E235: The First Thing LPs Notice That GPs Never Think About

Speaker 1 When people ask me why I'm so interested in investing, the best way I explain it is the infinite game of investing.

Speaker 2 I think it's incredibly well said. And one of the things I've heard other people say, but the more I learn, the less I know.

Speaker 2 When I started my investment portfolio, I remember thinking I knew how to invest, I knew how to fix stocks, and I thought I was very good at it. Obviously, I knew nothing about deaf or anything.

Speaker 2 And then after Warden Creek, I had such a great experience there. I thought I knew the appropriate and only way to invest for institutions and even with families on the foundation.

Speaker 2 And it took me a couple of career cluongs and like Koongus to recognize how much I have learned, but how little I know.

Speaker 1 Alex, you've had a storied career going from Army to Morgan Creek to JP Morgan to Cleveland Clinic to Aberdeen, oftentimes starting groups at these allocators. So let's start with Morgan Creek.

Speaker 1 So you started there in 2005. What was your experience like at Morgan Creek?

Speaker 2 Lorn Creek was just such an excellent place to start as in the end was. And

Speaker 2 I didn't know that. I didn't know going into it that I was going to have this amazing experience.
It was a new investment team, our new investment firm, really.

Speaker 2 The University of North Carolina of Chapel Hill had hired Mark Yuschko from Notre Dame. He was a senior ambassador at Notre Dame.
He joined as the first CIO for UNC Chapel Hill of the UMP system

Speaker 2 in 1998.

Speaker 2 And then from 1998 until 04,

Speaker 2 the UNC endowment was one of the best performing endowments nationwide. And a large part of that was a reflection of the investment philosophy that Lan and Joel Morris Howden while at UNC.

Speaker 2 He wanted to do something bigger. He wanted to build something bigger.
So at 04, he took the investment team with him, sorry, Morgan Greek, capital management,

Speaker 2 and he brought this endowment model to the OCL,

Speaker 2 which today is quite ubiquitous, but over 20 years ago, these were really just buzzwords that we all had really word of before.

Speaker 2 So the fact that I was able to start with such a high quality team that had such a sophisticated way of thinking about the world and investing, it was really just gratuitous.

Speaker 2 The

Speaker 2 real focus of the portfolio and the management, and this was a little bit different than others,

Speaker 2 was

Speaker 2 Mark and his co-founders, a guy named Dutch Kuiper, came from Wellington, the CO/slash COO,

Speaker 2 and Dennis Miter, who was the sales care that brought relationships to help found the firm. The real focus that they recognized was that holistic management of investment assets had to move.

Speaker 2 So with that guy I got to join, you know, be a part of that and be a part of a team that was focusing on total portfolio mobile and focusing on it on a sophisticated brand.

Speaker 1 As you mentioned,

Speaker 1 David Twenton had just wrote the book on the modern endowment style. And Mark Yusko at UNC was starting to invest into asset classes like Venture and then offering that in Morgan Creek.

Speaker 1 As Morgan Creek went from zero to 10 billion in assets, what were the characteristics of the early adopter LPs that embraced the Morgan Creek model?

Speaker 1 And how does that relate to LPs today that embrace trends early? What are the psychographic characteristics of those type of LPs?

Speaker 2 The first thing I'd say is

Speaker 2 Laura, you mentioned this,

Speaker 2 and this was really what it was like, you had the book, Pioneering Portfolio Management, had just come out just a couple of years ago there.

Speaker 2 And it's not like today where people on Twitter, on TikTok, or World Subback, podcast, none of that existed. And so a lot,

Speaker 2 the sharing of

Speaker 2 these investment philosophy.

Speaker 2 And then also sharing of investment results.

Speaker 2 You went to Yale, you were in the endowment community. I remember back then, Nick Kubo

Speaker 2 used to put out an annual report on the performance of multiple tutions.

Speaker 2 And if you were in an endowment, you could see the list of how every institution did one by one.

Speaker 2 And you could see at the very top, you know, Harvard, Jack Meyer at Harvard, David Swetzen at Yale, the folks at Coden. I mean, it was just most consistent known at the top.

Speaker 2 And so that philosophy, that endowment model philosophy that David Swankin has filed and that we, World Vitus files as well. That was something new.

Speaker 2 But there was another key to the puzzle that Mark Dennis Wong Dutch realized early on.

Speaker 2 And that was that a lot of ultra-high network individuals or families, as well as institutions below a billion dollars, were receiving piecemeal solutions.

Speaker 2 from consultants, from banks, from providers.

Speaker 2 It was, you know, they might have a consultant that helped them with equity, someone else that did not be getting folks' income, someone else that may have helped them with alternatives generally, but there was nobody 25 years ago that was thinking about the total portfolio solution and thinking about the necessity of a spending policy that reflects the spending needs of the individual institution,

Speaker 2 as well as the liquidity availability of the underlying assets.

Speaker 2 If you're thinking of a multi-asset class approach that includes exposure to deep private asset that will not be liquid or semi-liquid asset like some absolute return funds and so putting that all together into one solution

Speaker 2 is something back then you know sophisticated endowments and other institutions would do

Speaker 2 if you were under a billion dollars didn't have your own investment office you really didn't have that holistic viewpoint and so that

Speaker 2 you know, which was brought for the Morgan Street clients ranging from 20, I think the smallest client on the team's asset sheet was 25 billion i went the largest individual client was one billion most were around 250 to 500 million assets so bringing that kind of holistic view as well as and this was that's something people talked about today a lot back then was still kind of moving

Speaker 2 uh forward thinking about access to high quality managers will differentiated philosophical viewpoint.

Speaker 2 So something that David talked about in his book that a lot of sophisticated investors talk about today.

