2023 Top Episode #2: Dmitry Balyasny – Multi-Strategy Platform at BAM, EP.341

26:43And what's clearly a competitive world for talent. What is your pitch to the PM relative to your competitors to get them to join you? It starts with that philosophy that we try to be a really good partner for people in the best sense of the term. So if you think of the venture capital business, which is we're building a growth stage venture capital business as another vertical, the best investors in that space, how do they get the best company founders to partner with them? Why does Mark Zuckerberg partner with one versus another when he's coming up the ranks? The best founders and I think the best PMs both look for a really value -added partner.

27:24You don't want somebody who's all over every decision that you're making where everything you're doing is micromanaged and it's very vague whether the subjective decisions are going to go your way or not. But by the same token, I don't think the best PMs want someone that's completely hands -off because a lot of the experience that a firm has, having gone through it with hundreds of other PMs over time, you don't have to reinvent the wheel on everything. They want some guidance on how have other successful folks dealt with this problem? How have they built out their teams? What's worked? What hasn't?

28:02How have they developed their analysts? What's been the best practices in data monetization? How do they utilize tech? What's the best practices in portfolio construction? And so you want the benefits of that experience and that business building from a partner as opposed to just saying like, here's your capital, good luck, you lose money, we'll fire you, you make money, we'll give you more. So we really try to be that partner, like really find that sweet spot where we're really helping people build their businesses, helping them navigate their problems, showing them the best practices that have worked for others.

28:39That's kind of number one. And then number two is we've tried to develop a culture that's very collaborative and where insights at the macro level and insights at the process level are shared across the firm. And so you develop this learning organization where you're not just top down telling people, like, here's what's worked for others, but also horizontally, they hear from each other, what are the nuggets that they're picking up from speaking to thousands of companies every month on the equity side that might be useful on the macro side? How often are companies talking about inflation picking up or easing?

29:19Very useful on the macro side. Vice versa, on the macro side, When the Fed is active, your typical equity guy doesn't really have a sense of what that might mean. And so when they come in and they're making changes to the language, what does that mean? And so having that interpretation and constant iterative diagnosis of what's going on top down in the economy is super helpful. So that transparent and collaborative culture horizontally is super differentiated. that's reinforced by our partnership structure. So myself, my co -founders, we've been together for over 20 years. And then now we have 21 partners in the firm across strategies, across business departments, across geographies.

30:04And that really reinforces the culture. And I think in order to be a really effective specialist PM, they typically don't get hurt when there's something in their area of specialty that they're surprised by. They're usually all over that. But they usually get hurt when there's something that's rolling through the markets that might have started somewhere else that all of a sudden becomes an issue for their coverage. And so if you can get an insight into that earlier, you might be able to reposition your portfolio to weather those storms before they become evident to other specialists. And I think that's a critical advantage, especially at inflection points in these markets.

30:45So as you're trying to get the right PMs to join you or the ones that are the right fit, I'm curious how efficient the market is for talent from your business development team's perspective. It's relatively efficient. I think it depends on the transparency of the strategy. So equity long short, I would say is pretty efficient. There's a lot of teams. They all go to the same conferences. A lot of them know each other. People move around. Analysts move around. And so you can map things out pretty well. Other areas, if you get into lower latency quantitative trading, that's less efficient. And as you look at one of these people when they join you, compared to someone who's running an independent fund on the outside, what is it that you think creates an edge for the individual PM underneath your umbrella?

31:40Well, first of all, specialization. I think in long -shared equity, it's very hard to run a standalone sector fund. I mean, it's hard to run any sort of fund. You have all the challenges from running an equity fund. But then on top of that, you have all the challenges from running a specialist equity fund. Sectors come in and out of favor. Think about energy. How many times has it gone through these multi -year cycles where it's fantastic and then it's really difficult to trade, where generalist money is just flowing out and you just have the specialist hedge funds fighting each other. That's a very tough environment to trade in.

32:13So if you're on a platform and you're running that type of strategy, it could be anything. It could be tech, it could be healthcare, it could be financials. Is there a great appetite to invest in a standalone financial fund? Probably not. But even in areas like tech or healthcare, it's very hard because for periods in time, there's just less to do. And what do you do during those periods? How patient are investors during those periods. Whereas if you're on a platform and there's 50 other teams in different sectors and the money can flow up and down depending where there's opportunity to help pay for the various resources and to not distract you with explaining to investors why it's a tougher period all the time rather than trying to innovate your process and develop your team and go to an extra meeting and try to figure out a new idea.

33:03It's just like a lot of headwinds. Few guys do it, but if you look back, we used to invest in a portfolio of hedge funds when I was at Schoenfeld. That's one of the best things I had an opportunity to do early on, just personally investing in a portfolio of hedge funds and doing the diligence on that. If you look today and see how many of those funds are still around, very, very few of the single manager funds are still around. But the multistrats we invested in at the time, most of them are around. So it's just a much more durable model because you can refresh. we've had periods where a team has had to completely revamp their coverage their approach a lot of the members of a team if you're running a standalone fund like that's very hard to do that it's almost like why private equity exists if you're running a publicly traded company and you're trying to do a wholesale revamp you know the market doesn't have patience for that whereas in private equity has a ton of success doing that and so it's the same thing like your ability to adapt and change is just much better because you don't have to deal with all those other things and you have the resources of the firm to help you navigate that.

34:07So once you've given that stability to an individual PM, how do they go about creating that risk -controlled alpha so that you then can port that in all kinds of different ways at the firm level? Well, it starts with good old -fashioned stock picking and long shorts. So you're trying to pick longs that go up more than your shorts or in the down market shorts to go down more than your longs. And you're just trying to make the spread and trading around your positions actively to capture those spreads. And so you're typically in equities focused on earnings and multiples. Those are kind of the two main things that drive stock prices.

