Oct 28, 2024 · 1h 10m · capital-allocators
Ricky Sandler - Evolution of Long-Short Equity Investing (EP.414)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Ricky Sandler, founder and Chief Investment Officer of Eminence Capital, exploring his thirty-year career and the strategic evolution of fundamental long/short equity investing. Sandler explains how Eminence adapted its research frameworks, short-selling risk management, quantitative data capabilities, product offerings, and collaborative organizational culture to thrive amidst changing market dynamics.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 18% of the talking time here. How this is scored →
Ted as informed peer 3.0 Guest teaching 2.8 Guest disagreement 0.1 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 29:40 Sandler rejects backward-looking quant categorization
Sandler illustrates how systematic models blindly bucketed stocks like Zillow as unprofitable due to trailing data despite fundamental business shifts.
Hardest push from Ted ▶ 52:52 Ted queries top-down decision authority versus collaborationTed presses Sandler on how big strategic pivots were made when Sandler was originally structured as the firm's sole final decision-maker.
Biggest teaching moment ▶ 43:20 Sandler explains modern short position sizing and floating capsSandler educates the audience on why trimming into short squeezes locks in negative non-fundamental alpha and how pre-morteming position sizes protects against meme squeezes.
Ted holds their own ▶ 48:20 Sandler explains allocator portfolio barbellsTed prompts Sandler on shifting allocator demand, leading to a deep dive into why institutional allocators barbell between long-only and uncorrelated alpha.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Guest Profile and Overview: Ricky Sandler of Eminence | 3 | 0 | 0 | 0 | Ted introduces Ricky Sandler, outlining his background and strategy at Eminence Capital, followed by a humorous bet segment with colleague Hank Sturmack before bringing Sandler on. | |
| Ricky Sandler's Upbringing and Wisconsin College Years | 2 | 2 | 0 | 0 | Ted asks conversational background questions regarding Sandler's upbringing around finance and his college days at Wisconsin. | |
| Mentorship with Morris Mark and Founding Fusion Partners | 3 | 2 | 0 | 0 | Ted explores Sandler's early mentorship under Morris Mark and how that rapidly led to the confidence to start Fusion Partners with Wayne Cooperman. | |
| The Fusion Strategy and 1998 Market Lessons | 4 | 3 | 0 | 0 | Sandler explains the flawed shorting approach in 1998 during the Russian debt crisis and the difficulties of co-equal hedge fund partnerships. | |
| Founding Eminence Capital: The Jones Model and Culture | 3 | 3 | 0 | 0 | Sandler details founding Eminence on the classic Jones model while intentionally avoiding toxic hedge fund culture and emotional pressure on analysts. | |
| Post-GFC Market Shifts and Analyzing Investor Perception | 4 | 4 | 1 | 0 | Sandler explains how post-GFC dynamics required shifting from just relying on valuation reversion to analyzing buy-side narrative and investor perception. | |
| Integrating Quant Research and Alternative Data Science | 3 | 5 | 0 | 0 | Ted asks how quant and data science were integrated, prompting Sandler to detail how they hired fundamentally trained experts and used quant tools for macro valuation studies and cohort KPIs. | |
| Exploiting Systematic Blind Spots in Quantitative Factor Models | 3 | 5 | 1 | 0 | Sandler recounts how quant models mistakenly categorized Zillow as unprofitable due to backward-looking metrics, creating a distinct fundamental buying opportunity. | |
| Creating a Dedicated Short Team and Realigning Incentives | 4 | 4 | 0 | 0 | Sandler explains realizing in 2013 that analysts neglected shorts due to asymmetry in sizing, prompting him to create a dedicated short team and double short-alpha compensation. | |
| Sponsor Message: Ridgeline Front-to-Back Investment Technology | 2 | 0 | 0 | 0 | Includes a sponsor ad read for Ridgeline followed by Ted returning to Sandler to ask about actionable process adaptations to changing market participants. | |
| Modernizing Short Execution and Position-Sizing Frameworks | 4 | 4 | 0 | 0 | Sandler lays out modern short risk management, explaining the necessity of pre-morteming position sizes and letting positions float to survive meme squeezes without locking in negative alpha. | |
