The Derivative - The Endowment Playbook: Balancing Long-Term Goals with Current Market Volatility

Episode Date: April 17, 2025

In this wide-ranging conversation, Jeff Malec sits down with Dave Morehead, CIO of Baylor University's $2.2 billion endowment, to explore the unique challenges and strategies of institutional portfolio management. The discussion covers Baylor's innovative approach to portfolio construction, including their successful deployment of volatility strategies during the 2020 market crash, their current cautious stance on equity exposure, and their philosophy on private investments. Morehead explains why they're shifting away from cyclical assets in private markets and focusing on secular growth trends in healthcare, technology, and consumer sectors.Particularly timely is their analysis of recent market volatility, bond market dynamics, and the broader implications of trade policies on institutional investment strategies. The conversation provides a rare glimpse into how a major university endowment navigates market uncertainty while maintaining its core mission of supporting education and student scholarships.Whether you're an institutional investor, family office manager, or investment professional, this episode offers valuable perspectives on long-term portfolio management and the evolving landscape of institutional investing. From helium gas investments to long volatility strategies, learn how one of the industry's thoughtful practitioners approaches risk and return in today's complex markets.You want to learn how institutional portfolios really work? You want to understand how endowments think about risk? You want to hear from someone who's traded it all and now manages billions? SEND IT!Chapters:00:00-00:55 = Intro00:56-09:33 = Hedge Funds to Higher Education: Dave Morehead's Career Pivot09:34-26:18 = Baylor's Endowment Investment Philosophy26:19-36:20 = Beyond the S&P 500: Uncovering Unique Investment Opportunities in Helium and Niche Markets36:21-46:30 = Hedging and Volatility: Navigating Market Uncertainty with Strategic Risk Management46:29-53:51 = Trust and Uncertainty: The Geopolitical Challenges of Modern Investing53:52-01:00:32 = The Long View: Endowment Investing Beyond Quarterly Returns01:00:33-01:09:39 = A Nostalgic Journey Through 80s RockFollow along with Dave on LinkedIn and X and also be sure to check out Baylor's endowment for more information!Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠.Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

Our purpose is to support academia. So everything on the endowment side is first like do no harm and tends to be risk mitigating and then within that you're trying to do the best returns that you can get. Welcome to The Derivative by RCM Alternatives. Send it! Hi, this is Dave Moorhead, CIO of the Baylor University Endowment, and we're here to talk alternatives and institutional investing on the derivative. How are you Dave? Fantastic. Good.

You're down there in Waco? Yes. I have never been. Give us the quick down and dirty on Waco. Yeah, Waco is a hundred miles south south of Dallas and 100 miles north of Austin. So in my wife's vernacular, we're about as far away from civilization as we're allowed to be. That isn't that whole Austin to San Antonio is just becoming one big megalopolis, right? Like you think the same thing will

happen in 50 years of that whole all the way out to Waco and. And it is yeah, Austin to San Antonio, as you mentioned is is pretty built up all along I-35. The the there's in Texas, we talk about the triangle that goes from Dallas to San Antonio over to Houston back up to back up to Dallas. We think our office thinks that what has gone on from Austin to San Antonio is likely to occur from Austin to Dallas. And Waco is right in the middle of that. Got it. And what, you're Texas born and raised? No, Chicago area. Not at all. Raised, moved to Texas in 2011

to take a job here with the Baylor Endowment and have been here since. All right, where'd you go to high school? Wheaton North. Wheaton North, all right. I thought you know our partner at RCM, Paul Rieger. I thought you might've been a St. Ignatius guide like my Paul and my son's there now Yeah, my wife and I were both Falcons

We eat north Falcons. Love it. Exactly. We were part of the DVC. So it was always the DVC versus the Catholic League What was the DVC? I don't even know DuPage Valley Conference. God was the DVC? I don't even know. DuPage Valley Conference. Got it. DuPage Valley Conference versus the Chicago Catholic League and a lot of basketball and football. What was your what were you? What was your sport? Tennis. Tennis. Nice. So how did you make it down to there? They were looking for

someone smart came calling up here. someone smart came calling up here? It was it was more an inquiry from me to actually endowments kind of across the across the country. My wife and I had grown up lived were going to school in the western suburbs in Chicago. And when my daughter was my eldest daughter was in second grade, she was asking if she was going to see me in the morning. The answer was no. I was working at hedge funds at the time and we were off to work and whatever before the kids woke up. And that started a line of inquiry of like, did I want that to be the case? Did I want to do something else? And that sort of snowballed into,

at that point in time, I think I'd been on the for-profit investment management side for 17, 18 years. And the question was, did I want to hit the repeat button on anything that I had done up to that point, or did I want to do something new? It wasn't anything particularly that I'd done that I wanted to do something new? It wasn't anything particularly that I'd done that I wanted to do for like the next 25 years and so we opted for something new, investigated the endowment space broadly and ended up

here. If you had told me 15 years ago that I would be living in Waco I would have said that you need to get your head checked. But yeah the first time the first time that we were here is the first time that my wife had been to Texas she saw the inside of our house here one hour before we closed and I'm still married so yeah that worked out apparently I did something right. And my warped brain doesn't hear the sweet story about spending more times with your kids. I hear like, oh, hedge fund, which hedge fund? So hedge funds, what were they doing? Yeah. So let me take you back a little bit further as you're in the Chicago area. So you know, some of these. So I worked at First Trust right out of school and then from there did derivatives risk management at the old CRT at the time it was Nations Bank CRT that subsequently merged with Bank of America of course and so I was sitting on their derivatives

platform which was in the Sears Tower at the time and then went from there to William Blair was doing sell-side equity research on transportation logistics and then specialty retail. Went from there to Richie Capital, working for a fellow that I had worked with at the bank. And then after four years there, I think, there was a group of us that spun out and started our own firm called Hydeview Capital where we were trading energy specifically and I was there for about six years before moving south. So you were on the whole you were on prop firms, option traders, equity firms. And there wasn't a plan there. That was just, you know, kind of where my interests led.

