Masters in Business: The Emerging Manager Playbook – The Big Picture



 

The video from last week’s panel is above

Bloomberg Masters in Business host Barry Ritholtz discusses the current environment for hedge fund launches with IDW Group Founder and Chief Executive Officer Ilana D. Weinstein, Woodline Partners Co-Chief Investment Officer Mike Rockefeller, Fernbridge Capita Management Founder Brennan Diaz and Knighthead Capital Management Co-Founder Thomas Wagner.

Transcript after the jump…

 

 

We have an amazing group to discuss what it’s like to launch a hedge fund in the current environment and some of the things you need to know about becoming an emerging manager. Let me introduce the panel from your left to right.

Mike Rockefeller is co-founder of the six billion dollar long short equity fund Woodline Capital.  Previously, he was a successful p.m. at Citadel; Woodline launched in twenty nineteen. Is that right? With two billion dollars.

Ilana Weinstein is the founder of the IDW Group. It’s one of the top at head hunters in the world of hedge funds. She just celebrated her 20th anniversary with the firm. And if you read in big moves between funds who got hired, who jumped ship very often, Iaw is the mover and shaker behind the scenes.

Tom Wagner is the co-founder of the 10 billion dollar credit and event driven fund. Knight Head capital recently. He acquired the U.K. Birmingham Soccer League and Stadium, as well as an interest in a Pickle Ball team with Tom Brady. And I misread the lineup, so I’m going to say.

Brennan Diaz is the founder of the 1 billion dollar FirmBridge Capital Firm. He hails from previous firms, Viking And he launched Firm Bridge in late 2020. Good, good timing. Taking a hedge fund approach to long-only investing. We have about 50 minutes. And if there’s time at the end, we’ll see if there are any questions from the audience. But let’s just start by talking about the current environment.

It’s been a crazy couple of years from the pandemic to the new regime of rate increases. Frame what’s going on in today’s environment and what’s it like managing a fund in this sort of circumstance?

So let’s start with you, Mike.

Sure. So I think one theme is that allocators are becoming more sophisticated about the return quality that they are receiving and what they’re willing to pay for. And what they want is uncorrelated alpha and you take that concept, but then you look at the traditional long, short hedge fund and they are running portfolios of less than 30 percent Indio, which means that those returns are highly dependent on macro factors,very unpredictable factors that that you’ll be subject to.And what I think is an increasing appreciation is that a high area of portfolio is what is predictive for an uncorrelated alpha stream.And that is why you’re seeing the massive increase in multi manager assetsand those assets have more than doubled since 2017. If you look at some of the top launches that are coming out in 2023, ILX andfree stone. That trend looks to be continuing. And the reason why is that a multi manager provides a one stop shop for anallocator where you can get a high radio, low vol durable return stream andyou can do it in one single investment where you where you could have scale and you eliminate complexity, diversification built in right from fromthe get go. That’s right. A lot of let’s talk a little bit about this current environment. You see it from the perspective of talent.Tell us tell us what you’re seeing. I’m going to zoom out, because if you all want to start a hedge fund, I think we need to kind of start at the top andI’m going to give you the macro and then we’ll go quickly. Strategy by strategy. Barry, you and I talked about thisrecently. There was, to me at least an amazing article at the FT put out a couple months ago, which said this was news tome. I knew there were a lot of hedge funds, but apparently there are more hedge funds than Burger Kings.OK. True, thirty thousand hedge funds.The other thing you should keep in mind is that the average lifespan of a hedgefund is three years. So if you guys want to start a fund and you don’t want it to be just another Burger King that goes out of business,you need to understand what the lay of the land is within each of those strategies. Mike talked a little bit about long,short equities. Not to be like the Grim Reaper, but thereality is, if you’re not a multi manager and you’re not aggressivelymanaging market risk, then you fall into the category of a long, shortsingle manager that probably takes concentrated, more concentrated directional risk. And if you look at how these funds haveperformed over the last two full years, twenty one and twenty two, the averagethe cumulative return of these funds is down 40 percent. OK, with some funds down as high as 60 percent.Like Tiger Global. So if you think about the dollars lost to LP and it’s important to understand this because 40 percent of the hedgefund universe is long, short equities. So I’m betting there’s a decent percentage of you here that is thinking about starting a long, short equityfund. There was a tremendous amount of a, um, lost. So Tiger Global Pre 2021 was 100 hundredbillion. Maverick 14 billion. 130 billion. And then non tiger cubs like algae on 30billion. Perceptive 10 billion. When you’re down 40 percent on average, it’s a huge loss to the industry.More than 50 percent of total losses in two in 2022 came from long short equityfunds and half of hedge fund liquidations came from long short equity funds. So you really need to think about if youdon’t fall in to a all alpha non correlated category like Mike does.What is the value that you’re providing? Macro very volatile return stream.Twenty twenty one crappy year for most macro funds. Twenty twenty two great year. Twenty three again.Not such a good year. And you see again brand name funds like Roe Coast, Castle, Hook Element Element charged 40 percent fees, was able to upit to that in 2020, shrinking and trying to stem the bleeding from negative returns on credit. A bright spot, but I think I’m sure Tomwill talk more about this. You really need scale to compete. And then there’s the multi managers and that’s gonna be your biggest problem asa new emerging manager. How you’re going to compete for talent within a paradigm that has everything to offer from analysts up through to PMs.They have scale, they have capital, they have resources. They have a pathway to be APM. They have an aggressive pay out.They have economics. And they are like, it’s like my toe sis.You know, we used to have we have the tiger cubs. Now we have the multi manager cubs. Mike is one of them.He mentioned I like. I hope it’s okay. I share that view. He is now providing strategicinvestments to multi manager funds. I likes are two guys from Sit It Outthat Mike and his team gave capital to and they’re going to launch with 2 billion Brad Stone Grove and other Citadel guy is going