CIO Greatest Hits: Single Family Offices – Dawn Fitzpatrick (Soros)

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2:32Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators.com.

3:21under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy. So we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 Summer Series focuses on CIOs. We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven.

4:10Instead, we'll share a dozen gems canvassing every type of institutional asset owner. This week's summer series is another two-fold. Don Fitzpatrick from Soros and Steve Ratner from Willett Advisors, Michael Bloomberg's family office. We package these two leading single-family offices together to hear their different approaches to a similar investment challenge, with Soros leaning heavily on internal teams and Willett primarily on external. Before we get going, it's about that time of year when the summer breeds leisure activities. So whether you're an active participant or a fan, you've likely noticed a few memes spreading recently.

4:54First, there was Bill Ackman making his professional tennis debut. Now, Bill's a solid player, right around the same level as me. But tennis has different levels. My level of play puts me squarely at the bottom of the A-team at my club. My club's A-team is fairly even with the C-team at another local club. And that club has players like Peter Brosens at Jordan Park and John Pastel at Alliance Bernstein who destroy everyone else at their club. John and Pete probably can't take a game off of Elliott Spaziri, a local kid who's now 132 in the world. And you don't see Elliott making it that far at the tennis majors.

5:34That's another level. I've often described Jen Prosek as a major league communications entrepreneur competing with Little Leaguers. It's kind of the same with tennis. So no ill will towards Bill, but jumping levels is tough to watch. And then there was the infamous Kiss Cam at the Coldplay concert. One moment in time, one poor reaction, and hundreds of thousands of replays already. If there's a moral to these stories, it's sometimes you have to stay in your lane. You might see me hit some balls at a pro-am, but I'm not going to compete against pros, let alone head-to-head against Brosens or Pastel.

6:11And to the extent you see me on a kiss cam, that'll definitely be with my wife, Vanessa. As for staying in your lane with content, what better way than sticking with the leading voices of institutional investing right here at Capital Allocators. Thanks so much for spreading the word. Please enjoy my conversations with Dawn Fitzpatrick and Steve Ratner, both from 2019. Dawn, it's great to see you. Likewise, Ted. Well, why don't we just start in how in the world you go from a cross-country star to trading right out of college? So I had an interesting summer intern experience. It was 1990, and I was going to be an intern at Citibank.

6:57And if you remember 1990, it was in the midst of probably the biggest banking crisis since the Great Depression. So we show up for the first day of the intern program, and someone comes and asks for a volunteer to be an executive assistant. And the other interns around me are looking at this person incredulously, wondering why anyone would raise their hand. But I figured there had to be a catch here. So I raised my hand. And long story short is they needed an executive assistant for John Reed's chief of staff's chief of staff. But the good thing was back then, the city group was run by the policy committee and they all sat at 399 Park on the second floor.

7:48and believe it or not, the chief of staff, chief of staff sat on that same floor. But better yet, because he was the lowest ranking executive on that floor, my desk that summer was right outside the men's room. So you had a front row seat. You know, Citibank was the biggest bank in the country at that time to this crisis. And it was incredible. And right then and there, I decided that I wanted to be an investor and not an investee. Where did that insight come from? It was hard what they were solving for at that moment in time. And there was a lot of politics and you didn't necessarily control your own destiny.

8:26And being an investor and being a trader, it felt like every day I would have a report card and you'd live and die on the merits of the work you did. So what was that first stop out of college? So right out of college, I went to O 'Connor, which at the time was arguably the preeminent derivatives trading firm. They were actually a beta test site for Steve Jobs Next because they were one of the first trading kind of franchises to really embrace technology and compute power. I mean, it was fun because it was run by a bunch of 30-something-year-olds, mostly from MIT and University of Pennsylvania, very meritocratic, very entrepreneurial.

9:08And I went first to the American Stock Exchange where I was a clerk. And then I went to CBOE where I was a market maker. So what did technology look like? The use of technology for trading, what did that look like in the 90s, in the early 90s? I might have overstated. So we had good computers, but the truth is when we went down to the trading floor each day to make markets, we had things that we called were pilgrims and they were paper sheets where you'd set off of spot price and they'd basically, and you could move around vols and spot and you could use them to give you some context when you were making the markets.

