Will England - A Primer on Multi-Strategy Hedge Funds - [Invest Like the Best, EP.342]

0:00 I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridge line offers a better way forward, one unified platform that automates away the complexity across portfolio accounting. Reconciliation, reporting, trading, compliance, and more, all at scale. Ridge line is revolutionizing investment management, helping ambitious firms scale faster.

0:25 Operate smarter and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com.

1:00 Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. My guest today is Will Inglith, the CEO and co-CIO of Walleye Capital. Wali is a multi-strategy hedge fund quartered in Minnesota that manages around five billion dollars today.

1:43 Our conversation is a primer on multi-strategy hedge funds, which have become a force in markets through the success of firms like Millennium, Citadel, Point seventy two, and Baliasney. We discussed the operational complexity behind the model, which managers best fit this type of investment style, and what happens in stressful events like the GameStop short squeeze in early 2021. We also talk about performance culture, the all blacks, and Will's experience as a US national team rower. Please enjoy my great conversation with Will England. So Will, maybe we can begin by you telling me why you are so interested in Robert Barons.

2:18 I love learning about that time of history. And many things are different. But many things are the same. And the scope of what some of these individuals accomplished. Was incredible.

2:29 So I lived in Minnesota In a town called Y Zetta. There's still a train station there built by James J. Hill, who's one of the lesser known robber barons. But was still at the time One of the top.

2:40 Five or ten. I'm running a real world, I'm building this entire network. And what they're able to accomplish is just the force of personality of saying, I'm literally going to change the landscape of the US. I'm literally going to bring people physically move them across. That is so inspiring. And so much of that was because of who they were as individuals.

2:58 And yeah, obviously the Robber Baron term is because they're pushing the boundaries in certain areas. James J. Hill, relatively speaking, was one of the better robber barons. But really inspiring. And so when we talk today about People building great companies. Changing the world. It doesn't even fuck a pale comparison to what these people were able to accomplish and it's really inspiring and very applicable to today. World was different then in all sorts of ways.

3:19 both positive and negative, but the core concept of Someone who decides I'm literally going to go and have an impact. Still they're applicable today. I think a lot of these people that we were talking about at lunch, whether it's Vanderbilt or James J. Hill or any of these characters through history, would be fun to weave how they've impacted your thinking throughout the rest of the conversation. But before we go too deep into a history lesson.

3:41 I'd love you to level set for the audience and explain the style of investing platform that you are building and have built. Many call it the pod model or the platform model. I don't wanna take for granted that we explain this in lots of detail. We'll spend probably half hour here or something. Because I think it's become such an important part of the investing landscape.

4:02 And many people know Citadel and Ballyasney who I've had on the show before Many will also know your firm more soon. But I think just explaining this method of investing first and foremost would be a great place to start. And you can take that whatever direction you want, and then I'll poke and prod on aspects of it. The technical is a pass through multi manager. So I'll have hedge funds very special type of hedge fund. That term pass through, it sounds like it's an operational nuance.

4:28 But it's extremely important. What that is essentially saying is that investors are putting the trust in you as the investment manager to pass through essentially all the costs of the business in order to generate very high quality risk adjusted returns. The way to think about the landscape today is there are essentially four big firms in the industry that have all been around for decades. There's Citadel, there's millennium. There's point seventy two, which used to be SAC.

4:50 And now Balias will grow into that been around for a number of decades as well. realistically there's only four or five that have sufficient scale Sufficient track records competency to be able to again take advantage of the full benefits of reciprocation. core concept of the multi manager model is to say This should be a pure alpha vehicle.

5:07 And the way to get that is by putting together multiple different types of essentially relative value strategies. And that could be long short stock picking, both from a fundamental standpoint, a quantitative standpoint. various different forms of macro strategies. various different forms of volatility trading. It would be inaccurate to say that everything has an arbitrage element to it, but relative value or arbitrage esque is certainly pretty common across most of the different styles.

5:30 And multi managers The biggest ones, the best ones really putting that together, putting those strategies together. in a single format. It's very easy to articulate why that makes sense. And again, you take essentially just from a pure time series to employ multiple different uncorrelated time series to put them together.

5:46 Wallah you've got a multi strat. what is very fascinating about the model and why there are realistically so few players that are doing this. is to do that is incredibly difficult. Not only do you have to have excellent individual managers and we're talking in some cases hundreds of excellent individual managers or pods as they're referred to. But George will have to run a world class operating company. So that means world class technology systems, even some of the less sexier functions.

6:09 Operations, legal compliance, accounting and be really able to invest in that and be world class. is very very difficult. And so if when you think about the elements of a traditional hedge fund or investing model.

6:21 This was talked about in the previous podcast. If you're running an investment firm, you have to essentially pick your investments. So you've got your alpha of your signals of your quantity. Number two, portfolio construction, how do you put everything together in a balanced manner? And then number three is building the business. promotes will manager hedge funds, that's things like raising capital, it's hiring. Do we have a cool fancy office, stuff like that.

6:42 But for the multi manager pieces, that third piece That's just magnified dramatically'cause you're operating at such a scale across Essentially everything that be done in hedge fund land and putting it all together. Complexity doesn't scale linearly, it scales exponentially. So that's a really key differentiator of do you have the ability to run a world class operating company? And it is why in many cases Citadel is amazing. And in the past couple of years, just from a return standpoint.

7:05 have differentiated themselves and a lot of that goes back to the investments that they've made. in building just this machine of an operating company is very impressive. I've been really interested lately in studying asset management firms for whom scale is an advantage or even a requirement. Because typically the story in investing is that scale or AUM is the enemy of performance. That as you succeed you get more assets, and as you get more assets, your universe shrinks and you can't perform like you did. Early on. It's like a tale as old as time in the investing business.

7:34 But there seemed to be this small number of firms, not just in the multi manager model, but Someone like Blackstone, you could argue, has benefited from their scale in a lot of their strategies. So talk to us about What scale means in all its meanings for a firm like this where

7:49 You said there's only four or five, six I'd say contenders to those top four firms. Who will all have enormous scale In assets and all these other measures. What does scale do for you? How do you get it?

8:00 Why are the barriers to entry higher here than for a stock picking hedge fund? So let's separate scale into strategy scale versus company scale. with strategy scale all things being equal as you get larger Positions get bigger. become less nimble, transaction costs go up. So it's not like we're changing the laws of gravity in our particular type of world for any individual strategy.

8:22 And that can be a fundamentally driven strategy, it can be a quantitative driven strategy. the market is still there. You can't outrun those factors. What is different going back to my earlier comments about building an operating company. is that there definitely are economies of scale and even network effects as you get Bigger.

8:37 So just to talk from a size standpoint, you got Citadel Millennium approximately sixty billion Of actual A U M. There's a lot of leverage involved in these models. So the balance sheet is multiple turns higher than that. These are very, very big investment businesses. And we're considered one of the smaller players in the industry, and we're still above five billion. So small is relatively more three hundred people versus three, four thousand for some of the other places. But that second element, just to return to it for a second, the notion of company scale, operating scale, as you get bigger, you can get better. Think about what I was just saying before is

9:06 The model is not just about having good individual investment strategies and why is it that you might have hundreds of them. It's really to say for any particular type. You don't want that to get too big, to have too much market impact. But then you gotta start putting these things together. So it goes into okay, I'm only gonna build world class technology if I can build it for

9:25 dozens and dozens of people because otherwise the fixed cost investments are going to be too high. I'm only going to build an accounting department with dozens of accountants that are going to implement, again, world class systems to be able to track all the individual arrangements we'd have if you're doing that again at scale. So there's a true notion of the barrier to entry is that you need to be great at all of these non investment functions in order to frankly justify whether doing them. And I'd really just go back to underscore like technology is a huge, huge piece of what we're doing.

9:52 Just like in other businesses. And that's not a cliche like oh yeah, tech's important everywhere. You're literally dealing with You're toast with it. Yeah, bits of data. The exercise that we're running

10:03 It's like a nuclear reaction. You gotta keep it controlled and if you've got great systems be able to contain it,'cause you're using five, six, seven turns of leverage in this case. If something goes off the rails. You just blow up. And there are firms that have blown up historically. So the sophistication of the RISC systems is very much tied to the sophistication of the technology systems.

10:21 So if you don't have that as part of your DNA and abilities No, you absolutely can operate skill. But as you get bigger, once you're able to develop those systems again to really say these are our core central functions. that allow us to plug great investors onto the platform. you can get bigger and then that's where the momentum can build in.

10:39 As you get bigger, you can offer the best people, which again we can define what best means, but high quality practitioners. larger book sizes, economics and our industry become very important. If you're not operating a certain scale, if you're too small, you can't offer that to someone. It's not gonna be attractive. And again, that relates to this pass through concept that we've been talking about earlier.

