How I Invest with David Weisburd - E125: Co-CIO Alifia Doriwala on RockCreek’s $16 Billion Edge

Episode Date: December 31, 2024

In this episode of How I Invest, I sit down with Alifia Doriwala, Co-CIO and Managing Director at RockCreek, a multi-asset and OCIO solutions firm managing $16 billion in assets. Alifia delves into RockCreek’s unique approach to managing customized portfolios for endowments, foundations, and pensions. She shares her perspectives on navigating public and private markets, the evolving role of hedge funds, and the outlook for IPOs and M&A activity in 2025. This conversation is packed with insights for asset managers, institutional investors, and anyone seeking a deeper understanding of market trends and investment strategies.

How do you go about being a better CIO every year? It is so much about talking to as many people as you can and being open to different perspectives and open to different views and honestly reading as much as you can as well. You know, we are so fortunate. We get so much different types of research, different viewpoints, different perspectives, not only from our managers, from, you know, just the rest of the world. We do a lot at Rock Creek in terms of thinking about the macro environment. We have a board of advisors that are all very much macro thinkers. I think the best way you can be a CIO.

So what is Rock Creek? So we have about 16 billion in assets under management. We are a multi-asset and OCIO solutions business. So part of our assets are managing outsourced CIO portfolios for endowments, foundations, pensions that are less than, you know, call it $2 billion and don't have internal investment teams. And then the other half of our business is focused on multi-asset solutions. Give me a couple examples of how you solve the problems that your clients have. It ranges really in terms of a variety of different types of asset classes that we invest in,

as well as the kind of niche areas that certain clients want. And it really depends on the client, their type, what they need. And that's why the customization is so important. We don't believe that, you know, there's a one size fits all. You know, we do a lot in terms of private markets investing, obviously, and some of that can be very thematic. So certain areas or certain themes that we want to really focus on for a particular client. There is a corporate pension, for example,

that we manage a venture capital portfolio for, and we look for investments that are very much aligned with innovation in the aviation industry. And we have more traditional portfolios where there are institutions that can't access the best venture funds, can't access necessarily or don't have the resources to really do research on certain types of alternatives. And that's where we come in. As we start the new year, what are some themes that you're really excited about?

So, you know, in terms of private markets, we have started to see a real inflection in terms of our portfolio companies. We are very excited that we think the market might start to pick up in terms of the IPO market. We've been talking to a lot of our portfolio companies that are potentially getting ready to test the market and starting to talk to those initial investors. And we've heard that from kind of both sides. And private markets. And so we do think that the market next year is really going to start to open up both in terms of an IPO market, but also given the new administration, we do think that there might be a lot more activity or potential prep for activity in the

M&A space. And again, all of that bodes very well for our existing portfolio. So in terms of really starting to see marks come back in the venture side, we have a lot of optimism next year that that's what we're going to start to see. We've already started to see it the second half of this year. In terms of specific themes, I mean, I think we're at such an exciting time in private markets to be a private market investor and to be able to actually access private markets and innovation across pretty much every sector is so ripe for opportunity today. So that means biotech, other spaces within healthcare like medical devices, not just your kind of telehealth, which was all anybody talked about a couple of years ago. So we're really starting

to expand in terms of how can technology and innovation access and enable access in some of these sectors that we focus on, healthcare being just one example that we're excited about. So it's intuitive why M&A would pick up. We've had kind of an anti-M&A FTC chair in Lina Khan. What is the reason for why you see the IPO market opening up in 2025? Regardless of kind of what your political views are, what you hoped would happen, that there's an uncertainty that's gone. We now know what is the situation for at least the next two years in terms of administration. And I think that uncertainty being lifted from the market is one element of why we think that the IPO market will start to get stronger. I mean, second of all,

you've just seen a much more soft landing in terms of interest rates coming down, inflation coming down. We kind of know the path that we will be on if there are no huge exogenous events that are going to affect markets. And if that continues, plus you've started to see really strong fundamentals continue from companies that are public, I think that there will be much more appetite that IPOs will be well received again versus two years ago. There seems to be a lack of consensus to where interest rates will be over the next couple of years. What's your view on interest rates? I mean, do we think that we'll get to this magic 2% number necessarily? No, in terms of inflation.

And, you know, that obviously corresponds to interest rates. I mean, I think that in the next couple of years, we're going to probably see a lower inflationary environment, which will cause interest rates to remain stable, if not, you know, a little bit lower than where they are now. That being said, you know, longer term, we are worried that inflation will start to spike again, depending on what policies are out there, and that'll cause interest rates to rise. So I think it's really about managing that yield curve and looking to see where we are on that yield curve. You know, further out, there's a lot more worry in terms of inflationary pressures and risks. And so we'll have to monitor that and actually see what happens to see whether that materializes in what timeline. But you know, I think for the next year, year to two years, we're