Speaker 2 It is

Speaker 2 the view philosophically that if an investment manager is down performance-wise,

Speaker 2 that may be the best time to invest.

Speaker 2 And today, a lot of people know that a lot of people have heard this. Well, 45 years ago, 20 years ago, that was still very controversial.

Speaker 2 And a lot of performance we call this performance chasing, people trying to buy last year's wool.

Speaker 2 So that view

Speaker 2 and implementation

Speaker 2 of a holistic portfolio solution, recognizing that sometimes it's best to invest when a manager was down, that was new back then.

Speaker 1 One of the best times to invest might be when a manager is down.

Speaker 1 Presumably, that's because the entire market is down, the manager might have not made a mistake. It's just the nature of cyclical markets.

Speaker 1 And you also mentioned about separating sustainable returns or alpha versus beta.

Speaker 1 Alpha is somewhat intuitive. You might have structural alpha.
You might have proprietary sourcing. You might have a special right to win.

Speaker 1 What are some hidden ways that managers advertise beta in a way that maybe they mask it

Speaker 1 in a way that maybe it looks like alpha, but it's actually a high beta risk? How do you know when a manager is actually masking a high beta strategy?

Speaker 2 It's an excellent question. The first thing I'd point out, and this is something that

Speaker 2 seems to be systemic within the allocator community,

Speaker 2 I've seen it my whole career. I still see it to this day.

Speaker 2 When you look at pitch decks for managers, and when you look at the other side of a pitch deck, you look at the holistic well, performance report or risk report or

Speaker 2 something presented to an investment committee on the allocator side. So the GP GDP side about how that fund is doing.

Speaker 2 And then from the allocity side, when they're reporting to the investment committee or they're reporting publicly of their payment,

Speaker 2 something always jumps out.

Speaker 2 And that's a lot of statistics

Speaker 2 around risk or performance evaluation are focused, will have a number in there that just hard pay them.

Speaker 2 And so you'll see something and people will talk about, oh, you know, our beta or the beta fund, you know, it's 0.6 or 0.7

Speaker 2 and there are places in my career where we focused on a number where we wanted to have a beta exposure of x no or a given type of manager

Speaker 2 but

Speaker 2 data from cap m is just the starting point

Speaker 2 and when fine french did the three factor model and then the five factor model well if you want to do the five factor model from file and french cap m is the beginning part of it and the first part of it is beta which is just the factor exposure to the market's own

Speaker 2 problem is, a lot of allocators to this game do not do factor exposure work beyond data because beta is a factor. It's normal, the largest factor exposure.

Speaker 2 And moving beyond that takes a little bit of quantitative and qualitative work. So in large part,

Speaker 2 a lot of funds

Speaker 2 have been able to kind of get away with it because they are reporting a true number and they're just not talking about the other number as much.

Speaker 1 For those that don't know, Fama French improved on the capital asset pricing model, CAP M, and they found that there was additional factors like whether the security, whether the company was small or large, and whether it was value or growth.

Speaker 1 So they found other ways to more efficiently price the historic returns versus just the beta. of the stock.

Speaker 1 So by adding those other factors, you're able to more effectively price whether it's actually beta exposure, which is maybe it's a smaller value kind of investment versus where it's true alpha where it's outperformance for the same risk and return

Speaker 2 absolutely and that

Speaker 2 that's something that I find to this day

Speaker 2 one of the first analytics we always run I mean at least the last decade or so in just running through a pharma by factor model see what you're doing.

Speaker 2 They're part of the easiest thing to do is part of the easiest way to kind of suck that out.

Speaker 2 The thing where it gets tricky, I've discovered, is that for equity long only, equity long short, I didn't know how you modified it,

Speaker 2 it's relatively easy to come up with a useful factor model to give that whether a manager is adding,

Speaker 2 whether number one, whether they're adding alpha, number two, will tighten the consistency of the factor exposure that they have.

Speaker 2 Number three, whether you have any interest in even attempting replicate those factor exposures.

Speaker 2 If they're only giving you a beta to certain factor exposures, maybe that's the kind of of beta that you want. The top thing is,

Speaker 2 in my career, for macro managers, so like the bridgewaters of a world, for example, coming up with a good factor model to explain what

Speaker 2 very sophisticated macro managers like that are doing has always been important.

Speaker 1 Going back to the asset allocators that embraced this new Yale model in the mid-2000s and other forward-thinking LPs.

Speaker 1 What are some characteristics of either the institution or the individuals that are first movers in new strategies?

Speaker 2 One thing I always loved when sitting on the allocator side of the table is that allocators don't see other allocators as competitors.

Speaker 2 So they're very open to sharing information, very open to seeing processes, sharing about online strategies.

Speaker 2 Something that when I was working on Wall Wall Street, could get you fired with people, if you follow the competitor lab, even if we're selling

Speaker 2 an app in what they were working on.

Speaker 2 For the ones that are able to kind of leave forward in terms of their investment focus and hopefully blow on their investment outcome, it's really two separate things.

Speaker 2 Number one, and this is the first part, not as exciting, but it is useful, is

Speaker 2 operationalization of

Speaker 2 e-processes

Speaker 2 that allow the investment team to focus on and on models.

Speaker 2 So a lot of times, actually in my career, I used to go or to school also.

Speaker 2 A lot of times you'll have young analysts or member key investment team focused on what we call ETL processes. extract, transform, and model.
So they're extracting data from different sources.

Speaker 2 They're transforming it into a way that can be used by others. And then they're loading up up somebody's with them.

Speaker 2 So a lot of the Excel cleanup, a lot of PowerPoint, a lot of PDFs that they might wow, they want to Friday night.