10:58 It's different than in most hedge funds where might be a two in twenty model where the firm gets paid two and twenty no matter what. you could have five individual teams that are doing great, but the other day they gotta split that two and twenty. No, when we go and when all these other places that we've been talking about go and strike a deal with a PM That's formulaic, it's contractional. There is an element of eat you would shoot kill there.

11:18 And so as you get larger, yes, you can definitely incentivize people more with larger book sizes. So that's definitely important. On the other hand, the pace is really, really important. You can't go too fast. So that's what I tell people, it's inaccurate to just assume just to raise as much money as possible and because you're a multi manager. it's gonna be great. No, you need to do the things that are the precursors to success, just like in any business. You need to be able to build the platform properly. So when you absorb that capital, you can deploy in a ways which Ultimately are

11:46 respecting the trust that your investors are giving you. Whether I'm trusting that capital line in the first place. That balance is really the key point. I'd love to take this return stream that Some listening might be familiar with.

11:59 Which can and often does for multi managers look very different than like a Tiger Cub or something that's effectively stock pickers. Some of them really, really good stock pickers, but More of a market like exposure. And I'm just gonna make up a number. Let's say the return in a given year is fifteen percent. average return is fifteen percent over time or something.

12:17 And in the case of the multi managers, the best ones often the volatility is quite low. relative to what you have to endure for a fifteen percent return elsewhere. And hopefully uncorrelated to your point earlier with just the broad Let's say S P five hundred or something like that. So I'm an L P. I give you money.

12:33 And I get back a fifteen percent return. I'd love to walk through like the component parts of that fifteen percent. At every layer. The costs. The leverage, the return streams themselves, what those things are.

12:48 The portfolio construction tools and the risk. really break down what's underneath that return stream. And maybe going one by one. You pick the order, you probably can build it up from the ground up, but It is confusing probably for a lot of people that haven't thought through this strategy.

13:03 that I'm getting this simple return, but underneath that is all this fairly complicated stuff going on. So I'd love you to explain that in a lot of detail. Sure. So I'm just gonna speak in the context of assuming everything was trading equities. There's analogs for fixed income products, but just to make the numbers a little bit easier to follow. And again, effectively relative value investors. So let's assume when we're talking long short, that's true market neutral.

13:27 Long short. So if you have a hundred dollars in a fund. If you had one turn of leverage. That would just be hundred long, hundred short, two hundred is two hundred long, two hundred short. So the way the numbers work out. when you're just talking return on GM V on gross market value.

13:41 Is collectively, the individual strategies are really looking to make two to three percent return on GMV. The individual strategies. Yeah, the individual strategies and then collectively. So if you have fifty equity long short managers and you say, Okay Pick your number ten billion dollar balance sheet.

13:59 You're looking to make a couple hundred million dollars of P and L off of that. as a whole. And so those are the individual return streams, but the average the expectation is the same no matter where you are. So let's just say it's three percent. Go back to where your numbers are. And then that's at the GM V level. And so the way to back into the leverage is depending on the type of firm, you can have up to ten turns of leverage. So let's just say it was ten to make the math really easy, ten and three percent to get to your fifteen.

14:23 So I make three percent on GM V but using ten charges of leverage that'd be a thirty percent gross return. on the actual A U M. The way that the fees shake out. And the fees per unit of exposure again are very fair, but you've got a lot of them and that leverage comes in. Effectively the investor gets half of the return and because you're paying the individual PMs, there's a fixed cost element of it.

14:43 You're paying the same list salary. There's the technology cost, there's a central team costs. There's a whole fixed cost piece. And then individual PMs depending on their tenure and their strategy paying between fifteen to twenty percent of the actual P and L. So when you add that up, the investor gets about half of the return. And that's how you go from that thirty percent gross return to fifteen percent. So people talk about, yeah, there's a lot of fees in the multi manager model, which absolutely there are on an A one basis. And it's extremely important in our industry to remember that you are the steward of your investors' capital. They are giving you a blank check. Let's not abuse that.

15:16 We would actually look on the fees per unit of exposure, it is analogous to your standalone Tiger style investor that's charging two and twenty. It's just because of the leverage that that gets magnified a bit. And that's justified because of the benefits of putting all these different strategies together is really when it comes down to having this giant risk management exercise. And I can't underscore that enough of running a proper Multi manager. It's risk.

15:39 And people. plug great people into a great system, risk manage the hell out of them. That's what allows you to use those numbers and create A profile that ultimately is very retracted. Let's zoom into a specific strategy and manager and we'll call them Jane Smith or something.

15:54 So Jane Smith is a talented investor. They come to a platform like yours, and as you just articulated, their job is effectively earn a three percent long short spread. Let's say they're in equities and keep this really simple. And they're market neutral. They're not allowed any basic market exposure. And that's one market risk factor to which they are neutral. So her job

16:14 In this case is have the longs that she picks outperform the shorts by three percent. You don't let the basket out and That's what you're looking for. Layer more nuance on top of that. If you're recruiting a new Jane, let's say. What else are you telling

16:27 her she needs to do to be successful beyond just earn three percent better returns on the long versus the short side. For a long short investor like that is not just about market neutrality. we give someone a risk sheet when other firms would give someone a risk sheet and saying, Okay, effectively you're driving a car down the highway. Here's the guardrails. The guardrails are there, just like in a car, so you don't drive off. So what would some of those be?

16:50 obvious things going one step down to that. Don't be too concentrated in a single position. So if something surprising happens, you're not Punch in the face. So that's another element of saying, What's your universe to be in? Let's just assume if you're focused on picking tech stocks. don't all of a sudden go dealing with industrial companies or if you're a biotech manager you should be hyper focused on this particular set of what you're doing. So that's another element.

17:12 Liquidity, a big part of the risk elements as The worst place to be in investing is something that you don't like and you can't get out of. In private market investing. That's very clearly going on. Same applies to public market investing as well. So being cognizant of liquidity profile of your positions. So you can Stay animal to a reasonable degree.

17:29 Those are some of the obvious core elements. And that final piece of that, which gets talked a lot more recently, we act this way. all the firms are gonna act this way is to say, Okay, effectively as a stock picker and the same concept applies to a quantitative investment strategy, okay, stat orp strategy, really. Is your job spiraler comments is to produce alpha? So let's think of all the things that are known. Factor models are common factor models.

17:52 And you can bifurcate that in two ways in terms of the style factors. Momentum, value, growth, et cetera. Which are effectively more statistical than anything. And then there's the other side is the industry factors. You're just betting on tech stocks. You're betting on healthcare.

18:06 And let's actually take that out to a reasonable degree. And the reason for that And there's tons and tons of statistical analysis that we've done that other firms have done. human's ability to consistently not only time the market But to time, when is the value factor going to switch? When is the growth factor going to switch? Humans just aren't very good at that.

18:25 That's really a macro call. the law of large numbers is not in your favor. And so as a stock picker Let's just isle it out. Focus on stocks. Focus on like for like relative value. And I can even make an argument for

18:37 the market as a whole, this is a huge part, especially nowadays when so much talent has left long only of what actually keeps market efficient. This software company versus that software company, which one is better or worse. And that's what we want people to be doing,'cause that's where we believe they have edge. That is where the law of large numbers is in your favor, again, whether you're a quant investor or you're a fundamental investor, and saying Yeah, take out all the noise, all that other crap because it's so fucking confusing what actually is driving movements in any given day. And that's when they get this notion of idiosyncratic returns.

19:06 What is your idiomberg? That needs to be above a certain degree. And that's where firms can differentiate themselves effectively, how locked down, how tight are you going to be. And that is not to say that The machine is doing all of portfolio construction for fundamental stock pickers. Obviously for quantitative strategy, there is. But canonical example is someone's gonna have their universe fifty, sixty, seventy stocks, some firms is as low as forty.

19:28 Other places could be as high as a hundred, but here's your sandbox. Focus on those. But we're gonna give you tools and again, this is why skill does really matter because you need to be able to provide analytics and technology to be able to help identify this problem. to say, okay, now that I've got sense of the companies that I wanna be long, the companies that I wanna be short. How do I do that in a ratio that really takes out all the variants in P and L that is a distraction?

19:51 And you do need to do that in conjunction with the machine. You're just giving those picks to a machine and it's just giving you back the answer. But it is definitely an interactive experience. And that this has been an evolution over the past ten or fifteen years. Citadel was probably a pioneer in doing that. You're activating parts of my brain for my quantase that lead to a lot of interesting questions around why do it a certain way versus the other.

20:13 But before we get to some of those. I'm curious for your reaction just to what you think about efficient market hypothesis in general, because We're gonna talk a lot about how you've built your system. To make the most of these two to three percent return streams.

20:28 But these two to three percent return streams themselves there's another name for that, which is alpha. And the fish markets would say no, that doesn't exist. Do you think that some of these multi managers unbelievable success in terms of the returns that they've earned. Let's take Citadel just as the one everyone knows.

