Pitch Summary:
Amazon was partially sold due to its EV/EBIT of 35, which was considered high given the expected EBIT growth rate of 15%. The stock was trading at a PEG ratio above 2, indicating potential overvaluation. The decision to reduce holdings was also influenced by the need to manage risk, as Amazon was the largest holding at the end of 2024. The proceeds from the sale were reallocated to other investments like Bombardier and Google, which were deemed to offer better opportunities.

BSD Analysis:
The reduction in Amazon holdings was a strategic move to mitigate risk associated with holding a large position in a potentially overvalued stock. The company’s reliance on AWS for a significant portion of its operating income posed a vulnerability, especially in light of potential challenges in the AI sector. By reallocating capital to other investments, the investor aimed to diversify the portfolio and enhance overall returns. This decision underscores the importance of balancing growth potential with valuation and risk management in investment strategies.

Pitch Summary:
Intuitive Surgical was sold due to its high EV/EBIT of 80, placing it at the top of the ‘danger zone’ for overvaluation. Despite a modest 9% increase in stock price this year, the performance was below market average and personal investment benchmarks. The decision to sell was influenced by the opportunity to reallocate capital to more promising investments, despite the potential capital gains tax implications.

BSD Analysis:
The sale of Intuitive Surgical reflects a strategic shift towards optimizing portfolio returns by reallocating capital from overvalued stocks to those with better growth prospects. The company’s high valuation, despite its innovative products, posed a risk of underperformance relative to the broader market. By selling Intuitive Surgical, the investor aimed to capitalize on more attractive opportunities, demonstrating a disciplined approach to managing portfolio risk and maximizing returns.

Pitch Summary:
Trade Desk was sold due to its extremely high EV/EBIT of 200, which indicated a valuation premium that was unsustainable. The company’s stock had become a ‘runaway 10 bagger’ since its purchase at a PE of 40 in 2018. However, a significant market shift occurred as Amazon Prime consolidated the streaming ads marketplace, impacting Trade Desk’s growth trajectory. Despite winning a large share of Netflix ads in 2025, the divergence between valuation and growth became evident, prompting the decision to sell.

BSD Analysis:
The decision to sell Trade Desk was driven by the recognition of a valuation bubble, where the stock’s price had far outpaced its growth potential. The consolidation of the streaming ads market by Amazon Prime posed a significant threat to Trade Desk’s market share and future growth prospects. The sale was timely, as the stock subsequently experienced a 67% decline. This move highlights the importance of aligning stock valuations with realistic growth expectations and the risks of holding overvalued stocks in a rapidly changing industry.

Pitch Summary:
BFF Bank has experienced a significant sell-off due to regulatory changes by the Bank of Italy, which required asset reclassification and increased regulatory capital. Despite this, the bank’s capital ratios have recovered, and it is expected that the dividend suspension will be lifted soon. The bank’s unique business model generates high returns on equity (ROE) of 20-40% with minimal risk of loan losses, as their counterparties are government entities. The stock is trading at a price-to-book (P/B) ratio of 1.75, and with an ROE of 30%, it yields approximately 17% annually without growth. The stock is expected to re-rate to a P/B of 2.5-3 once the dividend suspension is lifted.

BSD Analysis:
BFF Bank’s business model is particularly resilient as it has no exposure to the credit cycle, given that its counterparties are primarily government bodies. The bank’s ability to generate high ROE with low risk positions it well for future growth, especially as it expands into other European markets. The regulatory setback is seen as temporary, and the bank’s compliance with the Bank of Italy’s requirements suggests a favorable resolution. However, potential risks include further regulatory changes and execution challenges. Historically, the stock has rarely traded below a P/B of 2, indicating potential upside once normal operations resume.

Description:
Stephen Gilmore is the Chief Investment Officer of CalPERS, which at $600 billion is the largest public pension fund in the U.S. …

