Investing Billions - E334: Texas Tech CIO: How We Find Asymmetric Bets

Episode Date: March 26, 2026

Why buy an office when everyone else is selling? In this episode, I sit down with Tim Barrett, CIO of the Texas Tech University Endowment, to explore how he builds high-conviction portfolios across private equity, real estate, and hedge funds. Tim shares why governance, manager selection, and a generalist team structure drive consistent alpha, how he balances risk and upside with portable alpha, and why lower middle market investments can outperform flashy venture deals. He also dives into building team culture, aligning incentives, and using the endowment’s size and flexibility to access niche opportunities others can’t.

So, Tim, you're the CIA of Texas Tech Endowment. And out of the hundreds and hundreds of conversations that I have with Alicator, you're the only one really taking a deep dive on office space today. Why are you so bullish on office space? Right. I think if you pull the curtain back and look at office space in general, it's an abysmal story. And that's the headlines you see everywhere.

Our job as investors is to dig beneath that headline and see if there really is opportunity. Are we hitting the turning point? When we think about office now, the vast majority of office, especially second-tier cities, et cetera, we don't want to touch. but we think that there's a unique opportunity to buy at a discount to replacement costs, in some cases a meaningful discount, trophy assets in growing areas. We specifically like certain areas of the Dallas market and the Plano market. We think there's a lot of opportunity there to pick up high-end trophy assets with a population

that's growing in that area. And you'll see people migrate from these, call it Class B or A-minus buildings to these trophy assets. There's a lot of opportunity there. Is that just a rule in our actual? asset management in general where some of the best trades are one or sometimes two levels below the headline. So the headline says, do not touch this asset. And then when you dig down, that's where the health is made. I would say that's almost a quintessential rule of investing, right? If we can talk

about real estate, we can talk about private equity, private credit, just about any asset class you're thinking about. The pain part of that asset class is usually talked about pretty quickly. Like last week, it was software and AI's wiping out all the software companies, right? that's kind of the canary in the coal line for an investor to go look at his portfolio, specifically private credit in this case, and decide whether we have the right exposures with the managers and talk to them. Do you have exposure to software companies, specifically application type companies? Right. Enterprise is probably going to be fine. The application companies are in serious, serious hurt with AI coming.

So we think it's a perfect opportunity to dig down to that next level, have discussions with our managers, and try to find out how they're repositioning that portfolio. If you go upstream of being able to make these trades, it's really a governance question. It's a question of whether your IC empowers you to make that trade in office space, that everybody's saying stay away from it, but you see the alpha there. Absolutely. I've been doing this for almost 30 years. And I can, I've worked in a number of different places.

And I can tell you that governance is the hidden thing that nobody really talks too much about. And it can radically impact your ability to manage your portfolio. successfully depending on how tight that governance is. At Texas Tech, we have the government's authority to make those traits. We don't go to an investment committee for approval. Our committee is myself and my investment team. So we're able to quickly do a co-investment if one comes across our plate that we really like. Or if we want to go into office, we can do that. We're held accountable at the broad portfolio level to that kind of global 65 plus 35 benchmark, which is our benchmark. So that's how the Board of Regents thinks about our portfolios, are you beating that on a risk-adjusted basis?

And luckily for us, we are. But at times we aren't, right? I mean, markets go up and down. We're probably a little more defensive than that benchmark right now. And I think that's the right place to be. But that government's authority to allow us to make trades to move the portfolio around as we see fit is critical. Just think about a regular pension fund that may have to go to a quarterly meeting. They may have to go to two or three quarterly meetings for they get a change in the portfolio approved. That's pretty standard practice. A lot of times it takes two meetings.