34:45So earnings, can you get ahead of the street? Can you get ahead of other hedge funds in estimating earnings inflections where you're not one, two or 3 % differentiated, but you're 30 % differentiated for the quarter and you might be 60 % differentiated for next year because you figured out something that's going on with this business, which might be a combination of micro factors where that company is coming out with new products, new processes, changes to their business model and macro where something is going on in the macro environment that's really going to be a huge tailwind or a huge headwind to what that company is doing.

35:20And you're putting those things together to arrive in really variant earnings estimates. And that changes all the time. And as people catch on and you're proven right or wrong, the stock prices will move and your spread of variants will close and you have to rotate to something else. So that's one. And second is multiples. So what's going on with the story? Is this something that's likely between the story of the company and the story of the macro? That's going to be a case of expanding the multiple or contracting the multiple. And this is where really understanding sentiment, positioning and macro and having lots of folks to talk to about that is really helpful.

35:59A big difference between a more junior analyst and a more senior analyst and then a PM is really an understanding the drivers, the story, the sentiment, which will lead to the multiple change. A frequent complaint you get from analysts when they're going through their winners and losers is, I got the numbers right, but the stock got killed because the multiple contracted by 50%. It's like, well, that's part of your job is to understand what's going to make the multiple go up and down. The best investments are ones where you get both of those right. When that individual PM is constructing their portfolio, what guardrails are you putting on them?

36:36It's different by strategy. The common things across all strategies is we have volatility budgets. We allocate capital in the form of volatility dollars. Then somebody has an expected sharp, and they multiply that sharp times the vol dollars to arrive at their expected P &L for the year. And so you have like a drawdown framework that's very objective and clear that everybody signs off on on day one, and that's multi -step, so you're not forced to reduce the portfolio by a large chunk at any one time. So that's common across all the strategies. And then there's lots of specific limits based on the strategies.

37:14So macro, for example, in commodities, you'll have a lot of stress testing and stress limits based on historicals of when everything goes wrong, you get very extreme scenarios, how much can you lose? And you want to make sure people don't lose a lot more than they're a model to, hedging the tail risks. In equity portfolios, you'll have IDEO versus factor risk limits. And you might say, okay, your IDEO limit is we want you to run at least an 80 % IDEO, 20 % factor portfolio. Or you might say it could be lower than that, but we want the factor portion to be more based on your industry factor risk because you have demonstrated skill in that versus your style risks or beta risks.

37:57You have liquidity limits. You'll have guidelines on things like number of positions and concentration. So lots of things like that, that does create a box within which that person can operate. How do you think about developing talent so they can be successful under your firm? Yeah, I think that's really important at all levels. So starting at the junior levels starts all the way from an internship program where we had 120 interns this summer from a lot of the world's top schools. It's a big undertaking and it's across all strategies, all departments. We wind up converting somewhere between a third to a half of those into employees where the teams have had time to battle test them before they hire.

38:37And so at the end of the day, it really lowers your hiring cost and you're getting great talent. So it starts from that. Then you have different functions like analyst development programs. So we have a program where we take pretty young analysts, either straight out of investment banking or a couple of years out of sell side, and we put them through a development program for six months typically, where we teach them all the hedge fund equity investing skills of how you transfer that knowledge from sell side to buy side, and then make them available to our long, short investing teams and match them up by sector.

39:12So that's a good one that we're growing. Then it goes to a PM development program where you take a former number two from a top performing team who's ready to make the jump to number one, and you put them through a two -year PM development program where they're running money during that time and scaling their team, scaling their capital, but they're learning all the pieces they don't know. So typically, they'll know stock picking, but they won't know portfolio construction. They might have not had a lot of experience in trading. They probably wouldn't have managed a lot of people before. So we coach them on all those aspects.

39:45Then at the PM level, we have a couple of different things. We have a PM development group that gives them lots of data that's fairly quantitative. So we look at all their stats and we give them a lot of feedback on what's working for them versus others. How do they rank versus others across all different dimensions of portfolio management. And so then they can iterate and optimize within their own style if they choose to work on their weaknesses. So you might have somebody who's great at cutting their losses, but is not so good at riding their winners. And so how do the other guys that are good at that do that?

40:18Or somebody that does great on generating ideal alpha, but they lose too much on factors and they have too much volatility in their book and they wind up getting out of their winners too early because of that. Can you help them with portfolio construction and factor management to avoid that? So somebody who's over -trading, how do you lower their trading costs? How much alpha do they have immediately after putting on trades? Maybe they could trade more patiently. So all these kind of things. And then there's a lot of horizontal learning, which is really important. So we have a lot of forums for that.

40:49We have a top PM gathering every year with top performers across strategies get together for a few days where we spend a lot of time together talking about best practices on things that are common across them. We'll have monthly PM meetings by strategies. What's working in equities? What's working in macro? So people talk about their specialties and what's going on in the markets. There's a weekly PM call that's just PMs, no management, where they're talking about across strategies, again, across sectors. And you're just getting a lot of tidbits of information that you would never have as a siloed PM.

41:22We're doing a global PM get together in New York where we have one day of content is things that are common across all PMs where we have panels and things that are common processes. How do you build a team? How do you hire well? How do you grow your capital and expand? How do you utilize technology and data? And then you have another day that's strategy specific. The commodities guys, equity guys, macro guys, et cetera. So all those kinds of things. And I think the horizontal stuff is just as valuable as the management development things because you just learn from practitioners. You get a lot of buy -in because somebody's talking about something that's working for them.