20:44 Like the best counter to efficient markets. You can lever something a million times, if there's nothing to lever, there's nothing to earn. Markets are not efficient. They're closely efficient. They're nearly efficient. But they're definitely not efficient. The reason why private markets taking out all of the hype and the fads and the low industry environments, so you can say But people will say I'm in private markets because there's an information asymmetry and I want to access something for various different reasons.

21:09 So the core concept that there's a return to hard work and study Very much exists. Empirically, you look at the track record. And this isn't just a here's a needle in the haystack type arguments. The number of shots on goal that the firms have had with a hundred of this investment strategies. Really refutes that. Absolutely that's a counter to say that there isn't consistent alpha market. The point is It's really hard and that's why running in a very tight construct taking out

21:33 All of these especially low law of arch numbers. Tight bats. That's why that's really important. And just to say the obvious adage of you all need to be right fifty five percent of the time. The difference between fifty five and fifty seven percent of the time is huge. It's just really hard to do that. And you want to take essentially as many small bets and add them up as many times as possible to squeeze out. that alpha over time. And I view it as

21:58 We'll probably get into quantitative versus fundamental stock picking, what is the place? They're very much a place for both and it'll always be the case. human's ability to synthesize information even in a world of AI. on a multi montescale.

22:11 I think that is timeless. I'm definitely plagiarizing one of the leaders in our industry who said that recently, but I think it's a great statement. But it's really hard and you need to be very dedicated to doing that using tools available to you. Let's talk about what happens above the individual manager level. So A simple way to think about this would be

22:29 Let's take a bigger number, a hundred managers, all of whom are doing something a little bit different, different sectors, different strategies, different asset classes. And they're all trying to earn that two to three percent. Naively you could say, Okay, great, we've got a hundred of those, we're just gonna allocate capital to them. We get the average of those. They all just get to run their own books and we just get what we get.

22:48 On top that maybe with some leverage. But I think there's more going on at that second layer. Whatever you wanna call that, the center book or the core strategy or something. So I have more questions about the individual manager level, for sure, but just at a high level first, what is happening when you start to roll all those things together.

23:04 What literally is happening at the firm and in the portfolio above the individual level? So this is really going behind the curtain, which is fun. Definitely there's a lot going behind the curtain. The basis for your question was saying, Okay, let's think of a simple hypothetical problem in which you've got a hundred uncorrelated time series. Well the optimal solution to that would just be to give each one the same amount of risk.

23:24 In practice, they're not uncorrelated and the correlations move around a lot, which is what makes this really hard. And so earlier statements around this being a giant risk management exercise very true. And so there's a couple of questions to act there. What is going on as far as the center book or the back book or the alpha cast portfolio, the magnifying portfolio? That's different than just the true risk management exercise of what is the risk team doing every day? What is my head of risk doing? What is a head of risk doing at

23:49 Citable Millennium. Again, technique is the same. Style might be different at different firms. So number one, of course, every individual strategies has their lane and that's a machine is looking, are you staying in your lane? pretty much in real time. And if you go outside of your lane The machine is going to flag that and it might get mad at you. And there's all sorts of nuances of how is it going to get mad at you, but practically speaking, you're staying in your lane.

24:11 And that's You put on a position that you shouldn't have. Or you lose more money than you're respectively allowed to lose. Yeah, absolutely. There's a low automation to that.

24:20 But then there's some other extensions, this is where Machines can do a lot of it, but human intuition, human thought, humans' ability to essentially architect a risk management system is really important. It's a living breathing exercise of Okay. We have different strategies that we didn't think were going to be correlated, all of a sudden they're becoming correlated.

24:37 Why is that? Is there something in our baseline risk model that We didn't see before. when I talked about this concept of idiosyncratic returns or alpha something that's not in the model. That's literally saying that Just because something looks like an idiosyncratic return.

24:51 it could be that there's a factor that's not actually in your tractor model. So actually trying to think through that. And dynamically adjust for that. And that is constant. And that is definitely going on on our firm. I know what's going on. at all these different firms and be like, Okay. Is there something underlying that could be sort of resonant frequency? which could impact multiple different types of strategies and screw up this

25:10 perfect analytical concept of having actually uncorrelated return streams. And it can appear in weird ways. You can have a biotech manager all of a sudden become correlated to Someone trading European consumer stocks. Why is that? That could be something in the markets.

25:25 And it could be flows driven. What fundamental stock picking is, and again, multi managers do a lot more than fundamental stock picking, that's a huge part of it. So obviously fundamentals is a big element. The other part is game theory. Is that what are all the super smart people that effectively all went to the same schools or trained in the same banks and Think the same way.

25:41 What are they doing? General. fighting with each other. And so this notion of positioning and crowding And it is really game scary, is hugely important. then that's another thing that the risk teams are constantly trying to think about a lot is what is my crowning factor, which is this boogeyman of

25:56 What's co holdings risk? What are positioning dynamics? It's all basically saying the same thing of If everyone is positioned the same way. And they all move their feet at the same time. It's like you run from one side of the boat to the other. Well, everyone's screwed.

26:09 the whole thing might capsize. And so Thinking around that, constantly monitoring that. It's just very amorphous. It's really, really important. So it's all of that is the risk management exercise. The other part of your question is What is this Boogeyman Center book that gets talked about? And PMs really hate that at a lot of firms.

26:26 And the reason for that is not because they disagree with it intellectually. The core concept of Centerbook again, just using equity long short managers, is to say Once you get to a critical mass, again Earlier. An economy of scale.

26:38 Another argument. You got thirty, forty individual stock pickers, they're all sector focused. Well, a machine can It's actually taken automated I look across what positions that PMs are having the trades that they're making.

26:51 And say, you know what, that's actually a pretty interesting signal. when you put on that position or the fact that you have this position that can do this across a large number of management. And I can take that information. And I can either throw it into One giant machine to

27:05 Holistically say I'm gonna call it the best picks, which is hard to do, but again, there's an approach to that. Or a simplistic approach to just be like, you know what, I'm just gonna copy what everyone else is doing. And the reason why PMs don't like the latter, which is quite prevalent, is because oftentimes they're copied and then the PMs are not actually compensated for that. So there's this notion of well, you're stealing my IP.

27:26 And it makes sense for the firm to do that, and this is where there can be tensions. because it's just more efficient, particularly from that cost standpoint, obviously. If you're running X hundreds of millions of dollars in a given sector and half of that is the PM and they're getting carry on that and half of that is run by the center team and there's no carry on that. Before it goes to the fund.

27:46 Then obviously that's more efficient for The fund, but it can also create tension. So years ago when we were starting our center book program, that is not the path that we chose. And not all firms do it that way. Some firms do. But it's not the path that we chose because we want it to be transparent to the PMs and have them participate in the economics. Which I think is important.

28:04 But that's core concept of saying you have a critical mass. of people doing all sorts of different things and a machine can take all the information simultaneously. And do some interesting things with that. And then do that at a huge scale. Again, thirty, forty.

28:18 Fifty percent. of exposure in an equity long short program multi management model. can be at these center books, it does make a ton of sense for first principles. But managing some of those human elements, the dynamics interaction with the PMs RP is very important. I'd love to get into the nitty gritty of the people.

28:34 the I'll call them the managers. in the multi manager sense that live at these firms and to supply their trade at these firms. It's so interesting to think about what you've built, which is effectively a company for whom the finished product is money. Let's stick with that fifteen percent a year just'cause it's convenient and maybe in the right ballpark.

28:51 And the raw materials that go into this factory and then produce the finished product of money for the outside investors for the LPs. Are these people and these teams that are in many cases and I know a lot of these people Incredibly talented investors. To earn three percent of return is shockingly hard.

29:09 And you're up against the market and that means someone else has to lose what don't want to come back to. as to whether or not all the talent in the world get sucked into these multi manager platforms. But there's gotta be so much interesting nuance going on around who these people are. How you recruit them.

29:26 the incentive packages that you have to give them where your competition might be them starting their own firm or something like that. 'Cause they're so talented. So talk me through the universe of the people. How many people out there do you think could earn that three percent.

29:40 Return is it. Thousands, is it hundreds, is it tens, dozens? And what is important to them and maybe we're starting to get into the style versus the technique here. But the people are Without them, there's nothing here. It's just a house of cards, so

29:55 Tell me everything you can about What you've learned In this part of the business. There's not an infinite supply. And actually this is getting to an important point of just where we are because the multi-stranger models generated this amazing elf in the recent years. It's not as if you can just plant a flag.

30:11 And say the model generates so much alpha in and of itself. that even if you've never done this, you're an analyst, you've never been a portfolio manager. Or you're at a bank, you're at the sell side and you've really never done this before, but walla, we can plug you in and imagine you can be there. I don't believe that is true. So there is a finite pool of talent.