9:45But it wasn't quite high tech when you were actually on the floor, but the models we used to make those sheets were pretty advanced. How were the models produced back then? It was more advanced than Black Shoals and it was just a lot of crunching of numbers and scenario analysis. Was either Amex Was your CBOE an open outcry pit back then? So the American Stock Exchange was a specialist system. And O 'Connor back there, we were the specialist for U.S. Surgical, which was the most active option in the world at that time. So that was a fun place to clerk. And then the CBOE was open outcry. And that was a real education going from clerking in a specialist system and then going to an open outcry pit in Chicago.

10:26But it was great. And for those people not here, how tall are you? So this is a big family joke because I come from a family of my dad, six, six, my brother, six, seven, five, four in the program and probably five, two in real life. What was that like being in that pit? It was an amazing education. I think you learned a lot in terms of how to think on your feet. You learned to understand technicals in terms of how flows operated and how momentum operated. You learn to work as a team with the other members of the pit. and you had to earn respect. You know, the interesting thing is when you first go into those pits back in the early 90s, you were invisible and they did not acknowledge you until you could prove you had utility value to them.

11:11What does that mean of like working in a team with other traders in a pit? It's about sharing risks. It's about sharing opportunities, helping kind of cover blind spots for everyone. So it's an interesting kind of culture, but it actually worked pretty well. So how long were you trading? I'd like to say I'm still trading or investing. I intermix the two words, but I still watch markets. I still put on positions. It's what makes me excited to get up in the mornings. So what were the formative lessons that you learned from those early trading experiences? One of the first lessons you have to learn, and it's a painful lesson to watch, is gap risk, especially when you're an options trader.

11:51So I was down in the pits in 1994. And the way a lot of trading operations worked in O 'Connor was one of them. You got paid each year at the end of the year. And December 1994, the peso devalued. And we went from having a spectacular year to having a horrendous year. And then one of the pits I was in, because you would cover more than just one pit, We traded a lot of Mexican ADRs, and that pit was – I was probably the only trader that was associated with an institutional platform. The rest were local, so they were primarily risking their own money. And watching them get devastated by the peso devaluation was like a really formative moment in my career.

12:41And also, by the way, watching the opportunity on the back end of that when there weren't too many people left standing and able to take advantage of that. There were two sides to that, but it was a pretty awesome learning experience. All right. So as you roll forward from being in the pits, what path did your career take from there? So from there, I went and I traded convertible bonds, which when you look across the hedge fund industry, it's kind of interesting because there's a lot of us who spent some formative years trading convertible bonds. And I think that's because, first of all, they're cross-asset class security, but it's also a security where a lot of things can go wrong and right.

13:25So it's a great teacher. You also learn about the perils and benefits of correlations between equities and rates and what can happen when a dividend arrives or disappears. So it makes you think in a lot of different dimensions that I think ultimately has served myself and a couple of my peers pretty well throughout their career. So you're trading converts and keep rolling me through. So I traded converts for a while. And then over time, I was parachuted in when we had risk that needed to be kind of watched over. Things kind of went off the wheel. So I ran our Mojorab desk for a little bit. And also, I should step back.

14:02So a group of original O 'Connor traders, myself included, reassembled in Chicago, probably in 1998, January of 1998, to start what became O 'Connor the hedge fund. And we launched O 'Connor as a hedge fund in June of 2000. And at the time that we launched, it was actually the largest hedge fund launch post-long-term capital, which, to remind you, blew up in the fall of 1998. So how big was that at the time? We were a$3 billion launch. And I guess maybe$3 billion is becoming big again. Right. And what was that strategy? So we were primarily market neutral equities and credit. And it was a multi-strategy, but it's distinct to kind of a millennium type strategy in that we really were a team.

14:55And I think one of the things that I always loved about my time at O 'Connor is that we were an incredibly cohesive team. We were really good at kind of connecting the dots and looking at relative opportunity sets. I think that's really, really important. And it's probably becoming increasingly important. And at O 'Connor, I took over equities and credit in 2006, and I took over running all of O 'Connor in 2007, right before the financial crisis. And that strategy, so there's a lot of ways of thinking about a multi-strat across equity and credit. What was the kind of risk and return framework you were trying to create?

15:35We wanted to produce returns that weren't highly correlated with natural risk assets that clients would have in their portfolios. We were trying to keep a fairly high liquidity profile to give us the ability to be nimble. From a return perspective, we were looking at something in low, single, mid-teens type of returns. And I think we did a really good job for a period of time in the financial crisis. I think we navigated as well as anyone, both in terms of truncating risk, but as importantly, taking advantage of the dislocation that was created. And we started to make money in November of 2008, just by kind of repositioning the portfolio and taking advantage of areas where kind of the rubber band had really stretched.