42:00It's very hard to sort of dismiss that. and you can really pick up a lot of things that otherwise you wouldn't have access to. As you roll it up, I'm curious how you go about the process of capital allocation across the strategies. We like to have a blend between top -down and bottom -up. I remember reading a long time ago how Home Depot got a lot more productivity out of their associates at the store, out of the clerks in the aisles, and how they managed to really ramp earnings as they basically gave a lot more autonomy and decision -making ability to the guys in the stores. So they could figure out like how much of this product to order.

42:35They can make pricing adjustments on the fly because what might be selling in Omaha might not be selling in Nashville. And all of a sudden, their earnings went way up. And so I think you want to balance between guys who are in the line of fire, who are trading the book every day, having a lot of decision -making autonomy. But you also want top -down strategic ranges that you think make sense for the firm and for where the stage of development for that particular business is. So to put some numbers behind it, an individual PM might have a range. So we give them a vol allocation of 50, for example, but we could say you have room to go up or down 20 % from that.

43:18In effect, you could go 40 to 60, depending on your assessment opportunity set at any given time. And so that's quite chunky. And if you have a number of people in a particular space all of a sudden go from 40 to 60, your allocation to that space just went up quite a lot. And so that's at the ground level, your day -to -day flows go to where the PMs feel that opportunities are greatest at any given time. Yeah. Then you have more discretionary changes where somebody raises their hand and says, I'm already at 120 % of my allocation, but I really feel the opportunity set is outstanding and there's a special dislocation going on.

44:00And so I'd like some flex capital, even though it's going to be above what's in my business plan for this year. But I think I can go from this 50 to 75 for the next three months because we just had this major dislocation. My team did a good job of navigating it. And now we want to pick up all the pieces and the spreads are really wide and we want to have the extra capital to do that. And that could be an equities, that could be a macro, that could be anywhere. And then you have the top down changes from the firm management investment committee level, where we could say the prospects for this particular strategy look better.

44:35The firm is growing. We have access, additional capital we can deploy rather than deploy it exactly the same way we were deploying it before, we want to disproportionately add a little bit more here because the PMs are really doing well. There's a lot of opportunity. There might be less competition for some period, and you want to take advantage of that. So between those top -down and bottom -up pieces, you could be fairly dynamic, but what you don't want is uncontrolled changes. So we might take macro, for example, from 15 % to 25 % if we feel like the macro opportunity that just got a lot better, which we did the last couple of years.

45:13But we're not going to take it from 15, 20 % to 60 % because you need the PMs to get used to running more capital. You need the depth of the teams to increase. There's always more challenges running more money. So you're always trying to find that right balance of taking advantage of the opportunity, but not getting so big that all of a sudden it swings the whole firm around before that business was ready for it. So at each of those levels, whether it's bottom up the PM, the opportunistic, the management looking at it, or the infrastructure required, when you see that pivot from 40 % allocation to 60%, is there a bias in the firm that is momentum driven or mean reverting driven of what defines an opportunity set?

45:58It's usually a combination and it depends a bit on the strategy. So in strategies that are more RV -oriented, so you could think about that as fixed income relative value, for example, or merger arbitrage, things that are very spread -oriented. There's a cost of capital, and there's a typical spread that you can earn if you're doing a good job in that strategy. And then once in a while, there's a dislocation. Some deals blow up. Some firm has a hard time. Something surprising happened. There's a bunch of stopouts. and all of a sudden the spreads are much fatter. And so those are more on a mean reversion basis where those guys will pick up their hands and go, this is the time we need to step up.

46:41And the trick is you want to hopefully have navigated the drawdown period well enough to where you have the ammunition to step up. Because it's always easy to say, yeah, of course we should step up. Most of the time things come back. But if you don't have the room there and they don't come back for a while and they get worse, now you have a giant hole in the front. you have to navigate the balance of those risks. But if the teams have done a reasonable job and that business is doing fine overall, then you definitely want to play offense when you're in a position to do so and capture that. Other strategies that are, I would say, a little bit more momentum -y like the growthy sectors in equity investing or directional macro trading, those tend to be a little bit more momentum -y where a good environment feeds a good environment for periods of time.

47:29And usually people will want more capital as they're making money in those areas. As you look at the overall portfolio, let's just focus this on equity long short. The notion of volatility scaling, as it relates to both what you're doing, and then of course, the other types of capital, the vast amounts of capital in some of your peers, how do you think about navigating not just your own portfolio, but the broader equity market environment that your PMs are participating in? Yeah. So you always think about the positioning and the crowdiness in different areas. In general, the best environment is when there's a lot of generalist participation in a strategy and there's a lot of money coming into a strategy.

48:14Because then your specialist participants, whether they're trading bonds, currencies, commodities, equities, they should be able to do a better job of forecasting where the the capital is going to go. On the other side, the worst environment is when there is no generalist capital and money's flowing out of the strategy and the specialists in this strategy are all underwater. And so in that environment, you're trading against other specialists and nobody has much risk tolerance. And so you have this cascading drawdown type of periods. So you want to know which type of period you're in and adjust the capital allocation accordingly.

48:55And again, you're never going from all in or all out, but you're certainly changing it relatively aggressively depending on that period. Your risk in a particular sub -strategy could be up or down 50 % very easily if you're in a good period versus poor period. So how we guide PMs when we have meetings and talk about kind of what's working in the market and what the environment is for a strategy, how much room you're willing to give things, how much positioning becomes a factor, and how much you're looking to ride new winners is very dependent on which of those environments you're in. How do you think about the PMs leaving the firm?