Speaker 2 And all of that work,

Speaker 2 we always said

Speaker 2 later in my career, you know, if this is, if the task that we're doing is something we could hire a high school student to do, well, we should not be doing it.

Speaker 2 Now, if this is just a time-intensive task that doesn't really add value, then it's not worth all schooling. People, the real focus on the investment team, the real value add is analysis.

Speaker 2 Analysis of the investment, analysis of markets, analysis of the portfolio, everything focused on the analysis and the decision board problem analysis.

Speaker 2 So the second thing, so the first is really operationalizing fast key.

Speaker 2 The second is focusing on,

Speaker 2 and I hate to use this term because people have given you for so long, but I think it's appropriate, is focus on where the plot is going to,

Speaker 2 not where they've right now.

Speaker 2 So So, having a good sense on

Speaker 2 where the markets are moving to, or seeing, in some places, virtually seeing, you know, something move at a very slow rate,

Speaker 2 where markets and therefore where portfolios are going to go,

Speaker 2 as long as you're on phase credit environment.

Speaker 2 Interest rates have just dropped by 25 fifths.

Speaker 2 Most people have a very good bank with the change from the operating thing

Speaker 2 to FONC

Speaker 2 that will probably continue downwards interested.

Speaker 2 And so it may not be as fast as people would expect, but unless they're the catalog that's going to move out in the other direction, and being ahead of the expected drop in interest rates means better than being behind.

Speaker 2 That's really the two. And

Speaker 2 that can be almost the toughest

Speaker 2 investing and thinking about the portfolio in the future state and where you want it to be and therefore trying to invest there.

Speaker 2 Knowing, and this is the other part, it's kind of cliche, but it still exists and it's still out of our career.

Speaker 2 So we have to acknowledge it, is that if you invest in a differentiated fashion from others and you're right,

Speaker 2 well, people might just think we got lucky. People may not recognize that you took, well, a well-palculated risk.
you know, that in the topic portfolio.

Speaker 2 If you take a differentiated view and the implementation of your portfolio and you're wrong, well, then you might not have a career.

Speaker 2 And that's very difficult. And so the default, the natural equilibrium outcome from that bike

Speaker 2 career optionality is that many investors then tend to fall back to, you know, what is the safest type of portfolio, where the consultants signed off on.

Speaker 2 And that means you still have decent returns for the portfolio, but that you'll be in the middle of the path, relative to peers or relative to the affected outfit that you need, given the inflation environment that we have and the increased spending over the portfolio.

Speaker 2 And as well, this is a concurrent thing that is happening more and more so these days when I resemble higher rule,

Speaker 2 the much lower rate of distributions on private asset portfolios.

Speaker 2 which for grant-making validations or pension plans or endowments with spendings,

Speaker 2 you know, that actually would shut them up.

Speaker 2 So

Speaker 2 having a forward-looking thinking move part in your portfolio in terms of the implementation and processes.

Speaker 2 And separately, the first thing I mentioned, having an operationalized process where team can focus on analysis versus data.

Speaker 2 That's a way that teams can really.

Speaker 1 You mentioned that the top allocators don't see other allocators as competition.

Speaker 1 Explain that. How do the top allocators collaborate with other allocators? Give me very specific use cases.

Speaker 2 I was very fortunate in my career to work on Wall Street and to work in the allocation.

Speaker 2 So I got to see what it's like on both sides of this.

Speaker 2 When I was working on Wall Street,

Speaker 2 if I had called, well, while I was at the office, it was factor by one of the office. If I had called a friend, I mean one friend,

Speaker 2 and asked them, well, what do they think about the markets? Well, how were they got to pay for it? What funds did they like?

Speaker 2 What tool did they use?

Speaker 2 I would have thought they found a dative.

Speaker 2 In contrast,

Speaker 2 what I experienced when working on the allocated part of the table, and I'll give you a specific example of it because I'm so proud of it,

Speaker 2 is that you could always call the affus.

Speaker 2 And if you didn't know them, you know, if you wanted to reach out to a few or allocated, like you have no connection. You're not connected on LinkedIn.
You've never met this person.

Speaker 2 But I saw, saw, you know, hey, this institution was in a recent magazine article doing reference to deep and about you.

Speaker 2 They've implemented Shop AFs. We're just talking about it now.
Or if you just call them, you can just email them with a name.

Speaker 2 Well, not to fick your brain about how you guys capture this bus sets, how you guys implement these. I dogging you dogged with some.

Speaker 2 I'll give you one specific example of it. I think every allocator for Link Blank.

Speaker 2 It was phenomenal. I was so glad to be a part of it.
I was part of the Cleveland Pittsford Alex Data Group. This was a non-profit volunteer group led by Alex Gators.

Speaker 2 And once at Florida, we would get together in First Womb at somebody's office, the U.S. Cancer Office.

Speaker 2 And before the meeting,

Speaker 2 we would send around a template. Well, I was the president of this two years, so I was all good.

Speaker 2 We would send out around a template where Alec Gators would put

Speaker 2 their portfolio. And they could put in the actual names of the managers or they could put in

Speaker 2 just some code if they weren't comfortable with that.

Speaker 2 And you would put in your exposure size, either Dallow up or something.

Speaker 2 We could get a good sense of how everybody was allocated. This little group was maybe 25 out and a few of them could work here.

Speaker 2 And then we would get together once a quarter.

Speaker 2 And when we would sit around on the big conference table, one by one, we would just talk.

Speaker 2 Talk about, you know, if you're a DB pension plan, if you're thinking about doing a CRT, a pension list transfer, and maybe you are, maybe you were thinking about it, maybe it happened.

Speaker 2 If you're an endowment, you know, and you have a new spending policy that you want to invest in months, the policy behind which you guys decided to go through that process and how that's going, how to get through the investment committee.

