Invest Like the Best with Patrick O'Shaughnessy - Dmitry Balyasny - Building a Better Model - [Invest Like the Best, EP. 274]

Episode Date: April 26, 2022

My guest today is Dmitry Balyasny. Dmitry is the Managing Partner and CIO of Balyasny Asset Management, otherwise known as BAM. BAM runs a multi-strategy, multi-PM model that aims to produce consistent absolute returns. Since its founding in 2001, it has produced only one negative year and become one of the largest firms of its kind. Please enjoy my conversation with Dmitry Balyasny.    For the full show notes, transcript, and links to mentioned content, check out the episode page here.   -----   This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/Patrick.    -----   This episode is brought to you by Vanta. Vanta has built software that makes it easier to get and maintain your SOC 2, HIPAA or ISO 27001 reports at a fraction of the typical cost. Listeners can redeem a $1k off coupon at vanta.com/patrick.    -----   Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.    Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more.   Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:02:53] - [First question] - The origin story of his firm and the key stages of evolution [00:06:43] - Describing the difference between good and great in platform hedge funds  [00:10:25] - How a multi-strategy, multi-investor group works and managing capital allocation [00:13:58] - What he’s trying to solve at the end of the day as their CIO [00:16:21] - How close they are to their idealized end-state  [00:18:26] - Typical amounts of leverage associated with these types of models [00:20:22] - Lessons learned about incentivizing talented investors [00:22:39] - Ways he tends to attract risk takers and their levels of variance [00:28:15] - Other characteristics that are common amongst great PMs [00:30:42] - The nature and source of edge and how it’s changed most over time [00:33:19] - Some of the hardest portfolio and business decisions he’s had to make  [00:37:59] - One of his most important business decisions on the firm side [00:40:09] - How they’ve thought about shorting as a firm in general and more recently [00:43:52] - How interest rates affect this style of investing [00:45:29] - His view on the opportunity set in private markets and what does and doesn’t excite him about it [00:49:42] - How reading Ayn Rand most shaped his thinking [00:50:36] - Things Ayn most got right and most got wrong in his mind [00:51:24] - What the war in Ukraine has felt like for him as a Ukrainian-American [00:52:08] - Ways the future still has him excited as he continues to build his firm [00:53:53] - Where his trading instincts draw him today and areas of interest [00:55:11] - His most memorable trade of all time [00:56:37] - In which order the major asset classes will be affected by digital innovation [00:58:13] - The kindest thing anyone has ever done for him

This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. Founded by a former byside analyst to encounter friction sourcing, building, and updating models, canalyst is now used by over 400 institutions, including the largest money managers globally and by a number of guests on the show. With detailed company-specific models and data on virtually every public company, panelists clients are able to ramp up faster, update models instantly, and incorporate the highest quality fundamental data into any workflow.

If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com slash Patrick. That's C-A-N-A-L-Y-S-T dot com slash Patrick. Stay tuned after the episode for my conversation with Canales customer, Giuseppe Coco, of L-K advisors. We talk about how Giuseppe has built Canales into his process as an international investor and much more. If your startup doesn't have the right compliance certifications, you can't

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Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management.

All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunossey asset management may maintain positions and the securities discussed in this podcast. My guest today is Dmitri Ballast. Dmitri is the managing partner and CIO of Ballyasni asset management, otherwise known as BAM.

BAM runs a multi-strategy, multi-PM model that aims to produce consistent absolute returns. Since its founding in 2001, it has produced only one negative year and become one of the largest firms of its kind. Please enjoy my conversation with Dmitri Ballyasne. So, Dmitri, this is my first opportunity to talk to somebody that runs an investment firm structured and built like yours. There's lots of names for these. I think the original name was sort of the platform model, multistrat, pod shop. There's all these names that float around the professional investing community

and yours is one of the largest. Maybe you can just begin by giving me a little bit of the origin story of the firm. And I always love telling these stories and sort of like chapter headers, like what you view in hindsight as the key phases of the evolution of the firm, because I know you focus both not just on investing, but also on building the firm. So give us that origin story with a few of those key waypoints along the way. First of all, thanks for having me on. A pleasure I've enjoyed the podcast over the years.

It's a honor to be here. Origins go back to my origins as a trader and kind of thinking about how to build out business around trading. So when I started in the business, I started as a broker while I'll go into school, but I really wanted to trade. But I was really got awful at trading and I was losing all the profits that I was generating

as a broker or commissions I was generating in my own personal trading. to such an extent that I bet I went broke when I was 23 and really figured out I needed somebody to show me what I was supposed to be doing. So I applied to lots of trading firms. I was hired into the Schoenfeld proprietary trading firm training program. And it was really a good opportunity to kind of learn some structure, which was inherently missing in my trading. And so there was a good opportunity to learn from guys who have been successful for a long time. That was kind of an open environment where you can talk to people and just less of a formal program, but more where you can

pick stuff up. And people were open to talking about what they did. And so I learned a little bit about money management, timing, discipline, risk management. And those things are all just as important as the stock selection or investment selection piece. Even after doing that for a while, the first year there, total income was zero. Thankfully, they bought us lunch. So we didn't starve. I started making money pretty consistently. To kind of go back to your original question, It was foundational for me seeing the way the firm was structured where there were lots of different traders with lots of different methods and specialties and styles. And the time when I started as about 100 something traders and by the time I spun out to start my own firm, I think it was about seven years later. There were over a thousand traders.

I grew up with the mentality of it makes sense to have lots of different types of risk takers because you have less correlation. You could attack different areas of the markets and have specialists in different areas. It always made sense to me. The other thing I did at the time after having some success trading was I had the opportunity to help manage our internal fund-to-fund portfolio, which invested in different hedge funds, just with our own personal capital. So that was also really helpful seeing how different firms are structured and who stood the test of time and who tended to have lots of volatility in both their trading and their businesses.

Doing that for a long time, it really further cemented my initial belief because, the firms that we were invested with 10 years later, almost in all cases, were variations of a multi-manager model, where you have different risk takers, different specialties, different styles within the same firm. Those firms tended to be much more durable over time and much more scalable, whereas the firms that were structured around an individual risk taker, even if it was fantastic, they had lots of volatility over time. In some cases, that paid for insult and some cases it didn't. But when I was launching BAM and thinking about the type of business we wanted to build, we very much wanted to build a really enduring, scalable, institutional business that would do well

regardless if I was trading while we're having a good year or not having a good year. So there's something very firm over fun to use a phrase that pops up here and again, where for this to be successful, you obviously have to do a lot of things well. You need great risk management. you need amazing recruiting. You need to be really good at incentives and thinking about holistically a portfolio level versus just your own book. These are probably very hard things,

each of them that you try to constantly get better at over time. How would you describe the state of this platform model today? What differentiates good from great in the world of platform hedge funds in 2022, in your view? Just thinking about the industry, I kind of never understood why, the hedge fund industry needed 10,000 hedge funds. Just from an individual wanting to hang up a shingle and try their luck,

obviously the economics in a lot of cases make sense to try that, but certainly they're used to. It's much harder today. But from an institutional investor perspective, the last thing you want is 10,000 options. So I always thought the industry would consolidate over time, and that's really accelerated over the last decade post-08, and I would say even the last three, four years, it's accelerated again. I always thought it would look more like the private equity industry at maturity, where you have

a handful of dominant firms that generate most of the institutional alpha at scale. And they have a lot of different offerings and a lot of different structure and a lot of investment talent. And then you have a larger number of specialized firms that tend to be smaller, but could be very good in different niche strategies. But you don't need 10,000 of them, but maybe you need a few hundred. And so in the private equity equivalent might be somebody doing the middle market energy deals. The hedge fund equivalent of that could be somebody in a particular sector or a particular geography.

