Capital Allocators – Inside the Institutional Investment Industry

Last fall, I sat down with a fellow former hedge fund of funds professional Khe Hy, who left the business a few years ago and has developed a fascinating media platform around introspection, self-awareness, and self-development. Certainly a set of characteristics we don't normally associate with folks in the asset management business. Khe interviewed me about my career path and some lessons I've learned about people, business, and life. With his permission, I am sharing the conversation to allow you to learn more about the perspective that I bring to the conversations on Capital Allocators. If you like the subject matter, I'd encourage you to check out Khe's podcast, entitled Rad Awakenings, available on iTunes or his website, radreads.co. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 1:53 – Ted's time with Dave Swensen 2:40 – How did Ted get the job not knowing about stocks 3:56 – The start of Ted's time at Protégé 5:27 – How did Ted view the world as someone picking managers vs someone picking stocks 9:01 – Early days at Protégé 10:36 – Attributes that Ted tried to unpack about individuals 13:18 – Understanding a team's intrinsic vs extrinsic motivations 15:03 – How much of investing is about true skill vs being on the right side of a market trend 17:06 – What did Ted learn about greed during the bull market run of the early 2000's 20:00 – The ego, envy and entitlement of financial professionals 22:36 – The potential to hit a high-water mark and never feeling satisfied 28:20 – Loving what you do despite the financial windfall 32:50 – Would Ted have the same passion for the markets if he hit the proverbial lottery 34:36 – The feeling of financial survival and what would happen if Ted didn't have it 37:24 – Citizen Schools 38:41 – How to stop caring about other people's perception of you 40:46 – Most underrated attribute of Ted that he has discovered in his reinvention 41:53 – Times Ted's resilience was tested 43:08 – Ted on Invest Like the Best Podcast 43:10 – Hero's Journey Foundation 45:02 – What does higher education and first jobs look like for the next generation given the digital changes in society 49:20 – Do millennials have less upward mobility then past generations 49:43 – The Premium Mediocre Life of Maya Millennial 52:09 – Follow and learn more about Ted at capitalallocatorspodcast.com 57:41 – Closing questions with special guest interviewers

Wayne Wicker is the Senior VP and CIO of ICMA Retirement Corporation, an asset manager that oversees $50B across more than a million retirement accounts of City and County public sector employees throughout the country. Before joining ICMA-RC in 2004, Wayne had a distinguished career as an allocator and manager, starting as an allocator at the corporate pension fund of Dayton Hudson (now Target Corporation) in the 1980s and the Howard Hughes Medical Institute endowment in the mid-1990s, after which he moved to direct investing in large cap growth equities for seven years at Cadence Capital Management in 1998. Our conversation covers Wayne's career path, multi-asset investing, and the ins and outs of managing defined contribution plans as a fiduciary and as a business. We discuss asset allocation strategies, regulatory limitations, stable value products, retirement shortfall risks, active vs. passive on large pools of capital, and managing internal and external teams. This episode took place at a recent Institutional Investor conference for Corporate Funds and Insurance Portfolios, with the core discussion about ICMA-RC occurring in front of a live audience. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 2:01 – How Wayne first got into the investment business 3:58 – What he did after getting his MBA 7:25 – How he learned about the pension business as a staff of one 9:18 – Key investment lessons from his early career 11:08 – Decision to move on from Target/Dayton Hudson 12:44 – Key differences between overseeing a corporate pension vs a hospital endowment structure 14:25 – How much did the difference in the investing strategy come from the mission of the funds vs the boards overseeing them 15:50 – What could Wayne do on the margin at Howard Hughes 17:28 – Transition to CIO 22:40 – Live Show Begins 23:00 – Defining ICMA-RC 23:32 – How does Wayne think about setting investment objectives with such a diverse group of clients 25:02 – Is it frustrating to have a more finite universe of investing options compared to previous work at Howard