Bloomberg Audio Studios, Podcasts, radio News. This is Masters in Business with Barry Ritholt on Bloomberg Radio.

Bloomberg Audio Studios, Podcasts, radio News. This is Masters in Business with Barry Ritholt on Bloomberg Radio.

This week on the podcast, yet another extra special guest. Brian Hurst is founder, CEO, and CIO of Clear Alpha.

This week on the podcast, yet another extra special guest. Brian Hurst is founder, CEO, and CIO of Clear Alpha.

They are a.

They are a.

Multi manager, multi strategy hedge fund that has put up some pretty impressive numbers. His background is really fascinating. Cliff Astness plucked him out of the ether to be one of his first hires at the Quantitative Research Group at Goldman Sachs. He was the first non founding partner at AQR, the hedge fund that Asna set up, and Brian worked there for a couple of decades before launching Clear Alpha. He had as a fascinating perspective on where alpha comes from as well as the entire hedge fund industry. Few people have seen it from the unique perspective he has, and I think he understands the challenges of creating alpha where it comes from and managing the risk and looking for ways to develop non correlated alpha that is both sustainable and manageable from a behavioral perspective. I thought this conversation was absolutely fascinating and I think you will also with no further ado my interview with Clear Alpha's Brian Hurst.

Multi manager, multi strategy hedge fund that has put up some pretty impressive numbers. His background is really fascinating. Cliff Astness plucked him out of the ether to be one of his first hires at the Quantitative Research Group at Goldman Sachs. He was the first non founding partner at AQR, the hedge fund that Asna set up, and Brian worked there for a couple of decades before launching Clear Alpha. He had as a fascinating perspective on where alpha comes from as well as the entire hedge fund industry. Few people have seen it from the unique perspective he has, and I think he understands the challenges of creating alpha where it comes from and managing the risk and looking for ways to develop non correlated alpha that is both sustainable and manageable from a behavioral perspective. I thought this conversation was absolutely fascinating and I think you will also with no further ado my interview with Clear Alpha's Brian Hurst.

Thank you very appreciate it.

Thank you very appreciate it.

Good to have you back here.

Good to have you back here.

Last time you were on a panel, we were talking about the rise of some emerging managers, including yourself. But let's go back to the beginning of your career Wharton School at the University of Pennsylvania. You graduate with a bachelor's in economics. Was quantitative finance always career plan?

Last time you were on a panel, we were talking about the rise of some emerging managers, including yourself. But let's go back to the beginning of your career Wharton School at the University of Pennsylvania. You graduate with a bachelor's in economics. Was quantitative finance always career plan?

That's a great question. I think when I went to school, I didn't even know quantity of flants was a thing, and frankly, at that point in time, it really wasn't much of a thing. I was taken him by my dad. He was an accountant and CFO of a commercial real estate company. He would take me to the office, and I was really fascinated by business. I really wanted to get into that. I was into computers. I learned how to teach myself how to program and things like that. But I wanted to get into business, and I said, Dad, I want to get into real estate. And my dad gave me some really good advice. He said, Brian, if you think about finance as an org chart, real estate is like one of the divisions and if you start in real estate, it's hard to move up and go to other divisions and try other things out. You should really learn corporate finance and you can always switch to real estate if you wanted to. And corporate fans is kind of the top of the umbrella or the org chart. And I said, okay, well what's corporate finance and where are I go to learn that? He's like, well, you should go to Wharton And then I said, well, what's Wharton? That's how it started.

That's a great question. I think when I went to school, I didn't even know quantity of flants was a thing, and frankly, at that point in time, it really wasn't much of a thing. I was taken him by my dad. He was an accountant and CFO of a commercial real estate company. He would take me to the office, and I was really fascinated by business. I really wanted to get into that. I was into computers. I learned how to teach myself how to program and things like that. But I wanted to get into business, and I said, Dad, I want to get into real estate. And my dad gave me some really good advice. He said, Brian, if you think about finance as an org chart, real estate is like one of the divisions and if you start in real estate, it's hard to move up and go to other divisions and try other things out. You should really learn corporate finance and you can always switch to real estate if you wanted to. And corporate fans is kind of the top of the umbrella or the org chart. And I said, okay, well what's corporate finance and where are I go to learn that? He's like, well, you should go to Wharton And then I said, well, what's Wharton? That's how it started.

That's hilarious.

That's hilarious.

You finish up at Pennsylvania and you begin your career at DLJ.

You finish up at Pennsylvania and you begin your career at DLJ.

What sort of work.

What sort of work.

Were you doing and what were your classmates doing? This is the early nineties.

Were you doing and what were your classmates doing? This is the early nineties.

You started DLJ.

You started DLJ.

Yeah, I did DLJ. It was interesting. That was my summer year between junior and senior at Warden, and they kept me on throughout my senior year to finish up an interesting project, which is basically automating the job of the investment analyst that we're doing all the company working, all the tank k's, tank q's, all the information. At the time, there was a new company starting up and I know on Bloomberg, but it was called fact Set at the time. Of course, and there was a salesperson walking around trying to get anyone to talk to them because this is a brand new company. And I was a summer analyst and I was like, I've got time, I'll talk to you. And he showed me, first of all two things. She showed me this thing called Microsoft Excel. At the time, everybody was using Lettus one, two three, and he showed me basically how you can type in a ticker and that pulls in all of the financial information right into this cheat for you before the internet, but you know what was kind of the internet at the time. I was like, wow, this is amazing. I was like, this could save me hours and hours of work. And so I went to the MD at the time and I said, hey, I think I can automate most of what the analysts are doing. He said, you're a summer intern. We're not paying you much. Go at it. And that's what I did. So I started off in that, but I mainly learned that I didn't want to do investment banking because it didn't hit on my course skill set, which was like engineering back down quantitative techniques and tools.

Yeah, I did DLJ. It was interesting. That was my summer year between junior and senior at Warden, and they kept me on throughout my senior year to finish up an interesting project, which is basically automating the job of the investment analyst that we're doing all the company working, all the tank k's, tank q's, all the information. At the time, there was a new company starting up and I know on Bloomberg, but it was called fact Set at the time. Of course, and there was a salesperson walking around trying to get anyone to talk to them because this is a brand new company. And I was a summer analyst and I was like, I've got time, I'll talk to you. And he showed me, first of all two things. She showed me this thing called Microsoft Excel. At the time, everybody was using Lettus one, two three, and he showed me basically how you can type in a ticker and that pulls in all of the financial information right into this cheat for you before the internet, but you know what was kind of the internet at the time. I was like, wow, this is amazing. I was like, this could save me hours and hours of work. And so I went to the MD at the time and I said, hey, I think I can automate most of what the analysts are doing. He said, you're a summer intern. We're not paying you much. Go at it. And that's what I did. So I started off in that, but I mainly learned that I didn't want to do investment banking because it didn't hit on my course skill set, which was like engineering back down quantitative techniques and tools.

That sounds really interesting. It's amazing to have that sort of experience as an intern, How did you land at Goldman Sachs.

That sounds really interesting. It's amazing to have that sort of experience as an intern, How did you land at Goldman Sachs.