I think that's where a world has been heading. In terms of how to get there, it's a very difficult model to execute well. And you can kind of see that by just how few firms have been successful. The folks that we competed with when we started are pretty much the same folks we compete with today. the number of institutional quality enduring business models in the space, you can really count on one hand. And for the most part, they've been there for 20 years or some cases longer. So why is that? Because to your question, you do have to get a lot of things right.

It starts with the mentality of the founders and the management. Being a good investor and being a good trader doesn't necessarily make you good at allocating risk or managing other people's risk or hiring other risk. And in many cases, it's actually counterproductive. Somebody's fantastic gristaker, it's kind of like Michael Jordan wanted to pass the ball. Like, it took a long time before he was comfortable passing the ball. But then they became really good. It's kind of the same thing with Hedgefins.

It's a huge shift from somebody to go to a model that's centered around particular investment process in a particular person or one team to having, you know, in our case, like we have 125 teams. So it starts with that mentality and really wanting to do that. that and buy into that and be comfortable allocating risk to people, which I started doing within my trading group, you know, 25 years ago at small scale. But beyond that, once you're comfortable with that, then you really need to figure out what is going to be your competitive advantage. How do you get top talent to come work with you? What are you going to offer them in terms of economics and infrastructure and capital and investment intelligence, etc.? And then once

you have that nexus, it's like, okay, how do you actually get everybody in the world? work together, how do you develop people and how do you manage at scale? So these are all different challenges that you run into over time and makes it a tough model to build out. Maybe you can just describe in some detail exactly how a firm like this multi-strategy, multi-investor group works in practice. So if there's, let's just say, a pile of institutional or LP capital that's going into the firm to be managed by BAM, just describe the key ways that that capital is allocated, monitored, etc. internally, because with 125 investing groups, it sounds like a ball of yarn and risk overlays and all sorts of infrastructure and trading become really important. So just describe how it

actually works. If a dollar's going in, how is that allocated dynamically to that 125 team roster? We're structured by business lines, by different strategy lines. Our largest allocation is equities, which you see 80, 90 percent of risk, now is about 50 percent of risk. You'll have a management team for that strategy where they're responsible for helping to recruit, managing the teams, helping to allocate capital to that. And as an investment committee, we all collaborate on that, but you have a dedicated management team for that particular strategy. And then you have the same thing across other strategies. So our next largest would be global macro. So we have 40 global macro teams, there's about a third of our risk. And you have a macro management team that's responsible

for the same things of monitoring and managing and allocating capital to know. teams and so on and so forth across all the different strategies, you know, commodities, credit, Kwan, merger arm, etc. Within each of those, then you have specific capital allocation and risk limits to each of the teams. And so for each strategy, you'll have a general box that we work on as a partnership and as a head of that particular strategy team to figure out what does that box look like. And we always innovate and optimize every year a little bit. What do you want it to look in terms of what kind of risks do you think people have skill at taking? How much capital do you want to allocate to that? What other kinds of risks are you comfortable with and what amount, etc.

So like in equities, we want it to be, you know, very close to market neutral, very close to sector neutral. We want to minimize factor risks just to have a little bit, you don't spend all your time worrying about hedging it out, but you want to maximize idiosyncratic risks and minimize the factor risks. So what is that equal to in terms of position? It might be a 50 position portfolio or maybe for a large, team of like the 100 position portfolio, 50 longs and 50 shorts. And then you have the same things across all the different businesses designing that optimal box that people will operate within. And then you have to customize it a little bit. You might have some things work well in the U.S. but don't perfectly translate to Asia, for example, or the difference between a relative

value rates trader and a more directional macro trader within the macro business. Maybe you have to modify kind of the box a little bit. But it starts that. And then you do the same thing across the risk team. So you have a large risk team and then they have specialists dedicated to monitoring all the individual strategies and making sure that everybody's kind of within their risk constraints. And then the more valuable function, once you can do all that, is you want to help people get better over time. So we do a lot of analysis of people's attribution. What are you really good at? What are you less good at? What are other people good at that maybe you can add to your skill set, and how do you kind of evolve as risk taker and progress over time?

And so we try to give people a lot of feedback on what's working, what's not for you, as well as for the overall firm. So you're not going to take a trader from one style completely polar opposite, but you want to work on your weaknesses and get a little bit better over time. I want to come all the way back down to the core unit, the actual investment team and all the things that matter there. But first, I'd love to zoom all the way up to your level. So you mentioned the strategy heads, equities, commodities, global matters.

macro, et cetera, that would be responsible for their groups or their teams. But as you get all the way up to the top, to the CIO position, how would you describe what you're solving for? Like, is there an optimization function that's going on? Are you trying to maximize a sharp ratio? Like, what is the solve at the end of the day as you put all these things together? There's always a balance between sharp and capacity. You're trying to always find the right balance for that. And we do that all the way from the individual PM level to the overall firm. The individual PM level, like you could have somebody who's a 4-sharp, but they only generate $10 million a P&L a year. Like, that's not particularly useful as the firm grows over time,

although maybe it was useful 20 years ago. And so same thing at the firm level. So you want to generate iSharp returns at scale that generate the type of performance that investors are happy to participate in. So that's kind of what you're solving for. How do you get there? So you need to figure out, first of all, what strategies do you want to be in, and then how to build all those different businesses over time?

You might have a whiteboard of like, here's all the different things we want to have over the next 10 years. But how do you prioritize those? And then which ones do you want to build now? How do you want to build them? So a lot of what we spend time on is recruiting. So once you have business plan for something, who's going to manage that? So you want to get the right leadership in. And then at the PM level, who's going to take the risk? And you want to really make sure you're getting really top talent. And so we spent a lot of time recruiting. And then at the development side today, for example, I did three calls. with different risk takers of three different strategies, 20 minutes each.

