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Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

2014 Financial Asset Management Education VI
Conference notes

David J. Moore, Ph.D.
www.efficientminds.com

November 10, 2014

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Alpha
“Apply fundamental analysis in a systematic way.”
Quantitative and analytical skills are very important.
No substitute for hard work.
Big data has an increasing role in investments.
Be mindful of “unit economics.”
Be mindful of CEO profit optimization and what they do with
profits.
Japan has problems: corporate governance, no population
growth, low productivity growth. Mr. Morrison: what was that
about Sony?
Be mindful of regulatory and geopolitical influences.
Know what you can lose and don’t be afraid to cut losses.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Outline
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2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Intro

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Intro

The panelists

Isabelle Fymat (IF)
General Partner
Crosslink Capital
Ryan Frick (RF)
Managing Partner
Dorsal Capital Management
John Aiken (JA)
Managing Partner
Resonate Capital

Fixed Income

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Intro

Introduction
IF: Crosslink
Crosslink is both a Venture Fund & Hedge Fund.
It took her 11 years to arrive at her now “ideal” job.
Media plays a role in disruption. Before:TV, now: Internet.
MBA accelerated exposure to business.

RF: Dorsal Capital Management
“Market neutral” absolute return fund. The goal is to generate α.
Chemical Engineer undergrad: quantitative and analytical skills
helped.
No substitute for hard work.

JA: Resonate captial
Undergraduate degrees in statistics and computer science.
Masters in Financial engineering.
Worked on “digital footprint” technology in previous company.
Long/short all public equities.
More “for” companies than against (more long than short).
Hard major strengthened work ethic.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Objectives

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Objectives

Hedge fund objectives
Crosslink (public side)
Superiour risk adjusted returns over a long term basis.
Mitigate volatility. Typically long 60 short 40.
Concentrated portfolio. 7% max on long, 2% max on short.
Dorsal
Power of compunding: Bad year is flat, best is +20%. (DJM: See
my writeup on reinvesting dividends)
Metric is Sharpe Ratio (SR). SR has been ≈ 2 since launch 5
years ago. µ = 9% and σ = 5.5%.
This is about 4-5X the return of a equivalent volatility bond.
Market neutral: no market risk.
Subsector neutral also.
Deep fundamental analysis.
Median holding period is 2 years.

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CEO A-list

Global markets panel

Fixed Income

Alternative investments

Objectives

Objectives and current themes
Resonate
Analytical: fundamentals, etc.
Scrape lots of information off websites via software. E.g.,
Carmax salesdata.
Average holding period in short position: 1.5 months.
On China & the Internet: 400-500M people have a phone but
only about 10M have high speed access on the phone.
No Android or Google in China (government banned?).
Baidu has near monopoly on phone. $5 profit per phone vs. $30
per phone in US.
Dorsal
Software as a Services (SaaS): Most are not profitable due to
heavy reinvestment.
P/E not applicable so use “strange” metrics like “EV/Sales.”
Be mindful of “unit economcis”.

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Alternative investments

Objectives

Current themes continued...
Dorsal
Long Workday (WDAY) the past 2 years: sound unit economics
(e.g., 99% renewal rate) but expensive by P/E.
Short a company like Workday but in construction space. The
unnamed short company is less expensive (lower EV/Sales) but
has attractive unit economics (85% renewal rate among other
things).
DJM: Not sure how possible acquisition impacts investment
decision here.
Crosslink
Big on disruptive technology. Advantage is value added in
transactions.
Facebook is reducing customer acquisition costs.
Takelessons.com is a holding.
Uber is a good example of a disruptive company: disrupts cabs
and auto manufactuers.
Big on “resource sharing” disruptors: Uber, AirBnb, etc.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Fees, etc.

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Fees, etc.

Fees, etc.
Dorsal
1.5% management fee, 20% carry. Earlier performance quotes
are net of fees.
“Diversified alpha” not just TMT (Telecom, Media, and
Technology?).
Resonate
Good time for smaller hedge funds since larger funds crowding
each others’ trades.
Lumpy returns on long side with steady alpha on short side.
Crosslink
Believes algorithmic trading is inducing volatility.
DJM: hedgefunds like volatility. However, there is a feedback
loop. From what I gathered, leverage declines with volatility. To
de-lever you must close positions. This induced selling could add
to volatility and create a feedback loop.
Average leverage of these funds: 150%.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

CEO Characteristics

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

CEO Characteristics

Good CEO characteristics
William Thorndike, Managing Director of Housatonic Partners and
Author of “The Outsiders: Eight unconventional CEOs and their
radically rational blueprint to success.”
A good CEO does two things:
1
2

Optimizes profits.
Invests and deploys profits optimally.
Invest in existing operations.
Invest in R&D.
Pay down debt.
Pay dividends.
Repurchase shares

