How I Invest with David Weisburd - E444: NEPC President on AI Portfolio Risk, Finding Top Funds, and Preparing for a Downturn

Episode Date: October 19, 2026

What if the biggest advantage in institutional investing isn’t finding better managers, but building an organization that can make better decisions over decades? In this episode, I sit down with Tim McCusker, President of NEPC, which advises on approximately $2 trillion in assets, to discuss what separates the best institutional investors from everyone else. Tim explains why even sophisticated endowments and pension funds fall into peer-driven investing, how governance and incentives shape long-term returns, and why the strongest allocators are willing to invest when others are retreating.

This enormous pool of assets collectively, almost $2 trillion, is the ability to think long-term and invests for the long-term because a lot of the rest of the market is not thinking that way, and that introduces opportunities that aren't there for those that have a one-year time horizon or even a three-year time horizon. What are those best practices that really set apart the top 10% of LPs? Over half of the private markets funds that we've underwritten over the last, decade have been in fund one, two, three, or four. So it's a primary focus for us to find those newer ideas. Is the difference in portfolio construction between pension funds and

endowments? Is it just that endowments are just much more evergreen in their nature? A $50 million commitment to a great venture manager would be a really sizable commitment in a venture fund. It just doesn't move the needle for a hundred billion dollar pension plan at the end of the day. So they need to think more broadly about their partnerships. keeping you up that night today, October, 26. I think it begins and ends with. So any PC advises on approximately two trillion in assets with the T. What do you learn having that aperture and seeing so many different portfolios? It's been fascinating. I've been there for 20 years watching the growth in the types of clients that we work with and also the assets that we advise

and support. And I think the biggest thing that I've learned, over the years is just the, it's less about the scale of that huge AUA figure. And it's more about the diversity of goals and missions across our clients. And then within those, the organizational risks and opportunities that just drive dramatically different outcomes, you could have two endowments, as an example, that have very similar size assets, but may have a very different risk profile because of the needs of the organization, how much of the total spending of the organization is supported by the endowment, the time horizon of that organization and how willing they are to take risk or to be more

conservative because of maybe protection that they need from that robust portfolio. I love that variety of getting to work with all kinds of different clients and then getting to see the really important work that they do. When we go to meet with our health care clients, we're usually meeting in the hospitals and seeing the work that's happening. And that's just, that's just one example. You walk into one of our large public pension clients and there's retirees meeting to understand their benefits as you, as you get checked in. So that, that variety of experiences has been really powerful for me. And I think most of any PC to understand that we're doing really important work across 400 plus clients. Such a great point. A lot of people will ask,

I'm sure you get questions for stock tips I only do from my mom and from childhood friends. And they'll always say, what should I invest in? And the answer to that is usually a list of boring questions. How long are you investing for? How much of it could you afford to lose? What is your opportunity cost? What else could you invest in? What's the rest of your portfolio look like?

Those questions, although they oftentimes are boring, they end up in a place where you have very diverse outcomes in terms of what you actually should invest in. That's exactly right. And that's such an important part of for us working with new clients. It's such a rigorous process to understand what their opportunities and constraints are. And that cascades down through their portfolio. It's first, how much risk are they willing to take? It then gets into how much do you want in public versus privates? What kind of liquidity tolerance do you have?

What are the drains on the portfolio due to benefit payments or spending needs that if we're in a downturn, could really constrain what you can do going forward. And that's why there's never a cookie cutter for clients. Every single portfolio looks a little bit different because every single client and organization has different constraints and opportunities going on. At the amount of assets that you're advising, you're dealing with some of the most sophisticated

institutional investors on the planet. What mistakes do you see the most sophisticated institutional investors make over and over again? No matter how focused a client or investment team or investment committee wants to be on just delivering the right outcome for their organization, there is always an element of trying to understand what peers are doing and then not being willing to go too far away from their peers. No matter how much you want to make it about the total return or relative to spending needs or liabilities, there's still this question of, well, where do I rank?

how am I doing relative to other endowments, relative to other pensions? And that can be, looking at what others are doing can be a good thing. There can be some important realizations from that. You may see innovation with a peer. You may see a move to de-risk or up-risk that starts a different kind of conversation and a different move for your portfolio. But I think just worrying about what others are doing for the, for the sake of knowing how similar or different you are, get you away from that first thing we talked about of managing your own organization's needs and having the right portfolio for the long term. And that peer risk, I think, can often introduce some short-term thinking. And the real power of this enormous pool of assets collectively, almost $2 trillion,

is the ability to think long-term and invest for the long-term because a lot of the rest of the market is not thinking that way. And that introduces opportunities that aren't there for those that have a one-year time horizon or even a three-year time horizon. At first glance, when you look at that, all endowments or all pension funds being very similar, you may think on the surface, it looks like herd behavior. But when you double-click on it, it goes back to the Charlie Mungerism, which is, show me the incentives. I'll show you the behavior. And if you look at the incentives, the incentives are a little bit nuanced for these endowments and pensions. funds and family offices in that they want to be top quartal.