30:28 that pool of talent in terms of how big it is is I don't know the exact number. It's probably more hundreds than thousands at some level. And when I say that, that's less about the technic aspects of the job. You can learn how to model companies, you can learn how to be a quant wizard. You can do all those pieces, but the job of being a PM

30:45 whether you're quantitative or fundamental, is psychologically extremely taxing. Because you're gonna be wrong basically just as much as you're going to be right. you're gonna get kicked in the face a lot and you're going to be someone who's the smartest person that they've known their entire life and then they're just gonna get beat up all the time. And that's what the job is. And that takes a certain psychological profile. And that requires training and I just don't think many humans are wired that way. So I don't know the exact number, but it'd be inaccurate to say that you couldn't

31:11 Just take anyone with a resume and assume that they're gonna do well on the model. And if anything. Probably the multi manager space, in my opinion, is a bit too crowded at the moment, which is natural in finance because something works when we know more people get drawn into it. And in some ways we're seeing that right now. The other thing

31:27 that I found really interesting because we did not start off as a multi manager. We ended up here Really? By accident. And when we concluded from first principles that the multi manager model It's a great business. It makes a ton of sense and iterated there over a number of years.

31:42 Once we really reached a certain scale in a very intellectually honest way, where we could start hiring people We had to think what is it that someone is actually looking for. There's a very high quality person that you're dealing with. And frankly, this is where I think the big floor Maybe are a little bit vulnerable.

31:57 These are humans and especially if they're humans where they're part of their career. Where it's not just about the incremental guaranteed dollar. They care about the firm that they work for. This actually does matter, just like in other businesses. And I'm not talking about in a fake way of

32:11 Oh, let's give someone a fucking ping pong table and they're gonna be great. Or some of these gimmicky things. Really. If you're a high caliber person And maybe you're at a point The PMs that we're talking about in many cases

32:23 They might need to work, they may not need to work, but they've done very well for themselves. So they're trying to think what is my Experien to be. After the assumption that all what I need to do To just do my job is there.

32:36 Do I actually wanna work for this firm? Do I respect the people that are running it? As humans, do I respect where they're going? And there is this notion of These PMs, even though it is neat with you kill model.

32:50 What we've found in growing our firm And I can say this'cause we wouldn't have been able to grow and produce if this wasn't the case. There's a group of PMs out there. For where for them. That's really important. They don't want to be motivated by fear.

33:04 Or they've already been burned out, maybe doing that elsewhere. That doesn't mean that they wanna sacrifice performance based environment,'cause you need to be hyper focused on performance. In all aspects. But those other elements that in a cliche away can sometimes be wrapped up in culture. That really does matter. And I think that increasingly is the multi manager space.

33:24 Evolves. It's not just about providing capital. It's not just providing great technology tools. It's not just providing flexibility. In the same way that V C investing years ago because the supply demand imbalance of capital was about providing capital. Nowadays you're a V C firm and you're not actually adding value to a company

33:41 In some way that's authentic to who you are. You're not gonna be as successful. And they're seeing that now in the multi manager space is because The capital is there to go after a finite supply of people. you really need to be thinking about what is your value add.

33:55 It not in a fake we're all going to be super poly analyst and claim that We're gonna hug each other all day. But no, really, are you treating people with respect? Do they respect you? And do you have a track record of doing that for an extended period of time? So there's many data points where they can point to that way. I think that is increasingly gonna really differentiate

34:14 Farms. Can you tell the wall backstory and from this existing in Minnesota, probably even just the fact of where you're living and spending your time is quite a bit different. Almost all these firms are in a couple of places. So tell the story why Minnesota Minnesota's state of mind in this case, I think.

34:31 to some degree at the firm culturally. Talk about the history and the culture. So this is a Very true story. Years ago when we first started raising capital,'cause we were a prop firm. My partner and I were in New York. We'd have multiple meetings with people.

34:45 And say we're walleye and they're like the Disney movie? Like walleye? And I'm like, No, it's not a fucking robot. It's the state fish of Minnesota. How the hell do you not know that? But it just it tells the story of Yeah, Minnesota is different. And I can say that as an East Coast person married to someone from Minnesota'cause imagine I'm from Minnesota, so I can corroborate. having the douche as he goes background to magicful, I can straddle both worlds. it would be irrational to assume that A firm we were started in two thousand five.

35:13 as a proprietary options market making business. So Chicago style training firm effectively building an engineering technology machine to quote single name options prices, very, very complex problem. But much more of an engineering problem than a mistro problem. And especially around the financial crisis earlier on had some great success.

35:31 doing that but literally based in a warehouse in Minnesota, didn't even have a website, no one had even heard of us. It'd be totally logical to assume that we evolve in terms of where we are today. And even at the start of twenty seventeen. History of referring effectively we started as

35:45 mentioned the single strategy prop training for breaking our history down to a couple of chapters. That was about the first five or six years. had very good success for a capital base. Up until around two thousand eleven, two thousand twelve. never losing money, but markets became much more challenging. for various different reasons, some structural changes and today Citadel Securities, which is different than Citadel the hedge fund, but Citadel Securities and Susquehanna really are the only pure options market makers left.

36:08 So we had an existential crisis really a little over ten years ago of saying We've had really great profitability. But now the magic money machine is going away. We've got a lot of capabilities, just like any industry, we need to transform ourselves or shit, we're gonna die. And many firms that did look like walleye years ago just died. And the reason why I run the firm now is I was a driving force, or not the only force, but a driving force of saying

36:32 we are going to transition effectively into a multi manager model while being a prop firm. We didn't do this to raise capital. We didn't do this because it was faddish. We did to fucking survive. And as a pro firm

36:44 Again, prop meeting is all the partners' own money. Conveys intellectual honesty. where if you're not making a really high gross return on capital You're dead very quickly. And the only way to do that is have very high sharp ratio of very good system. So we spent all five years transforming ourselves from a single strategy firm into a multi manager.

37:02 And in a scrappy way. I mean we're a sixty million dollar prop firm all over ten years ago. And it worked. And it didn't work because there was this one thing Where it was this lead bullet and we just We threw it all in there. It worked because

37:15 There's a lot of trial and error. There's a lot of throwing things against the wall. Even when we were starting to build our fundamental equiti business, originally we do that with managed account relationships with external firms'cause we're too small to even hire people. So that was a process. And we got to the start of twenty seventeen. We had retooled the business. Again, that was our chapter two. Chapter three starts at about that time. We said, Okay, we're a hundred million dollar pro firm. We have multiple different businesses now. We think we have some scale. We'd seen what some of the larger multi managers had done and there was another prop firm that had evolved from being a prop firm to starting taking external capital.

37:48 We think we can do that. It makes a lot of sense and it's an intellectually honest proposition for us to do that to grow a bit. is better for our investors. better for employees, better for the partners, just to get a little bit more scale. But scale I'm talking in that time of going from a hundred million dollar firm to a two hundred million dollar firm. And I remember in twenty seventeen and we were able to double the size of a firm pretty quickly, largely through people that knew us and

38:10 even though we're a prop firm, we structured the capital and hedge fund format so it could point to a true track record. And we thought that was big. And when I say track record, again, to give a sense of the numbers At that time, we effectively hit a hundred million dollar firm with thirty million dollars of expenses. Another twenty to forty million dollars of variable expenses.

38:27 So effectively if we weren't making at least a fifty percent gross return on capital every single year. Actually the investors, the partners were losing money. Crazy. Yeah, it really conveys, as I said, intellectual honesty. And so chapter three

38:40 basically the past six years It's definitely not like everything has worked. Got a lot of scars over the years. But we've just incrementally grown and grown and grown. And so when people hear our story, we asked about being in Minnesota We've obviously expanded to other geographies.

38:55 At this point, New York is our largest presence. About three hundred people now. We still have our warehouse in Minnesota. But it will look from the outside, Oh, okay, this is one of the real multi managers. But the core DNA of having been through that experience of fighting for survival maybe a little bit too strong, but there was we gotta figure this shit out or we gotta find something else to do.

39:15 is really helpful and there's a youth element to that as well. because I personally was given a lot of responsibility young age. I'm only thirty eight now. So back then in my early thirties and my partner who's thirty years older than me give a lot of responsibility. It was very much entrepreneur himself was saying, Okay, go and figure this out. So when we recruit when we talk to PMs It's not like I go out and say we're the best in every single dimension. I think we're great in some areas, we're good in other areas.