Hughes and Dayton Hudson 26:08 – Views on active vs passive 27:50 – The manager selection process 28:49 – Managing risks with external managers vs an internal team 30:34 – How does the team at ICMA-RC put their best ideas forward without governance getting in the way 31:34 – What constraints are imposed on investment decisions by the various regulatory bodies that ICMA-RC faces 32:40 – Their outlook on the market 34:08 – How does ICMA-RC's constituents respond to market performance 35:32 – Closer examination using 2008 stock performance 36:23 – How does Wayne educate investors 38:00 – Next steps for ICMA-RC 38:51 – Most challenging aspect of Wayne's work life 39:41 – Is there a looming pension crisis 40:53 – How do the Financial Planners help the employees if things don't work out 42:10 – How do they think about financial planning for clients when there's a chance defined benefit plans could come up short in the future 45:06 – How does Wayne address manager selection differently today given some of the constraints that he faces 47:19 – What has led Wayne to want to exit manager relationships 49:46 – Is there a point where Wayne would decide the optimal strategy is to go passive 51:28 – How does Wayne think about technology and the way it will be disrupt the industry 52:58 – Balancing the internal/external dynamic when hiring people 54:30 – Wayne's greatest success and failure over the last 14 years 55:50 – Where will the move into emerging markets come from 56:27 – What does Wayne think of the new products that can help younger constituents meet their retirement objectives 57:41 – Live Show Ends/Closing questions

Our exploration of the use of modern data analytics to enhance investment results continues this week with two of the leading providers of tools for portfolio managers. My guests on today's show are Clare Flynn Levy and Cameron Hight, both former investment managers who became entrepreneurs seeking to improve outcomes for other managers. Clare is the founder and CEO of Essentia Analytics, a behavioral data analytics service that enables fund managers to capture rich data about their own behavior and its context. Essentia analyzes trading history to help managers overcome common behavioral biases and optimize their trade entry and exit on positions. Cameron is the Founder and CEO of Alpha Theory, a fintech company that helps investment managers optimize their position sizing process. By creating a disciplined, real-time process based on a decision algorithm with roots in actuarial science, physics, and poker, Alpha Theory takes the guessing out of position sizing and allows managers to focus on what they do best - picking stocks. Our conversations cover the founding of their respective businesses, the mistakes portfolio managers commonly make, the tools they employ to help managers improve, and the challenges they face in broader adoption of these modern tools. The good news is the clients of Essentia and Alpha Theory have demonstrated improvement in their results after employing these techniques. If you ask Clare and Cameron, you may come a whole new appreciation about the potential for active management going forward. You can learn more about these two innovative companies at essentia-analytics.com and alphatheory.com. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes Clare (2:26) 2:29 – Clare's path to founding Essentia 5:42 – What makes data science of investing revolutionary in the past five years 6:25 – The pitch for Essentia's tools 7:57 – How do you use data to get into the behaviors that work and the ones that don't 8:06 – Michael Mauboussin podcast episode 8:10 – Annie Duke podcast episode 11:03 – Specific tenants of behavioral finance 12:39 – Parts of the portfolio process that they explore 14:20 – How do you actually convince people to change behavior 16:17 – The nudges built into the system 21:26 – How much data is needed to be able to help improve performance 22:16 – Most interesting data set that a portfolio manager has tried to get to improve their performance 24:21 – Is there consistency in people's patterns 27:08 - The hardest part of convincing someone to become a client 29:16 – What other places does Essentia plan on expanding 30:42 – Given all of the data that Clare has seen, what's her outlook on active management 32:39 - Closing questions for Clare Cameron (37:58) 38:02 – Cameron's background and the founding of Alpha Theory 38:35 – What problems does Alpha Theory looks to solve 38:49 – Psychology of Intelligence Analysis (Richard