to launch with manybillions. Andrew Komori, who came out of G.E. Shore, is launching with three billion. So into the fray.So this is the environment you’re entering into. And I as I as someone who has been recruitingin this industry for the past 20 years with my team and we’re working with the biggest, most successful funds in the world, it’s tough.Talent is scarce. It’s they have many options.And I think the multi manager dynamic just makes it that much more intense. So. So let me see what Brendan has to sayabout this. You’re the only lonely person on on the panel. Is it that challenging to be long?Only your how are you finding this environment from from your investmentstyle? Well, I mean, I think all the points Mike made her are right. And I think that the whole rationalebehind launching along only coming from a long, short background was the realization that market structure was changing.The ability to access short alpha and short alpha curves were changing, and thus the ability to maintain short gross exposure with the same investment styleand generate that level of alpha wasn’t there as much. And so I kind of felt that pressure on the short side of the portfolio forcingshorts were running higher net, kind of two bad options for an absolute return product, but looked at alongside a ledger andstill felt very strongly that the pool of alpha we were accessing, they looking out, you know, basically 18 to 18 to 36 months.So not looking at five to 10 years, but 18 to 36 months forward. Looking forward to what underlying businesses were going to be earning andthinking about absolute value. Intrinsic value and taking big concentrated bets on opportunities that were really attractive.But that window was not only kind of as attractive as it’s ever been, but in some ways it’s getting more attractive. Kind of driven by the underlying shortterm volatility in the market. And so I don’t think managing along only is is more difficult to manage in the long term.I think it’s actually materially. Jihye Lee easier. Which is kind of why we went down that route.And I also think that there’s material demand. I think Mike’s point is 100 percent right. That allocators want to pay for value. Right.You know, investors historically have not been, you know, invested in hedge funds just to pay fees on beta. They’ve been willing to pay the fees onbeta because the underlying assumption would be that you would deliver them enough alpha to cover the beta costs. However, there are large pools ofcapital in the world that want data exposure, very, very large pools of capital that will always have bad exposure.So I think the the message of going to people and saying I will take that bet exposure, I personally want that bit exposure for my own capital.Like over time I want the beta because the beta collecting that risk premium should be positive. And you only pay me when I generatevalue for you. Value being defined as excess returns relative to the S&P. I think that has a lot of resonance withwith with a lot of capital providers out there. And I think that it’s an opportunity for people who invest like me, who thinklike me to to go out and go out and execute on if they so choose.But, you know, you have to have the right model. You have to have a truly align fee structure and you have to kind of bewilling to go down that road. So I that you know, I think it’s in many ways the same. It’s responding to the same trend thatMike is talking about and taking it in a different direction. So to clarify, some people’s called activity fees, the the profitparticipation is only on returns over and above what the SPF is generally.So it’s actually, I would say, even more advantageous and that our management fees are a prepayment on future often. So we have to generate Alpha before weget to any type of incentive. Right. So the idea is over time of life of thefund, which will be a very long life. When you when we when we end at the end,we will look back. And 70 percent of the economics of the alpha that has been generated will flow to the investors and 30 percent willaccrue to the manager. And we try to make that as clean and transparent as possible. That creates more volatility in ourin our in our overall incentive fee income relative to other models. But I think that’s very solvable from a talent perspective, having to kind oftalk about that. But that’s the underlying model. Really interesting. Tom, what do you make of this currentenvironment and how are you finding the worlds of credit within within theheadphones realm? Well, I first of all, thank you, Barry, for having me here and for everyone attending.Appreciate it. You know, credit is relative to every other asset class we see today and we invest.We have a of our 10 billion, six of it is permanent capital. So we do a lot beyond just credit. We can do basically anything anywhere inthe world. We want the credit today and particularly private structured credit. So rescue financings, bridge loans,financing is to provide growth capital all structured as credit offer thegreatest amount of alpha relative to the risk I’ve ever seen in the 25 years I’vebeen doing this. There’s it’s extraordinary excess return. And that’s because that’s not liquid.And one thing that I think all of you or those of you in the room that are contemplating launching a hedge fund is there is an extreme push pull presentlyfor liquidity, visibly returns. Investors or allocators are not liquidand they need to generate returns, particularly in a context of higher rates where their hurdles have all gone up and they’re stuck in olderinvestments, particularly private equity. They’re probably going to take a period of time to recover to the alpha generative returns that they had historically produced.So they want you to be liquid and generate returns. That’s not really possible today. So you’ve got to find a niche that fitsyou. And I think the best advice that I could give for folks thinking about launching is forget all the noise, forget what themarkets want. Forget what the LP ISE want. Do what you’re going to be good at. It doesn’t matter what your strategy is.Doesn’t matter what your structure is. Doesn’t matter what your fees are. If you’re good relative to whatever benchmark you’re posted against, you’lldo just fine. Your business will grow. You’ll make plenty of money. You’ll retire a happy person, your kids.You never have to work if they don’t want to. You’ll do just fine. But if you try to shoehorn yourself intosomething that doesn’t fit, it’ll go terribly wrong. And I think the second most valuable piece of advice I can give you isseparate from all the examples you’re hearing appear of all these multi-billion dollar launches. That’s not normal, right?It’s not normal. And you might think you’re going to launch with a billion dollars. A lot of help us get started. We thought we were going to launch with a billion five as of March 16th, 2008.We just come out of the emerging