Speaker 2 If someone's investing in a new asset class or a new country or they're going to visit some country, we would like to know, hey, do we know any manager in

Speaker 2 India? You know, people were raving in, yeah,

Speaker 2 so we would do that for about two hours. And it was a closed door session, allocators only, you know, chatham house rules.
So nothing said in the room, could leave the room.

Speaker 2 And then

Speaker 2 we would invite

Speaker 2 a GP

Speaker 2 to come by for lunch. And the GP, you know, we're well ahead of time.
They were going to be there. They'd come in for lunch.
You'd open the door. GP would come in.

Speaker 2 We'd have lunch delivered, paid for by the GP. So GP would spend a few hundred bucks on lunch.

Speaker 2 And over lunch, for about an hour, the GP was allowed to talk about whatever they want to talk about. It was always something interesting to the allocators.

Speaker 2 I remember Goldman Sachs came in one time, wanted to talk about private credit,

Speaker 2 had a really great discussion, learned a lot with them. Goldman Sachs loved it because they had an opportunity to meet with a lot of allocators one space

Speaker 2 and it was kind of a friendly space.

Speaker 2 And then after lunch we all went home so this was something we did once a quarter all volunteer-led you know no cost to the institution but it was a way for our little group of allocators to get together share information share best practices um it was a really unique opportunity really unique group and it was really reflective the fact that for allocators you know We weren't trying to sell each other anything or prior to steal each other's information or employees.

Speaker 2 We were trying to share best practices so that we could all, you know, all state, provide a better outcome for the beneficiaries of the capital, which we won't focus at the moment.

Speaker 1 Perhaps this is obvious, but the reason allocators are willing to trade information with each other is because most of the new trends and most of the top managers are not capital constrained.

Speaker 1 In other words, it's truly not a zero-sum game, whereas, let's say, venture GPs at the Series A may not be as willing to share deal flow because there could only be one winners in that space.

Speaker 1 Is that basically what it comes down to? Or is there more dynamic to it?

Speaker 2 No, Dave, that's a phenomenal point. And I'll give you just a quick

Speaker 2 sound light on that part because this would come out

Speaker 2 sitting around that table or talking with our allocators. And for the most part, yeah, you're exactly right.
Almost every asset class was not controlled in terms of we invested and they invested it.

Speaker 2 Actually, that's better, though.

Speaker 2 Well, that really helps. We're on the same, we're locking our arms together.

Speaker 2 The one place where that may not be true is actually related to what you just said.

Speaker 2 If our institution has a relationship with XYZ Venture Capital Fund, and we just got an allocation to XYZ Fund 7,

Speaker 2 well, that's great for us.

Speaker 2 But us having that allocation is not reflective of us shoehorning out other folks.

Speaker 2 It's really a reflection, especially for the very hard to access venture capital funds,

Speaker 2 building long-term relationships with those firms,

Speaker 2 seeing them and them seeing us as long-term partners and doctors and what they're global and what we're investing in.

Speaker 2 And that

Speaker 2 does not impune upon the ability for other allocated world table around the country to also have built those relationships or try to build those bills.

Speaker 2 So it's really this kind of separate thing where we're comfortable saying, yes, we're invested in this liquid asset class, this liquid fund, if you're about to do, that's great.

Speaker 2 And acknowledging, you know, hey, yes, we did get an allocation to XY Medium Venture Fund 7.

Speaker 2 You guys may not have invested or gotten an allocation, but that's not because we did

Speaker 2 building that relationship. Happy to introduce you to this team, but you guys are just meeting the follow-up client.
So it's a really different kind of world.

Speaker 2 And it's very nice when you're on the allocator side of the table. People are very friendly.
Everyone always says, like, oh, what a great question. You and I would very help.

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Speaker 1 Andy Golden, who used to run Princo, he told me one of the reasons he retired is he wanted to see whether he was really that funny or whether it was the tens of billions of dollars behind him.

Speaker 1 And perhaps this is naive on my side or maybe too direct, but whenever I find myself in zero-sum games, I'm just explicit about it.

Speaker 1 You know, I'm trying to partner with this manager, I'm deploying in him. You know, this is maybe not the best time.
Maybe in the future, there'll be future allocation.

Speaker 1 And if it's non-zero-sum, I'm happy to make that introduction.

Speaker 1 What do you think about this perspective of being kind of extremely explicit on where you could be helpful, where you can't, versus kind of making excuses?

Speaker 2 Yeah, that's such a really great point. I mean, the one thing, and this does come up, this did come up in my career, I have seen this,

Speaker 2 where,

Speaker 2 well, if we are in a battle,

Speaker 2 if we are an investor in a fund especially a private fund

Speaker 2 well for the most part comfortable sharing that you have other allocators talking about it you know usually discreetly um we're not publishing this on a legislative somewhere

Speaker 2 sometimes uh it would happen though where we're evaluating funds

Speaker 2 we're looking at investing in certain hexagons

Speaker 2 And so we need to keep that discreet. Either discreet because, you know, we know, hey, this is a new fund, they're only taking a certain number of clients.

Speaker 2 And well, we're one about you that's a positive because of legacy relation false. Well, you know, we really value that and we don't want to share that publicly.

Speaker 2 So

Speaker 2 we're not going to share that publicly and we're not going to put it in people's face like, hey, we got access to this fund you haven't even heard of yet.

Speaker 2 So it's really a matter of just trying to be respectful, professional, and polite and open where you can be. The other piece about that too

Speaker 2 is is a reflection of the culture of the institution and a reflection of the culture of the senior leadership on your investment team.

Speaker 2 So I've been fortunate that the leaders that I worked with in the allocated community were very open to sharing, very open to meetings.

