And there are a couple of factors in that, right? One is just the level of interest rates because you're not paid on a short rebate. But the other one is that you could look back and say, there's just more and more competition. And eventually the competition, and all these incredibly talented hedge fund managers, kind of caught up with the ability of them, in aggregate, to generate really attractive returns.

Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, their successes, and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager, due diligence, or investment career to the next level.

Before we begin today's conversation, remember to keep two things in mind. All the discussion we'll have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary investors from all around the world. In this series, I have invited one of them, namely Alan Dunne, to host a series of in-depth conversations on the topic of what it takes to be a world-class allocator.

In today's world, portfolio construction is fast moving to the top of the agenda of many investors as they try to analyze and understand the riskiness of their portfolios. And with ever increasing uncertainty around the globe, being well diversified across many different strategies and themes in your portfolio can mean the difference between ruin and survival when the next crisis emerges.

The aim of these conversations is to try and understand the experiences that have influenced these highly specialized allocators and the processes they follow to harness the best returns for their clients so that we can all become better informed investors. And with that, please welcome Alan Dunne.

Thanks very much for the introduction, Niels. It's a great pleasure for me today to be joined by Ted Seides. Ted is a leader in the investment industry as a podcaster and educator. Ted is possibly best known as the host of the Capital Allocators podcast. Ted has been in the industry for over 3 decades as an allocator. He was at Yale and Protege Partners.

Very well, Alan. Thanks so much. It's wonderful to be here with you.

Great. Well, as I mentioned, I think most people know your story pretty well. You're well known in the industry. You worked at Protege Partners, the Fund of Hedge Funds, and at the Yale Endowment Office before then. But how did you get started? What brought you to the financial markets in the investment industry?

I was fortunate that my very first job out of college was working for David Swenson at Yale. I was a Yale undergraduate, and back then, Yale hired one undergraduate a year to join that investments team. And so alongside of Wall Street recruiting and things like that, I happened to interview for that office. And That was where I stumbled, right out of college, as many people do, into the investment world.

And I ended up spending five years at Yale, which was my true formative education in investing, and really learned so much about the world of investing from that incredible perch and had just the blessing to work with David Swenson and Dean Takahashi and so many of my colleagues at the time who later went on to run other endowment, and foundation, and family offices since.

Very good. I guess at the time you had no idea what a lucky break you had stumbled on. But I mean, you talk about all the learnings. What would you say were the big things you took from that period in terms of your kind of investment acumen?

Well, I really had a chance to learn the disciplines that David taught. And he really was a phenomenal teacher beyond just the book he wrote that so many people read. And I think it starts with an understanding of the purpose of the capital. That was different for Yale than many other things, but there was a very clearly defined purpose at Yale of managing capital for multiple generations, hundreds of years of Yale scholars. And then from that, you develop into an investment philosophy, an investment strategy, and a way of implementing that.

And what David was brilliant at was two things. One is clearly articulating each of those things, sort of very clear articulation of what he believed about investing. He had very deep, fundamentally held beliefs about investing, that included things like value bias and small cap bias in equities, and the importance of alignment of interest between the principals and the agents. and on, and on, and on.

And then he had tremendous discipline in sticking to those principles. There's a lot of people who will talk about the importance of alignment of interest, but then will invest in funds because they think it's a hot fund or they think it's something that's attractive that doesn't really fit into those same principles. And so, many of the ways that Yale executed its strategy were different from other people because it came from those first principles. And I just saw how the repeated exercise and discipline of doing that led to long-term success.

Interesting. And is that something then that you felt stayed with you through your own career as an investor, as an allocator, kind of setting out a philosophy and a set of beliefs as to how you should allocate capital or how you should, construct your investment strategy and then religiously kind of having the discipline to execute that on an ongoing basis?

Well, absolutely, right? You start with a set of principles and, depending on the type of capital you're managing and the structure of the liabilities, whatever the case may be, those principles can change from one pool of capital to the next. But the idea of having a very deep understanding of what it is you're trying to do, how you're trying to go about doing it, understanding your own competitive advantage, and then implementing on that with extreme discipline is something that it's so tried and true, it'd be ridiculous to say, oh no, I didn't believe any of that stuff.

There are a lot of subtleties of things that David did that I evolved into thinking a little bit differently. But for the most part, those key first principles are first principles. And as much as you can play around with them and test it and try things in different ways, I always almost came back to that center of gravity throughout my career.

And you touched on a few things for, I guess, your own thinking evolved and deviated from David Swenson's original ideas. Talk to us a little bit more about that.

Yeah, I'll give two examples of that. One (and to keep it simple, let's focus on the equity markets), David was a tried-and-true value investor and believed that, if you looked at the academic research, that value wins over time, and therefore your portfolios should be tilted towards value.

I learned, over my years of experience, particularly when you get outside of having a single pool of capital like you do for Yale, and like most of us are somehow engaged in the investment business, that you can only be wrong for so long most of the time. And so I evolved to thinking that although I understand the principles of value investing and why it might make sense both behaviorally and statistically, over a long period of time, that value may outperform, that if you want to survive in the investment business, you're better off having balance, say, in this case between growth and value.