Just talking about what's going on in their portfolio, what opportunities they're seeing, anything we can be doing as a business to help them grow and develop. And that always generates a lot of dialogue. So it generates some ideas that maybe I could say, okay, this is a really particularly interesting idea that the firm could be bigger in that maybe I'll put out of my own book. There could be situations where one of the DMs was interested in a data point that was coming out from a totally different sector that they weren't disclosed to, but that was going affect their companies. And so I put those two people together and talk about that. So that's a lot of

what we're doing at the top is having an overall plan, executing to that plan, getting the right people on board, and then making sure that the information flows really going around the firm. With all the different exposures and managing net exposure and factor exposure, all these sorts of things, great risk management, I would assume that sort of the idealized end state is some sort of uncorrelated, fairly high, absolute, and high, sharp return stream. And that you deliver that year and you're out every year, and that would be an amazing product, especially if fun correlated. How close to reality is that in these platform businesses? Is that something that's achievable and has been achieved pretty regularly? What causes it to deviate from that? What's been the kind of

feel of the returns? Nothing's a panacea. There's nothing that's perfect. It's a very good investment structure for consistently compounding capital at scale in an uncorrelated way. That's what we're really trying to solve for. So most individuals and certainly most institutions will have a couple different large pockets of capital that they need to allocate. And the vast majority of things that you can allocate to are correlated. They're correlated to the economy. They're correlated to the general risk and market environment. And so whether you're investing public or private, whether you're investing long only or long short equities or credit vast majority of things you had like every investment strategy in the board like 90% of them would wind up correlated to kind of the overall

economy so when we're trying to put together a market neutral product that's really uncorrelated that's designed to fit a particular need you have years that the equity markets are up whatever 25 and you might be up 15 doesn't necessarily mean you did a bad job and spend the same token but the same in the following year if the equity market's down 20, you still might be up 15 if you did a good job. That's really what you're solving for. How closely can you get to that? It's certainly very challenging to do, and there's periods where it's very difficult to drawdowns just like anyone else. But in terms of the consistency of the strategy, when you're able to do it across lots of different asset classes and you get to a scale where you do have really diverse risk

takers, it's pretty consistent. What kind of leverage is common in this? model to put on on equity on underlying cash and that's put into the firm. How's that managed? We look at things in a volatility adjusted basis using our largest fund as an example, but we try to run to like maybe a 7% annualized ball number plus or minus one or two. If you can put up a too sharp on that, right, that's a pretty good return. Now, the leverage it takes to get to that is a function of the market environment that you're in. If you're in a really volatile environment, then you don't need as much gross leverage because the moves you're getting are very large. Whereas if you're an environment like you had three or four years ago,

or it was very low volatility, it was really difficult to have enough leverage to get to the target ball levels that you'd like to get to. But I would say in general, if you were to look at the equity business, it's a little bit higher than your typical single manager long short funds, but it's not tremendously higher. And when you account for the diversification of risk taker and diversification of underlying positions, we'll have thousands of positions in a very diverse portfolio and a very low amount of factor risk. The actual realized volatility of those books,

in many cases, is lower than an individual portfolio that might have a lot less leverage, but it will have much more concentration, much more tilts, and it will wind up realizing a lot more volatility. So when you look at these things on a ball of just basis across strategies, you can compare how much risk do you want to take in equities versus macro or macro versus commodities or credit, etc. Because you look at them all in the same type of way. And so we want to have very consistent allocations across individual risk takers with a particular range. So if we have, say, a very senior risk taker in equities who's had very long consistent track record with us, and we have the same type of person in macro, for example, we want them running roughly similar allocations.

I think now's the time to zoom down into that world of the individual risk taker. And one of the things I was most excited to ask you about is the management of incentives. It's maybe like an oligopoly. There's you, there's Citadel, there's Millennium. There's maybe a few others. But as you said, you can count them on one, maybe two hands. And not just there, you're also competing against people starting their own firms and working in other places.

So just tell me everything you've learned about incentivizing talented risk takers in the investing world. I think the most important thing is you really, want to try to ascertain somebody's psychology coming in. It's difficult to do, and you can't always have huge conviction in it up front. Sometimes you can if you spend enough time with the person, if you have a reference from other people in turn. But certainly over time, as they're with you, for years, you certainly get a pretty good sense of somebody's psychology. And you want people who are really looking to build a business within a business, and are really looking to have a

long-term career and have the right psychology aligned with that. So this is a very difficult job mentally. There's periods where whatever you're doing just completely doesn't work. Maybe something's broken in the process. Maybe not. Maybe it's just the market is very difficult for what you're doing during that period. There's a lot of management issues where it's not individual risk takers. Almost everyone we have is managing a team. So some of the larger portfolio management teams might be in double digits of number of people. That's a lot of people manage with it. You have to deal. Usually it has difficulties at the same time that you're having investment difficulties. You have to be very mentally strong, very mentally committed that this is what I want

to do long term. This is the place I want to do it. I really want to build a consistent business. I'm willing to sacrifice a shorter term optimization for kind of long term optimization, whether that's spending time hiring quality people, mentoring them, developing them, that's really important, whether it's managing drawdowns where you need to reduce risk at some point if things aren't working. And so you just need people that have that mentality and they're really bought into that. Otherwise, you wind up with the stereotypical clashes and risk taker versus management, which we really try to avoid. And so as you think about attracting people with that characteristic that you just laid out that would describe a good PM that's going to be at BAM

for a long time, productively so. What typically wins them over? Is it structured financial incentives that make them feel like an entrepreneur that are just clear and uncontroversial? Is it other things? What are the things that move the needle? How high is the variance of those things across the firm? Like how customized does each risk taker? When we started, it was over 20 years ago, and we had a really good window into what lots of other funds were doing because we ran this fund of funds on the side. We had like 100 different hedge fund investments. The level of variance in how professionally businesses were run and how professionally people were treated was astounded. I mean, you had completely crazy stuff going on at some places.

My thought was if we could just start by not doing anything completely idiotic and just treating people like professionally and having some vested interest in their long-term career, that would go a long way. because it was just really bad, been very inconsistent. And so that was kind of the initial thought. You could just do it professionally. You would immediately be in the top 5% because just the industry was very immature. We didn't have any other advantages. We had no capital, right?

We started with $40 million, and our competitors were already in the billions. No capital, no reputation in the fundamental investing at the time. We had a trading reputation. We didn't have a lot of experience risk takers when we started. We certainly didn't have any great technology or infrastructure, and we had no idea what we're doing in marketing. Great sales stories so far. Yeah.

So our first institutional coverage, I opened up the yellow pages and looked up Goldman Sachs and Cold Company. So the only thing that we had going for was we were very intent in building a long-term business, so we wanted to structure everything in such a way that it would attract talent and retain talent, because that's the name of the game. These are all alpha strategies, very difficult to totally computerize. How do you attract and retain that talent? So first, you need the right underlying structure. So you need economic structure, diversification of risk, and investors that are buying into that, which takes a long time to demonstrate to people that works.

That was kind of our model from the get-go. Secondly, once you have that, you need to differentiate to the talent coming in. So that will by itself immediately differentiate you from 98% of the funds out there, but how do you differentiate from the other 2% that have a similar set of? And for us, that's always been the culture and environment that we want to provide to people. And I've always wanted to create a business where you have on one hand, you have the culture and collaboration and environment of a small single manager firm where it's typically tightly knit.

Everybody's rooting for each other. You go out for a beer afterwards. It's kind of one team. But the downside with that is like you don't have any risk diversification. You don't have the infrastructure. You don't have the economics usually to attract and retain the best talent. So you can combine that with the resources of a global platform with the technology and the infrastructure and economics capital.

It'll be really powerful. So that's kind of what we've always tried to do. As time has gone on, has that variance, especially at the platform firm level, dampened, meaning the economic deal that a free agent PM might command at the various platforms looks somewhat similar to each other and therefore they're really choosing based on that cultural point? I think so. I think people tend to sort of optimize for themselves on a few different metrics. Economics obviously is one. Economically, yeah, they're pretty similar. People have different twists on their offerings between your headline payouts, the total capitals, the expenses, the resources

that they're providing you, et cetera. So everybody's kind of got a different way of putting that together, but I would say for the leading platforms, like all the offerings are compelling. That's kind of one. Two is, what does the person want to do? Do they want to go sit in the corner and just be left alone to do their thing? Do they want to do their thing, but they want to do it collaboratively with management and have lots of resources that build their thing to the next level? Or do they want to actually have a voice in the overall business and the overall strategy of what is the best way to build this strategy? How can I contribute? How can I contribute? How can I make the overall firm better, the overall strategy better.

