Oct 22, 2018 · 1h 14m · capital-allocators
Andrew Tsai – Catching a Theme on the Chalkstream (EP.73)
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Andrew Tsai, Co-Founder and Chief Investment Officer of Chalkstream Capital Group, joins Ted Seides to discuss his evolution from trading floors and startups to running an unconventional multi-asset investment firm. Tsai outlines Chalkstream's anti-asset allocation philosophy, which emphasizes long capital duration, a structural low-beta core, and concentrated thematic bets across Japanese activism, electricity trading, and under-researched niche markets.
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 17.8% of the talking time here. How this is scored →
Ted as informed peer 4.7 Guest teaching 3.6 Guest disagreement 1.1 Ted pushing back 1.3
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 57:23 Dismissing allocator value in offering passive beta
Andrew firmly pushes back on the conventional allocator practice of bundling passive equity beta, asserting that clients already possess excessive beta and that allocators add zero real value by charging for it.
Hardest push from Ted ▶ 57:10 Ted challenging the omission of low-cost betaTed presses Andrew on why Chalkstream deliberately forgoes broad equity beta when long-term historical compounding suggests simple, low-cost equity exposure should be a core component.
Biggest teaching moment ▶ 48:00 Educating on structured Japanese CDS as China macro hedgeAndrew explains how mispriced Japanese credit default swaps on heavily indebted commodity companies serve as an efficient, highly asymmetric tail hedge against a hard landing in China.
Ted holds their own ▶ 16:42 Ted drawing precise historical parallel with AQR's 1998 survivalTed demonstrates his deep institutional knowledge by contextualizing Integrity Capital's shutdown against AQR's identical early-stage quantitative value drawdown in 1998.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Early Career Beginnings: Susquehanna and Market Making | 4 | 3 | 1 | 1 | Ted guides Andrew through his early career decisions, asking open questions about why he chose Susquehanna over Wall Street investment banking. Andrew shares anecdotes from the Chicago trading pits and his early thesis on hedge funds. | |
| Trading Fixed Income Arbitrage at Lehman Brothers | 5 | 4 | 1 | 2 | Ted asks specific questions about fixed income arbitrage, negative basis trading, and currency convergence trades in Europe. Andrew details the pre-electronic market environment and watching legendary traders like Alan Howard. | |
| Launching Integrity Capital and the 1998 LTCM Crisis | 5 | 4 | 1 | 1 | Ted probes the launch and unwinding of Integrity Capital during the 1998 LTCM crisis. Andrew reflects on the sobering realization that mathematical models fail when correlation goes to one and leverage forces liquidations. | |
| Capital Duration Lessons and AQR Comparison | 6 | 3 | 1 | 2 | Ted introduces a sharp historical parallel with AQR, which faced similar 1998 drawdown headwinds but stayed in business. Andrew agrees and elaborates on capital duration as the single most critical asset in fund survival. | |
| The Dot-Com Venture: Urban Fetch and Logistics Optimization | 4 | 3 | 1 | 1 | Ted asks how a quant team transitioned into running Urban Fetch, a dot-com delivery service. Andrew details the operational challenges, venture capital misalignment, and the painful timing around the March 2000 tech crash. | |
| Turnaround CEO Role at Carlyle and Recommitting to Investing | 4 | 3 | 1 | 1 | Ted explores Andrew's stint as interim CEO for a Carlyle portfolio company and what he learned about long-duration private equity. Andrew explains how the experience clarified that his true passion was investing rather than operational management. | |
| Partnering with Peter Muller to Build Chalkstream Capital | 4 | 3 | 1 | 1 | Ted prompts Andrew to discuss his partnership with Peter Muller and Pete's background. Andrew describes their shared offsite study of Warren Buffett and deciding to build an investment firm centered around backing exceptional people. | |
| Chalkstream's Framework: The Anti-Asset Allocation Model | 5 | 4 | 2 | 1 | Ted asks about Chalkstream's philosophy regarding long tails and conventional asset allocation. Andrew rejects rigid asset allocation models, arguing that historical correlations break down and that concentrated niche bets offer superior compounding. | |
| Sponsor Message: Ridgeline Front-to-Back AI Investment Tech | 4 | 3 | 1 | 1 | Following a sponsor break, Ted questions Andrew on the decision to accept outside capital rather than remaining a pure single family office. Andrew explains that external institutional investors bring accountability and vital organizational energy. | |