managers conference going, man was perfect. I was like, this is so easy.Then eight weeks we raised a billion and a half. We’re going to launch with three billion, Ken Griffin was backing us.It was like the greatest thing ever. The next day, Bear Stearns went bankrupt. And by the time we launched on June 3rd,2008, we had 413 million in capital. And the world just changed. Nothing happened with us. All the investments we were pursuing wasgood. Our first couple of years were spectacular. Like everything went great and things turned out OK. But that second piece of advice is youcan’t bank on being a multi-billion dollar launch. And so what does that mean? That means you have to do everything.You better understand how to set up a computer and phone. You better not to debug your computer. You better know how to answer the phonespolitely. You should not make good coffee for your old people. You stop by. You’re gonna be doing all of it. But don’t kid yourself.And if you don’t launch with billions of dollars of capital locked up for a multi-year period, you run a lot of risk.You create a cost structure that’s incompatible with where your capital could be, not where it is today. So I would advise that you do whatyou’re good at and learn how to do everything well and work really, really hard and stick to it for a period of time.And if you love it, it’ll work out. So. So let’s address the issue. You just touched on that sub scaleoperations. How do you compete for talent in the most competitive market in the world when you can’t write giant checks andyou’re running subscale? Let’s start with you. Sure. He never ran something. That’s fair. But on a relative basis.Yeah. It was only to build only. Well, you know, there’s a great movie that came out in 1989.So you might not have known it, but feel the dreams and if you haven’t seen it.The main character, Ray Kinsella, who’s played by Kevin Costner.He’s out in the middle of his cornfield and he hears a voice. If you build it, he will come. And he doesn’t know what build it is.But he decides to build a baseball field in his cornfield. And lo and behold, a bunch of dead baseballplayers show up at his house and start playing baseball. And you should have the mindset of what that movie tells you, which is if youbuild it, they will come. If you have a differentiated value proposition. People will invest and you know, thisthis panel is a great representation because it’s all different strategies. We’re all but we what we have and what people forget is what we’re offering isa product. And so you have to ask yourself, OK, why am I here? What is the product that I’m offeringand what customer base is going to want this product? And if you invest early in your infrastructure, if you hire before youhave capital, not after, then I think that you will get that capital. You know, my my good friend, BrandonHaley, who launched Holocene, he in 2017 had over two dozen employees without azero with zero dollars. And he ended up being a gigantic agigantic launch because he sold that story to investors. So that’s the mindset I would take a lot of.I think the difference, though, Mike, is you’re. You were coming from Citadel. Brandon was coming from said it all.People were willing to come before you built it because they knew would each of you represented I ISE a we as a firm are very loath.I’ll be I’ll be candid with you. To do work with emerging managers, because the truth is, most of you are not launching with billions of dollars.You’re probably not even launching with hundreds of millions of dollars. And given how competitive the talent market is, it’s very hard for reallytalented people to get behind you. With no proof of concept because they’re making two bets on you that that are beyond the scope of what they’re thebets they’re normally making. They’re making a bet on you as a new founder. You’ve never done this before.And they’re making a bet that you can scale that you are worth getting in the trenches with and grin and that you can grow.And I guess the good news, bad news about my unfortunately, it’s just it’s on a prediction is just a fact of life. Very few of you will launch with scaleis if you’re under two hundred and fifty million. I actually don’t think you need to worry about this.You guys may disagree with me, but if you’re a really small fund and many of you may start with 25 million or 50 million or 100 million, you can hirejunior people. You can hire people out of the sell side. You can hire people out of banking andthey’re multiple. And we’ll be thrilled to have a seat at the table. And I also think it’s it’s difficultunless people know you and have worked with you before, you know, the whole other side of things is. Are you a good mentor?Can you develop them? Are you going to pay them fairly? Are they joining something special with a great culture?Is there a runway? These are all the sets of things we deal with in helping people cross the divide to go from where they are to a largeestablished manager and get them comfortable on all those points. And so that’s also there. And if they haven’t worked with you, youknow, they don’t really know what the odds are that it’s going to be a good fit. And you, in turn, also don’t want tobring on board senior people that you don’t really know and have to give them substantial points in the fund. And then it may not work out if you endup with a high class problem of achieving scale. Then we get into thesetting up an economic structure which is going to be attractive to yourinvestment staff. And I’d say the one guiding principle on that is and it’s a good thing as a newer fund.The value creation for everyone working there should come at a massively different pace than sitting at a large established player where much of thatvalue has already been created. So what do I mean by that? If let’s call it 25 to 30 percent gets paid out to the investment andleadership team. This is on average and this is a back of the envelope thought. But I think directionally it’s truehere. You should be talking about 30 percent going to 50 percent to the extent that the people you hire.And again, this is further on down the road. Once you have scale and can attract more senior credible people to theextent that they put up great performance, they can hire and develop people, then you’re able to take on more capital and you’re creating more value.But at the end of the day, everyone is going to reference you within an inch of your life and the same way. L P’s are going to want to get a pointof view on you. Talent will too. And there’s what you’re telling them upfront, which hopefully is attractive.But even more attractive is the path forward. And you don’t want them discounting any of the promises or vision that you’regiving them because of what they’re hearing in the market. So that’s something to bear in mind and I think really critical as you add bothin the meeting, less so maybe in the immediate term, but