We Study Billionaires - The Investor’s Podcast Network - TIP444: The Changing World of Endowments and ESG Policies w/ Ted Seides

Starting point is 00:00:00 You're listening to TIP. On today's show, we have Ted Seides back to discuss the influence of endowments and hedge funds in today's markets and the impacts of ESG policies. Ted is the former president and co-CIO of protege partners, and prior to that, he was a senior associate working under investing legend David Swinson at Yale. He's the host of the popular podcast Capital Allocators and the author of a great book with the same name. In this episode, we discuss how hedge funds and endowments have changed. over the last 20 years, the biggest misconceptions regarding endowment funds, how endowments think through allocating across different asset classes, especially alternatives, the impact of ESG policies and how the narrative around them may be changing or evolving, why Ted has abandoned

Starting point is 00:00:45 his SPAC strategy and a whole lot more. Ted is always a very gracious guess and I always learn a lot from him. I hope you enjoy it, so here's my conversation with Ted Cydes. You are listening to The Investors Podcast, where we study the financials, financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Trey Lockerby, and I'm excited to have back on the show, Mr. Ted Sides. Welcome back. Thanks, Trey. Good to see you. It's really good to see you, too. There's a lot happening in the world today, and a lot's happened since we last spoke. And there is so much to kind of cover on today's show,

Starting point is 00:01:37 so many different topics that you bring such a wealth of knowledge on that I wanted to kind of kick it off with your previous career, your specialty, so to speak, which was in the hedge fund world. I wanted to kind of touch on a couple of fundamental curiosities I have about hedge funds. The first of which was, are hedge funds, generally speaking, like music where there's different genres of hedge funds? Or is it more like a single game where you have different teams and they're all playing the same sport. I think it's a little bit of both. There are definitely different genres of hedge funds.

Starting point is 00:02:13 So you could think about certain strategies and maybe even bucket it into more directional strategies like long short equity or some event-driven investing like distressed. And then you have more relative value strategies. So you could think of long-shard equity, but in a platform tightly risk-controlled or arbitrage strategies. And then there's macro. So there's all different genres. Now, within each genre, there's a lot of sort of individual competition in that game. And some of the games are zero-sum, right? You could think of long-short equity or equity investing is zero-sum to some extent. Macro also, though it's much

Starting point is 00:02:52 broader. And then sometimes it's zero-sum, but not against other hedge funds, against other market participants. So I think it's both, right? I think there are lots of different genres and there's lots of competition within each one. Now, when you were running a fund of funds, would your fund of funds look like an album with different songs on? I'm going to exhaust this analogy. Or would it be sort of like, you know, different players. You've got your forward. You've got your, you know, center. You've got different funds that are playing a very specific role within the portfolio that are all kind of different or maybe synergistic with each other. I think those two analogies are one and the same. But

Starting point is 00:03:29 when you're constructing a fund of funds, you want to create diversification within the strategies. And there's lots of different ways of doing that. The particular one we did, we were investing in smaller funds. And we thought that if smaller funds were to have a competitive advantage, they should be specialized in a niche. So we might have a health care fund and a technology fund and a consumer fund and a vent-driven fund that are all doing different things. So there's some crossover.

Starting point is 00:03:57 There could be some crossover. You could have a consumer who's also doing technology and have Google in both portfolios. But for the most part, we were looking for qualitative diversification and then doing the analytics underneath to make sure we were getting it quantitatively. With hedge funds, I mean, with hedge being in the name, do they have to be hedge, so to speak? Are they always long short in some way? Or is that just sort of a colloquialism at this point? It's become more of a colloquialism.

Starting point is 00:04:26 You know, think of activist funds, which are generally long. only, and then a market neutral fund, which is clearly long short or even a quantitative market neutral fund, which is designed that way. The idea of a hedge fund was that you are hedging out some market risk, but it has become a general term that encompasses lots of different strategies. Do you find that most hedge funds are following this sort of modern portfolio theory, just to kind of weight the risk involved and help hedge the bets? Is it pretty consistent that they're following that same theory? You know, modern portfolio theory is really designed for multiple assets, and it's an academic

Starting point is 00:05:02 construct to help kind of create efficient portfolios and understand risk. It's not something that applies particularly well within a hedge fund portfolio. I suppose there are aspects of it where you could think about weightings of positions and value-added returns of alpha over beta, but it's not really, modern portfolio theory is really designed for multi-asset portfolios more than the specifics of one hedge fund. So according to you, one of the biggest mistakes new hedge fund managers make is not applying what makes a great business to their own hedge fund business, right? They're experts in what makes a great business, but they are ultimately entrepreneurs at the