And so even in times like this, where over the last decade it's been growth, growth, growth, I've thought, well, that's great. People are leaning towards growth. I want to make sure that I have a balance between value and growth and not just get carried away with growth. So, that's one example. Another example, in my time at Protege, one of the areas of opportunity we pursued was seeding new funds. And when we referred to seeding, we included having an economic stake in that manager's business. And that's something that in some ways Yale never did.

Yale might negotiate… They were always investing early in funds. They often, if not always, would try to negotiate for a fee discount on their capital, but they never took a carry or economics in other people's capital. And I understand the rationale for that, but it's not… If you look at what Yale's done and who they've backed over the years and the success of those managers, there's a degree to which there's a trade-off between saying, no, we want the integrity of the manager getting paid every dollar of fees, and the imprimatur of Yale that created tremendous economic value for many billionaires in the asset management industry, and Yale kind of left some money on the table.

And so, I go back and forth on that because I do deeply understand and agree with his philosophy and the potential for challenges that come when you have outside owners in an asset management business. But I also experienced the other side of it where, if you create that relationship carefully and create glue between you and the managers, you can have really productive long-term relationships and extract economic value for being the backer of a business. So, there are plenty of little things like that, but I still think you come back to far more of what I learned or things that I wholeheartedly agree with than otherwise.

I guess the Yale model, as it's come to be known, is this first and foremost, I suppose, an asset allocation approach. Obviously, there's certain things, secondary to that, you're talking about as well, about beliefs, about skin in the game, etc. But going back to the asset allocation perspective and, you know, putting on your asset allocation hat now, if you were back in Yale and trying to manage an endowment in the current environment, one of the things we've been talking to on this podcast, with a lot of allocators and CIOs, is about the end of 60/40 and basically the challenge that both (at least up until recently) equities and bonds looked expensive relative to history.

What would your perspective be if you were back in that kind of chair of managing a multi-asset portfolio? How would you be solving that investment conundrum?

Well, one of the things that I grew to have a very, very deep belief in is at least my, if not almost everyone's, inability to time markets. And so, I believe whether you think the risk profile of a pool of capital like that is 60/40 or 70/30 or 80/20, people can decide what's appropriate for them. The idea of veering off of that, because of valuation, is a form of market timing.

And I do think and appreciate what Howard Marks will say about being aware of where you are in cycles and understanding what can happen. But if you look at even where we are today after a significant sell-off in growth stocks in the last couple of months, and said, did you think that was possible? Well, sure, valuations seemed rich. What did you think about two years ago? Well, sure.

Last year for these pools of endowments and foundations had their best year in history. And if you took action two years ago instead of four months ago, you would have been much worse off just over a two-year period. And so, these pools of capital have very, very long durations. And the idea of creating market timing, behavioral bias, all the things that can get in the way of long-term compounding is just not something I believe in.

And so, I also know, from the experience, that these pools of capital are not fleet boats. They're really tanker ships. And so, if you think market conditions aren't great and you hear about people being opportunistic or tilting, they're usually talking about small single digit percentages of a pie.

The pie is moving and there isn't that much year-to-year that's going to change the fortunes from what it would be the year before. And I think that's right. I think we tend to get in our way, as investors, more than we add value from making those incremental changes.

So, it's very much about having that long-term philosophy and sticking to it through ups and downs as opposed to these so-called tactical or even strategic tilts.

Very much so.

Interesting. And I mean, that's obviously very much from the perspective of a big endowment, like a Yale or equivalent. I mean, for smaller pools of capital or more unconstrained pools of capital, what would your thoughts be?

I'm not an expert in… I'm not a trader. I know this is Top Traders Unplugged. I'm not a trader. So, I'm not going to have a lot to weigh in on that. But, you know, if I manage my own personal capital, which I do, and it's obviously vastly smaller than a multi-billion-dollar pool, you have to think about some of the same things, which is what's the purpose of the capital? What's the risk structure that I'm comfortable with? And then how do you want to go about implementing?

And as an individual, or as many individuals, you don't have access to, call it the deal flow, the opportunity set that you do even when I was at Protege managing a couple of billion dollars, you could see everything and choose among that. So, you have to be thoughtful about where? Do you want to just ride the market and be long-term, and it starts with an index fund and maybe you can do things on top of that, and where do you want to be more tactical or strategic?

So, for me, from doing the podcast, I tend to get access to a lot of really, really interesting investment managers pursuing strategies that I never would, just as an individual with my balance sheet. And so, there are times where I choose to invest with managers, I think are extraordinary, in a small way because I have the ability to do that. And that's one way to add value.

But in terms of being unconstrained and navigating the markets, I think that, you know, from a small pool of capital or an individual, it just starts with, what do you believe about markets? Just because I don't believe that I know how to time the market doesn't mean, Alan, that you don't believe that you can. And therefore, you might devise a completely different strategy than I would, both of which are entirely valid. It just depends what you're trying to achieve.

So, there were very few people who even understood how mergers got created. And therefore, if you were one of those and created a merger arbitrage trading strategy, not that many people understood what that spread was, why it would close, and all those kinds of things. So, you could provide liquidity to the market, and you could get paid nicely for the closing of that gap.