That's half a year before you're even moving. To me, whether that's a co-investment or whether that's jumping into a new strategy, you think it's going to be very good for the next year, year and a half. You're missing a large part of that play, all because of governments. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster, and do it with leaner teams. With Alpha Sense AI-led expert calls, their Tegis call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer,

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slash how I invest. So your committee is telling you this is what we want, but it's giving you flexibility on how to get it, which is a subtle distinction. A lot of people think governance is either loose or tight, but there's also about giving people the ability to pick their tools to achieve the objective. That's exactly right. When you think about the 65, 35, we don't go down to the next level at the 35. So let's just call that stable value. It's benchmarked against the Bloomberg a global aggregate. Nobody on the regents or our investment resource council are telling us, hey, put money in the Bloomberg aggregate, put money in treasuries. Nobody has that discussion. We separately build a structure and a portfolio and we try to beat that aggregate, that benchmark

on a very consistent basis, but at a high level. So like we're usually running 500 basis points over that benchmark over time. This last year was an exception. I think the Bloomberg accurate, it was close to 8%. We're still going to beat it for the calendar year 25, but it was much tighter spread this year. It was a little tougher benchmark. But overall, we get to take and manage the risk profile of that portfolio. Many endowments, when I talk to them,

they talk about their alpha strategies, how they're contrarian. But then when you look at their returns and our asset allocations, they're very tightly banded. It seems like there's a hesitancy to go against the grain because there's so much incentive not to do that. What has led you to be more independent and willing to take risks where other endowments are not able to. That's a tough question. Other endowments is a hard thing to answer on how they invest in their

governance style. There are many endowments that, in my view, take way more risk than we do. And they build massive venture capital portfolios, which is kind of the endowment model. I would say, if you look back at our portfolio over the last few years, we had quite a bit of venture capital at one time. And it really wasn't because we planned to. It was because, I think it was 20, 22, or 21, where our venture portfolio shot up by over 100% in one year, right? Fast forward today had three years of no returns, right? So it's been flatline. We're starting to see signs of it coming up now.

And that's been like how endowments thought about adding lots of value is really through these private equity portfolios that were massive. Our teams got together and said, we actually don't even like that model. So we're probably anti-endowment in that regard. And we're lowering our venture capital exposure pretty dramatically in favor of what we think is a more consistent returning asset, which is lower middle market buyout. Yes, we may not get the highs that venture capital does, but we're going to be much more consistent in that space. And frankly, the companies are easy to underwrite, right? They have revenue. They have EBITDA.

There's a game plan says how many bolt-ons we're going to do on that company. And we're able to underwrite that much easier, at least my team, than a venture capital idea. Right. So whoop is a perfect example. We did a co-investment in Woop with one of our managers, loved the idea. Didn't have any idea that the ring thing was going to come out and six other devices were going to come out and make whoop not quite as valuable as we originally thought. I think venture capital is very tough from that regard. So we're kind of pivoting to a different way of managing the portfolio than I think the traditional endowment, if that makes sense. When we last chatted, you said that you like to spend a lot of your time with managers

talking to them about their best ideas. Maybe double click on what that looks at like and what you're trying to ascertain in these meetings? The manager selection and partnering with managers is probably one of the most critical things that we do, right? That's how we get our alpha. That's where we get it from. It's not like anybody in my office is doing really internal trading, right? It's all through managers. So that partnership is everything. So a perfect example of that was when we were in Europe, we were really trying to focus on small, nichey, secondary managers that we could find over there and we found one. And it was a spin out from another company. And we sat down and talked with them

about how would you go about building a secondary strategy and we partnered with them. I think we're the first institutional capital really to partner with these guys. For that, we get a piece of GP economics out of them. And we also have co-investment rights. And we negotiated rights in the future funds for capacity. This is a perfect example of like talking to managers and getting out on the road and finding ideas that really work for you and can add value. I would say the other piece of that is every one of my senior guys on the team, they talk to all of our managers minimum once a quarter. And some of the managers they're talking to once a month or once every two weeks to pay on how much dialogue they have with that individual manager. That flows through to the entire team

about ideas and what they're seeing in the market. It flows through at our pipeline meetings and it also flows through at our strategy meetings that we have. And those are every two weeks. So they're pretty constant updating on what the managers are seeing. Think of as just a funnel of knowledge, right? Is how we think about it. Scott Wilson at St. Louis, Washu, is famous for this. He would meet with his manager, and he would actually ask a very simple question, which is, what is your biggest position and are you at your concentration limit? And for those that were at their concentration limit, he would ask to co-invest more. So the idea was that if you have a concentration limit of 20 and you're 20 percent, you're actually underweighted. You still have to manage your

