The Exchanges

Q I'd love to turn to talking about some of the underlying strategies within hedge fund portfolios. And Dan, I think we have to start with the platforms. These platform hedge funds in what's become a pretty concentrated industry by assets have by far the largest footprint. What's the investment case for the platform hedge funds?

A It's an interesting case because the elevator pitch for hedge funds, I think, and Adam alluded to this earlier, is that if you invest in hedge funds, generally, you're not going to get total returns that are quite as high as equity markets, but you'll get something maybe that's between the returns of bonds and equities, and the volatility will be much closer to that of bonds. And you'll have low beta to both. That actually sounds pretty good. Now with these platforms that we're talking about, if you look over the last three, five, 10, or even 20 to 30 years in cases where they've been around for that long, and there are some that have, the platforms have actually outperformed equities on a total return basis with volatility and the betas that have been as low or lower than the overall hedge fund industry. So it almost looks like a silver bullet. That's why people have been attracted to this exposure. The results have just been highly compelling on paper. But if you step back and think about what is a platform, a platform in short is just a type of hedge fund that's allocating risk taking across multiple distinct portfolio managers or trading teams. Each of those teams is pursuing a specialized strategy. One could be trading utility stocks. Another could do M&A. Another could do rates and FX. For the most part, they're running market neutral. That is with very little exposure to…

AI assessment note: “platforms have actually outperformed equities on a total return basis with volatility”

Q Dan, there's a lot of head nodding about the strategy, a lot of head nodding about how hard it is to find the right managers. How do you go about picking the macro managers you want to invest in?

A In the macro space specifically, I completely agree with what Craig and Adam have been saying. The point that Adam made about trying to find an edge with respect to trade structuring and expressions as opposed to simply looking for people who appear to have good thematic judgment is something that I agree with. I would add to it that Another way you can try to get at a similar result is by looking for people who turn over positions more frequently. They could be delta one positions, but they're just not sticky. People who will be very tactical in the way that they trade and will not get married to themes because so much from our perspective of the value that's added in macro is Is actually done while you're waiting for the themes to play out. It's not capturing the big breakout of a theme. And frankly, if that's what you're trying to do, I don't think you pay someone two in 20 or one in 10 to do that. I think you think about buying some CTAs or something. The macro space is very valuable because of the diversification benefits. It's kind of doing For the hedge fund portfolio, what the hedge fund portfolio is doing for the broader asset allocation at an institution.

AI assessment note: “looking for people who turn over positions more frequently”

Q Great. Well, let's finish it off with just one closing question for each of you, which is, what's your biggest investment pet peeve? Dan, why don't we start with you?

A I really dislike the use of the term black box when referring to certain investment strategies. Usually these will be quantitative investment strategies. And the reason I say that there is a good reason to not like that term. I understand why people use the term and I do use it myself sometimes too, because it's fun to say, and it's easy to incorporate into conversations. But while it's true that you have to diligence Quantitative or systematic strategies differently than you do other strategies. It's simply not true that you can't gain as much confidence in an investment in that space as you can investment in a discretionary space, whether that's an equities or credit or something else. If anything, I would make the argument that you can actually get more comfortable with certain quant managers than you can With most discretionary ones for the obvious reason that they adhere to clear systematic processes. The real black box is the human investor who's subject to all the emotions and behavioral biases that come with not being a machine. Although that may be changing, right? If you ask certain people, the machines may very soon have all of those emotions and behavioral biases as well. But that would be my biggest pet peeve. I think we need to give the quants a little bit more credit.

AI assessment note: “I really dislike the use of the term black box when referring to certain investment”

Q Adam Blitz, and Dan Fagan. Great to see you all. Thanks for joining me. I'm looking forward to this, uh, geeked out deep dive into hedge funds. Why don't we kick it off with a quick round on each of your programs, and why don't we touch on assets you're overseeing, longevity of the program, and your objectives in the hedge fund allocation. Dan, why don't you start it out?