16:28Were there seminal moments in that time that you remember? So it's one thing to look back and say, hey, we were able to do that. It's another thing to actually step in when everything's falling off a cliff. So a couple things, and again, this I think goes back to the culture that O 'Connor has, is in the fall of 2008, when things obviously were going pretty badly for markets generally, the group of senior investors and myself, we literally hunkered down in a room and we looked across the opportunity set. And we were, instead of people wanting to hoard capital or point fingers, we really were able to kind of evaluate and pivot to where we saw the best opportunity.

17:11And at that point in time, one of the things that was really key is you didn't know the next firm or bank that was going to get tapped on the shoulder and liquidated. So you wanted to go to opportunities where there was a catalyst that might not be market dependent. And you also wanted to make sure you weren't beholden to financing markets and leverage. And I think we did that well. And by doing that, we had to sell some things where we were basically crystallizing losses and pivoting to other areas. But it was, I think, the only way to execute on that is if you have a team that trusts each other and is communicating really well.

17:53The other thing I I think we executed well in that moment in time is as markets started to recover post the first quarter, there was a ton of momentum. And we didn't sell into that momentum. If anything, we added into it. Whereas I think a mistake some investors would make is taking their ball and going home at that moment in time. It always sounds great to say, hey, we have a group of senior people who were able to communicate together. What did it actually take to get to that point in time so when you were in the room where it was happening that you already had that trust? So I think it's the actions leading up to that point in time, the moments in time when someone invariably loses money but loses money for the right reason.

18:40We're in a business where we make calculated bets and sometimes they just go against you. So I think that trust in moments like that had been built up over a long period of time. I'm also a really, really big believer in like physical proximity. So spending time kind of shoulder to shoulder with people over 20 years, it matters. And it's really helpful. I'm also, I'm a pretty candid person. You know, and I have an Irish temper. So people tend to know where they stand with me. So you mentioned over 20 years. How many people on that senior team had been working together for a long time? Our average tenure there was on the investment side was over a decade at that point.

19:24So we really knew each other well. We knew each other's strengths and weaknesses. We didn't hold back in terms of opinions. And it was really invaluable at that moment in time. So you mentioned the risk of not knowing which domino was going to fall next on the banking side. Was O 'Connor part of UBS at that point in time? We were. So we were wholly owned by UBS and we actually had prime brokerage kind of assets exposed at that point in time. And actually one of the somewhat controversial decisions I made was I pulled from a number of different prime brokers, but UBS was one of them. And, you know, and again, that from my perspective, I had a fiduciary responsibility to protect our clients.

20:09And I also felt an obligation to the team members. If something had happened to UBS during the financial crisis, we all had a lot of deferred that depending on what legal opinion you believed may or may not have been money good anymore. So I felt a real responsibility to both stakeholders. I knew that politically it could be dangerous, but I didn't think that should be part of my calculus. And when you were in that room making the decision to step on the pedal and things started to turn, you still had to have that overhang of, yeah, but we're sitting inside a bank. We did. And to be candid, we attempted a management buyout at that moment in time.

20:46And we got close, but we were recovering too quickly as were financial markets. So the trader, me and my peers actually tried to extract ourselves at a good price, but ultimately they decided they wanted to hold on to us. And so a few years after that, you got moved into being head of asset management for UBS. Head of investments. So all of the investment teams within UBS asset management reported to me. Okay. And how did that role shift from what you were doing, kind of stewarding a hedge fund? It's an interesting topic, and it's something that we talk about a lot here. I think in the asset management world, the difference between, quote unquote, traditional asset managers and hedge funds, those worlds are blurring.

21:31And it's really all about what's the value you can deliver above and beyond what I can do for myself. And in that context, I think what we wanted to do with our products we offered clients at UBS was exactly what we had been doing at O 'Connor. And it was about delivering valuable set of returns in the context of kind of opportunity set in risk. So it felt like a really natural progression. And I also think, from my perspective, it was a moment in time when the asset management industry overall was going through a lot of transition. And that usually creates a lot of opportunity. Yeah. And did your day-to-day role shift from being on the desk, making the investment decisions, to kind of running this big global business?

