Episode 48: Dmitry Balyasny - Managing Partner and CIO of Balyasny Asset Management

0:00This week on Generating Alpha, I sat down with Dmitry Baliazny, founder, managing partner, and Chief Investment Officer of Ballyasny Asset Management, one of the most respected multi-strategy hedge funds in the world. Dmitry immigrated to the United States from Kiev, Ukraine, at age seven, speaking no English. He worked as a door-to-door salesman at 12, became a stockbroker in college, and started his trading career at Schoenfeld Securities in 1994. In 2001, he co-founded Ballyasny Asset Management, which has grown to over$30 billion in assets under management with 2 ,300 employees across 23 global offices.

0:36Beyond building one of the industry's leading multi-manager platforms, Dimitri is the only founder among the big four multi-strat funds who still actively manages a book. He's also deeply committed to expanding opportunity, founding Atlas Fellows in 2021 to provide under-resourced young people with pathways into finance and investing. In our conversation, we talked about immigrating to America and learning to trade, the formative impact of Atlas Shrugged, losing everything his first year as a broker, and why he persisted, what he learned at Schoenfeld about building great hedge funds, the critical decisions that shaped BAM's evolution, what separates great analysts from great PMs, how culture translates into returns, the changing nature of edge, and much more.

1:16If you enjoy this episode, please follow the podcast and rate it a five stars on Spotify, subscribe on YouTube, and share it to anyone who you think might find it valuable. I really enjoyed recording this with Dimitri, and I hope you guys enjoyed listening. Thank you. Thanks, Dimitri, for joining me. It's been a long time in the making. I really appreciate it. Thanks, Mir. Nice to be here. Well, I want to start where I always do, the beginning. You immigrated from the United States to Kiev when you were seven, I believe. Other way around. Oh, Kiev to the United States when you were seven. You don't want to immigrate the other way.

1:45Speaking no English, tell me a little bit about your childhood, how I think that experience shaped you, what it was like growing up. Sure. You know, it was tough for me, but it was really tough for my parents. And, you know, they're the ones that certainly get all the credit for having the courage to make the move. Just to give some perspective for folks who might not know kind of what's involved or at least what was involved at the time. when you submitted your papers to leave the country and immigrate in the former Soviet Union, you were immediately ostracized and were kind of persona non grata in the country.

2:30So my parents immediately lost their jobs and had to live off of meager savings and gradually selling off your personal possessions as you try to sort out everything you need to kind of make the move. And today, we have such a preponderance of information about everything with the Internet and AI. At the time, it was just like a void, right? So you had really no idea besides kind of hearsay of what was outside of the Soviet borders. And so they really took a leap of faith and fortunately worked out. So we immigrated to Chicago and I grew up there. You know, my parents had never driven a car, had to figure out how to get a driver's license, had to figure out how to learn English and start over in very menial jobs, like going from, you know, working as a professor or working as an engineer to working cleaning motel rooms until they kind of got their feet under them.

3:39And we slowly kind of made our way out of the out of the city into the into the suburbs and et cetera. And for me personally, it was it was strange. On the one hand, it was amazingly exciting because you saw like all these things that you had never seen before, whether it was flying on an airplane, which, you know, my kids can't believe that I'd never flown on an airplane before that. or, you know, really driving in cars, which didn't really happen very often, to going to a grocery store and actually having it, like, filled with stuff that you could just buy. You know, these were all kind of very novel experiences.

4:17But from a kind of personal standpoint, on the other side, starting over, like, with no English, you know, I came when I was about seven, going to be eight soon. I was put into third grade I couldn't speak any English and after six months in third grade they moved me down to second grade then I the following year kind of got the hang of English a little bit and got caught up and then I went to fourth grade so I still never really finished third grade so if I say anything really dumb during the podcast that's that's the reason I think you missed a little bit of division there.

4:56And so I also think kind of a moment that seems very formative for you is when you read Atlas Shrugged for the first time in college, if I'm correct, and Ayn Rand in general seems to have been very formative. Tell me about, first of all, a time in college and then reading that book, what did that bring to light? Yeah, it was, I think it was right between my senior year of high school and freshman year of college. So it also like lined up with kind of from a, you know, formative kind of standpoint, when you're going to college, you're kind of like looking for new ideas. You're open to kind of like different perspectives and stuff.