Like everything in life that works out well, that's you know, a lot of hard work but mostly luck. Because of the DLJA experience, that was a good thing to have on my resume. Cliff Asnas founder of AQR Capital, managing partner there at the time. I think it was late twenties. He was finishing up his PhD at the University of Chicago and was working for Goldman Asset Management. He got the mand to launch a new quantitative research group, and so he wanted to hire someone who had both the finance background and the computer science background. I had started with a couple of friends a software business in high school and at Penn. One of the things I did with my roommate was we started up a hardware business, kind of like Michael Dell, building and selling computers to faculty and students on campus. So I had the computer science background. Cliff had gone undergrad at Penn at Wharton also, so he knew that we'd taken the same kind of courses. We spoke the same language from that perspective, and I had that technology background. So I was his first tire as he was building out that new team. What my other colleagues did back then, you had basically three choices come out of Warden. It was accounting, investment, banking, and consulting. There was really no jobs for asset management, but those are the courses I love the most at Penn and really wanted to pursue that. So it was a great opportunity.

Like everything in life that works out well, that's you know, a lot of hard work but mostly luck. Because of the DLJA experience, that was a good thing to have on my resume. Cliff Asnas founder of AQR Capital, managing partner there at the time. I think it was late twenties. He was finishing up his PhD at the University of Chicago and was working for Goldman Asset Management. He got the mand to launch a new quantitative research group, and so he wanted to hire someone who had both the finance background and the computer science background. I had started with a couple of friends a software business in high school and at Penn. One of the things I did with my roommate was we started up a hardware business, kind of like Michael Dell, building and selling computers to faculty and students on campus. So I had the computer science background. Cliff had gone undergrad at Penn at Wharton also, so he knew that we'd taken the same kind of courses. We spoke the same language from that perspective, and I had that technology background. So I was his first tire as he was building out that new team. What my other colleagues did back then, you had basically three choices come out of Warden. It was accounting, investment, banking, and consulting. There was really no jobs for asset management, but those are the courses I love the most at Penn and really wanted to pursue that. So it was a great opportunity.

So you spend three years or so at Goldman with Cliff. By that point he had been there for a while and decided, hey, I think I have a little more freedom and opportunity to find launch a fund on our own. You were there day one, you left with him, right, tell us a little bit about what it was like standing up AQR with aastness.

So you spend three years or so at Goldman with Cliff. By that point he had been there for a while and decided, hey, I think I have a little more freedom and opportunity to find launch a fund on our own. You were there day one, you left with him, right, tell us a little bit about what it was like standing up AQR with aastness.

It was great. We started off this little background there as a research group within g SAM so think cost center and just putting some timeframes around this. This is nineteen ninety four, which is one of the toughest years in Goldman's history, even going back to the Great Depression. It was the kind of year where trem and a partner you get to put in money. Wow, which was was it that bad a year?

It was great. We started off this little background there as a research group within g SAM so think cost center and just putting some timeframes around this. This is nineteen ninety four, which is one of the toughest years in Goldman's history, even going back to the Great Depression. It was the kind of year where trem and a partner you get to put in money. Wow, which was was it that bad a year?

I don't remember. Ninety four is a terrible market year.

I don't remember. Ninety four is a terrible market year.

That was the year where the Fed had the surprise significant rate hike in feb I was actually on the floor.

That was the year where the Fed had the surprise significant rate hike in feb I was actually on the floor.

I think bonds took a whack, but equities also wobbled a bit.

I think bonds took a whack, but equities also wobbled a bit.

Is that a well a bit? But yeah, it was really a bad year for fixed income and the firm had a lot of risk and fixing, I presume, which led to the tough year. Yeah. So we were a research group, cost center, and then left in people were disappearing week by week as they were cutting down really headcount, and so quickly we realized we've got to start gendering some revenue. We want to say, alive. And Cliff went to them and said, hey, we've been we built some interesting models. We think we're good at picking stocks and futures and things like that. We think we can trade on this and make some money. He convinced the partnership to give us some money. So it's basically a prop trading effort. For a little while, it did very well. They kept adding money to it, and then we opened it up and turned it into a fund. It was really Goldman's first real hedge fund coming out of g SAM that funded very well, which really opened the door for us to be able to leave and start up and raise money as an independent hedge fund.

Is that a well a bit? But yeah, it was really a bad year for fixed income and the firm had a lot of risk and fixing, I presume, which led to the tough year. Yeah. So we were a research group, cost center, and then left in people were disappearing week by week as they were cutting down really headcount, and so quickly we realized we've got to start gendering some revenue. We want to say, alive. And Cliff went to them and said, hey, we've been we built some interesting models. We think we're good at picking stocks and futures and things like that. We think we can trade on this and make some money. He convinced the partnership to give us some money. So it's basically a prop trading effort. For a little while, it did very well. They kept adding money to it, and then we opened it up and turned it into a fund. It was really Goldman's first real hedge fund coming out of g SAM that funded very well, which really opened the door for us to be able to leave and start up and raise money as an independent hedge fund.

What were the specific strategies Cliff was running at g SAM with the partner's money.

What were the specific strategies Cliff was running at g SAM with the partner's money.

It was a multi strategy approach, but it was all quantitative. And when I say quantitative, that means a lot of things to different people. I think about every good investment process is really a process, and whether people would label as quantitative or or not is really how automated it is. And so by quantity of I mean like really automated downloading public data for the most part, pumping it through some systems, and that causes you to want to buy and sell different instruments around the world.

It was a multi strategy approach, but it was all quantitative. And when I say quantitative, that means a lot of things to different people. I think about every good investment process is really a process, and whether people would label as quantitative or or not is really how automated it is. And so by quantity of I mean like really automated downloading public data for the most part, pumping it through some systems, and that causes you to want to buy and sell different instruments around the world.

But you're still creating or Cliff at the time was creating models, and the models would give him a ranked list of Hey, the top ten stocks on this list of a thousand are really or whatever the number is, are things you want to look at, either getting long or short based on whatever that model is.

But you're still creating or Cliff at the time was creating models, and the models would give him a ranked list of Hey, the top ten stocks on this list of a thousand are really or whatever the number is, are things you want to look at, either getting long or short based on whatever that model is.

That's right. So that you'd have many different signals, and we're treading many different asset classes, and so it's like you're saying all those signals you would givefferent weights different signals, and those would add up to you like these things, you don't like these things. We would trade global equities in a bunch of different countries, but market neutral so long as much as you are short, so you're not taking a bet on is the market going to go up or down. You're really taking a bet on this group of stocks is going to perform this other group of stocks by looking at a bunch of different characteristics. We did that for stocks, We did it for currencies, for commodities, you name it was. It was tradable, and we had data we wanted to be trading it. And that's really what the genesis of that fund was.

That's right. So that you'd have many different signals, and we're treading many different asset classes, and so it's like you're saying all those signals you would givefferent weights different signals, and those would add up to you like these things, you don't like these things. We would trade global equities in a bunch of different countries, but market neutral so long as much as you are short, so you're not taking a bet on is the market going to go up or down. You're really taking a bet on this group of stocks is going to perform this other group of stocks by looking at a bunch of different characteristics. We did that for stocks, We did it for currencies, for commodities, you name it was. It was tradable, and we had data we wanted to be trading it. And that's really what the genesis of that fund was.

How long were you guys doing that before you realized, hey, this is really going to be a successful model, And then how much longer was it before maybe we should do this out from under the compliance regulations of a broker dealer.