49:39We basically guide people, number one, to be very thoughtful on the hiring. The more thoughtful and the more work you put into the hiring process, the better your odds are that you won't have to deal with making a change, or at least not quickly. And we see this all the time. The biggest gating factor to someone's success growing from a first -time PM to an experienced PM or a small PM to a large PM is their ability to build a team, to manage a team. And so defining that to start, like, what are the people you're looking for? What is your ideal number two look like? What is your ideal partner in your portfolio look like?

50:19What coverage model do you want? And what are the people look like that are covering those spaces? What's their experience level? And what are your expectations from them? And you want to really figure out how to avoid the expectation mismatches and just doing things that are unrealistic. So we see a lot of times you'll have a younger PM and by definition, they'll then wind up almost always hiring really young analysts. And the expectation is this person is going to come in and help me make a lot of money. It's just not realistic. At the stage of development that they're in, they're going to take a couple of years just to figure out how to be additive.

50:55So if you want somebody to come in and help you make money and you're a first -time PM, you better find a partner on your portfolio. It could be a 50 -50 partner, they could be a 60 -40 partner, they could be a 70 -30 partner, but somebody who's really going to be a partner or a strong number two for you, where they're going to be sufficiently attracted enough to the growth prospects of that, where you're going to be able to get an experienced person. So it's those expectations, avoiding those mismatches, I feel is really, really important. And also how much effort you're putting into the process.

51:27Maybe the first person you interview is going to be great. But usually, it might take 30, 40, 50, 60, 70 interviews of looking at lots of people, being very clear on what your criteria is. And through the process, you're also defining in your own mind what you like, what you don't like, what's the ideal background for you, and defining that better. And then taking the time with that person, like have them do case studies, have them do some sort of part -time analysis for you, talk to them for a bit on lots of potential ideas and compare them to other people. and really make a thoughtful decision.

52:02Interview them on Saturday, see if they show up for a couple hours. Just make sure they're really bought in and it's a really good fit. It lessens all those problems. Having said all that, you're still going to have to make changes. And we'll do everything possible to help them over that period of time to get going. But it's important to have enough time because you can have somebody with a great track record that starts when their particular strategy is really out of favor. And the best person to strategy, you could have had the best directional macro guy five, six, seven years ago when there was zero volatility and rates were at zero, they're just not going to do that well.

52:33Then you let them all go. And then the year after that, rates start going and they all make a fortune. So you have to sort of distinguish between giving somebody enough time on an absolute basis, but also what's the opportunity set in that strategy. So if the opportunity set in the strategy has been great and they're not doing well and you've given them a good amount of time, we tend to make a change. If the opportunity set And the strategy has also been really tough, but they're really doing a good job building their team, constantly iterating their process, getting feedback, coming up with innovative ways of improving, and just working their butts off.

53:08We'll tend to give them more time, and hopefully there will be a change in the environment for that strategy. For an analyst with a PM, if you don't think it's working, you give them clear feedback on why it's not working and what they need to do to change. Or maybe they're great and it's just not fit style -wise. And in those cases, we'll try to find them a fit with another team. But generally, we want people focused on their top performers and how to scale them, as opposed to constantly trying to fix the underperformer. At some point, it's just better to make a change. We tend to do a lot of work figuring out ahead of time, how committed are we to this strategy?

53:44A lot of times we'll get a call in this team, this PM that kind of picks their head up. They previously haven't wanted to engage, but whenever there's some issue at the firm, and now they want to look around. They're like, I talked to a competitor of yours last week and I got a term sheet three days later. I'm like, well, that's not going to happen here. So you should just take that if that's what you want. You want to be aggressive and move quickly, but if you're going to take three days to hire somebody, they'll probably take three days to fire somebody. So we want to invest the time up front to figure out, is it a good fit?

54:14Are we really bought into the team and the strategy? Inevitably, they're going to have a hard time at some point and you want people that have actually taken the time to understand what the heck they're doing and to have some conviction in the team. So when they are having a hard time, you could go back to your notes and say like, oh, we all spent a lot of time with these guys. We thought they were great six months ago. They're probably still great. They're having a hard time for some reason. Let's see if we can figure out why. And then in things like macro, it's a little bit more discretionary.

54:42So like Steve Goldberg, head of our macro business trades. So him and the macro management team work with the PMs on some of the trades. and occasionally they'll do trades that are split three or four different ways, and they'll all trade it independently and compare their views. And we found that's very creative on the macro side because there's less line items to trade, and it's more helpful to compare and customize structurings. Whereas a lot of the value in the positions, a lot of times it's how you structure them and the optionality you're able to build in. Whereas in equities, there's thousands of line items, and there isn't really much structuring.

55:18And so that's much easier done quantitatively. When you add all this up, I'm really curious, what does your dashboard look like? I look at the main bets that we have. I look at equities markets overall and the larger macro markets. And then I look at all the PM P &Ls. So you have every team as a P &L, and then you roll it up by sub -strategies. Keep an eye on what's working and what's not working, where you might be able to take more risk, less risk. How do you think about leverage at the firm level? We run to a vol profile like the rest of the PMs, so we run the firm the same way. We've averaged about a 4 % to 4 .5 % vol as a fund for the last, I'd say, probably five years.

56:03It's been pretty consistent. Now that we've gotten more diversified and built out, more large strategies that are uncorrelated. What does that vol translate into of, say, leverage in equities? David Quirk Equities, it tends to average around four, pretty typical. It changes, obviously, depending on the vol environment that you're in. That tends to be an average. David Quirk I'd love to ask you a couple questions about the multi -strategy, multi -PM business as it relates to markets and competition. And there's always this concern that there's a lot of leverage in the equity markets in these strategies, and they all have variations of a theme of similar trading strategies.