portfolio. And sometimes you have constraints as a manager. So he would look to literally co-invest into the manager's best ideas. He saw the signal that their best managers were actually underweight in their best ideas. We haven't gone through and done that per se. I think when we think about co-investing, which is really what we're talking about here, we really are looking for asymmetry in the co-investment. Five years ago, we did a lot of co-investments and we've really slowed it up. And we've slowed it up for two reasons.

When we went back and looked at it when we were doing lots of co-investments, and we did that because we thought we could one lower fees in two, to improve our returns because these were great ideas for managers, right? It had to be from a manager that was in our book that we trusted that was already putting it in their portfolio, right? So that was our way of like keeping the guardrails on and allowing a small team to still be able to do co-investments. It's what we found is that we still did too many.

The returns were kind of middling. Like they kind of did okay right around the fund returns, but they weren't providing outsized returns. When we look back and decided to really dig in and say, which one was. ones were outsized returns. They were ones that we really commented on the high asymmetry of the trade. And I'll give you an example. One of the companies that we invested in recently has contracts with the U.S. government. And it's a very technical company that uses lasers and atomizes metals to then print. Right. So you could, for instance, if you wanted print a missile or you could

print anything, really, anything metal. It does it at a super fast speed. It's an autonomous factory, basically, is what these printers become. And we looked at the contracts that they had that were coming in, and we said, this has a lot of asymmetry in it. We're already protected by the first few contracts that came through. If they're successful in any more contracts coming through, that's pretty sticky money when you start talking about Department of Defense. So those were ones where we had success at. So we really look for that asymmetry, we really look for locked in contractual income that we know is going to come in those deals. And we'll go back. bigger on those.

When you meet with a manager and they present you an opportunity, how do you know that it's something that you should double click on? That's a great question. It goes back to a little bit of that asymmetry, right? I think the second piece that we think about is how successful, like if we have a manager in the book and he's sending his stuff, how successful have we been with that manager? Because most likely we've been doing other co-investments, right? If he's proven track record, the one that he's feeding us over time that they're working,

we have much more confidence to continue that process. And then the second step after that is individual underwriting of that deal. Is it like the other deals we have in the portfolio? Is it differentiated and does it have asymmetry? And does it have long-term stain power contracts? If we see that, we like an 11. Curious, you mentioned asymmetry. So on one end, that's potential 10X.

On the other end, oftentimes it's a zero. How do you think about that? Do you have to present the zeros to the investment committee? Are you presenting on a net basis? The symmetry on the downside, is that something that you care a lot about? Or is it just part of the game? It depends a little bit on what asset class. When you go to private equity and private credit, we're really looking for consistency.

I don't think we do very many co-investments at all that we think could have a zero. Back in the day, we used to do venture co-investments. Those definitely could have had a zero. But as we've moved more to lower middle market and growth investments for co-investments, we don't believe we're going to hit zeros on any of the ones we do. We think downsides and a lot of them could be, you know, single digits. You could have that kind of downside and upsides could be, you know, 30, 40, 50 percent kind of IRAs on those trades or multiples in the three to five X. There's very few that we underwrite where we go, oh, we think we can get a 10X.

I think there's only one in the portfolio that's been mentioned that we think we could have a 10X on. And most people don't even pay attention to that because it's, it doesn't happen very often. tying back to what we talked about earlier, you said that you went away from heavy on venture to more lower middle market in simple ways. They have somewhat similar returns, but venture once in a while will have this huge outperformance. We'll have this 10x fund, which is much more rare these days. What are the second order effects of having a more stable portfolio and focusing more on lower middle market versus venture? What are you solving around? The first thing a CIO solves around is ensuring that his stakeholders are happy.

because that is your career, right? So when you think of the Board of Regents or donors at Texas Tech, what they want to see is consistent outperformance over the benchmarks. And as soon as you introduce a ton of venture, that volatility and that ability to have two, three, four years of middling returns creates a lot of stress on the time and a lot of political stress. From my standpoint, that's probably the main driver of wanting to push that direction. the second piece has to do with benchmarks.

