Jul 17, 2017 · 1h 7m · capital-allocators
Adam Blitz – Inside Hedge Fund Allocation (Capital Allocators, EP.17)
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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 Adam Blitz, CEO and CIO of Evanston Capital Management, exploring Evanston's bottom-up manager selection process, qualitative due diligence framework, low-leverage portfolio construction, and the evolving role of hedge funds in institutional portfolios.
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 22.8% of the talking time here. How this is scored →
Ted as informed peer 5.4 Guest teaching 3.8 Guest disagreement 1.2 Ted pushing back 2.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 52:55 Adam forcefully warning against short-volatility products
Adam delivers his most decisive warning of the interview, calling the trend of selling equity volatility a dangerous trap packaged as alternative yield.
Hardest push from Ted ▶ 14:56 Ted challenging bottom-up selection with Markowitz asset allocationTed directly pushes back against Adam's purely bottom-up manager framework by citing Markowitz academic findings that top-down allocation drives the bulk of variance.
Biggest teaching moment ▶ 9:45 Adam on the real reason hedge funds shifted to risk mitigationAdam candidly dismantles industry PR, explaining that disappointing returns forced underperforming funds to reposition themselves as risk mitigators when cash would do the same.
Ted holds their own ▶ 16:48 Ted dissecting the mathematics of long-short equity alpha vs. betaTed displays his allocator background by precisely articulating the arithmetic of long-short spread, beta drag, and net market exposure.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Adam Blitz's Background: From Math to AQR and Evanston | 4 | 2 | 1 | 1 | Ted prompts Adam to trace his journey from his early affinity for sports math to Goldman Sachs, AQR with Cliff Asnes, and founding Evanston. The exchange is warm, biographical, and highly collaborative. | |
| The Evolution of Hedge Funds: 2002 to Present | 6 | 4 | 2 | 3 | Ted probes whether hedge funds' recent performance struggles drove the shift from return enhancement to risk mitigation. Adam candidly agrees, noting the average hedge fund fails to justify fees and shifts its narrative toward downside protection. | |
| Identifying Managerial Edge Across Strategy Disciplines | 5 | 5 | 1 | 1 | Ted asks how Adam filters thousands of funds down to roughly thirty holdings. Adam educates on sector dispersion in long-short equity, scale differences in distressed debt, and the need for structural edge in macro. | |
| Bottom-Up Manager Selection vs. Top-Down Asset Allocation | 7 | 4 | 2 | 4 | Ted invokes Markowitz mean-variance optimization and probes whether bottom-up manager selection conflicts with top-down risk limits. Adam explains Evanston's qualitative risk framework and defends their contrarian heavy allocation to long-short equity. | |
| Evanston's Strategic Allocations and Low Leverage Philosophy | 5 | 4 | 1 | 2 | Ted asks Adam to contrast Evanston's strategy breakdown with consensus industry allocations. Adam explains why they avoid highly leveraged quantitative strategies due to liquidity risk and margin vulnerability. | |
| Data Analytics vs. Soft Qualitative Factors in Due Diligence | 5 | 3 | 1 | 2 | Ted asks whether data science and AI are reshaping fundamental due diligence. Adam explains why qualitative soft factors like competitive hunger remain superior to quantitative screens in manager evaluation. | |
| Manager Sourcing Channels and First Meeting Evaluation Criteria | 6 | 4 | 1 | 2 | Ted explores manager sourcing channels and initial interview dynamics. Adam breaks down prime broker flow, network referrals from eccentric peers, and probing trade implementation over standard stock pitches. | |
| Operational Diligence, Background Checks, and Red Flags | 5 | 3 | 1 | 1 | Ted asks what happens offline during background checking and operational due diligence. Adam details looking for missing references, forensic track record verification, and trusting instincts around perceived sleaze factors. | |
| Sponsor: Ridgeline Investment Management Platform | 6 | 3 | 1 | 3 | Following the Ridgeline platform sponsor read, Ted asks how a nine-person investment committee makes high-conviction decisions without succumbing to consensus groupthink. Adam outlines their unanimous-entry rule and the discipline of revisiting contentious ideas. | |
| Ongoing Manager Monitoring, Asset Growth, and Cultural Health | 5 | 4 | 1 | 1 | Ted asks how Evanston monitors portfolio managers on an ongoing basis. Adam highlights tracking asset growth style drift, post-success internal culture friction, and informal touchpoints over rigid metric checks. | |