DJM: This topic is related to my upcoming research: choose
companies that contribute more to market returns than market
participants.
Jack Wech is the de facto “Gold Standard” of CEOs.
CEO performance is evaluated relative to market and peer group.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

CEO Characteristics

CEO characteristics
Highly decentralized resources. I wonder if the CSU
administration is aware of this. Where’s my new computer?
Adjectives of personality: pragmatic, analytical, frugal.
Smaller boards with large ownership stake.
Strong #2s in their companies (e.g., Munger with Warren Buffett).
CEOs tend to be more towards the “foxes” (know a little about a
lot) and #2s were strong hedgehogs (know one thing well).
Why not Jobs, Walton, Larry Paige, etc.: These geniuses not
replicable. (DJM: Don’t believe that. Read “Outliers” by Malcom
Gladwelll and you will see how luck played an important role in their
success.)

Ultimately the true test is the results of actions taken over 5
years.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

CEO Characteristics

Good CEO language

“Per Share” metrics are powerful.
“IRR,” “unit economics”
12-18 month holding period: capital allocation skills less
important.
5+ year holding period: capital allocation skills very important.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Intro

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Intro

The panel

Purav Jhaveri (PJ)
Managing Director
Franklin Templeton
Omar Aguilar (OA)
Chief Investment Officer
Charles Schwab Investment Management
Anjun Zhou (AZ)
Managing Director
Mellon Capital
Ryan Kim (RK)
Managing Director
BlackRock

Fixed Income

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Intro

Warmup discussion
Franklin Templeton (PJ)
Maximize gains in dollars so stable currencies are important.
Bullish on India & Mexico (DJM: a little India biased?)
Charles Schawb Investment Management (OA)
Notes diverse actions from central banks around the world.
Mellon Capital (AZ)
Long equity and bonds because of attractiveness.
Long dollar / short euro did well this year.
Mindful of policy support and growth differentials.
BlackRock (RK)
Bank of Japan is going to print 60% (or was it 16?) of GDP in
Yen.
Problems with Japan: Corporate governance, ROE is low, poor
investment choices.
Japanese companies are paying more out to shareholders
(dividends and repurchases).

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Oil price outlook

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Oil price outlook

How do assess oil prices?
Mellon Capital (AZ)
Thinks oil will remain steady the next six months or so.
Weakness in Global demand for oil as well as increase in supply.
IMF report: $20 increase in oil leads to 0.5% increase in GDP
Charles Schwab Investment Management (OA)
Commodities prices are determined by supply & demand.
Saudi lowered prices of oil to the US not to Asian countries.
(DJM: conspiracy against Tesla?)
Meanwhile, OPEC cuts production.
Oil & technology are negatively correlated.
Franklin Templeton (PJ)
≤ 85 → benefits oil importers like Japan and India.
BlackRock (RK)
Lower prices is a net detriment to the economy. Why? Lower
prices induce political unrest in unstable exporters such as
Russia, Venezuela, and Brazil.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Investment approach and career guidance

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Investment approach and career guidance

From the experts...
BlackRock (RK)
Quantitative: apply fundamental analysis in a systematic way.
(DJM: Sounds like the Mosaic)
Be mindful of Big Data’s impact on investment (DJM: see
Carmax example).
4000(?) stock reports are generated every day. You can’t read
them all. Let a computer do it. (DJM: See A-List CEO language)
Mellon Capital (AZ)
SWAN. Smart Wise Ambitious and Network?
Charles Schwab Investment Management
(1) Learn all the time. (2) Try new things. (3) Don’t fear mistakes.
Mike Tyson everybody has a plan until they get hit.
Franklin Templeton (PJ)
Be able to compare and contrast.
Be comfortable making a decision with the information you have.
Retailers fare better when they localize operations in India.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Intro

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Intro

The panel

Jon Xiong (JX)
Managing Director
Goldman Sachs
Niklas Nordenfelt (NN)
Managing Director
Wells Capital Management
Mike Rosborough (MR)
Senior Portfolio Manager
CalPERS
Jonathan Burton (JB)
Editor & Columnist
Marketwatch

Fixed Income

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Intro

Warmup discussion
Goldman Sachs (JX)
Does not like equities. (DJM: Yackman doesn’t like bonds. So what? No
one has a monopoly on the truth.)
Monetary policy divergence is an opportunity. UK, US, and NZ on a
different monetary track than Europe and Japan.
Long/short currency positions.
Regulation impacts market mechanisms.
CalPERS (MR)
US rates have remained low a long time.
Rates fell even after QE stopped last month.
Rates will remain low since we are now less consumption oriented.
(DJM: falling real wages for the 99%)
Wells Capital Management (NN)
Companies borrow money simply because they can. Avoid these
companies.
Metals & mining companies are struggling. (DJM: How’s FCX doing?)
Ton of money thrown at shale gas yet earnings are low. Sees “cracks” in
the model.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Other topics