| Product Evolution: Long Funds and 150/50 Strategy | 4 | 4 | 0 | 0 | Sandler walks through lessons in allocator psychology post-GFC and why launching long-only and 150/50 products stabilized the business when hedge fund demand wavered. | |
| Mechanical Execution of the 150/50 Long Extension Strategy | 3 | 3 | 0 | 0 | Sandler explains the mechanical exposure rebalancing of the 150/50 strategy using the exact same underlying names as the hedge fund. | |
| Talent Retention, Compensation Philosophy, and Collaborative Structure | 3 | 3 | 0 | 0 | Ted asks about talent retention and avoiding spinouts; Sandler discusses generous compensation, long-term alignment, and collaborative conviction. | |
| Sustaining Competitive Drive and Multi-Decade Firm Longevity | 3 | 3 | 0 | 0 | Sandler articulates what drives multi-decade longevity in money management, citing competitive desire to adapt and love for the craft rather than money. | |
| Parenting Philosophy: Instilling Humility, Gratitude, and Independence | 2 | 2 | 0 | 0 | Sandler outlines his parenting approach: avoiding living through children, allowing independent mistakes, and ensuring gratitude for privilege. | |
| Personal Pursuits: Racket Sports, Longevity Habits, and Resilience | 2 | 2 | 0 | 0 | Sandler shares personal wellness habits around racket sports, prioritizing sleep over early breakfasts, morning sunlight, and overcoming childhood obesity. | |
| Pet Peeves, Influential Mentors, and Essential Life Lessons | 2 | 2 | 0 | 0 | In concluding rapid-fire questions, Sandler reflects on his pet peeves, influential mentors, and the vital life lesson of understanding other people's perspectives. |
Statements from this episode (29)
Sandler: 1998 market dislocation prompted rigorous short selling approach at Eminence
“That feeling of not being able to be offensive when things are dislocated was something that caused me when I transitioned from fusion into eminence was a big part of what set my foundation for much more of a proactive and rigorous short selling approach.”
Sandler: Co-equal hedge fund partnerships fail due to strong investor egos
“Co-equal partnerships in this business are really hard. I think that this business attracts very strong personalities, people that have strong opinions, willing to debate them, but probably not willing to compromise on them a lot, and so we battled a bunch on …”
Sandler: Business-and-Investor Hedge Fund Partnerships Fail Over Perceived Value
“Either two stock pickers like us, who maybe didn't always see eye to eye on investments, or the kind that maybe lasted a little bit longer, but ultimately broke up also, which was the business guy and the stock guy, or gal in this case. And those also didn't e…”
Sandler: Eminence was founded on a 120% long and 80% short model
“As an investor, I wanted to build what I thought was a classic Jones model hedge fund approach. True long short, more moderate long short ratio, spending significant amounts of time on alpha generating single stock shorts. That model of a 120 long by 80 short …”
Sandler: Emotional stress makes investors incapable of making unemotional decisions
“Ultimately, the thing we want to try to do is remove emotion from investing, and so if you put somebody under emotional stress for making a bad stock pick, or for the way a stock is behaving, What's the likelihood that that person's going to be able to make an…”
Sandler: Eminence gained early edge by screening accounting pressures
“And this was still the early days before people were ripping through 10 queues, before accounting services were out there, before CFRA, and I think that we identified an ability to screen for pressures in accounting that provided an early window into doing som…”
Sandler: Post-GFC stocks disconnect from fundamental value much longer
“What I noticed after the GFC was that stocks would trade at bigger disconnects to fundamental value for much longer than they used to, and we couldn't just count on the market to Correct things.”
Sandler: Stock multiples expand due to shifting marginal buyers, not personal valuations
“The stock isn't going to go from 12 times earnings to 18 times earnings because you think it's worth 18 times earnings. It's going to go from 12 to 18 because the next investor believes something different.”