5:37And I think, at least for me, like I was kind of hungry for, you know, knowledge, right? Not like factual knowledge, but kind of like broader, you know, wisdom and knowledge. And so I was always kind of interested in philosophy and reading different philosophical type books. Athol Shrug had sat on my bookshelf for a couple of years prior to that, and I was kind of intimidated by the length and didn't really know what it was about. And so it took me a while to kind of motivate myself to start. But once I started reading it, I couldn't put it down. And I think the best way I could put it is, like Ayn Rand put into very eloquent writing a lot of moral and philosophical kind of thoughts that I had kind of bouncing around in my head.

6:28where I couldn't articulate them the same way. I couldn't put them together into a coherent philosophy. But it immediately resonated with me as far as freedom, independence, self-determination, working kind of for your rewards, and all of that being not just a sort of cost of doing business to keep the world moving, but actually the right moral way to do things that was beneficial for, you know, society as a whole, as well as the individual working in their own self-interest. And so it really, really resonated with me and I would definitely recommend it for folks to check out. I've been intimidated by it for a few years now.

7:17I think I'll pick it up after this podcast. And during your time in college, I'm correct, you became a broker because ultimately you wanted to become a trader, but the broker was kind of the first step to doing that. You made some money from commissions being a broker and I'm correct. You kind of didn't make any money in the end because you traded them and lost a lot of money. Yeah, I was definitely not down. So the career trajectory was I did some sales when I was in starting in junior high and then throughout high school, different types of sales jobs because I pretty quickly figured out that was the only way you could get paid any money as a kid was you had to earn commissions.

7:59You know, podcasting hadn't been invented yet. I wasn't smart enough to start a VC fund, so I did different types of sales. And so as I was looking to get into finance and trading, it was kind of natural that I could get like a foot in the door through sales, which is basically what being a stock worker was at the time. You got a stack of leads to call and people you were trying to get to open accounts and do some trades investments, you know, with the firm. And I was pretty good at that. And I pretty quickly had a number of other young people kind of working underneath, you know, my umbrella.

8:36And we were doing, you know, very well for our age, like as far as generating revenues, but I was really interested in trading. And so I was taking like all the commission earnings that I was making and using that to fund my personal trading account. And there I had no idea what I was doing. And so I was losing that and more because I was young and silly and leveraged that by levering via credit cards. So that was my early version of prime brokerage, which was not the way to do it. And I didn't know what I was doing. And so I was losing more than I was making and got to a spot to where I really figured out that I needed to get some formal mentorship to really figure out how to trade properly.

9:19And then you saw the only ad that Schoenfeld has ever run in a newspaper, if I'm correct. And I'm also just interested. So first of all, tell me about your start at Schoenfeld and your trajectory there before spinning out to BAM. I'd love to hear that. But even before that, most people who lost a lot of money trading early on might've been like, okay, this is not for me. Why did you keep on going? Well, one, I really loved it. So I was doing it not just to make money. I was doing it because I was really passionate about trading and investing in markets and companies. And I was always very interested in it.

9:57So that was one. Two, like I'd never really been naturally good at anything. So I've had to pretty much work at anything that I become competent at. I usually have to spend a lot of effort to get there. I can relate. Right. And so I kind of figured because I had that, you know, kind of backbone from working my way up and other things, whether it was sales or sports or whatever, I figured if I really loved it, it's not, you know, kind of rocket science. If I worked at it hard enough and got some reasonable instruction, like I could eventually, you know, figure it out kind of step by step. So that's kind of where that, you know, I think confidence, you know, came from.

10:42And tell me about that. How did you get started at Schoenfeld? And you had a very interesting career trajectory there all the way from starting yourself. Then you ended up running a team. And even on the fun-to-fun side, how did that kind of, were the steps leading up to spinning out of that and starting BAM? Yeah, so I guess first off, like, just the perseverance in getting the job, I think, is important. So, you know, at the time, there weren't lots of, you know, different hedge funds to talk to, certainly not in Chicago. And, you know, I didn't really have any experience that was useful for them to be interested.

