The Ledger
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Macro overlays often add portfolio risk rather than reducing it
“Because we run our portfolio without leverage and because of how we manage our portfolios, we don't use macro overlays. And I'm not even sure that macro overlays often would be risk Reducing. I think it much might be an additional risk that you're putting on t…”
Decentralized team captains make better investment decisions than senior executives
“I want to have a larger number of team captains who are people who have been here for a long time, who we've seen their work product, we trust their work product, and those people can be empowered to make decisions on individual investments because those peopl…”
Wong: Long-term biotech investing struggles within non-specialized firms
“I mean, honestly, I think biotech, especially the way we, that I've always done it, which is longer term oriented, is difficult to fit in any larger firm that's not focused only on healthcare.”
Leffell: Davidson Kempner pooled partner profits to prevent desk capital hoarding
“Every partner in the firm did well if the firm did well, and did poorly if the firm did poorly. And the hope there was that If merger arbitrage is having a gangbang year, then the guys in distress where I was would not glom onto capital for mediocre ideas. We …”
Leffell refuses any investment opportunity if counterparties rush his decision
“The other big coaching thing here is never rush. When somebody is rushing you to make a decision, back then it was enough to say I'm not doing it, and to this day I won't do it. If somebody's rushing me that you have to act now on a new idea, say what was tomo…”
Davidson Kempner rejects commodity and growth equity strategies
“I don't know what we would do with, like, a commodity strategy, or I don't know what we would do with a growth equity strategy here. I don't think those are things that we either could risk manage properly and or Wouldn't necessarily fit in with everything els…”
Fund managers must match capital duration to target opportunities
“I think you need to make sure you match duration of capital to opportunities. And there are just different things that you can do if you've got a four or six year period to invest versus having strategies where investors have much more frequent liquidity along…”
Fallen angel debt offers large volume and high margin of safety
“What I like about that is you have indiscriminate sellers who often want to get out because of ratings downgrades. You typically have extremely good collateral backing you, and you've got large volumes of debt, so you can put both a lot of money to work and yo…”
Davidson Kempner corporate distressed deals use little to no leverage
“First of all, there's a lot less leverage on the strategy than there would be in private equity. In a lot of cases, there's no leverage. In some cases, there's limited leverage. Real estate, if you're doing more distressed or opportunistic real estate, that li…”
Risk management uses proactive review over automatic pod-shop sellouts
“We tend to operate differently than some of the pod shops in that regard, where typically hitting a test leads to a conversation versus an outright sellout, although typically it's conversations well in advance of hitting a test as people get closer to tests.”
Voluntary capital deployment is far more informative than non-deployment
“I think about omission and commission being quite different things. And so to me, someone actually proactively putting money to work that you don't necessarily have to put to work is far more powerful than someone not putting money to work.”
Effective leadership succession cannot succeed within 6 to 12 months
“You can't just say, hey, I want to retire, let's get this set up for six to 12 months, like, and expect it to succeed. This is something we worked on in different guises for a decade, and I think there was grooming well before that in terms of my taking over t…”
Successful leadership succession requires genuine desire to retire
“The person in charge has to actually want to retire for this to be successful. A lot of times the person in charge may pay lip service to wanting to retire, but they don't really want to leave. That's what creates some of the problems or some of the issues.”
Davidson Kempner plans to remain an independent private partnership
“I expect we're going to stick with this approach. It's worked very well for 40 years at this point. It's become more old fashioned, but because we continue to invest our own capital, we fortunately have had the balance sheet That we've been able to not do that…”
Davidson Kempner's best portfolios are right only 80% to 85% of the time
“You know, in any given year, no matter what we do, there are going to be investments we lose money, and even our best performing portfolios may only be right 80 or 85% of the time.”
Davidson Kempner is skeptical of crypto and holds minimal exposure
“Rightly or wrongly, we've been very skeptical towards cryptocurrency, and so we've done very little investments that have any angle related to cryptocurrency on them. Not zero, but very, very few of those, and that's one where I just couldn't get my arms aroun…”
Distressed workout peers are simultaneously allies and adversaries
“The way options to credit works, especially in workouts for distressed situations, is literally at the same time, you could be on the same team as somebody or you could be on a different team as somebody all at the same time. And so sometimes other actors in t…”
Calibrate downside risk and loss probability before considering upside
“The first questions I ask are, how are we going to lose money? How much money can we lose? On this, I always assume that if someone asks me about an investment that they're interested in, that they think there's upside to it. So I always want to calibrate the …”
Opportunistic credit capital was scarcer in 2011 than 2005
“So ironically, it felt like there were fewer people with capital for opportunistic credit in 2010, 2011 than there were in 2005. And you much rather would have capital in 2011 than you would have in 2005 for the strategy.”
Leffell: Committing investment theses to writing creates crucial institutional accountability
“The third thing would be always commit things to writing. That was one of the early disciplines we took on because having something in writing creates accountability. There's no he said, she said. The analyst has committed something. You know what was said and…”
Leffell: Distressed Bank Debt Did Not Historically Trade Before Late 1980s
“Buying bank debt, and bank debt did not historically trade. So these were one-off transactions. It was pretty much a small group of banks and funds that were doing it.”
Leffell: Davidson Kempner acquired unfunded revolvers while being paid 50 cents
“To try to explain to somebody that you were buying an unfunded revolver at 50 cents on the dollar, and the seller was going to give you 50 cents, so forever unfunded, you just pocketed 50 cents, was pretty entertaining, and we ended up doing it.”
Leffell: Physical edge of faxing SEC filings is dead in modern markets
“So in the early years, we would have someone stationed at the SEC, and when a company we were following filed something, this person or company would take it and fax it back to us, and We had those rolls of fax paper that if you didn't read it quickly enough, …”
Davidson Kempner grew from $1B to $14B+ pre-GFC
“Assets under management went from a little bit over a billion dollars to over fourteen billion dollars at the pre-GFC peak”
Davidson Kempner bootstraps many control investments without additional capital
“I think that's a big part of this is a lot of these things that we've done, we've put no additional capital to or very little additional capital.”
Distressed downside protection relies on hard assets and early cash flow
“Part of the downside protection is that even if it is cyclical and not secular, we want to make sure we get our money back in it. So that's a downside protection. So what are the hard assets that you have that you can sell off? How much cash flow might you ear…”
Davidson Kempner tracks stagnant positions via a 'dead money report'
“We produce something periodically we call the dead money report. So investments we've had for long periods of time that have earned typically between low single digits, And minus low single digits. We find that everyone focuses on the winners, and everyone foc…”
Davidson Kempner partners must keep most of their net worth in firm funds
“We require all of our partners to keep the lion's share of their net worth invested at Davidson Kempner, and we want to be one of the largest investors in any individual vehicle, and we are collectively by far the largest investor across all of the vehicles”