56:43How do you think about the potential for some systemic risk or contagion effect across these different strategies and firms? I don't think it's unique to this space. I think for some reason it gets singled out to this space. But much larger risk in dollars is the more long -biased strategies that are common across other areas. So if you look at last year and you think about the meltdown in growth investing and whether that was your mutual funds, your ETFs, your long bias tech funds, they were all pretty correlated. And the dollars of those dwarf the dollars when you're thinking about a market neutral equity stock picker market.

57:27I think it happens across every strategy. It's just one of the things you have to deal with. I think the way you can help mitigate it is through diversification. So the more diversification you have as a firm with good risk controls and good PMs, not just diversification because you hired the first available guy and you threw him in there and you said you're diversified, but you've really taken a long time to build really solid businesses across different strategies, sectors, geographies, trading styles, and your capital is diverse across those, it certainly helps. doesn't get rid of it. So if your larger competitor down the street decides to close up shop in a disorderly way tomorrow, is that going to have a ramification across all these firms?

58:11Absolutely. But on the other side of that, if you can navigate it, you obviously have phenomenal opportunities because you'll have more alpha and less people to pick up that alpha and you'll have big dislocations. So you have to manage through those periods. So one of the things I take pride in is in 2020, we had a period in the first quarter trading around the COVID -19 mess where we did a good job trading around in inequities. We had really good information flow across our teams between the healthcare teams and others, and then across the macro universe. But then there were other strategies, various relative value macro strategies, merger arbitrage strategies, all the RV type stuff that wasn't directly related to it where the spreads really blew out.

58:53And we could have done a better job of seeing that early. We didn't, And I think most people didn't see that connection quickly. But even at the depths of third week in March, we were positive on the month with a lot of convexity in the portfolio, even though those strategies were down a lot. And firms that didn't have that diversification or didn't do a good job of seeing it in other places, they had massive drawdowns intramonth. And so we never want to be in a position of relying on government intervention to save us. you want to build a diversified and durable enough business across all these things that you always have some areas that are hopefully doing well when others aren't.

59:30If there's a crowding unwind in a particular space, you'll probably get hurt there. But hopefully you'll have other strategies that are doing well enough that you can sustain and trade around it and maintain a decent enough level of exposure to where when it snaps back, you're there. And that's one of the benefits of running a diverse business. What's happened with the other side of the balance sheet and the types of investors and how you've gotten the capital that you've needed to grow in the ways you want to over time? Yeah, this is something I wish we would have done a better job of early on.

1:00:07Unfortunately, when we started off, we were coming from a prop background. Thankfully, there was enough interest and we got initial capital, but it wound up being very volatile capital because we didn't really have an institutional approach and institutional investors. And so it wound up with too much momentum. And sometimes the momentum was based on us where I remember first we went from 300 to 600 and then we had a drawdown and we went back to 300. In the meantime, it hired a lot of people and I was like, oh my gosh, how are we going to deal with this? We made the money back and it was fine.

1:00:41But it happened again in 08 where it didn't have anything to do with us, but we went from $2 .5 billion to $1 .25 billion and we made money in 08. People needed their capital and we decided not to gate them and we were liquid. And so people took their capital. So post that, and particularly the last five years, we really emphasized a more institutional approach, both first in the types of investors and then in the terms. I mean, I think you need both. and now our success and consistency over time, we've had knock on wood 20 out of 21 positive years and very consistent volatility and drawdown management and zero correlation over that time.

1:01:25It's enabled us to attract and grow really top tier investor relationships. So the investors we have today, a lot of them are like the who's who if you took just a blank sheet of paper approach and you said you were starting the best fund in the world well, who do you want invested? A lot of our investors would be on that list. But that's taken a long time to develop those relationships, both from getting to know each other and working together through the ups and downs that you inevitably go through, as well as the transparency that we try to provide them and the value add that we try to give them beyond our returns.

1:02:00We always try to help them with market color or any strategies that they're considering internally. So that was first, building out a institutional marketing team, client relationship team, which again, has taken a decade to do successfully. It's a big part of that. And then the second part is the term. So as the strategy has been successful and we've delivered, we've been able to get longer duration commitments. And that's really helpful. And I wish we would have had that 10 years ago because every time your capital goes up and down a lot, it just stifles your business development. Sometimes even your retention, although we did a pretty good job with that, but your ability to expand and take advantage of those dislocations, if your capital is shrinking at that time, you just can't do it.

1:02:46I think it's very tied to the success in building out additional strategies. You can see a chart of our duration of our capital expanding to where today it's all two and three -year capital up from monthly and quarterly capital five years ago. Our success in building out things like macro and commodities and other strategies, I think is directly tied to that because you can consistently invest and you could show potential incoming PMs. If you hire a quant PM today, a lot of them have two -year sit -outs and then they take another year to build. So they have to believe that they're joining a place that's going to have plenty of capital and resources for them to deploy three years from now.

1:03:26So if your capital duration is three months, you could talk all day about how great you are and how great your investors are. They're just not going to buy that. So it's a real impediment in hiring. And then also in investing for the infrastructure that you need for these areas, a lot of the technology investments that we're making to improve the trading infrastructure, for example, where we think we can lower our slippage significantly, multiplied by the billions and billions of dollars we trade every day, it's going to have a huge impact for our investors, but we can't make those investments that are multi -year investments where you have to fund large teams to develop these things if you don't have the visibility on your capital.

1:04:05So as we've been able to push that out, I think it really improves our ability to make those investments both in people and systems to then drive the better returns. And I think you've seen that consistently across some of the larger peers. You've had a lot of growth in your fund and other peers over the last couple of years. How do you think about where this can go over the next five or 10 years in terms of the capital that can be deployed in these strategies? I think it's a function of how much capital is going to be in the markets, which is a function of what happens to the world. If the world continues to grow and the world is flourishing and GDP is growing and economies are expanding and money is going to come into the markets, then I think you can continue to grow.