How long were you guys doing that before you realized, hey, this is really going to be a successful model, And then how much longer was it before maybe we should do this out from under the compliance regulations of a broker dealer.

We started that as a fund really in nineteen ninety five. It had been trading prop for a little time with Goldman's money, and we made money almost every month. Basically it traded as a fund, and you think we left in terms of a timing perspective, you know, they started nineteen ninety five We left early nineteen ninety eight, so it's only a couple of years in change that we were trading this within g SAM before leaving to start at BAQR.

We started that as a fund really in nineteen ninety five. It had been trading prop for a little time with Goldman's money, and we made money almost every month. Basically it traded as a fund, and you think we left in terms of a timing perspective, you know, they started nineteen ninety five We left early nineteen ninety eight, so it's only a couple of years in change that we were trading this within g SAM before leaving to start at BAQR.

So let's talk a little bit about AQR. You there from inception, from day one. What was that transition like from you know, I imagine at Goldman Sachs you have access to life, lots of support, lots of tools, lots of data, lots of everything. What's it like starting over again from scratch in a standalone hedge fund.

So let's talk a little bit about AQR. You there from inception, from day one. What was that transition like from you know, I imagine at Goldman Sachs you have access to life, lots of support, lots of tools, lots of data, lots of everything. What's it like starting over again from scratch in a standalone hedge fund.

I'll tell you a funny story. So I got into a few different battles with the administration folks at Goldman Sachs size management. If you remember, like in college, I had a computer business where we'd like buy parts, build computers and sell them, and so I knew how to build my own computers. Goldman Sachs. At the time, the standard computer that everybody had was what was called an eight eighty six. This is like the first real PC that IBM had out there, and you know, they were good, but they weren't the most advanced available machines. Basically, I went to the administration and I said, look, we need the most advanced machines because we're trying to run a lot of computationally intensive models and this machine we have now is very slow at taking very long to run our models. You can buy the latest machine at half the price of what Goldman was paying and get twice the performance. What I didn't realize at the time is that when you're trying to run an organization that large and complex.

I'll tell you a funny story. So I got into a few different battles with the administration folks at Goldman Sachs size management. If you remember, like in college, I had a computer business where we'd like buy parts, build computers and sell them, and so I knew how to build my own computers. Goldman Sachs. At the time, the standard computer that everybody had was what was called an eight eighty six. This is like the first real PC that IBM had out there, and you know, they were good, but they weren't the most advanced available machines. Basically, I went to the administration and I said, look, we need the most advanced machines because we're trying to run a lot of computationally intensive models and this machine we have now is very slow at taking very long to run our models. You can buy the latest machine at half the price of what Goldman was paying and get twice the performance. What I didn't realize at the time is that when you're trying to run an organization that large and complex.

I want everything stand you.

I want everything stand you.

Can't support it unless everything's standardized. And so there was a reason for it which I didn't understand.

Can't support it unless everything's standardized. And so there was a reason for it which I didn't understand.

That you guys can support your own hardware.

That you guys can support your own hardware.

That's not that hard.

That's not that hard.

Cliff eventually persuaded them to give let us get the new machines. But one of the big changes as you talk about leaving a place, you know you have lots of resources and whatnot at large organizations, but you have limited resources at every place, no matter how big you are. There's always trade offs that you're making when you start up as a new firm. One thing that was a big change is that at Goldman we had to support lots of other groups. We were providing research advice, investment advice, talk to clients, help them raise money in other products. When we launched you own hedge fund. All that matter was making money in that hedge fund, so helping that focus was important, and we were able to buy the latest computers that have the cost.

Cliff eventually persuaded them to give let us get the new machines. But one of the big changes as you talk about leaving a place, you know you have lots of resources and whatnot at large organizations, but you have limited resources at every place, no matter how big you are. There's always trade offs that you're making when you start up as a new firm. One thing that was a big change is that at Goldman we had to support lots of other groups. We were providing research advice, investment advice, talk to clients, help them raise money in other products. When we launched you own hedge fund. All that matter was making money in that hedge fund, so helping that focus was important, and we were able to buy the latest computers that have the cost.

I'm going to bet that you did something a little beefier than those IBM eight to eighty six is.

I'm going to bet that you did something a little beefier than those IBM eight to eighty six is.

Yeah, I was overclocking the machines. I was doing all the pulling, all the ways to get things to go as fast as possible.

Yeah, I was overclocking the machines. I was doing all the pulling, all the ways to get things to go as fast as possible.

Huh.

Huh.

Really interesting. So at AQR you juggled a lot of responsibilities. You were a portfolio manager, researcher, head of trading, and apparently tech geek putting machines together. What was it like juggling all these different responsibilities.

Really interesting. So at AQR you juggled a lot of responsibilities. You were a portfolio manager, researcher, head of trading, and apparently tech geek putting machines together. What was it like juggling all these different responsibilities.

There's a couple things I'll say about that. So one thing, just from a personal perspective, my wife and I we have five children together, and that's a lot to deal with. My wife is amazing, and there's no way I would be able to do all the stuff I do at work if it weren't for her being amazing and handling everything at home. So that's the first thing, and how I get so many things done at work. I'm also from a personality perspective, I get bored very quickly. I like learning and doing a lot of different things. I like being able to jump around, So to me, that's just fun. The consequence is sleep. I don't sleep very much.

There's a couple things I'll say about that. So one thing, just from a personal perspective, my wife and I we have five children together, and that's a lot to deal with. My wife is amazing, and there's no way I would be able to do all the stuff I do at work if it weren't for her being amazing and handling everything at home. So that's the first thing, and how I get so many things done at work. I'm also from a personality perspective, I get bored very quickly. I like learning and doing a lot of different things. I like being able to jump around, So to me, that's just fun. The consequence is sleep. I don't sleep very much.

What do you mean, not very much? And you know that only gets worse as you get older.

What do you mean, not very much? And you know that only gets worse as you get older.

We usually get to sleep around one am and you know, six six thirty something like that.

We usually get to sleep around one am and you know, six six thirty something like that.

All right, so five hours, that's not terrible, not too terrible. I've lived on six hours most of my life and it's and you get older that that shrinks. I thought you were referencing the five kids, because it's like, hey, when you have five kids, you want how to juggle a lot of different things at once because something is always that's fine.

All right, so five hours, that's not terrible, not too terrible. I've lived on six hours most of my life and it's and you get older that that shrinks. I thought you were referencing the five kids, because it's like, hey, when you have five kids, you want how to juggle a lot of different things at once because something is always that's fine.

There's always something going on, that's for sure.

There's always something going on, that's for sure.

What was it like working with Cliff back in the days.

What was it like working with Cliff back in the days.

It was fun. I think Cliff's greatd a lot of different things, but one was he hired well. He was able to attract really talented people and then he just let them do what they do. So he's not a micromanager. He just lets them run with it. And so that was a very fortunate thing for me right place, right time in terms of being able to get a lot of responsibility early on, and that's how I was able to not just be a researcher building models and creating new strategies that I'd run by Cliff and he would say, Okay, you're doing this dumb or doing that dumb, and you got to improve this, but also doing all the trading by myself for the firm for the first several years, and then eventually saying, hey, Cliff, you know I need some help here. We need to hire, you know, someone to run technology other than me. We need to hire more traders than just me so that I can actually sleep. So that's how he ran it. And it was a lot of fun. I mean you mentioned it earlier on. I mean Cliff hilarious and he's.