And people kind of self-select on that. Some guys are very comfortable going into something that's very well established, and they have a particular niche in that business, and they just want resources to do their thing within that overall built-up business. Others are much more entrepreneurial. Maybe they don't want the risk and expense and distraction of kind of starting their own shop, which is very difficult these days. And for a lot of strategies, it's really close to impossible.

but they do want to make an impact overall. And so when they look back in their career 20 years later, like, what'd you do? Generating a consistent P&L, like, all right, that's great. But over time, like, if you're spending vast majority of your waking hours doing something, like, what'd you build? Like, what can you look back on and say, like, I was a part of that? And part of it is being in a world-class firm and part of a world-class strategy where you could say, like, hey, I'm on this team.

The team is awesome. I was part of this championship team. We've won't one every year. And two is I was part of building something where maybe wouldn't have looked exactly this way if I hadn't contributed. People kind of self-select to different versions of that. And firms are in different parts of that.

And businesses within firms are different parts of that. What other characteristics, other than the big overarching one you mentioned earlier about just overall alignment, what are the other characteristics you've seen over the years or decades that are common amongst the great PMs that you've worked with? Are there attributes that they tend to share in common or that you proactively look for?

Yeah. I mean, psychology number one, it's just that the mindset of developmental mindset of like every year I start with zero, every year I want to be a little smarter than I was the year before, always kind of working on their craft. That mindset leads to much more consistency over time. You could have like somebody's style go in and out of favor. And you could have a year where your particular thing. thing is in favor. You got the couple big themes or trades right. And that's awesome. But to do it

consistently year in and year out, you have to be able to adapt. And the only way you can adapt is if you have this really flexible mindset where you're always trying to learn the new thing, pay attention to what the new thing is that's going on, and just try to really build a consistent business. So I think that's most important. Part of that is the line between conviction and stubbornness in the line between aggressiveness and humility. Need a little bit of both. If you don't have enough conviction, you don't have enough confidence,

you don't have enough aggressiveness, you can't ever take enough risk to put up meaningful dollars to kind of be at the top level. But if you don't have enough humility and flexibility and kind of adaptability, whatever your style is isn't working, it was a lot of money.

So if you want to be consistent and have reasonable drawdowns relative to your P&L and adapt to different markets, to be consistent year to year. It's like really that psychological balance between the two. And another piece is building a team is a real differentiator and doing that successfully to where one the person wants to do it.

They don't look at their teammates as an automated bit spreadsheet. They want to mentor somebody and have them become a great analyst and eventually a great PM. So having the desire to do that and then investing the time and energy to do that at scale across multiple people is really important. If you aren't invested in that and you don't take care of your team and you aren't invested in developing them and taking care of them both financially and from a knowledge perspective, they're just going to turn over. And if they just turn over all the time, it's very hard to scale a business.

I'd love to talk about the source of edge, even just the nature of it and how it's evolved over time. One of my favorite, I think it was William Gibson lines, was first identification, then commodification. You see that in markets all the time. You mentioned the hedge fund replica strategies. Someone finds something and then it goes away. Just describe in your investing career, especially the BAM era, how has edge changed most, do you think? And I'm curious across any asset classes that you want to dive into, how has it changed?

Looking at it from, I guess, an equity perspective first, my original strategy from 20 years back, the markets used to be just much more inefficient to where you could have like an individual trader put up very strong returns. just because there were so many trading inefficiencies going on over the course of the day or a week. So that still exists, but it's just much, much harder because a lot of those trading and efficiencies have got them quantified. So now you have the set-ar programs basically that are doing that all day long in various high-frequency programs, etc., in various ways where they're capturing a lot of those inefficiencies where previously you could have a discretionary trader and capture that. Fundamentally, same thing. You could analyze a company if you were speaking. Speaking to, you know, IR quarterly, like that was a differentiator.

So that's not a differentiator anymore. That's like cost to do a business. Building models. I remember when we're interviewing VMs and they said, well, build my own models. They said, wow. Really? Is that worthwhile? Like, certainly it wasn't commonplace because there was enough inefficiency that you didn't need to do it.

And then all of a sudden, as more people started doing it, you did need to do it. And, of course, now today everybody builds their own models. You know, the use of data and technology. So we're offering Python classes, for example, internally. And we have lots of folks from all the various strategies, you know, signing up to become much more proficient Python because it's just a much easier way to screen a lot of data and have it accessible quickly. You know, it's relatively newer. The use of lots of different data sets, about 100 people in our data team now. And so various teams work with them in different ways.

Many teams have their own data people on their own team in addition to using the centralized team. And that's becoming a cost of business and more commoditized in some ways, but you're always looking for different pieces of it that are less commoditized. Trading infrastructure, where five years ago even, I would say, have really good software at the trader's fingertips that would break down real time all of their exposures and factor risks and concentrations and tilts in a really useful way. It was pretty rare. We've iterated ours a number of times and now it's really good. what do you think are some of the hardest decisions that you've had to make either portfolio-wise? I'm curious how 2008 went or March 2020, some of the seminal, really difficult markets that you faced while Bam has been live. But I'm also curious the really hard moments or decisions at the business level, too.

So maybe just walk us through maybe one each of portfolio side and a business side. What the hardest decisions or stretches have been in memory? Portfolio side, I guess I would break them into two parts. One part would be like where there's a real market dislocation going on, like a 0.08 or 2020. Another side is like when there's less of a market dislocation going on, but you're really drawing down as a business. We had a down year in 18, which is our only down year. So that was more specific to us when it was a difficult market. They all kind of bring different challenges. In a really volatile macro-driven period, the first thing we want to do is we want to make sure that we're set up. well enough defensively so that we can play offense.

Because if you're kind of vulnerable and you're getting killed when everybody else is getting killed, it's very hard to go on offense and you wind up in a hope situation of at some point this aligned and it will all be fine, which of course it does, but you might be gone. So that's kind of the first thing that we do is we already run fairly tight, but we just want to make sure that any sort of tail risks that we have, any sort of negative convexity that might be not obvious in some strategies are hedged out. Any traders were concerned about where they were struggling when things were less volatile, now they're really struggling.