Transcript:
One of the things that has attracted value from the Kulpers experience has been a tendency to be too procyclical. If you think back to the time of the financial crisis, various assets were liquidated, risk was taken off. That was done in part because of concerns about liquidity. Concerns that didn’t need to be acted upon, but there was an information challenge at the time. Information on liquidity has improved greatly since then, but risk was taken down. If you’re a long-term investor, that’s exactly the time to be putting on risk. The same thing has happened when markets more exuberant. Risk has been taken up. One of the big advantages of having a total portfolio approach with reference portfolio is you tend to have a more stable risk appetite through time and it’ll be transparent if risk is taken up or down. management now becomes more accountable because under a strategic asset allocation yes the management can make a recommendation to the board on the SAA the board adopts it and the question is who owns it because it’s combined it’s a joint thing with our proposed approach for the total portfolio the board adopts a reference portfolio and that corresponds to a particular amount of risk but it’s the management that is using it initiative to propose the portfolio and to invest the portfolio the management becomes more accountable. It also becomes clearer how has the management team done relative to a simple off-the-shelf portfolio. [music] I’m Ted Sides [music] and this is Capital Allocators. My guest on today’s show is Steven Gilmore, the chief investment officer of CalPERS, which at $600 billion is the largest public pension fund in the US and one of the largest institutional pools of capital in the world. Steven joined Kalpers 18 months ago from a career spanning Wall Street, the IMF, and two of the most innovative sovereign wealth funds where he was chief investment strategist at Australia Future Fund and CIO at New Zealand Super Fund. Our conversation dives into the theory and implementation of the total portfolio approach drawing on Steven’s experience at Australia and New Zealand and his plans for CalPERS. [music] We cover the TPA mindset, its fostering of sound governance and accountability, comparisons to strategic asset allocation, challenges of implementation, and the adaptation of the model at CalPERS. Steven is one of the most experienced practitioners of TPA in the world. Our discussion pairs well with my recent conversation with Ashb Monk as more allocators learn and consider [music] this approach to managing assets. Before we get going, Valentine’s Day is right around the corner. I found there’s two types of red in the air. The sweet scent of love [music] and the red of jealousy, envy, and frustration. It’s love we’re all after. In my younger years, I was a forlororn romantic in search of happily ever after. Once I found it the [music] second time around, much of Valentine’s Day has been a beautiful thing. That’s after the redness of stress that goes into the run-up to the [music] big day. For those still searching and feeling the red of jealousy, envy, and frustration, know you’re not alone. Many are in your shoes, and the rest of us will tell you it’s not all roses on the other side. So, what do you do when you’re feeling stuck [music] and a little lost looking for a special someone or a special gift to give your special someone? We have an answer for you. Knowing that every top has a bottom and every love has heartache, we’d suggest a gift that keeps on giving. And what better way to celebrate together than the love that comes from a premium subscription to Capital Alligators, where you get thousands of pages of transcripts, a weekly email with wisdom and hot takes, and a community of like-minded lovers of the show. [music] Our gift to you for this holiday. How about a 50% off your first year subscription? Just hop on the website and use the code we love CA50 for [music] your discount. You can see the call notes for the capital W in Wii and capital CA in we love CA50. Since we want to share the love all year long, you can use that discount code anytime, not just in these weeks leading up to Valentine’s Day. Please enjoy my conversation with Steven Gilmore. [music] Stephen, wonderful to see you. It’s great to be here. Ted, >> take me all the way back to your start in finance. that goes back to university, studied economics, then went and lectured in finance for a year before going off to the Reserve Bank in New Zealand. Then went traveling, picked up a job at Chase Manhattan in London, derivative structuring, FX options, then a detour to the IMF for 6 years, then back to the markets with Morgan Stanley. I was an emerging market strategist then went across to AIGFP was there for a while then off to future fund in Australia New Zealand super and now Kelpers there’s a lot of steps there in your time at Wall Street what were some of the different roles that led you to understand how you thought about markets >> it’s an interesting question because you learn something in each role when I was at Chase before the merger with JP Morgan. I got to to sit in the dealing room and to combine different products. I got to sit with the swaps traders, the floating floating traders, the option traders and I would structure transactions. Seeing things from different perspectives was very helpful. I still think about going through the pricing on a floating floating swap. That was insightful. Well, then moving to the FX options desk. It was quite a revelation because when you come from an academic background, you think it’s all about the formula and you don’t really understand how people derive or how they trade implied V. That was another lesson. There are lots of incidents like that. Those are two early ones that stand out. So along the stops along the way, the last one you mentioned was AIGFP which for those who remember was part of the epicenter of the financial crisis. So I’d love to hear about your experience there. >> I was there during the financial crisis. I started at AIGFP in London which traded under the name bonk which was the European arm from 2004 until 2009. I was working primarily on emerging markets had created an investable emerging market index business which was going pretty well. That was a fairly small part of what was happening at AGFP. The problematic part of the business related to super senior protection on multis sector CDOS’s that became problematic with with subprime. There were issues with liquidity. The repo market froze up and we all know the story of what happened with AIG. I learned a lot from that time. One of the things that really impressed me was the quality of the people at AIGFP. They had really good people. I thought a lot of Joe Casada who ran the place he was super smart, very knowledgeable across many things. One of the lessons that came out of course was that no matter how good a person is, things can always go wrong. It was important to challenge to stress test. One of the things that made it problematic for FP was it came down to liquidity challenges. Sometimes you can’t anticipate that the repo market’s going to freeze up. you can’t necessarily anticipate how the rest of the market’s going to perform. You always want to think about what can go wrong even though you’ve got brilliant people. In the case of FP, they stopped entering into new super senior transactions of that elk from late 2005, well ahead of the final denuant in 2007 2008. It wasn’t soon enough. What led you to make the move from Wall Street to Australia’s future? Well, >> I’d been in the public sector and the private sector and I like both. After the financial crisis, I wanted something else to do. One of the opportunities that came up was to work with Future Fund in Melbourne. Being a New Zealander, it’s closer to home. So, I went off to Melbourne. After a short period of time, I ended up running the strategy team there. and thoroughly enjoyed it because the future fund had started in 2007 had quite a large pot of money. It was a startup with a lot of capital. So we had to think about how to invest. The future fund had actually been one of the beneficiaries of the financial crisis because it had a lowrisk portfolio going into the crisis. So it had a lot of cash to invest when assets were very cheap. It was a pretty exciting time. What did you see as the core principles of portfolio construction when you were there? >> That was largely shaped by the CIO at the time, Dave Neil. One of the core things was to have a joined up process to build a portfolio that was designed to achieve the ultimate objective rather than to have lots of segmented asset classes. Yes, I had asset class teams. The idea was to think of the portfolio as a whole. So you didn’t have all these intermediate targets that became known as a total portfolio approach. >> You saw that both at Australia and then later back home New Zealand super fund. What are some of the subtle differences in two different sovereign wealth funds applying the total portfolio approach? You’ve got to understand the objectives of each of the organizations. One thing that I spent quite a lot of time thinking about when I arrived at New Zealand Super was why Future Fund and New Zealand Super did things quite differently. Future Fund set up in 2006, started operating in 2007. So it was later than New Zealand Super which got going around 2003. They had a lot of similarities. sovereign wealth funds both in Australasia. New Zealand super had larger risk appetite than future fund. The reason being it had a longer horizon. It was getting small contributions over a long period of time. The distributions from New Zealand super were going to be some way off in the distance. Future Fund had started with a lot of money to begin with, $60 billion Australian dollars. The last thing you want to do when you’ve got a big money to start off with is to lose a chunk of it. You got to be conservative. They also started at a time when assets were cheap. They had a lot of liquidity and were able to benefit from those high prospective returns because of those cheap assets. It worked pretty well for a while. future fund was discretionary active a short horizon because the expectation was that they would have to make distributions to the budget come 2020. It turned out not to be the case and those distributions have been put off further and further. The team at the beginning didn’t know that. If they had known that, I imagine the future fund would have had a higher risk appetite through time. But that wasn’t the case. Going back to your question on the approaches to the total portfolio, you’ve got to think of what the objectives of the two organizations are and how they react to those objectives and also lift experience. Future funds lived experience was that discretionary investment worked reasonably well. Had also been reasonably cautious because when they started the reward for risk was quite high. New Zealand super had risk on during the financial crisis, had a large draw down, had stuck with the strategy effectively and then became more structured in terms of the philosophy, adopted a total portfolio approach. Both organizations did that around 2010. New Zealand super was far less reliant on external skill, tended to think more about having a stable risk appetite through time. A lot of the active risk was more systematic trying to rely on the advantages that the organization had advantages like a long horizon fairly stable risk appetite and tried to take advantage of that mean reversion that worked well. Both organizations have been very successful but successful in different ways. In the case of New Zealand super total portfolio approach they have a reference portfolio. Future fund total portfolio approach doesn’t have a reference portfolio. They both have an understanding of how much risk they’re taking. So they will focus on that risk appetite. Future fund will move around quite a lot in terms of active risk and it used to be quite discretionary. New Zealand super much more systematic. >> The concept of this one has a reference portfolio this one doesn’t but both under the umbrella of total portfolio approach which lots of people are talking about now. What does total portfolio approach mean to you? >> It’s more about a mindset. The most important thing is that the portfolio is built to try and achieve the ultimate objective. The ultimate objective for future fund now is CPI plus 4 to 5. That’s what the portfolio is constructed to do. In New Zealand, it’s less clear in terms of having a specific return objective. The focus is on the risk appetite and generating wealth for future generations of New Zealanders. and to help the budget manage the cost of an aging population. But in both cases, the focus is not on what is referred to as a strategic asset allocation. It’s saying what’s the best portfolio and there’s a competition for capital across the portfolio across asset classes. In both cases, >> to the extent that a strategic asset allocation approach has defined buckets, defined targets, that there are guard rails put in place. Sometimes you hear about total portfolio approach other than there’s a reference portfolio that’s got some simple stock bond risk appetite. It feels less guardrailed around what the expectation should be. How do you go from we want to achieve this objective to a portfolio construct underneath that that someone on the board a governance structure can get their arms around and say okay this is our version of the total portfolio approach. Let’s talk about Kulpus for instance. Under the strategic asset allocation which is currently in place, the management team has the discretion to vary the asset allocation within certain ranges. What we did was to look at how much that variation would aggregate up to in terms of the leeway management had been delegated. We estimated that that amounted to around about 450 basis points of active risk using all the policy ranges. With the transition to a total portfolio approach, we weren’t asking for that much active risk. We were asking for more flexibility in how we used it. The guard rails are still there in terms of the active risk. What has changed is that there’s more discretion to deploy that active risk in different areas. With that additional discretion comes the responsibility to be more transparent. We will be more transparent with the board in terms of the proposed portfolio and the rationale for v strategies after some time in the seat at New Zealand. How does one go from being home in New Zealand to being quite far abroad in California? >> I grew up in New Zealand. My first few jobs were in New Zealand. When I was at the Reserve Bank, I did what a lot of New Zealanders do, and that is take a year off to travel. That one year ended up being 30 years. I went from New Zealand, I ended up working in the UK, then working in the UAS, then back in the UK, then in Hong Kong, then back in the UK, then off to Melbourne, then Oakland. I also spent some time in Tajjikhistan when I was at the IMF. Lived there for 2 years for me. Living in different places is normal. I’ve lived in six different countries, 10 different cities. It’s not unusual. >> So, geographically, it fit. How did you end up professionally deciding to make this move? I’ve been at New Zealand Super for 5 years. It’s a great place and it’s nice being home. I got a call from a recruiter. They mentioned the culpa’s role. Frankly, I wasn’t that interested. It’s a tough gig. But the call prompted me to think about it some more, to do some due diligence. I thought, there’s so much potential there. When the recruiter called back, I was more open. And the recruiter immediately got Marci on the phone. She’s very persuasive and very engaging. Not long after that call, like the same day, the recruiter called me and said, “We want you to interview with the board subcommittee.” Shortly thereafter, I interviewed the board subcommittee and great questions and I really enjoyed the interaction. That’s what I wanted the role. >> In past conversations with Matt at New Zealand and Raph at the future fund, they both emphasized the importance of sound governance in being able to make the model work. What’s your perception of the lived experience of Kalpers knowing you’ve seen lots of different CIOS over the years? One of the things that has attracted value from the Kulpers experience has been a tendency to be too procyclical. If you think back to the time of the financial crisis, various assets were liquidated, risk was taken off. That was done in part because of concerns about liquidity. Concerns that didn’t need to be acted upon, but there was an information challenge at the time. Information on liquidity has improved greatly since then, but risk was taken down. If you’re a long-term investor, that’s exactly the time to be putting on risk. The same thing has happened when markets are more exuberant. Risk has been taken up. One of the big advantages of having a total portfolio approach with the reference portfolio is you tend to have a more stable risk appetite through time and it’ll be transparent if risk is taken up or down. I’d like to think there’s a governance improvement there. I would also like to think that management now becomes more accountable because under a strategic asset allocation, yes, the management can make a recommendation to the board on the SAA. The board adopts it and the question is who owns it because it’s combined. It’s a joint thing with our proposed approach for the total portfolio. The board adopts a reference portfolio and that corresponds to a particular amount of risk but it’s the management that is using its initiative to propose the portfolio and to invest the portfolio. The management becomes more accountable. It also becomes clearer how has the management team done relative to a simple off-the-shelf portfolio. It should improve accountability and those are all governance improvements. When you came into Calpers with this thought from your experience, you’d like to shift the portfolio to total portfolio approach. What did you find in the portfolio in the process of trying to figure out this is the right TPA model for Kalpers? When I first came in, my focus wasn’t on rapidly moving to a total portfolio approach. My intention was to spend 3 to 6 months listening, learning. were about to start an asset liability management review which occurs every four years. The question for me was do I want to push to go down this route of a total portfolio approach now or do I wait 4 years and I didn’t really want to wait. We really did this in a stepwise fashion. One of the first things we did was to show the board how a risk equivalent portfolio had done compared with Kelpa’s portfolio. It was revealing for people because you can take a simple combination of equities and bonds and it will track the actual portfolio very closely and that’ll be the case for most pension funds. Once I saw that reaction, I thought we should go further and take people on this total portfolio journey. I saw a few other things which made the process easier. You want to get the right alignment and you want everyone to be investing the portfolio as a whole. Some years earlier, Marci had changed the compensation structure so that everyone got rewarded on the basis of the whole portfolio, not their asset class. That was quite important. The team had done a lot of work on liquidity, had invested a lot of time, a lot of effort, some really good work was done on that. That was a particular advantage for looking at the whole portfolio. I saw some elements there which were really helpful when one wants to go down this route. >> How did you think about skill sets of a team that are accustomed to strategic asset allocation investing compared to this idea that you’re going to compare assets across asset classes? One of the things with a strategic asset allocation is that you do have policy ranges. You can deviate. In practice, teams tend not to deviate too far from benchmarks. There’s a psychological element. Conceptually, if you were to speed up the SAA process, the review to do it more continuously, it would look more like a total portfolio approach. If you have that thought process, we’re just going through the exercise more frequently and becoming less anchored to what the essay is. that’s getting you partway towards that mindset of a TPA. Thinking about how the competition for capital takes place, you have to go out and have some sort of common language for looking at different investments. That can be difficult because different asset classes think about returns differently. If you’re looking at private equity, you’ll think about IRS, you’ll think about multiples. If you’re looking at infrastructure, you might think about discount rates. If you’re looking at real estate, you might think cap rates. Some people will focus on money weighted returns. Some people will focus on time weighted returns. You’ve got to come up with something that everyone can work with. That takes time. Likewise, when you’re looking at the cost of capital, you have to be thinking about well, is this a reasonable proxy? Especially for the private markets because you’ve got infrequent valuations. So, that takes time as well. When you bring this down to brass tax for CalPERS, considering the needs of that pool of capital, what reference portfolio have you recommended? We’ve recommended 75% equity, 25% bond portfolio. We’ve recommended an active risk range around 400 basis points. That’s a growth orientated portfolio and it’s a function of our time horizon. It’s also a function of our funded status. We’re just over 80% funded is reasonably similar to the current portfolio. A little bit riskier than the current portfolio, but not a lot. >> What common language have you come [clears throat] across those asset classes as you describe to start to understand how to compare the real estate asset to the public equity to the private equity? >> You should think about funding all the investments out of the reference portfolio. funding in them out of some combination of equities and fixed income. In our case, it’s US treasuries. You want to risk match the investment you’re making with some combination of equities and bonds. In reality, it’s going to be the equity risk that dominates. You’re obviously looking at things like equity beta as one of the considerations. You’ve also got to be thinking about how you charge for ill liquidity because if you are investing in a liquid asset, you’ve given up some optionality and that’s of some value. How much of course will depend a bit on the institution depending on how much liquidity you have. It also can be a function of base currency and currency hedging and so on. Those are some of the considerations >> as you’re getting ready to figure out how you’re going to make these comparisons. Love to hear in your time at New Zealand or in your time in Australia, what was an example of comparing that common illiquidity premium that you would want from a private equity or venture capital asset to a public equity beta. In both of those countries, in New Zealand and Australia, a lot of the investing was offshore because they’ve got relatively small domestic capital markets. One of the biggest considerations related to foreign currency and the hedging of those foreign currencies. And of course, for comparing assets, you would want to look at things on a hedged basis so you can compare across countries. that has implications for liquidity because in both Australia and New Zealand and Canada for that matter when there’s a negative shock equities are going to fall but those currencies will also weaken so there’s a liquidity consideration that’s different if you happen to be a US-based investor or it has historically been different that’s one consideration you’ve got to look at the big factor which is equities and you’re normally looking at regression analysis but then again you’ve got to think about what is the market value at a point in time and these things are infrequently marked. There can be a lot of discussion and debate. In the end, you want to get something that’s reasonable. As you go to implement, how do you think about in the context of funding some risk budget in the reference portfolio directly managed versus outsourced to managers? From a culpas perspective, we do manage some of the public liquid markets internally, but it’s more difficult to do that in the private markets. It relates to skill sets, the size of the team, the breadth of expertise. I don’t anticipate that we will be particularly active direct privates apart from co-investment. But I expect that we will become more active in the public markets given the balance sheet management and our improved liquidity management. >> As you’re looking at making these trade-offs and particularly making these shifts over time, what does the data and information that you need to aggregate look like on a dashboard on your desk so that you can make an informed decision? >> The data and analytics are hugely important. One of the things we have been doing at Kulpers is embarking on an effort to simplify some of the systems we’re using to get that better whole of portfolio view. That’s a multi-year exercise. You essentially want to be able to aggregate in a common language. Historically, we’ve tended to have best of breed, you know, applications by asset class. that can be great for a single asset class, but it’s not so good when you want to combine everything. So, you got to be thinking about the right tradeoff between that asset class functionality and the whole of portfolio. Bias is to try and have a better view at whole of portfolio. What is it that you’re looking at to understand what you own so that you know how markets might be impacting what’s in your portfolio? A lot of the portfolio risk is going to be dominated by equity risk. The 75 equity 25 bond reference portfolio that simple construct will do a good job of approximating what our actual portfolio looks like. So you can stress test it. It may be that some things have a stress beta which is higher than what you might get with the 7525. Some things might be lower. What’s most important is to be thinking about how the portfolio performs under different scenarios. People have looked at historical scenarios. They’ve looked at actual events. But of course, any of these shocks that you’re going to experience is probably going to be different from the past. They’re similarities, but you’re not going to get an exact repeat because people have learned. Market structures are different and so on. quite important to understand how the portfolio performs given a growth shock or given an inflation shock or given a real rate shock or a risk premium shock. Other structural changes scenarios will play a more important role as we go forward. The reality is you cannot