It was fun. I think Cliff's greatd a lot of different things, but one was he hired well. He was able to attract really talented people and then he just let them do what they do. So he's not a micromanager. He just lets them run with it. And so that was a very fortunate thing for me right place, right time in terms of being able to get a lot of responsibility early on, and that's how I was able to not just be a researcher building models and creating new strategies that I'd run by Cliff and he would say, Okay, you're doing this dumb or doing that dumb, and you got to improve this, but also doing all the trading by myself for the firm for the first several years, and then eventually saying, hey, Cliff, you know I need some help here. We need to hire, you know, someone to run technology other than me. We need to hire more traders than just me so that I can actually sleep. So that's how he ran it. And it was a lot of fun. I mean you mentioned it earlier on. I mean Cliff hilarious and he's.

A funny guy. And it's rare to find someone who is a quant who can communicate as eloquently as he can and at the same time has such a devilish sense of humor. Like that's an unusual trifecta right there.

A funny guy. And it's rare to find someone who is a quant who can communicate as eloquently as he can and at the same time has such a devilish sense of humor. Like that's an unusual trifecta right there.

And it's part of what makes him fantastic as an individual, but also fantastic to work with and work for. It made the place fun even in the tough times. And so that's a big reason why I think a lot of people stuck through lots of the ups and downs that any organization has.

And it's part of what makes him fantastic as an individual, but also fantastic to work with and work for. It made the place fun even in the tough times. And so that's a big reason why I think a lot of people stuck through lots of the ups and downs that any organization has.

Let's talk a little bit about the AQR experience. The firm seems very I almost want to say academic. They publish a lot of white papers, they do a lot of research, They have very specific opinions on different topics that seem to come up in the world of finance. How much of this intellectual firepower is part think tank and how much of it is just Hey, if you're going to have an investment perspective, you need to have the intellectual underpinnings to justify it.

Let's talk a little bit about the AQR experience. The firm seems very I almost want to say academic. They publish a lot of white papers, they do a lot of research, They have very specific opinions on different topics that seem to come up in the world of finance. How much of this intellectual firepower is part think tank and how much of it is just Hey, if you're going to have an investment perspective, you need to have the intellectual underpinnings to justify it.

So I think one thing that makes acar a very powerful is its ability to attract top talent, specifically on the academic side. The smart people want to hang out with other smart people. That there is definitely a network effect that happens there. And I would say part of the compensation you're getting indirectly by being in an organization like that is getting exposure to all these great minds that you can learn from, you can bounce ideas off of. So is it a think tank? Yeah, I think it is a think tank from that perspective, But at the end of the day, it's a business and they're there to make money, make money for their investors, so I think there is a lot of focus on that as well. So the publications, you see a lot of white papers, and sure, I would say it rhymes with a lot of things they do. But they obviously keep a lot of the special sauce unpublished and use that within their funds.

So I think one thing that makes acar a very powerful is its ability to attract top talent, specifically on the academic side. The smart people want to hang out with other smart people. That there is definitely a network effect that happens there. And I would say part of the compensation you're getting indirectly by being in an organization like that is getting exposure to all these great minds that you can learn from, you can bounce ideas off of. So is it a think tank? Yeah, I think it is a think tank from that perspective, But at the end of the day, it's a business and they're there to make money, make money for their investors, so I think there is a lot of focus on that as well. So the publications, you see a lot of white papers, and sure, I would say it rhymes with a lot of things they do. But they obviously keep a lot of the special sauce unpublished and use that within their funds.

But they're still writing about broad strokes. So let's talk about a white paper that you wrote titled the Evolution of Alpha. Tell us how has alpha evolved over the past few decades.

But they're still writing about broad strokes. So let's talk about a white paper that you wrote titled the Evolution of Alpha. Tell us how has alpha evolved over the past few decades.

Sure, this is a white paper I wrote from my clear Apha Cio CEO hat and it really talks about the history of the hedge fund industry, why different models of delivering alpha, starting with let's say single strategy hedge funds, fund of funds, multi strategy funds, and now multi strategy multi manager are multipm funds and that's the latest evolution. And then we talk about what we think might be the next step, part of which we think we will drive. So that's the point of the paper. And there's reasons why you went from different models from one to the next, and it has to do with a variety of things. I can Curg. You to read the paper, it's on our website.

Sure, this is a white paper I wrote from my clear Apha Cio CEO hat and it really talks about the history of the hedge fund industry, why different models of delivering alpha, starting with let's say single strategy hedge funds, fund of funds, multi strategy funds, and now multi strategy multi manager are multipm funds and that's the latest evolution. And then we talk about what we think might be the next step, part of which we think we will drive. So that's the point of the paper. And there's reasons why you went from different models from one to the next, and it has to do with a variety of things. I can Curg. You to read the paper, it's on our website.

But so let's follow that up. What were the drivers of the shift from a single manager to multiple managers to multi strategy to multi manager multi strategy.

But so let's follow that up. What were the drivers of the shift from a single manager to multiple managers to multi strategy to multi manager multi strategy.

What was the key driver of that?

What was the key driver of that?

Starting back this is around two thousand, let's say. Obviously hedge funds existed before that, but that's really the point at which at least a meaningful amount of institution investors actually started having investments in hedge funds as like a normal course of business. That was the year obviously that the market sold off a lot. That was the Enron fiasco and whatnot. A lot of Wall Street was let go, so a lot of talent was being let go, and much of that talent was investment analysts, research chants. The covered stocks new stocks, deeply knew the management of those companies deeply. So if you're an investment analyst at a Wall Street bank, you go off and hang up a shingle, start a single strategy hedge fund where you're picking stocks. You had an argument why you'd have an edge because you knew these managers these stocks deeply. And that's really was like a Cambrian explosion of hedge funds at that moment in time, and even to this day, I think in terms of like sheer number count, the vast majority of hedge funds are really stock picking hedge funds.

Starting back this is around two thousand, let's say. Obviously hedge funds existed before that, but that's really the point at which at least a meaningful amount of institution investors actually started having investments in hedge funds as like a normal course of business. That was the year obviously that the market sold off a lot. That was the Enron fiasco and whatnot. A lot of Wall Street was let go, so a lot of talent was being let go, and much of that talent was investment analysts, research chants. The covered stocks new stocks, deeply knew the management of those companies deeply. So if you're an investment analyst at a Wall Street bank, you go off and hang up a shingle, start a single strategy hedge fund where you're picking stocks. You had an argument why you'd have an edge because you knew these managers these stocks deeply. And that's really was like a Cambrian explosion of hedge funds at that moment in time, and even to this day, I think in terms of like sheer number count, the vast majority of hedge funds are really stock picking hedge funds.

Long short eleven thousand hedge funds out there too.

Long short eleven thousand hedge funds out there too.