A Thanks, Ted. GIC is Singapore's sovereign wealth fund. We don't disclose our total assets under management for various reasons, but the program that we have is fairly large in hedge funds, and we've had it for A couple of decades. The GIC framework overall is one that has a very long-term investment horizon and a focus on generating good real returns above inflation, since we're trying to compound real purchasing power for Singapore. And we do that by investing in a diverse set of markets and asset classes, both public and private. I'm a member of what we call the external manager's department, which essentially is mostly A hedge fund investing team, but we also invest in some other types of liquid alternative investment strategies. One thing I might add to this is just from GIC's perspective, since we invest across all types of asset classes and markets globally, not just hedge funds. One of the things about our approach to hedge funds at the more top down level is that we see hedge funds as very important vehicles in the portfolio of active management. And the big reason for that Is that hedge funds can provide very valuable diversification to these large institutional portfolios. And one of the things that we do focus on, regardless of which manager we're looking at or which strategy we're considering, is the ability to deliver some type of different edge or different type o…

AI assessment note: “we've had it for A couple of decades... hedge funds can provide very valuable diversification”

Q Dan, one more for you, which is, as Adam mentioned earlier, leverage is one of the real left-tail risks in the industry. How do you get comfortable with the degree of leverage taken by the platform hedge funds you invest in?

A You don't. I honestly don't think you're ever comfortable with that. If you're comfortable with leverage, you are doing something wrong. It's always about the trade-off. You will find that certain managers Clearly run too much leverage for their capital base, their LP liquidity terms, the talent they have on their platform, and the markets in which they operate. That will happen sometimes, and it can be really difficult to not proceed with doing more diligence because the returns can look really good for a long time. The way that I personally get as comfortable as I can with leverage in these strategies is Is by making sure that the things that I propose for investment or ultimately in which I invest are managers that have very good communication with us, answer all our questions very directly, share with us a lot of data, frequent data too. All of the relationships that we have with funds of the type I've been describing are relationships where we can call them up Right now and talk to people immediately and pose our questions and have them asked, making sure that we have relationships like that. It's the only way I think it works. And March, 2020 was an illuminating experience from that standpoint as well, because we went through that in real time, multiple times a day on the phone with different people at some of these firms, not even just those with which we have invested r…

AI assessment note: “The way that I personally get as comfortable as I can with leverage”

Q There's a lot of ways of getting at those objectives. So maybe we'll do one more round before we dive in on how you think about your investment approach in the space. Why don't we do the same order? Dan, go ahead.

A I think the right way to think about our investment approach in our team specifically, we are bottoms up. The process does not start with us looking at certain strategies like fundamental equities or quantitative equities or credit, and then setting a budget for how much we want to put into each, then going out and filling that budget. Quite the opposite. We're looking globally at At all types of investment opportunities, pretty much strategy agnostic in that sense. And then when we find something that seems truly compelling, we pursue it. The rationale behind all that is we simply don't think there are that many opportunities out there that are truly exceptional and truly compelling. So we try not to narrow the spectrum across which we look at first and And that's worked pretty well for us over time. Obviously, you make adjustments at the end of the day if you figure out that you're tilting too heavily in one direction or another.

AI assessment note: “I think the right way to think about our investment approach in our team specifically, we are bottoms up.”

Q Dan, I have to follow up by asking, how would you know? Because you might see risk reports that show thousands of positions in market neutral, but how do you get a sense as an investor in these of what's really going on?

A That's a great question. I think it's difficult, but I don't think diligence into multi-PM platforms, or quant funds for that matter, is as opaque as it's often made out to be. You have to want to deal with people at a pretty granular level, and what I mean by that is you need to work the network or the ecosystem. If you're allocating to funds like this, and you want to do it with confidence, you almost have to wear a second hat of being a pretend recruiter as well. You want to talk to as many people who go in and out of these platforms as you can. You want to understand the different styles that different platforms attract, and then you want to cross-reference as much as you can, try to have honest feedback relationships, which takes a long time to develop, and frankly, is a lot of work. Other thing is, there's an analog with looking at a concentrated equities portfolio. Maybe there's 50 stocks. Maybe there's 30 stocks. Maybe there's 20 stocks. If there's 20 stocks, maybe, though, you only need to look at the first seven or eight, but there's something like that in the platform space, too. If you find a platform that has 200 portfolio managers, certainly you're not going to go out and get to know 200 people really well. So what you do is you look across the different strategies they have, the core business lines, and you try to find the two or three biggest allocations in each…

AI assessment note: “you need to work the network or the ecosystem... talk to as many people”

Q Curious what that means in practice. So you can talk to someone about how they understand that footprint, their firm, the broader context of who's trading, what they're trading. What do you actually look at, Dan, when you're saying you want to do the safest version of that context?

