Nov 21, 2022 · 58m · capital-allocators
Frank Brosens – Culture and Partnership at Taconic Capital (Capital Allocators, EP.282)
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In this episode of Capital Allocators, Taconic Capital co-founder Frank Brosens discusses his formative training on Goldman Sachs' risk arbitrage desk under Robert Rubin, Taconic's collaborative partnership and risk management culture, and the life principles that have guided his multi-decade investment career.
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 23.6% of the talking time here. How this is scored →
Ted as informed peer 4.0 Guest teaching 4.4 Guest disagreement 0.1 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 25:20 Rejecting the public listing pot of gold
Frank dismisses Ken Brody's conventional suggestion to build the firm toward a public listing or sale, insisting that hoarding economics creates poor culture.
Hardest push from Ted ▶ 42:12 Hedging costs eating lower expected returnsTed presses Frank on whether methodical left-tail hedging excessively drags down overall portfolio returns in an era of compressed risk-arb spreads.
Biggest teaching moment ▶ 39:40 Models breaking down at the tailsFrank educates on why Gaussian statistical models fail during crises like LTCM and 2007 subprime, explaining discrete correlation-to-one stress testing.
Ted holds their own ▶ 53:56 Listing the Rubin desk alumni cohortTed demonstrates thorough historical grasp of hedge fund industry lineages by cataloguing the specific alumni of Rubin's desk and their career trajectories.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Host Announcements and Capital Allocators Holiday Promotions | 3 | 2 | 0 | 0 | The segment begins with host promotions before transitioning into Frank Brosens describing his early career and entry into Goldman Sachs. The dynamic is polite and biographical with no tension. | |
| Moving to Risk Arbitrage and Managing Partner Capital | 4 | 4 | 0 | 0 | Ted guides the conversation toward Goldman's risk arbitrage desk under Bob Rubin. Frank explains how the desk operated as the sole arena where partner capital was actively levered and risked. | |
| Rubin Desk Culture and The Risk Arbitrage Lineage | 4 | 5 | 0 | 0 | Frank recounts navigating the 1987 crash as desk head and Rubin's leadership style. Ted listens attentively as Frank shares deep institutional history without any pushback. | |
| Departing Goldman Sachs and Taking a Family Sabbatical | 3 | 3 | 0 | 0 | Frank details his unconventional departure from Goldman Sachs to take a multi-year sabbatical with his young children. Ted validates the unusual nature of this career choice in finance. | |
| Founding Taconic Capital and Implementing the Anti-Goldman Clause | 4 | 5 | 0 | 0 | Frank explains founding Taconic Capital with Ken Brody and creating the anti-Goldman clause to maintain LP alignment and private partnership permanence. | |
| Ridgeline Front-to-Back AI Investment Technology Sponsor Read | 4 | 4 | 0 | 0 | Ted asks how Taconic competes against eat-what-you-kill compensation hedge funds. Frank explains their subjective compensation structure, partner equity distribution, and talent retention approach. | |
| Evolution of Investment Strategies Across Risk Arb and Credit | 4 | 5 | 0 | 0 | Frank outlines Taconic's expansion from risk arbitrage into structured credit, RMBS shorting, and CMBS buying rights. Ted listens as Frank outlines the strategy evolution. | |
| Downside Stress Testing and Risk Management Methodologies | 5 | 6 | 1 | 0 | Frank rejects standard deviation models for tail risk management, citing Emmanuel Derman's principles. He details Taconic's bottom-up discrete stress testing methodology assuming all correlations go to one. | |
| Macroeconomic Liquidity Regime Shifts and Internal Capital Allocation | 5 | 6 | 0 | 0 | Ted asks how left-tail hedging impacts baseline return hurdles. Frank responds by analyzing the post-QE macroeconomic transition and how capital repatriation creates persistent air pockets across asset classes. | |
| Dislocation Funds, Distressed Credit Outlook, and Macro Hedging | 4 | 5 | 0 | 0 | Frank breaks down the criteria for launching draw-down dislocation funds, emphasizing their proudest moment was not deploying capital when risks outweighed returns in 2008. | |
| Career Longevity and The Risk Arb Desk Peer Group | 4 | 3 | 0 | 0 | Ted contrasts Frank's longevity with peers from Rubin's desk who have retired or closed funds. Frank attributes his endurance to passion for the craft and his early family sabbatical. |
Statements from this episode (18)
Brosens: Goldman Sachs was considered a 'middling firm' early in his career
“It was viewed as kind of a middling firm at the time. The big firms at the time were First Boston, Morgan Stanley. The banks really weren't players in the space. JP Morgan wasn't really considered a competitor. There were other smaller firms, Bear Stearns, et …”
Brosens: Risk arb drove the lion's share of Goldman's risk in the 1980s
“Most of the risk at the time at Goldman Sachs was taken in the arbitrage area. There was very little risk being taken elsewhere in the firm. Jay Aaron had not yet been bought. They really didn't take an awful lot of risk in the fixed income side. The lion's sh…”
Brosens: Goldman risk arb grew to nearly $1B in capital by 1987
“I think we had a couple hundred million dollars worth of risk at the time when we started. It grew so that by the time I started running the area in early 87, we were running close to a billion dollars worth of capital.”
