Sep 28, 2020 · 1h 1m · capital-allocators
Luke Ellis and Mario Therrien – Best Practices in Alternatives (Capital Allocators, EP.158)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Ted Seides interviews Man Group CEO Luke Ellis and CDPQ Head of External Management Mario Therrien regarding the mission, governance, and impact of the Standards Board for Alternative Investments (SBAI). They discuss the post-2008 evolution of industry best practices, operational due diligence, beta unbundling, and modern hedge fund 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 19.7% of the talking time here. How this is scored →
Ted as informed peer 4.0 Guest teaching 3.3 Guest disagreement 0.8 Ted pushing back 0.3
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 45:20 Luke challenges allocator powerlessness premise
Luke firmly counters the idea that managers dictate all terms, arguing that large institutional buyers hold substantial negotiating leverage and that standard two-and-twenty terms are now an exception.
Hardest push from Ted ▶ 43:24 Ted presses on market power vs theoretical fee disaggregationTed directly challenges the guests on how practical market power concentration undermines the theoretical ideal of unbundling alpha and beta fees.
Biggest teaching moment ▶ 35:00 Luke reframes fee pressure as volatility and Sharpe compressionLuke educates listeners by breaking down how funds halving their operating volatility from 12 vol to 4 vol effectively tripled their effective fee per unit of risk delivered.
Ted holds their own ▶ 39:39 Ted deconstructs long/short equity vol sourcesTed demonstrates sharp technical mastery by dissecting how long/short equity volatility is driven by gross exposure, market beta, and concentration rather than alpha generation.
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 Backgrounds and Roles at CDPQ and Man Group | 4 | 2 | 0 | 0 | Ted opens the discussion cleanly, directing Mario to review his expanded role overseeing all external funds at CDPQ and inviting Luke to introduce his career trajectory. Both guests provide collaborative biographical overviews of their career beginnings in derivatives and pension management. | |
| Founding Mandate and Governance Structure of SBAI | 4 | 4 | 1 | 0 | Ted asks about the origin and governance of the SBAI. Mario and Luke elaborate on the post-2008 financial crisis context, explaining how initial UK manager gatherings evolved into an institutionalized, balanced board between allocators and managers. | |
| Eliminating Egregious Behaviors and Setting Baseline Standards | 4 | 4 | 1 | 0 | Ted probes into what bad behavior meant in early consensus building. Luke bluntly details historical abuses like managers expensing private jets and unilateral gating, while Mario explains how CDPQ integrated compliance with these standards into their core operational due diligence. | |
| Establishing Operational Rules and Alignment of Values | 3 | 3 | 0 | 0 | Ted asks about the specific operational rules formulated by the board. Luke provides concrete examples of prohibited practices such as double-dipping trade fees, while Mario stresses the broader shift toward alignment of values. | |
| Measuring SBAI Impact on Governance and Market Stability | 4 | 4 | 1 | 0 | Ted asks how the board measures its tangible impact over time. Luke notes the drastic reduction in front-page hedge fund scandals during recent market turmoil compared to 2008, while Mario details how emerging managers use standards to build institutional-grade operational frameworks. | |
| Sponsor Message: Ridgeline Modern Investment Platform | 2 | 2 | 0 | 0 | Following the mid-roll sponsor break, Ted asks about future organizational objectives. Luke and Mario outline their expansion into alternative credit, insurance-linked securities, and growing traction in the APAC region. | |
| Hedge Fund Industry Maturity and Tech-Driven Concentration | 4 | 3 | 1 | 0 | Ted pulls back to look at the macro state of the hedge fund industry. Luke explains that industry hypergrowth has ended, giving way to tech-driven institutional concentration where the top hundred firms command most assets. | |
| Managed Accounts, Fee Structures, and Volatility Calibration | 5 | 4 | 2 | 1 | Ted asks about fee pressures across the industry. Luke presents a contrarian view arguing that the true issue was declining volatility and Sharpe ratios rather than fee levels, while Mario explains how CDPQ shifted to managed accounts to monitor realized volatility. | |
| Disaggregating Alpha, Beta, and Factor Risks in Long/Short Equity | 6 | 4 | 1 | 1 | Ted articulates the specific challenge of fee calibration in long/short equity when volatility is reduced or driven by cheap beta. Luke agrees and explains how systematic factor replication changed former alpha sources into cheap, commoditized risk factors. | |
| Allocator Bargaining Power, Alpha Scarcity, and Tiered Fees | 5 | 4 | 2 | 1 | Ted presses on how allocators can overcome relative market power in fee negotiations given industry concentration. Luke pushes back on the premise that allocators lack power, demonstrating that institutional buying power is highly concentrated while illustrating hard alpha capacity limits. | |
| Fee Transparency, Fair Treatment, and Side Letter Governance | 4 | 3 | 0 | 0 | Ted inquires about standards around fee transparency and differentiated side letters. Luke distinguishes between fair treatment and equal treatment, emphasizing that undisclosed preferential liquidity is unacceptable. | |
| Global Outreach Strategy and Institutional Growth of SBAI | 3 | 2 | 0 | 0 | Ted asks how the SBAI is expanding its outreach globally. Mario and Luke humorously credit podcast appearances before detailing their structured trustee ambassador initiatives and organizational scaling plans. |
Statements from this episode (15)
Therrien: CDPQ's external manager program manages 45B CAD across 130 GPs
“Everything that we do at CDPQ with our external funds, which covers about forty five billion dollars Canadian, which is about close to 15% of total assets of CDPQ, and that covers about a 130 different GPs around the world.”