It goes right back to governments again, right? So some endowments will have a venture cap benchmark, a buyout benchmark, a growth equity benchmark, and they blend those three together, and that's what they're trying to be. Well, if the benchmark has 30% venture in it, you're naturally going to push to 30% venture because you're trying to match that benchmark up. So whether venture is a great deal or not, you're in it. We don't have that. The acquies our growth benchmark.

equity plus 100 for the entire growth portfolio, whether it's public equity, long short equity, private equity, real estate, whatever. That's what we're trying to beat. So when you think about that as your benchmark, if you're not compelled to invest in venture, you're compelled to invest in something that will build a portfolio that will consistently beat that benchmark and beat it handily, right? Not just by a little. In the private, you probably want to double that benchmark at least, right? I don't think that's possible in years where acquies run at 20%, but that's rare, right? Let's happen the last few years, that's not going to continue. The heck we overtime, 7, 8% return. So if we can get high teens to 20 in our private asset portfolio on the growth side,

that's all brought. And that's what we're trying to do. When I had Larry Cochard, former CIO McKenna, UVA, and Georgetown, he talked about this. And he also had a storied career over many decades. And he found that what's very underrated is the sustainability of the endowment strategy. What does that mean? It's all fine and dandy if you could get 9% versus 8% for seven years. But then if a new CIO comes in and then they have to sell via secondary and then the next two years are 6%, you're going to end up at the same 8%, versus if you actually have a compounding strategy that could survive over many decades, you're actually going to outperform a very spiky portfolio that the stakeholders might not like.

A couple different things when you think about that, right? I think the first one is governance and turnover. If from a governance standpoint, the university in this case is not taking care of its team and paying people appropriately, you're going to have massive. turnover. Every time you turn over a private equity guy and hire a new one, he has a new strategy that he wants to implement. There's always turmoil and change. If you hire a new CIO, that's a gargantuan wholesale change at the portfolio level. Like we run portable alpha, we run different strategies. Most of that stuff would probably be wiped out by the next guy.

That sustainability partly is driven by governance and how they manage the relationship with the Office of Investments at the University. The second piece is sticking to your long-term knitting, right? Obviously, we're not in some ways, right? Like, I'm moving away from venture. We're making that smaller to go to lower middle market. And that's after probably seven, eight years of building out the venture portfolio. Now, we're going to keep the ones that we like the best in that portfolio,

but we're shrinking that exposure. So I would say in some ways, we're not being sustainable in the venture portfolio because we're not doing it at the same size. But I still think by going to lower rental market, it's a better portfolio for us. But those changes happen all the time in portfolios and hurt that sustainability. Portable alpha, it's a big buzzword in investing. How would you explain portable alpha to an eighth grader? Support for today's episode comes from Square,

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book appointments, man and staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works.

Check out is fast, receipts are instant, Sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. Experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are. In store, online, on your phone, or even at pop-ups, and everything stays synced in real time.

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That's S-Q-U-A-R-E.com slash go-slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from, Square, the all-in-one way for business owners to take payments, book appointments, man and staff, and keep everything running in one place. Whether you're selling lattes, cutting hair,

running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. Experience is smooth. for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups,

and everything stays synced in real-time. You could track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go. And when you make a sale, you don't have to wait to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so their best customers keep coming back. And right now, you can get up.

to $200 off Square hardware when you sign up at Square.com slash go slash how I invest. That's SQUA-R-E.com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. It's a great question. If I think about portable alpha eighth grader, I would say market exposure, we get very cheaply. Now, we do that through a swap, but you can think of that as the same return as an index fund. Right. So we're getting at the same return. What we're getting out of doing in a swap is we're not putting any money out really to get that exposure. So let's say we want to put a hundred million

dollar portfolio together. I'm going to buy a hundred million dollar swap on the acquit. I've spent no real money. So what am I going to do with a hundred million? This is a levered trade, right? So I get the exposure of the market for a hundred million. Now I'm going to take that hundred million. I'm going to put 70% of it in multi-stratt hedge funds, maybe some short biased hedge funds, stuff that doesn't correlate with that $100 million of market index exposure or very lowly correlated. And then I'm going to put 30% in treasuries. Why do I need the treasuries? Well, I've got to put the money somewhere.