What can we do to help them stabilize their portfolio so that they can survive this period and come out another side and do well? And there were lots of those issues in 08 in 2020. I would say like 08, it was amplified by systematic concern where you're just worried about financial world can be there. So I remember being on calls with prime brokers going, when are we going to get our money, which was a real concern at the time, because you just didn't know if they were going to be able to meet the margin calls. The CDS for prime brokers was going through the roof. We went to cash, Q4 of L'A, largely the cash, just because we were concerned

about the systemic environment and the RV trading, which is most of what we do, whether it's macro inequities, nobody really cared about the differentiation between the stock and that stock, Q4 of OA. So it made a good decision to go to cash, but then it was actually like worrisome, like, we're actually going to be able to get the cash. We had some nervous days waiting for wires to come, which thankfully they eventually came. So that was amplified just as a going financial system concern. Like the other issue was, we wound up slightly profitable that year and the fund, but we were rewarded with 50% of redemptions. We chose not to gate people, lots of financial investors needed their money. Then we had business issues worrying about, we had to pony up money

and make sure that you can help the business survive. We certainly don't want to be laying off productive risk takers or business people at the U.M went down. We had to kind of step up and we had to do that a number of times over the years and fund those deficits for periods of time. 2020, we were in a much better place, like as a business with much more solid capital and great investor base. We were doing well, trading-wise. The improvements that we had made over the years going through like difficult periods like 18 was for us where we had too much concentration by strategy and by risk taker and by positions and then we work really hard to improve that. So by time we got to 2020, we have much more diversification by strategies, by risk takers,

by underlying portfolio positions. So there's just a lot more bets and a lot less factor bets and systematic bets that we didn't want was one. And then two is really helpful from the cultural and communication sense, like everything that we've always talked about being valuable for having a seat here. It's not just about what's the economics on my P&L. It's also like what's the place where I can actually generate the most P&O. And part of that is the collaboration across teams and intelligence that you get of what's going on in the macro environment. That really paid off in 2020 initially with intelligence

with the healthcare teams and understanding what's going on with COVID. And then the understanding of what was going on in macro and with the Fed intervening by the communication across macro, It was very stressful in terms of like every day you would have some portfolios that were down a lot, others that were up a lot. Markets had crazy swings. But it wasn't particularly stressful on the business level. Everything was kind of executing the way it was supposed to be. If you set aside the kind of really early insights gleaned from watching all the traders and the fund of funds experience and thought maybe more towards the latter half or something of the BAM journey, what business decision now just on the firm side do you think was the most?

important that you made, and was it a hard decision to make? The most important early decisions were, one, having the right founding management team. I've had the same two partners on the business side for 20 years. Investing in that up front, I think a lot of hedge fund managers, when we talk to guys who are interested in starting their own fund and they kind of walk us through the economics, like a lot of times it's about I can get somebody to manage the business side for this amount of money and it won't be that impactful. And so therefore, I'll be better off with the management fee. And it's totally like the backwards way of looking at it, in my opinion. So we didn't have any

management fee. We started off just trading prop. And so everybody's compensational is just our expense. But even with that, we really invested in management from the start. And that's been hugely impactful over the years. And I would say the mistakes have also been on that side where we didn't invest in management of particular strategies or particular functions like risk at. a senior level like early enough. And when we did, that combined with the core management team and PMS we already had really took us to the next level. And then the second thing is the right foundation for a fund. Like if you have a standard fund structure and you have lots of risk takers, there's just not a sustainable law. Because at some point, somebody's going to make a lot of money

and somebody's going to lose a lot. If you can't pay the guy that just made, you're constantly going to have a revolving door of talent, of the profitable talent. And you have to be able to pay people market rates. So how do you do that, that piece specifically? Like, what is the setup? Yeah, if you have a top PM, in the old days, you could certainly start a fund. You know, today, maybe you can start a fund, but you can certainly go somewhere where you can get a payout that's very similar to starting a fund. If you're not doing that, there's no way you're going to retain top talent over time. Those two things, the right economic foundation, not compromising that, and then investing in management and really valuing that part of the business is really important. It must be really difficult to manage the

short side of the book in recent years. It just seems like so many stories of insane volatility amongst heavily shorted stocks. And just I've heard from other hedge fund investors more and more that shorts are just a sort of balancing basket to take net exposure out and less and less about generating alpha on the short side. Walk me through the progression of how you as a firm thought about shorting, especially more recently. Mars hasn't changed that much. I think that the basic thought process that you hear about short selling is flawed. Trying to run an absolute return fund, lots of different types of trades to try to engineer a consistent high, sharp return street. It's not as simple as I'm just going to

buy the best companies that I think are going to go up for the next 10 years, and I'm going to short companies that I think are going to eventually be zeroed. I think if that was all it was, it would be a much easier business, and there would be a tremendous amount of overlap between people's positions because it's not that hard to try to identify the companies that you think, hey, this Apple was a great company. Yes, it is. Maybe you could figure that out a little bit before somebody else, but that's not, to me, the value of a hedge fund. That's not going to engineer a consistent return stream. Markets are just too efficient. And so that misconception, like just looking for one type of trade, creates huge volatility in people's portfolios. So yes, if you're a short book

is entirely composed of companies that you think are zeros, you're going to have a very volatile short one. And if you're good at picking them, maybe over time that'll make money, but it's going to have crazy volatility. What we're really trying to do is we're in the relative value business. We want to be in the business of consistent spreads. So whether you're operating a casino or you're operating a bank, or you're operating a multi-strand hedge fund,

like you're in the spread business. And so we're looking for lots of different types of trades. And you're looking for outperformance between your longs and your shorts. And so you're going to bucket things in different ways. Yes, you might have a structural bucket in a particular section where you might have some portion of your portfolio that's like, okay, these are my home run positions that I really think I figured out that Google is going to be great before other people have figured it out. It's not priced in and I'm just going to let it come from.

Okay, you could have a few of those. And you could have a few on another side where you're like, this is a fraud. I think these guys are going to be a zero. You can have a few of those, but then you have lots of other types of trades. On the short side, you could have expectation misses. It could be a great company, but they're investing a lot in their business for the next couple of quarter more than people think. And revenues are falling off a little bit.

Expenses will be a little higher. And if this multiple, I think it's going to hit the stock. You could have competitive shorts. There's a competing product coming up. This other drug company has a similar drug that's coming up. And people don't understand how similar it is and it's going to be priced at one. there's lots of different types of trades and you need to have a diverse portfolio of lots of types of positions. And so you try to minimize these exposures that either you don't have much

skill at predicting or the skill is very low relative to your skill at other stuff. Your skill of predicting, for a typical fundamental PM, their skill of predicting like how a company is going to perform over the next quarter or two relative to similar companies is pretty high. If they have an investment process that's designed to do that and they're following a a pretty tight group of stocks and they're following them very closely, really understand their business models. They should be pretty good at consistently predicting that this company is going to outperform this company for the next quarter or two and constantly re-evaluating that

and rotating their portfolios. Their skill of predicting the company that's going to a huge outperformer in the next five years, they might have some skill at that, but it's certainly going to be lower. It's going to have a lot of volatility. In addition to the world of shorts, the other variable that seems to be important for this business model and has changed a lot recently as interest rates. In what ways do interest rates affect this style of investing? And how do you think about them?

In general, if higher rates are positive, for a couple of reasons. One, it tends to correlate with higher levels of volatility. You want some volatility. So, like, the worst environment for us, if there's, like, nothing going on. If there's nothing going on and there's very high correlation between stocks and between themes within different asset classes, like, it's very hard to make much money. And you don't want to run a tremendous amount of leverage during that period to compensate it because that could change, and then all of a sudden, you got too much leverage in a difficult

period. So that's the worst. So anything that's away from that, which higher interest rates help with that is helpful. More volatility is helpful. Secondly, for some of the strategies like macro trading, the largest part of macro trading is trading rates. And if rates are just all locked at zero and there's no difference between the paths of various central banks, you know, very hard to make much money. And that's the environment that rate traders were in for a lot. And now it's kind of the opposite of that. So you have a lot of rates volatility. You have various paths for various central banks. And you can do all kinds of different trades. You could do curve trades. You could do directional trades. There's just a lot to do. And so that helps. From a leverage basis on

equities, it doesn't really matter because you're always paying the spread and you're always levered. So your spread that you pay the prime broker between the long and you're short. It doesn't change the level of interest rate overall goes up and down, but you're just paying the spread. So And it doesn't really affect us from that. What's your view on the opportunity set in the world of private investing? Obviously, it's been another huge trend here. Venture, growth stage, more traditional private equity, what have you done in this area? And what excite you?