And there are a couple of factors in that, right? One is just the level of interest rates because you're not paid on a short rebate. But the other one is that you could look back and say, there's just more and more competition. And eventually the competition and all these incredibly talented hedge fund managers kind of caught up with the ability of them, in aggregate, to kind of generate really attractive returns.

Interesting. I mean, it's probably true that what you say, in the last decade, you know, we've had low interest rates and maybe an environment which has been obviously more conducive to beta, less conducive to active strategies. Obviously, in the last 18 months, we've seen a very different market environment.

Would that give you some hope or would it be a possible indication that we might see a better environment for hedge funds, given that we're seeing, you know, obviously we're at the start of a tightening cycle from the Fed, we're seeing more macro volatility, you know, we're seeing arguably divergences in economic cycles, etc. Is that a more favorable environment or do you still think that headwind of increased competition is going to dominate?

Well, it's a little bit of both, right? I do think that it's been a long time since people would say, “fundamentals spoke”, and that's really particularly on the stock picking side, where you saw hedge funds being able to add value. I don't think that competition, structurally, is disappearing.

So, people understand how lucrative it can be to be a successful hedge fund manager. The size of the larger hedge funds today, the Millennium, a Two Sigma, Citadel, are so much bigger than they were. And so, the assets in hedge funds are very, very large and staying that way, which I believe means competition will certainly stay.

And you've seen the maturation of the industry almost in the same way you would expect to see the maturation of any industry, which is it gets more concentrated in the hands of “winners.” And it's harder and harder for people who are smaller to sort of succeed and thrive.

And so, I think structurally, hedge funds are more competitive. Cyclically, you would expect there to be better opportunities, but it's just really hard to know, are those short-term, medium-term, long-term trends? It's very, very difficult to point to, oh, rates are going up, therefore hedge funds will do better, right? Will do better than what?

Does that mean they'll deliver more alpha now that people are much more sophisticated in understanding what value-added means? Does it, does it mean that just the returns will be higher, but maybe there won't be more alpha because you have a kind of a hedge fund beta from higher rates? Yeah, I don't know the answer to that, but those are the right questions to be asked.

But I don't really think about it that much today because you're not really at an extreme. At the time, you were at extreme valuations in the market. You had rates, short-term rates were at 4% or 5%. You had a normalized environment for hedge funds, and you probably would have bet against anything, you know, the S&P against anything. Hedge funds had been churning along, making 8% to 10% a year. That seemed like an awfully good bet.

I don't see the extremes of either side of that today. So, you know, I prefer to try to make bets when I think the odds are in my favor, even if it doesn't work out, as it didn't. And so, I wouldn't make that bet today, but not because I have a view one way or the other. It's because I have an absence of a view.

Obviously, at Protege, you were a manager, selector, and allocator. One of the things that we've been talking about to CIOs and allocators, here on this podcast, has been this challenge of asset allocation and manager selection. And I suppose it's been interesting talking to a number of CIOs who have said, you know, manager selection is much more difficult than asset allocation. What was your perception of how difficult it is to be a manager selector? Would you go along with that view?

I'm not even sure I understand what that means. Asset allocation is easier than manager selection.

Those are the two key drivers of returns. I would frame it quite differently. So, I have lots of conversations with a lot of top CIOs on my podcast. And one of the evolutions that you've seen over the years is a model that, as you alluded to, sort of the Yale model, that was really predicated on asset allocation driving returns, to a model where the asset allocation is thought of as more of a communication tool than a driver of returns.

And it's really the manager's selection that some of the top pools of capital in the allocation world believe will be the driver of returns. And some of that is, it's hard to predict what asset class returns will be. So, it's one thing if you think public equity markets will do much, much better than bond markets and therefore, asset allocations can drive returns.

Another is that the historical studies that Roger Ibbotson created, that everyone cites, as asset allocation being the driver of returns, we're all backward looking. And so, you have the same people who will say they don't believe in market timing, who then say that asset allocation is going to be the forward-looking driver of returns.

Well, how is that possible? If you don't believe you can time the markets, you can't possibly know which assets will be doing better than others. So, that can't be the driver of your returns. So, there's always been this funny tautology in, is asset allocation the driver of returns in retrospect or prospectively?

And so, I think when people say it's easier to think about asset allocation, it's because they have a good sense that, given the risk characteristics of asset classes and the objectives of their portfolio, they can match those two things up. And that's more easy to do, maybe, than to pick manager selection. Now, those same people you talk to generally have a portfolio full of managers, not passive indexes, and they believe their managers will outperform.

So, you know, it might be difficult... It is difficult. It's just been especially difficult in the equity markets trying to outperform the S&P over the last decade or so. But most of these people spend their time on manager selection and not that much on asset allocation.

Absolutely. I mean, from your perspective as a manager selector, you know, what would you say were the big challenges that you had to overcome in that role. It's, obviously, you were doing due diligence on hundreds and hundreds of managers every year. How do you go from that funnel of hundreds of managers down to the handful of managers that you ultimately select? What are the key things that tip things into balance from your perspective?