| Investment Lessons, Bank Spinouts, and Sizing Discipline | 6 | 4 | 1 | 2 | Ted asks where Evanston has made mistakes. Adam reflects on backing investment bank spinouts who lacked true business-building grit, distinguishing macro skill from luck, and the emotional challenge of selling struggling managers. | |
| Market Opportunities: Equity Dispersion and Mispriced Volatility | 6 | 5 | 2 | 3 | Ted asks where Adam sees market opportunities and how allocators can trade volatility. Adam details why passive ETF flows create stock-picking dispersion and warns against the crowded retail trend of shorting VIX volatility. | |
| Systemic Risks: Market Liquidity and Factor Crowding | 5 | 4 | 1 | 2 | Ted asks about systemic risks on Adam's radar. Adam outlines acute liquidity mismatches in credit markets, high-yield ETF fragility, and crowded factor models reliant on cheap leverage. | |
| The Future Outlook and Next Performance Node for Hedge Funds | 5 | 4 | 1 | 2 | Ted asks Adam to scenario-plan the next performance node for the hedge fund industry. Adam outlines a two-thirds probability of market stumble leading to hedge fund outperformance, followed by closing reflection questions. |
Statements from this episode (29)
Blitz: The average hedge fund adds no value net of fees
“I think the industry as a whole, and we, we've always felt the industry as a whole does not really add much value, if any value, net of fees. So the average manager isn't very interesting.”
Blitz: Evanston prefers smaller, sector-focused long/short equity managers
“So long, short equity, which you know, is a good part of what we do. We've always preferred smaller managers and managers with a sector of expertise, you know, all else equal.”
Blitz: Real estate offers high alpha due to limited security-level scrutiny
“A sector like real estate is sort of a boring sector, right? There's not that many people who are looking security by security and saying, you know, here's the characteristics of REIT A versus REIT B, right? It's not a particularly exciting area, but it's one …”
Blitz: Evanston prefers larger distressed debt managers with established infrastructure
“Distressed debt is very different. You know, we generally prefer larger managers. They're managers who can afford the infrastructure, the legal expertise. They've been through multiple credit cycles.”
Blitz: Avoid top-performing distressed debt managers chasing low-return risk
“I'd argue in the recent period managers who've done great, you would probably want to be more cautious of the managers who've done sort of mediocre because they might be chasing risk rewards that aren't very attractive.”
Blitz: Bottom-up manager selection beats top-down asset allocation in hedge funds
“Much more bottom up. You know, we think the scarce resource are really great, great managers. And, you know, we've learned this the hard way, right? When you try to say, here's my view of the world, let's shove a mediocre manager in to fit that view of the wor…”
Blitz: Quantitative risk models work in 98% of cases but miss tail events
“We have a framework we call our qualitative risk framework where effectively, you know, we think quantitative measures of risk work in 98% of the cases, but it's the two percent of the other cases that you really need to worry about.”
Blitz: Long/short equity offers the greatest manager diversification among hedge fund strategies
“We actually think long, short equity is the strategy where you get the most diversification among underlying managers.”
Blitz: Evanston's long/short equity managers run 40% to 50% net exposure
“So, you know, if you look across our long short equity manager universe, I would say the net exposure is probably between 40 and 50%.”
Blitz: Evanston allocates nearly half its portfolio to long-short equity
“If you look across the firm, probably about, you know, close to half is in long-short equity, maybe 15 or so percent in macro, 20% event-driven and the remainder in relative value. Very little quantitative strategies and very little in the way of strategy that…”
Blitz: Investors are poorly compensated for crowded, high-leverage strategies in illiquid markets
“And when you start combining highly leveraged strategies with strategies that are crowded, where people are looking at similar factors in a market that we still think is fairly illiquid, you know, in our view, those are risks that you're not particularly well,…”
Blitz: Manager selection depends heavily on qualitative soft factors
“We think so much of manager selection and trying to figure out who's going to do well prospectively is based on much softer
Factors such as, you know, why is the person doing this?