39:39 And we still sock in certain areas and that's fine. We wanna accept where we are. And I'll tell people that. But definitely when someone interacts with me. the other members of the senior team and be like, That's an intellectually honest person. That's someone who's not bullshitting me. There's a realism to that. And because there is so much bullsh in finance, if you're a really high caliber individual and you're selecting

39:58 'Cause there is a little bit of supply demand and balance you're selecting across number of firms. They want to work with the intellectually honest person, but they don't want to sacrifice competency. You need to have both. You can't just tell a great story about We're great people. We got this great culture. We treat each other really well. You need to be really fucking good. If you're not, it doesn't work. But if you can do both, that's really powerful. And because the biggest firms in our industry who are amazing institutions, I have

40:22 So much respect for all of them, especially Citadel, and I think Ken Griffin is truly brilliant. It's like if Michael Jordan was still playing basketball. That's the analogy to think of. Or is the Elon Musk of money making. Like really. And that's such a gift to people like me to say Okay, there's someone up there. Who is still pushing it, who is still going to the limits, who is not satisfied.

40:41 That is amazing. But I think the one thing where those firms And partly could just be science or a little bit vulnerable. is this notion of thinking about the individual PM experience And what are they looking for? What is the attachment that they want to look for? Because they still wanna be part of something, I believe, or a certain group of people that wanna be part of something. They don't just wanna be a mercenary. sitting in some random ass office in Dubai or Spain or you name it and you see all these places poking up.

41:06 They still want to have a connection to their firm. And we can tell a story of our Minnesota roots, of our prop trading roots, of realism in all the partners How does that feel different live? If I'm one of these hundreds, this incredibly valuable resource, these individuals that can go do this and Let's say I'm the best and I'm a free agent and I have my choice. Every platform's after me.

41:26 What would be the felt experience difference of being at Walleye versus being somewhere else? Sure, I'll give an example of that of someone that we just hired who was definitely out of their profile. And we still try to get the entire firm together. And we're three hundred people, so we can still do that, but we're all over the world. So that's harder. But we brought the entire firm out to Minnesota in early August. Minnesota's an absolutely amazing place to visit six months a year. The other six months a year absolutely do not go there.

41:52 Plus you like ice fishing. Yeah, but ice fishing is not a joke. I literally live in a lake. People ice fish, there are pickup trucks that will drive a mile offshore. That's not an exaggeration. So come there in August. But we brought the entire firm out there. had a party on on the lake and I had my office door open the entire time, people coming in and asking questions like

42:11 How do you think about this? How do you think about that? What is the firm doing in these dimensions? So there's a notion of accessibility and just again It's not complicated. It's not overly complicated, but doing it the right way, not putting on errors, it would be totally inaccurate to say that this is a family. It's not a family, it's a business, it's a professional sports team. But professional sports teams can still operate with respect and respect for everyone across the organization. So that's one element. The other element, which does I think come from our firm a bit more and the particular people that are running the business, myself and my other partners. And very fortunate because we have effectively our chairman

42:43 Was very successful. It was almost seventy. And then there's a group of us young guys that are running the business. And there's a great balance there. The young guys were really, really hands on. And I think that also really resonates with PMs.

42:57 If we bring someone into our firm And let's say that's a little bit of a new category for us. We haven't necessarily done this type of strategy before, or we're not perfect in some dimension, which can happen. You don't have certain product types enabled or you need a new technology piece. Even at this day. I'll get really involved.'Cause years ago That's what I was doing. And I have the knowledge to be able to do that same with the other partners.

43:18 There's this notion of No one's above that. No one's a figurehead. And that can be really, really in the details at times. It doesn't mean that I'm micromanaging or getting lost in the weeds. But there's definitely a place to be like

43:30 Yeah, be hands on, get after it, show people that it's important. And I've had so many new PMs that have come here and be like I can't believe that you actually took the time to look into that personally or when you said that It's going to get taken care of. Just even something as simple I need some new futures options enabled in the system, can we actually go through and do that?

43:49 Okay, fine. I'm not saying we're the only firm that operates that way, but definitely from my experience, the best firms you still have very hands on senior people that are also, frankly, very confident able to do that. And you're showing PMs really that they're important and they care. It's not just about hiring PMs, but you're really building teams of investors. You have a PM They can have sub PMs, they can have analysts.

44:09 And sometimes there can be competition for those analysts as well. So PMs will come to me and say, Hey I really like this person. They're in process in a number of places. Can you speak to them?

44:19 Absolutely. And people feel that in all various different ways. As I mentioned, whether that's getting the weeds in a technical problem. Whether that's helping with recruiting. And that doesn't mean one of the things I haven't mentioned, it's not like we're saying we're soft on anything goes and you can lose a ton of money. And there's no problem to that.

44:34 That's not the attitude. I think we're very fair in that respect, which is a third piece is that When you talk about all these risk parameters in the corridors, sometimes From the outside people like Oh, well this group they run with such tight limits and here you basically can't operate. Generally speaking, I don't think that's true, maybe with the exception of one firm.

44:51 Overall the risk corridors are fair, but what PMs wanna feel Is that is just that that they are actually fair and if they have a question Or they want to actually have a discussion with a reasonable person. Let's say someone's going through a drawdown. And they get close to the point at which there's this drawdown limit. Which every firm has, including us. And that's really a way to

45:11 Say from a statistical standpoint, let's automate the offboarding process. Obviously the hardest piece in risk allocation, whether that's allocate individual positions or allocate individual managers is one to actually call it quits because there's this human psychological bias to say Oh, okay, if I fire someone or if I change my idea that I failed in some way. So drawdown limits are very helpful to just automate that and take the human emotion out of it. But the PMs wanna feel like well shit, there actually could be situations. They're rare.

45:38 But there are situations where the path matters. And that could be not the right decision to do. So while we tell people, look, that is rare. This is definitely not a oh, if you've got a great story you can just keep going indefinitely. But we're willing to have that conversation that we are investors ourselves and have a lot of experience of what it's like to be in that situation.

45:56 And that is what PMs really respect. Again, going back to reasonable, competent people. that are doing the obvious things well. Yeah, if you're in a tough spot you want to have a fair conversation about it. as opposed to just essentially being fired by some twenty three year old because in a spreadsheet the cell goes from green to red. That's again what these high cult people want. Do you identify personally more as an investor or as an entrepreneur or systems builder?

46:19 Me personally? Yeah. Definitely the latter. Definitely the latter. Earlier in my career I went to grad school for math. started off at a big one firm in London.

46:29 I was able to in a random experience spend some time in a now one of the great Growth equity firms. In Chicago. So for people that have my seat of just sort of wider range of experiences.

46:40 And even when I first came to Wall, I was running my own quant strategies that I wrote personally was writing code all day. And then it was evolving into hiring teams of people in quant strategies and then more broadly across effectively over time everything that can be done. In our world. And then turns the differences between being a PM It's essential.

46:59 for someone in my position to have been a P. That's for the psychology aspect of it. And to be successful in doing that, you need to prove your bona fides and you also need to be able to say, I understand psychologically how hard that could be, no matter who you are. But in terms of where we are now, my role is I'm designing processes. And increasingly as we get bigger

47:18 I'm interfacing with people and putting in place people that I really trust that are experts in their domain. My official title is CEO. And CIOs that you've got. Investment officer.

47:28 But the investments that I'm making are investments in strategies. I'm not making a call on individual stocks. I'm not making macro calls. And effectively the individual strategies are to use a normal company analogy, they're like individual products. And I'm saying how much do we want to invest? Over here. inner equity longs for a business as a whole. And then maybe in particular areas and how do we get the right coverage across the map.

47:48 Do we want to start bulking up our quant business just like again another division of the firm? And for me, having a quantitative background And the ability to abstractly architect data has been very helpful. What I personally really enjoy is because it is such a human business. And I really think that is overlooked the multi shirt model. This business is risk and people on the people side.

48:07 It's so important. being given the opportunity. to lead groups of people that effectively are coming together. Look, this is finance. This is the money making business. We're taking money from rich institutions and we're trying to make it into more money. So as humans, you need to find purpose in doing that. And yes, there's all sorts of stories you can tell about who those institutions actually are and their core purpose, which is true.

48:29 But for the people that are in there day to day This notion of how you do Anything is how you do everything. And Let's be excellent for the sake of being excellent. That doesn't mean that we are excellent in every way, but at least that's the goal.

48:43 And my role now is leading that across our investment and our non investment functions. And the non investment functions are so critically important in our business. That is what I personally enjoy the most. I have to ask, since we share this background. Coming up as a quant. A couple of quant questions.

48:58 What can you say about the half life? of successful quantitative strategies. So if you think simply as a quantitative strategy is just a pre detetermined, pre baked set of rules for making investment decisions based on some model. I'm talking about the models themselves.

49:14 How long do you think the average model can or does quote unquote work for. It's related to sharp ratio. You can't just group quant into one bucket. And there are quant strategies that are double digit sharp ratios. And

49:28 If anything, the half life of those is a lot shorter. And that's because if you just think about it from a analytical framework The higher the sharp ratio, the closer it is to a pure arbitrage. And at some point capital's gonna flow in and close that arbitrage. And there are real 10 sharp ratio strategies out there. I've seen them that can run for years. So it's not like anything that the higher the sharp ratio, the faster it dies. But generally speaking, something could be great for six months because of some strange anomaly and then go away. At the other end of the spectrum, you think of something like trend following strategies. I started my career after grad school, I was at the time the world's largest trend following manager and trend followers.