Yeah, yeah, long short discretionary equity stockpicking hedge funds. That models survived for a little while, but as investors were investing in these individual kind of single strategy, single style hedge funds, what they realize is that anyone single approach is not very consistent. You know, it's going to go through it's good periods and it's bad periods, and it's hard to hang on to what I would call be exposed to what the line item risk is. When you have these quarterly reviews of what's going on the portfolio, invariably the discussion is, let's talk about the things that are down the most, and that leads to, you know, firing managers when they're down, usually just after a environment that was just bad for their approach, before it rebounds and does well, you know, in the next year. So that model, well it still exists today, is tough from an investment to stick with. Then you switch to fund of funds and soucial investors. You know, one stop shop, buy into a fund of funds. You can get exposure to many different strategies and styles in one vehicle. That's what came out of that and was to address this inconsistency. So fund of funds were more consistent than a single strategy fund. But I would say the consequence and its or the issue really is both for fund of funds and really for portfolios of hedge funds that investors have. It's cash inefficient. It's capital inefficient because most hedge funds have a lot of cash on their balance sheet typical hedge fund. It varies, but depending on top of style and strategy, will have between forty and ninety percent of the money you give them just sitting in cash.

Yeah, yeah, long short discretionary equity stockpicking hedge funds. That models survived for a little while, but as investors were investing in these individual kind of single strategy, single style hedge funds, what they realize is that anyone single approach is not very consistent. You know, it's going to go through it's good periods and it's bad periods, and it's hard to hang on to what I would call be exposed to what the line item risk is. When you have these quarterly reviews of what's going on the portfolio, invariably the discussion is, let's talk about the things that are down the most, and that leads to, you know, firing managers when they're down, usually just after a environment that was just bad for their approach, before it rebounds and does well, you know, in the next year. So that model, well it still exists today, is tough from an investment to stick with. Then you switch to fund of funds and soucial investors. You know, one stop shop, buy into a fund of funds. You can get exposure to many different strategies and styles in one vehicle. That's what came out of that and was to address this inconsistency. So fund of funds were more consistent than a single strategy fund. But I would say the consequence and its or the issue really is both for fund of funds and really for portfolios of hedge funds that investors have. It's cash inefficient. It's capital inefficient because most hedge funds have a lot of cash on their balance sheet typical hedge fund. It varies, but depending on top of style and strategy, will have between forty and ninety percent of the money you give them just sitting in cash.

Really, that's a giant number. Half is a giant number. I thought you were going to go in a different direction. I have a friend who's an allocator at a big foundation, and he calls the fund of funds fund of fees because you're paying layers on top of layers of fees, and it definitely acts as as a long term drag. But I never would have guessed that fifty plus percent of assets handed to hedge funds are in cash at any one time. I always assumed it was the opposite that all right there, you know, like the one thirty thirty funds or whichever variation you're looking at. I always assume that they're leveraged up and even if they're long short, all that money is put to work. You're saying that's not the case.

Really, that's a giant number. Half is a giant number. I thought you were going to go in a different direction. I have a friend who's an allocator at a big foundation, and he calls the fund of funds fund of fees because you're paying layers on top of layers of fees, and it definitely acts as as a long term drag. But I never would have guessed that fifty plus percent of assets handed to hedge funds are in cash at any one time. I always assumed it was the opposite that all right there, you know, like the one thirty thirty funds or whichever variation you're looking at. I always assume that they're leveraged up and even if they're long short, all that money is put to work. You're saying that's not the case.

Well, technically all the you know, they will put the money to work in the sense of it's not pure cash hitting there. But really there's a lot of barring power. You love assets that you're holding, there's a tremendous amount of barring power you can borrow against those assets that you hold to then create a more efficient portfolio. And that's where kind of multi strategy funds evolved. So multi strategy funds gave you the benefit of many different strategies and styles, yet put into the same vehicle all these positions held in the same vehicle to get much more cash efficiency, cap efficiency, higher return on capital, plus the consistency.

Well, technically all the you know, they will put the money to work in the sense of it's not pure cash hitting there. But really there's a lot of barring power. You love assets that you're holding, there's a tremendous amount of barring power you can borrow against those assets that you hold to then create a more efficient portfolio. And that's where kind of multi strategy funds evolved. So multi strategy funds gave you the benefit of many different strategies and styles, yet put into the same vehicle all these positions held in the same vehicle to get much more cash efficiency, cap efficiency, higher return on capital, plus the consistency.

So I'm assuming if you're using a multi manager, multi strategy approach, anyone strategy at any given time is either going to be doing well or poorly, but the overall performance of a multi strat will offset that. So it's not like, hey, this guy has a bad quarter because what they do is out of favor and the clients pull out their cash just before the recovery. Is there a tendency to leave money with a multi strat multi manager approach for longer and so you don't have those sort of bad quarter, bad month, whatever it is, because this just isn't working now, but it'll start working eventually. Is that the underlying thinking.

So I'm assuming if you're using a multi manager, multi strategy approach, anyone strategy at any given time is either going to be doing well or poorly, but the overall performance of a multi strat will offset that. So it's not like, hey, this guy has a bad quarter because what they do is out of favor and the clients pull out their cash just before the recovery. Is there a tendency to leave money with a multi strat multi manager approach for longer and so you don't have those sort of bad quarter, bad month, whatever it is, because this just isn't working now, but it'll start working eventually. Is that the underlying thinking.

That's really the approach? In fact, a lot of successful single manager businesses evolve to the multi strategy approach because they recognize that lack of consistency for a single approach, a single investing style was a threat to their own business, and so expanding into other strategies and styles is how a lot of these more successful single strategy funds evolved.

That's really the approach? In fact, a lot of successful single manager businesses evolve to the multi strategy approach because they recognize that lack of consistency for a single approach, a single investing style was a threat to their own business, and so expanding into other strategies and styles is how a lot of these more successful single strategy funds evolved.

So it sounds like, if you're running either a multi manager or a multi strategy or both, everything needs to be very non correlated. You don't want everything down at the same time. How do you approach picking various strategies that are not correlated.

So it sounds like, if you're running either a multi manager or a multi strategy or both, everything needs to be very non correlated. You don't want everything down at the same time. How do you approach picking various strategies that are not correlated.

That's a great question. I think it's helpful. I don't like the gambling angle, but I think it's a helpful analogy because most people are used to the analogy. If you think about the casino, people go to the casino knowing that if they play the games long enough, they're going to lose their money. I think most people think that the multi strategy hedge fund is really like the house where each table or each game in the casino in their house has slight edge, and if they make sure that there's not going to be massive losses at different tables on the same night, same weekend, same month, over time, they will just just stashysically accrue profits in a more consistent manner. So that is a big focus. And if you think about what risk manners would do at a casino, it's the same thing. They're going to make sure that these tables, these games are not going to be making or losing money at the same time.

That's a great question. I think it's helpful. I don't like the gambling angle, but I think it's a helpful analogy because most people are used to the analogy. If you think about the casino, people go to the casino knowing that if they play the games long enough, they're going to lose their money. I think most people think that the multi strategy hedge fund is really like the house where each table or each game in the casino in their house has slight edge, and if they make sure that there's not going to be massive losses at different tables on the same night, same weekend, same month, over time, they will just just stashysically accrue profits in a more consistent manner. So that is a big focus. And if you think about what risk manners would do at a casino, it's the same thing. They're going to make sure that these tables, these games are not going to be making or losing money at the same time.

So let's talk about some of these diversified, non correlated strategies. I'm assuming some include momentum, long, short, any other sort of approaches that people would really readily understand.

So let's talk about some of these diversified, non correlated strategies. I'm assuming some include momentum, long, short, any other sort of approaches that people would really readily understand.

