Managing a C$600 Billion State Pension Fund ft. Amy Flikerski

[00:00:08] Amy

We have invested in traders or investors who’ve come out of banks. We’ve invested in people who have a very high profile, who’ve come out of large hedge funds themselves. We’ve also invested sometimes in number two type PMs who feel ready to launch and have their own groups.

I’d say our framework is around people, process, performance. That’s a rough way of how we do the analysis. That’s pedigree, that’s what’s the repeatability of the strategy that they’re employing? Performance information can always be a little bit of a pastiche. We may have a track that’s vetted and sometimes we have very little or nothing. It’s always going to be a little bit different in terms of the information that we’ll have to make those decisions.

… That’s the framework. Every scenario is a little bit different, but it’s a flavor of lots of different types of backgrounds that we’ll take a look at.

[00:01:25] Intro

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 products before you make investment decisions. Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:02:20] Niels

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging but also very important given where we are in the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like.

We want to explore their perspectives on a host of game-changing issues and hopefully dig out nuances in their work through meaningful conversations. Please enjoy today’s episode hosted by Alan Dunne.

[00:03:04] Alan

Thanks for that introduction, Niels. Today I’m delighted to be joined by Amy Flikerski. Amy is Head of External Portfolio Management at CPP Investments.

CPP Investments is the manager of Canada’s national pension fund and has over C$600 billion in assets under management. Amy has been at CPP Investments for over 12 years in a variety of roles. She previously worked at firms like Highbridge Capital and PAAMCO. Amy, great to have you with us today. How are you doing?

[00:03:32] Amy

Thanks, Alan. Doing great. Great to be with you as well.

[00:03:35] Alan

Good stuff. Well, we always like to kick off by just getting a sense of how people got involved in the markets and investing.

So, what were your own roots to ending up at CPP Investments?

[00:03:48] Amy

Yeah, thanks so much. So just a maybe quick summary of that. I’m Canadian. I finished my schooling in the US and my first job was in New York working for Moody’s Investor Service, which gave me kind of a fundamental training in credit analysis. And then I moved over to Highbridge Capital, as you mentioned. And that’s really what got me started in the hedge fund space.

And that was back in 2003. And so, my first half of career was focused on direct investing. And then I pivoted to fund allocation.

My first role there was at the institutional fund of funds group, PAAMCO. And as you mentioned, I joined CPP Investments in 2012, 12 years ago. And I’ve been in different roles within the external portfolio management group, which is the group that allocates externally into public fund managers. So, it’s a team that oversees a lot of the hedge fund and asset manager investments that we make externally.

[00:04:52] Alan

Okay, very good. And as I mentioned, CPP Investments is the manager of Canada’s national pension fund. Can you give us a bit more about CPP Investments and then the size of the assets, how the portfolio is set up, etc.?

[00:05:06] Amy

Yes. So, we have C$600 billion in assets under management as a firm. We do both internal and external fund allocation.

As I mentioned, external portfolio management oversees the public markets piece of the external allocating. And then we have, as part of our private equity efforts, we have a large private equity funds program as well as venture investing. So roughly collectively, those two external programs, two different areas are about 20% of the total fund.

And then the balance is done through direct investing across programs like real assets, which consists of infrastructure, real asset lending, renewables, energy. And then we also have internal stock picking team, which is called Active Equities, as well as efforts in direct investing and credit. So, a lot of private credit investing is done internally. So that’s just roughly kind of an overview of some of the investing areas. And some of the external pieces. Yeah.

[00:06:15] Alan

And obviously it’s a pension fund. So, I’m presuming it’s a long-term focus. I was looking at your website and annual report.

I think the annualized returns have been kind of 9.5% to 10% over the last 10 years or so. So, presumably the overall portfolio construction is very much with that kind of long-term multi-generational kind of perspective.

[00:0(6:40] Amy

Correct. So, we have a group called Total Fund Management, which works hand in glove with our Office of the CIO, Chief Investment Officer. The Chief Investment Officer position is led by Ed Cass.

So together they’re determining the asset allocation that go to each of those areas that I described just a little bit earlier. So, we get that at the start of each year and deploy the capital from that basis.

[00:07:05] Alan

Good stuff. And as you say, you head up External Portfolio Management. So, I mean, obviously what’s the particular rationale or what’s your mandate in your role?

[00:07:16] Amy

So, External Portfolio Management is a global group. We’re roughly about 40 people based in Toronto, London, Hong Kong, and New York. We oversee a large program.

So, as I mentioned, it’s about C$60 billion in size. It’s very diverse across the different geographies and strategies, very wide ranging from fundamental strategies to discretionary and systematic macro, quantitative investing, insurance link commodities. It’s a very vast portfolio that we’ve been growing. It also consists of a few different verticals like emerging managers, which I’ll touch on a little bit later.

[00:08:04] Alan

Okay, very good. And when you’re sitting down to kind of think about, before you even get into thinking about managers, or is it a case that is kind of top-down, first in terms of kind of a strategy allocation within these strategies and then populating it with managers, or do you think bottom-up as much as top down? Or how do you think about that?