What doesn't? So this is something that we started working on five years ago that I wish we would have started 15 years ago. But we really liked a strategy for a couple different reasons. Number one, it's a good strategy in its own right, even if you had nothing else, because just the trend is company state private longer. the trend of technology growth, creating most of the value in markets, I don't think is going to change. It could certainly change this year, but I don't think it's going to change for the next 20 years. So the ability to capture that by investing in the best companies during the

best part of their growth curve, you have to invest in privacy worker to do that because now by the time they come public, they're coming public, you know, $100 billion dollar valuations in some cases. Maybe it'll grow a billion, but you certainly missed a lot. That's by itself. But secondly, for us, it's super synergistic. The synergies between the public investing teams and the private, both for sourcing and diligence of the private companies, but also to help understand the companies they're investing in on the public side and the competition that's coming down on the pike for those. Who's taking share, who's winning share, losing share, like that's super important. Tech that's becoming more important in health care and consumer in other areas as well.

And there's a lot of synergies with equity capital markets business when we're very active. participants in new issues and secondary financing. So there's a tremendous amount of investment synergy there. So it's a really attractive area. The problem with it is if hedge funds are competitive like venture is the next one. Because hedge funds at least, you can compete for talent, and that's super competitive, but it doesn't matter how good you are, you can go and buy Google. Whereas in venture, you can't just go invest in Snowflake and they're private because you showed up. You need to overcome the negative selection on sourcing, which is really really, really, really difficult. When we started like five years ago, what's going to be our

edge in business plan to eventually be able to do that? Because you have to be invited into the us companies to invite it to invest. We started doing it in a few different ways. Like one, we personally started investing with lots of different early stage venture funds so that we would be a client, not a competitor, and we would have some deal flow from following their companies and seeing which ones are breaking out and already having a relationship, that fund and that manager and that company in a lot of cases. Secondly, we started a conference where we invite our hedge fund people and combine them with really top VCs, top founders,

and put together various panels on data and healthcare research or cryptocurrency in fintech, and you'll have panels of public guys, private guys, investors, founders, management teams. And we started that five years ago. It's become a really big draw at the top conference people want to go to. Those two things have created a bit of an ecosystem. The third thing that's really important is you need a dedicated team. Over the last couple of years, we've built out a really top privates team that's solely dedicated to that strategy. And then work hand in hand with the public teams. So when they're diligence in a company and they want to understand the potential exits and valuations, public competitors, and strategies,

we can get people who are expert in that particular niche of the market from the public side, as well as from the private side and put them together. if we like it to talk to the company, where do they really see the value that our guys can add? You kind of need all those things. I think people who are jumping into it without having an edge on the sourcing side and without having really experienced dedicated teams, it's very, very difficult to compete unless you're just,

you could be in the hot market where everything goes up and over time, that's very difficult to compete it. My thought is always like if we could bring to bear the strength of a really institutional public investing firm with all the intelligence that that has. Like we have close to 300 people in equity research. If you can combine that with really dedicated top-notch private teams and a proprietary sourcing network over time, like it's not going to necessarily be in day one, but over time you can really build a top-notch business.

In what ways was your thinking or your mind most shaped by reading Ayn Rand? It was certainly shaped, but my feeling like reading Atlas Shrugman, I was in college was getting a much more sophisticated articulation of things that were in the back of my life, where you always kind of thought, like, hey, looking at the world in this manner, it makes sense, but you couldn't really articulate it in a philosophical and moral way. And she obviously does a fantastic job of taking that and putting it into a coherent, logical, philosophical framework. And then on top of that, the books are super fun to read. And so you can get through a thousand-page book and now want to put it down.

I became a fan of that, tried to help out with Enron Institute over time, who's sponsor a large, I think it's the largest essay contest in the country for high school seniors with large prizes based on their essays. That's a shrunk in front of it. What idea do you think she most got right? And then I'd also be curious if there's, you know, a major idea that maybe you think she got wrong. I don't know anything major that she got wrong. Or at least I haven't figured it out. The major idea I think that she got right is basically that capitalism, and individual achievement is not just economically the best system, but it's morally the best

system, and they're morally and economically self-reinforced. That's kind of the thing that's missing in a lot of the dialogue that you hear in the press and politics. It's always trade-offs. If it's done correctly, with a focus on long-term success and achievement, there's usually not much of trade-off. The right course, it's not necessarily easy to figure out, but if you spend time on it, it's usually logical and you can even figure it up. You're from Ukraine originally. I'm curious what this episode of history has felt like for you as an American, obviously that lives here,

but obviously vested interest and deep personal roots in that part of the world. What's it been like for the last several months? Yeah, I was born in Kiev and best trade my parents over a maid, which I thank them for immigrating when I was six or seven years old. Yeah, it's been horrible. It's just a very sad, very, very sad situation. It's tragic that this kind of barbaric situation can occur in modern times in Europe and first world countries. You don't expect this in Europe.

Very sad situation that hopefully comes to the conclusion before you're going. Amen. What, if you think about the future of BAM, most still has you motivated? What are the Warren Buffett tap dancing to work phrase pops to mind? Like, what are the things that when you're doing them, you're still filled with joy around the investing business that will drive you forward? It's really the same things as when I started. I've always had two things that motivated me, like one, wanting to be an excellent trader. And so I'm still active in the markets and I still get excited about interesting trades and volatile markets, enjoy that.

And two, just wanting to build a great business. And as soon as it sounds, it takes such a long time to build a proper foundation for these businesses, for this type of business. Maybe other people are smarter and we're able to do it faster. It really takes, in our example, it certainly took over a decade and probably close to two decades. Now I really feel like we have a really good foundation for building new strategies and extensions of existing strategies with a high likelihood that will succeed at them all the time. That's exciting because you're always kind of learning new stuff and figuring out,

you're good at this particular thing. How do you expand it to the next adjacency and succeed at that? How does it fit in with other things that you're doing? Where can you innovate? How can you approach this problem in a way that's different from what other people have done? It might be better. And the last piece is people growth generating a lot of satisfaction for me. So when we take somebody who went through our PM training program,

it's now a top PM, and you remember interviewing them when they were an analyst coming through, or somebody who comes out of our scholarship program with college, it might start off in a very junior position. Hopefully, five, ten years down the road, they're great analysts or great PM, generating a lot of P&L for the firm. That's immensely satisfying. Yeah, it's fun to think about the career development,

maybe above all else, as a very rewarding avenue. As we wind down with your trader hat on, you mentioned always still interested in being good at that, getting better at it, where does that instinct pull you today? With your investing, trading function, not the business building function in mind,

Where are you drawn to, investigate or learn or participate today? My core is equity. Trade equities, trade a lot of tech and other sectors. I've traded more macro over the last few years as well. I'm more of a directional macro guy, and I like periods when there's a lot of upheaval, when there's a lot of risk-off type situations. I'm drawn to that because, one, I like it and I'm good at it,

but, too, it's also a really good diversifier for the firm. We always want to be in a position of strength when you look at monthly numbers or quarterly numbers for people, and a lot of times they might look pretty consistent. I'm like, what was the market for month? What the alternative have been if the market didn't come back? So like 2020, if the Fed didn't intervene in March, what would your month and number have been?