50:04 I'm going to look at momentum. Typically measured by moving average crossover. And that's gonna determine how long I am or how short I am. It's still a huge part.

50:14 particularly of futures markets. And it does even impact equities because of the positioning of that industry. Trend followers have been around. Since the seventies and generated decent uncorrelated returns for quite a while.

50:27 And last year was one of the best trend follower years in quite some time. Now the sharp ratio of those strategies Is less than one. If you're a good trend follower, you're like a point eight chart. And I can say this'cause I wrote a trend following strategy over a decade ago that still runs. So I actually know w everything that's in there and the nuances are different.

50:46 But it doesn't necessarily mean it goes away. So that's how I think about it a bit more. In quant landed multi managers, most of what quant is Is equity stat or And that's analogous to what I was mentioning before is that you're long a hundred dollars, you're short a hundred dollars, you're looking for idiosyncratic returns.

51:03 So what people are fighting over now is there's a signal aspect. Is there some new bit of data? That could help improve my signals. But at the same time, Arkway Star business running at scale. For almost eight years. lot of the data that they're using has been available really since the seventies. You go back

51:20 Copystat's been around for a long time. And when you read about Princeton Newport, what they were doing in the eighties They're talking about fucking value and momentum. Yeah, that book about him is great, but The core concepts have been there for a while.

51:33 What does change It is still very competitive. I'm not trying to say it's not competitive. Is that even in quant There's still artists. And this is what we find in evaluating. There's definitely quantitative artists that are saying, Okay Quant, especially that style of equity at our quant investing is less about finding the thing that no one else has. And I think that's totally ridiculous to think that you really are gonna find something that no one else has found.

51:55 Especially when you realize that At least since nineteen ninety. people that go to the elite universities of the world have been pouring into quantitative finance and everyone's really fucking smart. You have the same technical abilities are there. And I can say that with personal knowledge. So what differentiates people is how your

52:13 Putting together. Everything in the soup as one. That's a bunch of small decisions that are much more akin to, you know, artists making painting on a canvas than necessarily following a deterministic standpoint. And that can be how you're combining balance sheet data with

52:30 Technic data. which type of machine learning model you're using. And then that feeding into portfolio construction piece of how much you're trying to optimize for sharp ratio versus how much you're trying to Optimized for drawdown and all these different elements. How much of your exposure is gonna be in the US, how much of it's going to be outside, how are you gonna shift that around? There's all these tiny tiny decisions.

52:49 Even in building an equities dot arb strategy. If you had let's just normalize it to a hundred managers or a hundred points or whatever. You had to break down. both for walleye and generally, how you think those are allocated to the different styles, whether that's traditional equity long short, quantitative equity, quantitative other, macro, et cetera. What are the major buckets and what are the percentage roughly of managers in each bucket?

53:10 We started as a volatility specialist mostly in single name options. We still are very active trading options. It's a different style than what we started with, but still very active. There a lot of single name equities trading. But more so as a class level volatility. Across our entire business. It's still at this point.

53:27 twenty five percent or so, twenty five to thirty percent is related to volatility trading. We do a lot in long short equity. So that would be another forty percent or so. And then the balance is split up between capital market strategies. And fixed income and macro strategies of various different formats. And I'm not to say that's the ideal fashion. As I said, the history for us, we started as a volatility specialist, then we started pushing these other areas.

53:50 Sorry, I forgot Quan in that as well. That would be that last bucket quant is a decently large part of what we do, about twenty percent. Fixed income macro is a a small piece, that was the point I was trying to make. And that's not because we don't believe that there are good things to do in that category. It's just it's not our background, it's not in our G and A. And that's I think as well when you're building a multi manager platform. You think about playing to your strength. You can't do everything all at once.

54:12 And at scale, if you're Money, if your Citadel you've been around for thirty years, that you've had time to build these different businesses and build them in high quality fashion. And that's where there can be a tension because there's definitely a benefit to diversification. But If you expand too quickly, then you just lose money in diversified ways. How many is it? How many managers is it total? In our case about a hundred.

54:32 Oh, so it is about a hundred. It is about a hundred, but millennium So I think about three hundred. So the scale is large. And that's where it's a very complex management exercise. But what's crazy to me is to think about there's plenty of investment firms I'm sure that the investors listening will have encountered that's a leader, a small team, five hundred million dollars, a billion dollars, whatever. And that just to think that there's a hundred of those

54:53 Under one roof, let alone three hundred of those under one roof. Again, we're relatively Small. It's crazy. And that the scale is dramatic. And that's what we're saying before is the models makes a lot of sense. It's very easy to articulate.

55:06 Oh, we just earned two, three percent on gross market value. I can do that. But no, you have to do that at scale, not just from a AUM perspective. From a strategy standpoint perspective. It's very difficult to execute. It's very much an execution challenge. Well let's talk about leverage. So

55:21 And I'm also curious about how you control the portfolio, why you push down the limitations to the individual manager level versus just take whatever they give you. and manage everything above them. But leverage is probably important that we haven't talked a ton about other than just saying there's lots of it. So what determines

55:38 how much leverage you use. And how much does it range? What does it mean to be great at applying leverage versus just good? This seems pretty damn critical. Three percent's not interesting, thirty percent's really interesting. The difference there is leverage, so

55:52 Explain it to us. So ultimately you're targeting a return profile for your investor base. It's much easier to target a volatility profile than a return profile. So you're really backing into okay, if I'm trying to make fifteen percent return to investors and I wanna do that very consistently. really, really good net returns would be about a three sharp ratio. So just again do simple math.

56:12 The Charbio for the best platforms has been at that level the past couple of years, but Three sharp ratio isn't realistic, but nonetheless. Let's say it's five percent annualized fall at the fund level. So the leverage that you're taking is that okay. I need to be in this category and returns day to day you can't necessarily measure.

56:29 But you can get a pretty good sense of your volatility profile just by looking at the distribution of your PL. And there is an element of we're backing into with the range of possibilities that can happen of I'm generally speaking going to be five to seven percent analyzed wall. And I don't want to trivialize that problem because it is not simple. But it's also not that complicated to say if you go bit by bit and block by block.

56:53 And that piece is really important. I think it's insane to try to start one of these businesses from scratch. There's a few books that have tried the results of that have not been great. But if you're going bit by bit and saying, Okay I'm a hundred million dollar firm and my standard deviation is plus or minus five hundred thousand dollars a day. So he analyzes eight million.

57:10 Okay, I'm in range there. then it get a little bit bigger and a little bit bigger and you keep it at that same level. The leverage overall at the firm stays relatively constant. For us, it's been five to six hundred percent over the years, and that's reasonably stable. But no one is specifically saying I need to apply this leverage concept. You're really backing into

57:29 I need to deliver interesting returns for my investors in order to do that. with a variable I can forecast, which is much more around volatility. And also the potential for loss as well, because realistically if you're trying to make call low to mid double digit returns a year, having a ten percent drawdown, fifteen percent drawdown is not particularly good. So that's a huge piece of it as well as saying within that distribution of outcomes. What leverage level am I comfortable with?

57:51 Another thing that is pretty critical, you ask the question of how much does it vary, especially at the larger platforms. Being able to And this is true for us too, being able to say, Okay, I'm confident that I actually can have a view on the potential range of outcomes. So I don't need to be like, Oh, my risk management strategy is just to take down gross. That's stupid. And there's a lot of investors. And very famous ones that have made a mistake over the years of Oh, one day it gets a little dicey, I'm just gonna pull back from that.

58:17 you kinda need to prepare for that storm ahead of the fact, which is where Spectrum analysis does come into play. So it's cliche, but you can play position of strength, mate, when everyone else is a little bit weaker. So that's another maybe misunderstood, but certainly important point to make is that the risk management policies I I think this is a technique thing.

58:35 They're built to withstand crazy things that can happen in markets. And that's not to say that there's this eyes closed we'll be fine no matter what, very much paying attention. But definitely being able to hold your ground when you're going through it is really important. What is typically going on when there is a storm for this investment strategy in business? I'm curious about is there a red button somewhere in the firm that can be pressed? in the times that have been toughest.

58:59 What is usually going on? I'll use the Game Stop Week of January of twenty one, maybe as a more isolated example to just our industry? So if you remember then it's really a four day period. started on a Friday and there were some rumors that Melbourne was really having some trouble with her game style position.

59:16 And then Monday, Tuesday, and Wednesday for a very brief period of time. people in our industry just absolutely freak the fuck out. And there is this idea of Technical term. Yeah. Sorry, that's how I talk. I love it.

59:29 But And it was like wow, you could never short a stack Again. So holy shit, we have to take down our entire And so what's happening in those periods Again, as mentioned.