Shure) 40:13 – The mistakes he sees portfolio managers make 42:29 – What tool does Alpha theory is provide to portfolio managers 44:17 – What changes in the portfolio manager's implementation 47:27 – What have been the outcomes when people implement Alpha Theory 51:58 - Are there different firms or type of firms that are better at picking stocks 56:36 - The Concentration Manifesto 1:00:25 – How they calculate batting average of allocators 1:01:41 – Where else could this tool be applied 1:03:31 – What questions should allocators be asking of managers 1:05:09 – How much does the input of information impact the outcome 1:06:42 – What other research has Cameron been able to do based on this data 1:08:56 – Biggest challenge in running this business 1:11:23 – Closing questions for Cameron

Increased sophistication in manager assessment is an important trend in the search for alpha. My conversations with Michael Mauboussin and Annie Duke suggested frameworks to think about enhanced decision-making processes and prompted a deeper dive into the ways allocators and managers can improve their craft. This week and next explores some of the tools available to help make it happen. Basil Qunibi is the CEO of Novus Partners, a data analytics company whose mission is to help the world's top investors generate higher returns. As big data pervades commerce across industries, Novus is the most well-known provider of tools to analyze investment manager performance, allowing allocators to play Moneyball by breaking down the attributes of manager skill. Novus' 200 clients are split between allocators and hedge fund managers who collectively oversee approximately $3.5 trillion of assets. You can learn more about the company and its service at novus.com Our conversation starts with Basil's path to creating Novus and dives into the tools an allocator can use to improve their understanding of a manager's skill, including the data sets available to allocators, the levers a manager employs in driving returns, the relationship between data and a manager's process, a framework to analyze crowded names, and future horizons for data-driven assessments of managers. DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. 2:46 – The founding of Novus 5:45 – What did the qualitative assessment of managers look like at first for Basil 6:50 – How did he start to quantify managers 09:47 – What he saw in the initial data 13:24 – The early days of Novus, going all the way back to the concept 14:05 – Direct from Dell: Strategies that Revolutionized an Industry 14:07 – Sam Walton: Made In America 16:27 – Novus' first product 19:13 – Core components of measuring the skill of a manager 19:54 – Exposure management 22:10 – Capital allocation 23:27 – Idea selection 24:10 – Position sizing 25:11 – Tactical trading 25:45 – How should this data be used 28:08 – Why this data is useful for capital allocators 30:48 – How efficient is the market for talent 31:54 – What has happened to stocks that are crowded compared to those that aren't 35:15 – How does Novus use conviction in their metrics 36:43 – Consensus and concentration 40:02 – How Novus went from servicing allocators to also helping managers themselves 42:22 – Overview of Novus' clients and what they've been able to learn from all of this data 46:45 – What other markets could Novus be applicable to 48:56 – Most creative application of this data by a client 49:53 – Closing questions

Rick Selvala is the co-founder and CEO of Harvest Volatility, a ten-year old manager of a variety of volatility strategies that oversees $13 billion in assets. After starting his career in the Treasury department at General Motors in the mid 1980s, Rick has spent nearly three decades trading derivatives on the sell side and buy side. Rick has an uncanny ability to break down this complicated investment area and make it sound simple. Our conversation discusses the world of volatility, including intelligent uses of derivatives, overcoming headline risk, characteristics of successful traders, assessment of alpha, the current volatility environment, and strategies that capture returns. His insights left me thinking twice about some of the assumptions my System 1 brain had formed about volatility. Time for System 2 to go to work. DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes DONATE TO CYCLE FOR SURVIVAL, http://mskcc.convio.net/goto/ted. 3:03 – Rick's path to Harvest 5:17 – How should one think about volatility as an asset class 7:56 – Volatility as a path to enhance yield 