The Exchanges

Q And let's turn to the private markets. Again, a wide swath of strategies. Some, as you mentioned, Damien, some of these idiosyncratic return streams, some maybe more call it traditional private equity. Where have you chosen to kind of dive in?

A Well, there's definitely a thematic aspect to what we do. So we try to focus on things that are timely given the market environment. So earlier this year, we did a multi-manager allocation within distressed credit. This was basically immediately following the dislocation. And we believe that credit with the right managers was a great way to play the recovery because you At the time, it was very uncertain how things were likely to proceed, and credit, we thought, was a downside-protected way to generate attractive returns, regardless of how this played out, because if things go poorly, you have more ways of generating an attractive return. You can take over the underlying business or own the underlying assets and sell those and still generate an attractive return. More recently, we've done a feeder into industrial real estate because we think that's a sector within the real estate space where clients are generally under allocated, and there are a lot of secular tailwinds to building e-commerce infrastructure, last mile type of facilities. If we think going forward, what we're focused on, you know, we're looking at distress within the real estate space as well. So opportunistic real estate, we're looking at earlier stage investing within equities. That's obviously not an out of favor asset class. It's very much in favor, but we think through our relationships, we can find manager…

AI assessment note: “earlier this year, we did a multi-manager allocation within distressed credit.”

Q So Damien, let's start on the public side. Our par sounds a lot like something you might have learned from your Bridgewater days. Why don't you take me through how you approach public markets the way you do?

A Sure. Underlying risk parity, there are two aspects. One is what to hold. I think that's an important piece and actually a big differentiator in terms of how we do it versus how a lot of others do it. Risk parity in our mind is not just holding a bunch of line items at similar risk because a simple example is credit is if you hold credit in a leveraged fashion, you could make it have a similar risk level to equities, but it actually performs very similar to equities. There's not a lot of diversification there because the environments in which credit does well And I'm talking about corporate bonds, high yield bonds, tends to be very similar to the environments in which equities do well and poorly. So we try to identify assets that are reliably different. Going back to our original point, our overarching objective, find things that do well in different environments. And probably very much informed by my experience at Bridgewater in the book that Alex wrote, we identify the main economic drivers as growth and inflation. So we try to find assets that have differing sensitivities to different growth and inflation outcomes. And so specifically we've identified four major asset classes. Equities. Treasuries. So these would be nominal treasury bonds. Inflation protected securities, which are also issued by the treasury, but have an inflation indexing component. So they pay you CPI over…

AI assessment note: “Underlying risk parity, there are two aspects. One is what to hold.”

Q So when you came together to form the business, how did you bring these ideas together into what became your investment philosophy?

A We've always had that philosophy of seeking to find individually attractive returns that were reliably different from one another. It sounds like a very simple endeavor, but in practice, it's quite hard. If you think about most investment portfolios, they have lots of line items, but those line items are actually very closely related, particularly in really bad environments like 2008 or Q one of 2020. And so in practice, investors don't have that much diversification. They're all derivatives of the equity and credit markets, which are really dependent on a strong or improving growth environment, and they're susceptible to the opposite. So I think we've always had a connection in terms of our view on that and the importance of finding things that were driven by other factors, whether it's active management or whether it's other economic environments that might be beneficial for a particular asset or strategy. Finding ways to Build in reliable diversification within client portfolios has always been something we're passionate about. And I think it's evolved a little bit. So initially, I think we thought about the world in alpha beta terms. So beta meaning holding assets, earning a premium for holding different types of assets, long, only passive, that could be stocks, bonds, commodities, et cetera. And then alpha meaning active management, We've evolved that, I think, over time t…

AI assessment note: “We've always had that philosophy of seeking to find individually attractive returns”

Q and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. All right, well, let's turn to some of the other buckets, and why don't we start in the hedge fund side, or however you want to refer to that bucket. What do you see as your objective in that, and how do you approach it?

A Our objective is to find attractive, uncorrelated returns that are driven by manager skill. And within the hedge fund space, because managers have a much broader range of tools they can utilize, you're more likely to find that than in the more traditional mutual fund space where most of the return will be driven by what happens to the market, regardless of how great of a stock picker you have. So as a result, within hedge funds, we tend to gravitate towards managers that implement their skill set in a more market neutral context. Either market neutral all the time, so they have equal exposure to longs and shorts, or market neutral over time, meaning they're not biased to be long or short over time. And that's what we can rely on when determining that these are lower correlation strategies. Now, of course, the challenge is that when you take away the market tailwind, it becomes much harder to make money. So that's an ongoing challenge of identifying those managers with skill, with an institutional infrastructure that can repeat those outcomes over time. That's where a lot of qualitative analysis and many years of relationship building and evaluating managers comes into play.

AI assessment note: “Our objective is to find attractive, uncorrelated returns that are driven by manager skill.”

Q So what's the research process look like on a particular, just pick as a private strategy?

A If we come across something that looks interesting, we'll obviously spend a lot of time with that manager digging in, understanding the strategy. We talk to the peer group, understand what the competitive landscape looks like, make sure we understand the risks. We do reference checks. We want to make sure that we're working with high quality people that we can trust. There are operational aspects that we spend time on taxes, structuring. It's a pretty long checklist. But we have a pretty efficient way of moving through different opportunities. And then obviously those things compound from a learning perspective. So the longer you're looking at things, the more knowledgeable you are, the easier you can evaluate things. That's how it works.

AI assessment note: “we'll obviously spend a lot of time with that manager digging in, understanding the strategy”

Q Damien, what teaching from your parents has most stayed with you?

A I think an open-mindedness. My family, actually, probably like a lot of families in the US, they come from far off places, and my parents, they met each other in New York. My dad's French, was on vacation in New York, There was a commercial airline strike. He was trying to get home, so he walked into the nearest travel agency, and there was one woman on the floor that spoke French, and it was my mom, and they connected, and then after a four-year love affair back and forth between continents, they ended up getting married and settled in California, and I grew up with this family that had rich traditions in the Northeast and then also in France, and my mother just loved to travel, and that was something she imparted on me, and And the aspect of it that she loved was just this experiencing different ways of thinking. And I think that actually serves me well in this capacity, because again, it's, I think a lot of success and learning comes from being open-minded to different approaches to solving various challenges. And especially now, if you think about the investments that we source on behalf of clients, I think you need to have a global perspective and you need to think about different ways that you can generate attractive returns.

AI assessment note: “I think an open-mindedness. My family, actually, probably like a lot of families”

Q Where do you tend to fish for these managers?

A Through our network, I'd say. So by virtue of my time at Bridgewater, I know a lot of large asset allocators on the institutional world. So endowments and pension plans. And so we do a lot of sharing of ideas with those individuals. And that's how we surface a lot of managers. Also talking to the managers that we respect. They oftentimes have peers that they can recommend or managers that they themselves allocate to. And this business, I think talking to the smartest investors and getting their insights is immensely valuable because nothing is as valuable as experience. And then ultimately this is a trust business. So especially in alpha, you know, if you're just hugging the benchmark within us equities, it doesn't matter that much what you do. You're going to look very much like the index, but within hedge funds, if you're seeking alpha returns or skill-based returns, there's a very wide range. Range of potential outcomes there, and so you have to trust the values of the organization you work with. So we specifically look for managers that are their own largest investors, that close their strategies, that are not distracted by other businesses, that are terrified of losing money, because no matter how smart you are, this is one thing I learned from Ray, among many things, but one of the biggest lasting impressions I had from my time with him is he was Always very humble about …

AI assessment note: “Through our network, I'd say. So by virtue of my time at Bridgewater”