I will say that being in this seat where you oversee all of those types of strategies and trading practices has been extraordinarily helpful. So I haven't traded metals, I haven't traded softs, and trading practices has been extraordinarily helpful. So I haven't traded metals, I haven't traded softs, but I've traded almost everything else in the marketable space. So I cover marketables here. My colleague, Renee, covers private investments

for us here at Baylor. And we pretty much have like a sibling relationship. So, um, we talk a lot, we're always talking about marginal dollars, what, you know, should it go to the public side or the private side? What, what return characteristics or potential does she have versus what I'm seeing? And so, yeah, she prosecutes the private side and I, I look after the public stuff. And so, yeah, she prosecutes the private side and I look after the public stuff.

You're showing your age with First Trust and Sears Tower, two names that technically don't exist anymore, but we still call our offices right across from what we still say is Sears Tower. Come on Willis, whatever Willis Tower. I think they lease two floors and get to call it the Willis Tower. Right. That doesn't seem right. So and what was your favorite part of all those stops? The energy trading seems the most interesting.

I mean that, that I, and you were hanging your own shingle a little bit. Yeah, to me, trading the energy space is the hardest thing that I've done. It's, I mean, you basically have to keep track of three different things that are going on. You have to know what the economy is doing. You have to know what the market is doing, and then you have to know what individual companies are doing. And so if all of those things are aligned and headed up, then energy tends to go up. But there are more variables that come into play there, I've found, If all of those things are aligned and headed up, then energy tends to go up. But there are more variables that come into play there, I found, than, say, specialty

retail where that's really a US economy thing, right? How are consumers feeling and are they buying more, are they buying less? That one, to me, is a bit easier to to fair it out. I would say the thing that was interesting with all of it Was was the ability to do new things and learn new things my kids sometimes like I'm always last to Sort of figure out what's going around what people are saying, but sometimes it'll be like so what's your toxic trait? If I had one it would be that I get bored easily. Your kids ask you what your toxic trait is?

Yeah, or they're like in the conversation, they're like, they're like, yeah, my toxic trait is this. And they're like, dad, what's yours? Well, I've got that. They don't mean it like a trade. They mean it like you're in your life. Yeah, right. a trade they mean it like you're in your life yeah right right got it so yeah I in all of those it was beneficial to me to step into something new that I didn't previously have experience with learn it develop grow conceptualize it and and basically when I kind of get to that point, then I'm ready for the next thing.

So Baylor comes calling, you get the job there. That's interesting to me. So you guys think of the world in marketable and privates totally, even if there's asset class overlap? and privates totally even if there's asset class overlap? We do because our view is that things are better prosecuted on one side or the other. I don't subscribe to the seems to be a belief or a practice that if it's private it's necessarily better than on the public side. I think that there are a lot of issues potentially on the private side that haven't yet gotten, you know, brought to the fore or sorted out.

And sometimes people neglect to consider. And so private to us is something where you have to think long and hard because you're giving up liquidity. And it's not really the liquidity that you're giving up that is the problem. The problem is, is that you're giving up your optionality going forward. So once you make a commitment in a drawdown vehicle, that's a contracted cash flow that when they call, you have to send it. But of course, whenever they're calling capital, that may not be the

best use of capital at that point in time. And so necessarily, whenever you are signing, you know, subscriptions, papers for a private investment, you're selling a strip of options. And I think that most people don't think about it that way. And that short like an opportunity call, basically, right? Right. So, so, and then you end up a little bit over your skis, and then you're in a liquidity situation, you can't take advantage when you should and etc etc etc it takes you know three to five years to sort that out. And then we could argue right that there's a there's not just a premium anymore there's a discount right like for the privates

right well I was gonna save that for but we could dive in now like what Cliff Astinus calls, right, volatility laundering, right? Of, hey, we're going into privates because we know they don't give mark to market. We know the marks are a little smoother. So we're going into that on purpose. I think that's what drove a lot of private equity and the premiums. Yeah, I mean, if that's certainly not something that we think about, we're doing it for returns, period. People are getting into an asset class for that purpose, then yeah, you're sort of asking

for trouble because that's not the point of investing in privates. Investing in private should get you higher returns, but you need to take into account all of the kind of sold options. Yeah. But do you think they maybe not explicitly but implicitly in the numbers and look at the Sharpe ratio or whatever the volatility is lower this is a better investment or what you were saying before we don't really think of it as better or worse. It's just different. Yeah, yeah, it is different. And our threshold is to the tune of like 500 basis points annualized over whatever the public market comp is. So if it doesn't meet that, we don't do it.