Sure, when I think about most hedge fund strategies, the ones that people know about, the ones that there are. If you look at hedge fund indicies, there's a category for it, you know. So it could be long short stock picking, it could be merger arbitrage, it could be index rebound arbitra, or basis trading. There's a variety, and there's like dozens of these kind of well known, well understand activists exactly. These are all out there, they're they're well known. When you look at each one of those, you can break it down between kind of cheap passive beta. So let's take an example long short, discretionary stockpicking. Most of these hedge funds, the way they're implemented is the manager's net long the stock market, and so some portion of their returns, it's actually a pretty sniffing portion is just being going to be driven by whether the stock markets separate down there just pure data, pure beta, and that's that's a I think about the scarce resources your risk budget, and how do you want to allocate that risk budget. If you're allocking a lot of your risk budget to just pure beta, that might work for the manager, but for an investor that doesn't make a lot of sense because I can go and get pure beta. I can buy an index fund for you know, single digit basis points. At this point, it's effectively free these multi strategy funds in order to reduce the correlation across their managers. They don't want to have all these manager's long pure beta. That's a common risk that will cause them to make and lose money at the same time. And so when you're running a multi strategy fund, it's really about looking at these common risks. BITA is the simplest example. It could be sector exposure, it could be factor exposure like momentum you mentioned earlier, and there's a lot of other less well known but known in the industry risks that take place. You know, people talk about crowding. There's reasons why crowding happens. So being able to be aware of those and look for signs of that and trying to mitigate those common allies across your different strategies is a really key component to managing risk for these multi strategy funds.

Sure, when I think about most hedge fund strategies, the ones that people know about, the ones that there are. If you look at hedge fund indicies, there's a category for it, you know. So it could be long short stock picking, it could be merger arbitrage, it could be index rebound arbitra, or basis trading. There's a variety, and there's like dozens of these kind of well known, well understand activists exactly. These are all out there, they're they're well known. When you look at each one of those, you can break it down between kind of cheap passive beta. So let's take an example long short, discretionary stockpicking. Most of these hedge funds, the way they're implemented is the manager's net long the stock market, and so some portion of their returns, it's actually a pretty sniffing portion is just being going to be driven by whether the stock markets separate down there just pure data, pure beta, and that's that's a I think about the scarce resources your risk budget, and how do you want to allocate that risk budget. If you're allocking a lot of your risk budget to just pure beta, that might work for the manager, but for an investor that doesn't make a lot of sense because I can go and get pure beta. I can buy an index fund for you know, single digit basis points. At this point, it's effectively free these multi strategy funds in order to reduce the correlation across their managers. They don't want to have all these manager's long pure beta. That's a common risk that will cause them to make and lose money at the same time. And so when you're running a multi strategy fund, it's really about looking at these common risks. BITA is the simplest example. It could be sector exposure, it could be factor exposure like momentum you mentioned earlier, and there's a lot of other less well known but known in the industry risks that take place. You know, people talk about crowding. There's reasons why crowding happens. So being able to be aware of those and look for signs of that and trying to mitigate those common allies across your different strategies is a really key component to managing risk for these multi strategy funds.

Huh, there's so many different ways to go with this. So you're implying with these crowded funds that there's a way to identify when when you're in a crowded fund, I recall the quant quake a couple of years back, where all these big quant shops post GFC really seem like they were having the same sort of exposure in the same sort of problem problems. How can you identify an event like that before it takes your fun down ten twenty percent.

Huh, there's so many different ways to go with this. So you're implying with these crowded funds that there's a way to identify when when you're in a crowded fund, I recall the quant quake a couple of years back, where all these big quant shops post GFC really seem like they were having the same sort of exposure in the same sort of problem problems. How can you identify an event like that before it takes your fun down ten twenty percent.

That's a great question, And I would say a more recent example might be COVID March of twenty twenty when they're so I talked about a couple of different common risks. One is beta one. Another one might be factors, a simple. Other one is just there's a well known strategy. Let's say merge arbatrage. You know there are plenty of funds that are running merge arbatrage is one of their strategies within the fund. Okay, simply because a lot of people are doing something that in a sense, when there is some other exogenous event that causes people to de risk, it actually makes it bad to be in well known, well understood trading strategies, so that you know ahead of time that this is something that is crowded. You know that there are other players that are doing the same kind of trades as you going in.

That's a great question, And I would say a more recent example might be COVID March of twenty twenty when they're so I talked about a couple of different common risks. One is beta one. Another one might be factors, a simple. Other one is just there's a well known strategy. Let's say merge arbatrage. You know there are plenty of funds that are running merge arbatrage is one of their strategies within the fund. Okay, simply because a lot of people are doing something that in a sense, when there is some other exogenous event that causes people to de risk, it actually makes it bad to be in well known, well understood trading strategies, so that you know ahead of time that this is something that is crowded. You know that there are other players that are doing the same kind of trades as you going in.

Huh, that's really interesting, And just to put some meat on the bones. Multi strategy, multi manager, multi model funds have really gained prominence lately, names like Citadel, Point seventy two, Millennium, lots of other larger funds have very much adopted this approach.

Huh, that's really interesting, And just to put some meat on the bones. Multi strategy, multi manager, multi model funds have really gained prominence lately, names like Citadel, Point seventy two, Millennium, lots of other larger funds have very much adopted this approach.

Fair statement, that's very fair.

Fair statement, that's very fair.

I do think it's the best way to deliver alpha.

I do think it's the best way to deliver alpha.

So you're reducing correlation, you're reducing risk, you're increasing the odds of about performance. At how broad are firms like I don't know, Citadel or Millennium that they don't run into that crowded trade risk? You would think given their size and they're tens of billions of dollars, a crowded trade becomes increasingly more likely, right.

So you're reducing correlation, you're reducing risk, you're increasing the odds of about performance. At how broad are firms like I don't know, Citadel or Millennium that they don't run into that crowded trade risk? You would think given their size and they're tens of billions of dollars, a crowded trade becomes increasingly more likely, right.

Right, And there's a reason for why that's the case. There are literally thousands of different types of ways to make money in the markets, thousands, but there's only dozens of ways of making money in the markets that have lots of capacity. And you can put a lot of dollars in general, a lot of dollars to scale up, to scale up, and if you're going to be a very large fund, you by definition have to put more and more of your money into the well known large trading strategies and so they have to be particularly attuned to the fact that they are large and their competitors are also large, and then the same kind of trades. So it is at risk. And when these things, you know, when one of these shops sells out or reduces risks and one of these common strategies, it's going to affect the other ones. It's hard to avoid that. But they are fairly well diversified across many different types of strategies, so that's why you see still very consistent returns. But there is this exogenous risk element of having being big in the credit. The way you avoid that is by being smaller, focusing on smaller strategies. They're a little bit different.

Right, And there's a reason for why that's the case. There are literally thousands of different types of ways to make money in the markets, thousands, but there's only dozens of ways of making money in the markets that have lots of capacity. And you can put a lot of dollars in general, a lot of dollars to scale up, to scale up, and if you're going to be a very large fund, you by definition have to put more and more of your money into the well known large trading strategies and so they have to be particularly attuned to the fact that they are large and their competitors are also large, and then the same kind of trades. So it is at risk. And when these things, you know, when one of these shops sells out or reduces risks and one of these common strategies, it's going to affect the other ones. It's hard to avoid that. But they are fairly well diversified across many different types of strategies, so that's why you see still very consistent returns. But there is this exogenous risk element of having being big in the credit. The way you avoid that is by being smaller, focusing on smaller strategies. They're a little bit different.