immunize the portfolio to all these different shocks because then you won’t generate any decent return. It’s more about understanding what might happen being prepared for those and if there are some outcomes that are unacceptable then you can do something at the portfolio level to mitigate those risks. >> So at any point in time once you have your portfolio built out the marginal investment you might want to make needs to be additive marginal contribution of the portfolio >> conceptually yes the practicality of course is difficult to compare every single investment with every other one but if you have that common language you can approximately do that. You’ve also got to look at the investments that are already in the portfolio. It’s not just the new ones. Even the ones that are in the portfolio now continue to have to earn their place in a strategic asset allocation model. That incremental investment is probably someone’s assessment of better alpha. If it’s a new manager in public equities, we think that manager is better than the manager we have. maybe in the construct of what we’re trying to find. What might the similarities and differences be in that incremental investment in a TPA approach >> with an SAA? The asset class is probably thinking about how additive that investment is given the asset allocation. Let’s say it’s an asset class with a 10% allocation. They’ll fill the bucket up to that 10%. Now, it could be that is suboptimal. It could be that the return from the marginal investment in an asset class is less than it could be in another asset class or possibly it could be that it’s a lot better and the team should be doing a lot more. You could be underinvested or overinvested depending on the relative attractiveness. If you’ve got a 10% allocation, you’re probably going to look to diversify that portfolio. You don’t want to have a too concentrated an asset class portfolio. But when you’re thinking about its contribution to the whole portfolio, you should be much more comfortable in having a more concentrated asset class portfolio because it gets diversified away at the whole portfolio level. Those are some of the differences. It’s also one of the reasons why it’s hard to hold an asset class as accountable in a total portfolio approach because the asset class may have been asked to do something for whole of portfolio considerations. The assessment of the contribution is really the contribution to the whole portfolio rather than just looking at the asset class on a standalone basis. If at any given time you identify an opportunity set that is a good fit for the portfolio and seems particularly attractive in that current environment, how do you think about sizing? >> You want the sizing to relate to your degree of conviction in the investment? You’re also going to be looking at the overall portfolio characteristics. Typically any individual investment isn’t going to make that much of a difference at the whole or portfolio level. How do you think about how to measure appropriate diversification in a TPA approach? >> Scenario analysis is important. Let’s take a simple example. Equities and bonds. Do they diversify? Is a bond exposure going to diversify an equity exposure? Well, it may. It depends on what’s happening. Take the example of an inflation shock. If inflation goes up, nominal bonds are going to be hit. Equities are probably going to be hit as well. If you have a growth shock, it’s going to be the opposite. Equity is going to benefit. Bonds are probably going to be hit. So, bonds are diversifying there. You need to look at what’s driving the event rather than simply looking at historical correlations. One needs to be thinking about multi-dimensional scenarios and think about how the portfolio behaves given those scenarios. Among the triedand-true principles that have worked for a long time for some of the strategic asset allocation models, rebalancing and private market exposure always comes up. How does the concept of mean reverting rebalancing work within a TPA approach? >> I don’t see any difference. Future fund, New Zealand super would be rebalancing. Typically what you would do with the forms of total portfolio approach that I’m familiar with is you would have a target portfolio anyway. you would be aiming for something where you’ve got a reference portfolio. You’re rebalancing risk back the reference portfolio level. If you’re the future fund and you don’t have a reference portfolio, you’ll still want to think about equity equivalent exposure and they’ll want to rebalance back to that. It will be similar in terms of the privates. That’s an interesting one because with private market exposure, you can’t move that anytime you want because they’re liquid and the relationships involved. The investing teams will need to have clarity over a multi-year runway. In the organizations I’ve been in, there’s usually some sort of runway or plan over multiple years. The target portfolio has to take that into account so that the teams have decent planning horizon and so they can manage relationships. >> How have you thought about the trade-offs of active and passive within the portfolio? >> In terms of reference portfolio example, it’s passive. You will want to take active risk when you think you’re going to get paid for it. It’s as simple as that. >> How has that come through about where you’re choosing to invest actively? It helps us in the past the equity team the fixed income team have been good at generating good information ratios but it hasn’t been scaled which I found interesting because there have been constraints on the active risks that can be taken and sub constraints I look at this and think well these are great information ratios in some of these strategies why aren’t we doing more then there’s a question as to how far these can be scaled >> one of the big differences in the seat today from where you’ve been is the size of the asset pool itself. What are some of the areas where scale helps? Size helps a lot when thinking about the cost of transacting. You can improve your negotiating position because your size you can have very strong partnerships with economics works for both parties. I see the benefits to that. We’ve been taking advantage of that in recent years in our private equity portfolio. There was a period where we were underinvested in private equity and the strategy has changed. It’s been particularly successful since 2022. The focus there has been on relationships, having that partnership, having that alignment. A key part of that has been getting more co-investment. There are economic benefits to that. That partnership works when you get better information flow. We’ve done a good job of selecting managers. Those things more likely when you’ve got a somewhat larger team and asset pool because you can cover more ground and you can get access. You can’t necessarily scale in the same way on net. It is an advantage in an area like that. There are going to be some places where it’s a disadvantage because you can’t scale. >> What are some of those? >> If I was thinking of a hypothetically stat or something, how much could we do? When you’ve decided there’s a particular opportunity where it makes sense to pursue active management, how do you think about the size of an active manager, their assets under management as a fit for the Calpers portfolio? Given our scale, it’s hard to make small investments cuz they don’t move the dial. Some of these emerging managers can be outperformers. You want to take advantage of that. So you need to find the right framework and mechanisms for getting access to those smaller emerging managers. The reality is that the bulk of capital is going to be invested through larger managers because of the size of our portfolio. The governance boards, Guardians, New Zealand, Australia are thought of as very sophisticated investment pools of capital and in the public pensions in the US typically the people serving on the boards do not come from finance backgrounds. How has that changed how you thought about approaching the portfolio? It’s true. The nature of the boards are different. The boards in Australia and New Zealand, the ones I dealt with comprise investors. There’s a different type of conversation but Kulp is the board is the ultimate governance body. Our move to a total portfolio approach pays attention to that. It’s a management team that has the investment experience. We should be accountable for it. It becomes clearer. The board has the overall oversight. The asset liability management model remains the same. We’ve just moved to a reference portfolio and we’ve defined the active risk a little differently. Ultimately, there’s more clarity around who is accountable. It’s the management team that has the investment experience. The board has the governance experience. >> What are some of the subtle favorite features of yours that you’ve seen at TPA that you’d like to apply to Kalpers? >> One thing that stands out is aligning the act of risk to the level of conviction. If you’ve got lots of silos by asset class, you don’t necessarily do that. Back to New Zealand Super, I used to describe the active performance of New Zealand Super in baseball terms. If you look at all the different investment strategies, when I first looked at the analysis, I thought, well, actually, the hit rate or the batting average is pretty ordinary. That’s not that unusual, but the slugging average was amazing. the areas that it did best in had had a lot of risk allocated. Those areas that it performed best in were the areas of highest conviction as well. That was something that has been a feature. That’s something that’s important for Kelpus to think about where our advantages are and to make sure we’re allocating capital proportionately. When more and more people are thinking about total portfolio approach, where have you found that others are well positioned to do it that may not or where they’re really not going to be able to replicate it? It’s probably smaller teams that are better positioned. In our case at Kulpers, yes, it’s a larger team, but we had some of the enabling conditions. We had the alignment in terms of the compensation, the improvements in terms of liquidity management and we’ve got a capable team. Those things are all helpful. The fact that we’d embarked upon a data and technology transformation was also helpful to make it work. You need to have good collaboration. That’s a key thing. Having people that speak with one another are aligned with the ultimate objective. How have you tried to bring that culturally from what you’ve seen to operate in that type of collaborative way? One of the things we’ve done at the level of the leadership team is to call out collaboration. When people are assessed for performance, collaboration is one of the key leadership competencies. We’ve heightened that in terms of how much focus we give to it. There’s focus on communication outreach. We’ve had lots of questions and answers and discussions. When you do that in the big forum, people don’t feel that comfortable speaking up. There’s been a lot of outreach at the team by team level. Early on, there was some discomfort in the private markets because people were thinking New Zealand doesn’t have much exposure to private markets. The reality is future fund does. And if you look at the TPA adherence, they tend to have a bigger exposure to private markets. So there were a lot of misunderstandings because you’ve got to look at the organization and where its relevant advantages are when thinking about the asset allocation. There’s been an education process, Q&A, listening discussion and it’s ongoing. >> How do you anticipate making investment decisions? >> The key is to make sure that you’ve got the right blend of bottom up input and top down. When I think about the top down, you’re thinking about the overall risk levels of the portfolio. You’re thinking of the active risk budgeting and the way that gets allocated from the bottom up. You’re wanting to make sure that you see the ideas being socialized and being shared across the organization. In the end, if you’re deploying capital, you want to be confident that it’s going to beat the cost of what you’re selling to invest it. You need that consistent framework for thinking about that. If someone wants to invest in infrastructure, we’re going to effectively have to sell some equities and bonds to do that. If it’s infrastructure, it’s probably going to be a liquid. There’s going to be some charge for that. The investing teams are going to have to be thinking about what’s the opportunity cost of making this investment. And if everyone is looking at the same framework for assessing that opportunity cost, then you’ve got a model for making those investments. The teams will go out and try and find good opportunities. It may be that when you look across all the different opportunities that there are some relatively good ones and some errors and some that are less interesting and we should be able to discuss that as a team and upsize those ones that look more attractive. When something’s close on the margin, who ultimately makes the call? A lot of us delegate it down to the heads of the various teams, we raise the biggest questions to an internal committee of the various asset class heads. Ultimately, it typically is the head of the asset class that makes the call up to a particular size. >> Do you bring the heads of the asset class together so they’re not just thinking about their asset class? >> Absolutely. Essential. Internally we have what is called a total fund management committee. We meet fortnightly. We also have a similar committee that looks at the underwriting of deals. But those will only be the largest transactions. Those people get together fortnightly on these committees. >> As you think about stress test analysis in your risk assessments today, what most concerns you? >> When I look at our portfolio, you’re exposed to growth. I would like to have a greater exposure to diversifying strategies. Those things are things in the back of my mind. In terms of what causes me to lose sleep, it’s probably there being some unfortunate event and it’s hard to forecast. You hope that you have the maturity to look through that and to take advantage of those unfortunate events. It’s probably a function of behavior. How do we react when some adverse event occurs? I think about that. Do we have sufficiently strong governance arrangements to have gotten through that procyclicality? That’s been a challenge for us in the past. >> Have you thought about increasing use of technology maybe AI in improving the efficiency or the output of the investment process? >> It’s a continual process. We’ve spent a lot of time working on liquidity analysis, the analytics there. One of the things I did when I first came in to Kulpers was to say that New Zealand I can see the portfolio on my phone and I can see lots of different reports. We couldn’t do that at Kas when I arrived but now I can see a lot of reports on my phone. The team have seized that. So really good initiative to make that work. With the breadth of asset ownership over a long period of time imagine there’s a lot of data that comes from that. Have you thought about the potential for AI in improving what you can know? >> It’s a hard one because I don’t know that I can necessarily access all the data that would be relevant. We were early investors in private equity. It would be great to be able to look at the lessons that were learned early on, but I don’t know how accessible that information is. There are probably missed opportunities going forward. we can build information systems to capture more than we have in the past. That’s an area where we should have a true advantage given our scale, given the connections, given the access that we have. Given the seats you’ve sat in, you’re particularly well positioned to understand how large allocators might change their investing over the next 5 or 10 years. Just love to get your thoughts on that. Allocators often think about the past and project forward. There’s always a theme. There was the A model. Maybe it doesn’t work so well now. Then there’s a Canadian model. Maybe there’s some issues with that as well. Now people are talking about TPA. It has to be fit for purpose going forward. TPA will get more attraction, but it’s hard because you’ve got to have that collaboration. There’s going to be more thinking about the privates versus publiclix because you can see the efforts to try and give retail access. Interested in how that all plays out. Any other general thoughts? >> Right now, a lot of those entities, asset owners outside the US are conscious of the great exposure they have to US assets because the size of US capital markets, the performance of the US equity market and so on. There’s a desire to diversify away from the US. That’s probably going to be difficult because the other capital markets aren’t as deep. The entrepreneurialism in the US is a standout, but it is going to be a theme over the next period of time. There’s also going to be more thought about other regulatory interventions. I know that some regulations been scaled back. Issues of national security become more relevant, whether that’s security of supply chains. I can imagine there are possibly going to be more national security related factors to be thinking about when it comes to the financial markets. One thing that I wouldn’t like to see would be forms of capital controls, but that’s quite possible. So, we need to think about those sorts of things, things that haven’t been in play for decades. They were in play back in the 80s. How do you incorporate that into the implementation of the investment portfolio? It’s less of an issue for us in the US than it is for others. It really is thinking about stress tests and scenarios. >> When you put together a series of stress tests, how do you think about what historical scenarios you want to populate it with or what future economic scenarios you put in that are enough but not too much? >> We used to do this at New Zealand Super. I sprung a stress test on folks [snorts] at Future Fund back in 2011. We’ve probably done less of that at Kulpus, but recently we had a great little exercise which was initiated by the team and this was a liquidity shock. When you design these things, you have to make them realistic. You want to get engagement from the team. I think back to the one we did recently. People came in on a Monday and they don’t always do that because the core work days for us are Tuesday, Wednesday, Thursday. We had all these people in the room. We had our treasury team, the ops people, the various asset class heads and the total fund people and we had the shock that was designed by the people overseeing some of our liquidity management. We made it so that certain key people were away. It worked really well. Little lessons from it. Those are the sorts of things you need to do fairly regularly. Exercise those muscles. I’d love to hear an example of an opportunity that you’ve pursued with the team at Kalpers that feels like just the right fit for this particular pool of capital. There are quite a few things that might be just the right fit in the sense if they are something that aligns with those advantages that we have. Things like our time horizon, size and so on. There are times when we can negotiate economics which we think are favorable to both sides. We have done some of that in private equity. The thinking with the total portfolio approach is more around is this a good investment if we think it is. It’s less important where it sits. If you’re sitting there with a strategic asset allocation and you’ve got all these asset classes, it could be that you’ve got a hybrid. Where does it sit? or there could be something that’s new and you don’t have a bucket for it and it’s hard to do with a total portfolio approach. You look at what are the return and risk characteristics of this investment and does it make sense to the portfolio. If it does, you’re more likely to do it. Now, it could be in an opportunistic bucket in an SAA, but it fits more neatly in the total portfolio approach because you can think about cost of capital on a consistent basis across asset classes. Those sorts of things that might have fallen between the cracks are things that will be more relevant for us now given the way we’re moving. >> What do you hope the portfolio looks and feels like 5 or 10 years from now? >> 5 or 10 years from now, I hope we’re more fully funded than we are at the moment. A lot depends on what happens in the market. I would like to think that we have improved information systems, those regular scenario tests, and that we’re comfortable with the range of outcomes. I would like to think that we have a greater range of diversifiers within the portfolio. I would also like to have a more systematic dynamic as allocation process in place. I would like to think we’ve got more of those things that would fit between the buckets in an SAA type environment because I think that’s an advantage for us now. >> So after the end of whatever stretch of period of time, five or 10 years or longer that you’re in this seat, what would feel like a success to you? >> It would be a success if we were more fully funded. It would be a success if people thought that Kulpas was using its potential better in terms of the asset and the mandate the talent we have. It would also feel successful if people thought this total portfolio approach has worked. Often times when you think of a public employee seat in the US it’s very prestigious. It’s a big seat may not pay that much. There’s some intrinsic pull that someone may have maybe their parent in your case. as a teacher or whatever it was. I’m curious what that is for you in a seat in California, not your homeland. >> I like the purpose. It’s quite meaningful. We’re investing for 2.4 million members. There’s something about these asset owner roles that I enjoy because you get to work in the markets, which is intellectually interesting. You get to think about the economics and the politics. You get a seat at a table. We get involved in interesting conversations. It’s a privilege to be able to do this, particularly if you’re doing it for a good cause. Intellectually, it’s great to keep learning. When you’re dealing in the market, you have to keep learning. It’s also good to solve problems. It’s that combination of things that appeals to me. See, before I let you go, I want to make sure I get a chance to ask you a couple closing questions. Before we get to the closing questions, I want to tell you about one of our strategic investments. We’ve made a few and each are working on a product or service we think will be valuable to our community. One is FEMA. For all the private equity managers out there, uses AI to help map the landscape and source private businesses. It’s incredible what a well-designed AI tool can do to accelerate the discovery of businesses in private markets. There’s a link in the show notes so you can learn more. And here are those closing questions. What was your first paid job and what did you learn from it? My first paid job was a student job. I was a laborer doing all sorts of manual work. That job brings back memories cuz I remember my first day on the job. Group of us started that day. We were given tools like crowbar, pick, shovel, and we were asked to dig up a road. It was a metal road. It was hard work cuz we only had these tools. At the end of the day, I went home. I had seven blisters on my two hands. My father looked at me and thought I needed toughening up. He got some denaturalized alcohol and just poured it on my hands because that toughens up the skin. It’s stone. From that time, I wasn’t sure whether they testing us as new joiners, but it got easier after that. I enjoyed doing that manual work. Which two people have had the biggest impact on your professional life? People who know me know that I don’t stick to the script. So, I’m not going to mention just two people. The people that have had the biggest impact have been folks who’ve taken a chance on me. I did a master’s degree in economics. Normally, people in New Zealand who did that would go off and work in the Treasury or the Reserve Bank. Did the Reserve Bank later was offered a job at the Treasury, but didn’t go there. I was at a for a job at one of the universities in New Zealand to lecture on finance. I hadn’t studied much finance, but they wanted an economist. I thought, “Oh, that’s good. I’ll do that.” So, that was Lyall Mlan, who was the dean of finance, accounting and finance at Otago. He took a risk on me. I enjoyed that. And I got to spend some time with Simon Beninga. He wrote one of the standard texts on financial engineering. He was teaching us option pricing and that got me thinking more about finance. I went from there to the Reserve Bank. Then when I went traveling, I picked up a job at Chase Manhattan. That was a bit of a risk. I’d come from a central bank. I got parachuted into derivative structuring Sykes Wilford who was one of the senior people at Chase who took that risk with me. That was great. IMF, same thing. Moving from FX Options to IMF. I had that central bank background. So it wasn’t such a leap. Going back to the market, same thing. People at Future Fund, Dave Neil took that risk hiring me. It’s those sorts of people who’ve been prepared to take someone who’s come from maybe a nonlinear role. >> What brings you the greatest joy? >> I really like walking in the mountains, in the bush, being with nature. From a professional perspective, I like seeing people grow. It’s great seeing people you’re working with or people who work for you do well. They make you look good. I really get a kick out of that. I like solving puzzles and of course spending time with friends and family. How’s your life turned out differently from how you expected it to? >> It’s turned out very differently. If you’d asked me when I was a teenager what I was going to do, I thought I would work in the wildlife service. I wanted to spend time outdoors. I didn’t think I would be living in other countries. So quite differently. >> Last one. If the next five years are a chapter in your life, what’s that chapter about? >> It’s probably about what you’ve already asked. How have things gone at Kulpus? I would like it to be a story of success. I would like it to be a story of fulfilled potential. I would also like it to be a story of using my leisure time better and doing the things I enjoy. >> Stephen, thanks so much for joining me. It’s so great to hear about your latest seat. Thanks very much, Dave. [music] >> Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium [music] content. Have a good one and see you next time. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is forformational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this