Yeah, you know, these tend to be qualitative far more than quantitative. So, it's not easy to assess. What I would say is that for anyone in one of these seats, myself included, when you spend lots and lots of time meeting lots of lots of managers, you start to develop your own heuristics for what you think distinguishes someone who sure seems good from someone who seems truly exceptional. And a lot of that has to do with insight, the articulation of a strategy, the discipline.

There's nothing that I would say that is particularly insightful into how an allocator looks for these types of managers. I had my own heuristics, so I used to say things like, if someone is fundamentally smarter than you, you have no way of knowing how to distinguish between two people that are pursuing something that they know more about than you do, and they're fundamentally smarter than you.

So, you need to think about ways that you can learn something and challenge managers on your own playing field. And there's lots of different ways people choose to do that. Sometimes you're not even talking about their investing. You're talking about their organization, because allocators tend to know a lot more about the functioning of high-performing investment organizations than a manager who sitting in one would.

So, there are lots of ways of teasing that out. But I think it's far more art than science. And so, it's very, very difficult. It's one of the frustrating things that people I interview, on my show, is that there aren't that many that can really tell you exactly what it is. They just sit around it and they pick their favorites. And that's how they go about it.

I mean, I suppose that's the critical issue that, you know, are we insightful in our selections or are we being biased? And there's huge literature on behavioral bias and I know it's something you delve into in your podcasts and books and about trying to overcome those.

Back then, when you were an allocator, did you feel you were conscious of these biases? Some people are saying, I have a bias, but my bias has helped me be successful as an allocator, so I'm happy with it. So, that's one perspective. And, you know, we've had this growth in behavioral finance maybe in the last number of years.

Is that something you were aware of or did you worry about that or was it not something on the radar, you know, when you were selecting hedge funds 2 decades ago?

It was a long time ago. It's hard to remember. I think the one that we were very conscious of and tried to think carefully about is performance chasing. You could go into all sorts of subtle things about behavior and wanting people that sort of look like you, think like you, whatever it is. But performance chasing is a particularly pernicious one because we all know it exists. And generally speaking, we all do it anyway.

And so, you, as an allocator, you could look at (which we did) the history of all the decisions you made with managers. And invariably, you exit after weak periods of performance. There are a few exceptions to that I had identified.

But if you really look at it over time, the number of instances where somebody invests in a manager, that manager then performs well, does exactly what they said they're going to do, doesn't meaningfully change their organization or grow too big, everything is humming. And therefore, the allocator redeems. That happens almost exactly never.

But there is turnover, which tells you that even though that great manager who looks like perfection, usually will have soft periods of performance. There are also managers who have soft periods of performance that then reverse. But it is always this exercise that someone isn't performing that well, and then people scrutinize it. And then maybe even if they have a behavioral bias, or they understand that chasing performance is a behavioral bias, they'll find some rationale for why at that moment in time, whatever thesis they had about the manager wasn't actually right and they should come out.

And when you look at the history, as we did, of all the decisions that an allocator will make, no matter who it is, you always end up with the same issue. And so, that one is the one that I thought the most about. The only way that I saw around it, with any consistency, was when the investments were in tactical strategies.

But if it was an opportunistic manager who happened to be there and had this great run, and then they moved on to whatever was next, you would stay. And if you looked at the history of Paulson and Company, it's a great example of that.

So, in that strategy, which we were invested in, we exited, but then he pivoted to doing something else. And lots of people came in and said, well, this is just a brilliant opportunistic manager. And the fortunes weren't as good going forward as they had been in that particular tactical trade.

So, that's one example where if you know that you're going in for a particular defined purpose, and that either plays out or doesn't, you then can exit. And those exits, particularly when things worked, I saw as the one example of things where you could enter well and exit well.

Okay. And it's interesting, you know, you say people are aware of these biases and seemingly there's very little you can do about it. But maybe it's a good segue into the learnings from the podcast.

When you speak to other CIOs, allocators, do they agree? Have they anything that they do, from a process perspective, that can help them overcome this challenge of being seduced into investing just because of performance?

Yeah, I think the sophistication of these pools of capital has gone up a lot in the last decade. And so, you went from an academic awareness of behavioral finance to, people like Annie Duke coming out and saying, oh, based on what I learned at poker, here are some things you can do about it, to organizations actively taking those lessons and then applying it into their investment processes.

So, things like pre-mortem analysis, things like an understanding of how do you make a more effective group decision-making process by not having the leader of the group domineer the decision so that you can unearth all of the available information when you go about making a decision, I think those things have gotten a lot more sophisticated and are practiced much more meaningfully, than they were a decade ago.

It's interesting you touch on the likes of Annie Duke and, I was just, I have her book here and one of the first things she talks about is this idea of resulting, looking at the result of a decision as opposed to the process. And it's almost like it's an impossible one to get away from, you know, the idea of the decision the quarterback made, whether to pass or not. And if people purely assess it based on the outcome.

It's very difficult to get away from that in any walk of life. Do you think people are being successful in taking these insights and actually applying them? Or are we there yet?

I don't know how to answer that question. I think people are trying hard. but people, that's very general.

I guess what I'm getting to is that it's one thing to be aware of all of these things, but in the moment of making the decision, it is extremely hard not to have that bias. And I just wonder, despite the knowledge of all the academic literature and people saying we're embedding this into our process, I just wondered, are you seeing people getting better at decision making because of these insights?