22:15Yeah, it definitely shifted. And there was aspects of that that I didn't enjoy as much. What were those? You spend your time doing non-investment tasks and not an insignificant amount of time. And it was one of the reasons coming to Soros was so appealing because it really kind of got me back to what I'm passionate about. And what did you learn in that time about motivating and managing people in this space that you might not have been exposed to before when you were running a hedge fund? So I think a couple things. First of all, communication. I talked about the fact that I'd worked at O 'Connor with people for such a long period of time.

22:53When I took over running investments at UBS, yeah, I had to earn credibility with people who I didn't know as well and they didn't know me as well. And to do that, you really have to spend time. You have to communicate. So those skills actually were transferable when I came here. And I think that was really interesting. I also – it was good to understand the utility curve of the client who allocate traditional asset classes. I had a big passive business under me in that role given the increasing dominance of passive players in markets. I think that was really, really helpful. Okay. So you get the big call to come over here at Soros.

23:39What was the structure of how the investments had been run before you showed up? Somewhat concurrent with me coming over here, George transferred the bulk of his wealth to the Open Society Foundations. So before I came here, these assets, it wasn't managed the way you would think in a traditional foundation because it was a family office and they didn't have to think about solving for the things that you need to solve for when you're a foundation or endowment. So we had to lay all that groundwork and build that kind of foundation of thinking and the foundation of organizing the portfolio. And that's been a lot of work, but it's also been like a fun problem to solve for.

24:21So when you came over, there's probably a common outside view that George and Soros, certainly he made his money from macro trading and taking big bets and lots of portfolio managers. And what you described in Cumming is this risk-controlled, market-neutral background with some oversight of a beta shop. How did that framework about thinking kind of shift? And what does it really look like today? So the interesting thing is the portfolio when I arrived was actually over-diversified, I'd argue. So there weren't enough big bets in the portfolio. And one of the first things we set about doing is putting in place kind of a top-down architecture that would inform our bottoms-up asset allocation.

25:12And in doing that, we really reduced the number of allocations we made to managers to try to increase the concentration and give ourselves the ability to make more big bets. And in terms of that top-down architecture, we have two important kind of constructs. One is for the long term, and one is for the more short and medium term. The long term is we've set kind of a neutral risk level. Neutral to what? Neutral to markets? Is it neutral? It's not neutral to markets. This is neutral to what we expect to exist over kind of a five to seven-year period. And for us, that equates to about a 60-40 portfolio.

25:59So definitely not market neutral. That's fairly high octane, although it's less than your typical foundation or endowment. In terms of equity risk? In terms of equity risk. And there's a reason for that. When you think about your typical foundation, they tend to have fairly elastic spends. The Open Society Foundation has a less elastic fund because it's a huge global organization. So the ability to maneuver spend very quickly, it's just harder. And in that context, you can't take as much risk. One of our board members is a big fan of yours, actually, someone named Ben Inker. And he introduced me to a gentleman named John Hagler.

26:47He's kind of an understated luminary in the industry, in my opinion. So in the 70s and 80s, he was the CIO and treasurer of the Ford Foundation. And can you think of a worse time to be CIO of anything? So you had the oil embargo, you had Watergate, inflation hit 12 percent, S &P went down 45 percent and took a decade to recover. And so when he got to the Ford Foundation, he started to have them think in the context of the interrelationship between risk in the portfolio and spend. And he introduced concepts. And this, by the way, this is 40 some odd years ago. He introduced concepts like if you have forward foundation commitments, that is effectively leverage in your portfolio.

27:42So really, really interesting and obviously, I think, correct thinking. But those are things that I'm working with the investment committee I report to and the foundation to really think about how we want to flex risk in one aspect relative to risk in another aspect. You said it distilled into this risk structure that looks like 60-40, but it started with this view of what you see in the world three to seven years out. Talk a little bit more about what that view is and how that translates into a longer-term structure that kind of resembles 60-40 and risk. A couple things on that. So the reason we define it as risk allocation instead of just saying 60-40 is because this platform is pretty incredible in terms of the investment horsepower we have in -house and the degrees of freedom we have with the$25 billion.

28:40and we want to be measured against a passive 60-40 portfolio over that cycle. But the truth is we can grab a lot of other building blocks that play to our competitive advantage. So when we think about how we want to get risk, we want to really think about what are the different pieces of risk we can grab and what's the best at this moment in time. That's part of the thinking. And then the other thing we have is a shorter and medium-term policy portfolio. And that speaks to what blocks, what risk are we grabbing at this moment in time, and also where we are relative to what we think that average risk level is over the longer term.