The Exchanges

Q Which two people have had the biggest impact on your professional lives?

A My mentor from FACSA, Tom Simon, who's still here. For him in particular, I'm still in the red and will be in the red for the rest of my career. I could say the same thing about my boss here, Greg Thomas. They've taught me a lot. They've put a lot of faith in what I've been able to do, and hopefully I'm able to bring up them and the rest of the team with our success. And I think from both of them, one thing that Is particularly good advice that I would recommend others to think about is there's a risk in not taking risk in the same way that inaction is a decision. I'm very fortunate to be in the position I am, and a lot of that is from them instilling that in me, that comfortable isn't always the best.

AI assessment note: “My mentor from FACSA, Tom Simon... I could say the same thing about my boss here, Greg Thomas.”

Q What was the first iteration of trying to package it differently from a series of single strategy funds?

A The original iteration is now running on its 23rd or 24th year, but it was essentially, instead of having our clients pick one fund or two funds, whether it be thematic or focusing on a sector, is saying, we can take the best of what's at Wellington, package it in one global diversified strategy for you, and you don't have to go around and pick, and you can do due diligence on the firm and the talent underneath the hood. And it's still something that we are having a lot of success with to this day, Both in terms of thinking how to best unlock what's in the platform and really take advantage of the breadth, there's been just a lot of evolution on the way from there. Moving from just relying on those original funds that were equity focused, long biased, to really saying, how do we take advantage of all the other talent we have here at Wellington?

AI assessment note: “package it in one global diversified strategy for you, and you don't have to go”

Q can change the risk parameters that a particular individual portfolio manager is deploying to customize it for The market neutral platform. I'm curious, from their perspective, sometimes someone is accustomed to certain position sizes, certain number of positions, certain number of short positions, as it were. What have you found when you're changing that complexion of how the portfolio manager thinks about how they go about their day to day?

A We haven't asked any PM to do anything differently, and I think that's critical. We don't feel the need that we need to ask any of these PM teams to do something that they're not already good at. If we're asking them to run their portfolio in a different way, it probably means that there isn't a fit already, and rather, we're trying to create something that isn't necessarily there. But what this new platform does allow us to do is to say, I have really high conviction in Manager X. Manager X runs a long bias portfolio. We believe beyond that beta that comes with his alpha pattern, there is a lot of skill in idiosyncratic risk-taking. We have the transparency in terms of what those factor leanings and other exposures are that we could actually say, you have a role to play in this portfolio. But we're going to take some of that beta out of it. We're going to utilize with a lot of precision what that beta is and how we want to reduce it so we can still utilize that PM and lean into some of that idiosyncratic skill without maybe having that structural beta. But at different points in time, if we need a little bit more beta in the portfolio, that's a lever where we can then release our foot off the gas on that hedging But we aren't asking anyone to do anything different, but that is that flexibility that the new platform is affording us.

AI assessment note: “We haven't asked any PM to do anything differently, and I think that's critical.”

Q Where are you comfortable taking risk outside of a neutral portfolio positioning across the different strategies within this platform?

A We have some directional risk takers, and particularly on the macro side, but the hurdle there is obviously a little bit higher. There has to be asymmetry in terms of what happens when you're right versus what happens when you're wrong, because that's a different type of risk you're bringing to the portfolio. We have directional risk takers in rates. We have directional risk takers in FX. We have some that do it in equity. Those that we are Giving that lever to can do it in a way that is appropriately risk managed, that for us is appropriately sized within the portfolio. And most importantly, when they're going to be in drawdown, that there's still enough balance in the rest of the portfolio that we have enough drawdown diversification that it's not going to put the overall client experience outside of expectations and putting us at risk of permanent capital loss.

AI assessment note: “We have directional risk takers in rates. We have directional risk takers in FX.”

Q Once you bring in this group of portfolio managers into some initial portfolio, how do you think about the capital allocation changes over time, and what drives you to want to lean into a certain strategy or away from another one?

A We think of portfolio construction across three important dimensions. One is a risk-based, really focused on concentration. The other is a factor-based, and then most importantly, it's an extreme-based. We've done our homework on the manager research side in terms of the role these PMs are going to play, the kind of risks they're bringing to the table, and have that understanding of how that alpha pattern is going to manifest itself Across different parts of the cycle, across different market environments, and most importantly, across the extremes. We do believe our allocations are probably a little bit more sticky than you might find elsewhere in the medium and the long term. Over the short term, all best laid plans can go astray. And that's really where that risk management and hedging component comes onto the table. And so we think of ourselves as Having four layers of risk management. The first is, a priori, having the alignment of expectations and objectives with each of these PM teams. So all that work we did up front with the manager research process, making sure that these PMs understand how we are going to utilize them, what role they're going to be playing, that there's alignment between that role and that process and how they believe they can generate alpha for our clients. And that sets the table because they know what we expect them to do and what we expect them no…

AI assessment note: “We do believe our allocations are probably a little bit more sticky”

Q So I'd love to dive into how you're making it work. One of the things Mark touched on was you identified that your portfolio managers have skill. There is alpha there. What went into that assessment?

A Talent's what makes this work. We couldn't do it without the PM teams we have here, without their skill sets, without their discipline, and there's a lot that somebody like myself and my team can do from a portfolio construction or risk management process To give us the best chance of success, but we can't make it work unless we have that talent underneath the hood driving those returns. When it comes to how do we utilize that talent, I think of us as having three core roles. One is that manager research and strategy selection. Two is portfolio construction. And third is risk management and hedging. That manager research process is what really sets the table for us. For every strategy, for every PM team we have here at the firm, we have a view on the role that they can play in our portfolios, the kind of risk that they're going to bring to the table, and then ultimately an evaluation of what we call residual, but that's skill, their ability to generate alpha above and beyond that.

AI assessment note: “an evaluation of what we call residual, but that's skill, their ability to generate alpha”

Q When you put the portfolio together, what are the quantitative metrics around the exposures that you're comfortable with at that risk level, factor level, and extreme level?

A There's a few components to that, and I think the first one maybe to start with is we want balance. This is a very diversified strategy. We want to utilize the breadth of Wellington. That means we don't want to rely on any one PM team. We don't want to rely on any one type of thematic bet. We don't want to rely on any one sector or region or asset class doing well for success. So we're really focused on balance. We do a lot of work cataloging what are ranges of exposures that we're comfortable with. All of our reporting that we see on a daily basis and all of our risk management tools have these guardrails in mind as a highlight to us. This is starting to move out of that comfort range. Let's dig into it. In particular, the stress testing piece is very important. And the reason for that is most of the time what you're looking at, if you're looking at a predicted beta or a predicted vol number, is a one standard deviation, 68% confidence interval, best guess average of what the next three to six months are going to look like if they looked like the last six, 1218, or whatever the look back period is. But it's when those one standard deviation events become two, three, four, five, six, and you can remember that those were supposed to be once in a lifetime, and now they happen every three months. That's what typically causes a fund like this to not succeed. And so we have a lot of…

AI assessment note: “In particular, the stress testing piece is very important.”