Starting point is 00:05:45 end of the day. In what areas do you find managers are lacking focus? Yeah, I mean, I think that comment. has less to do with sort of the lack of focus of the manager. The task of a hedge fund manager is really hard. They have to manage capital. They have to build a team. They have to build a business. So they have to be both an analyst, a portfolio manager, and then a business builder. And one of the things you find, particularly in the last five, five, ten years, is that the environment for hedge fund, the hedge funds has become a mature industry. So you see larger and

Starting point is 00:06:18 larger funds, like some of the platform hedge funds, a Millennium or a Citadel or a DeShaw or 2 Sigma, getting larger and larger and attracting lots of talent within their fund. And it makes it harder for a new entry. Because like in any industry, when it gets mature, there isn't, unless there's some real need for the new product, there isn't so much demand for it. And so the idea is that since the industry is matured, there are lots of younger people that are excited. to launch their own hedge funds. But sometimes they don't put that into the context of the industry itself, which may not have the same type of insatiable demand for a new fund that it did, say, 20 or even 25 years ago. So that's just an unfortunate truth for those people who are ready

Starting point is 00:07:07 to start. It doesn't mean they shouldn't start. But it doesn't mean that it's just harder to make it work than it may have been at some time in the past. How do you feel like hedge funds have changed over the last, say, 20 years? And especially maybe since you've kind of left the game, have you seen a significant change in hedge funds? Yeah. I mean, if you go back 20 years, the biggest initial change was the institution of Reg FD, which Fair Disclosure, which made it more difficult for really hardworking on the ground

Starting point is 00:07:38 to analysts to get a significant edge over their competition. Before that, people who really dug were able to get more information than the market. After that, it made it, and certainly in the equity world, made it harder to do that. So a few things have happened. One is that the low-hanging fruit, not that it was easy to pick up, but the low-hanging fruit is much tougher. The second is that shorting has gotten a lot more crowded. And so you see the volatility, not just because hedge funds are shorting, but things like the meme stocks last year, where a fundamental analyst would look at a game stop and say, well, that doesn't make any sense. But if you're short the stock, it doesn't matter if you're wrong for a while.

Starting point is 00:08:22 It's really, really hard to hold short positions. And so the dynamics of extracting value from the short side have always been difficult, but feel like they're even more difficult. So I think that over the years, competition has gotten higher. The excellence of the practitioners has gotten even better. Michael Movison refers to that as the paradox of skill. And on an absolute basis, they're all better, but on a relative basis, it makes it hard to outperform. And then for a long time, we'll see what happens now. Rates have been really low. So there's been no short rebate boosting the return as well. So it's been a particularly challenging environment for hedge funds.

Starting point is 00:08:59 Now, the last time we spoke, we were discussing your bet with Warren Buffett against the S&P 500, basically that a basket of funds would outperform the S&P over 10 years. Is the S&P 500 a typical benchmark for most hedge funds? It's not. I mean, the S&P 500 is sort of a benchmark that people use for everything, but the idea is you're supposed to be hedging something. And most of the institutions that invest in hedge funds really think of it. more as an absolute return type hurdle. They might want to make the long-term expected returns of

Starting point is 00:09:35 an S&P, but the path they expect to be quite different. So on a year-to-year basis, there's not really a good comparison. Over a 10-year basis, you might think that if you're trying to earn equity-like returns, you'd want to make, say, 6 to 8 percent or 8 to 10 percent, independent of what the equities happen to do during that 10-year period. So there is so. long-term relationship. And there's some correlation because particularly, say, a long-short equity fund that's net long will have some exposure to markets. But not every hedge fund strategy does have exposure to markets.

Starting point is 00:10:11 Do you find that a lot of hedge funds have exposure to bonds, for example? I mean, we're seeing a massive sell-off right now. Inflation is over 8% now, and you've got real negative yield. Everyone is trying to navigate around. And you're seeing the sell-off in bonds because of it. But bonds usually fit into a portfolio to kind of mitigate volatility and things of that nature. So I'm curious, do you see that often in hedge funds and will a lot of hedge funds be kind of reassessing their strategy from here?

Starting point is 00:10:40 It's very hard to generalize about hedge funds, right? A long, short, equity hedge fund may not have a lot of bond exposure. A credit hedge fund might have a lot of bond exposure. A macro hedge fund might come in and out. So it really depends on the type of strategy, you know, whether they're going to have bonds and what their exposure would likely be. Got it. I also have a lot of curiosities around endowments, and I'd like to dig in on some of those as well. What are some of the biggest misconceptions in your mind regarding endowments? I think if there's a biggest one from the outside, it's the understanding of the purpose of the pool of capital.