[00:08:26] Amy

So, we look at it both ways. It will more be driven by the bottom-up manager selection perspective, but we do have a portfolio construction and risk effort within the group itself. And so, any new investment will go through that analysis so that we will have an idea of how any new manager will impact correlations, volatility, the kind of strategy allocations.

We have kind of scorecards from a portfolio construction risk lens, but they’re informational, they’re a complement to any kind of bottom-up manager perspective. So, we definitely take that into account, and it’ll be a balance between those two areas of conviction.

But we do have, historically, kind of built the portfolio from a bottom-up perspective. Now that we’re much larger than in those initial years, I think the portfolio construction lens is quite important to us.

[00:09:31] Alan

Okay. And obviously, with it, across the hedge fund space, there’s quite a lot of different types of strategies from, as you mentioned, fundamental systematic quant, you’ve got more credits orientated, more equity orientated, and then, discretionary macro you touched on. Some people think in terms of convergent and divergent strategies or maybe grouping them according to being more growth orientated or more diversifying. Do you have those kind of labels or split strategies from that particular lens?

[00:10:08] Amy

We don’t apply categories or labels on top. We have, to some degree in the past, from the portfolio construction lens had those kinds of buckets, but we have moved away from that a number of years ago. So, we just think about it in the strategy categories. And we find a lot of kind of diversification across each of those areas, which is helpful to us, of course.

[00:10:36] Alan

From my experience, sometimes it can be tricky to categorize a manager. Like it could be quant macro or quant multi-strat. Even having those labels, can that be problematic or tricky at times?

[00:10:52] Amy

Sure. There is some overlap, but not to the point at which it’s been detrimental. And then I’m sure we can come into this a bit more, but the way our team is set up, it’s very flat.

So, we don’t have, you know, stock silos that make it complex. I think, you know, we can also move things as managers evolve sometimes from, let’s say, a pure quantitative approach. If they kind of start to move in more of a multi-strategy effort, we can always move that and we have.

So, it’s, I’d say, alive, but not changing all the time, but not static either. And then the fact that we’ve got kind of defined strategy leads, who work together easily, helps mitigate some of that complication factor that you mentioned.

[00:11:42] Alan

Yeah. And in terms of the investment objective for this sleeve, external portfolio management, and how you’re assessed, are you thinking in terms of absolute return or risk-adjusted return, or is it that coupled with kind of a correlation characteristic, or how do you think about that?

[00:11:59] Amy

So, we run a market neutral program in aggregate, but we do have the flexibility to invest in, let’s say, on the fundamental side, managers in equity or credit who have some degree of beta. We do hedge that back through selling passive index or indices on our side. So that’s how we make those areas market neutral.

So, it gives us flexibility to choose market neutral or kind of higher net, or even 100% long-only, such as like activists or things like that. We categorize managers in the macro or systematic spaces as market neutral. So again, that is reviewed by our portfolio construction risk colleagues who make the hedging recommendation alongside the investment professionals who work together to figure out the right approach for the hedge.

So, in total, it’s an absolute return effort. But we do have a lot of kind of notes of flexibility in terms of the types of manager or manager selection.

[00:13:09] Alan

Okay. And in terms of the volatility or how much risk you take, are you looking to generate a lot of risk with this portfolio? And is its role, within the overall portfolio, as a kind of a volatility dampener or how would you see that?

[00:13:29] Amy

So, stepping back to the fund as a whole, when we were discussing that at the intro, we’re providing, our external portfolio management team is providing a return profile that is a little bit different in that it is absolute return focused, has more consistent volatility than some of the long strategies like infrastructure investing or direct private equity. So, it has those properties of, hopefully, convexity as well as vol adjusted. And it’s coming from kind of different sources, those more beta oriented, market-oriented types of typically equity exposures.

So, it fills many needs, and it’s kind of the only part of the fund that is able to deliver that. So that’s kind of some of the reasons why it’s done and what the objectives are.

[00:14:31] Alan

Yeah. And some of the allocators we’ve spoken to on the series, I guess, and even, you know, people like John Jackson at Mercer have been saying that we’ve had a changed macro environment in the last number of years, you know, after COVID, and then, you know, much more volatility in rates, etc., and this is a more favorable environment for hedge funds.

Is that something that would influence your thoughts? Or has it been the case that this kind of 10% allocation has been fairly structural and standard over time and in the case of CPP Investments?

[00:15:05] Amy

So, we’ve been exactly running our group since 2004. And it’s been successful throughout that period. The comment that you shared, I think we definitely agree with. It’s helpful in higher rates, it’s been helpful in terms of kind of getting, you know, a healthy level of volatility and markets up and seeing more dispersion across security types and asset classes.

So that that’s definitely been a helpful backdrop. But exactly, we’ve grown over the years and we’ve found, you know, growing allocation while maintaining the rough percentage across the fund overall.

[00:15:43] Alan

Okay. And I mean, obviously, it’s a big portfolio, you’re a large investor in the hedge fund space, your group is, as you say, about 60 billion Canadian dollars. I mean, presumably that creates advantages and disadvantages in terms of running the portfolio.