certainly as you progress and are trying to reach out to really talented, established people.Brendan, you finding the same sort of circumstances when you’re competing for talent? Watch what your journey been like.Well, I think it’s a little bit focused on the type of talent you’re recruiting, where it’s like come from a world in a lineage of funds where we don’t hireexperience people, where there’s a kind of fundamental viewpoint in the firms I’ve worked at that we hire people that are less experienced and we train anddevelop them. And that obviously aligns easier when you’re subscale, but that that’s not to make the decision because of scale.That’s just how the world I come from does things. I think, though, to a honest point, you have to be realistic about what theenvelope of what you can spend is, what that looks like and what the talent you can get with that in line against that. So you have to be really kind ofthoughtful about Tom Quinn earlier. What is what am I what do I want to do? What is my strategy look like? What is that business plan look like?What am I capable of of doing from a development in a mentoring and a leadership perspective? And then how does that work from aneconomic perspective, both in terms of day one, but also do a honest point. What does it look like over time? What is that economic trajectory looklike with success? With success as you go and I think you want to be transparent with people around what day one looks like, whatthat can evolve to over time, and what are the parameters that that trigger that evolution. And I would say the other thing that’sfundamentally different is that the analysts I would guess that all of our firms are probably doing you know, they’re all being analyst with probablyslightly different things, that the job is not the same at every firm. And I think that you want to be clear in terms of the way you’re going to investthe types of things that the analysts will be expected to do. And that will there’ll be some natural self selection of firms that individualsthat that want to have that they think they can be more or less successful in different environments. And let me follow up.When you talk about hiring people and mentoring them and shaping them. Is it just analysts or is it traders and PMS and others within within the funds?I would say my general point of view is that it’s it’s pretty much true acrossthe entirety of the firm that when I think about the firms that I’ve worked with and work with in the past that have been successful and you look at thepeople that have been highly successful there. None of them were really senior hires coming in.They were they were hired pretty junior, and they were trained and developed with. Firms and in a lot of those firms, someof the biggest hiring mistakes they’ve ever made were more senior than that. That’s true for our process. That’s not true for everyone else’sprocess. And so I think that there’s always been a natural pull towards you going younger and less experienced in training anddeveloping those people. And that just makes it easier for me in the current environment because I’m not competing against, you know, the type ofpeople that a lot. But you’re also not injecting a fully formed human, so to speak, in our business, into the ecosystem.And you don’t use tissue is going to reject the organism. It almost certainly will on.One other thing now is as a new manager without much capital. Just bear in mind, LP P’s are making a bet on you.Making a bet on you as a manager. Not on the bench yet. If you’re launching with just a small amount of capital.Interesting point, Tom. You’ve been doing this for a while. What’s your experience been of competing for talent in either hiring or buildingat all? Yeah, it’s it’s really challenging. It’s always the toughest part of the business, I think, while second raisingthe money. That’s that’s probably, you know, parting dollars from people. We have long lockups and a lot of it’sreally long. So that’s that’s always the longest process. But, you know, I think it’s a you know,it’s a unique challenge today because there’s been a shift over the last 15years that we’ve run night. We’re a new generation of professionals are coming into the industry or have come into the industry that expect a lotmore sooner. And I think this is you know, this is pretty common across, you know, a generation of folks that are, say, 25to late 30s, years old. And that’s difficult because if youthink about the last 15 years, we’ve gone 15 years without a recession. Really? And that means you really don’t knowwhat you’re doing, because if you have. Yes, you invested in one year with a rate rise. OK, but you still haven’t invested in arecession. So it’s really hard to get people that have experience, that are relatively junior, that have a perspective of howbad things can be. Right. And we’ve learned what happens with higher rates or we’re beginning to learnwhat happens with higher rates, which not even I or people substantially more experienced than I am have contended with.It hasn’t happened since the late 70s. And so, you know, we’re seeing new things. Well, that means that if you have folksthat haven’t experienced those things, even if they can imagine them, it’s different, actually experience them. And so managing people that haven’t yethad the experience, the challenge, and for you as emerging managers, you need to do that in a way that controls risk and keeps people motivated.That’s challenging, right? When they when they believe that they deserve more, they have a genuine view that they share more responsibility,more seniority, more economics. But they haven’t yet been battle tested. That’s a tough dynamic. And it’s one that you really need to bevery thoughtful about and how you manage. I would say don’t cave to the pressure, you know, find the right people thatunderstand that it’s a process. They’ve got to be committed to building the business alongside you or it’s going to come crumbling in upon itself.I think the other thing that’s notable that we’ve seen recently is there’s some really high cost structures in the hedge fund world.You know, 8 percent, the 8 percent fixed costs like that’s insane, insane thatthat is not the way to start and run a business. If you’re if you have your fixed costs meaningfully above your guaranteed feesand then you adjust for loss of capital. Right. If you can’t build that cushion and you’re at risk, like just look atyourself like a business, would you invest in that business because you’re LP, you’re going to look at it the same way and say, what happens if I allocatethis business? Like I don’t want to be like everybody running for the door. And if I’m the, you know, the ant andthe elephants behind me, it’s not going to be a good day. So you have to think about the cost structure, which aligns with how youmanage the people, which aligns with what type of people to hire. So it’s a it’s a multi variable