Starting point is 00:11:17 So these endowments over the last 20, 30 years have gotten very, very large in size, right? Tens of billions of dollars for universities. And a lot of current scholars will look at that and say the university should be spending more than they are. But the purpose of that pool of capital is to balance the spending for current generations of scholars with many, many future generations of scholars. And there's elegant mathematical formulas to determine spending rates that would allow you to do that because if you spend too much and you start eating to principal relative to your long-term return expectations, you won't have the same support down the road, you know, adjusted for inflation. And so that's probably a big misconception.

Starting point is 00:12:01 Another that comes up from time to time are picking apart very small individual investments. So many endowments invest through managers and managers can have lots of positions. And every now and then, whether there's a really important issue like ESG, you can have a student newspaper run an article saying, you know, a school's endowment owns this stock. And the stock might be 0.0001% of the endowment. And so it's not that it doesn't matter, but there's a materiality question. And so there are things like that that I think get misunderstood across some of the constituents. That's interesting, the spending aspect because, you know, tuition of universities has been

Starting point is 00:12:43 going up. I think it's over 144 percent of the last 20 years. And does that add pressure to the managers, you know, running these endowments? Obviously, the spending is starting to eat into their hurdle rate. They ultimately have to jump over at that point. Yeah. I mean, I think that. that the objectives of endowments are high, right? They generally spend, they're smooth spending rules to make sure that short-term fluctuations year-to-year don't make significant long-term damage to the corpus. But generally speaking, you see, let's call it, four to six percent spending rates every year out of an endowment. And that maybe, let's just call it five to keep it simple.

Starting point is 00:13:23 Foundation certainly have to spend five percent. As the endowment pools grow and the endowments support more of the operating budget, they have to be thoughtful about what that means for the volatility of the operating budget relative to the volatility of the assets. But I don't think that the decisions, the budgetary decisions that get made have to take into account the flow of funds from the endowment, but it doesn't necessarily, it's always been a hard, you know, long-term high objective. If you're trying to make, say, 5% real and higher education inflation's been about 1% higher than regular inflation, you're talking about making 8% or 9% a year. That's a lot. And so that pressure has always been there. I don't think it's more of late.

Starting point is 00:14:05 You mentioned that these endowments have been growing like crazy. And you had work under David Swenson a long time ago at Yale. And that endowment specifically is now over 42 billion. How much of that capital is actually earmarked for school-related initiatives? I'd have to look at their actual numbers, and they just released a report that's a wonderful ode to David who passed away last year. Generally, their spending has been in that range. It's probably four and a half to five percent. So you could think about that as, you know, their spending, call it $2 billion a year to support the operating budget. Now, to put that in perspective, when I started working at Yale in 1992, the endowment was $2.5 billion. So yes, it's been a long time, a couple decades, but they now spend

Starting point is 00:14:54 almost what the entire endowment was when I started every year. And so you can't do that if you're sort of overspending, right? You have to compound the capital to the point where, you know, you have a thoughtful spending rule. And over long periods of time, as the corpus grows, you can spend more and more. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists,

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Starting point is 00:19:26 How are you balancing things like venture versus equity versus other alternative investments? If you were running an endowment, how would you kind of think through that? Yeah, there's a lot of different approaches. I mean, the original model that David Swenson wrote about was a multi-asset class approach that uses some form of mean variance optimization. and so getting back to modern portfolio theory to think about the proper weighting of asset classes. And they tend to be very equity-oriented because they have long-duration liabilities. And so you'd have a mix of public equities around the world and private equity and venture

Starting point is 00:20:02 capital and maybe equity-oriented real estate and some other real assets. And depending on, you know, there's a fairly wide variety. what you've seen over the last few decades is an increase in the non-traditional, the alternative assets. So for someone like Yale, I don't know the exact numbers, but the venture and private equity and real assets and some of the hedge funds might add up to 50 or 60 percent of the total, if not higher. And they're on the more aggressive end in terms of that diversification. Others might have, you know, still have 40 to 60 percent in liquid securities and then the rest in less liquid securities. How do you think the managers who are running these endowments are, I know this is a pretty broad question, but if you were a manager running an endowment and you saw these inflation prints and kind of the

Starting point is 00:20:50 stagflation environment, it seems like we're entering into, what would be your strategy if you were kind of waiting those different options? Yeah, I mean, these are very long term. I refer to them as battleships and not fleet boats. So you'd have to have been thinking about that for a long time. And some of the research would tell you that there are some assets that do better, right? Some of the real assets you'd expect to do better. Equities generally do better. So to some extent, the endowments are reasonably well positioned for those environments. But inflation is tough.

