May 29, 2023 · 1h 16m · capital-allocators
Hedge Fund Master Class – Craig Bergstrom, Adam Blitz, and Dan Fagan (Capital Allocators, EP.318)
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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 Capital Allocators masterclass, host Ted Seides convenes veteran institutional allocators Craig Bergstrom, Adam Blitz, and Dan Fagan to dissect hedge fund portfolio construction in a 5% interest rate regime. The panel examines the trade-offs of multi-manager platforms versus emerging managers, systemic liquidity and leverage risks, alpha across equity and credit, and evolving fee structures.
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 19.1% of the talking time here. How this is scored →
Ted as informed peer 5.5 Guest teaching 3.8 Guest disagreement 1.8 Ted pushing back 2.2
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 39:21 Dan rejects premise of being comfortable with leverage
Dan bluntly rejects Ted's framing of getting comfortable with multi-strat leverage, declaring that an allocator who is comfortable with leverage is fundamentally doing their job wrong.
Hardest push from Ted ▶ 1:04:57 Ted pushes back on feasibility of hurdle rate renegotiationsTed directly challenges Dan's thesis on demanding hurdles, pointing out that existing capital signed binding terms when rates were low and questioning whether allocators have any real leverage.
Biggest teaching moment ▶ 22:15 Dan reframes AUM into a 10 trillion dollar gross market footprintDan methodically educates the audience on why raw equity AUM understates hedge fund risk, showing how 2.5x gross leverage creates a 10 trillion footprint rivaling half the entire US Treasury market.
Ted holds their own ▶ 1:06:02 Ted outlines the LP prisoner's dilemma in capacity-constrained fundsTed articulates the structural game theory of manager allocations, demonstrating his deep insider expertise on why individual LPs hesitate to enforce fee hurdles on top-tier capacity.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Institutional Program Backgrounds and Hedge Fund Objectives | 4 | 2 | 1 | 1 | Ted opens the panel by prompting each allocator to outline their institutional mandate and portfolio objectives. Dan, Craig, and Adam provide collaborative, high-level overviews of their respective programs with no friction. | |
| Bottom-Up Selection, Specialized SMAs, and In-House Desks | 5 | 3 | 1 | 2 | Ted probes into manager selection and asks Craig to clarify what 'version 2.0 or 3.0' means for fund-of-funds. Craig explains the evolution toward customized SMAs and direct internal trading in securitized products like CLOs. | |
| Structural Return Expectations in a Higher Interest Rate Regime | 6 | 3 | 1 | 3 | Ted questions how higher short-term interest rates alter structural return hurdles and strategy allocations. The guests note that short rebate yield directly boosts baseline hurdle rates for foundations and endowments while keeping allocation tactical. | |
| Managing LP Liquidity Mismatches and Hidden Illiquidity Risks | 5 | 4 | 2 | 2 | Ted asks Adam about balancing liquidity needs across opportunistic strategies. Adam highlights the hidden dangers of phantom liquidity during market stress events like the March 2023 SVB run on two-year Treasury bonds. | |
| The $10 Trillion Market Footprint and Cascading Contagion | 5 | 6 | 2 | 1 | Dan reframes Ted's footprint question to analyze total industry gross exposure, demonstrating that 2.5x leverage on 4 trillion dollars creates a 10 trillion dollar market impact. Dan educates on how risk-cutting guidelines at multi-strat pods trigger cross-market liquidations. | |
| Due Diligence on Risk Culture, Counterparties, and LP Co-Holders | 6 | 4 | 1 | 3 | Ted presses Dan on how allocators evaluate risk culture and operational plumbing in practice. Dan breaks down counterparty terms, co-holder redemption risks, and forced risk-cutting drawdown rules. | |
| Evaluating Single Risk-Takers vs. Platform Complexity | 5 | 3 | 2 | 2 | Ted asks Craig how single risk-takers handle information asymmetries when competing against pod platforms. Craig argues that concentrated fundamental managers often possess deeper situational insight than high-turnover multi-PM traders. | |
