- How does an unconventional “fund of funds,” committed to radical diversification via orthogonal return streams, choose investment managers that deliver uncommon returns? By prioritizing uncommon expertise.
- Dylan Grice, co-founder of Calderwood Capital, says his firm looks for managers with access to unusual return streams, inefficient markets or small niches that don’t appeal to bigger funds.
- Dylan joins Top Traders co-host Alan Dunne for a discussion about niche investing, the attributes of good managers and his advice for aspiring investment gurus.
“Sad as that sounds,” he says with a chuckle, that’s exactly what he did — at the London School of Economics, no less. As graduation neared, he saw that many of his classmates were applying to investment banks.
“I didn’t know what an investment bank was,” he says. “I thought a bank was just where you went to cash a check or something like that.”
But when he discovered that investment banks employed economists, he realized he could be paid well for doing economic research — [a perk] he wouldn’t enjoy if he pursued the Ph.D. he originally intended.
“It was a bit of an upgrade on my plans,” Dylan says.
As a global strategist in the London office of the French multinational financial services group Société Générale, he became interested in the psychology of both trading and risk-taking in general. There, at the prop desk, he learned that “it seems to do something to you when you’ve got money backing a view,” he says. “It seems to affect that view. It affects your thinking. … Risk-taking can really play with your rationality.”
However, he knew that “to be a successful investor, you have to stay rational,” he adds. “How do you stay rational when you’ve got capital on the line — when you’re actually allocating capital, when you’re making trades… and the world is going crazy?”
I’m confident he figured it out. After a stint as the head of liquid investments for a family office based in Zurich, he and former colleague Robert Crenian struck out on their own, founding boutique fund Calderwood Capital in 2019.
Dylan joined an Allocators episode of Top Traders Unplugged with co-host Alan Dunne to talk about niche investment strategies, the qualities he seeks in investment managers and how aspiring managers can build the confidence they need to compete.
Calderwood Capital offers both investment advisory and research services, with expertise in understanding traditional financial markets like equities, credit, government bonds and commodities — as well as unconventional markets such as cryptocurrencies, catastrophe risk, synthetic credit and private credit.
The firm specializes in orthogonal (statistically independent or uncorrelated), niche and capacity-constrained hedge fund strategies: investment types that are anything but vanilla.
That’s by design. When Dylan worked for the family office, hedge funds pitched to them all the time. He realized that “by and large, they all did the same thing … much of what we saw in the hedge fund space was equity in disguise.”
The strategies hedge funds usually deploy — long-short, event-driven, risk arbitrage, [most] structured credit — were all equity.
“Too much of the hedge fund space was actually just repackaging equity risk with a few bells and whistles and some extra fees.That was never very interesting to me,” he says.
Narrative versus niche
Dylan also knew of some really interesting firms and investors “doing stuff that seemed to be quite funky superficially, but once you dug into it, it wasn’t so funky.”
Life settlements are a good example. At first, one might wonder how they work, how they’re priced and how they’re valued. But after speaking to a few managers and traders, it becomes clear that the market has its own culture, its own narrative and its own folklore, he adds.
Catastrophe risk and cryptocurrencies have similar cultures of their own.
“The opportunity, as we saw it, was that … we could really build a very, very robust portfolio; a solid, sound, low-volatility, low-correlation, high-returning portfolio if we harnessed the full richness and diversity of the hedge fund space. … Nobody needs another portfolio dressed up as a hedge fund that’s really just an equity book in disguise.”
So what does he look for in a manager?
“I am skeptical that [the attributes are] quantifiable,” he replies. But he does note that, in spite of his macro background, Calderwood doesn’t invest in macro.
“It’s too difficult to determine the extent to which people actually know anything,” he explains. “[It could be that] they’re just guessing, or just on a hot run.”
With only a few exceptions, he thinks macro is “very much about … people spinning a narrative, and buying a narrative, in a way that it is very difficult to invest in.”
So his preference is to invest in managers themselves, those who have found a niche — one “they absolutely are on top of, and they know how it works,” he says. “They know how to do it, and they’ve been doing it for bloody donkeys [i.e., years], and their team has been doing it for donkeys, and that’s all they do.”
Access is everything
Ideally, those types of managers “harness something from the market,” whether it’s a risk premium “that just has to exist” or a niche “too small for the big guys to be interested in,” says Dylan.
Managers like these bring something unique to the table.
“People spend so much time fussing about alpha and finding the best in the peer group,” he adds. “Of course, you want to find the best in the peer group. You don’t knowingly want to be associated with dummies. You don’t normally want to allocate to idiots. But to reliably be the best in the group is just very hard.”
That’s why he believes it’s easier to pay for access, not necessarily the highest IQ in the room.
For example, say his firm hires a manager who knows how to source litigation claims in the north of England. That manager might not be the best litigation sourcer in the nation. But they work in a highly inefficient market, and Dylan knows that most people don’t know the ecosystem and how to source those deals. So he will gladly pay that manager handsome fees when they provide a high return.
Bad dinner companions make excellent managers
Off-the-beaten-path investments are the kind Calderwood prefers, and they look for an out-of-the-box mindset in managers, too.
“Of course, the manager has to have high integrity,” Dylan notes. “Ideally, they’re quite smart. But you’re not really paying [a premium] because the manager is best in class. … The type of manager we like is probably not the type of manager you’d necessarily want to have dinner with.”
Instead, Dylan and his team lean towards the kind of manager who is “so obsessed with his or her space that they don’t really have much else to talk about.”
That often means they’re not good at selling themselves — “and they’re, frankly, a little bit geeky about their area,” although for the record, many of Calderwood’s managers are “very fun, and very good over dinner.”
Read all about it
Alan asks Dylan if he can share advice for those who want to develop a career in investments, perhaps as a strategist, researcher or hedge fund allocator.
“I think it was Charlie Munger [who] said he didn’t know any successful person who didn’t read a lot,” Dylan replies. “I think that’s true: read a lot — and read actively. Don’t just read a book, and then read another one, and then read another one. Take notes on it. Absorb it, digest it, find people to talk to about it.”
That being said, “you won't actually know how to do something until you do it. So go and do it,” he advises.
But you have to really love what you’re doing, Dylan adds.
“It’s got to be what animates you. And you have to be very honest with yourself about what you love to do. Because you’re competing … The people who really love what they’re doing will put the extra hours in. They will be the ones who are thinking about it when they should be watching a film with their kids; they’re the ones waking up in the middle of night jotting down investment ideas. That’s who you're competing with. So make sure you love it. And if you don’t — don’t do it. Find something you do love.”
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.