So they want to be just better than their peers in order to hit their bonuses. But for them to take too crazy of a risk and to avoid this kind of index or benchmark hugging that a lot of these investors do, they could go to zero. So you could basically have this risk of ruin. So think of it as a poker game. You want to make the high expected value return. You want to get in that top quartal. but if you bet all your money on red or black and you lose, now you're out of your career. Now you don't even have a chance to play.

So there's these incentives that are really driving most of these institutions, if not all of them. Those incentives are much more in place with the larger organizations that have an investment staff of some kind built out. It could just be a couple people. It in some cases could be a similar to our investment research team of 70, plus people and they have peers that align with all the different asset classes that we cover, those situations are the ones where you see this incentive compensation. And there's that, by definition, it's sending people to work towards something.

That can be a really good thing over the, I think as long as you're aligning it with the right time horizon and the right goals of the organization, it's hard to do. It's hard. Everyone gets paid on an annual comp cycle. And that is just way too short of a time frame to evaluate investment performance. As we all know, markets move in longer term cycles than that. So that's something that we work with clients on. We try to, one of the nice things of working with over 400 clients is you see the best practices

across different clients and different client types. And you can share those with clients. It's much less about thinking about what's going on with markets or who the best managers are. it's much more about governance, and that's an important role that we play. This episode is presented by Juniper Square, the operations partner for private markets. I'm going to get to some of these best practices that you see across your 400 clients. But first, on these incentives, something that I've seen, not empirically just with my own eyes, some of the top performing CIO seem to be in their seat for many years.

Is that all correlation or is there some causation there? I think there's a lot of causation there. You look at, and we're going through a generational change, it feels like, with some of the larger endowments that have had folks in place over the last decade, you're seeing a lot of change there. And a lot of the best ones, the most highly thought of organizations, they're promoting within. And that's meant to be that they've worked really hard to develop the talent around them. So there's a lot of causation there where it's not just about that, that CIO and their longevity. they've built a team that is ready to step up when they leave. I think that having 30 years in an organization just gives you such an advantage to see how it's grown and evolved,

but to really see that mission in practice. If you're involved in a college endowment, where I went to college, I didn't go back for 20 years. I just went back and to see the difference in the school over 20 plus years to see the new buildings that have been built, but still holding the same character that it always, held and having that that same feel and culture and same mission. I imagine if you're if that's what you're focused on day to day and you're doing it for such a long time horizon, that's a much more powerful incentive for you than the incentive compensation. It's interesting. It's this I guess counter-narrative to historically there's there's this famous pension fund study that the

average CIO stays in his or her position for 6.1 years, which is very interesting because that's not only less than if you invest in a private equity or a venture capital manager, that's three vintage of 10 years. Yeah, with very few realizations. Yeah. So that's maybe 20 years conservatively. Here they're turning over every six years. Now it seems like there's an understanding that that's probably not the best for returns.

Now we want to homegrown this talent and create more continuity. It flows across an entire organization, though. The places that have been able to do that have probably had very little turnover in their investment committee, at least their investment committee chair, they've probably had little turnover in their organizational leadership, whether it's the executive director at a pension, the CFO at a corporation, or the president of college. So they see that longevity and value that longevity. When you have that turnover at those non-investment positions, that can often create turnover at the investment level as well. Personalityes don't align, goals don't align. So you,

It's not just that CIO staying in the seat, I think. It's the whole organization having a long-term mindset that leads to long-term investment thinking as well. I want to get back to, you mentioned, 400 clients. Not only do you have learnings from these 400 clients and close to 2 trillion AUA, you're also seeing them all at the same time. So you're getting like these 400 case studies every year. What are those best practices that really set apart the top? 10 or top 25% of LPs?