| The Emerging Manager Edge and Structural Leverage Risks | 5 | 4 | 2 | 2 | Ted prompts Adam on emerging manager sourcing, prompting Adam to warn that backward-looking risk systems lull multi-strats into dangerous leverage. Adam emphasizes that locked-in capital and smaller footprints protect early-stage managers from forced liquidations. | |
| Demystifying Multi-Manager Platforms and Tangency Portfolios | 6 | 5 | 2 | 2 | Ted introduces the investment thesis for multi-manager platforms. Dan deconstructs the platform model as an attempt to assemble an MPT tangency portfolio of levered human talent, warning that talent dilution is creating systemic fragility. | |
| Diligence Practices and Leverage Tolerances in Multi-PM Funds | 6 | 5 | 3 | 4 | Ted challenges Dan on how an allocator can effectively diligence thousands of pod positions and get comfortable with extreme leverage. Dan rejects the premise of ever being comfortable with leverage, describing how GIC conducts granular recruiting-level channel checks. | |
| The Bear Case on Multi-PM Platforms: Fees, Terms, and Survivorship Bias | 6 | 4 | 3 | 2 | Ted asks for the bear case on multi-PM platforms. Adam highlights pass-through fee opacity and margin terms, while Craig notes severe survivorship bias by pointing out multiple marquee platforms that went to zero. | |
| Sponsor Ad: Ridgeline Cloud Investment Technology | 5 | 3 | 2 | 2 | Following the sponsor break, Ted challenges Adam to defend fundamental long/short equity against pod platforms. Adam articulates a contrarian bullish case, arguing that pod short-termism has created an alpha vacuum for multi-year stock pickers. | |
| Platform Pod Limitations vs. Long-Horizon Stock Picking | 6 | 4 | 2 | 2 | Ted drills into the tension between alpha generation and portfolio construction. Dan and Adam explain that pod stop-loss rules prevent holding high-conviction positions through multi-quarter earnings cycles. | |
| Global Macro Alpha: Trade Structuring, Options, and Tactical Agility | 6 | 4 | 1 | 2 | Ted asks how allocators underwrite macro managers given unpredictable market cycles. Adam and Dan emphasize evaluating trade structuring, option convexity, and execution agility over pure thematic storytelling. | |
| Fee Negotiations, Hurdle Rates, and the Shift to Closed-End Funds | 7 | 4 | 3 | 5 | Ted directly pushes back on Dan's call for hurdle rates, noting allocators already signed agreements before rates rose and face a prisoner's dilemma. Dan and Craig acknowledge negotiation limits and point to SMAs and closed-end funds as the structural remedy. | |
| Top Investment Opportunities: Reinsurance, Credit Secondaries, and Seeds | 5 | 3 | 1 | 1 | Ted surveys the panel for their most compelling high-conviction ideas. Adam pitches cat reinsurance, Craig identifies private credit secondaries without J-curves, and Dan highlights founder-led seed managers. | |
| Strategy Red Flags: Extreme Leverage, Illiquidity, and Real Estate Risks | 5 | 4 | 2 | 1 | Ted asks each guest for red flags and investment pet peeves. Dan critiques the 'black box' label for quants, Craig warns against uncooperative managers, and Adam laments the conversion of the illiquidity premium into an illiquidity discount. |
Statements from this episode (37)
Fagan: Exceptional hedge fund opportunities are too scarce for top-down strategy buckets
“The rationale behind all that is we simply don't think there are that many opportunities out there that are truly exceptional and truly compelling. So we try not to narrow the spectrum across which we look at first and that's worked pretty well for us over tim…”
Bergstrom: Strategy asset allocation is a hard way to add value in hedge funds
“Asset allocation being something we think about episodically, but we think a hard way to add value in hedge fund portfolios.”
Blitz: Evanston prefers early-stage managers because principals are hungrier
“That often leads us to early stage managers who aren't managing a lot of money. The principals of the firm are hungry at that time, and there's not many good ones like that out there, but those are the ones we tend to prefer.”
Bergstrom: Corbin trades CLOs and CBOs internally facing Wall Street
“There are markets that we trade internally. We trade CLOs and CBOs facing the street, trying to use our manager selection insights and leveraging our relationship and transaction flow.”
