The Exchanges

Q What was that travel experience like in Europe right out of college?

A Well, of course, I had a backpack, and I had, I think, 300 dollars, and I stayed in the southern part of Europe, which was the cheapest part of Europe. I only spent one night in Geneva, because I ran out of money, so I went back to Greece. Europe in 1973 was much less sophisticated, much less than it is today. You think about that, that's 30 years after the war, which seems like a long time, but Europe was basically devastated in World War II, and it was still rebuilding. So it was, in Greece, I actually transported myself back and forth from Athens to various islands on army surplus transport boats, because that was the only service they actually had.

AI assessment note: “Well, of course, I had a backpack, and I had, I think, 300 dollars”

Q And so what was it like stepping in, right? You're in the thick of it in oh nine. A lot of panic.

A I came even worse. I came December of oh eight. So December 15th of oh eight, I took the job. It was a Friday. I signed a contract on Friday. I met with the managing team on Saturday. And the management team was a little bit freaked out for two reasons. One is that they had a new CEO that they didn't know and didn't come from their business, and I knew that, I knew that would be an issue. I said to them at the time, I said, look, I'm not going to bring people into this company. I said, my job is to figure out which of you are in the right job and which of you are in the wrong job, and to figure out how to promote the best people in the organization, because I'm sure that there's enough talent in AB to actually run it. And then I said to them, um, I know you feel like you're in a very stressful situation, but the good news is this company is not levered. It's not going to go out of business. Our earnings are going to go down a lot. Our assets are going to go down a lot, but we'll survive. And having come from a levered world, I knew that was a key issue, and that was not something that I think they really appreciated. And then we set about rebuilding the firm, and it took a lot longer than I thought. I had thought that the business could be stabilized and rebuilt within two to three years. By five years, I had a five-year contract. The business would be back on its feet and grow…

AI assessment note: “I came December of oh eight... the management team was a little bit freaked out”

Q So what does that look like in a typical strategy?

A So let's just take global equity for a second. So number one, the manager is only paid on performance. So constantly they're concerned about how much capacity can they really run? How much money can they really run? Secondly, we run concentrated portfolios. So that manager has 20 to 25 long positions in a global portfolio that's concentrated. It's not five or 10, but 20 to 25 is concentrated. What you learn about diversification as well is that the benefits of diversification continue. As you add more and more positions, but it's asymptotic. It becomes significantly less valuable once you're beyond 12 or 15. And 20 to 25, you've gotten 95% of the first occasion benefit. Plus, nobody owns one manager. Not an institution, not a client, nobody does. And that is another real problem in the industry, because people diversify themselves across managers, and when they diversify across managers, they're creating basically an inefficient index. And people don't think about the fact that each manager is trying to diversify their own business So they have the manager diversifying its business because it wants to for its own commercial reasons, and then the client diversifies itself over multiple managers, and it just ends up with goo at the end of the day.

AI assessment note: “So let's just take global equity for a second... we run concentrated portfolios.”

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A Today we have five managers, or will by the end of this year. We have a partner. Generali's our partner. Generali's committed four billion dollars of capital to Aperture. One of the things that I wanted to do differently than most launches was, number one, I didn't want to launch a single fund. Lots of Folks in the hedge fund world run multi-manager portfolios. It's one single portfolio. I thought that that was taking a little too much risk on because you're very path dependent with regards to that fund, number one. Number two is I wanted clients to be able to decide, do they want global equity? Do they want emerging market debt? Do they want a global long short credit? Where do they want to put their chips, so to speak? And I wanted managers to have a long duration to produce performance because, again, I've been in this business a long time. Managers don't always perform, and you can't expect that they will perform in their first one or two years, and so the capital is allocated for a five-year time period. Now, for five years the manager doesn't perform, then they don't deserve your money, and we think that that's fair time period for the manager, and good for the clients that are putting their money in, because again, the manager's not going to be dysfunctional if in year two they're not performing, because they have a long period of time for the seed capital. That's anothe…

AI assessment note: “Today we have five managers... Generali's committed four billion dollars of capital”

Q How did you think about the range of strategies you wanted?