Pitch Summary:
COVER Corporation is the largest vertically integrated VTuber company with a 41% market share in industry hours watched. The company is expected to achieve a 30% revenue CAGR through FY28, driven by strategic talent management and expansion into new geographies. Despite near-term EBIT margin stagnation, COVER’s unique business model and higher fixed-cost SG&A intensity relative to competitors position it for long-term profitability. The company’s virtuous cycle of talent attraction and retention, coupled with strong merchandising and licensing revenue growth, supports a robust investment thesis. Risks include potential EBIT margin guidance below consensus and talent graduations, but these are mitigated by the company’s strategic initiatives and market leadership.

BSD Analysis:
COVER’s strategic positioning as the primary industry expander allows it to capture new VTuber viewers while retaining existing ones. The company’s focus on talent support and localization differentiates it from competitors like Anycolor, which struggles with talent turnover and market exits. COVER’s merchandising revenue is set to grow at a 36% CAGR through FY28, driven by both made-to-order and in-house planned goods. The company’s ability to reinvest in its talent and expand its product lines will be crucial for sustaining growth. Additionally, COVER’s potential entry into new geographies and the development of its video game platform, holoearth, provide significant upside optionality. Investors should focus on the company’s marginal profit expansion as a key performance indicator, as COVER continues to reinvest in its growth strategy.

Pitch Summary:
Coursera operates in the capital-light education sector, offering a vast array of courses and professional certificates through partnerships with major companies and universities. Despite a strong workflow integration and a large target audience, the company faces challenges with growth efficiency and has yet to achieve a GAAP profit. Recent strategic shifts, such as selling to CEOs and focusing on organizational training, indicate a potential move away from its core business model. The market currently prices Coursera as if it is heading towards bankruptcy, presenting a potential opportunity for investors willing to accept volatility. However, the company’s uncertain position and transition phase make it a less attractive option for risk-averse investors.

BSD Analysis:
Coursera’s collaboration with industry giants like Adobe, Microsoft, and Google positions it as a key player in professional development, especially as automation increases the demand for upskilling. However, its recent acquisition of Udemy and pivot towards consulting-like services could dilute its capital-light model. The company’s strategy to target CEOs for organizational training might stabilize revenue but also introduces higher operational costs and complexity. While the market’s negative outlook on Coursera’s future growth could be overly pessimistic, the company’s current financial performance and strategic direction warrant caution. Investors should consider the potential for increased expenses and the impact of Coursera’s evolving business model on its long-term viability.

Description:
Bobby Jain is the CEO and CIO of Jain Global, a global multi-strategy hedge fund he launched last year that manages about $6 …