fairly constructive that we'll be in a similar interest rate environment to where we are today. There's a new governmental agency, DOGE, Department of Governmental Efficiency. If that department is successful, how will that affect interest rates and inflation moving forward? Well, we're based in Washington, D.C., so I thought you were going to ask me a different question because it'll definitely affect D.C. and many of my friends that work in the government across many different agencies. I mean, I think the real question is what will actually materialize and what will actually happen from them. take hold will affect interest rates or inflation as much as tariffs and the trade issues that we're talking about and the new policies that could come out in terms of different trade agreements between Canada, Mexico, China. I mean, I think that is undeniably the place that we have to look at to see where inflation will go. And that will, again, relate to interest rates. But there are

areas. And assuming that the tariffs hold at these pretty significant numbers, is that going to cause inflation to go up? In the long term, yes. Short term, maybe not. But in the long term, I think undeniably it will. I think there's a lot of consensus around that. But again, it depends on the nuances. And I think it's actually really interesting because some of the tariffs that have been talked about would affect most negatively big multinational companies, right, and their supply chains. But this goes back to your question on innovation and privates and where are we excited. There's actually been a lot of technology applied to diversifying supply chains now. And so multinationals are not in the same place as they were maybe five years ago when we were talking about tariffs in, I think, 2018.

Right. So it's a little bit of a different environment to do, to see what implications come out. Let's take a step back. You advise many billion dollar endowments and foundations. What's their typical alternatives portfolio look like today? Yes. So for a typical endowment and foundation that's really looking in perpetuity to sustain their assets. And again, there's really looking in perpetuity to, you know, sustain their assets. And again, there's a lot of caveats to this. So have a steady distribution, you know,

and a spend that they can plan on for the next 10, 20 years. Those types of institutions can take a large allocation to private and illiquid assets. So typically, we would say anywhere from 20% to 25% or even 20% to 30% in terms of a target for private equity venture. And if you add illiquid real estate, real assets, it's probably closer to 35%, 40%. So about 30%, 35% alternative, 60, 65% public. When we were last chatting, you said you were very excited about the public markets today. Tell me about why you're so excited. Yeah, I mean, I think there's a lot of opportunity today in the public markets, right? I think that's starting to potentially look a little bit more, you know, I don't want to say scary, but uncertain in terms of, you know, how long can we have such a positive public market. But I think there's always opportunity in the public markets. I think

that especially in the next year, we think that active management in the public markets is really going to start to be the place you want to invest in versus passive, which is where you, you know, undoubtedly would have been if you had just been looking at numbers for the last three, four years. And so passive has been quite a large allocation in portfolios because it's just done so well, but it's been such a concentrated market that active management hasn't been able to do well. We started to see that in the second half of this year change because of the broadening out of the market. Walk me through the decision making on whether you choose to be a passive or an active investor in the public markets. Well, it depends on how much value alpha you think there is in a particular segment of the

public equity market in terms of your decision of whether you would go active or passive. So for example, US equity markets, which is the classic example when people talk about passive versus active, U.S. equity markets are extremely efficient. So it's very hard for an active manager to be outperforming by, let's call it, 200, 300, 400 basis points on a consistent basis because the markets are so efficient. That is not necessarily the case when you look at other geographies or you look at particular sectors. What are some specific opportunities today in the public markets? In the public markets? I mean, you know, as much as we talk about diversification, we want diversified portfolios.

It's been very hard to argue that the incremental dollar from a macro perspective should go into anything but the U.S. Our portfolios are definitely biased towards U.S. public equities today. That being said, we do think that there will be selective opportunities, again, for stock pickers in particular sectors. So if you look at energy, if you look at pharmaceuticals, if you look at a lot of different fintech or financial services companies, asset management, insurance, there's a case to be made that a lot of those sectors are going to be very interesting, especially depending on what happens with

certain macro policies. So I think within the US, we're excited about certain sectors. Outside of the US, we're less excited about emerging markets. That being said, there are always spots to pick in terms of idiosyncratic risks that you can take. But from a macro perspective, I'd say we're still biased towards the US. Unpack the diversification within the public portfolio that you advise your clients to have. We are, again, like I said, overweighing the US versus emerging markets and Europe. And that's not a new view. For the last two years, we've had much less exposure, for example, in emerging markets because we just haven't found, despite valuations being cheaper

in certain countries, the risk reward to be beneficial compared to having the marginal dollar in the U.S. So we have some diversification, but probably not as much geographically as we did in prior years where there were more opportunities in other markets. That being said, we made a lot of money in Japan, for example, last year. There was a lot of momentum in the Japanese equity markets, but again, all through kind of active stock picking, right? Not from a passive point of view. So, you know, when we are managing our portfolios in terms of the public equity markets, we want some diversification, but we also want to be able to make the incremental return that we see given where

the macro environment is today. How does starting your career in sales and trading change you as the co-CIO of Rock Creek today? Yeah, you know, I feel fortunate that I have been able to have different types of exposure across finance, as we call it, which I always laugh because when people ask me, oh, I want to get into finance. I'm like, that means so many different things to so many different people. And you could do so many different things depending on what your skill set is and actually what you're interested in. do investment banking, which is a very different type of work than moving to sales and trading, where I was really researching stocks and putting on arbitrage trades between like Home Depot and Lowe's and doing risk ARB and merger ARB, which was a very common strategy when I was working at Wolverine and they had a multi-strategy hedge fund. So again, two very different skill sets,