1:04:47That ebbs and flows. But history, I think, has shown us that over time it tends to grow. So then you have the types of firms question. So last year, the multi -strap, multi -PM space hugely outperformed the single manager space. This year, I think you've seen a little bit of a flip. And part of that is the beta inherent in a lot of single manager strategies, where markets are up this year. If you're running a 50 % beta or you're long growth and short value type stuff, you're going to do well. So there's certainly periods where I think those strategies will outperform. And that's usually exacerbated when there's a lot of money that comes into the multi -strap and a lot of money gets out of the single manager and then of course it flips around.

1:05:28But if you look at it over 5, 10, 15, 20 -year periods, I think the secular trend is going to be sustained. So if you look at the market share in terms of investor dollars or the market share even more so in terms of the alpha pie in the markets or the talent in the markets and how much that was owned by the leading diversified multi -strap firms 20 years ago, 10 years ago today, that chart is up and to the right. And I think that's going to continue in that same direction, similar to what you've seen in other areas, whether you're looking at banking and what's the market share of the top five banks, or you look at private equity, what's the market share of the top five private equity firms.

1:06:13Once you build a durable franchise with a particular culture, a particular way of doing things that people are attracted to that stood the test of time. You can bolt on different pieces. You have the ability and resources to innovate, the ability to build new businesses, new strategies, the ability to try things and adapt. And that allows you to grow over time. How do you think about the war for talent? Maybe the right way to think about it is in kind of supply and demand. And are there a limited number of PMs that can succeed in that model? And if so, and the capital keeps coming in, what happens to that competition for that scarce resource?

1:06:53Yeah, I mean, I think there's a limited number of good PMs in general. So I don't think it's limited to this particular model. I think any type of high alpha content model where you really need to have a lot of skill, like by definition, there's few people that are going to have a lot of skill. How do you compete for that? It's a self -correcting mechanism to some extent. Like any market, at periods, it's going to become overheated and at periods, it's going to become depressed. So if you have a strategy that's done well and everybody's making money in that strategy, the talent in that strategy tends to get bid up.

1:07:26Then more people build teams in that area, more people overpay for the cost of building those teams, more capital gets deployed there, the returns come down, and the management of these firms got to be successful for a reason. We don't tend to keep doing the same dumb thing over and over again. So if you start losing money on something, you'll pretty quickly adjust. And so then the cycle repeats and rinses the other way. And all of a sudden, talent in an area goes from overbid to no bid very quickly. And so you try to be a little bit contrarian. It's hard to be completely contrarian. Just like in the markets, I think there's a balance.

1:08:05I don't think you want to sit with your value stock for 10 years for the one year that it's going to bounce. So we're always bid for the top talent in a particular area. but we always want to make sure we're getting a good return on that investment. I'm curious if you look at the levers of success and you're comparing your firm, you maybe have, I don't know, two or three competitors, I would say, in that 15 to 20, $25 billion range. You've got two that are significantly bigger, and then maybe you have a bunch that are trying to grow but are significantly smaller. What do you see as the strengths and weaknesses comparatively where you sit today to, on one end, Citadel Millennium, and the other end, someone who hasn't gotten the critical mass that you have?

1:08:49I think the biggest firms have the advantage of being the biggest firms, and they have the disadvantage of being the biggest firms. The advantages are they have more really developed strategies than others. The quant businesses there, for example, are very developed, whereas we're in the process of building out a quant business. So they have the advantage of having that P &L stream where we don't yet. And they have the infrastructure for it where we're building. On the other hand, when you're recruiting, you have the advantage of being a smaller firm. So some people are attracted to going to a place where everything is built out and plugging in and being a cog in the successful machine.

1:09:23And that's fine. Other folks want to be part of the build. It's a way to attract people who are very entrepreneurial and who are real business builders. Whereas 20 years ago, they probably would have just started their own fund. But now the industry has evolved to where there's so many impediments to doing that and so many resources you need. It just doesn't really make sense 99 % of the time. So they're attracted to the offering where they could be part of architecting how a strategy is developed and built. Part of having a seat at that table as a senior PM and helping to build that. And then having the opportunity that comes in the back of that.

1:10:02If they're successful with it, they could build a larger franchise where one might already exist at a place that has this built up. They can move into management over time. They could become a partner over time. So it's different trade -offs. I think you have to be big enough to where you can have the resources in terms of how much capital you're willing to allocate, how much risk you're willing to give out. Years ago, we were always hoping that we would have more than one or two people that would come to our top PM event every year and we're up over 100 for the year. Now everyone that comes there is up over 100 and we have some sub -PMs that are up over 100.

1:10:40You have to have enough capital to kind of make those bets to do that, but also enough opportunity that attracts those people, that sweet spot. So when you go too much lower, it's very difficult to have both sides of that equation because you have the opportunity side of the equation, but do you have the resource side of it? Are you willing to take enough risk? Are you willing to put enough capital behind somebody, not just on day one, but as they grow, if they have some success and now they're outperforming everybody else, how do you navigate that? Do you have the resources, all the technology and data and everything else to put behind somebody, the analyst development, all these different things?

1:11:17So the smaller you get, the harder all those things are to offer. And then for larger firms, they have the opposite challenge, right? Like you have all the resources, but how do you offer somebody the growth opportunities? And so we started a second equities business, for example. Some of our competitors have multiple equity businesses. So you have to come up with different structures to enable people to be entrepreneurial and to build businesses and have that runway to compete with the smaller firms for those type of folks. So it kind of goes both ways. What are the differentiations on the non -investing side, say, all of the operational infrastructure, the costs of trading, all of the things that go from the stock decision or the bond decision, the currency decision, commodity decision, to the return?