That type of environment is where I tend to get pretty aggressive and try to really make a difference. When things are pretty calm and everybody's doing well, I'm still involved, but I can spend a lot more time on business stuff and try to grow the business and recruiting. and things like that, because we have 125 other teams that are doing a lot. Do you have a most memorable personal trade of all time? So I have a most memorable miss.

That works too. When the mortgage subprime short in OA, we were researching it, and I was really attracted to the symmetry of shorting subprime, and it made sense macro stuff that we were looking at. But we were hesitant to do it as firm. You know, we were much smaller. certainly wasn't in our mandate that we would ever talk to investors about that we were going to trade subprime. We didn't have the kind of internal expertise on that.

And in retrospect, I should just put it on. And if it didn't work, it didn't work, deal with that, didn't have enough confidence from an institutional business mindset to do that. So we invested, you know, personally with Paulson and that, then it's great. And we had a great external hedge fund investment, but it could have been home run for the fund and for our clients. So the takeaway from that always is like there's always a balance between making sure. you have competency in something and enough expertise that you should be risking your money and your client's money, not doing willy-nilly. But you have to have enough also conviction and ability to take risk when you do see the opportunity, even if it's different from something that you've

done before. You might not do it at the same scale that you're doing businesses that you've been in for a long time. But you have to kind of get involved when you see something. And so we've tried to do a better job over the years of straddling the right. balance between them. Across the major asset categories you described at the beginning, do you have a sense in what order they'll be affected most by data, artificial intelligence, modeling, things of that nature in the future? Everything becomes more and more quantitative every year.

It's hard to say precisely how it's going to look 20 years down the road. So what I try to do is just make sure that we're always on the leading edge of that as much as possible. My personal view is as long as markets are made up of people where the majority of flows are discretionary, it's very hard to totally quantify that. The further out your timeframes go, the harder the quantification comes. So obviously the high frequency trading firms, you can certainly quantify a millisecond trading, and that works much better than people doing it, and it's a great business. But the further away you go from that, if you're trying to do private tech investing and there is no data you have a person in a business plan, that's kind of an opposite of that. Like you know, you need people to understand and research and have a view.

And stock picking or macro trading is kind of in between those. You constantly have to invest in the data and automation and improving your infrastructure and giving your teams better and better tools all the time to do that. So like last year we hired over 100 people in tech. I think this year we'll probably hire 200 people in tech. there's an insatiable demand for constant tools, whether it's rest tools, trading tools, research tools, et cetera. So we always want to be providing that. But for the further the strategies go from a time frame perspective, the harder they are to kind of fully automate.

Demetri, it's been so much fun hearing about a very unique brand of investing firm. Like you said, there are many of them, our first chance to explore one on the show here. So I'm so appreciative of the time and insight. I ask everybody the same traditional closing question. What is the kindest thing that anyone's ever done for you? I'll take my parents out of it. They've done lots of kind things for me. A memorable one that really made an impression on me when I was a kid.

I was doing door-to-door sales. I think I was 12 or 13. Fairly miserable job, door-to-door sales. But I was walking around with my bag of stuff that I was selling. I wasn't selling much that particular day. This guy calls me over. Amazing. Somebody called me over.

Maybe he wants to buy something. So I run over, start showing him all my stuff. And he's like, no, no, kid, stop, stop. I don't want to buy anything. I was like, oh. He's like, but I really like to see a young person working hard. They gave me 20 bucks. Simple as that.

And so that really made an impression on me. And it kind of reinforces that there's a value in the hard work just for the sake of hard work. If you can do that over time, eventually it will work out. Really cool. A unique answer. I haven't had one quite like that. Dimitri, real blast. Thank you so much for your time.

My pleasure. Thanks for having you. Next, you'll hear my conversation with Canalist customer, Giuseppe Coco, of LK. advisors. We talk about the good, the bad, and the ugly around proprietary models and how Giuseppe has made Canalist a key component of his investment process. So, Giuseppe, I think the place to start is with the concept of a deep economic model on a business. You've got a unique background in banking where I think you've spent, God knows how many hours building complex models. And I'd love to just begin there. Just talk us through your early experience, building models, sort of the good, the bad, and the ugly.

Yeah, so, you know, we started out with investment banking, which is very much on the private side. And there, obviously, you have a lot more information. And so you can go in a lot more detail. So you would look at the models that we were building for deals were frequently 20, 30, 40, 50 taps, thousands of lines long, only like to get to a very simple output. And, you know, you would spend hours just changing this, changing this, updating this. It would literally take forever. And it was very difficult, almost like, to audit, you would find something, okay, you know, this number should be this, this number should be that, right? And you would literally go back and spend hours and hours and nights just trying to reconcile that, just because most of the times people are just adding more and more complexity

to those models and always ask for incremental complexity. What do you think is the most useful and the least useful part of how those complex models are built on the banking side? Obviously, precision is good if you can get to it, but false precision is bad. What do you think the good than the bad is of that style of model building that's so complicated. I think to a lot of people that provides falls comfort because it's more like the more the merriar, but it's actually not the case. It's more sort of, you know, what are the relevant things? What are the key things that actually make a difference?

And frequently that, unfortunately, just gets lost in the detail. On the good side, to be frank, I don't think there is actually much because think of a solution like Canalist, which the first time I opened a canalist model, I was amazed by the level of detail and precision that they could get basically into their one-tab models. I was totally amazed by that, that it was even possible. You know, until that point, I mean, that hasn't even crossed my mind that it was really possible to build such a detailed and sophisticated yet simple model in a manner that they do. If you think about those early days and what Canalyst does or when you first encountered

it, what did you like about the service when you first encountered it? Like, what did it replace for you? And because you didn't no longer have to do those things. What did it open up or unlock for you with your time? When I first started on the by side, we started out by they sort of models manually. My former boss asked me, you know, to build out like the models manually into this and do that. I mean, obviously, like your work basically piles up. And I mean, it just takes hours.

It can easily take a few hours until, you know, if we don't want to potentially even like three weeks, depending on the degree of complexity to build a proper and running a fully integrated model for any of the companies. What Canada does is basically condense all of that process. So it's as simple as downloading any PDF file just from the internet. And you have the whole model there with all the relevant KPIs, with all the relevant drivers, so you can overlay basically your inputs. I think from all the tools I have been using on the by site and I'm using today, it is the one that reduces friction the most.

Giuseppe, I'm curious, where did you first hear of Canalist? Funnily enough, I actually heard about Canalyst on your podcast in an ad. And, you know, it was one of those evenings who was at home listening to a podcast. And like, you know, I heard automated models auto-opating. I was like, oh, my God, this is exactly what I need. And I'm curious if you've interacted with others in the investing industry, too, that are using it more and more. Like, are you seeing more colleagues or even competitors or friends using it too?

