Mark Yusko Master Class | Real Vision™

to become a great investor you really have to learn from the world's best investors you need to understand how they think how they construct investment frameworks and how they execute trades and manage their positions at real vision we interview the world's investing legends to find out how they do things you see what makes an investment rockstar is that process and that framework and that critical thinking in this masterclass series would to be the best of the best many of these interviews were filmed a few years ago now but that doesn't mean that you need to concentrate on whether idea is right or wrong the idea behind this is to learn how they think it's listening to what they do not the investment ideas that they were bringing at the time and that's the key takeaway well finally got you here because I've always wanted to interview to the master class I think you've had a fascinating career and some great insight and a lot of the people we've interviewed so far a kind of hedge fund guys but very being around the hedge fund invested in understand it better than pretty much anywhere now know so I think it's gonna be interesting no thanks for having me I think best thing to talk a bit a little bit about what you do now and then I'll talk a little bit about your your background yeah so you know today Morgan Creek is is a pretty simple construct in that we're a allocation firm arrestor investment adviser that tries to bring the endowment model of investing to other investors whether it be institutions or individuals and what does that mean it just means that we try to bring alternative investments and integrate them into two portfolios and that really goes from all the way back in my early career I mean I didn't start off to be an investment guy start off to be a doctor of all things and hold your soul to the devil exactly well you know biology and chemistry which I actually think are great training for investing and we come back and talk about that later but you know I came out of undergrad went to business school got a job at insurance company the guy was doing investments retired so I was a bond picker and managing fixed income and then I went to an equity shop and I probably stayed there forever to go back to the alma mater and when I went back to Notre Dame I didn't really know what an endowment was I just knew I wanted to be back at Notre Dame and I thought I was gonna miss picking stocks and bonds but what I realized pretty quickly was asset allocation drove returns you know you look at the money we put in the real estate market after the collapse in 91 92 you know we made tons of money bare Eastern Lick wasn't a billionaire back then he was just this guy who was raising money to go buy distressed real estate assets when we tunned it when I left noted a man went down to North Carolina in 1998 you know they covered the Economist magazine said a world awash in oil you know oil was $11 it was going 2-5 somebody was gonna be free like really come on and so I have this rule if I hear it once I remember I hear it twice I write it down here three times I do something about it so I saw that article and economists remembered it the next week Richard rainwater cover of Businessweek naked long eight hundred million dollars of oil tore that baby out put on my desk two weeks later three guys trained by Richard come in to pitch me on on buying oil and gas assets ding-ding-ding light goes off so I take it to the board go to the board meeting and it's my first board me I'm here three weeks in North Carolina and board says I said I want to invest in commodities want to put 5% in commodities let's start with 1% - these guys trained by Richard and the chairman says mark that's the dumbest idea I've ever heard but if you really want to do it ok and it's like ok great so we did and we put 5% in commodities and that 5% generate 25% of the endowments returns the next decade so it wasn't that we were geniuses it was just that buying cheap assets at a time when no one else wanted them when people thought was the dumbest idea ever usually works out pretty well so I learned about asset allocation driving returns I learned about hedging so in 2000 you know we had spent a lot of time investing in long only equities I started getting nervous that things were looking really frothy and so said we should start adding some hedge funds now the problem was they had banned hedge funds at University of North Carolina before I got there because Julian Robertson had been a manager and he had done really well up till 1996 then he had the tough year he's down 9% cover story Business Week you know fall the wizard and the University Band hedge funds and that was not disclosed in my interview so I said you know we're gonna put a lot of money into hedge funds because I'm worried about market valuations back in 2000 and when Julian started getting nervous in fact I just wrote about that in my letter and the chances will can't do and hedge funds I said all right fine we'll do long/short equity opportunistic equity absolute return an enhanced fixed income he says that's just nomenclature right I said yeah good as long as we're clear so we did and from that mm mm - you went to 60% hedge funds from zero and we're able to be flat when the average portfolio lost 1/3 so you know getting hedged was something that I really fell in love with and so we brought that in 2004 out of North Carolina at a university North Carolina into Morgan Creek so that's a pretty quick synopsis yeah so talk me through how the asset allocation process changed when you first start looking at allocation because it's changed tremendously it has yeah I think I think the biggest change role and you and I have talked about this a lot is in the good old days and since I'm old I can say the good old days I just my son just graduated from college for the second time with the master's degree this weakens thank you and but in the old days like back when we were looking at very stern like coming out of jmb you know we had six months to isolate the problem that you know real estate collapse looked like there were gonna be some opportunity we had no six months to interview people like Barry and Jay and say yeah these guys are really smart going to give him some money or bill Sanders who was forming this new idea of REITs in the United States when it wasn't really a new know a new new thing and you know we had time to get invested and then you had another couple years to harvest you fast forward - mm - you know with the Enron debacle and you had maybe three months to kind of interview people and find some ideas and 9 or 10 months to harvest you fast forward to 2009 you got about 11 and a half seconds at the bottom in March to actually make it vision and go buy those bonds at sixty-five cents on the dollar or else they were gonna back to par and so cycles have shrunk and I think that cyclical process and having to act more quickly has led from tactic for strategic asset allocation giving way to tactical asset allocation I think you have to be much more tactical today and you have to