1:12:02We have large technology teams, large data teams, large legal teams, and they work across strategies with specialists for all these different areas. And so when there's an opportunity that might be fleeting that takes a lot of analysis to figure out across the firm, we have the ability to get with the collaborative culture of the firm, the risk guys, the legal guys, the portfolio construction guys, the heads of different strategies. We can all jump on the phone together and really figure something out, whether it's bringing on a new team that might have a new strategy, whether it might be a particular trade that's off the run that somebody wants to do.

1:12:39more and more, I think that's going to be a differentiator in return because the commoditized stuff that's fairly easy to do, by definition, more and more people are going to do that. So commodities, why are there so few places that have built out good commodity businesses? Because it's freaking hard. So we kind of like those areas where you can export some of your capabilities, but that are difficult and painful to build because it keeps competition up. It might take you a number of years, but if you can do it, you got to moat around the business. In addition to the liquid markets, broadly defined, which canvas a lot of what you do, you mentioned this growth venture capital area.

1:13:22I'd love to hear why you got into the growth area. I think it's an extension of equities investing. So as you build these businesses, every year you kind of sit back and you ask, how do we grow this general franchise? what are the other areas that you can expand into that piggyback on your capabilities? So in equities, how do you do that? Well, when we started, we started with short -term trading, then we got to longer -term fundamental trading. So you expand by timeframe. Then you can expand by geography. So we have a lot of people in Europe. We have a lot of people in Asia. Those are continuing to grow.

1:13:59We're opening up Dubai. You're going to get more global coverage, assuming these regions of the world continue to grow. So then you go, okay, well, what other artificial divisions are there? Well, there's the private public division. So if you're looking at a private company that's a growth company raising a Series D round, is that dissimilar from a publicly traded company with a couple billion dollar market cap that your public PMs are investing in? Most of the time, it's not that different. And so you can use some of your skill sets from looking at the valuations and prospects in the public space and apply them to the private space.

1:14:37But there's also a lot of particulars in the private space. So you have to build that capability separately. You can't just have public guys do it. You can leverage off of their skills and team with them. But it's different because, first of all, you have to have dedicated time. So if it's an earnings period, how much time is your public VM going to spend analyzing this private investment that's going to take a ton of time to go meet with the management call, the customers, run the model? They're going to take zero time because they've got enough volatility in their public portfolio. So you need private people with that expertise.

1:15:12You need the sourcing capability. You have to be invited into the best deals. So you need to build your brand. You need to build your value add to the companies. What are you going to do for them? Can you help them with your data expertise, which is one of our differentiators? Can you help them with your equity capital markets expertise and how to navigate the private to public transition as the public windows open up? So we do teach -ins between the private PMs, the public PMs, your equity capital markets desk, and a venture capital fund that'll bring a bunch of founders who are looking to go public in the next few years, and we'll do a teach -in for them.

1:15:49And so you build your brand, and you have a line and a relationship with the founders. A lot of the skill sets are very complementary. And then even when you don't invest, you usually learn a lot about the company. So eventually, if they come public, you'll know more about them than others. And if they don't come public, but you still learn something about that business that you could apply to trading a competitor or investing in another private company, it's a very accretive strategy longer term. Now, like anything, it takes a long time to build. If you're going to do it in a quality way, you can just open up and spray money.

1:16:23But if you're going to really try to build a team, build a process, build a brand, build your expertise. It's a multi -year strategic undertaking. And we started with a small amount of capital. And as you build it out and you have success, you raise dedicated capital. And I think if you look at firms like D .E. Shaw that have done a good job at this across different strategies, they've taken the quant expertise and the business building expertise and leveraged it successfully. Now in private credit and private equity, solar investing, a lot of different tangential strategies, which have added a lot of value to their investors.

1:17:00And we'd like to do the same over time. How have you thought about that other divide between, say, equity and lowering the capital structure? So we have a credit investing business, also relatively new, that we started in the last couple of years. We started with a couple of credit portfolios. We're looking to build out more. But we trade converts. We trade high yield. We trade investment grade. We trade in the US. We trade in Europe. But it's still relatively small. It's just a couple percent of our AUM. Whenever we start new businesses, we start them small. We figure we're going to be the worst at them when we start.

1:17:28And as we build the expertise and the teams and the infrastructure and they're generating P &L, then we look to grow them. So now we're in the process of scaling those teams, plus we're adding a few more teams with different geographic expertise, different types of trading style. And if we're successful with that, then you can look and go and say, okay, we have success at public credit. Should we look at private credit? You want to have success at each piece before you sort of go to the next piece. same thing in commodities. If you had success in financial commodities, then you can look at physical and how do you leg into physical?

1:17:59So we're starting to work on that. So it's one step at a time. As you look out over the next, whatever it is, five years, 10 years gets a little bit long. What are you hoping to accomplish? We want to have world -class businesses in all the strategies that we're engaged in. So if somebody says, who's the best in equities? We want them to say, bam. Who's the best in macro? I want to say, bam. We want to get there. I think we're in the conversation and those first couple were earlier on in some of the other businesses, but we have good plans for getting there. Businesses that you're just starting off, you want to get them from startup to they're a solid business.

1:18:37Maybe you're not going to be the best in quantum five years. Can you be in the conversation as a well -known, reputable, solidly P &L generating quant business. That'll be great for the next five years. Then the following five years are like, okay, well now we are, how do we get to the top three? And so you sort of want to do that across every business. And I think the same applies in infrastructure. We want people to think about like, where's the best technology on the hedge fund side? We want to be in that conversation. So you want to be the best in all the areas that you're really involved in where you've had time to get to that.