59:39 And I believe that everyone in my seat at that top firms is. very much in the weeds and we can see a lot of what's going on in our portfolios. That's where having the systems in place to be able to watch that in real time. Very helpful. And even in that case it'd be like Okay.

59:54 We didn't really think about What the fuck is going on in Reddit could actually impact This world. But we need to pipe that into our system real fast. Yeah.

1:00:02 Pouring. Twitter's feed into our system. building tools on top of that to identify it's like oh this is next one that's there. Do we have high short interest stocks? Could something become targeted? That's very much a whack a mole exercise. So

1:00:15 But you asked about what is about what's actually going on. Just to give some examples of that, I remember hearing a rumor During that week, Citadels taking down Telling their books to cut in half. And I was like, there's no fucking way they're doing that. But nonetheless, those are the rumors that are coming in.

1:00:29 And the human piece, and this is really it's these low frequency moments. Where you really can distinguish yourself as a firm is You need to be able to manage that personally. And I can even say Managing that personally. 'Cause I've been through a number of these periods now. And I'm not saying I'm perfect by any means, but absolutely was I better prepared in January twenty-one than in March twenty twenty, having been through March twenty.

1:00:49 Yes. And so what came out of that is you're watching what's going on. You're thinking about whether you're exposed to these factors that are now obviously coming up. as the meme factor or the game saw factor, whatever craziness you want to call it. And if the answer is no and you see that your absolute strategy is losing money because very clearly There's people across the street that are freaking out.

1:01:08 Then the best thing to do. is to say we're not in a position where we're impaired. We understand what's going on. You need to have situational intelligence about it. You need to triangulate information. I need to be able to weather that storm. That was absolutely the right call because it rebounded very quickly. How did you know?

1:01:24 that Citadel wasn't taking down gross like that during that period. People in industry definitely have channels of communication. I did not speak to anyone there personally. To be clear. There is an element And you read about this and entrepreneurs of all types.

1:01:39 But there's an element of just being disagreeable and backing your own intellectual intuition. And I remember thinking when I heard that rumor was like That's just not true. That just wouldn't make any sense to me, so I'm going to ignore the jobs that are freaking out and saying that. That was certainly a piece. 'Cause it just wouldn't make any sense. Why not? Why wouldn't it make sense? Well

1:01:57 In that for instance in particular. That is a core mandate of basically those ain't down your exposure. So it'll be a huge departure from Effectively a stated operating principles. Also the potential market impact of that. would be enormous. And it's almost like

1:02:13 Okay. Literally hundreds of billions of exposure. And that's like someone saying you have a bloody nose, well let's just cut off your fucking nose. That just doesn't make any sense. So There's a skepticism about how actually valid it. And underpinning that assumption is that you have extremely smart, sophisticated, competent people that are running those businesses that would make sound decisions.

1:02:33 We're in a game of relative, not absolute talent, which is I think a really important thing that people often forget. When you are selecting people to play that game on your team. Aside from strategy. Actually abstracting away from strategy.

1:02:47 Are there things that you are always looking for? When you're interviewing a PM that feel like just necessary conditions of someone that you would hire The key traits Of a PM in this relative game.

1:03:00 Yeah, there's a few things. And some of these are gonna sound cliche, but they really matter and you feel them. So intellectual honesty is the biggest one. You meet a lot of people. They need to really understand why they made money in the past, because we're not underwriting the past, we're underwriting the go forward basis, which is an obvious statement, but very few people really understand that. Did you just make money because of the market call?

1:03:20 Or did you make money because you followed a process which has a probability of repeating itself in the future. Are you doing things in the right way? Are you putting yourself in a position to be successful? And can you evaluate and analyze that? And experience matters. But it would be inaccurate to just say you're just hiring based on experience. If anything past a certain point, there's a U curve. where you have almost two experienced people that were trained in a different world.

1:03:42 back in the eighties or nineties or even early two thousands picking stocks or before Reg F D. They're not equipped with the modern tool sometimes to be able to be successful, as I said, kind of interface a little bit more in a gray box style for But I met all stock picking is the most salient case. A core tenant of our firm.

1:03:58 When it was started. My partner who's I said it's almost almost been in the business since the nineteen seventies amazing career. When he started Walleye, one of the things that he said is I don't care how much money someone can make us. We're not gonna hire high maintenance people.

1:04:13 Believe me, there's a lot of high maintenance people in finance. And sometimes it can be tempting. To say You know what? Let's hire that person, even if they're a pain in the ass and they're gonna drive us crazy.

1:04:23 They're gonna make us so much money that it doesn't matter. Well, you know what? That's never the case. So that's actually really been a core tenure for It does come from her my partner. And we do think about that a lot. How do you screen for that?

1:04:36 Reputation. Reputation. You can get a sense of meeting with someone. Interviews are easy to fake, but it's a small world where someone's been before. usually follows them around. So there's obviously limits to how much you can screen for that. One of the things that I've definitely learned is

1:04:50 Is that German to our particular model is You can get a sense pretty quickly once you're actually working with someone and the romance has gone away of where they really follow that tenants. And so I do think that we put A bit more emphasis on the human side of it and less just trying to hire pure mercenaries and looking at people on numbers on the screen again, not to say we're perfect. We benefit a lot from those that have gone before us.

1:05:10 And your question was about relative talent game. Absolutely, that is true. Our sweet spot is people that are typically in their mid career. where they've spent time at larger institutions and for various different reasons they want to pursue a different path from being there. Some of that is structural, some of that can just be environment. I'd love to talk a bit about

1:05:27 Performance. I don't mean investing performance. I mean Cultural individual. philosophy almost of performance. At lunch we were talking about the all blacks.

1:05:36 And I know you're working with the author of that book on the company's culture. I'm dying to hear about that. But even at the personal level. You won't say it, but I will I think you deadlift like seven hundred pounds or something absurd. It seems like your philosophy of performance is that You said it earlier, how you do anything is how you do everything.

1:05:52 Just say more about the philosophy behind all this and then how the notion of culture and performance blend into aspects of your life. One of the reasons why I love our particular model is that notion of Yeah. Be excellent is celebrated.

1:06:05 Actually in many parts of life, people that want to be excellent are somewhat pushed to the side. And what I mean by that is personally Probably still can deadless are under pounds but I was an athlete in college and afterwards it was in rowing, which is A totally ridiculous sport because you essentially sit down next to someone else and then say who's gonna pass out first.

1:06:23 But if you can be successful in that and you really understand, okay, inputs and output and rowing is just this amazing sport because you can get pretty darn good on very little talent and just being incredibly pig headed. So that has definitely defined me. But the things that I've done personally in my life over the years, whether at first that was academically and then athletically, and then as I've gone on in my We are And I've definitely had my own faults and my personal favorite the thing that comes from that is When I'm personally the most happy is when you pursue something that is hard.

1:06:54 And it's a struggle. but you persevere and you do that. And you're doing that with other people that are in it for the same reasons. And the people that are really attracted to or from that enjoyed working with, we've got people that And not to overhyped it, but spent time in the SEALs program.

1:07:08 people that have played athletics at very high levels. There's this core notion, there's certain types of people that are wired in a way of they just want to be great at what they're doing. And over the past couple of years, As I've been in a leadership position of embracing that a bit more and be like, you know what, that's okay. And if other people find that inspiring and want to come along with that. That's great, but That is what gives me meaning is what gives a lot of the

1:07:28 Senior folks that are for a meeting. the final piece of that is to be able to demonstrate to people You know what? You can do that while also being An excellent human, excellent individual. In your personal life.

1:07:38 How you take care of yourself physically. Definitely That's usually important to me. And I believe Oftentimes.

1:07:44 People don't stress enough the connection. Not to get too crunchy about it, but connection between your mind and body and how you're physically private of the machine and how that's gonna impact your ability to just have energy to perform. All of that really matters. So all those things together, personally, I think that's why I've been able to

1:07:59 have some success and also to be able to drive a firm forward of saying we're gonna do this thing, we're gonna do this thing that's irrational because If we do it it's gonna be great and we're gonna feel great about it and then we're gonna go on to the next thing and the next thing and the next thing. What have you learned that's valuable about the all blacks? Maybe say what the all black says just for those that don't know. So this book it's called Legacy by another named James Kerr. James embedded himself within the all blacks.

1:08:21 The New Zealand rugby team, arguably one of the most successful sports franchises Teams ever. Yeah. Just amazing degree of success. And when he came away from that in a nutshell was saying You have these individuals

1:08:32 Who are incredibly performing. But in the book he has this line of sweep the sheds mantra, and that's a New Zealand terms of me is like Pick up the fucking locker room. Even if you're the god, the rugby god, and you physically look like a gigantic human Do the little things well. And that's not just talking about all blacks. You find that in all areas.