You can't put it all in locked up hedge funds because the market will draw down and then the guys that sold you to the swap are going to want to get paid. When it goes down, you've got to pay money in. So you need that for when a drawdown happens. That's how Portable Alpha used to run for decades. I ran it through the GFC that way of San Bernardino. That was a pretty harrowing time. And it really highlighted the faults in Portable Alpha, to be honest. Because when the market goes down that fast and that long,

you're constantly chewing through your collateral. And you're getting to the bare end of your collateral. So if you're going to run Portable Alpha that way, you also have to have the flexibility to completely take beta down. You need wide ranges. So if the market really gets in trouble, you need to be able to reduce your equity exposure by like 20%. And having that kind of governance structure is also difficult to get. So portable alpha is very tough for most people.

But the idea is beta and an index fund. You take the cash, 70% in hedge funds, 30% in treasury. So that's the old way to donate. So another way, you have $100 million in an index fund. Let's just call it S&P 500. And then you're borrowing against it and you're putting 70% in multistrat and 30% in cash. And that 30% is a cushion. against the portfolio going down.

That's exactly right. Differentiate Portable Alpha versus how other people will do Alpha, they'll put $100 million into a fund that tracks both beta and alpha. But here you're actually getting exposure to the alpha through the leverage. We are, right? The leverage in its fact is your market index is levered, right? It's a swap. So you get your leverage there.

And then we're also putting more leverage on at the alpha level, which allows us to put more treas. behind the market index. The reason it works is because you're in the alpha pool, you're levering your least correlated asset. So if you think across the whole portfolio, the one thing that doesn't move around with the market that much is that alpha pool and that's what you're building it for. When you build an alpha pool, you build it based on draw down risk and correlations. You don't build it to maximize returns. You want high returns, you want good returns, but your focus has to be on the downside and the correlation. And that's the trick to portable

So now when the market goes down, you still have the Treasury buffer from leveraging the multistrat position, the uncorrelated part, because it's not correlated, it's the market going down. So it's unaffected. That's correct. It's generally unaffected. You can have like a 30% correlation, but we stress test the heck out of that and believe that we can handle a 50% drawdown. And we look at it every week. Last year, it ran 800 basis points over the index.

the average global equity manager, if they consistently deliver between one and 200 over, like there's probably only a handful of those guys in the whole world. Like hardly anybody, you look at S&P Persistence Report. Active managers can't beat it. That's why we do this. Texas Tech is at $3.3 billion, which is no small amount of money, but it's certainly not Calipers. It's not you, Timco.

How does your size give you an advantage over other allocators? I would say we almost have a Goldilocks portfolio. think anywhere around three to five billions an amazing portfolio to run. We can do a lot of things that move the needle that are Utimpco or a TRS here in town. They just can't do. We just recently went into a lower middle market secondaries player in the United States. It was a pretty small firm. Their fund is like 300 million.

We took a pretty good bite out of that fund and we're taking co-investments for those guys. TRS or UTEMCO, they would take the whole fund. So we're able to get into these what I would call niche year lower middle market investments. And it's meaningful to us, right? 20 million is 1% of the endowment because we run two pulls of capital, $2 billion on the endowment about $1.4 billion in operational. So $20 million is really meaningful.