[00:16:01] Amy

Size, for sure. It’s not totally uncommon in the industry as clearly there are a lot of peers or different types of fund managers or fund of funds who run at large scale and complexity across different types of hedge fund investing. So, we’re certainly not alone.

I think the advantages have been, of course, around seeing a lot of breadth, ability to be commercial in terms of terms negotiation, being able to drive some best practices, whether that’s operationally or through fee structures, in which we look for alignment around alpha generation. So, I think there are different aspects of that size. And we’ve actually seen, over time that in fact, that’s kind of been the case from the manager side as well.

The largest managers have been able to drive some of the best performance over a sustained period while growing their firms as well. So, it’s been kind of a bit counterintuitive I suppose to what many people believe in terms of, you know, negative correlation between size and performance.

[00:17:14] Alan

Interesting. And I mean, obviously you’ve been at CPP investments for 12 years and the portfolio and the group has evolved. And we’ve seen, I suppose, something of a change in the industry over that period.

From your perspective, you touched on how your sense is larger managers maybe have leveraged their scale to their benefits. I mean, any other observations on the evolution of the landscape for hedge funds over that period?

[00:17:43] Amy

Sure. I mean, it’s changed. I’ve been in the space for over 20 years and I think we’ve all seen, even some of the large managers of the past either get acquired or merged or just shut as founders retire or, you know, there’s difficulty determining succession plans. So, there is a creative destruction, you know, element to the industry for sure. So, there’s no ability to kind of just coast along just because groups have a lot of assets under management.

So, I think we’re very attuned to that as fund investors. I always think of managers as the opposite of the anti-fragile, you know, Taleb’s anti-fragile. They are kind of fragile type businesses in fact that have, whether it’s performance or as I mentioned, personnel succession, you name it, all kinds of challenges that will come up, including the disruption in new markets. So, I think as of late we’ve seen, of course, the big rise of the platforms in terms of scaling and growth and talent and how the pass-through model is impacting the industry.

But, you know, certain strategies as well have come and gone in terms of kind of commoditization. So, I think just to kind of sum up on your question, there are lots of changes all the time and seemingly, they come in different waves, of course, depending on the market environment and where we’re at.

[00:19:15] Alan

And I mean, obviously, you touched on the rise of the multi-manager pods, which has very much been the acceleration in their asset growth, I guess, over the last five years or so. I mean, I guess for some people it can make sense to get that allocation across lots of strategies. But in your seat, I guess you’re already creating a multi-strat portfolio. So, is there a role for those types of strategies in your portfolio or not?

[00:19:40] Amy

There is a role. We don’t see it as a strategy sleeve in and of itself. We do have some exposure, but I alluded to a little bit earlier in terms of focus on alpha and paying more performance-weighted fees for those exposures and managers. I think the bar is very high for us when it comes to the pods, just because of the pass-through.

I think we like to understand and have transparency into what that looks like or what the boundaries might be or ranges. But in some cases, it’s proven to be very rich, especially in the higher-rate environment where cash is pretty competitive. So, returns have to be really elevated to warrant that, even net of cost or net of performance fees.

So, we do evaluate and we’re very much in dialogue, but I think it’s always going to be a really high bar for us on top of the diversification that you talked about within our program that already exists.

[00:20:49] Alan

I mean, have you seen these firms impacting then the available talent elsewhere? We might talk about this when we talk about emerging managers later, but I mean, obviously there is a war for talent going on. Are you seeing fewer opportunities now or as many as ever?

[00:21:04] Amy

So, the talent war is real as you cite. There’s just a really big appetite for managers of all types, talent PMs, rather than the firms. But in fact, there are increasingly allocations being done by platforms in the form of separate accounts to managers. So that’s a growing trend as well.

So definitely there’s a lot of blurring of lines in terms of platforms as both recruiters of talent with very high elevated needs, an ongoing appetite for talent across the globe and across strategies. I’d say notably that in the past few years their focused on commodities or other types of areas.

And each one, of course, has different areas of focus and flavor. But as their assets grow, we definitely see a lot of innovation on their part in terms of how to get that capital put to work as well as some with lockups and some without some returning capital.

So, it’ll be interesting. But yes, the pass-through has enabled them to really go after highly valued talent with upfront guarantees and so on. So it’s been a really good time to be a strong portfolio manager.

[00:22:36] Alan

Very good. I mean, I understand that within your group there are strategies, or certainly within CPP Investments there are strategies that are run internally from kind of an outside generation perspective. So maybe if you could talk a little bit about that, which ones lend themselves to being done internally? And how do you think about where it makes more sense to source managers externally rather than running internally?

[00:23:03] Amy

Yeah, great question. We’ve always run our investment efforts in parallel. So, we have historically thought of the external allocations as kind of completion exposure.

So, what I mean by that is allocating into strategies that would be able to be done internally, whether those are quantitative strategies that require a lot of specialized infrastructure, as well as talent, speed, et cetera, the modeling. So, we’re not likely to be able to build that internally anytime soon. We do some degree of internal quant investing around risk premia.