Is that part of the growing network of it? Here in the UK, my previous firm, I started using it. And then, you know, a team that was sitting like next to it was like, okay, hey, what are you guys doing? You know, how are you doing this so fast? And then they started using it as well. So it became sort of viral. And then when I joined here, so RCIO, funny enough, you know, when we first met, we talked

about it. It's like, you know, hey, there's this amazing solution, which I'm using as part of my process. He was like, oh, yeah, he's ex-fidelity. One of the Canadaist founders is also ex-fidelity. So he had it very much on the radar. And, you know, it wasn't even a discussion to get up and running with it when coming here. Maybe just talk about your day-to-day life at LK advisors. What exactly is it that you are doing?

What is the daily workflow so that we understand how it slots in? It depends on the time of the year. Currently, you know, we're going into earnings season. So what we're doing right now is lining up our numbers across the models for the companies that we're holding, seeing where our estimates are. And then obviously, that's just like preparation work at the moment. The rest of the time is screening for new ideas, speaking to management teams, attending conferences, setting up calls.

And for all of this, Canada is extremely helpful because, you know, you always have a single source of truth, which we can refer to look at the numbers. and to get a better sense for where it is and how, you know, something that a management team may say, something that we like learn may impact our estimates and where and how they could potentially translate into value. That single source of truth thing is interesting. How historically in firms like yours or in your experience knowing other analysts and PMs, how is ownership of the model typically handled? Because it seems like one nice thing like you said about Canales is it's a single source of truth. Like it's almost its own ownership. You don't have to worry about it as much.

but how in the absence of something like Canales are models typically shared and responsibility for them shared between teammates? Maybe like even going back to the previous experience, I think generally in finance and I think most people will agree that models are sort of pure. The model on the company, the idea, whatever it may be, is sort of viewed as the holy gray. The numbers that people use based the estimates on of value. And it's sort of like the most things, sort of, you know, what is the impact of fill in the blank get X, Y, Zad. So people hold it a very, very high regard and people are very, I want to say, almost jealous of their model. And everybody thinks that if you own the model, you own the process and you ultimately like have to do. But the model also is it's usually in pre-canalist type of times.

It is extremely time-consuming and inefficient to maintain. The way it's normally like shared among sort of like teammates is usually it's quite easy for mistakes to sort of sneak in. And Canalist is great because there are no mistakes in their models. If you want to have something added, right, you can just read out to the support team and product analysts and they will mend it to your satisfaction. So thereby using Canalys, you don't need to worry about maintaining your single source of true. How would you compare how you use Canales from your sort of hedge fund days to what you're doing

at LK advisors? Is it different? Is it similar? Is it highlighted anything for you about the product or products? It's a bit different. I think in my previous role, the coverage universe was a bit more fixed, a bit more Europe-focused. So it was more about updating, maintaining, forming a rolling view. I think in today's role, it's very different because our coverage and our universe is basically global.

So when I came in, I had to think of, okay, so how can we actually like leverage this? And one of the thinking was, for instance, I was very keen to build a what I would call a quality scorecard, which would allow me basically to, when you have to think about across developed markets, what is what most of what we do, potentially even like some emerging markets, how do you compare, cross-compare companies on a qualitative basis? So we started building out this process, which looks at more than 250 KPIs, to help us build sort of a score card, which helps to score any company along those KPIs from one to 10. And this is a process that we found very well.

working for us. And that without Canales, I mean, it would have been virtually impossible. Taking years or something. Yeah, it would have taken multiple years, multiple years. What do you think is interesting about where you sit? You know, you're in London. Obviously, a global coverage in universe is probably a little bit more important to you sitting there than if you sat in New York or something. How does that transfer into the use of Canalist and the global nature of what you do? Canales, over time, since I started first using the product, they have expanded massively, and wider, especially like European companies, as well as EM and developed Asia companies. So the universe has expanded tremendously.

The other great thing is, you know, we work closely with their product team to make suggestions on sort of, you know, companies that we care about and companies that we know, sort of, you know, people here in Europe care about. And they are extremely reactive to initiating and launching on new models when we ask them to that gets put on sort of like a wait list. So, yeah, we continue doing that. as we take an interest in different companies in Europe. And I think the roadmap is sort of, you know, to get to like 10,000 companies slash models,

which is a pretty wide scope. What do you still do that's, I'll call it very manual, that you don't think is too high value and you wish could be automated? Another way of asking it. I was like, what do you hope is on Canales product roadmap? I think it would be nice to have something what I would call a by-site consensus. If you ask many people in the industry today, buy-side consensus is this. very elusive concept of whisper, what some people may even call,

right, second sort of unformed expectation and it may vary. What would be amazing would be to have some sort of channelist user-weighted, anonymized average of what are actually the users on the other side thinking, and then, you know, sort of providing an opt-in or an opt-out, whether you kind of think you want to participate in that. I think that would be amazing. The other thing is they are currently working on this Canvas platform, and we have an internal developer who's working with their team to scale this scoring mechanism that I have just mentioned to you through a Python-enabled web platform to basically run that even at large a scale through the entirety of their platform. And as that becomes basically more life and more consumer-friendly as their website, I think that could open up very exciting opportunities and use cases.

down the line. I'm curious, Giuseppe, if there's anything that you think is lost in the process of outsourcing some of this model updating, another way of asking it would be, you know, if you're updating these things manually, does that give you some sort of felt sense for the business that you can't get just by looking at the numbers? And do you think that's worth that at all? I mean, obviously, you're a big catalyst user, so I can guess your answer. But I'm just curious whether there is a downside to, I'll call it, outsourcing some of this manual work around updating the models. I think the first part is that once, you know, when I remember when I open my first panelist model, you see all these things and it's more like, okay, how does this work?

Right? You look like an introduction. It's like, hmm, you know, I like it, do I trust it? And I think it's more when you have your sort of, you know, the companies that you know, and you follow them and you have a sense for the history, obviously, you know, you need to look at the numbers and you just anecdotally get a feel for what it is. But I think the beauty of canada is, again, I mentioned, right? So you open a catalyst model, there are five tabs.

and they have these beautiful summary sheets. And I almost find it a lot easier to just look at those trends and get a sense for how something has performed, what is driving X, what is driving Y. They actually enhance, in my view, that process of understanding what is going on. I had this debate with multiple friends. And my view is that it's totally overrated to say, sort of, you know, you need to build the model to entirely understand the business. I think you just need to look at the numbers, understand and how they flow, which is what Canada helps you with and do. I think the other thing that I found super helpful that initially wasn't as intuitive

is their custom templates. So Canada says like standard templates or an LBO, a DCF, coms, all these usual things. We have our sort of proprietary process of how we look at things, how we value things, the score cut that I've mentioned to you. So we spent, we invested a decent amount of time into the, like building our own templates that correspond to our process that work exclusively like on the kind of platform. Once we scale, we put in that, you know, it incrementally helps us understand and make sense of a business and whilst we can, you know, continue to comply with, you know,

how we do things and how we think about things. Awesome. Well, Giuseppe, thanks so much for taking the time to do this today. Really interesting career arc that you've obviously done a lot of modeling. So a great set of experience to understand why this is valuable. Thanks so much for your time. Thank you. episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.