Blitz: Hedge fund return expectations increase linearly with short-term rates
“I think the total return expectation for most hedge fund strategies, like Craig said, has gone up linearly with a level of short rates, even without any change in skill from the manager perspective”
Blitz: Higher base rates could restore hedge funds to endowment portfolios
“It's very hard to include a hedge fund strategy, even if it has a very high sharp ratio or risk adjusted return, if the total return is only three or four percent. But now that we've hopefully cleared that threshold, at least from an expected perspective in mo…”
Bergstrom: Pandemic dislocation in AA/AAA CLOs was far worse than high yield
“During the pandemic, CLOs came under much more stress than very roughly equivalent risk in high yield. So that's exciting because you can say, hey, I don't know exactly what's happening to the global economy, but I know that what we see in CLO AA or AAA is dis…”
Blitz: Liquidity mismatches in commingled credit funds harm long-term investors
“If you're in a commingled fund and credit, and the manager is very liquid terms, but the underlying assets aren't very liquid, that can get you in trouble very quickly. If they put in a large redemption and start selling at bad prices, that negatively affects …”
Blitz: Market liquidity risks are underrated due to superficial intraday churn
“I think liquidity risks right now are underrated and underappreciated. There's a lot of optics of good liquidity in markets. But a lot of that liquidity, especially in equity markets, is just day trading back and forth, and if you need to get out of a fairly s…”
Blitz: SVB crisis triggered a violent two-year Treasury squeeze via illiquidity
“You saw in March of this year where you had a pretty violent move in the two-year bond, one of the most liquid assets in the world. Many macro managers were positioned in that bond. They had to get out of that position when the Silicon Valley Bank news hit. Mo…”
Fagan: Levered hedge fund footprint reaches $10T, half the Treasury market
“Let's just assume two and a half times gross leverage for the industry in aggregate, which is, I think is probably conservative. That would get you to 10 trillion, which is what I would then call the footprint of the hedge fund industry. 10 trillion is a bigge…”
Fagan: Multi-strategy hedge fund risk cutting drives cross-market contagion
“Nothing's really occurring in a vacuum anymore, largely because of the influence of multi-strategy funds and platforms that will trade all of these strategies at the same time. And have aggressive risk cutting guidelines for when they're losing money in any on…”
Fagan: Multi-strat diligence must prioritize risk culture and counterparties over returns
“Most investing, you start by thinking about what the opportunity of the investment is. In this case, I think you want to start it with the risk culture framework and setup of the business model itself. So what does that mean in practice? If you're dealing with…”
Bergstrom: There are too many hedge funds with no reason to exist
“We believe that there are way too many hedge funds. I don't think that hard to identify a lot of firms that have no reason to exist.”
Bergstrom: Corbin prefers single risk-taker funds over large platforms for alignment
“We have a preference for a single risk taker model, and typically the PM and sort of the business owner are the same. It's not absolute. We do have investments with bigger businesses that look more like platforms. We will do that if we think the value proposit…”
Blitz: Multi-Strat Risk Systems Create Exponentially Understated Crowded Risk
“I think some have what optically seem like good risk systems that are very backward looking. You have lots of people using the same risk systems. I think it can lull you into a false sense of security that can make you feel like, hey, I can lever up my portfol…”
Fagan: Multi-manager platforms have historically beaten equity returns with bond-like volatility
“Now with these platforms that we're talking about, if you look over the last three, five, 10, or even 20 to 30 years in cases where they've been around for that long, and there are some that have, the platforms have actually outperformed equities on a total re…”
Fagan: Current trading talent pool cannot support multi-strategy platform AUM growth
“The proliferation of AUM in the multi-strategy platform space is pretty remarkable. And the amount of talent out there, frankly, I don't think supports where we are today. There's been a lot of hiring of people who are good traders, but aren't probably the few…”
Fagan: Confident multi-PM fund allocators must act like recruiters
“If you're allocating to funds like this, and you want to do it with confidence, you almost have to wear a second hat of being a pretend recruiter as well. You want to talk to as many people who go in and out of these platforms as you can.”
Fagan: Allocators who feel comfortable with leverage are doing something wrong
“I honestly don't think you're ever comfortable with that. If you're comfortable with leverage, you are doing something wrong.”
Bergstrom: New Allocators Cannot Replicate Legacy Platform Fund Conviction Today
“I think if we were to approach that manager today, we wouldn't be able to develop the level of understanding and conviction that I think we have now.”