In terms of our fundamental efforts, we’ve had our active equities department for a long time as well. And that’s a different approach than what we would invest externally. Externally we would probably look at more event-driven, catalyst-driven types of fundamental managers, with probably shorter duration investment horizon, whereas our internal active equities colleagues are looking with the longer horizon, larger positions. We’re probably a bit more concentration as well.

So, we do internal investing where we have the internal skill set as well as capabilities. Also it’s a way of keeping our overall fund expenses down, just given there’s a high fee burden to our external program, which taken in combination works well from a stakeholder viewpoint.

[00:24:43] Alan

And you touched on the evolution of the industry in terms of commoditization of some strategies. So, is that part of your thinking? If you perceive a strategy to be commoditized, you said, well, we can do that, in house, ourselves. Is that part of it?

[00:24:56] Amy

We’re always evaluating that. I wouldn’t say that’s a de facto, but it’s something that we evaluate, but I wouldn’t say we’ve done that a lot.

[00:25:06] Alan

Okay. And I mean, is there a perspective that you’d always see that? Was it internal and external, or is there a trend growth in internal, would you say?

[00:25:15] Amy

So, we, as a fund, believed in a crawl, walk, run approach. So back when we, in 2004, when the fund went from passive to active, the first kind of crawl areas were external. So that’s why external portfolio management and PE funds teams have grown. They’ve had the longest runway in which to grow and to kind of build the scale. And then the internal programs were built from that point.

So, I believe we’ll always have a combination and then the proportions may evolve over time, but we see the external pieces as very important in terms of partnership. That has always been a big focus, but how can we leverage our partners to bring kind of the best insights, knowledge, information back to the fund? And we think external groups, of course, who are best in class will help facilitate that very well.

So, we were very much in the mold of trying to drive as much as possible in terms of insight and benefit back to the fund through those relationships. So, it’s a dual-purpose return, as well as, you know, an information and knowledge aspect around why we do external investing.

[00:26:36] Alan

Okay. Makes sense. So maybe transitioning into those sorts of things. I mean, obviously there’s a lot of different hedge funds out there. You mentioned, obviously you guys have a global team. So, give us a sense on how the team is set up.

And how do you go from the funnel of, I guess, thousands of hedge fund strategies out there to kind of getting it into a more manageable list of opportunities to evaluate?

[00:27:03] Amy

We’re set up as one team. I think that’s an important point. We’re not separate groups. I know every organization is a little bit different, but we really value the fact that we’re one flat structure. It allows for very seamless conversation. Also, when groups are approaching us, in terms of meeting requests, there isn’t really like a door A, door B type aspect that we need to contend with. It’s all just one group. And there’s a lot of ease of communication across that. So that’s quite straightforward for us and for managers.

As I mentioned, maybe at the beginning, we do different types of investing within external portfolio management. It’s still also facilitated by this flat approach. So, we leverage the team’s expertise across strategies. So, we will have portfolio managers who lead the strategy coverage.

So, one person will do credit, another is doing equity, and others doing the global macro, etc. And then where our emerging managers program comes in is, we have a few colleagues focused on that, but they are working in concert with the strategy lead. So, it’s kind of a matrix approach in terms of the due diligence.

So, we have a good amount of resources and it’s global. We really value being on the ground in the different key markets for hedge funds. And that helps us be really in the flow and on top of what’s happening within those areas.

So that’s a really high-level summary in addition to the number of investment professionals in our regions.

[00:28:50] Alan

I mean, in general, I mean, obviously you have a portfolio now, so you’re not kind of building it from scratch. So, I guess the process has evolved. But I mean, at a high level, the characteristics of the types of managers, you did mention how larger managers maybe have got the benefit of their scale over time. Have you biased in for more established managers or what would you say in terms of key the characteristics you’re looking for when you’re assessing managers?

[00:29:21] Amy

We have the benefit of being really deep. We are, I’d say the mile deep, inch wide type of approach as opposed to more of a generalist allocator. So, we really are very deep specialists in the hedge fund field. And that’s supported by the large team and the global breadth.

So, we look at managers of all kinds, and not just through the emerging manager, even on our core funds, portfolio exposures. Sometimes these are groups that people may not be as familiar with, they’re not necessarily always going to be the household brand name from a hedge fund perspective. So, we have a balance.

Many managers who began through our emerging manager program and who have done well, we can what we call graduate them. It’s one pool of capital. So, they stay in the pool of capital, which is just the portfolio, but for all intents and purposes, they’re graduated. Then those become kind of core established funds which, to the degree they continue to perform and deliver, we just stay invested.

That’s in contrast to maybe others who are operating in the emerging manager space who have more of a private equity fund structure need to kind of keep rolling out. So yeah, so in summary, we look at managers of all sizes, geography, styles, and we don’t have an inclination bias in any one direction.

[00:30:56] Alan

Okay, well, I mean, you touched on your emerging manager’s program, which is obviously an interesting feature of the portfolio. Not everybody is willing to take on that early-stage manager risk.

So maybe if you could talk a little bit about that. What was the rationale for putting that in place and kind of how you structured that and think about making allocations to emerging managers?

[00:31:20] Amy

A few years before we formally established the program in 2016, we had been doing some of what you would call seeding. We didn’t necessarily have a lot of reps around that but had done some of that on the quant side, basically investing in groups with limited track, but strong pedigrees and a background in investing.