analysis, which I’m definitely not smartenough to solve. But it’s you know, for me, it’s a feel, you know, the types of folks that you can hire that you think will be a goodfit. And I think it’s incumbent on new managers to think about, OK, who. Who do I want to have effectively in thetrenches with you? Because I think the reason a lot of firms fail in that first three to five year period is because they buildthemselves or they expect stratospheric growth. And the reality is it can be really lumpy.Right. You just don’t know. You are experienced a good one. We launched we thought we’re going have tons of capital. We had last the market’s fall off acliff and I mean, like felt like really, really off a cliff. And no one. We didn’t expect that.But we built the business to be able to withstand that. And then we grew. Really. Rapidly after that, because we set up for, you know what, if everything goeswrong. So I threw a lot into the mix there. But I think all of these things are important considerations when you’rehiring. It can go great. You can build your huge success and have it. And that’s fantastic. But the odds are that that won’t happen.The markets won’t give it to you. The personnel won’t be there, know the capital won’t come in the way you expect.So if you build a sense of conservatism, when you build a buffer around your business, you’ll get to escape velocity. Really interesting.I’m intrigued by anyone who’s working for you who was born after before.If they were born after 1987, they’ve never experienced a recession in their professional career. It’s pretty, pretty, pretty amazing.So. So let’s talk a little bit about you mentioned your piece. How do each of you differentiateyourself? What’s your selling point when you’re either trying to bring in capital or hire somebody or in any other way, makeyourself differentiated from the masses that are out there? Let’s start with you, Mike. Sure.So. So our view is and was that the successful funds in the next decade are those that will be doubly builtbusinesses. As Tom mentioned, you know, you have to think about this as a business. And those that can attract, retain anddevelop talent with a competitive advantage. And, you know, this past weekend, there was a Formula One race in Monaco.So I’ll use that as an example, because a durable, successful hedge fund is alot like an F1 racing team. Right. You have the racers, you have your investment team. That’s the DNA of your business. But without a great car, you can’t winraces. And behind those cars, OK, you havemechanics, engineers, strategists, teams of people that are helping.And similarly, the hedge fund of today and for the next decade will be a hedgefund that has an infrastructure that can support their investment team, allowthem to operate at peak performance, and then run the business of a fund. And that’s a different job than what all of us here as investment managers do.That’s not our expertise. So you have to have that infrastructure and those experts in-house to help you do that.And that I think that has been a big selling point for our LP was in thebeginning. But also the talent that we bring in knowing that we’ve built this to last. What I’m hearing from you, Mike, is thatgenerating alpha, that’s table stakes. That’s just what you need to sit down.Everything beyond that seems to be where you separate yourself from the crowd.Absolutely. LP want to know that they can put capital in. They know it’s going to be an illiquidinvestment and know that they are putting capital into a stable, durable business and that’s what you have to provide them.When you launch, a lot of you have a unique perspective on differentiatorsand hedge funds. Tell us what you see from your vantage point. Well, people come in and they meet withus and they talk about what they’re going to do. And I will tell you, having seen a gazillion presentations, investormaterials, letters, it’s great to have that stuff on.Done in a way which obviously you’re gonna put time into it.You want to feel proud of it, but at the end of the day, my feeling is this industry is for the most part, very commodity.And the reason I went through the different strategies is to let you knowthat to the extent you’re launching a strategy that has not performed well inthe last couple of years, L PS are not going to give you the benefit of the doubt. It doesn’t matter what your presentationmaterials look like. It just doesn’t. You’re going to have to put up performance. And the biggest piece of advice I can give you is maybe, you know, you can sayyou’re differentiated all of this stuff. You’ve got to start investing as quicklyas possible. You bang the tin cup for capital for the first three to six months. You do what you can and then stop,literally stop. As counterintuitive as that sounds, whatyou want to do is start to prove and show some proof of concept, because unless you are coming from a fund that is a top multi manager or you’re comingfrom on ie a great fund that is pedigreed and L PS want more of thatDNA. Like I’ll give you another example. Last year Broadwell launched. That was a fund started by Alex Carnell.A CAC came out of Deerfield and had a huge reputation in health care and he launched with over 3 billion dollars. So unless there’s something that peacecan seek sink their teeth into in terms of the DNA that you carry, you’re goingto have to show them what you can do. And then, yes, it becomes a question of how do you beg, borrow and steal to fund the enterprise while you’re putting outperformance so that you can then go back to LP is raise capital and also get that talent, because now this Field of Dreams has some skin on the bones.Brennan, what do you think? What what is the differentiator for you as a long only fund manager? I mean, I think the easy answer is thatwe’re a long only had a manager that’s doing concentrated hedge fund like investing and there’s people that do that.So I would like but the field there is a lot smallerand the pools of capital allocated against long only there are pretty large as a lot of money can pass. There’s a lot of money in long otherlong only strategies. So it’s different than launching, you know, a higher fee product like a long shore product where you’re competingagainst, you know, the likes of the world where they’re making those tradeoffs. It’s a little bit different.I would also echo the idea that my experience and not every allocator is the same allocators want to invest in what they perceive as institutionalscale managers. It doesn’t necessarily mean you need to have 30 employees, but they want to. They may want to look at as a realbusiness. They want to understand the plan. They want to understand how you think about the growth of the business, thecontingencies of the business, what your strategy is, how you’re building the culture. Because to be perfectly frank, that Ithink that’s the that’s the easiest thing to kind of underwrite from an outside