| Chalkstream's Research Process and Flexible Mandate Deep Dives | 4 | 4 | 1 | 1 | Ted asks how Chalkstream filters themes across a broad and unconstrained mandate. Andrew explains their unlevered yield valuation framework and why they limit themselves to only one or two exhaustive deep dives each year. | |
| The Japan Thesis: Constructive Activism in Net Cash Companies | 5 | 4 | 1 | 1 | Ted and Andrew walk through the evolution of Chalkstream's Japan thesis from passive net-cash screens to constructive activism. Andrew explains how friendly activism produced defensiveness in 2008 and steady alpha during subsequent flat markets. | |
| Cultural Adaptation and Japan Credit Default Swaps Tail Hedging | 6 | 5 | 1 | 2 | Ted inquires about manager selection nuances and whether Andrew couples equity activism with CDS tail hedges. Andrew details cultural relationship dynamics in Asia and explains how cheap Japanese CDS functions as an asymmetric tail hedge against Chinese credit risks. | |
| Exploring Electricity and Power Market Trading Strategies | 4 | 4 | 1 | 1 | Ted asks for details on Chalkstream's newer thematic foray into electricity and power trading. Andrew outlines how high dispersion, non-financial participants, and weather volatility create market-making opportunities for quantitative strategies. | |
| Building a Low Beta Core Portfolio for Patient Investing | 5 | 4 | 1 | 1 | Ted asks how these idiosyncratic themes fit together into overall portfolio construction. Andrew explains how building a 0.10 beta core of capacity-constrained niche managers grants the firm the luxury of patience to wait for compelling thematic deep dives. | |
| Deliberately Forgoing Passive Beta in Portfolio Construction | 6 | 4 | 2 | 2 | Ted challenges Andrew on whether deliberately excluding passive equity beta is sensible given its historical compounding power. Andrew argues that his investors already have ample beta exposure and points out that a multi-decade bond bull market inflated past investment performance. | |
| Building Organizational Culture, Direct Feedback, and Offsites | 4 | 3 | 1 | 1 | Ted turns to organizational culture and how Andrew puts principles into action. Andrew explains their annual offsite structure, exercises in giving direct constructive feedback, and the importance of personal physical wellness on decision-making. |
Statements from this episode (24)
Top traders have largely abandoned Wall Street for hedge funds
“You know, there's not that many traders on the street today that have that kind of persona because they've all gone to hedge funds or done other things.”
Market crises can wipe out investors before mean reversion occurs
“When things go bad, they can go much worse than you expected. And things can really happen that, that don't make sense. And it doesn't matter if it makes sense or not, because you're not around to take advantage of the other side.”
Asset managers need capital duration to capture rare decade opportunities
“If you believe in your strategy, if you believe in your team, what is the X factor you need? You need duration of capital because you need to be around those times. And every decade, there's maybe one or two opportunities where there actually is Lower hanging …”
One-hour consumer delivery is unprofitable without third-party logistics infrastructure
“Deliver ice cream within an hour and all that kind of stuff. And of course that's not a profitable business, but what could have been a very profitable business and what a lot of people What people today have seen is that if you can nail the third party last m…”
VC investors blocked a multi-hundred-million-dollar buyout offer for Urban Fetch
“We actually had prior to that, another competitor try to buy us out, and this was, you know, halfway through that journey, so one year later after starting it, And this is another lesson in, in terms of lack of alignment and you kind of, all these things come …”
Relying heavily on historical correlations for asset allocation is dangerous
“Historical correlations would be useful, but dangerous to rely on too much. And if you think about asset allocation, right, you're relying on your forecast of volatility, expected returns and correlations.”
Over-diversification prevents asymmetric bets from generating meaningful returns
“When you kind of dissect return drivers and if you become overly diversified, all of a sudden it really gets hard to allow those asymmetric bets to be meaningful.”