So maybe I should take a step back and just define how we think about emerging managers. This is purely kind of looking for still best in class investors who are newly launched.

We also think about this as capital acceleration, which could be a manager in year two, three, four, a few years after the initial launch, who’s looking to take in a large investor. With the day zero type investment, that would be more of a seed where the anchor investor will take revenue share in order to mitigate some of those early-stage risks that we’re taking at day zero. Whereas with capital acceleration, we are looking more for the founder’s like terms. We’re not seeking the rev share at that point just because the business has been de-risked.

We don’t do any equity stakes. And again, we’re trying to look for best in class investors. We think of this as investing early in order to secure future capacity rights and early-stage performance. So, it’s very much a compliment to the core fund managers in which we invest. And I talked about this kind of graduation notion. So, it’s a perpetual type investment if all is kind of going well and according to our expectations.

[00:33:12] Alan

Very good. I mean, obviously you’re talking about best-in-class investors and maybe people who don’t have a track record but have the right characteristics. Is there a typical profile? Are these people who maybe worked at a multi-strat and want to spin out or worked at a bank or worked at another fund? What would you say the typical profile is if there is one?

[00:33:34] Amy

We have invested in traders or investors who’ve come out of banks. We’ve invested in people who have a very high profile, who’ve come out of large hedge funds themselves. We’ve also invested sometimes in number two type PMs who feel ready to launch and have their own groups.

I’d say our framework is around people, process, performance. That’s a rough way of how we do the analysis. That’s pedigree, that’s what’s the repeatability of the strategy that they’re employing?

Performance information can always be a little bit of a pastiche. We may have a track that’s vetted and sometimes we have very little or nothing. It’s always going to be a little bit different in terms of the information that we’ll have to make those decision. Every scenario is a little bit different, but it’s a flavor of lots of different types of backgrounds that we’ll take a look at.

[00:34:39] Alan

Obviously, you touched on some of the challenging parts of this, obviously getting track records, et cetera. How often a strategy can look good in small assets, et cetera, in terms of assessing the scalability of a strategy, is that challenging?

Obviously, it’s something I guess you’ve done for many years. You have a good sense around that, is that it?

[00:35:13] Amy

Strategy scalability, I think, is the most art form of all within our industry. Managers have a lot of difficulty, also, knowing for sure what the capacity limits are. I think those who are prudent will have, of course, milestones that they may achieve and then say, hey, we’re self-closed for a period of time or we’re hard closed.

I feel like we’ve observed, over many years, if all is going well there will be growth. We talked about it a bit earlier. I think the growth of some managers has defied expectation in terms of the ability to keep generating returns.

It is very much an estimate, and we try to work with managers, of course, around that given we tend to be large investors within a given fund. We’d certainly work with that in terms of what does capacity look like now and in the future. So, it’s kind of a moving estimate.

[00:36:18] Alan

Sure. What about, obviously, a scenario of a manager being within a particular infrastructure, it could be a discretionary macro, maybe within a fund or a bank and gets a certain kind of information flow, et cetera, and then, obviously, starts off by themselves. I mean, again, how do you assess that type of scenario where the kind of operating environment might be quite different?

[00:36:43] Amy

It’s a great question. We would debate something like that pretty heavily. So, you know, the questions that are, call it, like the investment discussion is typically the most robust within our group itself because you have all the strategy leads and our mid-level junior folks who are covering other strategies, we’re all the experts on those types of matters.

So, we’ll heavily debate those kinds of questions and ask ourselves whether what goes away in terms of the new approach, what is critical, what is less, can they repeat it? So, we will heavily debate and challenge ourselves on those very questions. But that’s exactly what we would be discussing.

[00:37:30] Alan

I mean, obviously, the skill of manager selection, as we’re talking, the kinds of things you have to assess is quite different to the kind of the quant analysis of security selection, et cetera. I mean, what do you think it is that makes good allocators good at what they do? It’s just been around a long time, and I’ve seen all of these things, or is there anything else?

[00:37:50] Amy

We really value, on our team, the diversity of strategy coverages. I think that’s really helpful. So, you know, I know in your experience, Alan, you would follow me, but like a quant allocator, somebody who focuses just on quant managers will be very different than the fundamental equity or credit investor from an allocation viewpoint.

So, I think it’s the person who asks the hard numbers questions alongside the macro person, alongside the equity long short person, which makes for a really robust discussion and looking at the vetting from the multiple viewpoints. I think it’s certainly the value of all those different skill sets coming together under the one team that I think, for us, has been extremely helpful. But allocator in general, I think it is a lot about longevity and having seen a lot of any kind of pattern recognition.

Sometimes, you know, things are kind of popping up like your earlier question about talent coming out of prop desks versus somebody coming out of a fund. Obviously, those will be very different levels of consideration or even observed success of those types of launches. So, exactly, it’s judgment acquired through a long period of time, which can be very helpful and important seeing different markets.