perspective. Always harder to underwrite stock pitches. I find it hard to underwrite stockpitches if I don’t know the stock really, really well. And so I think you want to you want to invest in that part of the business.And what that investment looks like is going to be specific to your strategy. Right? It looks very different for a motelmanager than it than it does for a smaller organization. But you can still get to that level of institutional scale as a smaller managerif you if you make it a priority and you’re thoughtful around how that looksboth day one and what your communication looks like for what it should be over time. Tom, what’s your big differentiator?I don’t think we really have one. No, I think I was a great quote pit bullthat not picking know where random sports investments. Seth Klarman. I read a great quote by him.I think it two weeks ago and he said, we’re fortunate to be unconstrained by aspecific investment strategy from the group directly. That’s so beautiful, right? Because what are you paying outpostsfor? You’re paying them to go out and find great investments where there’s downside protection.So the way that we present what we do is that we can invest anywhere in the world, really in anything but everything we do.We take a credit approach, too, which is we have an extreme focus on capital preservation and we try to structure for the best possible return.Sometimes it’s an equity return or linked return or convertible or warrants so we can gain an equity return. But that’s really the approach.So every investment that we pursue, we take that approach with the investment that we made in the in the football team in the UK was structured as a as asecured loan with, you know, the ability to eventually, you know, gain fullcontrol. You know, a lot of the investing that we’ve pursued. Has been structured in that way, and Ithink that’s a differentiator because it’s it’s a little different than investing in somebody that’s going to go trade high yield bonds or do publicdistrust. And I think the second thing is, at least from my core business, which we started as a distressed debt fund.The distress that funds just went off the rails. The last 15 years that the way that they operate is they they look at it abusiness as a carcass and then approach it to fight over the carcass. Right. We look at a business that might be acarcass and say, can we revive that thing? Right. Because if you can, the the pie thatyou’re fighting over grows. And that’s a lost art for a lot of investors in turnarounds like different many real turnaround experts anymore.And that is how you make tons of money, at least in my subsector.And so I think we’ve done that pretty well. We’ve invested in a few businesses the last few years where we had control thatwe’ve turned around. Our biggest short going into the Covid was Hertz. It’s now our largest long we’ve ever had in the history of the firm and it was a turnaround play centered aroundelectrification. So I think you’ve got again, it goes back to, I said, the very beginning. You’ve got to find what you’re good atand what you love and then apply it to your strategy and do that. Like just do that. Forget all the noise.Just do what you love and what you’re good at. And the rest of it should should be OK. And also having a structure thatsupports what you do is very advantageous. I mean, I don’t want this to be lost on you. Of that, 10 billion or billion is in an insurance company.Yeah. And the up and you have one another for two and a half that’s in drawdown, right?Sure. So there’s no timeline to returning capital. You some of our capital is literally insurance companies. Permanent, permanent.And then one of the drawdown funds the investor. It’s really like uber wealthy family. When we draw the capital, we never haveto give it back. Now, we don’t get paid until we give it back. But we don’t actually have to give itback in. Our fee is a sliding. Don’t steal this, by the way, so we can really good idea. Took a long time to come up with this. The fee is a sliding scale based on theIRR. So there’s this weird push pull because you know, sometimes you do a great investment. You compound at 40 or 35 or 30 for the first 18 months and then, you know,you’re not going to continue compounding at that rate. You’re probably going to slide to a lower level. Well, we have to decide, do we want to capture the higher incentive fee or wewant to hold it and make a larger point. I always go for the larger, more. Right. But the worst thing you can do is try tolive off of IRR. It’s not possible you can’t eat those make is what you want. So that duration of capital is hard, butthe dumbest decision I ever made was pursuing long duration capital. We would be three times larger, four times larger if I had just built theCielo business and listened to a lot of em like hired people to do right, do direct lending and do his all the things I tell you to do.No, but you were like you always had good ideas, like this is what your peers are doing. And you had very, very good advice overtime that I listened to none of. And I’m much poorer for it. Well, but friends at 10 million dollar fund.So there you go. No, but it’s why I said you’re going way back. I want permanent capital because I justsaid we have permanent capital. We can do whatever we want like we could by English soccer teams. Now, what I said we can do. We can make investments that really compound for a long period of time.And so we focused on doing that. Maybe it was a good decision that maybe it wasn’t. Time will tell.But again, it went back to. That’s what we love. That’s what we wanted to do. But my point being, it’s not just thestrategy, it’s also the structure. You get out for sure created a structure which is like I mean, it’s almost a mini Apollo.It is. You created a structure where you just charge on Alpha Keys can get behind that. It may be long only, but you’re just charging on Alpha and you’re all alpha.So and you have all of the DNA from one of the greatest hedge funds in the world. You know, these are things that makeeach of these guys differentiated to your question and unique. And the reality is there are very few individuals that come to market withthat skill set and that foresight. So so since I wrote us back that that’s true. Since we brought up L P’s andAllocators, I want to skip ahead to this question. What’s what’s the hardest question that you get asked by your limited partnersor allocators? What’s the most challenging question they throw at you will start with you again. Yeah, I think there are two hard questions.One is on the topic of exiting people and you know, that is mostly anobjective decision, but there’s a lot of subjectivity to it as well. And I think, you know, LAPD wanted to be objective and it’s sometimes hard toexplain. Explain some of the background to why we might keep somebody versus versus exit to them.I think the second question that they ask and we have a tough