Speaker 2 Some allocators I heard don't really kick a lot of meetings. Your portfolio is full or they'll call you if they need.

Speaker 2 Whereas places that I worked, very fortunate because my personal philosophy, of, well, hey, it's someone coming to town. You know, if we have time, you can eat with them.

Speaker 2 We'll be up for blah, blah, blah, working well enough.

Speaker 2 Well, it's really, I think of the allocator community, we'll invest in the community of discretion where necessary, but trying to be polite and friendly because this is a wall of the world from game.

Speaker 2 And the allocator community of Bag Discovery, you're a very small one.

Speaker 2 Everybody knows everybody. And if they're not in your first flying connection, you're all one, usually maybe two, usually just one financial amount of money.
Would everybody puck?

Speaker 2 Well, most people are very polite and puck a little up patient. Otherwise, they don't really work a lot.

Speaker 1 You mentioned that as an allocator, you always wanted to go where the puck is going. So let's say you had a thesis on GP stakes 10 years ago when dial was just getting started.

Speaker 1 Assuming that you can't invest in a brand new asset class, how do you operationalize operationalize digging into the asset class?

Speaker 1 And what are those steps for an allocator either getting into a new asset class or

Speaker 1 either getting into an asset class that the allocator had previously not been in?

Speaker 1 So perhaps they're now getting into venture capital or getting into an asset class that's brand new or that's really risen

Speaker 1 in the last couple of years.

Speaker 2 That's a great question.

Speaker 2 The first, and this is where being on the allocator side of the table, you're very, you're very lucky in this regard that if you're encountering a new asset class that you haven't invested with before or an up-and-coming asset class, so thank private credit for the last 10 years, especially the last few years, has been a little hot.

Speaker 2 One thing that you're able to do easily is call every GP

Speaker 2 and ask to get smarted. So you will call the big banks, call JC Morgan and Goldman Sachs, ask them to fly to wherever you are.

Speaker 2 you know if you're in battle creek michigan at please running or you know st louis missouri they will all fly up to come see you and you can ask and we've done this many times um we just want to get smart on this asset five

Speaker 2 and every big bank every consulting firm you know they get paid on you know not just you know the friendly meeting but on the execution you know something after the fact

Speaker 2 And a lot of times the execution can only start the initial process of education.

Speaker 2 and so you reaching out and asking for that education well people all and over at bisque provide that for you so you have this opportunity from the investment community investment managers alone and you can get lots of different perspectives because they know you know you're just entering the dating pool and you're trying to see which type of fund you'd like to swipe right on

Speaker 2 The second thing that you can do is talk to, like I mentioned when the win Pittsburgh allocator group, talk to other allocators.

Speaker 2 So reach out, reach out first to your warrant network and ask, like, hey,

Speaker 2 has anyone invested in this specific fund, this specific asset pipe? And you may already know this, but it's a very quick turnaround.

Speaker 2 You know, within the next day, you'll have a response, you know, oh, we haven't, but you could talk to these guys. This team over here,

Speaker 2 she has the new CIO brought this strategy to the table. So, she'd be a great person to speak with.
And you can get them on the phone, even if you don't know them.

Speaker 2 You just send them an email: hey, we're an allocator, we're looking for a business strategy. We heard great things from someone else, we gave a friend, we'd love to talk to you about it.

Speaker 2 So, within just a day or two, you can have set up a bunch of calls with other allocators who find out and learn more. And then, the final part:

Speaker 2 if you're getting closer and closer to thinking more about investing in a new tech fund, new type of massive class, well, specific fund,

Speaker 2 meeting with them.

Speaker 2 And

Speaker 2 one thing that's happened, especially in the COVID and post-COVID era, is that a lot of meetings, a lot of initial meet-ins, especially, take place over Zoom or over teens types of calls.

Speaker 2 One thing we always like to do where I came from, you might have that first call just to kind of get to know people, just kind of level set, like, okay, is this something

Speaker 2 worth meeting about?

Speaker 2 But then go see them, go shake hands, go see the the office, go in person. A lot of these funds are in major metropolitan areas.

Speaker 2 And there's always an excuse to get from New York City to Boston, Philadelphia, to Chicago, to Los Angeles. There's always other allocators, other funds that you can see around that.

Speaker 2 And if you can make a good day of it,

Speaker 2 then you can make it worth it. Meaning

Speaker 2 you don't have to have all of your meetings over Zoom. You can go shake hands and get to know people, get to learn a lot more about it, and they watch teachers.

Speaker 2 And that's, that's, you know, really, how else can you do it?

Speaker 2 One thing I've discovered, especially with new AI tools that have come out like ChatGPT, a lot of people say, you know, well, these tools will surpass all the need for the regular investigatory work.

Speaker 2 But one of the problems that you had, especially with, for example, the Oracle at Delphi, people

Speaker 2 from Greece, is that even if the Oracle has all the answers, well, we have to know what question to have.

Speaker 2 And then once you get the answer, it is perfectly an auto-intercorporation. former country.
Or the lighting might go to war. I think she doesn't universe.

Speaker 2 So the best way to get somebody's, and I think the best way to build relationships and truly understand people and fund firms and bosses

Speaker 2 is to go meet them, go shake their hands, get the down upon, ask them questions.

Speaker 2 Ask them questions that hopefully they weren't asked by everyone else.

Speaker 1 It's funny.

Speaker 1 I sometimes get frustrated with ChatGPT.

Speaker 1 I ask it questions and it answers the questions literally. And then two months later, I realize I was clearly asking the wrong question.
And I get frustrated.

Speaker 1 I'm like, why didn't it tell me this was the wrong question? It just basically answered it literally. So it's kind of funny how underrated asking great questions are.

Speaker 1 You mentioned you like to go on site. to the GPs.