11:22So I kind of cold called and, you know, sent resumes and networked with as many as I could find. And I had, you know, a very large stack of rejection letters. but I would go through the paper every week kind of looking for you know one ads for trading positions back in the day that's amazingly what people did and so if I hadn't been doing that I wouldn't have actually seen the one ad that that Schoenfeld ran at the time so that was helpful and then they were looking for people that didn't have a lot of trading experience but had like a little bit of market knowledge but they wanted to teach them kind of the approach that they thought worked and not have people come in with preconceived notions.

12:04And so I was very clear that I had no idea what worked. And I wanted to learn. I was going to work hard. And so I was hired into the training program. And, you know, we had no compensation, no salary. You know, today there's lots of signing bonuses and multi-year guarantees and, you know, all this and that. You know, we got free lunch. And that was it. And then you got a percentage of the profits that you generated from your trading account. But you had a very small pool of capital to start because the firm was trading its own capital. And as you didn't know what you were doing, it made sense to start people with a small amount of capital.

12:43So the first year, I didn't make anything there. And there were some people there that didn't make anything for years and eventually dropped out. But I kind of persevered and kept asking questions and kept kind of slowly improving and learning different disciplines and types of trading and types of risk management that worked, initially in equities and then broadening it out to macro, et cetera. And so after the first year, I kind of steadily started improving and consistently putting up solid P &L. And as that grew, I started hiring people to work underneath kind of my profit P &L center, initially hiring traders who I basically taught what I knew and gave them some responsibility to take a portion of my risk in different sectors.

13:32And then started hiring analysts five, six years into it. We were kind of the first group in the firm to hire fundamental analysts, which was an unusual thing to do in the 90s because it was such a momentum-y market. But I thought that wasn't going to last forever. And if I wanted to keep scaling and growing, we needed to do kind of fundamental work and hold positions longer. And so we started doing that. And then that morphed into hiring sector portfolio managers, where we gave them more capital to manage kind of underneath my umbrella. And then that became kind of the genesis of our trading group.

14:13And as we grew and expanded, we wound up spinning it off initially into a division and then into a separate fund entity that we capitalized. And I'm interested in what you learned at Schoenfeld, both from building a team over the years, but also, if I'm correct, you're on the fund-to-fund side for a bit and got to interact with some of the top funds at the time. What did you learn there about what makes a great hedge fund and how did you apply those kinds of principles to the beginnings of BAM? Yeah, that's a good question. So on the trading side, I would say having a disciplined specific approach.

14:46So the markets have lots of things going on all the time, right? There's a million different types of trading and investing that you could do in different asset classes, different holding periods, you know, long, short, neutral, investing, trading. So there's a million different things you could do. And generally, people don't really have a particular well thought out, you know, approach. Right. They kind of do something. It works. You know, they do a little more of it. It doesn't work. They do something else. You know, they try this to try that. And so that's kind of what I was doing before. And you really need a particular approach like this is the type of trade that I look for.

15:33Right. And this is the type of risk that I take. Here's my limits. here's what I'm trying to make, here's what I'm limiting myself to lose, and have prescribed method to the madness. And you start with a fairly small box. So when we start new portfolio managers who hadn't run money before, we try to make the box fairly tight. And when I started, it was really tight, because we really didn't have much experience. today, the people we have starting off in a PM training program already have a lot of experience, so they have a much wider box. But you need that box. So that says, here's the stuff that I think I have an edge in, this particular portion of the market.

16:16Here's how long I typically hold positions. Here's the factor risk I want to take or not take. Here's the concentration, the liquidity, how much I'm trying to make, how much I'm willing to lose as a drawdown. So you try to define all this stuff. And then as you get competent, the more success you have, you kind of gradually widen out, you know, that box, right? And sometimes you have to take, you know, you grow it and then you have a, you know, draw down something changes in the market and you have to shrink it again and go back to your basics a little bit. But over time, that's kind of how you develop, right?

16:50And then you're constantly looking for, you know, improvements in your approach, not just what to happen with this particular trade, but how can I use what I learned so that my next, you know, thousand trades are better, right? So you're constantly like iterating a little bit, right? And then from the fund-to-fund side, I was allocating a kind of a firm account that Steve Schoenfeld capitalized and I co-invested and a couple other guys in. I was kind of the fund-to-fund analyst. I went around and met like a bunch of different funds to help pick where we should be invested. And so that was a really interesting experience.