time with there’s just on adapting any strategy that we have at, you know, LP isdon’t want you to adapt and change the business model that you promised and that and that. And I think that’s. Completely fair. But there are times that are critical ina fund’s life that you need to adapt or you’ll die and sound money, too. For example. Right.So, you know, whatever it may be, that that is a hard question to answerbecause, you know, most of the time what they want to hear is don’t change your your path at all. You want to know why?I do want to. But I also want to comment on what Mike said. I do. That’s true. But when you have however many years ofputting up great performance and delivering exactly what you promised O PS, there is a higher receptivity I think to then whatever you see the pivotpoints as I’ve seen this with other clients as well, that maybe started as one thing and as long as they didn’t stray too far from their core DNA, I oneclient that is now 50 billion. He was 30 billion two years ago and he’s done it through us thinking through quick other strategies and otherproducts that are tangential but still related. And he’s got credibility with his piece because of what he’s delivered onturnover. OK, I just have to comment on this because, you know, like it’s such a it’s the bane of my existence.And I think it’s one of the biggest problems in our industry. People are terrified, LPC are terrified to fire people, they think somehow it’sgoing to reflect poorly on their ability to retain a team, their culture.Something bad’s going on at the fund. You mean he’s terrified of people?Yeah. But. But they’re they’re terrified. Oh. Oh, he’s will think. Sorry. That’s what I meant. Mm hmm.You have to be. You have to give people room to fail or to succeed, rather give them runway, give them tools, help them develop.But at a certain point, you need to graciously exit them. If they’re not cutting it because the majority of you will not have a passthrough model. OK. I mean, that’s just the truth. And you’re gonna have a little problem called network, which is Peter over here.I’m going to use just simple illustration. His ideas put up 100 hundred million of piano, piano.And Paul over here. Lost 100 million and you’re zero. And what you don’t want to do was Peter and Paul.You want to pay from you want to take from this guy to pay that guy. It’s hard to take from this guy to pay that guy because you’re going to end uplosing your best people. And you also don’t want your aides to feel like they’re surrounded by a bunch of BS or worse yet, CS.So you need to manage people who are not cutting it and give them time to succeed. You need to manage them out.And don’t worry about about your L PS because at the end of the day you’re going to have a much bigger problem if your stars leave the door.They appreciate you cutting your losses. If I just want to manage talent the way you manage a portfolio, you. That’s how you have to approach it.You have to be. You have to be rigorous. You have to be you know, you have to make tough decisions. You can’t worry about anything else. This is the biggest problem.It’s not just emerging managers, but in general that I see in our industry. And the best founders, OK, are the ones who do this really, really well.And sometimes, you know, people sort of they get a bad rap for it, but they’re also the best at developing people and giving people the most runway.It’s about creating an environment which attracts rock stars. On your question. Toughest question.One of the things you mentioned, Tom mentioned is I how you’re going to payfor resources. So if you have a 2 percent management fee and you’re in a 100 million dollar fund and you come from a fund, we’reused to having tens of millions of dollars spent on research and software and data and corporate access. You have to answer the question toappease as to how you’re going to fund that. You can’t have you touched on this? You can’t have 100 million dollar fundto meet a 2 percent management fee. And then one million dollars spent onfund expenses because that’s a 3 percent drag on returns out of the gate. And it’s even higher if you’re if you’re less.And the answer to that question really has to come back to how are you special? OK. You don’t need all these data sources.I’m going to do X. I’m going to do really well. And here’s what I need. And be very precise about what you’rebringing to the table and the resources you need to support that. The reality is you’re not competing head on with these funds that spend tens ofmillions of dollars or even hundreds of millions of dollars on research. Brendan, what’s the toughest question you get asked by potential employees?Let’s say during the fundraising process, for me, the toughest is always what what your target that you’re going to raise, to which my answer is I haveno idea. You tell me. We’ll see. I’m going to launch it and we’re gonna see what it is and it’ll be what it is. Now, I would say that you’re the hardestquestion. I always it’s a little bit like last question. How do you how do you differentiate yourself versus other funds? Because I always inherent in thatquestion is you have to know what that other fund is doing. And like I am a strong believer that unless you’re in the walls and you’releft, you understand exactly how the investment process works. It’s really hard to compare yourself to another fund. And so I try to turn it back to this. Know, this is how we invest.This is how we do things. You compare that to the other people you kind of see in the market. But during the fundraising process,we’re going to everyone in this room that’s about to go through it. You know, the how what you what what what your target for raising.I always found somewhat amusing because I don’t think anybody really knows until the last minute. Tom, how about you?I’m looking for a doozy for it. I love the question. What do you see as the great opportunities over the next six months?You’re literally like, really the answer to that question. I wouldn’t need you as an LP to be retired, like managing my own money tosomeone else to be a manager in one office. I’d be a professional fly fisherman, you know, like March know, 60, 20, 0 8.No one knew that. We’re about to embark on the greatest run in distressed financials we’ve ever seen. Right. September 10, 2001, no one knew there’dbe a huge opportunity in airlines. You know, just kind of go through history like you just don’t know. So I think my answer to this question.Really? And playing off a little bit of the other comments is. Don’t worry about what the LPC think.OK. Just say what you do, what you believe is right for generating returns. Because I’ll tell you, particularly as adistressed investor. The fees are always wrong. Always like very, very rarely do we make a new investment and make people go,wow, that’s great. Usually the like, oh, my God, really? Like, you really think that’s a good investment? Yes. Like