Speaker 1 What exactly are you trying to ascertain?

Speaker 1 What are you able to see in an in-person that you're not able to see on a Zoom specifically?

Speaker 2 Well, what car they drive? Dartless.

Speaker 2 Kind of a funny thing, but we always ask. We always check.
We always go to the parking drive. I get a little

Speaker 2 small thing. But

Speaker 2 the first thing that we're looking for is really

Speaker 2 from the IDD and an ODB perspective, separate form.

Speaker 2 And something that I'm afraid to say that it it took me too long to realize is that the ODB, the operational due diligence slide is almost

Speaker 2 always

Speaker 2 the first point of contact necessary. What I mean by that is historically in the allocator community, operational due diligence, ODV, is usually the last thing that happens.

Speaker 2 You know, you send the CLO or the head of ops or whoever that is where you're pushing,

Speaker 2 usually with a checklist of important things to go see how things are going and make sure it's more okay.

Speaker 2 Well, it's happened a number of times, like where you're with allocator, that

Speaker 2 you go down to the wire with a number of bugs, you go and visit them, especially if they're in an action or at the wall for it, to go hit fires to them. And then the FODD team comes in last.

Speaker 2 and discovers there's a critical red flag.

Speaker 2 So a critical red flag, for example, could be

Speaker 2 the fund is self-administered while the guy that owns the arm is not

Speaker 2 on the

Speaker 2 therefore that's a red flag we forgot what we call for.

Speaker 2 And finally, in my allocator career, with that,

Speaker 2 we put these, not many, just a few ODD red flag questions up front. So not the full ODD work,

Speaker 2 but we want to know, hey, before we come visit the office,

Speaker 2 or we come say hi and really get some really good guides, we just got to ask a couple of questions here. We just need to make sure, as long as all of these are yes,

Speaker 2 then we're okay,

Speaker 2 you know, or no. And

Speaker 2 so, a fund is self-administered,

Speaker 2 no,

Speaker 2 we're not in every fund

Speaker 2 unless it's from Chicago and in Senegal.

Speaker 2 If the fund, for example, is working with a non-top tier

Speaker 2 accounting

Speaker 2 or has recently changed auditors multiple times. Like that's the kind of red flag where, hey, you know what, we've seen this many, many times before.
We cannot do it.

Speaker 2 So those just a few ODD questions. We'll actually put back foot before meeting with any menu.

Speaker 2 And then when we're going on site,

Speaker 2 we're doing a few things. I mentioned the cars.
There's this old joke that one of my first CIOs, Mark Euston, saying you would call it red Ferraris in Gomez.

Speaker 2 They'd go into a PM's office and you'd see on their desk, you know, instead of

Speaker 2 10Q, 108 days, and all that stuff,

Speaker 2 you'd see books about Yah,

Speaker 2 books about Ferraris. You'd see them both

Speaker 2 level 900, you'd see the air fort with the Lambert Yule world things.

Speaker 2 And you'd look into the parking lot and instead of seeing regular cars,

Speaker 2 even a BMW could be a bunch of car, you'd see, you know, a Bugaki

Speaker 2 or you'd see a Ferrari catalog for a compact thing. We'd see actually nothing.
Like it happened.

Speaker 2 And you realize that

Speaker 2 the manager,

Speaker 2 as food as they were, the number he always fits by the way.

Speaker 2 One thing I discovered in the allocated community, as much as people say like, oh, performance, you've got the most important thing. I love to ask people when they say that how many magic do you guys

Speaker 2 that have bottom four followers

Speaker 2 or bottom half

Speaker 2 we're always meeting with top half up cortile objectile managers well performance is always almost always

Speaker 2 almost always great

Speaker 2 so you got to look at everything else So separate from the discussion about evaluating performance or what that feel like, what's that do?

Speaker 2 Well, we go meet with the managers, you know, we're looking in the parking lot, looking at the office, looking to see, for example, security on the office.

Speaker 2 You know, will we be able to walk into the building and into their office by kind of tagging along behind someone?

Speaker 2 You know, that happens sometimes, something we notice. Some places,

Speaker 2 you go in, it's like a fortress. Nobody gets into any office without a keycard.
All the servers are locked up, you know, with a separate keycard. Well, they're really legitimate,

Speaker 2 off-site backup capabilities, things like that? One other, I'll just give you this one last question

Speaker 2 that we love to ask

Speaker 2 senior leaders and junior leaders about an inductment fact when we go visit a GP.

Speaker 2 And if you ask it on a Zoom call, you know, you have all the faces, maybe they're all in the same room, maybe they're different loves, but you're always going to get the same answer if you're out of Zoom calls.

Speaker 2 Is that when you're in person, you like the independent react in a separate room?

Speaker 2 PM and to the analysts,

Speaker 2 what is your industrial bug? How do you make life? How do you generate alpha?

Speaker 2 That's wounded with Tom.

Speaker 2 And for the most part,

Speaker 2 not surprisingly, the answer were pretty consistent.

Speaker 2 What you hear from the analysts, well, senior or junior, what you hear from another junior PM, and what you hear from senior leadership is usually very consistent.

Speaker 2 What can be concerning is

Speaker 2 when those answers are different, or when the answers differ quite different.

Speaker 2 We made a lot of alpha here. We used to make alpha probably this process, this thought, difficult, and now we make out a different loan.
And if the senior leaders say something was quite difficult,

Speaker 2 and we compare notes afterwards.

Speaker 2 Hey, what was the vibe?

Speaker 2 You know, what did you sense when meeting with the junior staff independently of meeting with the senior staff?

Speaker 2 We've noticed, I'll never forget the meetings where it happens because it doesn't happen often. And that's where you have to go and you have to meet with them.