Huh.

Huh.

Really interesting. So you mentioned earlier early days of hedge funds, the fund of funds were popular. It feels like they're kind of going away. You certainly hear much less about them these days. Is that a fair assessment. Just because you don't hear about stuff doesn't mean it's disappeared. But I certainly only read much less about fund of funds that they are in the news much less. Have multi manager, multi strat multi model broad funds replaced the concept of fund of funds.

Really interesting. So you mentioned earlier early days of hedge funds, the fund of funds were popular. It feels like they're kind of going away. You certainly hear much less about them these days. Is that a fair assessment. Just because you don't hear about stuff doesn't mean it's disappeared. But I certainly only read much less about fund of funds that they are in the news much less. Have multi manager, multi strat multi model broad funds replaced the concept of fund of funds.

I think as an evolution, it doesn't mean that the fund of funds model is going away entirely. There's certain managers out there who have commingled vehicles that only you know. They won't run an SMA for you, they won't trade their strategy into your account. Fund of funds can access that, So there's a reason for that. And you know they're nice one stop shops and they can maybe a little more transparent. But there are You talked about this earlier, the fees being an issue, and it's really about the fee is a percentage of the dollars of P and L being earned. There's an academic paper recently published that did a really interesting study over ten years of looking at institutional hedge fund portfolios. What it showed is that for every dollar of P and L being generated by these hedge fund strategies, at the end of the day, the institutional investor took home about thirty seven cents, really, which is I think a shocking number from right right.

I think as an evolution, it doesn't mean that the fund of funds model is going away entirely. There's certain managers out there who have commingled vehicles that only you know. They won't run an SMA for you, they won't trade their strategy into your account. Fund of funds can access that, So there's a reason for that. And you know they're nice one stop shops and they can maybe a little more transparent. But there are You talked about this earlier, the fees being an issue, and it's really about the fee is a percentage of the dollars of P and L being earned. There's an academic paper recently published that did a really interesting study over ten years of looking at institutional hedge fund portfolios. What it showed is that for every dollar of P and L being generated by these hedge fund strategies, at the end of the day, the institutional investor took home about thirty seven cents, really, which is I think a shocking number from right right.

So you're saying almost two thirds of the money never either it's fees or costs or some other factor, but only let a little more than a third ends up with the actual investor.

So you're saying almost two thirds of the money never either it's fees or costs or some other factor, but only let a little more than a third ends up with the actual investor.

That's right, and it's actually it's really interesting breaks down the sources of all these things. Part of it is fees and double layers of fees and things like that. A big part of it is the behavioral nature, which I think is driven by governance of investing organizations.

That's right, and it's actually it's really interesting breaks down the sources of all these things. Part of it is fees and double layers of fees and things like that. A big part of it is the behavioral nature, which I think is driven by governance of investing organizations.

Where filled with humans.

Where filled with humans.

Yes, strategy is down. What's been down, Let's get out of that. Let's get into the thing that's been up recently that costs about a third of your offha.

Yes, strategy is down. What's been down, Let's get out of that. Let's get into the thing that's been up recently that costs about a third of your offha.

That doesn't surprise me at all, even though you expect big endowments and foundations and hedge funds to be smarter than that. Fillm with people and you're going to get those behavioral problems, aren't you.

That doesn't surprise me at all, even though you expect big endowments and foundations and hedge funds to be smarter than that. Fillm with people and you're going to get those behavioral problems, aren't you.

Yeah, Well, there's agency issues in between, and I think investors are well aware of these, so that causes part of it too. But a big thing and the thing that kind of the multi manager, multi strategy approach tackles that a fund of funds can't is you get a lot of netting benefits both from you know, one manager's long apple another manager's short apple. Right in a fund to fund approach where you're investing in two different funds, well, a they don't know that. And b the managers who long Apple, they're paying a financing spread to go leverage long Apple, and the managers's shortest paying financing spread to go short Apples. You're paying a lot of extra cost there just to be net flat, just to be net flat. So if those two managers instead traded those positions into the same vehicle, you're getting that efficiency and that's worth you know, in the order of like two to three percent per year just that alone. The enhanced risk management you can get by having daily position transparency and all the trades, if all the different pans are doing, being able to hedge out all these beta risk factor, risk sector risks, things like that allows you to be much more efficient with how you deploy that capital. And so you see that these multi manager funds tend to be a little more invested than a hedge fund portfolio typically could be, and that creates a lot of efficiencies. And so when you look at the returns that they're generating, you know, it's closer to like fifty to fifty, where like for every dollar that's generative P and L, fifty cents is going to the investor. So it's a much more efficient delivery mechanism of alpha.

Yeah, Well, there's agency issues in between, and I think investors are well aware of these, so that causes part of it too. But a big thing and the thing that kind of the multi manager, multi strategy approach tackles that a fund of funds can't is you get a lot of netting benefits both from you know, one manager's long apple another manager's short apple. Right in a fund to fund approach where you're investing in two different funds, well, a they don't know that. And b the managers who long Apple, they're paying a financing spread to go leverage long Apple, and the managers's shortest paying financing spread to go short Apples. You're paying a lot of extra cost there just to be net flat, just to be net flat. So if those two managers instead traded those positions into the same vehicle, you're getting that efficiency and that's worth you know, in the order of like two to three percent per year just that alone. The enhanced risk management you can get by having daily position transparency and all the trades, if all the different pans are doing, being able to hedge out all these beta risk factor, risk sector risks, things like that allows you to be much more efficient with how you deploy that capital. And so you see that these multi manager funds tend to be a little more invested than a hedge fund portfolio typically could be, and that creates a lot of efficiencies. And so when you look at the returns that they're generating, you know, it's closer to like fifty to fifty, where like for every dollar that's generative P and L, fifty cents is going to the investor. So it's a much more efficient delivery mechanism of alpha.

So we were talking earlier and I mentioned off air that the funny element of individual investors tending to underperform their own investments. I know you've done some research on that. Tell us a little bit about what you say.

So we were talking earlier and I mentioned off air that the funny element of individual investors tending to underperform their own investments. I know you've done some research on that. Tell us a little bit about what you say.

Yeah, this is really something that's very important to me when I think about the industry and like, what are the big problems that are facing the industry. What's really causing investors not to get as much money in their retirem accounts as we possibly could get there. One of them is this behavioral issue, which I think also ties to like incentives and governance and agency issues within investing organizations. Morning Star does a study that they call Mine the Gap, and they do it on a regular basis. Some of your relitiers might have heard this, and it's definitely worth reading. I'll quote some numbers off the top of my head. I might be remembering incorrectly, but what it does is it's measuring the time weighted returns of funds, which is the returns that funds report. These are the returns that if you invested a dollar at the beginning and you held it all the way through, the returns you would have gotten if you never went to or went out of that fund. Then they compare that to the asset weighted returns, right, and that is going to be the asset weight returns are counting for the fact that you know, the fund does well, everybody gets excited, money comes in larger assets, and then it maybe does not as well after that, and so the larger assets earn less return. And so the asset way to return minus the time way to return is a really good way to measuring what's the actual impact of this behavioral element of investing, which is a really critical part of investing.