17:31I'd say the main thing that was really reinforced to me that was helpful was there's a huge difference between two types of funds. One is a is kind of a boutique structure that's structured around an individual risk taker in a particular strategy. The Steinhearts of the world. Yeah. And that's like the vast majority of hedge funds, right? And then there's like a business, right? And it could be a proprietary trading business, you know, like a Jane Street or, you know, HRT, or it could be a hedge fund with a lot of different risk takers. And that's a completely different DNA from the individual centered model.

18:14and what i saw like as we were allocating the portfolio uh was split between kind of the two models we had a lot of different funds the single manager model uh had like a tremendous amount of turtle so some did great then they didn't do great then you know the manager would want to do something else or lose motivation or had some business issues but it was very rare that we were invested with the same guys for, you know, 10, 20 years in that part of the book. They were just like turned over a lot, right? Versus the diversified funds, like a lot of them wound up being the same ones for decades, right?

18:57Or they would like spin off and you have like, you know, they'd become, one would become two, but it was the same basic kind of DNA, right? And the reason for that is like that type of firm, like you can reinvent, right? You can expand different strategies, some work, some don't, you change the mix of strategies, you can allocate capital to the areas of the market where you think there's better opportunities, you can refresh your investing teams as people kind of develop and get better or not over time. So it's just a much more stable and consistent business model. So that kind of reinforced that that was the way that I wanted to go and really building out, you know, our business.

19:36Yeah. I wanted to build a business and a legacy rather than something more fleeting. Yeah. I just wanted to build a real business, right? So whether I had a good year trading or not, like I wanted the firm to do well, I wanted our investors to do well, and I wanted to do well in all market environments. So some are great for my style of trading, some are not like I wanted it to be, you know, a consistent, scalable, you know, business. And I'd love to hear a little bit about before we touch on talent and kind of different topics. I'd love to hear a bit about, from a high-level perspective, how BAM has evolved over the past 25 years.

20:10I'd love to hear it from what you think were the most important decisions that led to it becoming what it is today. Well, I think the first one is just that, what I was talking about is just, what is the architecture? What are you trying to build? So a lot of times when people start funds, they start from the standpoint of how much money can I raise, right? What will people invest in? And, you know, you obviously have to think about that, but that shouldn't be, you know, kind of the genesis of what you're trying to build, right? Because like investor appetites, you know, they change. And, you know, they certainly will follow returns, right?

20:54And you need something that you really believe in over good periods, bad periods, that you have a particular edge in and you know how to do and architect the firm, you know, towards that, regardless if it's easier or harder to raise money for it, you know, to start. Right. So the reason I say that is like this model was really hard to raise money for. And we had like a lot of ups and downs over the years in AUM before we kind of got to the real critical mass and really solid, you know, investor base like that took a long time. and the reason for it is it's like a complicated model for an investor to under it so if you compare it to you know an individual single manager pm coming in and saying like you know here's my track record you're investing with me i'm great at xyz i have this team we got five guys we worked together for 10 years simple fee structure simple risk like here it is right versus we come in and we're like well you know the pm's changed like we have 100 different people Today we have 200 different PMs.

21:56There's a couple thousand people. All these different strategies. They're going to evolve over time. Everything's complicated. And so it takes investors a long time to get comfortable with that. But really having conviction that that's the model that I wanted to pursue was super important because that conviction gets tested. right and a lot of people you know want to do a particular model and then when times get tough they're like yeah you know you know maybe i'll do something else right and so you know we really architected that and we wanted to build like a really diverse scalable business a real you know multi-risk taker multi-strategy and we stuck with it and we created a you know fund structure risk structure recruiting structure everything built you know around that foundation so i I'd say that's kind of the first, you know, critical thing, because it's very hard to veer from, you know, kind of a single manager to then say, like, OK, I'm going to have like lots of different risk takers.

22:56And now we're going to do multi-manager. Like, that's very, very hard. Right. So I think that's been critical to success is just that steadfastness. Then a partnership culture is really important. So I was fortunate enough to hire Scott and Taylor's two partners very early on. and we started the business together. So we've been together for like 25 years. And that partnership culture permeates the firm. Now we have 20 partners, both strategy heads on the business side, department heads and portfolio managers as well. And so that really feeds the team type of environment where people want the firm to do well and are rooting for the overall firm.