this.What’s going to happen? Like, oh, my God, he’s lost his mind. So I think you have to balance the fact that your the asset manager, you’re thebusiness builder. Just be honest. Right. And stick to your your strategy.But don’t get swayed by what the crowd thinks. That’s that’s a surefire way to fail. Let’s stay on that ends of the panel forthis question. Tell us the biggest surprise or lesson learned over the years. What really sticks with you?I’m still doing it now. I think the fact that I like it so much. Yeah.I came from you know, I was on a sell side trading floor with a thousand people. And it was sort of like, you know, verycollegial. Lots of interpersonal reaction, interaction. Very loud, boisterous.I loved that and thrived in it. I know it’s super surprising. And the you know, when you go to run your own firm and you start kicking,you’re small. It’s just totally different. And I wasn’t sure that it would give me the same level of satisfaction thatwe’ve that I get energized every day. It’s been way better. You know, afros gone. I lost all my hair, which probably is astress levels up, but it definitely has been a pleasure and far exceeding what I ever anticipated.Brendan, what’s the biggest lesson or biggest surprise that you learned over the past few years? I think the biggest surprise and I thinkit’s not intellectually a surprise, but it’s a little bit like having kids. You don’t really know what it’s like until you’ve got them.If you’ve worked, if your background is working in other funds, working with other people, you have peers, you work with other people who appear as ifsomething’s going wrong. Complain to those peers when it’s yours, it’s you and the way you behave, the way you act and who youtalk to in all matters because you’re setting the culture of the entire organization. And that’s you know, the thing JimParsons, who who I worked with before told me before I started with the highs are higher and lows are lower and you kind of feel it more internallyin the ability to socialize it out is less there. And so it’s one of those things. It’s not obviously I’d say that I thinkI run the room. But again, the. Of course it is. But until you go through it, you don’tknow what it’s like. And again, highs or higher lows are lower. I think it nets out to being awesome.But prepare yourself for that and prepare yourself that it’s different and how you behave matters. Alina, you’ve seen you’ve seen so muchfrom your vantage point. Tell us, what would the biggest surprise was for you? Well, we’ll save the biggest lesson forthe last question. But now what what really was like, I just want to answer it this way. I mean, it nets out that it’s awesomewhen you’re successful. But the the common the most common thing I hear. I mean, I get this literally at leastonce a week from real managers. These aren’t guys who couldn’t cut it. These are guys who got to at least two, three, four hundred million.They had actually good returns even with the volatility of the last couple ofyears. And they are they’re closing shop. And you just need to be aware of this or they’re just not having fun anymore.You talked about having fun and loving it. You go into this business for you go into the idea of starting a fund.You’re all emerging managers for two reasons. You believe in your strategy and you want to put it out into theworld with your own imprimatur. And what you don’t really realize or maybe you realize it, but yes, like the cabin having kids analogy, it’s notuntil you’re in the seat that it’s really tangible. These two things, investor and entrepreneur.These two hats you need to wear are actually in conflict with each other andevery moment you spend, particularly as a new manager, not investing and many ofyou will not be able to afford out of the gate the same infrastructure that these guys could see you’re gonna get pulled into.Each are issues and legal issues and administration issues. And God, you’re gonna be dealing with LP sometimes 100 percent of your time andyou’re going to be trying to put up great performance. And that’s exhausting and it’s sad, but there are many.I just have to tell the truth. There are many examples of individualswho got to a point where one might call them successful. They’re running hundred million five hundred million.I have one guy who’s running a billion and a half. His returns have suffered because of the distraction or they’re just not havingfun anymore because the thing that got them into this in the first place was a love of investing. And they find themselves actuallyfocused on a whole host of other issues, which really are not how they want to spend their time. So if this is what you really want to doand it’s an itch you want to scratch, you should go do it. But to the extent what you really want to do is have autonomy, invest, hadscale out of the gate, have great resources and not that fast necessarily about all the rest of it. We should have that conversation.And if you do launch and you launch successfully, we’ll have that conversation, too. Mike, what was the biggest lesson,biggest surprise to you? Yeah, you know, and Bear, you asked this question when I was on another panel with you a couple of years ago.An interesting article. Interestingly, it’s the same answer. And, you know, this is a talent driven business.And what’s been most surprising is the compounding effect of great talent. You always think about it in financial terms, but people who hire great peopleand keep the bar high, it’s amazing what it does to your business. And so that’s been the biggest surprise continues to be.So we’re just about out of time. We don’t have time for audience questions. But let me just throw one last question.Ten second response from each of you, and we’ll start with Tom.One piece of advice for someone about to launch a new fund. Just as I said earlier, do you love surround yourself with people that youthat you really want to work with and stay true to your initial objectives,one of which has to be to work as hard as you possibly can? Right. Yeah, I would. That kind of a corollary that I don’t don’t try to sell people on what youthink that you want to hear. You have to come to market with a perspective. You have to have a strong point of view.And that either works or it doesn’t. And that’s the bet you have to kind of underlying make. But it won’t work if you try to go ifyou try to shoehorn it into something that it’s not. Alana, take your time. With respect to hiring people, buildthis on the right way. LP is would rather see a longer and slower ramp and off with respect to optimizing your investment team and yournon investment team and performance. First, focus on putting up the numbers.Final word. Mike, what do you got? I have to say, in honor of the late Sam Zell who said this, go for greatnessdoes it? Mike Rockefeller, ILana Weinstein, Tom Wagner, Brendan Diaz, thank you so much for your time and your insight andgratitude. Thank you.