And you'll see that across, do you ever come in, you're like, hey, we've got an private energy investment. We've got a on the public side, energy stocks and those have kind of a horse race internally of which one are we going to invest in? We do do that to some degree, at different points in time, typically we'll pick, we either want a particular category in privates or we want it in public. So I give you for example like 10 plus years ago you could give money to a

private equity energy midstream manager where they're developing pipelines you can develop that for three to four times EBITDA, and then you could turn around and take it public, and the market value it at, you know, 13 or 14 times EBITDA, right? So that was basically a private public market arbitrage. And so you should just do that. That doesn't exist today. But to the extent that it did, you should be doing all of that on all of your midstream energy on the private side, right? Because that's just free money. Yeah. So, you know, when situations like that exist, then we'll allocate all of the capital either public side or the private side to take advantage of that arbitrage, if you will, between private

and public markets. Right now, what we're doing is we're really moving a lot of the cyclical assets out of our private book over to our public book. And the reasoning is because when you're signing up for private markets, you're saying up for, you know, getting cash flows back seven to 10 years in the future. And none of us know what the economy is going to look like. We definitely don't know what crude prices are going to look like 10 years out. Same could be true with real estate, anything that's cyclical. Same could be true with real estate, anything that's cyclical. And we don't, because our purpose, our goal is so meaningful to the university. We're trying to help students go to school, you know, higher ed costs are going up. We're trying to create returns faster than the school is growing so that we can ultimately get to a point

where tuition increases stop and potentially go the other way. Because that's our goal, allocating capital to a strategy and then having a macro variable affect that eight years from now. And so therefore we get zero percent return on it through no fault of the manager yeah that's an opportunity cost that we

simply can't take and so we're on the private side we're allocating to categories that tend to go up and to the right over time and then we're putting you know the manager expertise on top of that. So, or just like private credit or what? No, for your for your listeners, that would be like we're allocating to healthcare, tech, and consumer. We're not doing real estate, we're not doing energy, we're not doing anything that's cyclical because we don't want to be standing there eight years from now. This is metaphorical, but we want to be standing there eight years from now, explain to a student why they have less scholarship dollars because

you know crude prices ended up at 30. Right? And cycl and cyclical to me, you're saying I would call it more like, as a secular trend. Yeah, like correlated to the economy or a yeah, right. So we're trying to allocate to things that have big secular trends like healthcare, are people going to spend more money on healthcare globally in 10 years from now than they are today? Yes, of course, right? Is technology going to advance over the next 10 years? Yes, of course. Is biotech gonna solve more diseases over the next 10 years?

Yes, of course, right? So like we wanna allocate to those things where the underlying is yes, of course. And then we have the manager expertise sitting on top of that. But surely I could get 25 people, 2,500 people on here to be like, Oh, we're short on housing, housing is going to go up to the right, of course. Right. You could.

And that's why there are markets and they can run their own program. But to me, you're saying not only like sure that's a factor and of course but that's got all these dangers to a slowing economy, higher interest rates, yada yada yada that the others are a little more insulated from. Correct. Yeah, we don't want to take a risk that we can't forecast well. And go back because I've never, do you think what the model you explained, so the endowments there to drive returns to help cover all

sorts of costs or mainly to provide that tuition assistance? Give me a little background on what Baylor is doing and then maybe if you can I don't know how much you know about other endowments but how that contrasts with others. Sure, all university endowments, but almost all of them, the largest portion goes to scholarships, whether that's 30%, 40%, 50%, almost all endowments fall into that category. And then there's another big wedge of the pie that goes to professorships. So if a professor has a named chair, for example, the yada yada yada chair in, you know, sociology or, you know, finance or whatever, the rules are backed by endowed dollars. And programs too are sometimes funded by endowed dollars. I think that there are some schools that have actually taken this into the athletic realm

where perhaps coaches salaries are funded by endowed dollars. So at the end of the day, well, could be. Yeah, I haven't heard a whole lot about that happening. I think it's new enough. And the future direction of that is uncertain enough that everyone is doing that on a expendable dollar spaces as opposed to an endowed dollars basis. Right. Because if if the industry or if the approach to paying players changed over three or four years, then your endowed account would need writing or something. So yeah,

most university endowments basically it breaks down to most of it is scholarships and professorships. There is some that is programatical and then the balance is general use. The general use tends to be 20% or less of the, of the distributions to the university. And you just said the keyword I was going to ask about the distribution. So we're not talking right? What, what's the size of Baylor's? So Baylor's endowments, 2.2 billion. Okay. There is a legal requirement

across which all universities operate that the operators of the endowed assets maintain intergenerational equity. It's a legal term. That means that the same benefit has to accrue to the students today and the students in the future. And over time that has generally been assumed to be about a 5% spending rate. If you earn 8% in the stock market over time and you

spent 5% sending those dollars back to scholarships and programmatic funding, then you would have 3% left to grow the endowment and inflation, you know, prior to the last couple of years was kind of 2- three percent for the prior 30 years and so that five percent spending rate is is generally where people gravitate to. Is another name for that law the anti Chicago Illinois law right they're like okay we've made negative 4%. Let's spend 40% and see how things work out. Yeah, that that doesn't really work. Yeah. Um, and this is who was telling me the Princeton I think can cover their entire.