A I've interviewed, as I counted yesterday, actually, as of today, 292 managers over the last 13 months. I had a strategy of hiring managers that was not driven by strategy, but rather driven by human capital. At the end of the day, I always thought the person was the most important thing, and if we go back to me talking about my career a little bit, I've always been fascinated by the people. So at the end of the day, If I found somebody that I thought was really interesting, really good, had a different way of investing that I thought was persistent, that was the person I was going to hire no matter what the strategy was. And so I don't think anybody would launch their first fund in their company being emerging market debt, but Peter Marber, who is the manager I found, I thought was really an interesting manager in that space doing a really interesting thing. We hired him, and he was the first manager.

AI assessment note: “I had a strategy of hiring managers that was not driven by strategy, but rather”

Q Did you try to implement that within Alliance Bernstein before you started Aputure?

A I did, and we did. So my visit to the SEC and Treasury was as CEO of Aputure, and I believed that it was worth disrupting ourselves, meaning AB, by launching funds that were these performance-based funds, and we did. I think while I was there, we launched five or six funds. One of the imperfections of doing it at AB, which I've resolved at Aperture, is One of the main drivers of this performance structure and compensation structure is the portfolio manager is really aligned with you, the client. If the portfolio manager is managing 90% of their assets in fixed fees and 10% of their assets in performance, it doesn't actually achieve that. So one of the interesting things I see in the marketplace is large institutions will say to me, well, you know, we get that performance fee structure from other companies. And I say to them, gee, that's really good. I'm glad you do. How much of that portfolio manager's compensation comes from the performance? And the answer invariably is not much. And then I'd say, well, you're a free rider effectively, because the company that's giving you that deal is giving you the fee deal you want, but it's because it's an incremental dollar to them. It's not controlling the capacity, which is really what you care about, and it's not incentivizing the manager with your incentives, which is what you care about. You're just getting a fee deal that the headli…

AI assessment note: “I did, and we did. ... while I was there, we launched five or six funds.”

Q There's so much depth into these layers of assessments of the people and how they're managing the team and how they're going through the process and how they're trading. How much time do you spend with one of your managers before you decide whether you want to make them an offer to come?

A So I've been calculating that I spend personally an average of about 30 hours, and then other people in the company will spend cumulatively probably another 10 hours, maybe 15. So again, that's a lengthy period of time. It's not huge, but that most allocators would never spend anywhere near that much time with a person. It's a little bit like, ah, concentrated investing. You know, if you get to spend more and more time with people, you have a better chance of actually getting the judgments about the people, right? I had this epiphany as a banker. Said to myself one day, you know, I've been calling on you for 10 years. You're the CEO of some company. I've known you for a long time. Ok. You've known me for a long time, but you think about it. Over 10 years, maybe I see you four times a year for an hour. Okay, so that's 40 hours over 10 years. That's not so long. So, so, I've known you over a long time period, but I don't know you that well. Again, it's the intensity of time over the time period to actually get to understand the human being.

AI assessment note: “I spend personally an average of about 30 hours”

Q So the manager in that example that's got 20, 25 names, what might a fee structure look like?

A So for that manager, we charge what the global MSCI ETF charges, which in the United States is 32 basis points. That's the management fee. And then we only charge if the manager beats the index. One of the interesting things about ETFs is that virtually all ETFs, with the exception of US large cap, actually earn less than the index. There's friction cost. Security lending doesn't overcome all the friction cost. Can't always buy all the securities. For example, in high yield, the high yield ETF owns a hundred bonds. The actual index owns over a thousand, and so replicating the index is almost impossible. We think that we should be held to beating the index, not the ETF. So we have to actually beat the index, and if we beat the index, then we charge 30% or whatever that excess is. So by definition, you could never pay more than the performance, because the performance is the basis points, we only get a third, and it can't by definition happen.

AI assessment note: “we charge what the global MSCI ETF charges, which in the United States is 32 basis points.”

Q How do you use social media, both personally and professionally?

A Personally, I'm a neanderthal. I've learned a little bit, but professionally, Aperture's been an eye-opening experience. We thought out of the box. The head of our client business came from the music industry, so it had nothing to do with this world. But we had a view that The financial industry was not making itself available in a personalized way to the end client that you Met or listened to financial professionals in sort of a stilted, professionalized selling methodology. You're either being sold something, like the financial advisor was selling you something, or it was kind of a stilted academic paper kind of delivery. We think we're building real intellectual capital inside of Aperture, and we wanted to offer that intellectual capital to our clients, our prospective clients, in a way that they could understand it. And so I like to say we're sort of the Netflix of the asset management business. We offer you content where you want it, when you want it, and how you want it. And it could be in the palm of your hand. It could be, you know, on your computer. It could be wherever you want to read it. This year, I don't know if you know this, but it just happened recently. Simon Thorpe, who runs our credit business, is the number one influencer in the finance business at LinkedIn. I think that's a pretty big deal. Aperture's got a pretty big footprint. And why? Because Simon, who…

AI assessment note: “Personally, I'm a neanderthal. I've learned a little bit, but professionally, Aperture's”

Q You go through Pete Marwick and work your way from there into asset management. What was that step?