Brosens: Robert Rubin's investment philosophy centered on managing uncertainty and downside risk
“Bob's philosophy was one of uncertainty. He wrote a book on it where you couldn't know things for sure. You had to know what could go wrong. You had to estimate the probability of that thing going wrong and effectively being humble about your confidence level …”
Brosens: Managing partner capital drives tighter risk discipline than upside-only fees
“The second aspect of it, and I think this was really important and something that we tried to Bring to Taconic was the fact that at Goldman, it was the partner's capital. It wasn't other people's money. And that drove a very different philosophy with respect t…”
Brosens: Goldman risk arb lost 4% ($40M) in 1987 crash with 70% cash
“We came into about 70% cash. We were down four. We had a number of hedges in place. So Not unreasonable, but four percent of a billion dollars was 40,000,040 million to the partners was a very large loss.”
Brosens: Mark Winkelman left Goldman Sachs in 1994 after political leadership battle
“Unfortunately, at the end of 94, he ended up Effectively losing a political battle to run the firm and left at the end of that year.”
Brosens: Mid-career family sabbaticals operate as a 'career in reverse'
“I thought of it effectively as a career in reverse. Retiring and spending time with your family when they wanted to spend time with you with a view that I'd eventually go back into work and potentially try and find something that I would do forever.”
Brosens: Broad economic distribution among partners attracts superior talent
“If we create a firm where we distribute the economics pretty broadly, Amongst all the partners, we'll be able to attract and retain a level of talent that we won't be able to do in a firm where we take most of the economics.”
Brosens: Taconic has an 'anti-Goldman clause' diverting 30% to charity if sold
“So we put in a clause which has been Referred to by one of our investors as the anti-Goldman clause, where if the firm ends up either going public or selling at some point down the road, 30% of the economics effectively gets carved out and goes to Ken's and my…”
Brosens: Eat-what-you-kill compensation incentivizes undermining colleagues
“If you were sitting next to someone and you were getting paid purely as an eat what you kill system, you not only have no interest in whether or not the guy sitting next to you makes money, you actually want them to do poorly because if they do poorly, you get…”
Brosens: Taconic founders capped equity below 20% and zero out upon retirement
“Neither Ken nor I really right from the start took as much as 20% of the economics. There was a large percentage of economics available for the people that really drove the profitability. In addition, they knew that when Ken and I eventually retired, our econo…”
Brosens: High-volatility risk arbitrage requires dollar hedging over share hedging
“If you hedged share for share, you were frequently vulnerable to the dollar spreads widening because both companies would double. So both companies double, the percentage spread stays the same, the dollar spread doubles. So you needed to be more closely dollar…”
Brosens: Taconic bought 25% of all CMBS trust default-rights securities
“And so we ended up aggressively buying literally 25% of the entire market in those securities and built a real estate business around that opportunity set.”
Brosens: Taconic targets single-digit losses in crashes via monthly stress tests
“The philosophy of the firm from the inception has been to, in a big dislocation, keep losses to single digits, and we literally have a stress test that goes through the equivalent of an 87 crash and assure ourselves every month by going name by name, portfolio…”
Brosens: Investors rarely buy aggressively when assets reach their target entry price
“People frequently say, if the price were ever to get to this, I'd load up the truck. What happens when the price gets to that is they have no interest in loading up the truck”
Brosens: Markets will not return to excess Fed liquidity after inflation subsides
“I personally don't think that we're going to be heading into a period of excess liquidity for quite some time. I think the expectations that once inflation's under control, we're going to go back to the Fed as it was before, I think is less likely to be the ca…”