Transcript:
The multi strategy firms over time have more and more employee money and less and less available to investors. People have been giving back capital and all that. And I said this is an opportunity to create from first principles a multistrategy from scratch which even the market leaders not necessarily did. They evolved to that over time and they did a great job. But create one from scratch. The second big trend in the world is the financialization of everything. Everything’s becoming a tradable asset. the amount of people that are in the middle of that. Whether it’s the prop shops, the multi strategy firms, the banks, there’s not that many intermediaries for this thing. So, I said, here’s an opportunity I have to start one from scratch. I’m still young enough. Obviously, there’s gigantic barriers to entry in this business, but I felt like Millennium was in a great place, the extremely talented people, and so I said, “This is a time when I can get off and do it on my own. [music] I’m Ted Sides and this is Capital Allocators. [music] My guest on today’s show is Bobby Jane, the CEO and CIO of Jane Global, a global multistrategy hedge fund he launched last year that manages about $6 billion with over 350 employees. Bobby’s [music] storied Wall Street career includes spending seven years as the co-CIO of Millennium and 20 at Credit Swiss in a range of leadership roles spanning proprietary trading, derivatives, and asset management. Our conversation traces Bobby’s path from growing up as the son of immigrants in Queens to the trading floors of Okconor and Credit Swiss, all of which shaped his thoughtful framework-driven perspectives on markets. >> [music] >> We explore the evolution of prop trading and the migration of risk-taking from banks to hedge funds, proprietary trading firms, and private credit. [music] We then discussed Bobby’s ambitious launch, including the principles guiding its design, scale, and diversification out of the gate, talent strategy, risk management, portfolio construction, and the many trade-offs that create the different cultures and complexions of multi-manager hedge funds. [music] We close with Bobby’s application of financial innovation to helping others. [music] Before we get going, capital allocators seems to reach a sufficiently large audience to create all kinds of serendipity. Here’s my 16-year-old son, Eric, to share an example. I was hanging out with my friend, and his dad was super mad at us for being so loud. He told us we should quiet down and learn something. He then asked me, “Do you listen to any podcasts?” and I said no, but I probably should given who my dad is. He then goes, “Here’s one.” The guy asked a lot of really cool important questions. The podcast he was holding on his phone, none other than Capital Allocators. I sighed an annoyance because this has happened before. And I asked for his phone and started playing the Ben Hunt episode from June 2024. If you don’t remember, that’s the last time I did the spread the word. The sound of my voice made his jaw fall completely to the floor. Even after showing off to my friend’s dad, I’m still not going to listen to this podcast, but you definitely should. Apparently, all the rich smart dads are doing it. If you want to be rich, you should, too. If you already are rich, don’t worry. Tell your [music] poor friends about this podcast. They’re going to get a lot out of it. Thank you so much for spreading the word. >> Capital Allocators is brought to you by Alphasense. AlphaSense connects and accelerates every element of your research process, and I’m excited they chose to be our lead sponsor this year. One of the hardest parts of investing is seeing what’s shifting before everyone else does. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and stay ahead of consensus. But channel checks are no longer the luxury they once were. They’ve become table stakes. And that’s where AlphaSense comes in. AlphaSense is redefining channel research. AlphaSense channel checks deliver a continuously refreshed view of demand, pricing, and competitive dynamics, powered by interviews with operators across the value chain. Thousands of consistent channel conversations every month help investors spot inflection points weeks before they show up in earnings or consensus estimates. And the best part, these proprietary channel checks integrate directly into AlphaSense’s research platform, which is trusted by 75% of the world’s top hedge funds with access to over 500 million premium sources. From company filings and broker research to news, trade journals, and more than 240,000 expert call transcripts. That context turns raw signal into conviction. The first to see wins. The rest follow. Check it out for yourself at alphahensense.com/cap. Capital allocators is also brought to you by Morning Star. What if data wasn’t just a bunch of raw numbers, but a clear and decisive language to help connect investment strategies with long-term investor needs in a constantly evolving market landscape. Morning Star created that language bringing order and utility to insight rich data so you can prepare for your next opportunity no matter the asset class or market. Visit wheredateaks.com to see what Morning Star data can do for you. Please enjoy my conversation with Bobby Jane. >> Bobby, thanks so [music] much for joining me. >> Ted, great to see you. Why don’t you take me all the way back to your upbringing? >> I grew up in Queens. My parents were immigrants. My dad was an engineer and a builder. My mom was an accountant. Very excited to be in America. He was in the first wave of immigrants from Asia after the 65 immigration act. He gave us American names. He said, “We’re going to be completely integrated.” I didn’t meet another Indian family till I was 16. He said, “In America, you have to learn golf, tennis, and skiing in my neighborhood.” I was the only kid that did that. It was just me and my brother. I went to high school in Manhattan. I commuted an hour and 20 minutes each day from Queens. I went to Cornell. I majored in political science government. And then I went on to Wall Street. >> What were the most important things you learned from your parents? >> My dad was very conservative. We weren’t a borrowing family. I didn’t borrow a penny in my life till I was 50 years old and interest rates got to two and a quarter and I said, “I have to.” My dad used to say an Indian kid captain of the chess team. Who cares? You have to be captain of the sports teams. You have to be president of your fraternity. That’s what I was. That’s what I did. Queens was all about do what you’re going to say, say what you’re going to do. Queens logic, we used to call it. My mom was hyper intellectually curious. She read a book a week. I got my love for reading from my mom. I lived in a workingass neighborhood. I learned how to integrate with a lot of other people, how to blend in, and that all carried on going forward for a long time. What brought your interest in finance when you’re in school? >> I wouldn’t have heard of Goldman Sachs till I was 21, but Hunter High School had a program where you only had to take two classes as a senior. So, I worked at a stock brokerage firm in 1987. I was there for the crash. I learned what money management was. Reading the tape, going through the quotrons, going through the annual reports. I wouldn’t have said I was particularly interested in finance. I was a numbers guy growing up. I majored in political science in college, but when I got to be a senior, I joined the campus recruiting. Now, people are like, “Hey, my dream is to be an investment banker.” But that wasn’t the world back then. What you saw was that the highest end kids were going into finance. And there was two choices. You could go down the banking route or you can go down the trading route. I remember I went to a recruiting dinner at 2:30 in the morning. They went back to work. And I said, “Wow.” Then the Okconor guy showed up. Okconor was one of the original trading shops, the predecessors to the prop shops. Susan and Okconor were the two back then. The interview question was what 49* 28 and I said 1372. They say Mets play the Yankees in the World Series. What are the chances the Mets win four? I say one out of 16. They say you’re higher. So that’s how I got into trading. >> Once you first got on the trading floor, what did you find? >> The trading floor back then was the actual American Stock Exchange where options traded. I ended up on the floor and the first thing is you see what an actual trade is. You’re standing there on the floor. You’re buying something and the person who’s selling to you is right across the way there. It makes you think, I have to figure out why I bought this and this person wants to sell it and why I’m right and they’re wrong. That gets you into the core of what a trade is. It went with me for a long time because I realized trading is not a video game. There’s actual buyers and sellers. That was the first thing I learned. The second thing I learned was at Okconor, the core of the business was index options trade rich. People want to buy index options for protection and single stock options trade cheap because people long stocks and they sell call options against those stocks to earn a yield. There was a core architecture of the business that had an edge built into it and your job was to harvest that edge. I picked up the harvesting nature of the business is figure out how you can provide a service how you can provide in this case liquidity to two different pools of capital there’s money if you can cross two different streams in this case single stock options and index options there’s two different types of investors there’s money in those seams the third thing I learned was I thought the trading floor was going to die in about a minute I said I can’t believe this is the most efficient way to trade things I made a point to get off the trading floor as soon as I And turns out the trading floors lasted for a long long time after that. And so what I realized is that things can last a lot longer than you think they can. I learned the fundamentals of trading. Okconor was a brilliant place to work. There were a lot of clever people. A lot of people went on to do a lot of different things. Okconor was a good place to have formative views. >> Where did you go when you left the trading floor? >> I ended up going to Credit Squeeze Financial Products in 1996. That was the hot derivatives place at the time for a derivatives trader. That was the ideal place to work. It was a joint venture part of credit suites first Boston. I joined the index arbitrage desk. Now you’d call it the equity basis trade maybe delta 1 because most banks the proprietary guide was the end of the desk of that relative group. We had one group with a special forces group effectively. The job was to trade S&P futures versus the underlying 500 stocks. Credit Financial products was a clever place. The guy before me made $10 million in P&L, making 40 50 grand a day. My first year, we made $50 million of P&L. We were treating every index R basket as an option. First, we were buying 500 stocks versus futures. Then I said, why don’t we buy 50 stocks versus futures? Then instead of stocks versus futures, why not stocks versus stocks? Then if we’re doing it in the US, why don’t we do it in Europe and Asia? Within a short amount of time, it became a several hundred million dollar business. The first three arbitrageages were take technologists and pay them like traders which people weren’t doing then. So staffing yourself from the IT department and the quant research departments not necessarily the MBA classes. The second was collecting and storing data and doing things with it and cleaning it. The third is expanding the definition of data. We were doing natural language processing back in the late 90s. We were taking in the news speeds and trading things off of it. those prop desks, especially at credit suite, that’s where things were happening back then. It was much bigger than the hedge fund business, especially on the arbitrage and the harvesting side until the financial crisis. >> At what point in time did you start thinking about incorporating fundamentals into what sounds like a structural arbitrage desk? >> In 2003 4, we combined all the proprietary trading groups into one group called Global Proprietary Trading. after Alan Howard had just started Brevin Howard. There was a catalyst point where you could have spun out the hedge fund back then. I didn’t. I stayed and I ran this global proprietary business. What was happening in 0405 is the first time you had to start dealing with crowdedness. Some of these banks were risk ares we were a stat arbes citel was convert arb desk. Some guys were fixed income arb desk and suddenly the arbs started to get crowded. The questions were, could you take the fundamental equities business and turn it into an ARB business? That’s what we started to do. Overlay the statistical arbitrage, risk management systems where you were doing factor hedging and all that type of stuff and try to overlay that into the fundamental equities business. And that was the root of it in the industry. That happened in about 0405. I would say it got industrialized much later probably 14 15 16 that time onwards >> what was the breadth of what you were doing leading into the financial crisis >> we were doing all the things I’m doing now in fixed income you had commodity strategies credit strategies and rates of macro strategies and in equities you had arbitrage equities you had fundamental equities and you had quantitative equities and those were the six businesses we always had a big business in Asia Because at a bank you could leverage the entire architecture of having an Asia office. You have lots of different taxonomies. You have market making strategies or market taking strategies. And you want to balance across those things because the market making strategies tend to be reversionish and the market taking strategies tend to be momentumy. You have momentum versus reversion which is a slightly different context. You have fundamental versus arbitrage or I call them artists versus harvesters. The harvesting business is a beautiful business, but they tend to be correlated. So, you need a balance of all these businesses and it got you to abstract the problem rather than just fixing equities as you run one of these multi- strategy firms. That’s actually pretty important. >> How did the financial crisis change the nature of all the activity that you were doing? >> It changed the nature of your strategies. We went to decimalization in the early 2000s. Before that, you were market making. Now after decimalizations when the spreads were narrow you became market taking you had to take into account hedging more and risk management became much more prominent part of your risk model than it had been before. The big impact of the financial crisis was that regulators shareholders were uncomfortable with these kind of activities residing in the banks. There’s two clear industries that have moved from the banks to the private sector. One is the private credit industry is effectively taking what the banks are doing and doing that off asset manager Allen sheeps. One is the market making industry taking what’s done at the banks and doing it in the prop shop industry. What the multistrategy hedge funds are doing is the prop desk activities taking effectively the liquid businesses inside the banks and bringing them into the hedge fund world. That was a giant activity. You think about the amount of capital in the banks that were there and the amount of capital that needs to be replaced with the scale of these markets. So you have the prop shops, the multi strategy hedge funds and the private credit firms that has moved off the bank’s balance sheets. The banks are still doing some of those things, but they’re doing so much more. This relationship become more symbiotic and probably better for the financial system. What happened from there until you decided to leave >> that vulkar rule which was announced in 2010 or so didn’t get implemented till 2015 and that was a fundamental change in the banking sector people like me we tried to do it within the rules of the bank we realized it wasn’t going to work so 2012 I moved to run credit asset management which was a $400 billion asset management but the main goal was to move all the proprietary businesses into the asset management business which we started to do in 2012. There was two things we were doing. One is bring over a lot of the proprietary trading businesses. Some of those businesses are some of the largest hedge funds in the world right now. The second thing was to see if you could change the nature of the banking. What happened in the markets is risk takingaking used to be done off of bank’s balance sheet which is not that great because you’re borrowing short and you’re lending long. What we were trying to do which has happened now and it’s the advent of private credit is a lot of that lending off of an asset management balance sheet. We started doing that at credit sues people remember we gave the employees a lot of what was considered back then the toxic assets but they were not toxic assets they were undermarked assets. The question is, can you do things on an asset management balance sheet with pension funds, people that have longer duration assets, people that will take less duration, maybe have a lower cost of capital because they have less leverage built into it. That was what the move at credit asset management. Some of the firms have taken it one step further now moving to work off of insurance company balance sheets and that was a great time, but the bulk rule kicked in in July 15th. it became difficult to do what we were talking about on a bank’s balance sheet. That’s when I started thinking about after 20 years of credit SW in a variety of roles running the prop test for that whole 20 years co-running the securities division and running CSAM I started looking to potentially do something else >> along that period of time particularly after the GFC you had the growth of the multiPM model would love you to take a step back and describe what you see that model is and why it’s been so successful >> the first thing is there’s a fundamental engineering that happens in a multi- strategy context. Let’s say you have a strategy that one sharp ratio and you’re a single manager hedge fund. You want to make a 10% net return. Let’s say you have to make a 13% gross return. You have to run all else be equal a 13va to make a 13% gross return. There’s more math than that, but let’s just say simply speaking, in a multi- strategy firm, if you have enough diversification, you can run, as most of these multi-managers have done, a five vault to make a 10% net return. If you can run a five vault to make a 10% net return, that’s a different proposition. Why can you do that? Because of diversification, because of netting. If you have a business and you add one more portfolio, let’s say it’s that art portfolio, there’s a 50/50 chance you’re long Apple already, there’s a 50-50 chance they’re going to be short Apple already. Now, you don’t have to hold capital against that Apple. Whereas, if you were two separate hedge funds, you’d hold capital against being long Apple and you have capital against getting short Apple. This is complicated. There’s more degrees of freedom on this topic. Fundamentally, there’s a capital efficiency that comes out of a properly diversified multi-shite. Secondly, there’s a purchasing power topic. You’re more relevant to the investors as you’re one place because you can use this common intellectual property of risk management across more different things. The model itself works. What’s interesting about the model is these firms do very different. Even the market leaders, some of these firms are talent acquirers, some are talent developers, some are based on autonomy and some are based on collaboration. Some the production metric is a business. We have a commodities business and some is the PM. Some take care of the losses. Make sure you focus on the losses and the gains will take care of themselves and some are let’s focus on offense and the losses will wash their way out if we make enough. These are fundamental different things. Then you have actual diversification. A big difference in these models is a core satellite. A lot of these firms are effectively core satellite. It was a great PM that started a business that learned that they could raise more money and they started diversifying. But at the end of the day, the whole ecosystem is a lead actor and supporting actors. It’s difficult to transcend that and to have all lead actors and there’s a difference there. Supporting actors are different than lead actors in a variety of ways. The multi-managed industry was the prop desks. It’s not that different. The culture shock of moving from CS to Millennium was not that high at all. of the same thing. A lot of it was the same people as there was a transfer of people from the prop desks to the multi strategy industry. >> As you were coming out of CS, why did you end up going to Millennium? >> There was two basic choices. One was go work at an existing hedge fund or go spin out the existing prop business. I known Izzy for a long time. I had a tremendous amount of respect for what Millennium was and I thought I could be relevant there. And so Izzy called me and said, “I think 20 years is plenty.” So I joined Izzy and it was an incredible run, incredible people, incredible business. One of the things that my dad said to me was, “You really don’t know anything until you’ve done it for 20 years.” That always gave me a little bit of insecurity is there’s more knowledge to know. I had been doing it for 23 years at the time where the opportunity to go into a business like that to sit next to one of the legends of the industry was an opportunity that someone like me wouldn’t pass up. >> What did you see when you got there? I thought it was an incredible platform. What I thought of was try to turn this platform into an operating system to build up the IP in the center of it to further diversify to further industrialize the investment processes. I thought what you learn in the banks for better or worse is how to industrialize things, how to manage people, how to manage processes, how to build IP. That’s what you’re trained to do. You have a shareholder that’s paying a multiple on your earnings to build IP and perhaps superimposing that with incredible discipline on risk management. One of the things that you also learn in the banking sector is we’re heavily marked to market. Millennia was one notch further marked a minute. Why did we lose money last minute? Let’s see if we could do something better about that. I learned that real discipline. I also learned the diversity of ways of making money. Millennium at the time certainly was very PM focused and you could see people took the same problem from different vantage points and that is another form of diversification. 