Yeah, I believe so. Annie talks about the difficulty of making a decision when you're “in it”, so, when you can get emotionally triggered. Now, if you're an allocator, those decisions are much, much slower than they are if you're a trader. And so, the chances of being emotionally triggered when you're making a decision are much, much less.

There are usually a board that you go through. There are memos you write. These are not day-to-day, minute-to-minute decisions. And so, I think fewer of those decisions have the potential to be as emotionally charged as something that is a shorter-term, time-sensitive decision.

So yeah, I'd like to think that people are more thoughtful about it. I'm not inside all these different organizations to know that, in fact, they are practicing, they are getting better. There's a lot of CIO turnover. And so, it's really the organizations that have had longer stability that you would expect to improve their processes more than ones that are turning over. So, it's a mixed bag.

The other interesting aspect that you delve into, on your podcast and your book is the skill of interviewing, which I guess makes sense. It's not something that you hear a lot about in terms of, you know, if you pick up an investment skills textbook, it's not something that's mentioned there. But obviously, as an allocator, it is important.

What do you think differentiates somebody conducting a good manager interview versus somebody not conducting a good manager interview?

Yeah, I learned a lot about this from doing the podcast in ways that I hadn't when I was day-to-day interviewing managers. And the one thing that I start by saying is that I don't think, in all the time, the 20-something years I interviewed managers, I ever walked away from a meeting and wondered if I had been good in the interview.

Most of the time you walk away evaluating the manager, saying, do we want to move on to a next step? Was that a good meeting? What do we think of them? What do we think about our investment opportunity? And so that's a different lens than when you're doing a podcast and listening to a recording and saying, oh, wow, I missed that question.

And if you take that, and pull that string, there's a feedback loop that has been missing, historically, in the continuous improvement of an allocator in getting better in their interviews. And so, we have a module. I created a course called Capital Allocators University. We have a whole module where we talk about different techniques in interviewing and how to get better as an interviewer.

And you know, it starts with sort of thinking about what's the purpose of that interview and making sure you've set the stage the right way to achieve that purpose. And then there's some techniques in how you go about the interaction so that you can get as much information as you can.

There are some things that come up that can derail you, and you have to think about how to do that. There are some things about, how do you organize your team to get access to the most information. The setting that you're in, there's all kinds of ways that you can think about getting better. So, you know, I've learned a lot about that post my time at Protege, and it's one of the things we try to teach in Capital Allocators University.

Pretty good. And do you find that differs or is the same across strategies? So, obviously discretionary versus systematic, or if you're interviewing a manager in private equity versus a quant manager? I guess you're looking for different characteristics, but is the overall framework still the same?

Yeah, the content is obviously quite different, the types of questions you'd ask, the type of information you're trying to get. But the structure of how to think about conducting an effective interview is exactly the same.

Okay. The other ones… You touch on Capital Allocators University, which is an interesting initiative. It sounds like you're helping people develop the skills, the softer skills of the CIO, like decision-making and interviewing. Can you talk a bit more on that?

Sure, yeah, that's exactly what it is. One of the things I found from doing the podcast is the bigger lessons I learned weren't the investment lessons. There are always little things you can pick up to improve an investment process. But if you go through the CFA, if you spend 20 years in the business, you can always refine, but you have a pretty good awareness, as most senior people do in the business, of what investing is all about.

What I learned a lot about, though, were the disciplines in and around what's required to be successful as, say, a CIO or a senior investment professional. So, we talk about decision-making or interviewing, but also the basic principles of leadership.

Our business is known as being good at, say, managing money, but not managing people. And it's not that big of a stretch to say, well, if you talk to a couple people from the military, or that run good organizations, and try to understand what are the principles that go into that, a lot of it is common sense, but you need to hear it from someone to understand it as a framework.

So, there are things like time management. Everybody knows time is limited, but what has someone told you about how to think about how you manage your time and then some tricks to how to structure it on a day-to-day basis. So, those are the things we teach.

We've done it as a full course that we did the first time in September, and we're doing again starting in April. And then we're going to evolve that. We may chop it off into bite sizes and say, just do a class on interviewing in the future. So, we're kind of iterating on how to best share that information.

And what kind of people have you got participating in this so far?

Both of the cohorts are about 70% allocators and 30% money managers.

Okay. And is the idea that this is part of people's training, people who have an eye on becoming a CIO or a senior allocator in one of these kind of large pools of capital?

Yeah, that's right.

Very good. And I mean, one of the things that you touch on that has been a theme that with some of our other guests is this kind of, not a tension, but a contrast between those softer skills and the leadership skills that people are asked to develop as they take on senior investment positions in large organizations, when they've often come from a background, whether it's a quantitative background or more of a, I suppose, an analytical background. Presumably, you think these skills are learnable.

I mean, how much do you think you have to have kind of be thrust into a position and learn by doing versus learn by a capital allocators course or elsewhere?

No, it's always a little bit of both. You learn a lot by doing, but if you are given a fast race car, and told to drive it in the middle of midtown Manhattan, you don't want to be driving right into the Hudson River. So, I think the frameworks help people understand what very successful leaders have learned. And then, once you have a framework, you have to go about your day-to-day and apply it.