Therrien: SBAI has ~130 signatories representing over $1T in AUM
“This buy also has just about a 130 different signatories who have all committed to adhere to the standards that represents over one trillion in AUM worldwide.”
Ellis: Alternatives cannot achieve perfect alignment because investors pay and managers receive fees
“Everybody talks about alignment of interest in the alternatives industry, but the reality is, unless you sit around and discuss it, you have a situation where The investors pay the fees and the managers receive the fees, and you can't be perfectly aligned in t…”
Ellis: Zero management fees destabilize hedge funds and harm long-term investors
“You get some investors who say, look, you should never have a management fee on a hedge fund. And I can understand why, from an investor's point of view, that might feel good, but actually it's not good from the long-term health of the business, because if you…”
Ellis: Fund managers should not double dip on trade execution fees
“Is it appropriate that you're charging fees on the fund, and you're also charging a fee for putting trades into the fund? Well, no. That's an easy standard to say, no, you're getting paid to run the fund. You shouldn't double dip.”
Ellis: Only roughly 1,000 credible hedge funds remain globally today
“The days of talking about 10,000 hedge funds are over. I don't know what the right number today is, but the reality is that probably there's a thousand credible hedge funds out there, and the top hundred have a significant proportion of the assets.”
Therrien: Falling interest rates broke the traditional 2-and-20 hedge fund fee model
“The problem we've had in the last 15 years really is the whole rate structure fell, which brought sort of the two 20, not no longer the right fee structure.”
Ellis: Allocators consistently accept paying 25% to 30% of generated alpha
“I think the proportion of alpha that clients are happy to leave with a manager Has not really changed over years. You know, you can debate, and maybe it's something to do with the quality of the returns, some number between 25 and 30% of alpha that clients are…”
Therrien: CDPQ Moved Most Hedge Fund Allocations to Managed Accounts
“In order for us to be a better evaluator of talent, we have transitioned a big part of our program in edge funds onto managed account platforms.”
Ellis: Passive Market Beta Is Free While Alpha Merits Management Fees
“The fee for beta today is nothing, right? I mean, you can go and buy a passive index of whatever beta you want for nothing. The alpha is what's valuable, and people are happy to pay for that and should pay for that.”
Ellis: Allocators shouldn't pay active management fees on long-short equity beta
“So I think if you run an equity long short fund, and you run with a 60% net long all the time, you ought to not charge any fees, or clients should look at that and go, ok, I'm going to work out the fees on the alpha You make, and I'm going to net out the 60% t…”
Therrien: CDPQ uses '1.5% or 15%' fee structures to capture more alpha
“From our standpoint, one of the variation that we brought, which is in parallel to what Luke said, was the fee structure, which is X or Y. So we pay 1.5 or 15%, depending, instead of 1.5 and 15%, which actually helps us capture the portion of the alpha that's …”
Ellis: The 2-and-20 model is no longer the modal hedge fund fee
“We talk about two and 20, but two and 20 is not the average fee in the industry by a long way, and it's certainly not the modal fee either. Two and 20 is now the unusual.”