Starting point is 00:21:27 We haven't seen it in a long, long time. And how it impacts asset prices this time around could be different. So it's hard. You're not going to see significant shifts in the, these portfolios based on the potential for higher inflation. But there will be thoughtful approaches to incremental tilts in those directions. You brought up ESG a little bit earlier. What are, which ESG policies are infiltrating things like endowments? What effect do you think they'll have on either the performance or the way

Starting point is 00:21:58 that they're allocating a portfolio? Yeah, I think the E and the S have been particularly strong in the last few years. So there's much more concern for the environment, probably starting two or three years ago, as the case may be. So it's really the E and the S that have been important to these pools of capital the last couple of years in particular. And so you have to break it apart. Let's start with the E.

Starting point is 00:22:24 There is significant movement to understanding measuring metrics towards zero emissions. And there's lots of different ways that people have approached it. but the very first order reaction was divestment from energy and fossil fuels. And some institutions did that. We started to see a rise in oil prices before Russia invaded Ukraine. And now I think there's more of a recognition that to get through energy transition, you need fossil fuels. So it's not clear that that's the right approach. MIT just wrote a 15-year letter where they had a very well-articulated view of wanting to get to net zero. And the reasons why that wouldn't mean divestment from energy and that they would rather the shareholder of a stock where they cared about

Starting point is 00:23:15 net zero holistically and could influence management in that way and make sure they're owning the companies that are making proper transition while they're incorporating those emissions against other things they're doing in their pool. So you're seeing different approaches with the same goal on the environmental stuff. I think it's a very long-term issue, obviously, and we're seeing lots of movement. There isn't a single pool of capital that isn't thinking about it, trying to think about ways to measure it and then make progress. The social side, really we've seen more in the workforce than in the investments. So people are much more conscious about hiring in diverse candidates to their teams and being more focused about having that be a more

Starting point is 00:23:59 sort of an egalitarian process to make sure that people from different types of backgrounds are included in the process. So that's been a real conscious effort. We're seeing that in workforces and companies and certainly in the investment pools. Some of that diversity initiative also filters through two investments. You see a little bit more in venture capital than in the public markets. But that S part has really started at the employee level more than the company level. And on that last point, our friend Joel Greenblatt, I know in his latest book, Common Sense, he references this McKinsey study where they had proven in the data, it seems, that the more diversity, the better the companies seem to perform on average. Or there's at least like a net

Starting point is 00:24:45 benefit and a very positive one, which kind of makes sense and makes you realize why companies are exploring that or prioritizing that. With the environmental, that's a tougher nut to crack because obviously you kind of want to disincentivize the investment going into unsustainable resources, but it seems not very prudent to not have the roadmap in place to help us bridge, you know, the way to get there. So you mentioned it being a long-term issue. I'm kind of curious how much we might be set back due to just the lack of investment in that space. over the last few years? Yeah.

Starting point is 00:25:23 Well, we're going to find out. I don't know the answer to that, but it certainly contributed to the rise of oil prices. Do you think the recent spikes in oil and other commodities indicate that ESG priorities might need to be paused or reconsidered, at least in the future? Are those conversations happening with people that you're familiar with? To go from this abhorrence of fossil fuels in the portfolio to a recognition that we need fossil fuels.

Starting point is 00:25:47 Fossil fuels aren't going away. we need fossil fuels to allow energy transition to take place. So there's a shift. It's a hard one because people don't like the dirty fossil fuels as it relates to how it impacts the environment. But it is, again, this is very topical right now and people kind of really thinking carefully about how to integrate that into their investment plans. The other issue with ESG seems to be how holistically you want to look at it, how you

Starting point is 00:26:17 actually define what is environmentally sound or socially sound or even governmentally sound. In your opinion, what are the limitations of how ESG might currently be defined? Yeah. Well, a lot of it comes from, there's an objective that most people are agree with, but the implementation of that is really hard. And a lot of times what you see in the capital markets is that when you see a trend, people try to capture it through products. So those products might be index funds or, you know, an ESG-friendly metric. And there was an article, I think, in Bloomberg not too long ago, tearing apart. I think it was the MSCI ESG index because the way they constructed it wasn't even consistent with what anyone would think would be the goals of ESG. So those things take time

Starting point is 00:27:04 to work out. And each individual institution has to think about their own needs, their own objectives and how they want to measure and define some of these standards. We're getting there slowly. Again, it's a little bit easier on the environmental side because there's a sort of an objective of net zero and then people can try to work backwards. Now, it's not easy to look at a company, an individual company all the time, and get the transparency that you need and then build it up from the company level. But that's what's happening. And we'll get there. It'll take time, you'll get a set of standards. A lot of this started with the UNPRI standards, which are high level, but kind of incontrovertibly good things that people think they should strive towards.