two very different ways of looking at financial markets, but both very interesting and really both, I think, informed how I work as an investor and have worked as an investor over the last 20 years. And so I started my career at Rock Creek on the asset management side by really looking and, you know, understanding the universe of investment opportunities across, again, public markets and private markets. So having that background in investment banking, having the background as, you know, working at a hedge fund really informed how I asked questions and did due diligence on potential investment opportunities in those areas. So I was fortunate to have that background because I think it lays the groundwork for actually being able to do real due diligence on investment opportunities, understanding how financial markets and capital markets work.

Last year's Goldman Sachs report, which surveys over 500 ultra high net family offices, showed that they're only investing 6% into hedge funds today. Why do you think that's the case? First of all, the term hedge fund, what does that even mean? A lot of people would say that it's just a fee and a term structure. So it depends when you say, what are they like in 6% investing in what types of hedge funds? You can have a very stable value type portfolio of hedge funds where you're investing in relative value strategies in idiosyncratic markets and you're extremely hedged and you're not taking any beta or equity risk. You can, on the other hand, have a very directional hedge fund portfolio where you're doing a lot of long short or where you're taking a lot of long credit risk. So when people say hedge funds,

the interesting thing about that asset class is that it can span so many different types of risks and so many different types of alpha opportunities. And so you really have to identify what do you need for your portfolio. Family offices, I think, are probably, well, some of them might be a little bit also more risk-seeking. And so in which case, over the last couple of years, they would probably be more biased towards directional equity and equity risk than necessarily wanting to hedge their downside, which is what hedge funds can do for you. I will say that most institutions, endowments, and foundations would probably have a higher target to hedge funds, anywhere from 10 to, I've seen 20% in terms of hedge funds. But again, it depends on what type of role they will have in hedge funds. And actually, we had been underweight hedge funds for probably the last

two years prior to this year. This year, we've seen, again, a lot more alpha opportunities, a lot more stock picking opportunities, and so our hedge fund allocation has increased. So you also have to be a little bit nimble in terms of increasing and decreasing your allocation to that type of asset class, depending on what the market is giving you. What percentage of hedge funds that top institutional investors invest into are focused on hedging versus capturing alpha via quant strategies or other arbitrage opportunities? I don't know the exact specific numbers, but I would say the vast majority of hedge funds out there are probably more focused on equity

long short type strategies and more discretionary than quant. Now, there is a large allocation to quant strategies across both equity and credit and fixed income markets. So quant is a big type of, you know, head front strategy. But I would say that when I see new managers, you know, starting and launching, it's usually in the equity long short space. So quant is still a smaller amount of the percentage of the universe. But I also think that is because you need a lot of resources to be able to start a quant fund, right? One person, you and I can go and start an equity long short fund if we have the background and we can pick stocks and we don't need a lot

of resources around us. That's not true when you think about the technology and the systems and the data, most importantly, the data you need for a quant strategy. You've been over 20 years at Rock Creek. What do you wish you knew before starting? That is a very good question. I think that you learn every day. So I don't know if I could have anticipated what I would have needed to know before I started at Rock Creek. I do think that, you know, before jumping into the asset management world, you know, understanding again, understanding the dynamics of different asset classes and all of that is obviously very important. And maybe to round out my kind of foundational background, it would have been helpful to have worked at a private equity

fund or like at a portfolio company to kind of understand a little bit more of the private markets before I started. But I think if you look at what you can learn at an asset management firm, and especially in my job, like I'm fortunate to be able to really be able to talk to every single type of investor out there, private markets, public markets, right? And so I think it's hard to say, should I have done anything differently or known anything before I started? Is that the best way that you sharpen your saw constantly talking to peers and managers? And how do you go about being a better CIO every year? It is so much about talking to as many people as you can and being open to different perspectives and open to different views and honestly reading as much as you can as well.

You know, we are so fortunate. We get so much different types of research, different viewpoints, different perspectives, not only from our managers, from, you know, just the rest of the world. We do a lot at Rock Creek in terms of thinking about the macro environment. We have a board of advisors that are all very much macro thinkers. And so I think the best way you can be a CIO is to take all that information in, look at the data, be very data-driven in terms of your questions, in terms of your investment process, and then think about the more qualitative aspects of what's going on in the macro environment today as an overlay. But I will tell you, I think one of the most important things also is being able to be dynamic and flexible, because I think a lot of traditional ways of investing, especially when you think long term, is to not necessarily look at your portfolio.

And, you know, it's long term term it'll be fine um but i think in today's market and day and age you really have to constantly be just at least open to new ideas and open to the fact that we're getting data every single day and that could change what's going on in the market well alifia this has been great to catch up and look forward to seeing you down soon thank you so much