Speaker 2 You have to see them feel like there's the vibe that you get.

Speaker 2 The vibe that you get, the feeling that you get when you visit the manager and you meet with the team independently, that they're excited to be there. They see great opportunities.

Speaker 2 Things are going well.

Speaker 2 staff is being compensated from an equity perspective that leads you to believe what we're going to be the next generation of leadership that takes under the car when senior leadership eventually needs

Speaker 2 or

Speaker 2 you get a feeling that you're visiting a treasoners of war camp on park avenue

Speaker 2 and they're still getting fed but they're going to get out of there as soon as possible if they pay

Speaker 2 and that has happened to 81 out of 25 meetings that i've been to

Speaker 2 but you won't get that in a zoom call because everyone will be on the same date they grand their pen pop it from from. While asking,

Speaker 2 asking those questions independently in the bike chat,

Speaker 2 the red Ferrari kind of syndrome.

Speaker 2 And I think probably most important will.

Speaker 2 Well, this isn't the full ODD trip menu, mind you. This is the red flag ODD trifle.
Just a few questions up front that, hey, if these things are not hit, then we're not meeting.

Speaker 2 Can all that stuff done

Speaker 2 allows you to have much, much better meaning, much more open.

Speaker 1 We talked a little bit about how LPs get up to date on new strategies or up-and-coming asset classes.

Speaker 1 From the GP side, let's say they realize that they're in a meeting with somebody that's getting up to date on an industry. What are the best practices?

Speaker 1 What have you seen in the very top GPs that are masters in this education process? And how do they turn that into an investment over time?

Speaker 2 Yeah, it's a great question.

Speaker 2 The real critical part, number one, is

Speaker 2 being able to explain complicated things simply

Speaker 2 and ensuring as well,

Speaker 2 because this has happened before the meetings all function.

Speaker 2 You go to a meeting and

Speaker 2 you ask exactly as you have, well, how can they share this information? And you start getting the speech.

Speaker 2 And the portfolio manager or the CP have a prepared speech and given given topic and they're going to work their way through it.

Speaker 2 We're not really noticing whether the LP, the allocated across the table, are they really understanding what's happening? Well, are they

Speaker 2 over because technical language is being used that perhaps lawyer will?

Speaker 2 Sometimes, especially younger LPs,

Speaker 2 they may not know the right question perhaps.

Speaker 2 And sometimes it's hard for the GP to discern that the LP is just rotting their head and saying yes, but isn't really picking out the critical points. So

Speaker 2 trying to discern, like Richard Feynman, if you've ever seen his lectures,

Speaker 2 do you really understand the gaps we're driving to here?

Speaker 2 And if not, let's pause and make sure each part is understood because, I mean, they're sharing what they think is really critical alpha-generating capabilities, and that's valuable.

Speaker 2 So, we should highlight the value that they have and their capability of riding that alpha, especially on a consistent basis, because that's hard to find.

Speaker 2 The other thing, and this is sometimes common,

Speaker 2 not as much common today as it was 20 years ago, but I still see it.

Speaker 2 Ask GPs for some information, and they'll send you a link to their pitch check, you know, a link to the data room, or maybe they'll send you a PDF of their pitch pen.

Speaker 2 But what you need, sometimes people like, babe, save me the type, send me the Excel file. with all the data that we're looking for.

Speaker 2 And sometimes that Excel file is just the performance or monthly performance.

Speaker 2 But you want much, much more than that.

Speaker 2 And so anticipating what allocators are looking for of, hey, you know, here's the historical performance monthly in Excel.

Speaker 2 And also, here are the historical exposures and what local attribute reports to show the drivers of alpha on a given basis. Here's a factor model got rebun.

Speaker 2 answer all of these questions before they can even be added or at least have those answers available easy for the allocators to be able to get to.

Speaker 2 Because the goal from the GP's perspective is to get inducted. And the goal from the allocators' perspective is to find and break investments for their institution.
Everyone's on the same page or

Speaker 2 trying to help their beneficiaries.

Speaker 2 But the key sometimes is that miscommunication or,

Speaker 2 you know, delay unnecessarily. because the process by which we're communicating with each other are different.
You know, we're speaking French, they're speaking Italian.

Speaker 2 Yeah, they're roughly saying they have the same basis, it's about the same language, so therefore, we're not understanding the fact.

Speaker 2 So, trying to anticipate that,

Speaker 2 get ahead of glazed eyes, get ahead of the data requests, get ahead of the analytic,

Speaker 2 not even just the law of data, but here are the analytics that you might run, and here are the questions you might have had, and here how we sharing

Speaker 2 wrap these types of questions. For example, well, outside of factors, that's new.

Speaker 2 Our data to this benchmark and how the most appropriate benchmark because

Speaker 2 they show you clearly what we're inducting. That kind of stuff.

Speaker 2 That allows the relationship to happen.

Speaker 1 So, another way you want to be able to explain the different layers of the thesis. I love the Einstein quote: everything should be made as simple as possible, but not simpler.

Speaker 1 So, explain it to a simple possible, most possible way without oversimplifying it.

Speaker 1 Ask and answer questions very, both very literally. In that, if I'm asking for last month's report, send me last month's report, but also try to get behind the interest of that question.

Speaker 1 Why are they trying to do that? Well, maybe they're trying to figure out our

Speaker 1 track record. Maybe it would make sense to give them a three-year versus the one-year that they asked.

Speaker 1 Just make it simple to interact with you, make it simple for them to gauge the relative performance that you have versus the benchmark.

Speaker 1 So really realize that a lot of GPs inadvertently think that, well, maybe they'll get to a diligence process without asking about these points, almost like they're hiding diligence information one way or another.

Speaker 1 If you could do the opposite, which is lead with that and disqualify the LP before they disqualify yourself, you're also saving both parties more time.