I mean, how many endowments I guess I'll form in a question how many endowments out there actually covering that entire desired outflow? Yeah, not a lot, right? Because basically you would have to have donors that gave 20 times whatever the expense was to properly endow it and take it off of the college's books, right? It was fully covered by the endowment. So it's a lot of dollars. The people generally ask me, and it would hold true for Baylor, it would hold true for any other school, Northwestern. I went to University of Chicago for grad schools,

I'd hold true there. Do, you know, For some of these schools, Northwestern, University of Chicago, the IVs, the endowments are in 10 to $20 billion. Does it matter if I, the next donor, created an endowed account? And the way that I always respond to that is, I would ask the student who's, you know, receiving the scholarship from your endowed account, I,

I would guess that to that student, it matters a whole lot. Yeah. And so, and that's the difference between just putting it into the general endowment versus I'm endowing, I was a philosophy major at Union College versus I'm endowing, I was a philosophy major at Union College, I'm endowing a philosophy scholarship. Right, you can do that, right? So I couldn't endow an account specifically for you, because then I'm getting around the gift tax thing, right? So that's not allowed. But I could say, for any, for any union student

who is pursuing philosophy as a major, you could even make it more particular. Chicago came, you know, from a place east or west of the Mississippi River, that actually ends up being a contract between the donor and the university. They legally cannot use those dollars for something else. But then is that confusing on your guys' side? As a practical matter of like,

to me if you're like a huge hedge fund of funds managing all these SMAs, of, of like, this has to stay in a sleeve, and I can't have that in some super illiquid thing, where I might need to get that out. If you're right, if I had to keep track of all of those things, that would be very confusing. Thankfully, I don't. So how it works at most endowments, certainly the large ones is there's development staff that

calls people and asks for money. That money comes in if an account is formed. Treasury, the accounting departments at the university keep track of, at Baylor there are 5,000 line items that make up the endowment. They keep track of all of those. It gets unitized. So like a mutual fund. Yeah.

And when dollars come in, they buy units. Of the main. Of the main, we call it the Baylor University fund. Got it. And then on the flip side, when we're sending dollars back, those, that's just a distribution distribution just like it would be from a mutual fund. X number of shares are redeemed and then Treasury takes responsibility for making sure those dollars get to the right account and to the right place. So is there a little bit of a hack

there right? If you were in some venture capital fund that's going to pay a big distribution next year and I came in this year and endowed something I'm going to get that distribution from that without having lived through the 10 years of investment period, right? You, you, that's true, you would, we of course, mark everything to market. Yes. So there would have to be a little bit of, you would have to know things on your side. Yeah.

But go ahead, hey, hack it away people, send a billion dollars in and get that next distribution. Exactly. Yeah. Yeah. Generally, what's your guys sort of return target, risk profile, all that good stuff? Yeah, we don't.

And portfolio composite. Yeah. Right. Of course. Let me give you some perspective on how we think about the endowment philosophically. We're a little bit like, and most endowments are a little bit like doctors and like first do no harm. The distributions that we provide this year for Baylor about a hundred million dollars,

Baylor's budget on an annual basis presently is about a billion dollars. So the endowment is covering 10% of Baylor's budget. So from that standpoint, no endowment is going to be all equity, right? Because if you, and if we just take the current environment, if we talked about tariffs that are going on, we're unclear where that's going to sort out. But let's just say that there was a full blown trade war and everyone just stopped trading with each other. Then in that situation, the market could be down by 50%. So yeah, if that

were the case, and if you had 100% of your dollars in equities, then you go-forward years, instead of me being able to give the university $100 million a year, now I'm giving them $50 million a year, right? So to the extent that endowments take on a great degree of volatility, they're putting the future tuition at risk for, you know, for the students who are going to attend the university

in the future. And so almost all endowments come at the risk side of things first, right? We're trying to, in fact, in our spending policy, to even make it a finer fact, in our spending policy, to even make it a finer point, in our spending policy and what governs the distributions that are sent to the university, not only is there a smoothing function that sort of like over the last three or four years, it's looked back, but we can't send less to the school the next year than we did this year.

Right. So there's a floor built in. There's a floor built into the spending policy that kind of keeps floating up. It's in essence like in hedge fund land, a high water mark. Yeah. So once we've given the school $100 million, regardless what happens in the equity market over the next year, we're still gonna give the school at least $100 million.

And the reason for that of course is because academia doesn't move at the speed of the markets and our purpose is to support academia, right? And so if you think about that, and it could be the case if you rolled back and you went through, you know, the 60s or the 70s, and there was a lot of volatility and the equity market just kind of went sideways and something like that. And then you had like a tariff type thing and a big downdraft, you could get yourself into a lot of trouble if you were just, you know,

Now you're drawing down principle. Exactly. Right. And so and then at that point, you would actually Again, Chicago, see Chicago, Illinois. Exactly. And at that point, you're actually going against the legal framework that these endowments are set up for because then you're not being true to the intergenerational equity between today's students and tomorrow's students. Today's students would be benefiting at the expense of the future student. So everything on the endowment side is first like do no harm and tends to be risk mitigating and then within that you're trying to do the best returns that you can get and so this is why some of

the stuff like when you're comparing stuff you know I could have just been in the S&P you know 100% and that that's beat all the end of that well it's like not right 2 billion in Nvidia I could have solved all the exactly all texas's problems yeah and it could have until there's a tariff there and then it's down 15 percent and then the schools at risk so um i think most people on the endowment side who sit in my seat just don't comment when those things come up. But not only are they laughable, but we actually can't do that. Right. So like if I put the entire endowment in Nvidia, I would go to jail. Yeah. As you should. Yeah. And so what is right to me that lends itself to like we should just be in T bills.

But then you get the zero rate environment then you're in that problem too right so that's the that's the traditionally that's where all endowments were. So it's only been over the course of the last 80 years that endowments have migrated to they used to be stipulated legally that you could only be in fixed income. And then over time, what's happened is that equity allocations have increased and then alternative allocations have increased, right?