It's having that long-term mindset above, above all else. So much time is spent, and this isn't unique to NEPC. I think this is cross the investment industry with managers that are underperforming and trying to understand that. And it's important you go through that process because you want to make sure it aligns with what your original beliefs and investment thesis were for a manager. But most of the time, it's something in the economic and market cycle that's driving that that aligns with what you would expect from that manager and you should be sticking with them

at that time. If you really have courage, maybe you should be adding more to that manager at that time because that's just the time to buy them when they've had a little bit of a downturn and the cycle's going to turn and they're ready to deliver. I think focusing on that short term is really challenging. It's so easy for investment committees and investors in general to do because that's the number that's staring at you on the page. But much more important to focus on the long term, focus on the strategy of the organization, get the asset allocation right, get that ongoing commitment if it's available to you to private markets, correct, and build that portfolio over the long term. That's where the real value is going to come from, from staying fully invested, staying committed

to managers that are doing what they're supposed to rather than turning over portfolios. So I think it's focusing on the long term and then being really well diversified. That's probably investment philosophy number one for any PC and for me personally. It's spreading your bets as far and wide as you can that you're not just focused on one thing going right to hit your return target at the end of the day. I was just speaking with the CIO of Calsters a couple months ago. And he was talking about in 2021, they ran this best investment idea contest within Calsters. Okay. What is the best investment idea?

And the best investment idea was actually preparing for the next downturn. How do we prepare for that next downturn? In the military, you have these war games. There's a nuclear bomb being detonated. What do you do? And the reason you have these war games is, A, you have to figure out whether you're ready for it, but some of it is actually being prepared and building those kind of mental processes and having that emotional resilience to be able to deal with these issues when they come up.

Hopefully not if in this case, but in market downturns, it's a matter of when they come up, not when they, what makes it very difficult to deploy, like you said, it's a heroic trade just not to sell your losers in a downturn. That itself puts you in the top 5%. But as you mentioned, there are some top CIOs and other endowment investors and some endowments that are famous for actually like Yale or University of Michigan are famous in deploying in downturns. And I think the secret behind that is the actual work that they do beforehand. They get to know their managers. They know their manager's skill sets. They know their strengths. They're weaknesses so they could do exactly what you're talking about, which is disentangle performance

of the manager versus performance of the index. So sometimes you might have a biotech VC that may have just been in a bad biotech market, but may actually be a good biotech VC. And of course, every other investor is looking at the same field and everyone's trying to get out of biotech. They're selling out these large discounts. That's actually the time to come in. The one thing that I would add to that, all of that true, those types of of investors, investment teams, they typically, if not always, have the support of their investment committee and the larger organizations. If you don't have that, you may have the intestinal fortitude to double down at that point. But if your investment committee, if your leadership

team, whatever your governance structure is, if they're not willing to support that, or if they do support it, but they're really second-guessing it and they're ready to call you out on it if it doesn't go right, that's almost as bad as not doing it because there's times when you double down right at the exact time. And there's a really rapid recovery. We've experienced a few of those. F-shaped recovery. Right, like post-COVID. March into April of 2020, what a rapid recovery that was. Liberation Day, just a little over a year ago, like a really quick turn back up. And that's great if you can get in at that time. But we do see scenarios over history where it's a much choppier ride.

And you've got to have that conviction to stick with something or rebalance back into equities when they're down 20, 25%. You have to feel like you've got the support of the decision makers, the larger organization, to really be able to do that. Such a good point. When I interviewed Scott Malpass, who's legendary CIO from Notre Dame, he was. was there for 32 years. I think he was like 25 or 26 when he became the CIO. And he said, he was very humble and he said, well, before I tell you about why we did so well, I only had two chairmen over that 32 years on the investment committee. And one of those was Jay Jordan, one of the top private equity guy with Jordan Company. So he had the support on the IC level. It's equivalent to

a CEO is only as effective as their board allows them to do. And this happens also on the LPEC. level. Absolutely. It's 100% true. If you don't have that, you're probably going to run in circles. Let's go to specifics today. The bleeding edge endowments, the most aggressive investors that still do an thoughtful approach, what's their portfolio construction look like today? The philosophy in the endowment world is just a very different way of looking at things from a portfolio construction perspective. Endowments, and I don't know that one is right or wrong, it's a different approach based on the risk tolerance and the spending needs for an endowment versus a large public pension or even a health care system that maybe has endowment-like assets, they're just

going to they're going to use that pool very differently. Endowments spend a lot of time in portfolio construction thinking about the manager roster, the partnerships that they're entering into, and it's a, I've found it to be much more of a bottom up process of thinking about making those right long-term commitments to the right partners and continuing to commit to them over and over again if it's a private fund or staying in and adding to public markets strategies. Whereas on the pension side, it's typically more top down. It's thinking about what is the overall risk tolerance that I can take. how much of that risk should be sourced from equities, how much of it should be public versus private,

versus relative to the amount of benefit payments and spending needs that I have versus inflows for contributions. There's more of an asset liability analysis there. Now, sometimes those portfolios can end up looking pretty similar. Typically, you'd see more in privates in endowment portfolios because of that approach to partnerships. And I think the tolerance for illiquidity that they have and the relative spending needs compared to the outflows of a pension plan. But we see a lot of our large public pension clients, maybe not as high as endowments and foundations in privates, which can sometimes approach 40, 50%, but many of the cutting edge public pensions that we work with will have 30 plus percent in private markets. So they end up not that far off, but the path to get there, I think, is very, very different. Is the difference in portfolio construction between pension funds and endowments?