11:07 – Is there a programmatic way to implement 12:55 – Volatility as a path for insurance 15:45 – Where do people go wrong with leverage 18:28 – What level of understanding of this space do clients really have 21:58 – How would someone express the idea that volatility is cheap in the market 22:04 – Bill Spitz podcast episode 24:24 – What strategies could managers take advantage of in a low volatility environment 26:01 – How does Rick asses if someone is a good trader 27:32 – How do you identify firms that are too bold 29:26 – Does the community have a good sense of whether traders are acting responsibly 30:08 – How do you determine if a manager is outperforming 32:11 – Is there a structural return from selling insurance to the market 34:13 – Have computer systems changed trading in the derivatives market 35:14 – Taking a look at the current environment 38:43 – Recent market turmoil 39:58 – Are quants impacting market volatility 41:26 – What's next on the frontier for Harvest 45:02 – Closing questions

Ali Hamed is the co-founder of CoVenture and Managing Partner of the CoVenture VC Fund. CoVenture is an innovative company that identifies and invests in novel assets formed by the intersection of technology and finance. The firm manages an early stage venture capital fund, direct lending fund, and crypto asset index fund, with each taking a creative twist on its market. Our conversation starts with Ali's entrepreneurial path to the creation of CoVenture, and covers examples of previously unpriced investment opportunities, including produce receivables, employee payroll loans, AirBnB accounts, and loans against employee stock options. We walk through the world of crypto assets and the state of the venture capital industry. Ali's fresh lens on the world offers a fascinating perspective on every aspect of early stage investing. If I didn't say it in advance, you'll be astounded to hear that Ali is only 26 years old. He's one to watch for the long-term. Learn More Join Ted's mailing list at CapitalAllocatorsPodcast.com Write a review on iTunes Follow Ted on twitter at @tseides For more episodes go to CapitalAllocatorsPodcast.com/Podcast Show Notes 2:22 – Ali's background 3:09 – How Ali got the bug for startups 4:06 – His time in NY without a home and where he gained the confidence to start in the entrepreneurial space 7:35 – Why their venture business is different from so many others in the space 9:12 – How Ali turned an idea into a business 11:33 – How does Ali describe CoVenture 12:10 – An example of an ideal CoVenture investment 14:53 – The transition into a specialty lending business 19:25 – How many niche opportunities has Ali identified as a place where he could create loans 22:04 – Examples of unpriced assets 24:23 – How does Ali find unique opportunities 27:40 – What's next on the horizon for Ali and CoVenture 28:28 – Looking at cryptocurrency and the business that Ali has built for the space 29:33 – Why did they create a cryptoasset index that was cap weighted 30:39 – Why should someone have exposure to a cryptoasset 35:23 – How does someone in the financial world get comfortable with the idea of cryptoassets 38:59 – Why Ali doesn't invest in ICO's 40:42 – What would an institutional cryptoasset fund look like 45:50 – How should an allocator try to address the idea of first in money in the cryptospace 50:32 – Where can someone play in the spectrum of venture investing 52:30 – What is the time horizon for venture investments 56:24 – Closing questions

Annie Duke is a renown public speaker and decision strategist. For two decades, she was one of the top poker players in the world, including winning a World Series of Poker bracelet and the $2 million winner-take-all WSOP Tournament of Champions. Her study of the science of smart decision-making began with a National Science Foundation Fellowship, which she used study Cognitive Psychology at the University of Pennsylvania. Among her charity work and television appearances, Annie was a runner-up to Joan Rivers on Celebrity Apprentice, during which she raised $700,000 for Refugees International. She is a natural teacher and storyteller with an active mind that constantly searches for accurate truth. I highly recommend Annie's new book, Thinking in Bets, which comes out this week. In her life after poker, she is a featured speaker, writes a newsletter and a blog, and advises companies on improving their decision-making process. Have a look at her website, annieduke.com, for more information. Our conversation