Starting point is 00:27:46 I think the social side is much harder, much harder to measure, much harder to understand if this was something that came out of, you know, 30 or 40 years of, let's just say, slightly unfair hiring practices, how do you unwind that in a short period of time? It's very difficult to do. It's not clear that you can, but you start with trying to find ways to introduce recruit, and then once you hire, retain people from different backgrounds. Now, with things like endowments going back to that, you know, obviously these, the Gen Z millennial types seem to be much more aggressive in their kind of demands to see this shift and this change. Do you think the students at these schools are adding pressure to the endowments to make certain shifts or the faculty

Starting point is 00:28:35 to, you know, make certain considerations and refocus to prioritize ESG. Is that part of the discussion? Yeah, absolutely. I mean, it starts at the, sometimes it starts from the students, but in these days it probably starts from the governance board and saying that this is, this is now important objective, and then it falls onto the team to go ahead and analyze and implement. So shifting gears a little bit from ESG. When we last, Beau, you were very bullish on SPACs and you were even building a basket of them, I believe. Several SPACs have recently been just destroyed from either redemptions or a lower multiple. Have you changed your fundamental view of SPACs as a result of the Fed tightening perhaps in your mind

Starting point is 00:29:18 or any other things that are leading to these kind of lower valuations in SPACs? Yeah, I mean, there's been a monumental shift in the spec market from, you know, a little more than a year ago till now. And that really started probably February, March of 2021, where there was almost an embedded premium on the publicly listed SPAC. So you'd have $10 in a SPAC that was trading for 1040 in the markets. Hard to understand why you could try to rationalize it for optionality, but that deflated. And once that deflated, it made it much harder for SPAC sponsors to raise capital, because if someone provides you $10 and the next month it's worth $10.40, it's pretty easy to raise money. If someone provides you $10 and the next month that's worth $980, it's a lot harder

Starting point is 00:30:04 to get the $10 if that person can wait and buy it at $9.80. So the first dynamic is that the pace of new SPACs has slowed down dramatically. The second is that the players who were funding the SPACs, which many of which were hedge funds in an arbitrage strategy, are now not really supporting a lot of the business combinations. So if you have a SPAC and that raises a say $200 million in trust, those investors all have the option to take their money back at $10 when a deal's announced. And you're getting numbers like, you know, originally it was 10 or 20 percent and now it's up sometimes as high as 80 or 85 percent.

Starting point is 00:30:45 So the capital is not even there to do the deal. That gets replaced by pipes, private investment in public companies. And for the right deals, you can have a strategic pipe investor that allows a deal to get done. the sponsors are putting up a lot more money and changing their economics. So it's dramatically changed. And now the last piece is you have the potential for regulation trying to change the way that SPACs can go public, or I should say a DSPAC transaction. So when a SPAC lists, you have a shell, and that's the listed entity. It's a bunch of cash. When they went to merge with a private company, the private companies would create projections, which you can't really do in a normal IPO.

Starting point is 00:31:27 And so they would, some of them were inflated projections or they were, I don't say they're inflated, but they were very optimistic. And the SEC is at least making some headway in discussing, ramping down on that. So a lot of the advantages, though not all, the cost is still, the costs can still be beneficial to a company and the certainty of going public specs are still a way for some companies to go public that are more advantageous to them than IPOs, but it's a lot less attractive. And then in the trading markets, you have a couple hundred SPACs that had two years to do a deal that are now, you know, a lot of that heyday started in Q4 of 2020, Q3 and Q4 of 2020. So we're going to be seeing that later this year. I think a lot of them won't get

Starting point is 00:32:16 deals done. Some might get extended. I'm sure some things will be creative. There's a lot of incentives to get deals done, but the public markets aren't being receptive to companies that don't deserve to be public companies. So the whole environment's changed. I no longer have a SPAC portfolio. I did it for a little while. The downside was very, very low, so I didn't really lose much money. I didn't really make much money on it. I'm still part of the equity sponsor of three different SPACs. And we're just going to have to see. It's not easy to get deals done. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:36:10 Back to the show. That clock that seems to be ticking, as you put it with the Q3-Q4 timeline of SPACs running out of time to find a deal. Is that actually advantageous to private companies in a way? Because these SPAC companies might be a little bit desperate to bid a little bit higher for a company, perhaps, and it kind of puts the leverage more on the private company to get a good deal done. Yeah, in theory, that's one part of the equation. But the other side of it is the receptivity of the public markets, right? If it's not an attractively priced deal, it won't get done and it doesn't matter. So you could say, yeah, the company can extract a better deal from the SPAC sponsor,