These guys, they can't even move the needle doing that. It's not worth doing the deal. They want to put $100 million to $300 million. checks out. That is a massive advantage. I think the second advantage goes back to what we talked earlier as the governance. We can react quickly on all of that because we aren't going through a committing process. You last chatted. You said that you like to hire generalists on your team who are senior. Double-click on that strategy. I've probably always been a generalist guy. Sector specialist or specialists in general, that whole concept. The larger you are, the more

that makes sense. At our size, we wouldn't have the budget to even hire enough specialists to cover the market, right? I think that'd be very difficult for us. What I like about the generalist approach is it's about total portfolio management thesis. If I have a specialist in healthcare, health care is always going to look good in private equity health care to a healthcare specialist. He'll always find stuff to do and put money in. But he's not thinking about industrials. He's not, he's not thinking about real estate. He's not thinking about anything else in the portfolio. He's hyper-focused on the health care space. Will he find good deals? Probably. but if the beta of that market is not good and is struggling, he'll still put that money to work.

Whereas a generalist, I want them looking across the portfolio. I'm not even, if you think of my generalist in credit, he's public and private credit. I want him to think about that, but we also use hedge funds in our stable value and other strategies. I want him understanding knowing those as well because is what we want is the best risk adjusted return, whether it's in your book or the hedge fund guy's book. Having the generalist for me allows the team to think more whole. holistically about the portfolio in the same way I think about it. And it gets buy-in from them that, hey, why are we doing this hedge fund strategy versus another private credit? We're doing it

because we think private credit's starting to get long in the tooth. We're a little worried about the economy. We'd rather have more defensive posture right now. So we'll put in that hedge fund. That might be the discussion that day, right? And I just think it allows a better total portfolio management approach. You're not creating the wrong incentives in terms of investing. And you're also, although you have a generalist layer on your team, you're partnering with specialists. So you're going lower middle market, secondary person, somebody that spends all their time in a very specific niche. And you're having the generalist part of your team member, manage that relationship and basically get abreast on the opportunities in that niche. I was just describing the team portion only.

But you're absolutely right in the manager side, right? Like we have exposure to Orbomed. They're our healthcare specialist. They're phenomenal at what they do. We haven't been in venture. We haven't made credit. And that's all they do for a living. We think you need that exposure.

but I don't need somebody on my team that's a specialist in that excursure. I've had over three decades of dealing with people, managing, developing them. What's something that you've recently changed your mind around talent management? The biggest thing for me, and this is probably, unfortunately for me, it probably occurred in the last 10 years of my career. I didn't pick up on this early, was I always believed early that investment skill set was, are you a CFA, did you go to a good school? Where did you work? What did you do? Let's talk about the deals you did or the funds you hired, et cetera.

And I really was hyper focused on investment skill. And as I've done this for decades now, yes, you have to have that in this field. But that's just the table stakes. That's what gets you into the game. If you're in the game, you probably already have that. And I kind of stopped worrying about that part so much and really started focusing more almost on culture. and drive than the other two because what I've found is that even if you hired really smart investment guys, if your culture gets fractured from bringing in a person that just doesn't fit or having one or two that don't fit on the team well, that creates way more havoc than having somebody that might not be quite up to speed in investing. In the end, I teach somebody how to invest and how to think about managers and how think about strategies. And I can walk them through

analysis and show them what to look for. What I what is hard to teach is culture and fit. That that to me is almost ingrained in a personality behavior and how you behave. So to me, that whole personality and culture fit is taking a much bigger driver in how I hire. How would you describe the Texas Tech culture? Very open. Our doors, we all sit within 20 feet of each other in the office. And even on the weekends, like on a Saturday, people will call me or they'll be shooting text and emails. They're working on something. And it's just constant open dialogue.

Anybody feels comfortable walking into anybody's office and talking about an idea in their portfolio or just being a channel check. You know, Mike, my credit guy will go over and talk to Clint about a credit deal and see what he thinks about it. And they'll have big dialogue on that, you know, outside of our strategy meeting and outside of the pipeline meeting, they'll do these things. Everybody's fighting for the same thing. We all get paid on the same bonus for total portfolio performance. And it's that open culture that really drives success in my opinion. Did you come up with that incentive scheme? And what are the tradeoffs of individual versus team-based incentives?