And so over the industry is changing, right? And as things do. And so I would say there are different schools, of course, that have different levels of risk tolerance, kind of obviously, right, as everyone. Different state laws the whole game, right? Well, all each endowment is governed by state law. State law has generally trended to be similar in this regard. So everyone's basically governed by the same laws. But it might be the case that a school particularly needs to get their endowment higher,

and so they are willing to take more risk to make that happen. Or it could be that the school you and this is the same thing with a lot of ultra high net worth individuals we have a lot of money we're just trying not to lose it right and so you get yeah i mean we do kind of compare school returns but that's also specious too, right, because there's a whole range of risk tolerances and preferences and needs, etc. for each different school. So in general, annualized volatility runs in a range from sort of like 10 to 15 percent. So it's not too different from the equity market.

I think equity market kind of over time is 14-ish. Yeah. The last, I think last 10 years, the top endowments are probably high 9%, 10% returns type thing. But we're like our, I can't speak to everyone else's, although I think it's very similar, but to give you some perspective on how diverse our pool of capital is, we're way, way more diverse than the S&P 500. Like it's not even close. And we own all sorts of things. We own makeup brands, we own

beverage brands. We particularly own like helium gas, you know, in addition to the energy stuff and, and what have you, well, we own. You're saying like actually have ownership on the cap table of those or own the own in the public markets? And the helium case, it's a private company that produces helium gas. And which is running out or there's a private company that produces helium gas. Which is running out or there's a shortage or something, right? Which is why we own it. So one of our sort of core tenets, one of the things that we try to do is we kind of look at things from a top-down perspective and where are the shortages, where are the bottlenecks in industries where demand is growing, and then we try to own either the companies, the assets, or the inputs around those bottlenecks or shortages, right? And all we're really

trying to do is set ourselves up in a situation where the wind is at our back. Right. And typically, like in the helium case, like that's not that doesn't move around very much based on what the equity market is going to do. Right. He goes into MRI machines. It's used in semiconductor manufacturing, it's used in rocket launches, so semiconductor usage is going up, rocket launches are going up, MRI machines are going up, therefore I want to own the thing that is in short supply. And we try to do that broadly across the portfolio.

I thought it was just huge kids birthday demand for the helium balloons. It's got industrial. But you're talking just in the equity sleeve of the portfolio, right? This would be in the marketable side of the portfolio. So we divided into, you know, the private side would be venture capital and private equity and buyouts and anything that has like a seven to 10 year draw down fund structure around it. On the marketable

side would be fixed income equities and what we call as marketable alternatives. Hedge funds would fall into that category. Anything that was hedge fund equity like but wasn't like a drawdown function, drawdown structure and was shorter dated. And what do you mean by drawdown structure where they can ask for more capital? So there's capital calls. So in our fund, privates end up being about 45% of the assets

and some of the bigger endowments, you know, those, like it was 60%, upwards of 60%. What we have found is that, or what we believe is that the equity market doesn't always go up. And the ability to move the flexibility to allocate capital into opportunity sets when the market is down is kind of critical. And so we've stayed right around that 45% level because what we found is if you go beyond

that, then when the equity market goes down, then you have this denominator effect, then the total private side like kicks up to close to 60%. People are still calling capital, it's contractual, you don't have an alternative there. And so in that situation, you end up selling of some of your public holdings to fund these private, but you're selling it in the whole, and that's what we're trying to avoid. So I would say at any end in time, we probably have more liquidity, um, then

we probably need, but then in situations like we're in today, that that's very beneficial. And then out of that whole pie, right? So the market of versus drawdownable, what does the alts look like? If we put, and I guess I'll ask you, how do you- On the marketable side, right. So on the marketable side, it'd be about 50% sort of

typical traditional fixed income and equity type funds. And about 50% would be alternative. Got it. Which might be, are they still might be have a beta to stocks? Oh certainly. Yeah okay. So it could be some energy hedge fund, some specialty China tech or something. something. And then what I would call true alternatives like macro or managed futures or long volatility that would do well in a market downturn, what does that allocation look like? If anything. Yeah, so that depends and that's varied quite a lot for us over time. I can take you back through it a little bit. Going into 2020, I mean we didn't know that there was going to be a pandemic, but going into 2020, we had about 15% of the endowment

in cash and long volatility. And that really came about because 17, 18 volatility was basically the cheapest thing on the board. And so the warehoused it. Yeah, we were buying it. We owned it. We probably went into the pandemic with about 80 million in long ball products, which was up about 60, 65% over that, you know, the second, I guess, March, April, May of 2020. At which point we sold it and rolled that into equities that were down 30%, right? So, fantastic. What did that look like? That was predetermined

monetization, or it was just, hey, this is crazy. Let's do an emergency meeting and come out with a rebound. Yeah, so we have the wherewithal, the staff has the wherewithal to move money around within, you know, percentage guidelines for each fund. And so like we all know that you know VIX doesn't stay at 80 for very long. So if when it's you know north of 60 you better be getting after it. So yeah that's you know I've traded vol before and yeah it's just kind of and it was likely going outside your band anyway right? So if you were it wasn, we didn't have that much. I think we were, I think it was zero to four or 5% that we could allocate.

And at the time it was probably, we'd probably allocating, oh, well, I don't know, 3%, two to 3% at that. And then as 2021 rolled on and stocks were going straight up, we sold equities. We bought long vol again. We started stock filing cash. 2022 happened, which was the tech meltdown. Because it wasn't an existential thing, vol didn't rock it up like it did during the pandemic timeframe, but it was

a 15%. We sold that we bought equities. And then, yeah, we've been pretty long equities up until about the fourth quarter of last year, and we took equities down by five, six percentage points. So at the moment, we have the least amount of long only equity exposure that we've ever had. So we're fairly sanguine about what's going on in the market these days. It doesn't meaningfully impact us. We have over the last two to three years been allocating a lot more to idiosyncratic type things like helium, right? It doesn't move.