Is it just that endowments are just much more evergreen in their nature? I don't know if that's it because you think of a typical pension. It's been around for 100 years and it's going to be around for another 100 years, especially in the public space where pensions are still open and accruing benefits. They have a different kind of demographic profile than they had 30 or 40 years ago. But the expectation is that it is going to continue to invest, distribute benefits and have that equation balance out over the ultimate long term that contributions plus investment return equals benefits plus expenses. I think it's some of it's the scale. The largest pensions are, there's really large endowments out there, but they still are small compared to the largest public pensions out there.

So their ability to access some of those great partnerships that endowments have is more limited. They just can't have it. They're too big. Yeah, I mean, a $50 million commitment to a great venture manager would be a really sizable commitment in a venture fund that just doesn't move the needle for a $100 billion pension plan at the end of the day. So they need to think more broadly about their partnerships. And it's not to say that they're just in the largest. part of the market in in private equity or private credit or private real assets. But they can't get all the way down there to where the end up. So in many ways, they just have less managers

available to them. I think that's right. Yes. Yeah. Now, they're probably doing, they're doing a lot in co-investments to make up for that. And so they're getting exposure to some really interesting things. Endowments are doing that as well. But it's just that that band of where they can go. endowments can stretch a lot lower in the cap and risk tolerance. One thing I've learned from talking to hundreds of investors is that great investment firms aren't built on investment returns alone. The firms that endure are great at the things most people don't see. Their operations, their relationship with LPs, and the quality of information they

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can trust their information and prove it. See it for yourself. Start your free trial at Alpha dash sense.com slash how I invest. That's alpha dash sense.com slash how I invest. So investments are these investments that large LPs are able to make alongside fund investments. And oftentimes in private equity, they're zero fee, zero carry and venture typically zero fee in some form of carry. What's the best practice in terms of co-investment programs that you've seen? What are some dues and what are some don'ts? The number one don't for us is don't try to replicate what the GP is doing. You've built this partnership with this private equity manager because you believe in their ability to source great investment ideas.

It's not a productive use of anyone's time to completely re-underwrite the idea that they've brought to you. So we think a best practice, instead of spending weeks and weeks, redoing everything that they've done, is to go through some form of a strike zone analysis. Does this idea, this co-investment opportunity that they're presenting to us, does it fit with other things that we've seen from them and that we've seen them deliver great returns on? Is it in the right sectors where they have an edge? Is it a similar size to other things that they've done? Is the structure similar to other things that we've seen from them?

If you can check all those boxes and doing a high-level review of the investment, it seems like an interesting opportunity, that allows you to act quickly, which is really important for GPs. This is not like the fundraising process where you have several months to underwrite them and get to know them and know their whole. process. This is something measured in weeks, sometimes days, instead of months. So that makes you a great co-investment partner for those GPs if you can act quickly. And no is okay, I think, for GPs. It's a quick no. A long maybe is the worst outcome there for the GPs. So being a great partner by working

quickly and making sure it's the right fit, those are the right kind of best practices that we see. Chris Ellman, who is former CIO of CalCSA that he was there for 20. 23 years, we had this conversation about what worked in terms of co-invest. He said they tried everything. And the thing that worked was underwriting the manager and just diversifying into all of their co-investments. So not picking winners and losers. And surprise, surprise, after a couple decades, it ended up being that the alpha there was actually the fee savings. Right. So what you would expect what happened is exactly what happened, which is on average, you got the average gross return of the manager with lower fees. Yeah. I mean, you just got a bit more buyout exposure or venture experience.

or whatever it might be, you diversified it a little bit and you're lowered your weight at average fee. You referenced this earlier. Venture Capital is harder for pension funds to get around because of their minimum check size. You're also advising on $2 trillion in assets. So you also have the scaling problem in terms of what managers and what asset classes you could deal with.