A So for me, I was always captured by financial markets, and I had an opportunity to work at Goldman Sachs, and the interesting part about Goldman Sachs at the time was the accounting profession, you had to be a jack of all trades. You had to be a technician, You had to be a salesman. You had to be a manager of people. You had to be a manager of the client. And frankly, nobody was good at all those things. But that was really what you were required to do. What was really curious to me about Goldman Sachs was, Goldman Sachs allowed people to specialize, and they compensated the different specialties equally. So at the partnership level, I mean, if you became a partner, you could be a corporate finance specialist, you could be a sales specialist, you could be a client specialist, you could be a trader specialist. Basically, the compensation was equal. Which, again, from a behavioral point of view, was very interesting, because Now you let people gravitate to their greatest skill. And you didn't incentivize people who maybe were lesser skilled managers or lesser skilled corporate finance people to try to do that because it paid more, because it was all equal pay. And I thought that was fascinating, and I was really interested in joining that company for that reason.

AI assessment note: “I had an opportunity to work at Goldman Sachs”

Q How does that recruiting process work where on the one hand, as you hire someone, they want to manage money. On the other hand, this is an example of you said, well, they're running a shadow book for 13 months. How do you bring those different people in and convince them to come?

A I think that this is one of the interesting things in the industry. The revenue model itself is if you're a manager that can perform Your compensation at Aperture is significantly better than any place that you're at, because you earn on less capital, more money than you would in the loan-only space, and even in the hedge fund space. So for those people who actually believe they can perform and have a history of performing, this is kind of like emancipation, because they're not on the road all the time trying to raise assets. They don't turn themselves into a salesperson. They focus on performing, and they ask to get paid for their results. They know they're not going to perform every year, so they're prepared in some years not to make any money. So they have to understand that. And that also Understanding that person, finding that person is also interesting. I had a CEO tell me, one of the big companies, we'll never get a good manager. And I said, why is that? He said, well, because good managers know that they don't perform. And so I said, so what are you telling me? I'm not going to get a good manager because the managers I'm not going to get are people that know they're not going to perform and aren't willing to actually bet on their performance. Guess what? I don't want that manager. I'm actually trying to figure that out when I talk to people. Are you really a risk taker?…

AI assessment note: “Your compensation at Aperture is significantly better than any place that you're at”

Q So when you're screening through potential PMs for Aperture, do you tend to look at portfolio managers that are more experienced so you can dive into examples of that, or are you looking at someone who's been a very successful analyst who your intuition is telling you they have the chops to be able to trade and be a portfolio manager?

A So I've looked at both, and I've actually hired both. Interestingly enough, the fellow that runs Global Equity, Technically had not been a portfolio manager, although he managed his position with portfolio manager skills, and actually he ran a portfolio for us on Bloomberg and our Bloomberg system for, I think, 13 or 14 months. It was very interesting about that. This goes to allocating capital to managers. So in the industry, just take a basic simple situation. You've got a financial advisor, you meet with your financial advisor, and your financial advisor says, we're going to buy Manager A. What's the reason for that? Well, his three-year performance is really good. Or maybe his five-year performance is really good. And that's about the only part you listen to. And then he goes on with all the other things that he has to say. But ultimately, it's just based on that historical performance. So we're very tied to looking at history. And it's the agency risk in us that is a huge bias in our willingness to invest capital. We have to see experience. Because if you invested without experience, people would say that's silly. And that's a human trait. That's actually fair. It's not an unfair thing. But experience has its own bias associated with it. And escaping that bias is also a challenge. So, with regard to this one person that I did hire, I actually watched him Perform. And when …

AI assessment note: “So I've looked at both, and I've actually hired both.”

Q How did your career then progress through Goldman?