[00:39:24] Alan

Yeah. I mean, obviously, we’ve talked a little bit about the multi-strat, multi-manager pods and you’re liaising with a lot of emerging managers. So, presumably, you know, that development obviously has impacted the choice between setting up your own firm as an emerging manager or going to a larger shop. I mean, what are you sensing, speaking to people, for those who still go down the independent route, you know, presumably it’s a tougher route to go down, but what’s the key driving force behind that, would you say?

[00:40:01] Amy

So, it’s a good observation. The bar to launching a fund has just gone higher and higher in terms of just the regulatory needs and the setup costs and building a team, you know, leading a firm. So, for most people, I think going to a platform will be probably the better choice in terms of alleviating the need, in terms of the infrastructure and environment in which they’re trading, as well as (we touched on this too) the incentive sweetener that platforms are offering to do that. So, I think that makes sense. There perhaps doesn’t need to be, you know, 5,000 hedge funds.

When you still look at it, it is still kind of a low barrier to entry type of business. So, perhaps that does make sense for some talent to be going in that direction.

What we have seen is, there is still a very large appetite on the part of portfolio managers, some who have the ambition to set up their own firms, having those offers from platforms, full well-knowing the big lift that it will entail and then, also, the limited visibility in terms of the ability to succeed standalone.

It’s an interesting thing to see. We often do ask kind of what’s the driving force or motivation or why should this be standalone versus within a platform, particularly for some of the more like adjacent type strategies like a commodity manager?

[00:41:43] Alan

Okay, interesting. For managers who might be listening here and they’re thinking we’re emerging, should we be knocking on CPP Investment’s door? Who should be reaching out to you and what types of early stage managers would be a good fit for you?

[00:41:59] Amy

Great question. So, we have our lead for emerging managers, Yan Kvitko. He looks to look at basically any type of group, whether that’s, again, something very early, I think for him earlier, the better, we endeavor to give really direct quick feedback if it’s not the right fit or we prefer to monitor.

And then similarly, if it’s of interest, we start to progress in terms of triaging around the strategy and the people and the kind of the vision. So, I would certainly welcome inbounds to Yan, or the strategy leads, or myself. We’re always looking for new opportunities on the emerging manager side. And we’re very accessible in terms of kind of the conference attendance and coverage through Capinto and so on.

[00:42:57] Alan

Okay. So obviously, we spent a good bit of time talking about the emerging managers. As you say, some of them then grow to be more established managers, I guess, within the portfolio. But presumably, then you also allocate to other large managers.

For the portfolio as a whole, how active are you in rotating it? Do you tend to be long-term holders or small stop losses? Or how do you think about the portfolio construction and the turnover within the portfolio?

[00:43:29] Amy

We’re definitely longer hold investors. So, one way I like to describe it is we’re near-term monitoring. We’re really on top of what’s happening with markets or in the marketplace or with the managers themselves, any team changes, things like that.

So, we’re very much on top of that day-to-day. We are, however, more slower twitch in terms of making our decisions. I described a pretty robust and rigorous due diligence process.

So, we’re investing for the long-term. We’re also running up a program that’s based on performance. So, it’s not just kind of invest forever and that’s it. We’re always evaluating. So, we do, for example, a quarterly portfolio review of the entire portfolio. So, that takes a lot of our time, but we factor all of that information back into making some of these decisions.

We also don’t typically, if something, let’s say, has shifted to the negative or there’s some hair, we try to work through that as opposed to kind of being knee-jerk in terms of the response. It’s a whole range. I mean, it just depends on what the situation is or the context.

We have, on occasion been very quick, but on balance we tend to give up more time rather than less for the managers to work out either performance or team issues or strategy, especially some strategies kind of find themselves out of favor. So, we try to just take that into consideration as well. But we have managers in the program who’ve been in there for over a decade.

So, we definitely have all blend. But at minimum, I think it’s roughly like a two to three year kind of initial horizon.

[00:45:26] Alan

Sure. I mean, obviously, you find seed capital to emerging managers, new accelerator deals. So, that sounds like you don’t have particular constraints on being a big part of a manager’s business or do you for other allocations?

I mean, sometimes you hear from allocators that we can’t allocate to that fund because we’d be more than 10% of the fund, et cetera. Is that a constraint for you guys?

[00:45:49] Amy

I think luckily for us, we have limited constraints. So, we’ve always had a really pragmatic approach to fund investing. So, we don’t need the minimum three years of track. Like I talked about, we could do the day zero. So, we do that for the early stage. And then in terms of kind of percentage of a fund, because we’re large we often find ourselves, even with established managers, kind of really in the top set of LPs by size.

So, it’s not a hindrance. We do talk about that or monitor it. We also have maybe some different transparency needs that may come with that. But as long as the manager is kind of making the concerted effort around ongoing fundraising, that’s not a hindrance to us. But it is a valid point because we’re really kind of tied to the manager in that sense from a business viewpoint.

[00:46:50] Alan

And I mean, in terms of a typical ticket size, can you say what that is or I guess what’s the kind of typical range that it could be?