How do you underwrite venture capital as an asset class, given that some of these funds are smaller? The appetite of across our client base to do venture is much more concentrated in clients that are on the order of several hundred million dollars in total size, 500, 250 to a billion, not multi-billion dollar super large organizations. So that gets a lot more interesting if we can only negotiate capacity for 25 or 50 million in actual. aggregate. The actual number of investors looking for that typically fits within that. If we get more demand than we actually have the capacity for with a manager, we have a process to follow where we treat all clients equally. But it's very different from that $2 trillion figure of where there's interest in doing venture. It's a lot of work. And we have to underwrite a decent number of

ideas to get to have enough breadth for our clients. But we've historically been able to do it. And I think We've, over the last decade, have been very proactive in trying to build long-term relationships there. We probably, we were more pension-heavy historically and didn't focus as much on venture as our business and the marketplace has shifted. And we work with a lot more endowments and health care organizations and family offices. We've been very intentional in trying to build out that venture lineup. And it's very different than working with long only managers or large buyout managers in that part of the world They're knocking down our door. They're coming to us looking to get on our lists and and and get a rating so that they can be in client portfolios and and we're doing a lot of filtering there We've got to get out and pound the pavement in the venture world and proactively open up those doors and and be pretty patient sometimes that means we do a lot of work and there's not room for us in one front

fund or maybe we've got to access a manager in a different way. We first get access to their growth strategy or their late stage winners portfolio, but building that relationship. Having them see how we work and the type of clients that we bring typically opens up capacity over time. And so our best venture relationships now, we've been in four or five funds. We've built it from maybe even just $5 million of capacity to start to something that's $50, $75 million, $100 million of capacity and a really diverse set of clients going into it. A lot of the larger LPs, they have these emerging manager programs because they're trying to get into the next managers, specifically in venture capital because you have to access

them early. Yep. Has your strategy evolved in that direction that you're trying to get toehold into some of the top next generation managers? We're always looking for that. It's a demand from our clients to get in earlier with the up-and-coming managers. Over half of the private markets funds that we've underwritten over the last decade have been in Fund 1, 2, 3, or 4.

So it is a primary focus for us to find those newer ideas. That said, there's lots of great managers that are on Fund 9, 10, 11, 12, and you want to have exposure to them as well. So you typically, as a risk management exercise, you're going to size those newer fund commitments smaller, so it's harder for them to be meaningful. But it's important that we do that work. We have one specific part of our process that's helpful. We have an investment framework that every manager, researcher that we have across public and private markets, they're going to follow a very similar framework of 250 plus questions that's exhaustive across all aspects of the

organization, the people. How many pages is that? It's on a web page now. So, I mean, it's got to be, when it's all written up, it's got to be 30, 40 pages. That's better. We just got a 70 page. Oh, boy. Person listening will know who it is, but I won't out them. But we're making our progress to that. That's great.

But we have a separate part of our process that we call the Discovery Platform. That what we found over time is that as you build out a really robust process, you can kick some things out along the way due to, Maybe it's a lack of robust operational support within the organization, especially if it's a newer fund. Maybe it's a really concentrated portfolio and just outsized risk for what we generally would want to put in front of clients. We have a handful of clients that are willing to take on those kinds of risks to be in a fund early. So we have our discovery platform that out of, I mentioned, 100 plus private markets ideas, probably 100 or or so new long only funds coming through every year. It's a small handful. It's five to 10 ideas that go through a more streamlined process that recognizes it's very explicit about what those

extra risks are and it's very clear to an investor what they're taking on. But we realize that in some cases it's inappropriate for us to filter that out if that's really interesting to some clients. So that's allowed us to get some new ideas through. And sometimes, those ideas don't go anywhere. Maybe no clients do it or just one or two clients and it doesn't knock it out of the park and we don't do more work on it. Other times we see some of those risks that we were worried about get built out. We see them add a COO. We see them get the right registrations and we bring them through on their next fund for a full one rating for all of our clients. So it's been helpful for our process too to follow those managers more close.

because you have more focus when you have client capital invested. Just to play devil's advocate, I had a former investor from the Cornell endowment. His biggest criticism in the investing industry was that people are double diversified. In some ways, three ways they're diversized. So a lot of people are thinking from their venture capital portfolio, then from their manager portfolio, then from their startup, where the right like Pareto Maximal way to invest is to look for the most asymmetric portfolio companies. then you have 20 portfolio companies per manager, now you have 10 managers,

and then you have better returns on aggregate basis than just worrying whether open AI is going to be 100 X or zero. What do you think about that? I can see where you can get over-diversified. You see it. You've kind of framed it in the private market sense of funding portfolio companies. We've seen it when you're constructing a long-only portfolio as well,

where you maybe add a few too many managers and you're trying to reduce tracking error in that process, but you might be offsetting so many trades at the end of the day that you're basically paying active management fees for close to index performance. Your managers are bidding against each other. Yeah, it's in some sense. Now, that's a little bit easier to quantify

and adjust for in public markets because you can see holdings. You can look at historical returns. You can see the correlations of alphas across managers. You can see the active risk budget. that they're delivering. It's really hard in private markets because you're giving an empty check. You don't know what the portfolio will be. You have a sense of where they're going. But I do think you still need a reasonable amount of GP diversification. You may get Open AI in a couple places. You may get the opposite of open AI. You may have, that's the nature of investing in venture,

that there's going to be a lot of swings and misses. And you may have that in multiple portfolios. I think it's, you're just getting a very different kind of exposure there than you're getting anywhere else in the portfolio. So I see the point, but it's a risk that I think clients should be willing to take on because the upside is, is meaningful enough that that over diversification is probably a tradeoff worth taking there. Speaking of risk, reward returns over the last 50 years, venture capital has really been the top asset class performing on that basis across. across any other asset class in the world.