Starting point is 00:36:47 but if it's not a reasonable evaluation, the deal won't get done. So you might see some terms shift. You know, some of the economics that the SPAC sponsors have will probably get given up. You have some other players who have come into the space and doing creative things to help backstop some of the capital and trust in SPACs and get some of the equity sponsor ownership in exchange. So you're going to see evolution in the ecosystem to try to get more of the deals done because the vehicles exist. But it is a totally different proposition than it looked like a year ago. You mentioned there might be a cracking down there from the SEC.

Starting point is 00:37:27 What might that look like just aligning specs with more of a traditional IPO? And that just kind of disincentivize the whole world of SPACs? Yeah, it's not the SPAC versus the IPO. It's the merger transaction the SPAC undergo. So the SPAC does an IPO, and the SPAC itself is subject to the same SEC regulations as a regular IPO. What happens, though, is the SPAC then merges with a company. And it's a question of what that company is able to say and project from the merger,

Starting point is 00:37:59 which is different from how a company that, and S-1 to do an IPO is what they're able to say. And so the SEC is talking about normalizing those two. So it's not the SPAC, which did the IPO, but it's the DSPAC merger to make that a little more parallel. And we'll see how that plays out. So if it's not SPACs moving forward, are there any other vehicles or you mentioned these backstops of pipes and things like that? Are there any other vehicles, investment vehicles that you're kind of looking at this time? Well, there's always things to look at. I mean, this is an interesting period of time, particularly challenging. I mean, I think markets are always challenging, but wherever you look across the spectrum, there's cause for concern and maybe opportunity as things sell off. So, you know, you look at the public market tech stocks that have sold off dramatically. What does that imply for venture capital, late stage venture capital, and all the way through the statu. valuations and private equity are just up and up and up and up and up. And then you have this

Starting point is 00:39:05 inflation backdrop, which is sort of, and maybe stagflation, which is very, very difficult for an investment environment. So, you know, I think that on the margin, some of the things that we like to look at at times like these are those that are really uncorrelated with capital markets. I've done a few things in the sports world where there's some tie to the economy, but they are very, very different risk-award dynamics than just public securities or corporate, even most corporations. And that's kind of what on the margin what people will look for. Some of the private credit strategies that are interesting and getting down market into lending to even venture-backed companies are quite different. There's always correlation across these with what's going on in

Starting point is 00:39:53 the world, but sometimes there's a lot less. So you've now hung up your hedge fund jersey, so to speak. And it seems to me that you are a very deep thinker who's found this right balance between work and family life. And you're now podcasting, you're writing books, you're constantly learning. What have you learned over your career that has helped you kind of lead to this life that you've now created for yourself a little bit further detached from the markets? Yeah. I mean, there's always a balance between too much and too little. And when I left protege, and even to this day, I never imagined that I wouldn't be

Starting point is 00:40:31 allocating capital in markets. But when I left in 2015, in particular to 2016, hedge funds were quite out of favor. And it wasn't easy to find an attractive seat to do that. And the podcast just came out of that. I had some time on my hands. I had a lot of wonderful relationships. I wanted to touch base and stay in touch with people. And so I started having all these conversations and it just kept going and it eventually became its own business. The balance is a tricky one, right? I still would long to be on a team managing a pool of capital, but you have to find the right team and it's not an easy thing when it's not your own money. And so there's always a balance. And I'm always thinking about, okay, the podcast has its own incredible access and sourcing to

Starting point is 00:41:14 managers and wouldn't it be fun to be able to help a team with some new ideas that I see from doing it and then direct some of the podcast towards some of that research. So I have conversations like that a few times a year, and at some point in time, it would not surprise me at all if we took the podcast and attached it on to an asset manager. That's a really cool idea. Yeah, I brought it up because we've had folks like Jason Karp on the show, and we just had John Arnold on the show. And it seems like, yeah, if you're not careful, you can definitely overdo it to a degree,

Starting point is 00:41:45 or I'm not saying that's what happened in your case, but it's this balance of life and finding this fulfillment outside of markets and other areas is always fascinating to me because it kind of just continues to open my mind on what else is possible, right? I'm not sure if you ever imagined yourself to be an author, but now that you have a couple of great books under your belt, it just kind of, again, opens up this really bright future. And after dozens of podcast interviews and now books kind of surmising the takeaways, have you had time to reflect on what the most enjoyable or informative conversations you've had via that format have been? into date? You know, for me, some of the most interesting ones are a little bit outside of

