you don't wantto be in that position ever. Whether
it's private credit or whetherit's rich hedge funds.
Yeah, you mentioned that it isstill a relatively new asset class

(54:59):
in the grand scheme of things.It has kind of been around since
the financial crisis. So, withany asset class that, I guess, emerges
and is new, on the one sidepeople are pointing to great opportunities

(55:23):
and other people a bit moreskeptical pointing to potential risks.
Imean,from your perspective,are there any obvious areas of concern
or, as we went into atightening cycle, were you worried
about default risks escalatingor anything inherently part of the
private credit structure andthat side of industry that you think
needs to be looked at or wouldbe a concern?
Yeah, I think it's, you know,with any sort of new asset class

(56:03):
you're always going to havethat risk that there's too much money

(56:34):
that comes in too quickly.And, you know, that is certainly

(57:02):
a risk for some parts, maybethe sort of investment grade direct

(57:32):
lending areas or the areas ofthe market which are relatively commoditized.

(58:03):
And there are some, that's forsure. ButI think if you're smart
about it, you know, there is aclear benefit to private credit versus
public credit, both from theborrower's perspective and from the
lender's perspective. And Idon't think that's going away. That's
a structural shift, astructural change. The banks are
not going to be the mainprovider of these types of loans
anymore. It is going to beprivate credit funds. And I think
that's fairly obvious.Itdoesn't really matter which material
you read, you're going to endup with that similar type of conclusion.
And similarly, you have thesize, the absolute size of the asset
class. Youknow, there are alot of people looking at the… I think
the latest numbers I saw were,were 2.5 to 3 trillion in size, which
is vastly bigger than what youcan find in the real estate market
today. Therein lies the sortof conundrum for us and for many
other asset allocators outthere. Ithinkif you look through
most asset allocation modelstoday, you're going to find a far
higher weighting to realestate than you will to private credit.
And already, based on justmarket size, you should have the
opposite. You should haveprivate credit as a bigger component.
Butagain, lack of history,lack of track record, lack of going
through different cycles. Andhow robust is the private credit
model? How robust are theindividual managers that are out
there today? And can theysurvive a credit shock or a systemic
shock of the magnitude we'veseen in the past? So,I think those
are all valid concerns, but Ithink once you address all of those
and do your homework you comeout with a similar conclusion to
what we have, which is that itis a valuable component. It's a yield
component for your portfolios.It is a fairly effective yield replacement
for public fixed income. AndIthink the last point, which is probably
very relevant for a number ofpeople, it really does depend on
your jurisdiction and howcredit or debt investments are treated
from a tax perspective. Butmore often than not the sort of private
credit due to the liquidity istreated more as an equity investment
from tax reasons. So, youdon't have the coupon income that
you get charged tax on orincome tax on. So, I think that's
also a valid point and anextra, almost a hidden benefit in
a way or a less known benefitfor many investors.
Interesting. Credit as anasset class, public or private, it

(58:27):
can behave like equity sometimes in more risk-off periods. And
equally, I guess, there can beperiods where equity markets might
be flatlining and, obviously,in the credit markets you're picking
up the coupon, the income. So,it could be advantageous from that

(58:52):
perspective. Doyou look atthe two asset classes from that perspective
in terms of the relativeattractiveness of equities versus
credit, you know, maybe on amulti year basis? And until the allocations,
are they pretty stable allocations?
Yeah, I mean, I think thatcertainly we in the investment team
look at it in that way. Youknow, I think maybe the future state

(59:27):
for putting together assetallocation portfolios are, I wouldn't
term it as sort of tacticalasset allocation, which I think is

(59:54):
much more short-term. I thinkthat's best left to hedge funds and
the other more short-term riskmanagers out there, but more of a

(01:00:25):
dynamic asset allocationapproach. So,I mean if you think
about the world or the marketcycles in sort of four simple cycles,
inflationary boom,disinflationary boom, stagflation,
and deflationary bust. Mostportfolios, the 60/40 model in particular,
have grown within thedisinflationary boom from the ‘80s
through to 2020, call it. Andpost there we're going through a
period of, call it, veryunstable growth. It's quite volatile
post Covid. You have inflationissues, and you have deglobalization
issues. So, whether we end upin more of a stagflation or a continuation
of what we've seen, or aninflationary boom, that remains to
be seen. Nobody knows, nobodycan predict that. Butobviously there
are certain investments whichwill prove to be more immune to those
type of environments than whatwe've had in the past. For want of
a better way of saying it, mysense would be that credit markets,
particularly well managedcredits with a focus on the downside
risks are likely to producesimilar if not better return or quality
of returns than you're goingto see from broad equity markets.
Okay, interesting. Well, we'recoming up in time and we do always
like to get some perspectivefrom our guests, towards the end
of the conversation, on Iguess maybe advice for people coming
into the industry or even, Isuppose, things you've done or read

(01:00:46):
through your career that havebeen influential. So, if you were
to give advice to somebody whowanted to develop a career in hedge
fund or private creditallocation, what would you say?
Yeah, you know I think read.Consume as much data as you want.

(01:01:17):
I think today, certainly inthe post Covid world, there are a
lot of very good sort ofpublicly available information be

(01:01:50):
it in the form of webinars orannual investor meetings. I think
in our own country, Norgesfund, Nikolai Tangen, who runs the

(01:02:24):
MBIM fund today, has a podcastwhich I think is fantastic and gives
you great insights into howthey think and how the best CEOs

(01:03:02):
in the world think. Atthesame time, they have an annual meeting
with, and they invite peoplelike Howard Marks and other sort
of well-known top investorsout there. And read. You know, some
of the best books out thereare… I think one of the ones that
I mentioned already was thatwith Jim Simons The Man Who Solved
the Market is a fantastic readfor anyone looking to get into hedge
funds. I’mnot saying it'srepeatable today, but there are techniques
and things in there which giveyou a hint as to how these programmers
or how systematic trend canwork in in the various different
markets today. Andthe otherone then, when it comes to sort of
asset allocation, is, I guess,the fear and greed or I think the
book from Howard Marks,Mastering the Market Cycle is a fantastic
read as well. It goes throughthe different market cycles. You
know that's not really whatwill generate you the alpha. It's
more the identification ofwhat the market perception is at
that time within that marketcycle. So,whether they're over optimistic
or over pessimistic those arethe key sort of areas in terms of
market pricing that you cangenerate some extra alpha. And that,
again, sort of you know leadsback to what I talked about earlier
in terms of a more dynamic andless static asset allocation over
time, focusing more on thekind of 3, 5, 7 year type cycles.
And really, I think the wholeasset allocation game is really about
stacking the odds in yourfavor. If you manage to do that,
manager selection is a distant second.
Okay, interesting. Well, yeah,that's maybe a follow up topic for
another day. But Cian, thanksvery much for coming on today. It's

(01:03:31):
been great to get yourperspective and hear about your thoughts
about allocating to hedgefunds and doing asset allocation.
AsI guess our guests willinfer from the conversation, it's
a world in the midst of apotential regime shift. We don't
know exactly what it's goingto look like, but it certainly is
changing and having goodthoughts on asset allocation is certainly
critical for navigating thecurrent environment. So, from all
of us here on Top TradersUnplugged, thanks for tuning in.
We'll be back again soon withmore content.

(01:03:51):
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