20 plus years at CS, bunch of years at Millennium. How do you decide that it’s then time for you to start on your own? >> After 30 years, even my dad would say I was ready to do this. [laughter] There was so many inflection points of when I could have started a hedge fund. I was always worried maybe the world doesn’t need another hedge fund. One of the things that I do separately from my day job is I’ve sat on the board of numerous investment committees including two Ivy League, Harvard and Cornell. What you see is that these investment committees are designed to be 60 65% equity beta is their main risk. The second risk is a liquidity risk. They’re taking illlquid assets. They’ve replaced some of the equity with private equity beta or growth equity. 35% is not equities. Not equities is supposed to be uncorrelated to the equities. People would have more in equities, but they can’t afford the draw down capability of the equities. So that not equities used to be bonds. They invented whole businesses around this risk parity and all this and then now what you start realizing is that the bond market anti-correlation equities may not persist forever. Everyone’s trying to figure out other ways of doing that. If you think of the investment universe as a giant $150 trillion 354% of that’s 5060 trillion you need of diversifying assets. The multistrategy industry is one of those. There other ones you could do infrastructure and real estate but that’s illquid. So your liquidity budget may have been taken up and so you have private credit but that’s pretty illquid. You have the uncorrelated hedge fund industry including quant macro multi strategy maybe a trillion half dollars a lot of that is closed to new investors. So the investment vehicles available in any of those spectrums especially the multi strategy industry not that much. The biggest trend in our business is the privatization of alpha where the alpha is residing on the prop shops as well as the multi strategy firms. The multi strategy firms over time have more and more employee money and less and less available to investors. People have been giving back capital and that and I said this is an opportunity to create from first principles a multistrategy from scratch which even the market leaders not necessarily did. They evolved to that over time and they did a great job. but create one from scratch. The second big trend in the world is the financialization of everything. Everything’s becoming a tradable asset. The amount of people that are in the middle of that, whether it’s the prop shops, the multi strategy firms, the banks, there’s not that many intermediaries for this thing. So, I said, here’s an opportunity I have to start one from scratch. I’m still young enough. Obviously, there’s gigantic barriers to entry in this business, but I felt like Millennium was in a great place, extremely talented people. So I said this is a time when I can get off and do it on my own. >> One of the characteristics of the multi strategy shops is they all have scale and it’s made it difficult to enter that space. How did you think about what you needed just to get going on day one so that you could compete with the larger players? >> One of the things my dad said is take the pain up front. What makes this thing relevant what everyone wants is another viable competitive firstear hedge fund designed as such. The hard part is the normal stuff. You have to put together a leadership team. Thankfully I’ve been doing this for 30 years. So I knew those people already. The second is you have to hire a bunch of people to build this with you. Most people in the infrastructure side of the world are playing for a B. They’re coming into an existing thing and they’re saying, “Hey, go figure out how to go to the cloud from data centers. Go stack on this thing. Go tack on this thing.” But build your architecture properly from the beginning attracted a lot of people. Then you have to attract a bunch of risk takers to say, “I see the lane you’re picking. I want to be the first one in a hedge fund because everyone that’s ever been in a hedge fund knows that the people get there first do better than the people that get there later.” Then you have to go put together an investor base. an investor base that understands what you’re trying to do, has been in this industry before and sees the prize at the end of the tunnel. The biggest barrier to entry is people say, “Well, there’s a chicken and egg. You have to put together the scale. What comes first? The investors or the putting together the scale?” Actually, there’s no chicken and egg. It’s just a chicken. You have to build it all off your own balance sheet and then the money comes in. That’s a bar entry that you have to get through. I was prepared for all that. I have been doing this exact thing in my mind for 30 years. For the first many years as what’s now called a PM back then you just call it a trader. For the last many years as a leader and a designer of these businesses, we got to launch in about a year, which was a reasonable time to build something from scratch. Especially with the advent of AI, you didn’t have to hire as many programmers. The build versus buy decisions were better. A lot of that data stuff I was talking about, you could buy a lot of that now. In the end, it was a good time to start. >> You mentioned that all of these multi strategy hedge funds have their own different flavors of how they do things. After seeing so much of this over a couple of decades, what first principles were you bringing to develop a chain? First of all, this core satellite thing bothers me and it was something that to the extent a firm is seen as a fixed income firm or an equities firm or a quant firm, it’s difficult to shed that label when you’re attracting people into the satellite. Someone said it to me once, well, you haven’t done this thing in 10,000 days. It can’t be that important to you. People know it. You attract better people if you get it at the beginning. One way to do it is hire a bunch of PMs and put in a manager later to run that business. It’s a lot easier to build it from the beginning that way. It’s part of your core thing. You have a seven-legged stool at the beginning. That’s a different topic than I have a one-legged stool and I’ve added a second layer of stool. When that thing doesn’t go right, your own investors, your own people say, “Why are you doing that thing?” Whether that thing’s not going well, whether your thing’s not going well, people say, “Why don’t you get out of the non-core thing?” The core satellite thing is the first thing. Second thing is the world has confused a couple of things. The view of a PM in this industry is they want autonomy. Especially the people in the next generations don’t necessarily want autonomy. They want autonomy of compensation, but they don’t necessarily want autonomy of lifestyle. So they want to say if I make money, I should get paid on what I do. And if I don’t make money, I don’t want to get paid on what I do. That’s a normal thing. But they do appreciate that the concept of five people sitting in a room with a few Bloombergs and a few phones. Not that easy. You want people around you. You want IP. You want a business that you’re tapping into. You want an operating system you’re tapping into. Some of the hedge funds do that and some of the hedge funds don’t. The beauty of this industry is that there’s successful hedge funds in every side of this, but you pick a lane. Third thing is where I felt you had a few great talent developers where 80% of the people coming out of college, you’re putting them in through your training program, you’re teaching them how to do the business. And then you have some great talent acquirers. A lot of the businesses that grew up in the last 10 years were talent acquirers. Talent acquirer is expensive business and it’s a business that lends itself very well to the market leader. They have the most resource. What was missing, which is what the prop test was, was there was a talent accelerator, the talent transformer. You’re taking the market maker on the desk. You’re taking the guy from quant research. You’re taking the equity research analyst and you’re turning them into PMs. That’s the core competency of what you’re doing. You’re also doing the talent creation and you’re also doing some talent acquisition, but you created a core competency in that. I want to be a business of the 35-year-old killer. The person that has all the tools, but they need people in their corner. You can call that mentorship. You can call that guidance. You can call that coaching. You can call that risk managing. That was a very important part of what I thought to do. Of course, I just started a firm. I had to acquire talent. But my real business proposition is talent acceleration and taking good people and making them great. I break up the world into killers, then steady producers. You need steady producers. If you had all killers, they’d start killing each other. Options on killers and options on steady producers. And I want a balance of the killers, the options on killers and the steady producers. And then fourth is I wanted to create something which was diversified at the beginning. The whole system wants you to create sequentially. They say Bobby why don’t you start in one area. Start a billion and a half dollar fundamental equities business or quant equities. When that works, go do the next thing normal. The problem is now you started that first thing. You built everything for that. You’ve built your risk system for that. You’ve hired your lawyers for that. You’ve built your trading systems for that. Now you want to do the next thing which is quant or fixed income. A, you haven’t done that in four years. B, you have the core satellite problem. And C, your system isn’t built that way. I said, I want to build it properly. Fine. a little harder at the beginning clearly, but over time that pays huge dividends. I’m thinking about these decisions we made. Thank God we have one common risk system and we have one common architecture. Fifth, I picked a lane on the risk manager. This industry broadly pays all these firms when the PM’s there, they’re getting paid 20%. Round numbers, some people pay deferred, some people have clawbacks, some people have sharp ratio thresholds, but round numbers, that’s the industry that we’re in. Why are you paying people even that much? You’re paying them for a sharp ratio and you’re paying them to manage money in a stop-loss context. The stop-loss context is harder. If you’re losing money on something, it’s easier. If you could buy more, you buy more, you buy more. If you have to cut when you’re losing money, that’s harder game. And that’s why people get paid 20%. I’ve tried to focus on risk management, the core, this is what this is, a riskmanagement business. Focus on controlling the losses and let the profits take care of themselves. But you have to pick a lane on that. We’re going to take a quick break in the action to tell you about Ridgeline. Imagine starting your day with reconciliation already done. No spreadsheets, no breaks to chase, no duct tape holding systems together. 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The world is saying we want you to provide a service and we’re going to pay somebody to provide that service. If the government wants to issue $2 trillion of debt, somebody has to buy that debt. When people want to use portable alpha type strategies, they want to buy futures instead of the bonds. Fine, they’re going to pay up for those futures. There’s an opportunity there. You can provide liquidity. People love index funds. Okay? But somebody has to keep those index funds in line. Same with the dispersion trade assets. Sometimes you can get paid for a service. Even in fundamental equities, if you conceptualize it that way, somebody has to price these equities. Someone has to price them in the long run. Someone has to price them in the short run. The index funds are relying on that pricing service to happen. And so there are some service that’s being provided. The second is they’re clever people. There are people that are experienced that have done it that understand it. The third is a bunch of IP. If you said to someone, go try to buy and sell equity, it’s very difficult unless you put them into a structure where you say, here’s how we do research. Here’s the corporate access that we have. Here’s the research model that we have. Here’s the factor model that we run into. Then at least you give them some framework to make decisions. It’s more than just the people. The biggest thing is that there are a lot of people that realize this multistration model has moved towards the autonomy section. Autonomy of compensation, autonomy of action. That’s something that attracted people. I have a reputation for developing people me and some of the other people that we’ve hired here to run these businesses. The third is it’s a big thing people that get here first to the extent along that option. Many people would like to work at Microsoft and Google and Apple and many people want to work at Stripe. People want to work at the startup. It’s actually a pretty attractive concept. There was a big talent war in 2017 to 2022. Interest rates were zero. The whole multi-management industry was tiny in 201617 when Millennium and Citadel were really the two big ones that were managing third party capital. Then these smaller firms got big. There was a talent war then. Now you have to pay competitively. You have to pay people a reward if they make the money. But the friction costs not as crazy as it was back then. We were able to attract a lot of people. There’s seven of us that are running the investment side of the business, the CIOS of the businesses. good 30 40% of them either I or one of them knew already that created a ballast another topic is a lot of people like this business structure the PM structure one of the things is as you raise more capital you’re going to have more people doing the same thing you’re doing I do say to people it’s not like you get a veto on anyone I might still hire another person doing that same thing but you get a vote and it’s going to be done consciously and we’re going to say how is this helping the people there how is it helping the investor and how is it aggregate return of the firm If you’re in a business where having multiple people touching the street, like in a dealerdriven market, it gets confusing to the street. Having that thought of ahead of time is something that’s attractive to people. It’s hard to actually do the interview process. All the risk takers here, I meant myself. We don’t have a giant business development department. There’s two or three dedicated people in business development. Then it’s me and the CIOS that are doing the business development. If you weren’t in the trenches for years, it’s very hard to do. People know it right from the beginning. your conversation changes from let’s talk about this trade. I think it’s a marketsdriven culture. It’s not a hiring driven culture. >> How did you go about interviewing and assessing talent to tease out who you think is top tier from maybe somebody who’s just good? >> It’s a pattern recognition. I probably interviewed 200 people a year for 28 years. One is getting a feel for it. Two is there’s a word that gets thrown around a bit, but I’m going to use it here is alignment. What I try to figure out every day is do I feel aligned with the people that work here, the risk takers. Do I feel like they’re aligned with the interest of the investor? Inherent in these businesses is the trader has an option that if it goes well, they get some percentage of that. If it goes poorly, you’re left with the bank. Do I feel a line? A lot of people, they talk about risk in the first couple of minutes. They’re thinking about risk. And some they’re hedging to be polite. That’s a different thing. Some people when they lost money, they start using the passive tense. So when they talk about making money, they use the active tense. When they start talking about the winning trades, they talk about clever they were. When they talk about losing trades, they talk about the unwind. Okay. What about the wind? That you can get a pretty good feel. You start thinking about how they think about the people that work for them. Are these tools for me or these people that have their own goals and ambitions and how you’re using them? How you’re developing them? This process is more self- selecting than you would think. And people get a feel for what you’re trying to accomplish, what they want. What’s going to happen more and more is people are going to find their way to where they want to be. It’s going to become a talent development industry. Whether it’s talent development, talent acceleration, the people going to start molding people into the way that they think of the world. And those worlds will be different. Some firms, not in the multi-manager world, but in the multi strategy firm, they run one global optimization at the top of the house. Everyone hunter gathers alpha and then we run it risk on top of the house. You could do that. You just can’t do that and pay people unnetted compensation. Some people might move more towards that way and try to change their comp models and say, “Okay, I’m going to do clawbacks and do this.” As this industry matures, it’s not that old an industry. You got a couple of players that have been doing it for a long, long time. And then at actual scale, 10 years. >> So once you have the structure built and you’ve brought in these initial people, I’d love to dive into the investment model, what are the strategies you chose to participate in? Broadly speaking in the equity side there’s fundamental, quantitative and arbitrage. Arbitrage could be options. It could be what’s called delta 1 or index rebalancing. It could be convertible bonds. Could be merger ARB or other types of event driven trading. In the fixed income type strategies, rates of macro is one, credit is one, and commodities is a different one. There’s a seventh business in the way we created the taxonomy which was Asia. because I’m sick of people trying to run Asia from seven in the morning when they’re busy or seven at night when they’re tired. I said Asia is going to be a more finessed market with a very Korea, China, onshore, offshore China, Japan, India, Southeast Asia. You have a lot more going on in Asia. Trying to do that from the US through the US news filter was a difficult thing to do. So those are seven businesses. I would view it as we have a common risk approach which is focus on the tales and figure out how to mitigate the tails. but different investment approaches. There are CIOS for each of those businesses. I’m one of them. I’m for the equity arbitrage and each one of them has a slightly different philosophy as to what the alpha engine is for that. >> What are some of the design elements of collaboration across the teams? >> I would say there’s three models. There’s discourage collaboration for whatever reason because a you’re attracting people that don’t want to collaborate. B there’s something structural that you don’t want collaboration. Maybe it’s correlation or something like that. One is enforced collaboration. If you want to put an idea into the model, you have to come into the auditorium and explain it to everyone else. And one is encourage collaboration. I’m in the encourage collaboration model. If you ask me how does it happen? What happens in these hedge funds, better or worse, is that the culture of the firm reflects their founder. I’m a pretty collaborative guy. My instinct is when someone needs something, I say, “Why don’t you talk to these people?” That becomes a cultural thing. people realize that’s the accepted topic of the day. It’s more a cultural topic than a structural topic. Everyone absorbs information differently. Some of the groups have daily calls, weekly calls. I never absorbed information that way. I’m more of a absorbing information through reading. We’re not a heavy call place. Having said that, for the first 18 months of the firm, we did a weekly call every Monday morning for 25 minutes where all the call was was 1:00 p.m. got up in front of the whole firm, talked about what they do, then someone from a staff role talks about what they do. After 18 months of that, I think it sets a tone of that type of collaboration. I’d >> have to ask about the capital allocation process, both starting with you at the top, the individual CIOS down to the PMs. First thing is you have these different businesses. Ideally, you don’t get overweight one versus the other. So, you try to keep it within some tolerances or ranges. Within that, you’re competing with a sharp ratio. You’re trying to find strategies that have a sufficient sharp ratio that clears your cost of capital. If somebody wants more capital, your instinct is to give it to them as long as they’re within the relative sharp ratio threshold. You’re not too overweighted. You can assess what the tales are. But the capital allocation model is a lot more static than you’d think. If you look at most of these multi-management firms, it doesn’t change all that much over a period of in certain market environments. You’re moving capital to one place or another, but that’s not the dynamic. It’s not like every day we’re saying, “Let’s pull it from this person, move it to that person.” We’ve been in a capital deployment phase for the last 18 months. We raised billions of dollars. We call the capital over a year. Took us about 15 to 18 months to deploy the capital. Now you have a little bit of scarcity of capital. >> I’d love to dive into the fundamental equities business in particular. How do you view both the risk and the capital allocation both for your team and then in a world where there are a lot of other fundamental equity businesses like this. >> There are some fundamental questions in the equities business. There’s a concept of are you factor ignored? No one’s really doing that anymore. Are you factor aware? Are you factor obsessed? I’m generally skeptical of models, especially empirical models. So I’m more in the factor aware than factor obsessed model. The empirical models are taking a bunch of historic prices and then creating some relationships about it. The one Amazon is worth2 