A I would describe it as most investing, you start by thinking about what the opportunity of the investment is. In this case, I think you want to start it with the risk culture framework and setup of the business model itself. So what does that mean in practice? If you're dealing with a large fund that has a footprint in fixed income relative value and systematic equities and a bunch of other stuff, Don't start by going, well, what do you think about the opportunity in fixed income RV? Start by saying, what are your counterparty relationships like? How long have you known these counterparties? Are you a big share of their footprint? Are you a very important client to them? What are the terms like? How have those terms changed over time? You would also want to know, what are your LPs like? Are you going to experience co-holder risk with other LPs who might be faster money? And this is a tricky one because this is actually an area where you have to make a balanced assessment between your own position as an LP in isolation and your position in ecosystem. It's the redemption terms of the fund. It could be that you think, look, I always want the best liquidity I can have. I want to be able to get out in a month with But if you're talking about an investment in a fund that runs levered books and might feel a lot of mark to market stress, you probably don't want other investors to be ab…

AI assessment note: “Start by saying, what are your counterparty relationships like? How long have you known”

Q Craig, Dan, any additional thoughts on fundamental long short equity?

A I've spoken about platforms a lot because that's an area of interest, but certainly don't want to give the impression that we at GIC, any of us on our team really have abandoned fundamental long short equity in the more traditional implementation. If anything, I think it's critical that To make sure that you're looking in areas that might be a little bit unloved at the current moment. I think we'd probably all agree with that. One of the things that I would criticize platforms for, in contrast to some of the positive things that I said about them earlier, they are, like Adam said, short-term oriented. That's the design. They have to run high sharps at the individual team level to make that whole portfolio construction exercise work. So if you just invest in platforms, or even if you put a really big portion of your hedge fund portfolio in platforms, you abandon some very valuable potential sources of return. People simply who can hold concentrated stock portfolios through multiple earning cycles. If all you're doing is platforms or quant, you're going to miss that. You can argue about how to find the right managers in that But to say that you shouldn't be in that space just because it's had some apparent difficulties from high profile funds that have struggled, I think that would be really short sighted. So when we think of long short equity at GIC, we think about the different…

AI assessment note: “don't want to give the impression that we at GIC... have abandoned fundamental long short equity”

Q new product, you want that to be a fair deal. But all these investments shook hands on the deal before rates were up, in theory, with the knowledge that rates could go up. So much capital is already invested in these agreements where there isn't a hurdle rate. How much success do you think you'll actually have in getting those fees changed on your existing portfolio of hedge fund investments?

A I think it depends very much on how hard other LPs are also pushing. If it's just us doing it, I think your intuition is right that we probably won't have as much success as we would like. Probably nowhere close to it, frankly. But if you have the four or five largest LPs at a fund saying this, I don't really view it as trying to retrade these managers. I view it as Trying to make the partnership more constructive and more robust going forward. Managers who are honest about this understand the problem, and I think that for those who care about the longevity of their businesses and keeping their partners in good standing, they'll at least have an open mind about it. Maybe we don't land exactly where we want, but maybe we meet somewhere in the middle, and that's a good outcome for everyone.

AI assessment note: “it depends very much on how hard other LPs are also pushing”

Q Dan, the undisclosed amount that you manage is no doubt very large. Curious, how do you think about the size of your footprint, both in terms of how you want to manage around your portfolio, but also how that then affects the managers you invest with and the underlying markets?

A Yes. If I could cheat a little bit and talk a little bit about the footprint of the industry in general, because following up on Adam's point, I think this is a very important topic today. When you think about the footprint, I think we really mean the total size of positions that hedge funds hold, not their equity capital. I mean, the equity capital of the hedge fund space, I believe most people put around four trillion dollars today, which maybe that sounds big because there's a trillion involved, but keep in mind, you just combine Apple and Microsoft, their market cap together is five trillion. So I don't think that four trillion number should be so scary, and it's distributed across thousands of funds and things like that. But hedge funds are levered. Let's just assume two and a half times gross leverage for the industry in aggregate, which is, I think is probably conservative. That would get you to 10 trillion, which is what I would then call the footprint of the hedge fund industry. 10 trillion is a bigger number. The entire U.S. public equities market is about 40 trillion, I believe. So you're talking about a quarter of that. U.S. treasury market is only a little over 20 trillion. So using a conservative estimate, we've already gotten the hedge fund footprint to half of the U.S. Treasury market, which incidentally, the Treasury market's about the size of U.S. GDP, so half…

AI assessment note: “If I could cheat a little bit and talk a little bit about the footprint of the industry”