1:19:13And you want to maintain your culture and your spirit of the firm and the partnership ethos of the firm and expand that really as you're continuing to grow. I think that's really important for us. Dimitri, before I let you go, I want to ask you a couple of fun closing questions. What is your favorite hobby or activity outside of work and family? Summertime, I like to mountain bike. Wintertime, I like to ski. I like to play basketball, work out, just try to do something physical that takes your mind out of the markets. If your mind drifts, you're going to wipe out. So it really forces you to focus on something else and clears your mind.

1:19:49What's your biggest pet peeve? I think sort of analysis paralysis. I think that applies on the business side as well. There's a healthy amount of analysis you need to do to gain enough conviction, establish a risk reward, and just get going. You could do analysis forever. And by the time it becomes obvious, usually the opportunity is gone. And so a lot of times you're not really going to learn everything until you're involved. You just got to figure out how to get involved in a risk responsible way that you can then scale up or down depending on what you learn. What investment mistake have you made that you'd never make again?

1:20:23Probably related to the overconfirmation point. Like in 2008, we spent a lot of time trying to get comfortable with the subprime short. So we had an early look at it and I was very attracted to it because of the payoffs that you had at the time on it. And we spent a lot of time trying to get different parts of the firm comfortable so somebody would put it on. But we didn't really have any mortgage traders. We didn't have credit traders. We barely had fixed income traders at the time. So we had some macro and equity. And so we had the equity guys chatting with people on the trade, the macro guys chatting, but it wasn't in anyone's bailiwick.

1:21:04And we were overly focused on what the investor reaction to it would be if it didn't work. The question would be like, well, what are you doing trading mortgages? Are you like equity guys? We wound up not putting it on, even though we personally had money in the Paulson Mortgage Short Fund. We made some money personally on that and with employees, but we never made a big dent in the fund, which was a huge miss. So we wound up making a little bit of money in 08 instead of making a lot of money because we're overly focused on that sort of investor risk mitigation as opposed to just saying we've modeled it out to where if it didn't work, we were going to lose one or 2 % on the fund level and we're willing to risk that.

1:21:44And if it worked, we would have made a lot just being comfortable with that assessment. So that's something we learned from that. Which two people have had the biggest impact on your professional life? I'd say philosophically, I became a big fan of I ran in college. I ran at the shrugged became my favorite book. I'd say it had a big influence because a lot of this game is really mental. And so you have to have your philosophy aligned with what you do for a living. If it's not, it's very hard to have sustainable success. So if you have a lot of conflict and guilt around being successful, you wind up self -sabotaging yourself.

1:22:20And I've seen this a lot over time. And so she was very good at articulating a very cohesive, positive philosophy for being a successful, productive individual and for capitalism in general, not just as a positive economically, but as a moral positive, which really helped not ever having those type of conflicts where you could basically be a positive. positive influence on a larger level, on a society level, company level, et cetera, while being very individually successful that it's not a trade -off between the two. So that was very impactful to me. And I've gone back and read it a number of times over the years and have gotten involved with the I -Mrain Institute on the back of that.

1:23:13We actually started a scholarship program last couple of years called Atlas Fellows based on the title from that. And their funds are called Atlas Funds. we find really qualified, top -tier, driven, but under -resourced high school kids and help them with college scholarships combined with financial industry internships. And that's on the reading list. Professionally at work, I would say definitely Stephen Schoenfeld, who was the owner of Schoenfeld Securities. Now it's morphed into a hedge fund over time, but when I was there as a proprietary firm. And so Stephen gave me a really good opportunity to build kind of my own division and the runway to do that.

1:23:55And secondly, the opportunity to co -invest with him in hedge funds. When I was very young and just starting to make money, I had the opportunity not just to invest, but also basically be the fund -to -fund analyst. I would trade all day and then call Renaissance and try to get capacity after the markets closed. And so that was great learning because I really learned early on how to differentiate different firms and why some more successful and have those conversations with my own money kind of backing it. And so that was very foundational as we thought about how to build our business. What teaching from your parents has most stayed with you?

1:24:30Work ethic and integrity. We had the classic immigrant experience. So my dad was a college professor in Kiev. My mom was an engineer. They came here and they were cleaning motel rooms for $3 an hour. So just the work ethic, seeing them go through that and get back to their normal professions over time and the perseverance to do that and always having the integrity to do it the right way. What's the best advice you've ever received? We had an early investor, Tom Lee, who ran a successful private equity firm. And I think we had $300 million under management or something when he invested with us and he had a big family office that was a prominent hedge fund investor.

1:25:14And we met with him. I asked him, we're just starting out. What's good advice? And he said something that always stuck with me, which is this business is a pain in the ass. If you're going to do it, you might as well do it big. He's like, it's a pain either way. You're always dealing with lots of different constituencies and lots of different people, plus the markets. So if you're going to bother, might as well do it big. All right, Dimitri, last one. What life lesson have you learned that you wish you knew a lot earlier in life? I'd say probably hiring really experienced people as opposed to trying to figure everything out yourself.

1:25:52This becomes easier, obviously, as you grow. But I think we were always very do -it -yourself and maybe a little bit too adverse to just paying up and getting somebody who really has already done it. And it's not just money, it's also delegating authority and figuring out the right balance of partnering with somebody to build particular areas. But once we got comfortable and we're always iterating and trying to get better at that, but I'd say that took the firm to a new level. And I think now we have the opportunity to do that again as we're looking to build different businesses and departments.

1:26:30Dimitri, thanks so much for the time and this great look inside what you've done over a couple of decades. Yeah, my pleasure. Thanks for having me. Thanks for listening to the show. To learn more, hop on our website at capitalallocators .com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.