[00:46:59] Amy

Sure. It’s been evolving over the years, but I’d say like on the lower end for what we call our incubation type managers, maybe roughly like a US$75 million investment. And that can range to the higher end on the established side of US$300 million and upwards. So, we’re always looking to secure future capacity rights, whatever the type of investment that we’re making. But it gives you kind of a range of where we initially start at and then we seek to grow over time.

[00:47:33] Alan

And you touched on, you may have transparency requirements. My sense is that the industry has evolved to providing more of that. Would you say that across all firms or is that still a challenge? What kind of transparency? Is it kind of allocations or positions at a high level or what level of granularity would you say is reasonable?

[00:47:54] Amy

Sure. I think it has definitely evolved a lot for, the better, over time. So, the post-Madoff period, especially, I think catalyzed a lot more transparency from fund managers. So, it’s kind of like pre-that period. Any of that’s not really acceptable.

In terms of what we look for? So again, on the pragmatic point, we do a range of fund structures. Sometimes we’re in co-mingled funds, sometimes we’re doing a fund of one or SMA.

SMA, we do that for more of the maybe higher vol strategies, like commodity or quant, where we can also customize our leverage. But through the SMA, we’ll get typically greater transparency because that’s our account than through perhaps co-mingled. I would say more of 20% to 25% of our portfolio is in that SMA category.

So, generally, it depends on the strategy, but we want to kind of have a sense of what are the key P&L drivers in a given month or what are the top positions. I think on the equity side, managers tend to be more prudent, disclosing shorts, which makes sense given meme stock type situations and the kind of nature of shorts themselves.

So, we’re looking for… Basically the purpose of transparency for us is to just get our arms around what are the performance drivers as well as kind of visibility into the fund. I think it’s notable that I guess some of the platforms are more difficult to get your arms around. So, I think that’s a bit ongoing. What is the right level of transparency that investors need with groups like that?

[00:49:50] Alan

Okay, interesting. Maybe to bring it down into something a bit more tangible, if we were to talk about one strategy, say discretionary macro. I mean, from your observation of assessing new managers and then the managers you have worked with over the years have been very successful. I mean, what’s your perspective on the ones that have done it very well? Are there any common characteristics that might inform future allocations?

[00:50:13] Amy

When I think of the macro landscape, I sometimes think of like a George Soros, you know, this kind of like risk taker who has the real stomach for wins and also drawdowns at time that may come with that type of approach. But there are different flavors, of course, of discretionary macro investing. But I think at heart, it’s about, you know, smart, astute risk taking, a kind of proven risk management process, like the ability to kind of weather through those drawdown periods, somebody who also is very on top of Fed or central bank activity, plugged into those kind of networks, global perspective.

Typically, those are some of the characteristics. Clearly, there’s something special on top of that, which will further differentiate. But I think those are a bit of some of the characteristics that we see from a macro viewpoint.

[00:51:16] Alan

Sure. And I mean, you touch on drawdown management. And in some strategies people like to talk about, well, we’ll cut risk at a 10% drawdown or 15%, whatever it is, or even at 5%.

And obviously, there are pros and cons to that, obviously, in terms of getting back to high watermark. And I mean, there might be different considerations, depending on whether it’s a discretionary or systematic strategy. Some of these things that seem to be designed to provide comfort to institutional allocators, do you think they’re a good idea or not? Or does that give you more comfort when you see that kind of a drawdown control mechanism?

[00:51:56] Amy

It definitely has to have a context. But I think it makes sense. We like to see some type of approach or framework that fund managers have. And again, it can be evolving over time.

We don’t want to see that quarter to quarter, but sometimes managers will go through an extended drawdown period, which should kick off a discussion of whether their risk framework still holds or what is the reason for that protracted drawdown and what could evolve from there.

So yes, I mean, whether it’s what you described or something else, I think it makes sense. We tend to see that more with systematic or macro commodities. The risk management for fundamental tends to be more at the security selection level rather than through an independent risk framework. But I think generally, it’s a good approach to take. It may not be applicable across the board for every type of manager.

[00:52:58] Alan

And obviously, you touched on how bottom-up considerations are as important or maybe more important than top-down. But I mean, say if you’re looking at two different opportunities, one might be discretionary macro, the other might be credit, you’ve got a space, you’ve free capital your portfolio, they’re very different in terms of kind of the underlying exposures you’re going to get. Obviously, you mentioned that you adjust for the beta and you can hedge around that.

But for things that, yeah, obviously, might be easier to compare to discretionary macro managers, they’re doing basically the same similar thing. Is it hard to compare when you’re going across strategy? And how do you think about that?

[00:53:35] Amy

We think about it in terms of this relative value set up as you talked about. So, we’ll look at what we have in terms of the return profiles and correlation. It’s a little bit back to what we were speaking about earlier in terms of the portfolio construction risk assessment alongside with the bottom-up view.

So that all the shorthand that we would use for that relative value assessment would be like additivity. Is it an area of the program that we don’t have exposure to or that we want more to? Or do we have more, and we don’t need as much another one? What is the right level of diversification that we need within that given area?

So, we think about that relative value decision like at the aggregate level. And I think it’s a blend of the quantitative analysis with a qualitative lens. Often, we may not need to choose in such a hard binary kind of way between two choices. But we do always have that kind of question when we’re looking at new investments.