A So as I said, I was very lucky. I started in the mortgage securities business. Goldman early on decided that they would create a business in investment banking and in the fixed income business, what was then called the fixed income business. There was a joint venture that focused on financial institutions. They recognized early on that financial institutions had an unusual nomenclature to it, an unusual regulatory environment, and if you really were going to provide service and advice to that industry, you had to understand it. And you had to speak the language, and you had to understand the peculiarities of balance sheets, regulation, and issues that surrounded that. You couldn't call on Procter & Gamble and Citibank and assume that you could have the same conversation. It just didn't work. And of course, as the world got more sophisticated, that became more obvious, but Goldman was early at that, and I was in that group of people that actually serviced financial institutions. That included banks, insurance companies, and asset management organizations. That was a period of about eight years or nine years for me in that environment, and in that nine-year time period, well, let's call it 10, because it basically was 1990 to 2000, many things happened in the United States of America, as well as the world. The most significant thing of which was the change of the interstate banki…

AI assessment note: “I started in the mortgage securities business... I was in that group”

Q Can I push on that a little bit? You've seen a lot of examples where you have talented analysts that don't end up having the chops to create proper portfolio construction around the relative conviction of their own ideas. So how do you balance the two?

A It's a very good point, and it's a very difficult problem because what I'm leading up to is that the third component of a successful PM is that they're also have trading skills. So you need to be an analyst, an engineer, and a trader. The number of analysts that can become an engineer and a trader is small. The ability to identify an analyst who actually can be successful being the trader and the engineer is very difficult to the point where it's hard to take the risk. I have done it, but it's hard to take that risk, and you need some proof of concept. So I think the challenge that analysts have is they've spent most of their career getting really deep on a particular company, set of companies, bonds, structures, whatever. They concern themselves to some extent of when I buy it and when I sell it, because they have price targets. But the interdependencies of the different ideas and the interdependencies of the different ideas with the market and the impact that that has on the total portfolio as it relates to an index is a challenge. It's a different challenge than they're used to, not something that they've thought about. Now, they're smart people. They can learn it, but there's also an instinct to it. There's a feel to this. You can construct portfolios with quantitative methodologies. So for example, let's just be very simple. We can say, we're gonna have 20 stocks, and we'r…

AI assessment note: “You can construct portfolios with quantitative methodologies. So for example, let's just be very simple.”

Q Are they specifically hedge funds, or long only, or just anything that you find interesting?

A So this is a bit of a complex answer, but another thing I found in my career is that allowing managers to be unconstrained is far better than constraining managers. Clients constrain managers all the time. I was talking to a client the other day who said, well, you know, if I give you money, then you can only own a certain number of bonds that look Like a certain thing, and I basically said to them, look, I appreciate that you have your constraints and your concerns, but I won't manage money on that basis, because I'm trying to actually produce a return series that you're looking at to make a decision to hire me, and then you're giving me a set of constraints. It makes it virtually impossible for me to actually create that return series, so that may be okay for you, but that's not okay for me. So we attempt to provide general constraints, meaning it's emerging market debt, or it's global equity. But within that, I don't want to say to somebody, you have to have large cap, you have to have small cap, you have to have mid cap, you have to be in China, you can't be in China. It's basically you go where the money can be made. Because at the end of the day, I'm trusting that the manager who's spending all day long and all of their life trying to find a return is better at identifying where to put the money than me. Because I'm not spending that much time doing that. So number one is…

AI assessment note: “allowing managers to be unconstrained is far better than constraining managers”

Q So what was the impetus for you leaving Goldman?

A So I had a great career, Goldman. I was there almost 24 years. When I took over the Investment Management Division, which wasn't a division at the time that we went there, we formed it basically in 2000, and that's when I went there. I said to the division at the time, look, I'll be the last head of the division that comes from outside of the division. It really didn't make any sense that a division wouldn't be run by somebody who came from the division. And the asset management business looks like a simple business, and it doesn't have a balance sheet. It's basically cash in and cash out, but it's basically a extraordinarily complex behavioral driven business because you're humans that are either building machines that are making decisions or humans that are making decisions, and humans are very complex, and not only are they are complex, but their reactions to various different scenarios in the world is different each time because nothing is the same, and so human reaction and controlling human reaction Creating processes around human reaction and building a business that's based entirely on human talent, that's a really challenging and complex process. So, most people looking at asset management think it's simple, but in fact, it's extraordinary complex. And as I like to say to people, if it was so simple, every manager would outperform. And we know that that's not the case.…

AI assessment note: “So I had a great career, Goldman. I was there almost 24 years.”