What drives them?
Do they really love this?
How competitive are they versus are…”
Evanston Capital meets with over 200 new managers per year
“So we end up meeting in a given year, call it north of 200 new, new managers that we weren't previously familiar with.”
Blitz: The importance of trading and execution is dramatically understated
“I think the, it's so dramatically understated the, you know, how important trading is in any investment strategy, market impact, implementation.”
Blitz: A clear portfolio construction approach strongly predicts manager success
“What we found over the years is that, you know, the more folks are confident and have a handle on their own approach to portfolio construction, as opposed to kind of blowing in the wind on it, the much more likely they're going to be successful in it.”
Blitz: Track records built on low capital bases struggle to scale
“And a lot of times in the past, you might have what appears to be an optically good track record, but it was done on a very low capital base, or there was some sort of issue that enabled them to do well out of the gates, but at any sort of larger size, you kno…”
Blitz: Evanston immediately rejects hedge fund managers showing a sleaze factor
“You know, we have a term we just call sleaze factor, which is whether it's on the investment side or the operational side, if you're meeting with the manager and you're just not getting a great vibe from them, you're getting incomplete answers. Just, it doesn'…”
Blitz: Evanston requires unanimous nine-person committee approval for new managers
“So we have a nine person investment committee that is the formal kind of investment body, if you will, of the firm. And we need unanimous approval of all nine of those investment committee members before someone makes it in the portfolio. Only really need one,…”
Blitz: Evanston's best hedge fund investments rarely check every box perfectly
“Very, very few of our, you know, best investments have had every single box check absolutely perfectly, and in fact, some of our more mediocre initial investments have been the things that kind of check every box, but again, that spark wasn't necessarily there…”
Blitz: Evanston avoids tiny toehold allocations, investing in size from day one
“And I'd say when we do our day one investments, we do it with conviction and in size. And so you know, we're not believers in, hey, you know, let's take a 10 basis point position in a manager so we can all pat ourselves on the back that we knew that that manag…”
Blitz: Style drift from asset growth is Evanston's top redemption reason
“It's probably the number one reason why we redeem from managers is the style drift that comes from asset growth.”
Blitz: Evanston averages 15% to 20% annual manager turnover
“Turnover on average in a given year is about 15 to 20”
Blitz: Trade structuring is a more sustainable edge than directional macro calls
“Something like the ability to structure trades very well, or, you know, say, hey, here's my macro view, but I'm going to position myself in such a way that if I'm right, you know, I'm going to do really well, and if I'm wrong, I'm going to, you know, lose a li…”
Blitz: Allocators should redeem immediately when a manager's passion deteriorates
“If you start to sense, boy, the mentality of the manager is changing or something about their strategy or something about their love for the business is kind of Changing for the worst. Even if they're going through a drawdown, you're still better off probably …”
Blitz: Allocators should add to underperforming managers and trim top performers
“You want to be reducing when someone's doing well. You want to be adding when someone's doing poorly if everything else, all else is equal. You want to be investing in a new manager, at least new for our portfolio after a period in which they've been strugglin…”
Blitz: 90% of long/short equity managers add no value after fees
“And I mean, I would caveat that with, you know, we think 90% of them probably add no value net of fees.”
Blitz: Top long/short equity managers face high alpha prospects from ETF flows
“For the 10% who are really good though, we just think that the distortions between individual stock prices and their fundamentals is just going to continue to grow because it's going to be influenced by ETF flows and index flows and things like that, and so fu…”
Blitz: Popular short equity volatility strategies are a very risky proposition
“You know, I'd say one, I'd call it maybe an orange flag or red flag on the equity volatility side is you're seeing a lot of people today go, go explicitly short equity volatility and it's being packaged as a quote unquote alternative strategy. We think that th…”