We own via another manager, we own three Class B malls across the US and one in the UK. So there would be another example of endowments being much more diverse than just what the S&P 500 is doing. So, yeah, I mean, we're involved in all sorts of things as it relates to our exposure right now. We have the least amount of equity that we've had. I'm kind of happy to maintain that lower equity exposure for the time being. We have a number of things that are more idiosyncratic that are doing quite well and kind of bolstering our returns outside of what the equity market is doing. And any trend following managed futures exposure?

what the equity market is doing. And any trend following, managed futures exposure? We do have some, not a lot. We actually have it paired with some of our tech long only exposure. So we think about where our risk lies. And then of course, we're trying to mitigate risk. And so course we're trying to mitigate risk. And so let's see on the long only equity side we probably have about 10 percent where we've hedged it in addition to just having not a lot of long only equity exposure about 10 percent of our equity exposure is hedged. Some of that is hedged with trend following. Some of it is just edged with long haul. So we're trying to mitigate both the 2022 scenario where it's just the valuation drip, drip, drip, you know, for the whole year. But we also wanna mitigate some of the, oh my gosh,

existential risk, you know, pandemic happens. Yeah. And so the combination of trend following and longfall serves that purpose. And how do you personally over the years deal with trend following drawdowns, which we're in a pretty good one right now hasn't delivered, it's been way too choppy and whipsaw. Right. Exactly. Well, we don't own things. We are not a set it and forget it shop. So we started adding trend following actually Jan one. So we've had it in our book before in the past, but then there's a long period of time where we did not And we've just added it back Because equity valuations were high we didn't know how they were going to come down and to your point over the last quarter trend following hasn't worked to

Mitigate that down move that we've seen in equities, but the long ball that has. And so you would get in or out of it, not based on its own performance perhaps, but based on the greater picture for you. Correct. Now equity is super cheap, we're going to get rid of that hedge. Correct. Back into equities. Exactly.

In other words, not everything needs to be hedged all the time. Right. Right. In general, our view is the endowment can withstand a 10% down move. It gets really difficult for us if the equity market were down 40%. And so we hedge things sort of 10% and beyond. We're not, we're not, if the market's down 5%, we could really care less. Yeah. So let's talk, we're recording this had a super crazy week last week, which we'll say for the

listeners this week recording on Friday, but what not losing sleep at all just of interest are you staring at your screen going this is crazy? Like what are your main takeaways from this? I mean it's historically crazy right? The vol that we're seeing you know up and down 5% in a day is about 10x normalized vol so like it's for sure crazy um we were very attentive over the weekend uh as to what was going on it wouldn't have surprised me um of course the markets opened mond Monday down another 5% and then rebounded, but you don't know. I mean, when futures were closed, we were watching Bitcoin because it trades around

the clock, of course, and it was down 5%, 7%. So on Sunday, I was touching base with all of our managers saying, like, if we're down 10% tomorrow morning, how do you do? And, and then preparing for, if that was the case, who would we allocate to, to take advantage of those lower prices. But you're not thinking, where am I ditching risk and this kind of thing and deleveraging or thinking where am I, where can I get into things?

No, and, and the, the endowment itself is not leveraged, right? So the individual managers can take on leverage if they want to be risk. I should have said Yeah, it's not no We tend to do the de-risking bit like I mentioned in advance of a lot of these things so if if something doesn't make sense to us, we lower our exposure. If the Mag-7 being at 30 times earnings, that doesn't make sense. So we have very little exposure to those names. I don't think we've ever owned Nvidia, for example. So that helps us avoid divots, which if you go back to the central thesis of what an endowment

is about, that's the primary thing that we're trying to do. We're trying to avoid divots, and then invest after the dust clears. And so it's worked so far over the last 10 years. So we'll see if it continues to work. But we try to get out of the way of things that don't make sense, and then allocate quickly in behind them when they trip and stumble fall in their face. in behind them when they trip and stumble, fall on their face. Any, as you were watching the screen, any major concerns that bonds are in big trouble, US dollars in big trouble, like that the US is in trouble, right? If that's no longer a flight to safety, I don't know what the duration is on your fixed

income side, but like kind of how you think about that whole piece of this new puzzle. Right. I think what's going on here on the bond side, rather than anyone sort of manipulating bond yields, is if you think about it, we basically had, let's just say that the scenario that I gave before, it's metaphorical, but we can work with it. Say everything that is imported costs 100% more, right? And that's the way things were gonna be. And the stock market in that scenario is down what? I don't know, 35%. Yeah. And that would make sense.

Then you had a 90 day pause. You're just going to hit pause. Except for China, which is what 20% 15, 20% of our trade. At least. Value. Yeah. Yeah. And it's a, you know, the tariffs on that are 125. Well, now they're 125. I don't know. They could be 150, whatever, right? Let's say all the other ones come to some sort of agreement. Then you divide that 125% by 20%.

And so like, basically on average, everything that you buy that's imported is, cost 20% more. Well, that's clearly inflationary. Right. And I think that that's what long I think this expected value of inflation is what the bond market is doing. Right.