Today, people are debating whether there's too much capital going on or whether they'll persist. But one argument that I don't hear many people making is that venture capital deserves to be in a portfolio just because it's different. Is there some argument that you should have venture capital in your portfolio? Not necessarily because it's better than private equity or long only or these other asset costs, but because it offers you something different that other parts of portfolio does not. I think there's a pretty strong case for that. If I, innovation, the beauty of America is the innovation culture that we have. And if you look at how public markets have evolved over the last 20 or 30 years,

if you look at the top 10 names now, a lot of them didn't exist 20 years ago, 30 years ago. And if you just got them when they entered public markets, you've still done really well in that process. But you missed out on a lot of return in those early days by not having exposure to them through some form of venture. And while the world is going to evolve in fascinating ways over the next 10 or 20 years, I think that innovation is still going to be there in the venture space as an institutional investor. That is different than anything else you have in your portfolio.

And by the way, companies are typically staying private a lot longer. We see that. We've seen that for a long time. I don't really see that changing. So getting that exposure early on. Now, you could say, well, I could get it through late, growth and I'm still getting it before it goes public. Again, I think you're missing out on a lot of the return. And there's a lot of being close to that, having that in your portfolio, meeting with those

managers. I think that just makes you a smarter investor in general to see the innovation, to see what's happening on the cutting edge. You can apply that to the rest of your investment process and your overall investing philosophy by having that exposure. Yeah, you could argue how in the world are you managing a long only portfolio if you don't understand AI, if you don't understand And then intricacies, like whether you're going in with eyes wide open or not, it's going to meaningly affect your business. Absolutely. You mentioned long only. You guys invest a lot in long only funds.

Me and my business partner, Curtis, has, we have a list of things LPs hate, but do anyways. It's an inside joke. And one of those things is investing into these pot shops, the Millenniums, the Citadels, the Ballyasnees, the 0.72s. Obviously, I know you can't comment on specific managers, but it seems like LPs love these pot shops. How would you explain on a simple level why these pot shops are accruing so much capital and why they make sense as investment? You see a lot of smaller and mid-sized hedge funds that just can't, they may be really talented investors, but can't scale up to have their own all of the. The compliance of the operations, the infrastructure, everything. and it just makes sense for them to work in a pod shop.

There's folks, there's really talented people that I think thrive on that pressure and it makes them better investors. And the netting and risk management that the platforms perform is incredibly impressive when you think about what they've actually delivered at the end of the day. So I think it's there's an economic role for those pod shops. It's replacing transactions that were happening before. and where banks were profiting in a lot of cases.

And it can make sense for institutional investors to try to participate in the profits that are getting created. But it's just, I think, philosophically, really hard for a lot of investors to stomach those fees, even if the end results do work. I mean, ultimately, it's like we're partners 50-50.

Yeah, right. I'll take your capital. Sounds fair. Yeah. But on the pot shop specifically, maybe you could explain. So it's just a combination of many different alpha trades that can't scale, but somehow they aggregate them under one roof. They aggregate them. They net them. You can have almost opposite positions within two pods within the same platform. And so there's some transaction cost savings. I don't know if that's a real alpha lever for them, but it definitely saves something at the end of the day. But these platforms have scaled in a tremendous way.

It's collectively over $100 billion, and then they're levered up. So these are really important market participants. You saw it recently with situational awareness. That was a fascinating, no pun intended situation. And it was a pod shop that stepped in and took control of those assets, and I imagine profited pretty nicely from those at the end of the day. So they are, they're playing an important market maker and market participant role to create liquidity. And they're putting out, they're taking on risk and profiting from it smartly at the end of the day.

