Why Hedge Fund Managers Must Adapt or Die | Kyle Mowery on The Future of Small Cap Value
Jan 14, 2025
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Kyle Mowery, Portfolio Manager and Founder of Grizzly Rock Capital, shares insights from 13 years of experience in small/mid-cap value investing. He discusses the difficulties small-cap managers face in today’s market and the shifts required to adapt strategies. Mowery emphasizes clear communication with investors and the importance of evolving investment approaches post-COVID. He also explores the benefits of joining established teams instead of starting solo funds and offers tips on building trust with investors through reputable partnerships.
Kyle Mowry emphasizes adapting investment strategies to align with evolving market conditions and allocator expectations for sustainable hedge fund growth.
Effective risk management and clear communication of skill sets are crucial for hedge fund managers to maintain credibility and navigate volatility.
Deep dives
Fund Strategy and Market Demand
Kyle Mowry discusses the importance of aligning fund strategy with current market demands, noting that the industry has shifted towards a preference for extreme strategies—either very low net with a focus on unique return streams or higher net exposing funds to greater volatility. He shares insights about Grizzly Rock Capital's mixed net exposure approach (approximately 40%), suggesting that this may not align with what allocators are currently seeking. Allocators show varied perceptions regarding what qualifies as low net, indicating that traditional definitions are evolving as market circumstances change. Mowry highlights that understanding the allocator community's expectations is essential for fund managers, emphasizing the need for a clear articulation of skill sets and strategy.
Risk Management and Allocator Relationships
Mowry emphasizes the critical role of risk management in fund management, contrasting single-manager funds with larger pod shops, which employ extensive risk management teams. He argues that successful investment management relies heavily on the alignment between managers and allocators, especially regarding expectations of risk and return. This alignment fosters better long-term relationships, which are crucial for navigating periods of volatility. The discussion points to the necessity for fund managers to be clear about their investment strategies and to avoid style drift to maintain credibility with investors.
Adapting to Market Changes
The podcast delves into how Mowry has adapted his investment strategies in response to changing market structures and conditions, particularly following the pandemic. He stresses that while traditional value investing methods remain relevant, they must now also account for market catalysts that influence stock movements. Mowry articulates a shift towards focusing on stocks with discernible value realization events as opposed to hoping for classic mean reversion to succeed. This adjustment highlights the imperative for investors to be intellectually honest in their analyses and responsive to the variables impacting their investment landscapes.
Foundational Steps for Fund Launch
Mowry reflects on the essential steps for successfully launching a hedge fund, stressing the need for robust service providers and a significant anchor investor to ensure viability. He shares insights from his own experience launching Grizzly Rock Capital, highlighting the challenges of starting small without a solid foundation. Mowry advises prospective fund managers to prioritize developing a clear value proposition and to invest strategically in operational and compliance aspects. His views suggest that establishing a reputable and capable operational backbone is fundamental to gaining the trust of allocators and achieving sustainable growth.
If you weren’t in large and often expensive technology stocks you likely struggled as a hedge fund manager in 2024. For small/mid-cap value investors like Kyle Mowery, Portfolio Manager and Founder of Grizzly Rock Capital, who’ve sold their investors a mandate that makes it nearly impossible to go buy the NVIDIAs of the world you can only fall back on communication and the clear expectations you’ve set with your investors. The problems plaguing small cap value managers are not new though, and if you are still practicing what Mowery calls “the old ways,” 2024 was likely not the first tough year you’ve had to explain. Here, Mowery explains how he’s adjusted his strategy over 13 years of existence to adapt to changing market structure, why he thinks of you have skills joining a pod is better than starting your own fund, and things he would do differently if he was setting up Grizzly Rock in 2025.