The good thing is we have a very deliberate due diligence phased approach. So maybe I could just quickly touch on that or elaborate from what I was sharing before. It starts with what we call a screening memo, which is kind of the short summary of what the fund does, the people, a bit of track record information. And then if that is supported by the rest of the team, it goes to what we call like a due diligence phase. The team will go on site to see the manager. There will be, let’s say, operational risk assessment that’s done by a separate set of people from our group. And then the team kind of comes back. We discuss any open-ended questions. And then the third stage is what we call the kind of final discussion. The full memo is, at that point, written up with references and a lot more detail around the process and the risk management and other features of the fund. So, we don’t often find ourselves making those decisions in isolation where we have a long time to deliberate and assess and some things just fall out by their nature.

[00:56:00] Alan

Yeah. You mentioned commodities a couple of times. I’m just curious, for something like commodities, are you trying to neutralize the commodity beta as well there? Obviously, I guess you’ve got a whole set of real assets elsewhere in the portfolio. Would you actively kind of negate the commodity beta or would you just accept that?

[00:56:22] Amy

Again, commodities, very high vol, can be a high vol space. So, we look for a bit more institutional groups on that side who do have more risk management kind of frameworks and that they’re tested. So, we’re not looking for the total discretionary approach to commodity trading.

And then increasingly, we’ve looked at different areas ranging from natural gas to, now like carbon credits. And our team is also taking a look at kind of the different metals. So, it varies.

We don’t invest in commodity fund managers as a way of offsetting rest of fund. We just think of it as kind of an interesting uncorrelated, or can be uncorrelated, part of our hedge fund allocation portfolio. As well, it can provide back those insights to our teams who are investing more in the companies and the platform opportunities within, let’s say, wind or renewables or traditional energy as well.

[00:57:35] Alan

Good stuff. Just conscious of time. I mean, if you were to give some advice to any managers who are like, not just emerging, but accounting to emerging, I mean, people who are reaching out and trying to establish a relationship, but not just CPP Investments, but allocators in general, what do you think are the key things that are important for managers to do in terms of that ongoing process of engagement?

[00:57:58] Amy

So, we, as far as CPP Investments goes in our program, we really value the outreach, and we endeavor to do the same. So, our approach is kind of to be in a position to be able to give quick feedback, whether that’s by email or spoken, whatever it might be. Obviously, we have a high volume of inquiry given our size, but we really want to be on top of opportunities across all ranges as we discussed.

So, I think it’s just kind of knowing that we’re going to be pretty specific and targeted, and that it is a long discussion and sales process in terms of whether for us or any allocator. So yes, I think maybe a more broad guidance, allocators have more to do than hours in the day. So, it’s always a little bit of that balance of trying to juggle the replies with meetings and so on.

I think it’s just a little bit of persistence on the part of the fund managers to allocators, and that the fund managers should apply kind of a broad approach to their fundraising efforts, depending on their stage of evolution. So sometimes it’ll be important for that founder to have enough working capital to make it if that institutional money is not coming in right away, or unless they’ve taken some type of seed agreement in which they have a few years of runway. But I think it’s important to have the business capitalized because it is a very long process to raise additional capital and to use those sources creatively, you know, friends, family, etc.

So, some may want to give up those economics early stage for that security or a few years of security, and some will strap. And I think it’s just different approaches, but not necessarily dictating success. So yeah, I think that would be kind of in some summary for the advice, just you have to go in knowing that it will take a long time and that it’s competitive, and it’s going to be a bit unpredictable in terms of where the capital raising might come from.

[01:00:20] Alan

Very good. And we always wrap up by just getting some perspective or any advice you might have for people who are coming into the industry, you know, looking to build a career in hedge fund allocation, any things that have been helpful for you in your career that you would like to pass on?

[01:00:34] Amy

It’s hedge fund investing and hedge funds in general still is untraditional, in a sense. University graduates don’t just have a program, and you get fed into it. So, there are different ways to come into the industry.

But I think if you’re really passionate about public markets, like whatever role it is, just get one’s foot in the door and kind of go from there. It can be through, you know, bank, whether that’s any trading that’s going on, or sell side type research, it could also be through if you’ve got real expertise in technical or computational type investing, that’s another area, you know, from a data viewpoint or getting into investing itself. But I think, basically, it’s really getting smart on the industry and knowing how one might fit in and kind of leveraging strengths.

So I think it’s about leveraging your podcast, Alan, or others that might be similar and just getting smart on kind of a facet of the investing landscape that’s not readily obvious from kind of a career/office type of viewpoint. You have to kind of network, get to know some people and then just kind of crack in and keep growing as you progress at each stage in terms of whether that’s on the job experience or the reading or just taking advantage of information that’s readily available.

[01:02:05] Alan

Very good. Well, this has been great. Thanks very much. It’s great insight into the operation of your portfolio and CPP Investments. So, we very much appreciate it. Make sure to follow Amy’s work and CPP Investments to see how they evolve over time.

And we’ll be back soon on Top Traders Unplugged with more content. So please stay tuned. And for all of us here, thanks very much.

[01:02:30] Ending

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