Microsoft and.3 you need a bit of humility around the models. That’s one question around that. The second question you have to ask yourself is what are you thinking about crowdedness and how you measuring crowdedness, how you dealing with it. The third question is do you consider an industry bet an alpha bet or a factor bet? Those are different dimensions of these risk. We’ve tried to say we’re going to run it in a somewhat integrated risk fashion with some logic also as to how many people in each sector, how they interact. It’s as much an art as a science. How have you thought about cutting off the tails? A lot of the multipm pod shops, there’s certain draw down and they’re out. What’s your game theory around that? >> There’s the premortem and there’s the mortm. So, you try to do your best to figure out what the premortem [clears throat] you’ve constructed a portfolio. Broadly, 95% of what we do or more is liquid. The vast majority of what we do is exchange traded markets. So at least you have a chance to get out generally in exchange traded markets. If you do the premortem and you say hopefully I’ve constructed a portfolio that is robust to many of the things that are thrown against it. Generally speaking in these models you make more money in a high volume environment but you lose money in the move from a lowvall environment to a high ball environment. As you’ve extended risk capital to the market and now the cost of risk capital’s gone up you’re going to lose on mark to market on your current risk capital. The second thing is the mortm. when it’s happening, you have to move your feet of. So, does that get crowded? Do you get everyone’s rush to the hills at once? There’s some of that. The markets have gotten so big relative to the growth in this multi strategy industry. The industry’s put on tens of trillions of dollars of market cap in the last few years. The multi strategy has grown by 100 billion, 150 billion. The second thing is the capital structures in this industry have gotten infinitely better. People have fiveyear lockups, threeear lockups, four year lockups. So it’s not like everyone has to sell because they’re going to lose their assets. The third thing is there are a lot of different riskmanagement approaches. They make a decision. If things are liquidating, I’m going to buy more. And if I think they’re liquidating because the fundamental model has changed, I’m only then going to sell. Most people have been rewarded for buying on dips. Now, I don’t look at it that way. Everyone looks at it dip. That’s the beauty of the markets. I view it as the reason you’re cutting risk in a time of stress is it might get worse. So, you’re trying to hedge. The bad news is you’re locking in a bunch of losses and you’re paying a bunch of transaction costs. The good news is when things settle down, when the ball the VIX goes from 50 back to 30 or 20 or whatever, you now are clean. You’re not nursing a bunch of positions. You have the ability to trade on offense. And so, how do you get yourself on offense is the name of the game. If you can think that way and say, “Here’s an opportunity.” And the firms that did that in 2020 and thought that way did a lot better than the firms that were holding on because they’re holding on. The thing went from 100 to 80. They’re waiting for that 80 thing to go back to 100. You’re buying something at 50 that someone else had to sell. You sold it at 90 fine. You locked in a loss, but you’re buying something else that wasn’t even on your pad that someone needs liquidity. These are markto- minute firms. You’d run the premortem and you run the mortm. It’s not formula 8. This is what hedge funding is. You have to be ready to do it. >> What’s the culture around the behavioral aspect, the psychology for your portfolio managers inside your shop >> when you start a new firm? That’s one of the things you don’t really know in the interview process. You tend to get people that are a little less optimist. If they were more optimistic and more growth mindset, they would have gone to a place where they could just be long. We emphasize risk management and so people get that. We got a little lucky in that the financial crisis happened in March and April of 2025 with the liberation day and all that. So I got to experience it of how much did I feel like I was pushing people and how much did I feel like people were reacting and it turns out at least in that environment I didn’t have to do much. People got it harder to push people to take risk. What is hedge funding? Hedge funding is taking a bunch of information, turning it into data. Taking that data and forming convictions on that data, then taking those convictions and doing things in the marketplace. When you have less data, especially in the first 18 months, it’s hard to form those convictions. You don’t have enough data on your own systems of efficacy, on your own risk modeling, on your own PMS. They feel the same way. They don’t have data on how you’re going to react at a tough time. So that data building gets better every day. In the beginning, it’s harder to push people to take risk than it is to stop people from taking risk. As we’ve got more and more data, we feel like we’re getting onto offense. But that’s a process that’s real. It’s not like a philosophical thing. It’s like as you get more data, as you get more at bats, as you get more experience, that all gets better and it gets better every day and the teams get more comfortable with each other every day. And I feel that palpably. And so that becomes a culture of risk management. How do you think about competing on compensation? >> If you tried to run this model on a different compensation model, meaning you have to rely on how everyone else in the firm, people that you haven’t even met are doing, it’d be hard to do that unless you did the talent creation side. Unless you said, I’m going to hire everyone from scratch. A lot of the people that come into this industry are coming from places like that where for whatever reason they think they’re producing more than the median of that group. The world has constructed these portfolio managers as unitary onetrack mind people. I’m just looking at my compensation. People want to get paid competitively. They want to get paid fairly. They want to get paid transparently. Once you’re paying them fairly competitively and transparently, then the margin there has a lot more math going into it. The optimization functions are more complex. Fine, I can get paid a little more, but I got to sit out of the market for a period of time. In that period of time, is the strategy going to change? Is my market going to change? I got to put together a new team. Do I like coming to work? Do I feel like people are in my corner? Do I feel like what’s the probability of success? Do I feel like the way I trade? I think that’s the biggest one is the way I actually interact with the market in sympatico with the way these people think about that and that’s a big topic. You should be able to get that right 90% of the time when people coming in. It’s a complex optimization function but it’s generally about fit more than about conversation once you’re in the transparent fair competitive and the basic point is you said what you were going to do and you did what you were going to say. Once you do that, you’re in a good starting point. >> As you take a step back and look at all the structural ways that you’ve been able to make money in the past and are trying to do it today, what opportunities are you most excited about? >> What are you looking for? You’re looking for areas that there’s not necessarily enough capital to provide the service the market wants. Areas that you can find cheap volatility. And sometimes you’re trying to find areas where you’re willing to take complexity risk to take to get into some market. banks trying to figure out how to get partners in hedging some of the risks that they’re left with that either take up a lot of regulatory capital or are not necessarily capital efficient for other reasons. It’s called strategic risk transfer. We’ve set up a business to do that. Asia has some of that in the complexity side. You’re setting up a business in India. Not that easy. Once you do it, you could probably get access to some things. If you took it at a business level, a more concrete level, the fundamental equities business, I started trading indexes in the mid 90s. The S&P was at 500, about 5% of a company was indexed. Now, round numbers, I’m making up a number, 25% of a company’s index, and the S&P is up 14x. So, that’s 70 times bigger. So the fundamental equity someone’s picking stocks in a structured way doing the work given the size of the market pretty good business right now there’s really opportunity the liquid credit markets a lot of people have moved into the illquid credit markets the private credit business has been the biggest growing business in the world in the last few years that leaves some opportunities in the credit markets and then also what we call arbitrage there’s some money in the seams of different types of investors in different types of arenas is the biggest theme is in three or four years apparently I read our industry until last year hadn’t grown that much in terms of assets especially the multi strategy I think it actually was flat in that time government’s issued another $15 trillion in debt the equity markets grew by $30 trillion the markets have gotten really big companies are starting to go public again some of the regulatory environment is starting to get balanced now you’re getting regulatory competition different exchanges are starting to say list here that’s good for the markets at least in the short run. >> These models often bring with them a question of an existential risk. A lot of leverage. Leverage can cause problems. How do you think about the broader contagion risks of this model? >> The contagion risk is what we lose sleep about every time. Is everyone going to start heading out of markets? Now, maybe the next one’s going to be way worse, but you’ve had a couple of interesting events in the last 5 years, six years. CO was real event. Ukraine was a real event. GameStop was a real event. SVB was a real event. Let’s say the data got good in 2005. So you have at least 20 years of good data to give you some sense of how these businesses have done in that period. Obviously the next would be worse. Now we spend our lives trying to understand this. What are the only ways you can deal with is actual diversification. And some of these strategies are actually diversified. Again market make the amount of dimensions that you could start diversifying. You have some strategies that are going to make money in times of stress. You have lots of different various tail hedges on the market tends to be clever and tends to find a way to find the hedges that you didn’t put on. Are you taking some crowdedness risk? There’s some of that in there. When I’m in the market, I felt it crowded in various times. I felt it more crowded in 2010 to 2019. The markets were smaller, but V was low. And so what happens when VA is low is some people accept a lower return and some people lever up to make the returns equal. People like me, we accept a lower return. We communicate that because the thing that we’re most worried about is the asymmetry vault. 10day V in February of 2020 was 7 10day V 2 weeks later was 118. If you’re not managing that risk, you can lose a lot of money. The second thing is the asymmetry of liquidity especially in dealerdriven markets. People that grew up in the equity markets are used to exchange traded markets. You go into fixed income markets. Suddenly liquidity disappears very quickly when things go wrong. You can manage it by portfolio construction. You can manage it by the premortems and then you got to deal with it. And it is a risk that is embedded in this business. How do we deal with it? We deal with with those concepts. portfolio construction, premortem, postmortem, tail hedges, and really culturally making people say that’s what we’re doing here. What people are doing in this business, they’re giving us their money. They’re not giving us their gambling money. They’re giving us their alternative to fixed income money. We have to protect against that. When things go wrong, they want to look over this part of their portfolio and it looks okay. The good news is when it goes wrong, generally that next period is a very good period. Despite however anyone did in March of 20 or in the last quarter of08, 09 and April to December of 20 were by far the two greatest times in this market. You have to survive that previous period. And that’s what we spend so much time doing. When you go from a larger platform, the prop desk, a millennium, to a smaller business, what are the things that as you look out over the next couple years, as you develop scale that you can add in to what you’re doing that you might not be able to do today because you’re smaller. >> I don’t think there’s much. One of the leaders in the industry said to me when I was starting, you’re going to underestimate the benefits in starting from scratch. He said, so often I want to throw the whole thing out. It’s not just legacy systems. It’s legacy architecture, legacy people, legacy processes, legacy mindsets. We got to build everything instead of buy everything. We got lucky that AI became native to this place. We didn’t have to hire hundreds of technology people, hire hundreds of technology people. The biggest thing that would change as we scale is you’re going to see the operating leverage start kicking in because we think we can get to two, three times the size without having to hire that many more people. If we had more scale, would I start doing a couple of things that I say a little more speculative? You have some firms that view themselves as manufacturers and some firms that view themselves as packagers like I’m packing the alpha and we’re hiring places. You hear them talk about the beauty departments. We view ourselves as a manufacturer. In the first iteration of it, we’re not doing a lot of speculative things. Let’s figure out if AI can do this or that or the other thing. The model itself was innovative by launching it all at once, by launching comprehensively, by building it that way. The challenge in this business is balancing patience and excitement. I live my life in seconds and minutes and hours and days and things take months and quarters and years. The metrics at the beginning of this, you have to get yourself into the model of am I getting better every day? Did I put together this thing? Do I believe in my system? Do I believe in my people? That’s the metrics. And then eventually the gross returns turn into net returns and that’s the evolution of this business. >> You mentioned earlier being on the boards of the investment committees of Harvard and Cornell. Would love to ask what you’ve learned from sitting in those seats. >> As you get into these large organizations, there are two different ways of thinking. Some people are like risk managers. Let’s diversify. And some people are concentration. Let’s figure out where things are going to go and let’s go there. It’s no different than Republicans and Democrats are two different religions. That’s a core topic to talk about. The second topic is people that have been operators of businesses. I consider myself an operator of business. They think about what are your core competencies and what are your competitive advantages and how do you build businesses around that? That’s what you’re taught as an operator of business. Investors think in different ways and that’s a great thing. Taking the best of both of those people is something that these endowment board have been good at. Sitting on these endowment boards gets you into the mind of how investors think. Part of my job is figuring out how to make money in a risk control way. Part of it is especially in these passroughs to represent the investors to say I say every meeting I’m in there’s me there’s whoever I’m talking to and there’s an investor sitting there. Having been put in that investor situation in various different forms there have given me a firsthand look at how an investor thinks about things. these firms, not just the multi-manager firms, but all these asset managers and investors taking a leap of faith. They’re trusting that you’re going to do what you said you were going to do with that. That’s a big responsibility and it’s something that I’ve learned firsthand of sitting on these investment committee boards. So Bobby, somehow in addition to having built all this over the last couple years, you also have for a long time run your family’s charitable giving and would love to hear a little bit about how you approach philanthropy. In 2014, we started something called the Jane family institute trying to take financial concepts and bring them into the philanthropy world. Also to try to take either leftwing or right-wing ideas and put them in the opposite language. The original project we started on was trying to turn the student loan market into a student equity market via income sharing agreements. Some people don’t like it because it seems kind of icky. What if I took 100% of your income for 100 years? That seems icky. So, there’s a branding element. There’s a framing element on the left. People think, well, college should be free and so why should I even do that? There was a whole bunch of things. We did it with thousands and thousands of students. They’re they’re still running those programs. We did a lot of the guaranteed income pilots around the world. Generally, people hate the concept of universal basic income. It feels something for nothing. People like earned income tax credits. People like child tax credits. There’s a framing element to it. If I hadn’t started the hedge fund, I would have run with that. I’ve done nothing on is I was heavily involved in the charter school movement earlier in my life. I wanted to start charter prisons. Basically, private not for-p profofit prisons. Charter. The right-wing likes charter, leftwing people like rehabilitation. And chances are the charter prisons, the people that get involved in that will want rehabilitation as part of it. We had about 20 people in this organization. It’s been 11 years. They’re pretty autonomous by now. >> What are you excited about for the next couple years? >> It’s the first time in my life. I want to hit fast forward. I’m a cherish every minute guy, but everything I’ve done in my life, process led to outcomes. Now the process is there. We’re doing all the things that I thought we’d do. Everything we said we were going to do. I see the alpha there. I see the value add to the investors. I see the value add to the markets. I see the value add to the people here. I’m enjoying what I’m doing. I’m passionate about it. >> All right, Bobby. I want to make sure I get a chance to ask you a couple fun closing questions. Before we get to the closing questions, I want to tell you about one of our strategic investments. We’ve made a few and each are working on a product or service we think will be valuable to our community. One is Ascension Data. Ascension provides workflow software for compensation that allows you to track, plan, and take care of your team. We’re excited for you to check out how they can help solve the sticky painoint of compensation. There’s a link in the show notes so you can learn more. And here are those closing questions. What is your favorite hobby or activity outside of work and family? >> I’m a gigantic reader. I got it from my mom. I’m reading a lot of literature, a lot of philosophy. That’s how I understand the markets. I view the markets as a complex system. I view myself as a student of complex systems. The most complex systems are actually systems with human interactions. The best place to learn about that to me is literature and philosophy. So, I spent a gigantic amount of time on that. >> What was your first paid job and what did you learn from it? In Queens, I did everything from a ball boy to a caddy holding for NBC News to a paper out. That was just what you did back then. But working at the stock broker was a really interesting entryway, especially during the crash. I’ll never forget those days. People’s actual money being lost gave me a flavor for this isn’t abstract. This is a real thing. Someone said to me, there’s nothing casual about managing other people’s money. I have that deeply embedded in my thinking. And I wouldn’t say it’s my first paid job. was my first steady job and that stuck with me. >> What’s the best advice you’ve ever received? >> I had a boss at Curtis Swiss who died in 2010 called Paul Kello and he was my mentor and he was the president of the firm and he ran all the divisions I was part of. We had to do some layoffs and he said by the way you should get a thank you note from all those people meaning do it with dignity and respect and treat people with dignity and respect at every turn. I got to say that, you know, not that I’ve gotten that right every time, but when you start a firm after being in the market 30 years, you have a whole record of things. And I like to say I was doing favors for people for 30 years. Now I’m asking for favors for the next couple of years. Everyone delivered on it. It takes a village to raise one of these firms. And that village came in and I was able to take that advice in for a long time and treat people with dignity, respect, and that’s the advice that I think of every day. >> Bobby, last one. What life lesson have you learned that you wish you knew a lot earlier in life? >> When I think of life lesson, my parents taught us from the age of 5 to 20, focus on education, 20 to 35, focus on career, 35 to 50, focus on family, 50 to 65 on service, 65 to 80 on philanthropy, 80 to 95 on spiritualism. That’s the stages. Obviously, you’re not going to follow those time frames. I knew that ahead of time. I haven’t. Listen, I extended [laughter] the career thing a little longer. I’ve tried to do service with some charitable activities and time and resource contribution. Family is the important part of my life. I have three teenagers that demands some time. It’s a good thing for people to think of the stage of the life. Do I wish I knew that earlier? I did knew that earlier, but I didn’t really think about it till you get older. >> Bobby, thanks [music] so much for taking the time. >> Ted, it’s great talking to you always. Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium content. [music] Have a good one and see you next time. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is forformational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.