Japan, Korea, and power trading account for 40% of Chalkstream's risk
“If you look at Japan, Korea, and increasingly power as a percentage of our risk in our portfolio, that's probably 40% of our risk.”
Cross-asset valuation requires standardizing investments down to unlevered yield
“And I think having that kind of asset class valuation framework to be able to kind of look at things and kind of, if you think about it, roughly dissect things down into an unlevered yield, right? You can do that for an equity, you can do that for a cap rate, …”
TOPIX fell 44% in 2008 while Japanese net-cash activists lost 16%
“You know, Japan Topix is down 44%. You know, on average, these guys were down 16, 17%.”
Friendly, constructive shareholder activism creates strong alpha in Japan
“And this is one where we really saw the value of activism in Japan done in a very particular way, which was friendly, constructive. And we saw that that created really good alpha.”
Chalkstream shorts overleveraged, declining Japanese companies via credit default swaps
“We have CDS positions in Japan. That's a whole nother bet where we think there's these massively levered companies that are trading at ridiculously tight CDS levels that we think are in industries that are in secular decline.”
Investors should buy CDS when highly levered entities hit 17 basis points
“Lehman traded at 17 basis points. And just as an overarching theme, anytime a highly levered thing trades anywhere in that zip code, I think he just, I think he puts them on.”
Chalkstream holds a 4x notional short CDS position against tail risks
“Japanese equities down 40%, China hard landing, the world ends, like we're levered about four times short, notional short on CDS.”
Electricity and power markets are dominated by utilities, not investment funds
“Most of the people, the participants, I'm talking things like day ahead markets, FTR markets, price of power on the different regional exchanges. Most of them are public utilities or hedgers, not investment folks.”
Institutional-grade electricity trading teams are exceedingly rare
“We've probably met with 60 or 70 or so, but most of them are kind of small ex-utility traders from public utility or from an energy trading shop. And to find groups that we can partner with to do it in, in, in kind of a institutional long-term approach is, has…”
Chalkstream's capacity-constrained core strategy maintained a 0.1 beta to the S&P
“That part of our portfolio's probably been. 0.1 beta or so to the S and P over the last five, six years. With pretty consistent alpha.”
Finance professionals implicitly hold equity beta regardless of direct portfolio holdings
“If you work in finance in New York City, and you have zero equities, you're long equities, right? Right? If you're in the hedge fund industry, private equity industry, you have beta, DS&P.”
Falling 10-year Treasury yields drove manager performance more than individual skill
“A graph of tenure yields going back 40 years. And the reason I keep it there is that it looks like a ski slope, right? It goes from 14% down to where it is today. And there's been some gyrations, but it's basically, I say this to all my contemporaries, like no…”
Chalkstream holds intentional direct equity beta exposure in Japan and Korea
“We do have some beta portfolio. We have it in Japan. We have it in Korea and things like that. And so like, I definitely have indirect beta and I have some direct beta bets, but the direct beta bets in our portfolio are very, very intentional.”
Capital saturation and copycat fund spinoffs have severely compressed active alpha
“It dwarfed what we expected by a factor of five. And so, it's really hard to create a lot of active alpha when there's that much money in the space, and when a lot of the similar approaches, we're now almost on third generation, meaning, like, some of the earl…”
South Korea's large equity market has very few quality hedge funds
“That's where in places like Korea, where it's a huge equity market and you can count the number of good hedge funds on one hand. So we think it's a secular play. That's why we built a business there, a hedge fund business there, and we expect to be there indef…”
Chalkstream bars near-term topics at its annual three-day company offsites
“We do an offsite every year. We take the whole company and we go somewhere for three days and we're not allowed to talk about anything that is in the near term. And the theme of the offsites is the same every year, which is in five years from now for looking b…”
None of Chalkstream's most successful investments were consensus committee bets
“If I go back and think about all of our greatest hits, you know, I don't think there was one that was a consensus, like, yeah, that feels good around the board kind of investment. It was always like, there was always some twists, some difficulty”