The scale that they're operating on, they're almost like the Treasury Secretary in 2008 making these deals between banks. They're almost filling that role to be to be the buy on the way down. Portable Alpha. It's probably the hottest trend within the public sphere. How would you explain portable alpha and are you a believer in the strategy? I am a believer in portable alpha. A little bit of a long history going back 20 years. NEPC was very innovative as an institutional consultant and recommending portable

alpha to a lot of our clients that are pre-financial crisis and it was working very well. In general, portable alpha is taking an alpha stream that, you believe in that you believe is durable and uncorrelated. And rather than just having that sit on top of cash, swapping out the cash through derivatives and getting some other kind of beta exposure in your portfolio. So instead of just having a hedge fund, you swap out the cash part of that and put it over the S&P 500 or put it over the Global Acqui Index or over treasuries and you get you get the beta exposure that you want for your portfolio plus a high conviction alpha alpha manager that you want there's a lot of lessons learned through the financial

crisis and portable alpha basically went away because of that you had the big challenges where you had embedded beta in a lot of those alpha strategies they still had point two or point equity beta in their portfolio. And then you had volatile concentrated beta exposure with just equities. So you all of a sudden had all these liquidity challenges where equities in 2008 were down 20, 30 percent. The alpha portfolio was down 20 percent. And by the way, you've got to hit margin calls on the derivative that you're using to get that equity exposure. So a lot of the derivatives had to be shut down. The liquidity wasn't there. And then when things whipsod back, clients didn't have the beta exposure. So it was a terrible double whammy. Where we saw success is

clients that had balanced beta exposure. So they would use multiple betas. They'd have stocks, but also bonds to balance that out. Sometimes long bonds with some of our corporate pension clients. That was a really nice balance where they, instead of losing 30%, they maybe lost 10 or 15 because long bonds were rallying at that time. They were very explicit about building alpha portfolios that had little to no beta. So you didn't have that double double beta exposure that was one of the real challenges with it. So I take those lessons and I think there's a place for portable alpha in portfolios. I'm not sure you needed in the same way as you did, say, five years ago when rates were zero or one percent and you were swapping out such a low cash rate. If I'm getting four percent,

for cash right now and I can take a really nice hedge fund alpha stream that can get me three or four percent. Well, that's probably about or better than I'd expect from from equities plus some alpha anyway. So I don't know that you have to get too cute with it, but it can structured right. It can be an effective solution for clients, but like a lot of things, it's all about the risk management and the risk tolerance that you have. If you stuck with it all the way through portable alpha worked out, even through the financial crisis, but it was hard. both from a conviction standpoint, but also from a structural liquidity standpoint,

to stick with it. Part of what makes a lot of this difficult is people, you and me both, have thrown out these terms like alpha and beta. But when you go down the rabbit hole, you sit down with AQR or Ballyasnia or Ken Griffin, they all have slightly different definitions of all these terms. In fact, you mentioned this whole blow-up around beta exposure.

Beta exposure is an unknown factor oftentimes, And there's much more hidden forces in what creates beta and what creates correlation than people realize or people assume the most recent example of that was 2022, where lo and behold, now the 6040 portfolio, now equities were correlated with bonds. And everyone's like, how in the world that happened? You told us they were negative correlated. Well, it's because people had liquidity and people needed it. And for the first time, it was a supply shock and all these factors. But it's not quite cut and dry, not only the definitions of these terms, but whether they even exist. And that's what makes it tricky.

Yeah, and they, as you brought up, the correlation between two different beters can evolve and completely flip based on the factors that are driving markets. If you have a world, like we experienced throughout the 2010s, where inflation was really low, but also really stable. So inflation wasn't a driving force in changes to markets. It was much more about the growth factor that drove market changes. Well, stocks and bonds move in opposite directions for a moment. growth. If growth is disappointing, rates fall, bonds rally. Equity earnings expectations fall, they reprice and they drop. So that's where that beautiful offset of diversification happens between stocks and bonds. If like in 2022, where we were getting surprises with inflation and rates

were rising as a result of that, and by the way, we had rising real rates, well, stocks and bonds move in the same, there's a discount factor on stocks, the same. The same. same way you reprice bonds based on their duration. So they start moving in the same way. So I think that's an important part of portfolio construction is recognizing that correlations are not static at all. Regimes can change and that you want different forms of balance and diversification in your portfolio. So inflation hedging assets would be an important part of offsetting that. It's not just stocks and bonds to get you all your diversification. And when I think about those learning. Like, what do you do? The world is unpredictable. You have all these hidden

variables and correlations. I think really the only thing that you could do is to your point, even Portable Alph in 2008 worked if you had the conviction, you had the liquidity. So you have to create a buffer. You have to be honest as investor and sit down and say, okay, I'm smart. I know all these factors. I've talked to 100 of the smartest managers in the world. And ultimately, I'm still going to discount. I'm going to have 20% in highly liquid cash or treasuries or other short-term securities so that if the smartest people in the world are wrong, as seems to happen once a decade, maybe today every couple of years, then I still have that amount of flexibility in my portfolio in order to weather that storm. Sure. And yeah, the margin of safety, if you will,

right? I think that's critically important to have that, that flight to quality piece of your portfolio that's going to work when nothing else is working. Speaking of things that keep you up that night. What's keeping you up at night today, October, 2026? It begins and ends with AI. It's hard to follow the headlines and have that not keep you up at night in some way. It's so fascinating of where we're going. And there are so many interesting developments that will happen that have already happened. But this existential risk, you can't just put your head in the sand and forget about it. We've got to think about what are the right kind of controls that need to in place while allowing for continued innovation. I do think the solution to all that is more AI.