Bergstrom: Multiple Well-Regarded Multi-Strategy Platform Funds Have Gone to Zero
“In my career, a bunch of extremely well-regarded multi-strategy managers that look like platforms roughly went to zero.”
Blitz: Passive and pod shop flows create alpha vacuum for stock pickers
“So what's happened the last 1012 years, you've had a lot more money flow into passive investments versus active investments, and you've had a lot of money flow into the platforms, which Not to paint a broad brush, but generally are shorter term traders. And so…”
Blitz: Low gross and net exposures destroy hedge fund returns after fees
“A lot of long short equity managers actually run at too low of an exposure, both gross and net exposure, and you need such a tremendous amount of stock picking alpha to overcome that cash drag, to overcome the fees that they charge in order to generate somethi…”
Blitz: 100% long by 60% short is optimal long/short equity exposure
“So there's kind of a sweet spot in the middle where there's enough exposure and let's call this a hundred long by 60 short as sort of a sweet spot, if you will. Depends a little on the volatility and dispersion of the area. You can probably go a little lower t…”
Bergstrom: Credit markets will not see a golden age of distress
“I think that we are not going to see a golden age of distress. Oh, these are great businesses that happen to have not the right cap structure. Those days are gone. The markets are too competitive. They're too multifaceted. There's too much dry powder. And in p…”
Bergstrom: Declining recovery rates are a bigger credit trend than defaults
“We're trying to be defensive to a lower recovery environment. That's, I think, a trend that we see as even more dramatic than defaults.”
Blitz: Repeatable Macro Alpha Comes From Trade Structuring, Not Thematic Bets
“So the thing that we think is repeatable is having an edge in trade structuring and implementation. So basically instead of saying, I'm going to put all my eggs in the Euro basket or put all my eggs in the basket of the tenures going up, sort of view things th…”
Bergstrom: Strong Demand and Talent Scarcity Let New Macro Funds Overcharge
“There are relatively few players. There are relatively few training grounds producing strong new players. There's sort of a structural bid, as best as I can tell, for the strategy. So it means that credible new things get traction more quickly and do so, for e…”
Fagan: Macro Alpha Is Generated Waiting for Themes, Not Catching Breakouts
“So much from our perspective of the value that's added in macro is Is actually done while you're waiting for the themes to play out. It's not capturing the big breakout of a theme. And frankly, if that's what you're trying to do, I don't think you pay someone …”
Blitz: No-hurdle incentive fees cost allocators 80 to 100 basis points
“With short rates going up, especially in the long short equity space where people are earning short rebates now of call it four to five percent macro strategies where people are earning that on unencumbered cash, really without any skill, the manager is off to…”
Bergstrom: Open-ended credit hedge funds are in secular decline
“The open-ended credit hedge fund businesses we believe in, in secular decline, not going away this month or this year. But shrinking significantly in favor of closed-end structures, a big long-term part of that is hurdle rates, as you mentioned.”
Blitz: Catastrophe reinsurance offers compelling, uncorrelated risk premiums
“The niche strategy that's interesting right now is in catastrophe reinsurance. So you've had a lot of hurricanes and other perils over the last five years, obviously for good reason, a lot of concern about climate change. So the demand to sort of reinsure agai…”
Bergstrom: Private credit secondaries offer significant discounts with no J-curve
“Right now, we really like the opportunity to invest on a secondary basis in private credit funds. The private credit market grew a ton the last five, six years, and now you're seeing small funds, some investor not re-upping, the consultant has changed, the sta…”
Fagan: Systematic quant managers are less 'black box' than emotional human investors
“If anything, I would make the argument that you can actually get more comfortable with certain quant managers than you can
With most discretionary ones for the obvious reason that they adhere to clear systematic processes.
The real black box is the human inves…”
Blitz: The illiquidity premium has inverted into an illiquidity discount
“Somewhere along the way, the last five years or so, the
Illiquidity premium somehow turned into an illiquidity discount.
I don't really understand it.
Used to be you demanded a higher return to lock up your capital, to lose the ability to make a change in mana…”
Blitz: Recent flood of private illiquid managers will fail to meet expectations
“Many managers have come out recently to meet this demand, and we just don't think the results collectively are going to be what people want, but they might not really care because the people in the seats making those decisions might change by the time the poor…”