I did come up with the incentive scheme. And I was the one that wrote it up for approval. The incentive scheme is really based on outperformance over three and five-year periods on excess performance over the benchmark. It's also built on sharper ratios over the benchmark. And then the last piece is personal objectives on my view of how they've integrated as a team member. So those three components to me hit, hit what's really important. And the reason why I like it is because it's completely aligned with my institution's goals. So if we beat that 65, 35, 35 plus 100 over a long period of time, we do it with less risk through a better sharp ratio.

That's the Goldilocks scenario everybody wants. And they want it over longer period is not one year. So that's why the three and five year period. And the last piece of that is when you think about adding 30% of your bonus and it's more behavioral personnel, individual, that puts a line in the sand to everybody comes to work for me and says, hey, this is important. 30% of your bonus is going to be based on how you operate as a team member, how you operate in our organization. And I want to see openness.

I want to see dialogue. I want to see arguments back and forth about ideas. If I don't see that, you don't get that bonus. You just go to your office and do private credit. You're not getting a bonus, right? Have to be integrated. The incentive structure is paramount in how well an organization runs. Last time we chatted, we had this interesting conversation about head.

hedge fund fees. Not that you love paying hedge fund fees, but you're fine with them. Why are you fine with paying these exorbitant hedge fund fees? And how do you justify that? In the end, it's about net return. So I'll just take us back to portable alpha for a second because that's the place where we have the most hedge funds. And that's where all those kind of pass-through fees come through for the hedge funds when you start talking about Ballyas, D.172, these big multistrants. And the fees, they are a little egregious, but they run massive organizations. And no, we don't like paying them. No one does. But what we get is uncorrelated return. So true what they call idio return, idiosyncratic, meaning we've stripped away all the factor returns, all of that.

And if somebody can really deliver true idio return, that's worth paying for. What's not worth paying for in my mind is hiring a high yield manager to just give me high yield exposure for the most part, or hiring a beta manager, you know, a stock manager who, if I'm lucky, we'll give me 100 basis points of alpha. And basically, I'm paying all those fees for him to replicate the index. So when you think a market exposure, I don't want to pay anything for that. But if it's true idio, it's worth paying for it because it's uncorrelated. Said another way, if you're somebody's just tracking that's a B 500, and even if they be by 100 points, but you're paying 2 and 20, which is the equivalent of 600 basis points, you're losing 500 basis points. Versus if you're just

using them for the alpha and they're getting you a return of like we mentioned earlier, 800 basis points, than paying some small percentage of that makes sense. That's a perfect example. We have multi-strat credit managers in Europe and the United States that blow the doors off the bar cap consistently over rolling three and five-year periods. And when I say blow the doors off, I'm like, one of them was up 17 this last year. Well, the bar cap was up eight. 17 is probably the high mark for that guy.

So it'll probably gravitate back towards 12. But that's fine. That's still beating it substantially over long periods of time. So we'll pay more for that as well, right? That's a hedge fund construct. They're moving the money. It's not beta-oriented. And we like those type of strategies as well.

When it comes to investing, what's something that you've changed your mind on in the past two years? We used to run a lot of tactical asset allocations when I was at San Bernardino. And we even ran it for a while at tech. And we found that over time doing it, we added a little bit of value, but a lot of consternation. There's a lot of stress moving the money around. and trying to tactically be right on the market, you know, over each three to six-month period. And we found that just being more stable and letting structure win is an easier way to do it.

So portable alpha is just a structure. I'm going to always create my alpha on top of it, probably with about a 90% hit rate. Whereas if I do tactical, my ability to add alpha is probably closer like a 52, 53% hit rate. It's just harder. People have added value at that level. But it's not as consistent, and it's a brain drain. and you spend a lot of time doing it, and you could be spending your time doing something else in the portfolio.

You've essentially shifted this tactical layer down to the manager. So if you think about what are these multistrots doing, they're basically trying to fit the best strategy, but it allows you to essentially off-esgate that layer from your day-to-day, so you're not constantly making 53-47 decisions. You're hitting on a key point of good portfolio construction. So whether we talk about the alpha pool, they're picking stocks long and short.