So I think that the administration was able to keep sort of 10 years locked down, if you will, until this tariff bit. And then people just start doing expected value math, which is not very difficult, and are going like, yeah, pencils out to be up 20% for everything, right? So then the back end should lift, and that's kind of what we're seeing. And I was on a pod last week theorizing maybe it's the

end of trust in the US markets and especially the US Treasury market of like, I don't know which way these guys are going there. Yeah, that I'm again off again, is there maybe a little bit certainly that's, you know, that the foundational requirement for the function, you know, financial markets is trust, right. And that's why economists, of course, are saying that the damage has already been done because if I'm a CEO and I'm making $20 million a year, making whatever it is that I make,

and I have the ability to ask my board to spend half a billion dollars building a new plant in the US, am I going to do that? No, because it's going to take three years to build that plant. And in year five, we might have a new administration that changes the rules again. And so then I get fired because I spent half a billion dollars on a manufacturing site that now has no use. In the most expensive spot in the world.

So is manufacturing coming back to the US? No, of course not. Now will it go to other countries like other than China? Yeah, it will and it already has, right? Hence Vietnam being a target, right? So that will continue to happen. I would not want to be a supply chain vice president right now. I think that's realistically the point of the spear. But yes, when you've sort of had the rug yanked out from under you, and the decision makers are people that are making, you know, 10, 20, 30 million dollars a year at the at the top of these big companies do they want to risk their income to potentially spend you know 200 million 500 million to build a factory in the us no of course not that's a good i haven't heard that

take before like not because it's bad for the shareholders, but probably also bad for the shareholders, but they're like looking after their own skin. Of course. Yeah. Right, they got to pay that the homeowners fees on that house and Jackson Hole or whatever. They can't be getting rid of that 20 million dollars a year. Right. Talk for a minute, we touched on a little bit. Is it hard for you or hard for endowments to write all everything we just talked about is kind of short term, but you have this super long term view. So right, like you have to transact and you have to act in the short term, but you're having a, as you said, seven, eight year view.

Right. Like, is that mentally difficult for you guys? I think it takes- Or helpful. To me, it works very well. So, and let me give you some perspective around that. I would be a terrible floor trader, right? Like in the pits in Chicago,

I simply can't process the change that fast and make it to say I would be penniless and hungry if I had to be in the pits in Chicago, right? That's not my shtick. Likewise, I'm not a very good trader as it relates to what our next quarter's earnings going to be. There are a lot of the pod shops that are like really, really good at that. That's not kind of my shtick or my strength. I prefer to think in a top-down manner over the course of six months to three years. And the endowment space actually suits that type of thinking very, very well, because we can lean on longer dated. We don't have to have returns today, right?

Like Podshaps have to have returns today, right? Otherwise, the capital leaves. I don't have to do that. We own our capital. Our capital isn't going anywhere. And so I don't have to worry about making money today and therefore I can lean into things that are dislocating and might take, you know, six to 30 to 36 months to work out. For myself, once you get beyond sort of three years, I'm like, who knows, right? I don't know if Israel and the countries around it are still going to be at each other's throats. I don't know if Russia and Ukraine are still going to be at war like it's like, that's too far for me to see. But over the next two to three years, I think I think it's, it's not too

difficult to ferret out like where things are headed. And then we invest around that. If we were good at predicting where things were you know seven or eight years in the future then we would do the cyclical bits on the private side right now because we would be able to really like I know that in seven years crude's going to be at 30 or 120 and then we would invest that way. I don't and so therefore we don't. The and do you think right, this kind of leads, I guess to why an individual there's a lot of family offices are trying to adopt endowment models, even some individuals, but is that a

mismatch, right? Like, if I put an endowment model on my 401k, maybe that works, but in my Cod's kids college account, probably not, because I'm going to need all of that money in six years or whatever. Family offices are interesting because the families themselves actually play quite a big role in how the investing goes. Now it depends on one family to the other, but It depends on one family to the other. But the central thesis with all family offices is that obviously the family has done something right. Yeah.

So whether it's in energy or real estate or owning a company, et cetera, the family has been involved in business previously. They know how to make money and they've actually been extraordinarily successful at whatever it was that they were doing. And so a little bit by definition, you in that case are working for someone who to some degree is potentially better at the money making, but then you are. Yeah. So from that sort of foundational underpinning, family offices, often, the professionals, the investment professionals that work there, tend to have more of a dialogue with the patriarch or matriarch of the

family who has gotten the family to that point, to that financial position more so than exist in the endowment space. Right. So we know Mr. Baylor. Correct. We meet our board quarterly and in between those times they're available if we have a question or a concern or need some assistance with something but otherwise they leave us to implement the plan

that we've talked with them about previously. I'd push back a little on sometimes the family office patriarch whatever is has the like entrepreneurial trap, right? They think they're good at all this other type of investing because they've had all the success, but it's doesn't correlate necessarily. Yep. That's true. Uh, you get that a little bit with doctors as well. Right.

Yeah. Doctors, actors are used to being the expert in the room and saving people's lives and that doesn't necessarily translate to finance. And then my experience in Texas is you got a lot of oil money that wants to just keep doing oil money. And so from that standpoint, we know a lot of family offices around the state, of course. And from, and from that standpoint, the investment staff then are taking exposure that's significantly different than what we're doing because they may

have a company, a business, an asset, a sector that like dominates the family's wealth, it might be 50% or more of what governs that family's financial situation. And so they actually then wouldn't invest at all in energy on their own because they already have this big, you know, oil asset over here. over here. Way in the beginning we mentioned some of the private stuff has issues. Want to elaborate on that? I think we touched a little bit on it of the drawdowns and then to ask if in this right, what are Nasdaq's down 20% off its highs? Are you starting to see some privates not do distributions?