Speaker 2 100. Yeah, you said it exactly.
It's anticipate the larger question of what they're looking for.

Speaker 2 Try Try to give them, you know, maybe not too much, but a little bit more than they were asking for, right?

Speaker 2 So that they can come to the true understanding that you have, which is that you are providing alpha for your fine thing like them to be a fire team.

Speaker 1 You didn't even have a chance to go down JP Morgan, Cleveland Clinic, your time at Aberdeen. So we're going to have to run this back.

Speaker 1 But before we end, tell me a little bit about Allocator Training Institute and who should be double clicking on Allocator Training Institute and who would be the the best fit as a potential customer.

Speaker 2 Yeah, absolutely. So the Allocator Training Institute has created the first training for one for younger allocators medical.

Speaker 2 So it's a free level program, really geared for those folks who are working in a want to work at analog camera and want to learn topics. I'll give you an idea from private asset ash boat basic models.

Speaker 2 You know, how to create a factor model, how to evaluate more investment in four, how to run T and E analysis to evaluate whether we're finding that the money drugs provide an alpha while with public market pens money.

Speaker 2 So all of these topics and many more are not taught in undergraduate business school, the graduate business school. I know because I was developing.

Speaker 2 So we have created as a program that these young wallet in this can get with the

Speaker 2 really learned way

Speaker 2 publicly about how to work at analysis or how to evaluate their

Speaker 2 own loan.

Speaker 2 Well, we created a program a few years ago. It's going really well.

Speaker 2 And the audience so far seems to love it because it's the one and only place where you can learn all the qualitative and qualitative tools on how to be out here.

Speaker 1 And who would this best be used for? Somebody that just starting out and allocating somebody with a couple of years of experience?

Speaker 1 Is there any value for senior allocators and who could benefit the most?

Speaker 2 People that find it most valuable have

Speaker 2 we say negative one

Speaker 2 and your experience. Negative one, meaning still an undergrad, like a finance student, we just singer walks to work at an allocator.

Speaker 2 Maybe they had a summer internship and they want to go back, but they're trying to

Speaker 2 get the skills so they can hit the ground running.

Speaker 2 A little up to 10 years of experience and really, well, especially for the quantum field tools that we're teaching the place that we found most valuable.

Speaker 2 There are some interesting advanced construction methods and case studies that we teach. So for example, what happened at the public school employee INEP system

Speaker 2 Pennsylvania? What happened at Powder's? What happened at Kodak Hufrand? What happened at Guiding and How Acquirement Public However? These advanced case studies,

Speaker 2 we teach them in the program, but for a lot of young analysts,

Speaker 2 not necessarily

Speaker 2 useful for their career yet, something for their back pocket. So for the senior folks, learning about these case studies, what happened to the senior leaders at these institutions can be critical.

Speaker 1 When people ask me why I'm so interested in investing, the best way I explain it is the infinite game of investing and there's a specific thought experiment.

Speaker 1 So, if me and you, Alex, had a million hours to go today

Speaker 1 and diligence every single asset in the world, from country-specific natural resources to small caps in other hemispheres to quantum hedge fund strategies.

Speaker 1 Even if we had perfect knowledge of every single asset class in the world, tomorrow it would be stale.

Speaker 1 Tomorrow, there's a new administration that comes into a country, a new competitor set that comes in. It's literally this skill that you cannot master, even if you had a million hours a day.

Speaker 2 It's constantly evolving.

Speaker 1 It's one of the things that makes it so fascinating, why there's this infinite amount of knowledge that you could gain.

Speaker 1 Not to keep people from starting to learn or from kind of having this analysis paralysis, but it is this kind of cool thing where you know that you could keep playing this game, you know, for the rest of your life and keep on improving yourself.

Speaker 2 Well, David, I think it's incredibly well said. And one of the things

Speaker 2 I've heard other people say this better than I don't know about you,

Speaker 2 but the more I learn, the less I know.

Speaker 2 And I thought,

Speaker 2 and this wasn't the half part,

Speaker 2 back in the 90s, actually money dating myself when I started my investment for you.

Speaker 2 I remember thinking I knew how to invest, I knew how to fix stock, and I thought I was very favourable. I've decided I knew nothing about deaf.

Speaker 2 In the early 2000s, right now, I knew about startups,

Speaker 2 learning.

Speaker 2 And then after Warden Creek, I had such a great experience there. I thought I knew the appropriate and only way to invest.
not for institutional even with families on the foundation.

Speaker 2 And then

Speaker 2 it took me a couple of career clues and my clues to recognize

Speaker 2 how much I have learned, but how little I know. And I think to your point,

Speaker 2 well, even if we could spend infinite time,

Speaker 2 you know, a million hours studying every antsy fund, everything, you know, things change tomorrow.

Speaker 2 We were here to have an applause, new policies, new frameworks for the FOMC over how they think about infrastructure. And so therefore, we have to update and food.

Speaker 2 Who could have thought, you know, I'll never forget,

Speaker 2 you know, when cell phones first came out.

Speaker 2 And I remember seeing a camera on a cell phone in 1997

Speaker 2 and thinking, oh, that'll never fake phone. And now the ubiquitous.
And then Bitcoin, when that's emailed. Well, I remember thinking Bitcoin, crypto, blockchain, all that stuff.

Speaker 2 Well, year after year, all this will never get anymore. And now it's awesome, almost ubiquitous.
So I keep being being humbled by how little I know and how much I've had to loan.

Speaker 1 Well, on that note, Alex, thanks so much for jumping on. Look forward to continuing this conversation live.

Speaker 2 Thanks so much for your time.

Speaker 1 Thank you. Thanks for listening to my conversation.
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