1:08:51 I love the line, how you do anything is how you do everything and The notion of Humility. The notion of supporting your teammates. Another key takeaway from that book is

1:09:01 Don't be a dickhead. So it's similar to what I was mentioning before about not hiring higher man's people. Just some really great values and that you can have this organization that has those pieces. Where you have this collection of team strength, a team of support. That's also really high. performing. And so the reason why we're working with James is that

1:09:18 He had worked with a firm where I had spent time years and years ago that I have tons of respect for. helping them to articulate and institutionalize elements of their own culture at scale. And then we were the next guinea pickup to do that. And as far as what that means, there's artifacts to that, of course. There's words. He's an author, so he's an amazing writer. But it's more what are the rituals involved, even things like getting the whole firm together. What is the right communication cadence?

1:09:42 And in talking with James about it, these are things that all firms face as they go from There was this core group of people that was seeing each other every day. and there was a lot of nonverbal communication to once you get above hundred and fifty people, this magical barrier in human cognition and you lose the ability to keep track of more than hundred and fifty faces. You have to really focus on institutionalizing that.

1:10:02 And there are organizations that can do that at scale. Typically they're outside finding it. But certainly the military they're the case. The obvious special forces teams. Some sports teams do this better than others. And so we're spending time in that. What aspects of the ingredients that go into the recipe that is the firm

1:10:19 Ma maybe even like the most insider ish type things. Have we not talked about that you think a lot about? How big to get. And how fast. So

1:10:29 The past couple years because the returns of platforms have been strong and there's this general intellectual acceptance. that there's a better mouse trap. There's been money that's just been thrown at institutions.

1:10:42 Like ours. That have a credible shot. the biggest firms have effectively doubled in the past two years. to just scale that boggles my mind and many others' minds. There is effectively blank

1:10:54 Check. Spac type. multi managers that are being started. by very smart people, but very different coming from a massive institution to starting one on yourself. So the space is crowded, there's a lot of money that's come into this space.

1:11:09 Investors of all sizes. And We've grown, but on a percentage basis we've definitely grown. We've also turned down a lot of capital. But the conversations that we have internally

1:11:20 H How do you get that pace right? And I'm sure that startups that are in a bit of a bubble have had similar types of conversations. It absolutely happens in our industry. And finding that right balance is really

1:11:31 Important. So that's certainly something. It happens behind the curtain is talked about. I guess the other one That is worth mentioning. And just to come out and say it because people

1:11:42 We all have good manners in our industry. Or maybe I don't always have the time, but at least I was brought up to have good manners so I can fake it. But the fact is it's a relative talent game. And There's only a small number of firms. It's extremely competitive.

1:11:56 And that's not to say that firms hate each other. But absolutely probably a big part of what drove Millennium and Citadel to be so excellent. Is a huge rivalry there. Then maybe you could send that to other firms as well.

1:12:08 And we have our rivalries too. And I grew up in a sport is literally you're either gonna sit down and erg Line up and Yeah, who's gonna pass out first?

1:12:18 and the level of intensity and competition around that. Behind closed doors. Yeah. People care a lot about that. And If you're gonna play in this arena.

1:12:28 You have to embrace that and be like, you know what, I wanna compete. Day in, day out. 'Cause if you're not, you're gonna get passed by. We talked about Some of the robber barons early on in the conversation. Is there anyone else that you find yourself returning to, whether that's reading about them, studying, thinking about the way that they lived?

1:12:45 That has been most impactful. on your thinking or way of living. I didn't mean to compare you to a Robert Barron either. No, I don't think I'm a Robert Baron for sure.

1:12:55 It's less about one individual because I don't think anyone's perfect and I think it's quite dangerous to be like this is the one person that I think is ideal. If there was one person that I'd be like, you know what, if I could have that guy's life holistically in every element, not just business success, personal success. It probably would be Ed Torp, who's one of the pioneers of quantity. He's been successful across many areas. He's like ninety years old. But he looks like he's sixty and has a good family. Okay, that's successful.

1:13:21 But it's not like I study that guy intensely. What I do find myself studying And it's why I love the Founders podcast. It's not just a shapeless plug. It's really true. 'Cause learning about successful people of the past, whether they be in finance, going back to Rob or Baron age, Vanderbilt was a fucking psychopath, but he's still extremely admirable in many ways, in certain parts of his life. Same thing with J Cole, James J. Hill.

1:13:44 Do you go down the list? You can't be serious without studying Rockefeller. You name it. And human nature doesn't change. And so what I find myself doing constantly just'cause I'm so curious is reading books about these people. How did they think? When they were my age, what was their life? How old were their kids?

1:14:00 Or the problems they're facing, or the stresses that they're facing. How do they interact with their partners? How do they interact with their Employees'cause all that stuff doesn't change at all. And then ultimately Not trying to copy anyone. But

1:14:13 You take bits and pieces from what other people have done before. And that's true of those really outsider industry as well as even with our own industry. And you ultimately come up with your own mosaic. I'm saying. I'm a learning from others because you'd be crazy not to. But blindly copying is also equally crazy. You want to come up with your own recipe. So I'd study I'd say the personality type as opposed to one individual personality.

1:14:36 This has been such an interesting dive into a model which has become one of the largest gravitational forces in markets, and I think Because it's fairly complicated. Maybe other than my conversation with Dimitri Ballyadsen, there hasn't been like a good

1:14:50 summation of what is going on, what are the component parts of this. So I've really loved how much detail we've gotten into. I think you know my traditional closing question. What's the kindest thing that anyone's ever done for you? So I'm gonna tell a story involving one of the previous members of your podcast, which As I've gone on and gotten a little bit older and have a little bit less hair, I think about more and more now.

1:15:09 So I used to work in a firm called Dollar Equity Partners run by Antonio Gracias. And the way I got there And two people know this story. After grad school, I was at Oxford doing math and I was a hardcore math nerd. And a big time row, I thought I was awesome.

1:15:24 And then I started working in a quant firm. in London I was doing really well. And back in two thousand nine Effectively my best friend is twenty years older than me. My son's godfather now. Is like well You're a smart guy in your twenties, but you know jack shit about the world and investing. And I think you should come work

1:15:40 I just joined this firm with this guy Antonio. He's really great. They're doing really cool things. It's a private equity firm. in Chicago and I was like, That sounds crazy, but

1:15:49 You know what? I want to come back to the US. I'm very curious person. I met those guys. I love those guys. Okay, great idea. So moved to Chicago in twenty ten. And I was terrible. Really, I didn't know how to model. I didn't even know what a fucking LLC was the first date. I was a hardcore math guy and I thought that was the ultimate intellectual achievement. But I just got my ass kicked and it was super helpful in hindsight. But the specific story that I want to tell to answer your question.

1:16:12 was I remember distinctly this one day. It was about when I was two months in. And I was really not doing a good job. I just was not trained properly. I was not mature enough for the role. And I thought I might get fired. I was like, Oh my God, it's the first time I've ever failed in anything in my life. And Antonio sat me down and he said, You know what? You're fucking up.

1:16:30 Yeah, I know. But we're gonna help you. We're gonna give you tools to support you. We're gonna send you to company modeling school, which everyone does in an investment bank what I've never done'cause I was a math guy. And so we're gonna give you the tools to do that. You still gotta carry your own backpack. This is a culture of excellence. You need to perform.

1:16:45 But we're gonna support you and give you the option to put yourself in position to do that. And at the time I didn't think, Oh wow, this is really kind. But as I've gone in, particularly now in running a larger firm. I realize how kind that actually was when you have someone that is just not performing, it'll be so much easier to be like, you know what, this is not a fitting to move on.

1:17:02 But seeing something in me and the intensity within me and be like, You know what, this is a person where I'm going to actually go not really out on a limb. That would be way too strong. But to be like, I'm gonna be supportive here. That was extremely kind and that's been kind to me because if I had not had the experiences Of being in that firm.

1:17:19 Which were in hindsight. Truly crazy. About three months after that. They were leading an investment in this rocket company called SpaceX that I never heard of. I didn't know where the fuck Elon was. And then I'm crawling on rockets, literally. had I not had just those literal experiences of being there.

1:17:34 develop relationship with some of these individuals, seeing what's possible, that firm has gone on to be extremely, extremely successful. It would not have set me up for the next thing and the next thing. And I think about this notion a lot when we talk about Combining Excellence in a performance based culture.

1:17:49 But also being supportive and thinking about the human a lot. It's been extremely, extremely helpful to me, so I'm very grateful for that. One of the great little sayings I picked up from the special forces community is deeds over glory. And one of the funny things about Antonio, who I think the interview we did with him is like the only

1:18:06 Where you can hear him say anything. Is he'll always show up in these pictures. It'll be Elon in a room fixing some problem and he'll be off on the corner helping solve problems. Such a fascinating guy and a really neat story to hear that would not have been my expectation that Antonio would pop up in this story, but a great closing answer. Thanks for your time.

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