Yeah, this is really something that's very important to me when I think about the industry and like, what are the big problems that are facing the industry. What's really causing investors not to get as much money in their retirem accounts as we possibly could get there. One of them is this behavioral issue, which I think also ties to like incentives and governance and agency issues within investing organizations. Morning Star does a study that they call Mine the Gap, and they do it on a regular basis. Some of your relitiers might have heard this, and it's definitely worth reading. I'll quote some numbers off the top of my head. I might be remembering incorrectly, but what it does is it's measuring the time weighted returns of funds, which is the returns that funds report. These are the returns that if you invested a dollar at the beginning and you held it all the way through, the returns you would have gotten if you never went to or went out of that fund. Then they compare that to the asset weighted returns, right, and that is going to be the asset weight returns are counting for the fact that you know, the fund does well, everybody gets excited, money comes in larger assets, and then it maybe does not as well after that, and so the larger assets earn less return. And so the asset way to return minus the time way to return is a really good way to measuring what's the actual impact of this behavioral element of investing, which is a really critical part of investing.

And the gap refers to the behavior gap, which is the difference between what the fund generates and what the actual investors are getting.

And the gap refers to the behavior gap, which is the difference between what the fund generates and what the actual investors are getting.

Yeap, please continue.

Yeap, please continue.

And so what you find is that for like sixty to forty balanced funds, which typically are in retirement accounts where people maybe aren't looking at them every single day, they get statements once a quarter that are delayed.

And so what you find is that for like sixty to forty balanced funds, which typically are in retirement accounts where people maybe aren't looking at them every single day, they get statements once a quarter that are delayed.

Set and forget just it's kind of a set of Yeah.

Set and forget just it's kind of a set of Yeah.

That gap is on the order of sixty basis points, relatively small, relatively small, but it costs still. It costs sixty basis points year for the average investor. This beaver for those simple funds. Now for alternative funds, when they look at those, that gap is one hundred and seventy basis points a year.

That gap is on the order of sixty basis points, relatively small, relatively small, but it costs still. It costs sixty basis points year for the average investor. This beaver for those simple funds. Now for alternative funds, when they look at those, that gap is one hundred and seventy basis points a year.

Okay, that's starting it up.

Okay, that's starting it up.

That really I mean, if you think about that compounding over a decade, that was a massive hit to wealth. Why is there such a big gap for alternatives and not as much of a gap for the sixty forty I think it has a lot to do with investor understanding of what those products are and therefore the confidence people invest in alternatives. They don't necessarily understand them, and so you're setting yourself up for FI. You're a little bit there, because when it has bad performance you don't understand what it does, you're more likely to redeem.

That really I mean, if you think about that compounding over a decade, that was a massive hit to wealth. Why is there such a big gap for alternatives and not as much of a gap for the sixty forty I think it has a lot to do with investor understanding of what those products are and therefore the confidence people invest in alternatives. They don't necessarily understand them, and so you're setting yourself up for FI. You're a little bit there, because when it has bad performance you don't understand what it does, you're more likely to redeem.

That makes a lot of sense.

That makes a lot of sense.

So to me, investor education, really understanding what they're investing is is a critical component to being a successful investor.

So to me, investor education, really understanding what they're investing is is a critical component to being a successful investor.

Really really interesting. So you talk a lot about idea meritocracy. It's on your site, you've written about it. Explain a little bit what is idea meritocracy?

Really really interesting. So you talk a lot about idea meritocracy. It's on your site, you've written about it. Explain a little bit what is idea meritocracy?

This is a really important part and it's part of our culture at clear Alpha. The idea is to get all ideas surfaced so that the organization can make the best decisions. How do you know what prevents good ideas from surfacing. One is that people may not know that you know, a questions even being asked. So many organizations are run fairly siloed different groups, and a lot of that happens associally large large organizations. It's hard for everybody to be constantly communicate with one another, so just not even knowing a question exists. So the way we address that is that we use Microsoft Teams at the office and most people are in various channels and we're seeing questions going on all the time. I really discourage people from asking me a one on one question. I will usually redirect a question someone asked me to here's the broad company, here's the question that was asked, here's the answer. So then immediately the entire company learns you know what this topic was, and very often that says, oh, someone else, I have another idea about that that I want to now share. So getting accessibility for people to deliver. But the most important about idea meritocracy is really from a leadership standpoint. People have to feel safe bringing up ideas that they're not going to get you know, yelled at. You know, there's no bad questions, there's only people not asking questions. That's not bad. And the only way that that for people to feel safe about that is that they need to see me as the leader and my other partners as the leaders, to be willing to take in feedback, be challenged even publicly and say, you know what, that's a really good idea, let's go with that. And so just having them feel that safe environment so that people can always ask and bring questions up.

This is a really important part and it's part of our culture at clear Alpha. The idea is to get all ideas surfaced so that the organization can make the best decisions. How do you know what prevents good ideas from surfacing. One is that people may not know that you know, a questions even being asked. So many organizations are run fairly siloed different groups, and a lot of that happens associally large large organizations. It's hard for everybody to be constantly communicate with one another, so just not even knowing a question exists. So the way we address that is that we use Microsoft Teams at the office and most people are in various channels and we're seeing questions going on all the time. I really discourage people from asking me a one on one question. I will usually redirect a question someone asked me to here's the broad company, here's the question that was asked, here's the answer. So then immediately the entire company learns you know what this topic was, and very often that says, oh, someone else, I have another idea about that that I want to now share. So getting accessibility for people to deliver. But the most important about idea meritocracy is really from a leadership standpoint. People have to feel safe bringing up ideas that they're not going to get you know, yelled at. You know, there's no bad questions, there's only people not asking questions. That's not bad. And the only way that that for people to feel safe about that is that they need to see me as the leader and my other partners as the leaders, to be willing to take in feedback, be challenged even publicly and say, you know what, that's a really good idea, let's go with that. And so just having them feel that safe environment so that people can always ask and bring questions up.

Huh, that's really interesting. Also, you've discussed generating less common ideas earlier, we were talking about crowded trades. How do you generate less common ideas? How do you find non correlated sources of return when you're you know, in a hyper competitive marketplace.

Huh, that's really interesting. Also, you've discussed generating less common ideas earlier, we were talking about crowded trades. How do you generate less common ideas? How do you find non correlated sources of return when you're you know, in a hyper competitive marketplace.

Great question. So I'll use an example here. There's a common strategy that people might be familiar with. It's called merge arbitrage. And basically, company A is going to buy company B, whether it's for cash consideration or stock for stock type transaction. And you know, merge arbitragers look at that and they might go, you know, long the company's being acquired, short, the company's doing the acquire, and then make money if that deal ultimately closes. That's a that's a very common, well known strategy. That would be the common version of implementing the strategy. A less common version implemented is you try to find one that you like more than others. So you might think they all are like the vast majority are going to close, but some you might like better than others, and so you could go long half of them and short half of them, so you're not exposed to this common element of merger arbitrage deals closing. You're neutral to those. So if a large pod shop, you know, one of these large multi managers, if they decided to get out of merger arbitrage and they're selling all these positions down, half your portfolio will get helped and half your portfolio will get hurt, but you're less exposed to that crowding risk, and that common what I would say, a risk factor that these other common strategies have. So that's a niche version of how we might implement that kind of a strategy.