So they're already picking winners and losers in doing that. They're also picking different strategies within the multistratts, as you said. So that's a layer of what I call dynamic management. I don't have to do it tactical. They're doing it. The other place that we do that is in the multistrat credit guys, right? They're being dynamic moving money around into credit markets. I don't have to try to figure out.

Do I want to be in triple Cs in high yield? Do I need to be in double Bs? Where do I need to be? We're not trying to figure that out. We're outsourcing that. And that's how we think about being dynamic in the portfolio. And we think it's better than building a tactical overlay. Again, if you go one layer up, why does it matter that you're spending all this energy

of being tactical in your portfolio? Well, there's opportunity cost to that. And that opportunity cost is spending more time with your managers, finding the best opportunities and generating alpha where you could actually generate alpha to the manager relationships versus being the best hedge fund manager in the world. It's very difficult to outperform 0.72 of Ballyasne, which essentially is on the other side of any tactical move. I'd rather have my guys spend their time on finding the next really good manager in a strategy

that we think has a lot of opportunity, then thinking about how to shift it around. Like our manager lineups are pretty stable. The portfolio has been built up for a while. It's working. There might be one or two managers that come and go each year, but it's not very many. I don't want to put words in your mouth,

but it seems like you tolerate a lot of spikiness within specific domains of your portfolio because you're able to construct your portfolio in such a way that smooths out the returns. Is that kind of your approach to it? And is that a philosophy that you adhere to? We try to think about the portfolio very holistically. each sub asset class has a focus on consistency.

There are different managers in there. Some are higher vol, some or lower vol. There's usually a mix in each asset class. And I think then what we try to do is then model that sub asset class and say, okay, how consistently will this structure beat whatever that benchmark is? If it's unstable value, it's the Bloomberg global aggregate. So if Mike builds a public hedge fund portfolio and credit,

how well does that do? And let's compare that also against our hedge fund book that's in that space. Where do we see the most consistency and how do we build those together? Should I be putting more in the hedge fund? Should we put more into credit? If in credit, which manager adds the best downside protection and improves the risk adjuster return? That's kind of the holy grail of how to structure those things together. It's very hard to do because managers change over time, right? So you've got to constantly keep looking at this and seeing if there's a signal in the noise that says this manager is taking more and more risk. And you've got to kind of follow that on a monthly basis and really look at that to see if there's changes going on. And that's where the dialogue

with the managers comes in as well. If you could go back to 1996 when you first started at San Bernardino County, so you first started as investor, what's one piece of advice you would have given a younger Tim that would have either accelerated your career or helped you avoid cost of mistakes? Be willing to go get your experience at smaller shops where you're going to get more authority and faster trained up because it's not a massive organization. That's how I spent my career doing. San Bernardino, people didn't want to go to San Bernardino. They wanted to go to LA or Orange County or San Diego, right? So San Bernardino gave me great opportunity. Within three years, I was CIO. Within like five years, I was CEO and CIO, right? All of a sudden I was running it as a young, very young person.

Probably shouldn't have been, but I got that opportunity. Why? Because I went to a place where a lot of people didn't want to go. So I think you can get a lot of opportunity in the world by thinking that way and opening up your mindset to other opportunities are a little smaller. My investment standpoint has been fairly stable over a long period of time in my view, and I probably wouldn't change it much. We take a lot more credit than most people, both in private and public credit exposure. I would say I do that more than my peers, and I still believe in it. I believe that that yield cushions the overall portfolio is really important.

What you'll see with our portfolio over a long period of time is we're in second and third quartile in the Google all the time. We're rarely in first quartile. We're rarely in last quartile. We're trying to get the middle of that distribution of returns and be consistent. And it shows up in our data. What we're doing is work. Works over a long period of time.

That's over the last 17 years it's work. And we think it will continue to work. Tim, on that note, thanks so much for jumping on and sharing your wisdom and looking forward to doing this again soon. Yeah, really enjoyed it, David. Thank you. If you found this conversation valuable, please click follow how I invest so that you don't miss the next episode with the world's top investors.

Thank you.