Pitch Summary:
Infineon Technologies AG is positioned as a well-managed, de-risked option in the semiconductor industry, with extensive in-house manufacturing capabilities and a strong outlook driven by exposure to powerful secular industry and technology trends. The company dominates the power semiconductor market, holding a 17.4% market share, and is a leader in automotive semiconductors. Infineon is also at the forefront of emerging technologies like GaN and SiC, which are expected to see significant growth. Despite near-term cyclical challenges, the company’s long-term growth drivers remain intact, and it is well-positioned to benefit from the transition to electric vehicles and renewable energy. Infineon’s financials are expected to improve sharply once demand recovers, supported by its strong market position and technological edge.

BSD Analysis:
Infineon’s recent financial performance has been mixed, with cyclical weakness in automotive and industrial markets, but strong growth in AI-related revenues. The company reported Q1 revenues of €3.66 billion, with a notable increase in its backlog, indicating underlying demand. Infineon’s automotive segment, accounting for 50% of revenue, showed healthy growth despite tariff headwinds. The company’s dominance in power semiconductors and microcontrollers provides a durable competitive advantage in the automotive sector. Infineon’s investments in AI-related capacity are expected to drive future growth, with AI revenues projected to reach €2.5 billion by 2027. While the current valuation appears fair, the stock becomes more attractive below €40 per share, offering a higher margin of safety for long-term investors.