But what we've learned from the people who have taken the course is that those frameworks have been invaluable in their understanding and calibrating what it is they're trying to do in their day-to-day jobs.

Very good. Just going back to the podcast, I mean, obviously you've spoken to, I guess, a couple of 100 CIOs or allocators at this stage. And, you know, I'm guessing they're all very successful people. And you touched on, you know, that it’s very hard to differentiate, say, between the good and the great, you know, insight, discipline, etc.

When you've gone through that process, is there anything that has surprised you about these people that you would have wouldn't have anticipated at the outset in terms of what's been behind their process or what have been key features of their success?

And so, as a result of that, if you walk through the path that, say up until now, most of the CIOs have taken, they come from massively diverse backgrounds because there was no training ground to be a CIO. Now that's changing. Now, more and more of the CIOs have spent their careers as an allocator. But That wasn't the case.

And so, many of the people I've interviewed, it's sort of fascinating that they all have a very different perspective based on where they came from. And I guess it's not surprising in that if you thought about the structure of the industry and the growth in these types of offices, the leaders had to come from somewhere and they couldn't come from within the industry because it didn't exist. So, it's not surprising, but it is very, very interesting that people bring different perspectives to those seats.

And, do you think that's possibly a good thing or not? I mean, some of the CIOs we've spoken to maybe have had experience as a trader, as an allocator, maybe as a hedge fund manager, whatever it is. Do you think that diversity of background is helpful in stepping into a CIO seat?

I do. Yeah, I do.

Yeah. One of the things that I suppose that's important, that you touch on in the book, outside of just the decision making itself, is governance and good governance processes. And again, I guess this is something that a lot has been written on in terms of what constitutes good governance and what constitutes bad governance.

Do you think this is something that is… You know, it's obviously something that's important in these large pools of capital. Is there something in that more, you know, individual investors, smaller pools of capital can learn from what the big guys are doing around these in terms of what constitutes a good investment process, any kind of learnings that are applicable more widely to investors?

The governance challenge, for the big pools of capital, is that the people that are making the decisions, the ultimate decisions, they're often a board, and it's not necessarily the investment team that's doing the work. And so, the question becomes one of roles and responsibilities. Who has ownership? Who's responsible for what? How do decisions get made? How do you make sure everyone's on the same page?

So, the more complex the decision process, the harder it is to create effective… and I'll call it governance effective decision-making sort of same thing. So, yes, I think if there are smaller pools of capital, it depends on how small, if you have one person, there isn't really a governance issue. They're just making decisions.

But one of the things I hadn't really appreciated, when I started doing the podcast, was how pervasive that challenge of getting governance right is. because I had only worked at Yale, which has a highly effective governance structure, that worked very well then, I'm sure it works just as effectively today. And then I worked at an asset manager where the decision-making was within the asset management company. It wasn't a board who was ultimately responsible for it.

So yeah, I think that in any decision-making unit, you know, the governance challenge, in these pools, has to do with a board and an investment team. If you have a similar structure, you'll have similar lessons. But if it's a smaller unit, then you get into more the construct of how do you create effective decisions on the team?

Okay. And I mean, from that perspective, you know, is there a right amount of leeway you think the investment team should have, this is the constant tension between who's got the decision-making power, is it the board or the CIO? What's your perspective on that?

Yeah, it's a wonderful question. It depends who you talk to. So, I think the investment team would always love to have as much discretion as possible. But ultimately, it's the board, in many of these instances, that has the fiduciary duty.

Yes.

So, it's the board that has to be comfortable enough with the investment team. Much of what you see over time is that the quality of the governance is highly correlated with the tenure and duration of the investment team. So, the longer a team is in place, the more they're able to both earn and gain trust from the board to have the discretion to do more and more of what they think they should do.

But boards aren't static either, right? With the rare exception of, say, the University of Notre Dame, and Scott Malpass was the CIO for 30 years and only had two board chairs. That's almost unheard of. In fact, some people would say that's poor governance because you don't have enough change. But when you have stability is when you've had great long-term outcomes.

Okay. And it sounds like this is a potential, possibly potential, headwind in terms of getting a good investment outcome. Can you have too much government, do you think, if that balance has shifted too far away from the investment team?

Yeah, there are many examples of where a board domineers over decisions in such a way that it inhibits the investment team from doing what they should do. Now, the board might not think that's a bad thing.

I write about one Ivy League endowment whose governance structure has improved measurably over the last decade, but for many, many years, the board would turn away almost every investment recommendation that the investment team made. So, if you think about that dynamic, you have an investment team that's out in the community, meeting money managers, doing due diligence, coming up with their favorites, bringing it to the board, and for whatever reason, the board is saying no. That is unlikely, as a process, to deliver good investment results.

Who knows what the outcome would be? In fact, the outcomes weren't great at this particular institution, but the process is horrible. So yes, there are many, many situations where the board imparts themselves as individuals too much on the investment process.

Okay. I know you've been working on Capital Allocators University, and it sounds like that's a big undertaking at the moment. Are you doing anything else from an investment perspective at the moment?