All the potential nefarious uses of artificial intelligence are probably offset by protections and security around using artificial intelligence to battle those negative interests. So I think there will be a solution there. But it's not just that AI existential risk. It's the concentration of AI in portfolios. It's this mega theme of AI driving really strong economic growth across the world, but particularly in the U.S. You look at the headline numbers and economic growth is, you see it flowing through in real rate expectations that the market is forecasting really strong economic growth over the long term. But it's really, really concentrated. It's not broad-based economic growth. It's happening in a few specific sectors. And,

a very concentrated set of beneficiaries. So that's not necessarily a good thing for the economy or for, probably for politics. We see enough challenges in fighting as it is. This will probably only make it worse. And I come back to the things we've been talking about just being really well diversified. And being well diversified in this environment can still, it can mean that you're concentrated in AI overall because it's hard to avoid that theme altogether. But you need to have some balance and protection in there.

We talked about the high quality bonds, but you need some inflation protection as well. You need global diversification. That can be really hard for investors to do right now when we've watched the U.S. run for 15 straight years and outperform everything else. But the priced in expectations are for the U.S. just to continue on this rocket ship. And if there's any disappointment there, you would expect the U.S. to underperform other parts of the world. So having that, having geographic diversification,

asset class diversification, thematic diversification, I think all of those things are really important. So great points in a very high agency way to look at it, which is there's some tail risk on AI disrupting markets. There's even some P-Doom disrupting and extincting the human race. How do you factor that in a portfolio? Well, I don't think you really have to factor that in portfolio

because you won't be around to experience it. But just because you don't know this tail of risk of AI disrupting different parts of market due to cybersecurity, bioterrorism, all these things, doesn't mean you shouldn't try to derisks the other portfolio. So if, let's say, 10 or 15 percent of your risk is always going to be there, is irreducible. Even if you know that and accept that, you should still focus your energy on that 85% that is controllable. I think that's exactly right.

Speaking of things that keep, at least me up at night or things that I'm trying to learn more about is how AI fits into inflation and the federal deficit. I kind of think about it as this triangle where it's affecting each other. How do you look at these three factors affecting each other? If you look structurally at the federal deficit, it's not going anywhere on its own. And I think we saw that in 2024 with Doge. Very, very little. There were high, expectations, very little actual cost savings. You talked about inflation and AI. And I think those are potential deficit solutions. The one hope on the deficit is that you can grow slash inflate your way out of it to something more manageable. Six, seven percent deficits are not sustainable. You grow

debt to GDP. You grow your interest payments every year where interest costs end up, just dwarfing your federal budget. If you can just get that down to three or four percent, that becomes something that's manageable. If then you're nominally growing GDP by five or six percent, three percent growth, three percent inflation, that's really hard to do over the long term. But if we're in a big productivity boom,

that probably is possible for a decade. And you need a decade type of time frame to manage through this process of getting that deficit down from the six and a half percent level down. that three or four because I just don't know where else you're cutting. You're not in this world with less global cooperation and tension with China, tension in the Middle East. You're not cutting defense in any way. You're not cutting Social Security or Medicare. There's not a place that you can go to just to create that savings. It's got to be a growth-oriented mechanism to get that under

control. And if we don't, then 20 years from now, I think we have a real challenge. We've let that debt-to-GDP ratio spiral and we have some currency reserve risk. You started at NPC 20 years ago in 2006. If you could give yourself one timeless piece of advice that you could give yourself right before you start at NAPC, what would that be? I'll give a personal one and then maybe a market or or portfolio one. The personal one would be always look to grow and take on new challenges. I've found as I've, whether it's a new opportunity, new leadership roles, or just covering a new space, working with a new client type, those points in time where I was most uncomfortable

and had the largest sense of just imposter syndrome that I can't do this. Why are these people listening to me? this room. When I look back on those situations, that's where I grew the most. And those opportunities to grow led to more, more opportunities. So I think I was able to take advantage of that. I would just, I double down on that going back 20 years and tell myself, do not miss the opportunity to do different and new stuff. Tim, this has been an absolute masterclass. Thanks so much for jumping on. Thank you very much. It's been great, David. Congrats on getting to the end of my conversation with Tim. If you enjoy that conversation with Tim. You're going to

Enjoy the conversation right here.