discusses Annie's path from an Ivy League education to professional poker, the nature of a bet, how we form beliefs, why we make bad decisions, and what we can do to improve our decision-making process. Towards the end, we also talk about bankroll management, poker faces, and advice she would give the President on how to make better decisions. For more episodes go to CapitalAllocatorsPodcast.com/Podcast Write a review on iTunes Follow Ted on twitter at @tseides Join Ted's mailing list at CapitalAllocatorsPodcast.com Show Notes 2:30 – Annie's path through the poker world 6:05 – Her transition into teaching and the lesson of tilt 11:57 – How do you apply the concepts of betting and gambling broadly to decision making 13:35 – What is it about the science of the brain that prevents us from making good decisions 14:17 – Stumbling on Happiness 14:19 – Dan Gilbert Ted Talk 15:44 – Kluge: The Haphazard Evolution of the Human Mind 18:50 – Motivated reasoning 21:10 – Is there anything we can do to fix our decision-making biases (wanna bet) 28:05 – Other devices to improve our decision-making 32:29 – Value of a decision group 33:16 – Superforecasting: The Art and Science of Prediction 34:00 – Mertonian Norms, CUDOS 40:27 – Mental time travel (Marty McFly from Back to the Future) 42:55 – Jerry Seinfeld – Night Guy vs Morning Guy 44:55 – Applying these tools and the parallels between poker and investing 48:59 – Reading poker faces 49:21 – Joe Navarro books 49:34 – Joe Navarro Psychology Today 52:50 – What advice would Annie give President Trump in terms of improving his decision-making process 53:52 – Favorite sports moment 55:45 – What teaching from Annie's parents has most stayed with her 56:08 – What information does Annie read that a lot of people might not know about that is valuable 56:18 – The Greatest Show on Earth: The Evidence for Evolution 56:19 – Why Evolution Is True 56:58 – What life lesson does Annie wish she knew earlier in life 58:28 – Looking ahead, what advice would Annie give herself today from a ripe old age

Retired Investment polymath Seth Masters talks about China's transformation, contrarian career paths, flaws of benchmark-based investing, potential causes of the next crisis, and angel investing in fintech.

Bill Spitz was the longtime head of Vanderbilt University's endowment before retiring, for the first time, in 2007. He has received numerous lifetime achievement awards for his work and is one of the legends in the business. After failing in his retirement, he joined Diversified Trust Company, a wealth manager with $6.5 billion in assets under management that he co-founded back in 1994. Our conversation discusses managing an endowment in the early years, implementing unconventional investments, creating an edge as an allocator, selecting managers and conducting due diligence, exiting managers, challenging current landscape, and working with families. For more episodes, go to capitalallocatorspodcast.com/podcast Follow Ted on twitter at @tseides Show Notes 1:21 - (INTERVIEW STARTS) 1:30 – Early days at Vanderbilt and the landscape for university investment offices 3:17 – Career before working at Vanderbilt 3:59 – Transition from Wall Street to going back to his alma mater 4:48 – Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment 5:23 – Out of the box ideas when he first got started 6:25 – Convincing the board to approve unconventional ideas 8:28 – Why Bill retired 9:28 – Diversified Trust White Papers 9:31 – What is the edge that allocators have when it comes to investing 9:33 – Paul Johnson and Paul Sonkin podcast episode 9:35 – Pitch the Perfect Investment: The Essential Guide to Winning on Wall Street 10:05 – Gaining an Edge in Investing 12:30 – Where can skill from an allocator perspective be applied 14:32 – Judging the skill of managers as an allocator 15:16 – Looking out to the future, how will the endowment model stack up against the traditional 60/40 portfolio 17: 47 - How do you manage clients when your strategy may not be keeping up with the S&P 500 in the short term 19:15 – Thoughts on bitcoin 20:00 – How Bill was able to get involved with Diversified Trust while working at Vanderbilt 21:47 – Differences in managing endowments vs taxable pools of capital 23:22 – Stories that either derail an investment process or educate someone to stay the course 24:23 – Manager selection process and what Bill looks for when choosing the right one 28:01 – Bill's view on exiting managers 29:55 – How do you measure the evolution of a manager's investing