So, I've been managing my own capital and finding some really interesting ideas. We have been thinking about how to get access to more capital to pursue some of the things that we've been doing. I can't say a whole lot about it publicly because of all kinds of regulations, but there is one particular strategy we are pursuing in the short-term and are going to be sharing with some of the accredited investors in our community.

Okay, sounds intriguing. We should keep an eye out for that.

You touched on how the hedge fund industry has become more challenging for the participants in the last while. Obviously, one area where we have seen fantastic growth in the last couple of years, and some of the hedge fund world migrating into, is the whole crypto space and digital assets. What's your perspective on that? Is that a source of interesting opportunity, do you think, at the moment? And do you think cryptocurrencies are here to stay?

I mean, I think so. I'm not a crypto expert, but I do think that there are a lot of signs coming out of the venture community, let's say, whether they're traded instruments or venture investments, that many of the top programmers… You know, there's already been a tremendous amount of wealth, at least on paper, created in this space.

And with blockchain, you have what feels like a revolutionary technology that will find its way into very productive use cases. I don't know what those will be, but yes, I'm a believer that, long-term, this whole area of blockchain and, to some extent, cryptocurrencies is here to stay and will be a larger, and larger important part of the financial system.

And is that something you're looking at from an investment perspective? I mean, is that just something that is going to infiltrate all aspects of how the investment industry is run?

To some extent, I mean, personally, I have pretty simple investments in Bitcoin, Ethereum, Solana, and Coinbase stock. There are some terrific managers in the space. And I'm actually about to do a whole bunch of… I did a mini-series last year called Crypto for Institutions.

I'm gonna do Crypto for Institutions 2, and be interviewing some of the managers that I understand are really top-notch in the space. And for me, that's just a learning process. I am not a programmer. I'm not a technologist. And I think I understand Crypto 101. I understand most of the terms. I understand some of the use cases, but I'm not in the weeds. And this is a wonderful way for me to learn, alongside my audience, a little bit deeper into what's happening in the space.

Okay. I mean, from that perspective, obviously, you've been in the industry, you know, 30 odd years, I guess. You've seen a lot of change. You've seen the rise of the hedge fund industry. You know, more recently, you've seen the growth of podcasting and you've participated in that.

What do you think are the big macro trends that you think are going to be driving the industry over the next few years and areas of interest that people might want to be looking at, particularly if they were starting off in their careers now?

Well, we certainly touched on crypto. I think that's a big one in the technology space. The other one that feels like a big wave is ESG, and particularly the E and the S. We talked a little bit about governance. I don't think anyone's ever said they want bad governance.

So, it's very hard to know, you know, looking at the environmental side now, we're at a really interesting inflection point, right? We've just gone through a period of time where, for a couple of years, people treated energy and the price of oil like it was going to go away and it wasn't needed. And as we've learned more recently, clearly that was false. And so, there's going to be this interesting balance and tension between fossil fuels and a desire for a cleaner environment going forward.

I have no idea how that plays out, but you do know that with the generation coming up, there's much more sensitivity to broader constituents than just profitability. And so, I think the environmental side, diversity, equity, inclusion, we hear more and more about in hiring practices. And I think it's hard to know exactly how you invest on those trends, but I think they're increasingly important and in the thought process of everyone who's allocating capital. So those are probably the two biggest I would point to today.

Okay. So, if you were doing it all again, starting off, you might be looking at something in the impact investing or something like that, is that fair to say?

Yeah, I mean, those are great areas. Another one is biotech where I just think similarly, it's kind of a hybrid, it's similar to the technology revolution. You've had massive changes in the ability to map out genes and try to discover diseases. Now that sector's been killed in the market for the last year, but I think, over the long-term, There’ll be tremendous advances in technology and that's going to play its way out.

Interesting. And I mean, we haven't talked much about the podcast. I mean, in your experience of that, obviously you started off as an investor and, presumably, when you got into the investment world, you envisage yourself managing money and being on that side. And now you've had this massively successful podcast, which is a totally different skill.

When you reflect on that, is that something that really has surprised you? Is it something that you could see taken in another direction, or what are your reflections on the success of Capital Allocators podcast?

I mean, I think it'd be hard not to say it's a surprise. We're coming up on 10 million downloads, and it's got a really nice audience. I think that for me, the biggest difference in what I used to do and what I do now is something that comes very naturally to me, which is sharing. So, when you're in the investment world, there's an element of you might share ideas with your friends, but there's sort of a competition. And when you have great ideas, you want to exploit them yourself. And it's just not my natural state for whatever reason.

And so, what I do is learn on the fly, meet people, share those conversations, and that has a great resonance for me. We created a vision statement for our business that's to learn, share, and implement the process of premier investors. And so that's really what the podcast is. And when I think about implementing, I do a fair amount of advising of both asset managers and allocators, not as a like a consultant, you know, to some of these wonderful investment consultants, but it's really I've been around for a long time. I managed portfolios for a long time, and I really enjoy helping people think through those challenges.

So. There are different ways. We talked about potentially investing capital for other people. There are different ways of implementing. But the podcast has been a really fun way of doing it. I have not really thought a whole lot about scaling a podcast business. That's not where I came from in pursuing the podcast in the 1st place. But I'll do more episodes if there's more interesting things to talk about.