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Other topics

Eurzone, Japan, etc.
Goldman Sachs (JX)
Very likely that Eurozone may end up like Japan. Low growth
rates and output going forward.
This is Japan’s “last try” due to demographics: No population
growth and maybe productivity growth.
CalPERS (MR)
CalPERS is about $300B and is $75-$100B larger than next
largest.
≈ 7% fixed income is in emerging markets.
Wells Capital Management (NN)
Acknowledge you don’t know which way rates are going to go.
However, you can still assess risk.
WCM is managing portfolios up in the capital structure (i.e., more
secure) and floating rate securities.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Other topics

Regulation and career comments
Goldman Sachs (JX)
Regulator mechanism is out of control.
Be mindful of liquidity risk.
Understand what your maximum losses can be. (DJM:
Value-at-Risk)
Okay to cut losses and preserve capital.
No QE would clear out the excesses but nobody wants to live
with that alternative: possible change in direction of US standard
of living.
Understand how your activities fit in the big picture. Don’t be
robotic.
CalPERS (MR)
Bet on how fast rates are going to rise or fall relative to current
prices. (?)
Do something to make you stand out such as CFA.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Intro

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Intro

The panel

Michael Hoffman (MH)
Founder / Managing Director
Probitas partners
James O’Donnel (JO)
Chief Investment Officer
Forward Funds
Scott Cullerton (SC)
Director
KKR
Clay Smudsky (CS)
Managing Director Forward Funds

Fixed Income

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Intro

Warmup discussion
Forward Funds (CS)
Access to alternatives is growing. (DJM: e.g., SDOW)
Forward Funds (JO)
Alternative investment: Not stocks or bonds. Long/short, real
estate, derivatives, and continually evolving.
People don’t like volatility.
Liquid Alts: can get money back the next day. (DJM: are liquid
alts correlated with the market?)
Monitor leverage, volatility, liquidity.
Probitas partners (MH)
Alternative investments comprise 8 to 30% of state funds and
upwards of 50% of endowments.
Core investment products don’t produce high enough returns to
meet obligations. (DJM: so take more risk with my pension
fund?)

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Liquidity

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Liquidity

Forward Funds (SC)
Underlying assets he manages do not have daily liquidity.
Average 5 to 10 year lockup period.
They derive value from lack of liquidity.
Illiquidity premiums of 4 to 6 percent(?): Private capital, Senior ),
Junior, Private Equity.
Advantage of illiquidity: protects remaining investors from others
pulling out due to fear.
Probitas partners (MH)
Korean pension fund: anticipated AUM 2.5X that of CalPERS.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Fees and assets

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Fees and assets

Not cheap?
Before: Give me your money, pay me to keep lights on
(management fee), lets talk in 10 years about the upside and my
20% of that.
Now: Given the magnitude of pension investments management
fees far exceed the costs of “keeping the lights on.”
Probitas Partners (MH)
It is important to see how management style and team have
changed after the 10-12 year lockup period.
Medical office buildings.
Forward Funds (JO)
Hong Kong Real Estate
Agricultural commodities: after strong harvest and subsequent
price declines, prices should rise.
KKR (SC): Europe, special situations

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Private equity vs. hedge funds

Outline
1

2

3

4

5

Hedge funds
Intro
Objectives
Fees, etc.
CEO A-list
CEO Characteristics
Global markets panel
Intro
Oil price outlook
Investment approach and career guidance
Fixed Income
Intro
Other topics
Alternative investments
Intro
Liquidity
Fees and assets
Private equity vs. hedge funds

Alternative investments

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Private equity vs. hedge funds

What are the differences

Largest hedge funds have not earned their 20% upside fee.
Private equity does not have much downside protection.
Private equity can exercise control (inject capital, make
management decisions, etc.) to mitigate downside.
Give me lead I’ll turn it into gold. Give me beta (risk) I’ll turn it
into alpha (excess returns). Both are unlikely.
Alternative investments: Don’t know portfolio at time of purchase.
Just have info on team and strategy.

Hedge funds

CEO A-list

Global markets panel

Fixed Income

Alternative investments

Private equity vs. hedge funds

Omega
“Apply fundamental analysis in a systematic way.”
Quantitative and analytical skills are very important.
No substitute for hard work.
Big data has an increasing role in investments.
Be mindful of “unit economics.”
Be mindful of CEO profit optimization and what they do with
profits.
Japan has problems: corporate governance, no population
growth, low productivity growth. Mr. Morrison: what was that
about Sony?
Be mindful of regulatory and geopolitical influences.
Know what you can lose and don’t be afraid to cut losses.