All that kind of good stuff. So let me answer the first question. Yeah. You know, you've seen this from Congress or from the regulators is that basically there's been more focus recently is that basically there's been more focus recently on the transparency of what the management company is paying for and what the LPs in private funds are paying for and making sure that if the LPs are paying for something that that is then disclosed, right? So no, in the in the pod shops, for example, those are often sort of like costing 20 types of things. So like almost all costs can be rolled into that. That is a big article is like 50% or something. Right. The, the, the private funds are not set up as cost in 20, but if the, if the

principles at the fund do consulting work for one of the companies in the portfolio, there's a question of like, if that consulting fee, like where that goes, or does that get backed out against management fees that the LPs would be paying anyway, right? So there, I think that the, just like any industry, as it grows and gets bigger, it gets the attention of regulators, it gets the attention of lawmakers, and it wouldn't surprise me if there were more transparency requirements around all of the cash flows that are going back and forth between portfolio companies and the management company. Which is weird in my world of regulated futures and commodity pull operators that's already in place. There's all sorts of regulations.

And that was, and your business was around much earlier than, you know, the build-up and growth and the private fund universe. And so it's not a surprise, right? The regulations and whatever that exist in your world at one point didn't exist. And then there were some bad actors, whatever, and then there were regulations around that, etc. This happens in every industry. And so it wouldn't surprise me if more of that is forthcoming on the private side. It'd be bad for the private jet industry. They can't, well, I need this jet to fly out and see my private company in Michigan.

And how else am I supposed to get there? Yeah. No comment. I'm not sure where that's going to land. Yeah. And then because you mentioned Podshops, you guys invested in some Podshops Yeah, no comment. And then because you mentioned pod shops, you guys invested in some pod shops and there's been a little bit of like they're getting too big. I guess it's kind of what you're saying.

But what's your thoughts on that as a strategy and where it fits kind of in a portfolio? Yeah, there's a number of things that we don't do. That doesn't mean that they are bad things. They're just we can't do everything and we have a particular mean that they are bad things. They're just, we can't do everything. And we have a particular strategy and approach to doing things. We don't do private credit. Uh, we don't do odd jobs. Um, at the end of the day, we are effectively running what the pod

shops themselves are running. Right. And we feel capable of allocating capital between managers and strategies on our own. So we don't feel like we need that additional help, if you will. You don't have a center book. If one of them are on here, they'd be like, well, the real strength in it is having a center book and offsetting risk in real time and yada, yada, but. Yeah, I think if you plot all of the endowments risk and return I don't

believe that there are any endowments in the country that have our same level of risk and higher returns so we're doing just fine on the risk adjusted side of things yeah we know without a center but we got it um awesome we're gonna and I was I forgot to say before when you were talking about all the rankings and you look at the other endowments, performance, every year, I can't remember who puts it out, but they put out a graphic of the Ivy League's performance

and it drives me crazy because it's not color coordinated. It has Dartmouth, like red, and all the colors are different colors. I'm like, how easy would this be to just put the school colors on each of those? Well, the interesting thing is that in the Ivy leagues, because the endowments are generally quite large, is that within the Ivy leagues, every student newspaper up in the Ivy leagues produces that graph that is color coded. Yeah.

Right. Because they're keeping track of how they're doing versus the school up the road. Yeah. What are they? What's the average in the Ivies now? 35, 40 billion? Yeah. I don't know. I think Brown is the smallest at around eight. So in Harvard, Harvard's like 60. Yeah. Yeah.

And what I was saying before, I heard Princeton is has hit that place where just their distributions are covering the entire school. I think that's I think that's true. It was on a podcast. I can't.

Who's the thinking fast guy? But he was saying, like, stop giving money. They don't need any more money. He's like, give it to your kids, stop giving money, they don't need any more money. He's like, give it to your kids, do something else, stop giving them money. All right, let's finish with something fun. Little, do a little Mount Rushmore,

and let's ask your favorite bands. What four bands would you put on your own personal band Mount Rushmore? All right. So, you know, I grew up in the 80s, largely, junior high and high school. So bands of choice at that time were Van Halen, Def Leppard, U2, The Cure. So the 80s station on XM or the 90s station is generally what My Car Radio is always on. Got it. So that's your, that right there, that's your four?

Yeah. Same again, was Van Halen, could be Green Mar. U2. U2 for sure. That's my number one. And the Cure. And the Cure, right? A lot of U2 in there. I put the Cure on there. I went to see U2 in the Sphere in Vegas. It was phenomenal. My wife and I went to the 30th anniversary Joshua tour the 30th anniversary Joshua tour. Yeah, in Chicago and Soldier Field? Up here in Dallas at the American Airlines Center.

All right. That was cool. It was at Jerry World. It was at the Dallas Cowboys Stadium. I still haven't been there. That's super cool. Yeah. Hopefully we're getting one of those in Chicago soon when they moved the team out to Arlington Heights.

I'd be fine with it if they build a big, huge, cool stadium like that. Yeah, of course. And get some better teams. Right. All right, Dave, this has been fun. Thanks so much. Of course. Thanks for having us.

Keep fighting the fight down there. Yeah, we're trying. All right. Thank you. Cheers. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmults and visit our website to read our blog or subscribe

to our newsletter at rcmults.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments, we'd love to hear from you. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM alternatives their affiliates or companies featuring. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past their potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative

investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.