I'm sure there will be. Well, I mean, what do you think is behind that success of it? Obviously, you've got great guests, fascinating people. Is it the fact that there is maybe less content around about the whole being a great allocator, being a great CIO, maybe there's plenty on the macro space? Or do you think you fill the gap in that respect or what's been behind it?

I attribute most of it to the quality of the guests. I've been around the business for a long time, have a lot of friends in the business, and I felt like I kind of know where to go to get some great guests. And people have told me, over time, that I guess I'd do a pretty good job of interviewing them. You put those two together and it's a pretty powerful combination.

So, I think that there aren't that many investment podcasts that have followings. And most of them have their own niches, right? A lot of them are technology focused. Yours is trader focused. There are very, very few that are focused on the broader picture of investment strategies. So, managers and CIOs are most of what I interview. And so, you know, maybe there's one or two others like it. And because of the people that I've had the benefit of knowing over my career, I think the guests speak, and it's been a wonderful exercise the last five years.

So I'm relatively new to the podcasting world. I think it's been my 5th or 6th. So, as a novice, any tips for me as a podcasting novice and just early starting interviewer?

Alan, I think you're off to a great start.

I plugged you to say that before we came on.

But honestly, I do find it interesting how, if you told people five years ago, people would be sitting around listening to these conversations with people, they may not have believed it. But it is fascinating how we've seen this growth. And I think people are hungry to learn from experienced people in the industry.

Yeah, I'd agree with that.

You touched on how your role has evolved into, strategic advice to asset managers and money managers. Is that kind of where you're taking your business and your career now in the next stage? And can you give us a little bit of insight as to kind of what types of topics you help people with on that side?

Yeah, thanks for asking. It's funny. One of the fun things about the podcast is it creates all this optionality. I never quite know where the next stage is going to go. But one of my passions is helping others in the business.

And I've worked with about a half a dozen, mostly hedge funds, for a number of years. And they all fit the same model, which is they're usually managing a couple $100 million, and there's one person who's in the lead, and they just want a senior sounding board.

I don't market for them. A lot of people come to me and say, all these people, you must know where the money is. No, I don't. Otherwise, I'd be managing all of it myself, right? But I can give strategic advice about how to go about marketing. I help them think about portfolio construction. I might help them think about people on their team. I love introducing people to others that can, you know, potentially add value.

And so, I get a fair number of inquiries about that. Mostly they're with startups. I generally don't work with startups anymore. I did that for years at Protege.

And then on the allocator side, there have been a few relationships I've had that they kind of look a little bit more like investment committee relationships. The one with the family office, I'm talking to another family office about it now. And it just helps me when I have these ideas. If I had the capital to deploy it, I will. If I don't, I'd love to be able to share it with people that can take advantage of it.

And so that may, in the future, take the form of advisory. It may take the form of managing a fund. That's something we've been talking to people about and seeing if there's interest in. And I never quite know.

I always think at some point in time, I'll find myself back in a seat with a large pool of capital and a great team of people and be managing, mostly allocating and some direct investing for a family or a group of families. I never quite know where that's going to head. And I think that's always been where my heart is. And so, it's just a question of finding the right fit.

But, I'm having so much fun doing the podcast. It's fun to do, you know, one of these multi-spoke I don't know what they call it, they sort of creative our lifestyle, do some podcasts, and do some writing, and do some investing, and do some advising. It's been a tremendous amount of fun.

Very good. Portfolio career, I think, something like that.

Yeah, exactly.

Good stuff. So, listen, we're coming up to the hour. It's been great speaking to you. Fascinating to get all of those insights.

You know, we typically wrap up getting some tips for people who are starting off in their journey. What advice would you have for people in terms of things to read, things to do, people to follow on Twitter, etc., if they are relatively new in the investment industry? Obviously listen to Capital Allocators as a good start as well as Top Traders Unplugged. But anything else?

Boy, there is so much more information now than, you know, when I was coming up in the business. So, you know, I always tell people, find what they're really interested in. People talk about pursuing their passion. And then focus on the relationships with the people they have, their friends, their friends' parents. Those are usually how people find their way into the business and find great opportunities.

Very good. Well, Ted, thank you very much for coming on Top Traders Unplugged. It's been a pleasure having you on. So, with that, I'll hand it back to Niels

Thank you so much, Alan and Ted, for a fun conversation, this time with a fellow podcaster. As you can hear, Ted has covered a lot of ground in his career and has tremendous insights into many aspects of the investment world. But to me, some of the topics that stood out was his views on discipline and principles, also the role of hedge funds and how it's changed in the last decade, the competition within hedge funds themselves and how to do a good manager interview, something that I can confirm is not as easy as it sounds.

So, I hope you were able to take lots of inspiration away from this conversation. Make sure you go and follow Ted's work, buy his book, and also, of course, follow Alan on social, because as you can tell from today's conversation, it is so important that you understand what goes into allocating capital well, as an investor. And we really look forward to sharing many more of these insights as our series continues.

From Alan and me, thanks ever so much for listening. We look forward to being back with you on the next episode. And in the meantime, take care of yourself and take care of each other.

Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review in iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.