Starting point is 00:42:26 investing. They'll touch on investing. So, for example, I've done a whole bunch with Annie Duke on decision making. And that's really fun because you learn a lot about frameworks for getting better at investing that, you know, I just wasn't exposed to when I was in it. And so there are some of those that I feel like I've learned the most from that are more, a little bit more interdisciplinary, than just investing. On the investing side, there's always an interesting strategy or a nuance or a way somebody's going about something that you'd like to gravitate to. And there's just so many different lessons from each guest. So it's hard after, I've probably done 300, you know, it's hard to sort of pick out, oh, this one or that one, because there's always like another

Starting point is 00:43:12 thread to pull. What would be your general advice for our listeners? Let's start with the markets today. How are you kind of thinking through your allocation, not in such an investment advice, but are there, you know, the effects that are going on in the macro environment? Are they, are they creating opportunities? Are they creating caution? What's your just general approach in today's markets? I try to have a long-term approach. I don't trade a lot and I tend not to react to, you know, macro, especially macroeconomic stimulus because it's not my area of expertise. But like anybody else, I can get caught up and exciting things. And I had made some investments last year that worked out that were in growthy names that then sold off quite a bit. And so you

Starting point is 00:43:59 want to not react to something that's happened recently, but then also keep in mind kind of the long-term plan and objective. And so I've been doing some rethinking about that, about my liquidity profile, about how much I want to be in active strategies versus passive strategies and where? Where do I think, you know, I can really add some return and then not getting too cute right now on things I don't understand very well? That liquidity point is very interesting, obviously, because sitting on cash is not that ideal in a high inflationary environment. And when you tie up capital, say, in a hedge fund, you might not see that money for quite a while. So there's this really interesting dynamic on what to do with your cash. That's been a big topic

Starting point is 00:44:45 of discussion, do you feel like from your hedge fund experience, today's environment, let's just say, is advantageous to look at things like, you know, maybe products that BlackRock or others, you know, give retail investors some exposure to alternative assets? Is this kind of the time that these funds are, might be advantageous in that way? Well, the alternative strategies are generally there to diversify against the traditional assets. So if you feel you're in an environment, and maybe we are today where equities feel a little risky and certainly bonds feel very risky. Those tend to be good times to be thinking about other alternatives. Now, the question is what alternatives, what's available, and how do you pursue them? So me, as

Starting point is 00:45:30 an individual investor, I have some access to private strategies, but it's hard to plan out liquidity you know, 12 years from now. And so I tend to do things that are exposed to some of those strategies, but might be in a, you know, an alternative asset manager that's listed in the public markets. And so I've owned Pershing Square Holdings for a long time as an active manager. I own a company called Blue Owl, which is really a private lender merged with Dial, which buys stakes in alternative asset managers and is growing quite a lot. It was a despact transaction from a year ago. And at different times, I've owned things like Brookfield asset management and wonderful infrastructure player or digital bridge. So those are asset managers that are participating,

Starting point is 00:46:20 like a Blackstone or something like that. I tend to own those. I choose to own those more than the funds because sometimes the funds that are available to the retail investor aren't really the best of. And if you're not in the best of, if you're not in the top quartile in those spaces, it's hard to extract the returns you'd want. Now, that said, you can read about what KKR is doing and that more and more of these large asset managers, their next interest is creating products that are high quality products for the retail investor. So I think we'll see more of those.

Starting point is 00:46:57 But they just have a very different liquidity profile than most are used to. Are you experimenting with anything like real estate or art or gold or other of these kind of real assets, so to speak, or just typically play in the public markets? You know, in the public markets, I think if I wanted real estate exposure, I'd probably just buy some reits. I'm not a real estate expert. You know, on your podcast, you actually have done this series recently about venture. I'm curious, what has been sort of the curiosity or the interest that's led you into doing this series specifically on venture? Yeah. Well, Venture is a very long-dated strategy, and it probably had its brightest day in the sun last year, last fiscal year, where returns were just through the roof. And so those institutions that had been participating for a long time just had their best years ever, these endowment portfolios had their best year ever in the fiscal year end of June 2021. So when something like that happens, it's always fun to try to say, okay, what's going on? And I started reaching out to some people I knew some of the top venture firms.