Sandler: Multi-Year Reviews Are Necessary to Accurately Diagnose Investment Mistakes
“And at the end of the year, everybody goes back and looks at their winners and losers and tries to learn from them. And what I started to do is look at the last three years. Because oftentimes, in the moment, you bought a stock, it disappointed, it went down, …”
Sandler: In late 2022, growth stocks traded below their historic 50-year premium
“So in late, twenty-twenty-two, as an example, we did a fifty-year analysis on the premium for growth. When analysts came to me in the middle of twenty-twenty-two and said, hey, this stock is cheap, it's back at pre-COVID multiples. I instinctively knew pre-COV…”
Sandler: Tracking real-time alternative data is table stakes against pod shops
“We are also tracking the real-time KPIs, because that's what everybody's using. So I would call that today table stakes, to know what the pods and the short-term investors are seeing in the data, and so sometimes it's helpful to say, oh, they're going to miss …”
Sandler: Quantitative models create mispricings because they cannot look forward
“What quants can't do is look forward, and how things will change over time, and so you learn the power of it, but also the blind spots, and so they can't see what next two, three quarters are gonna be, and so that led me to a conclusion where Zillow and Uber, …”
Sandler: Eminence holds Dave & Buster's on store remodel thesis
“Dave & Buster's is a company that we own, and we have a thesis around new management, putting in place menu changes for the food and beverage, remodeling all the stores, and so they have 10 stores out of 200 that are remodeled.”
Sandler: Eminence doubled its compensation weighting for generating short alpha
“I changed our compensation structure to add double weight for short alpha, and preached to the team.”
Sandler: In late 2019, short-term stock movements detached from fundamentals
“What we began to notice in 2019 was stocks were behaving unpredictably, even if you really knew the fundamentals. It was as if the things that we were doing in the short run Didn't matter at all.”
Sandler: Passive equity market share has risen to 60%
“We just went from 25% passive, I think at that time it was probably 50. Now it's 60.”
Sandler: One-week to three-month stock price action is now mostly meaningless
“Implication number one was price action is much more meaningless than we used to think. Call that the one week to two, three month price action was stocks were Acting weirdly, and it meant nothing.”
Sandler: Eminence portfolio turnover spiked up to 80% on shorts since 2019
“What I noticed when I look back over the last four years is that our turnover since the end of 2019 is 40% higher on the long side, and 70 or 80% higher on the short side.”
Sandler: Eminence spends 20% to 30% of research time on market setup
“We're still doing the deep research on the business, but we're probably spending 20, 30% of our time understanding that and hopefully taking advantage of it.”
Sandler: High volatility benefits long investors but compounds short-seller risk
“High stock volatility is good for the long investor. Stock goes down. You have less risk on the table. More upside. It's easy to buy. Stock goes up. You have less upside and a bigger position. It's easy to sell. The opposite happens in the short side. When it …”
Sandler: Single-stock to index volatility ratio is at historically high levels
“The ratio of stock vol to index vol is at very high levels relative to history, and so that creates this challenge on the short side where these movements are not necessarily based on bottoms up fundamentals.”
Sandler: Eminence caps individual short positions at 2% of capital
“We don't allow shorts to grow above two percent of capital.”
Sandler: Eminence allocates 70% to long strategies and 30% to hedge fund
“Today, only 30% of our assets are in our hedge fund. 70% are in long-oriented products, a long fund, And a one 50 by 50 fund, which is a long replacement, portable alpha, alpha extension, but it's a hundred percent net long, it's competing with the market.”
Sandler: Portfolios cannot be structured to beat markets and never lose money
“And I realized then that hedge fund investors want you to beat the market, and they want you not to lose money. And you cannot structure a portfolio to do both of those things at the same time.”
Sandler: Classic long/short equity hedge funds no longer fit allocator portfolios
“And I realized, and talking to allocators, that the classic long short equity hedge fund had not a really big place in allocators portfolios anymore. That allocators were barbelling their portfolio.”
Sandler: Fund managers must be 'long-term greedy' and err on generous pay
“I think you have to compensate people. You have to err on the generous side. I don't think you have to dramatically overpay them, but you can't be cheap, and you can't be greedy. You gotta be long-term greedy.”
Sandler: Collaborative funds beat joining platforms or launching solo firms
“They have to realize that they're good investors, but they could be great inside of this system, and therefore, a solid piece of this pie is better than signing up to live and die by every other own decision, let's say if you went to a platform, or having to b…”