23:41In addition to obviously being very motivated and the economics that they get from generating P &L on their own portion of capital that they're managing. So I think combining those two things, it's very hard to do. And most firms are kind of one or the other. And we've always believed you could be both. You could have individual incentives and you could have firm incentives and firm partnership. And those things really reinforce each other. Those are the main ones. before we go back to the episode i want to take a short break to talk about my sponsor row the generating alpha podcast is presented by row the all-in-one banking platform for startups thousands of startups like perplexity product hunts and more use row you get everything you need to manage your startup's cash fast banking setup cards with a two percent cash back and yield that turns company cash into extra runway all super important in the early days of launching But the thing founders really love about Roe is their team.

24:41They're obsessed with helping founders disrupt the status quo and will go to the end of the earth to help them to do so. And exclusively for Generating Alpha podcast listeners and viewers, you'll get a$1 ,500 statement credit, plus a ton of exclusive perks when you manage your company cash with Roe. Terms and conditions apply. To learn more, visit rho.co slash generating alpha. Roe is a fintech, not a bank. Checking and card services provided by Webster Bank. Member FDIC. See reward terms for details. Thank you, and back to the episode. Yeah, and I'd love to touch on the topic of people. Of, I think, obviously, what makes these firms enduring is kind of a consistent flow of great talent.

25:21And so I'm interested, just to start off, what makes a great analyst and what makes a great PM, and how do those differ? Yeah, good question. So what makes a great analyst, and I think this is similar to a great PM, is you have to be able to think differently, right? You have to come up with unique, variant ideas, differing views on things that lots of other people are constantly looking at, right? And you might not have a differing view necessarily for the next five years, but you should be able to come up with a consistent flow of differing views for the next few months, maybe the next year, maybe the next couple of years in some cases.

26:03So that takes a particular type of wiring where you're kind of constantly looking at like the other side of the coin and what might cause people to come around to your view and then digging on that. So the balance of creativity and investment process discipline, right, is like common for both analysts. and you need that for PMs as well, right? So a lot of times people that are like really creative and come up with brilliant ideas, but they don't have like process discipline. And, you know, they might fall in love, you know, with one particular idea, right? They have a hard time kind of, you know, running models on a hundred different companies, right?

26:46Like you need kind of both things, right? So that is in common. I think the thing that's different is at a PM level, you certainly need more risk tolerance, right? Where you're comfortable with volatility and some of that is innate and some of it can be learned, right? You need the ability to juggle lots of different balls, right? So as an analyst, the great thing about being an analyst is you can go super deep on a particular thing and not worry about anything else for some period of time, right? So if it's a big enough idea, you know you can raise your hand talk to your pm and say listen like i think we should spend whatever the next you know week i'm just going to work on this right uh and if you agree that this is like a big potential thing uh like i'm going to spend 90 of my time digging on this until we either prove or disprove this thesis because i think this could be a really big bet right uh as a pm like you don't have that luxury right like every day there's something blowing up in your book hopefully there's something well going on uh you know there's some macro problems somebody tweeted something, you know, there's constantly, you know, 50 different things that you're juggling.

27:58And so the ability to do deep work and dig in on something, but also to zoom out and look at the overall portfolio and constantly, you know, balance those things, that's like a unique, you know, PM skill. And on the topic of talent, in recent years, a lot of people have seen these big headlines of hedge funds paying up for big talent. But I do think that at a point, kind of the marginal compensation doesn't really matter rather than the type of firm you'll be going to. An extra million dollars and a hundred million dollar contract isn't going to matter as much as the firm. And so my question to you regarding that is, how do you guys kind of uniquely position yourself to attract the best talent as a firm?

28:40Yeah, so I think once you're at the level economically to where you can compete, right? And I think realistically, 99 % of funds don't really compete in this pool. for actual portfolio managers that are running meaningful books and getting paid on their performance because they don't have the economic ability and scale and structure to compete for that. So once you're past that and you're competing with other large firms in that space, if the main thing that you're offering is a sign-on or a guarantee check, that's not really compelling because it is fairly commoditized. Like if you're a strong PM, you have a good track record, you're a good team manager, you're a good risk manager.