Starting point is 00:47:59 I don't know them well and decided, you know what, let me find some venture firms that some of the institutions I know really like and invest in, but aren't the really, really well-known brands. And what you find is there are extraordinary entrepreneurs who have become venture capitalists, investors, just passionate about building businesses and doing it in all kinds of different ways. at all different stages, from pre-seed and seed stage and niches to people just looking for the best companies across sectors. And it was just really fun to have a bunch of conversations and try to understand what are the different ways that people go about it, all with this backdrop of an insatiable amount of money in the space and valuations being driven up. And what does that mean for future returns?

Starting point is 00:48:51 And so there wasn't a single person that I interviewed who wasn't a way. that they were playing in that environment. And yet it has just been such a rich ground for company development and returns that it, you know, continues apace, despite what's, you know, a really insatiable demand for the good products. Does that kind of tie in with the incentive to not necessarily go public? I mean, as your podcast put, your ventures kind of eating the world right now? And is it just because the private markets are getting better premiums, meaning better valuations. What is kind of driving that in your opinion? We've had a bunch of dynamics, especially the last five years or so, that opened up

Starting point is 00:49:33 later stage private markets to stay private for longer. So it started with SoftBank raising the Vision Fund. And then you had the surge of Tiger Global and to lesser extent, say Co2 and Dragonnear, where there was this concept that you could capture some of the value in, companies before they went public by keeping them private longer and letting them grow. And that's worked out extremely well for those investors. So once the capital is there to stay private for longer, the companies will do it because there's a lot less restrictions on them as private companies. Now, eventually, many of these companies will find that the right exit is to go public. And that is a different set of criteria. And so the valuations, you know, we've already seen

Starting point is 00:50:20 valuations sell off in the public markets, and private markets usually lag in those. But if one of these companies eventually wants to go public, they're going to have to fit into the construct of the public markets for valuations, not maybe where the private markets were. And so we'll see how that plays out. But yeah, I think a lot of the trend towards staying private longer is a combination of the flexibility afforded to private companies relative to public companies and then the availability of capital. That just brings up another question about in my mind around the ESG component a little bit because you saw a lot of this liquidity enter the public markets, but then you saw a lot of these managers, CEOs, buyback shares instead of, say, invest in new operations or, you know,

Starting point is 00:51:08 I'm thinking a lot about these oil companies in particular that have kind of led to this sort of decline in supply. Should we expect the SEC to crack down? Are you seeing any shifts in regulation that or needs for regulation and certain things that affect the public markets more than they do private markets? I don't know the answer to that. Public markets are more regulated than private. They have been. There are some interesting dynamics that relate to governance challenges when you have investors

Starting point is 00:51:37 in late stage private companies who don't necessarily have governance rights. So if you think about some of the late stage private investors who are decidedly not taking board seats, but they are putting lots and lots of money into the companies and become some of the biggest shareholders of the companies, you have a dynamic that looks a little bit more like public company governance that can get distributed than private company governance. And so, you know, you go on streaming now and you could watch the story of WeWork, you know, We crashed or Uber super pumped. And you see that dynamic. You see the dynamic where in those instances, the private company CEOs just had probably too much rope and eventually had to get rained in. Now, there's a different question of whether that's a regulatory issue in terms of

Starting point is 00:52:31 governance or that is a just a management issue of the board and the private company. but you're not really seeing regulation come into the private companies yet. Well, Ted, it's always a pleasure to talk to you and learn about the things you're up to. And I always learn so much. Before I let you go, I want to definitely give you an opportunity to handoff to our audience where they can learn more about you, your podcast, your books, any other resources you want to share. Yeah, thanks, Trey. So we encapsulate all of it on a website.

Starting point is 00:53:02 It's capital allocators.com. And on that site, we have all of our podcasts. We do have a free monthly mailing list that just has some great curated reads and some words from our sponsors. And for those interested in transcripts and things like that, we have a modest priced premium membership as well that you can access on that site. I also am on Twitter and LinkedIn, although I'm not an aggressive poster, but we do put quotes from our episodes and we post the episodes on both of those platforms.

Starting point is 00:53:32 All right, Ted. Thank you so much for your time. I really appreciate it. I always love having you on the show, and I hope we can do it sometime soon. Sounds great. Thanks so much, Trey. All right, everybody. That's all we had for you this week. If you're loving the episodes, please go ahead and follow us on your favorite podcast app and maybe even leave us a review. You can also find us on Twitter. My handle is Trey Lockerby. And if you want to upgrade your portfolio, definitely check out the resources we have for you at the Investorspodcast.com Or simply Google TIP Finance. And with that, we'll see you again next time.

Starting point is 00:54:01 Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

Starting point is 00:54:31 Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP444: The Changing World of Endowments and ESG Policies w/ Ted Seides

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