strategy, especially as the market changes 31:41 – What is different today about investing vs when Bill first started 33:56 – Do alternative and emerging investment streams deliver the returns that many hope for 35:13 – Why don't endowments, foundations, or pension funds feel comfortable with moving chunks of their portfolio to cash 37:00 – How does Bill think about the balance of investments with higher return potentials against their higher costs 38:13 – Any categories that really pique Bill's interest 39:22 – What does the asset management industry look like in 10-20 years from now 41:56 – What should aspiring money managers think about as they move forward in this business 43:09 – What Bill is most proud of in his career 43:54 – Favorite sports moment 45:01 – What teaching from Bill's parents has most stayed with him 45:14 – Battle Hymn of the Tiger Mother 45:18 – The Triple Package: How Three Unlikely Traits Explain the Rise and Fall of Cultural Groups in America 46:10 – What information does Bill read that he gets a lot out of 46:20 – The Economist 46:33 – Wall Street Journal 46:34 – Bloomberg 46:45 – Life lesson that he wished he knew a lot earlier 47:29 – In his waning days, what advice would Bill give himself today

Michael Mauboussin currently is the Director of Research at BlueMountain Capital, a multi-billion dollar hedge fund and asset manager. He spent the majority of his professional career thinking and writing about decision making, behavior and complex systems, with long stints at Credit Suisse and nearly a decade alongside Bill Miller at Legg Mason. Michael has been an Adjust Professor at Columbia Business School for 24 years. Our conversation covers Michael's early career, the paradox of skill, academic research more favorable to active management, decision-making, optimal size and composition of teams, unsettling features in the market, data analysis in sports, career risk, the Santa Fe Institute, and Michael's new research on the horizon. Every time I speak to Michael I come away thinking better and feeling smarter, and this time was no exception. For more episodes go to CapitalAllocatorsPodcast.com/Podcast Write a review on iTunes Follow Ted on twitter at @tseides Join Ted's mailing list at CapitalAllocatorsPodcast.com Show Notes 1:48 - What was Michael like as a kid 2:26 – How Michael found his way to Wall Street 6:18 – His start as an analyst in consumer and packaged goods 7:52 – Why there are no .400 hitters in active management and the paradox of skill 8:15 – Full House: The Spread of Excellence from Plato to Darwin 14:26 – Why have there been massive flows into index funds over the last 3-4 years 15:44 – Academic research supporting active management 16:09 – Mutual Fund Flows and Performance in Rational Markets 16:25 - On the Impossibility of Informationally Efficient Markets 22:52 - Indexing and Active Fund Management: International Evidence 23:12 – Do these trends also apply in global markets 24:01 - The Mutual Fund Industry Worldwide: Explicit and Closet Indexing, Fees, and Performance 25:22 – What has Michael discovered in his new role at Blue Mountain through his new credit lens 27:49 – Amazon, the world's most remarkable firm, is just getting started 30:02 – What are some of the lenses that Michael uses when dealing with allocators 35:02 – How does Michael go about interviewing for a team while taking into account their biases 36:19 – The Rationality Quotient: Toward a Test of Rational Thinking 36:37 – Biggest risks in the markets today 37:31 – Banks to Funds: Have Some Leverage With That Deal 39:45 – Liquidity in the markets 41:26 – What's most interesting to Michael about the merging of data and sports 41:34 – The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing 43:42 – Big Data Baseball: Math, Miracles, and the End of a 20-Year Losing Streak 44:32 – Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won 45:57 – Psychological bias in sports 46:16 - Malcom Gladwell Podcast: The Big Man Can't Shoot 47:23 – Psychological bias in investment management 47:40 – Scott Malpass on Capital Allocators 48:44 – Michael's work with the Santa Fe institute 53:08 – Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies 54:40 – Next big piece of research Michael is working on 57:53 – The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction 57:59 – Should Michael be using his skills elsewhere in the context of a world where so many advocate for just indexing 1:01:36 – Charley Ellis on Capital Allocators 1:02:31 – CLOSING QUESTIONS