think about the short term or the long term being made up a series of short terms but that's often not where the Returns come from short term trading is a harder game and hell for sure yeah even with talking short term in kind of ass allocation world there three months two months that's a hard thing to do compared to taking a view on a cheap asset and sticking with it for a number of years ah it is it look all the big returns come from having a variant perception that turns out to be right you know Michael Steinhardt and when you have variant perception you know it's a variant perception because everyone says you're crazy like my board back in 1998 so you know when you want to buy assets from distressed merchants energy companies in 2002 people look at you like you have two heads but if you do that and you hold it for a period of years you make big returns and Jeremy Grantham has a great line right he says you only need one or two big ideas a year a year right most people are trying to figure out what do I do every day and you know there's a great line from Soros he said to about Byron Wien he said that you know the problem is Byron you come into work every day thinking you have to do something I come into work every day realizing I don't need to do anything so I only do something when it's special and I think that ability to step back to your point from the day to day churning and trading and say alright which of these trends or which of these cycles and even though those cycles are shorter which are meaningful enough for me to really do something about it and take a big position and I guess possible I think what you're talking about the kind of patience element people have forgotten that so if the patient is relevant I see this you're kind of you could turn the world upside down and say well equities are wildly expensive from my viewpoint so therefore I don't want to be involved right and that's a different way of approaching it very different and I think to that point and and again I I'm passionate about this particular point just cuz I just got done writing about it in fact there's this great line that if I can't read what I wrote how do I know what I think so the process of writing is you know when you sit down and you actually have to put it on paper and then show it to people it actually crystallizes how you you view the world yeah a lot of time I don't even know what I'm gonna write and so let's sit down writing you come back because it's been you know stewing in your head raising it comes out at clarify at all exactly it's that that intuition that eventually makes itself apparent and so if you think about your point where sometimes you just need to ignore asset classes and and that's a active positive decision and you know back in 2000 right if if you said I don't really understand this internet thing I don't understand these valuations I don't understand how a company with no earnings but lots of eyeballs can be valued at this level now they ridiculed people you know Julian and Tony died at PDF em and Gary Brinson I mean they shut firms down because they didn't get it you know Warren Buffett was ridiculed back in 2000 and again in 2007 when he raised cash little they know that cash should be a good asset but I think that that process of of really thinking about are there alternatives to the traditional way of thinking about a 60/40 stocks and bonds in back in 2000 yeah us large cap stocks were very expensive but you could have bought small cap stocks and did pretty well you could have bought emerging market stocks and did incredibly well from 2000-2010 US market compounded negative one percent okay real okay if you bought emerging market equities made ten percent that's huge but you were going long something that most people don't spend time thinking about today I think a good example would be Japan you know people have been fighting about Japan and saying oh they're gonna implode and they have too much debt and they do have a lot of debt and their currency is going to get weaker and weaker and weaker you and I have talked about this but the bottom line is they're at these are gonna continue to go up because they have good companies they have good in a technology they're taking that technology and they're taking it out to places like Africa and China and India where they need it to develop that that emerging market consumer yeah the cheap currency helps as well cheap currency definitely helps and look I'm not sure of a lot but I was sitting with Hugh Sloan a good friend in in London on November 11th 2012 you know right after obvious on had been elected and he looks at me just like you and I are sitting here and he says mark the yen's gonna be lower the rest of your life and I went it's a profound statement Hugh and he says mark come on it was 350 30 years ago and the fact that it got to 78 I'm surprised any of these companies survived how do you survive when your currency strengthens that much but they did and they got so lean and they delivered and today you have these incredibly lean companies that are now competing on a global basis again and they have a commitment by both a base on and Kronus on to weaken that currency I think that's a single most profound thing I thought of just come from you there is if you can survive at 78 oh my gosh then any weaker currency means the upside huge unbelievably huge you mean you know I got really excited about Sony a couple years ago you know hit $9 and everybody just writing it off and I got excited for a strange reason then my son for his graduation present from wanted a Sony camera no you don't want a Sony you want a Nikon or or something he says I don't know Sony yeah this cool new you know mirrorless LCD I'm like okay and I checked out I go to the store and the guy was like oh my gosh I didn't want to try one of these can I just take it out of the box like oh there's something here so you know starts to come back a little bit they start to make inroads so now the stocks in the low 30s and I just read on Friday people saying it's gonna hit 150 its all-time high so that's a company who's given up for dead and is now circling back around because they survived that period of strengthening now you can have currency tailwind and turns out that no one informed the CEO just like Apple no one informed Steve Jobs that Apple was a meaningless company but it went down to really really low and now it's a ruling the world yeah the investment rental in the Cayman Islands we were talking before and one of those stocks that came up with Sony we just put up the monthly long-term Chael Sonnen yeah and this is perfect rounded bottom chart pattern awesome it just looks fabulous I you know again Sony is a bit of a no-brainer in many respects because it is a great consumer company and if you believe that there is a growing demographic in various countries where people want to buy this kind of stuff well we're on this - I want my I mean I remember the first Walkman I got I mean I it was like this huge deal and I would you know I I have loyalty to the brand you right so talk to me a bit about how the hedge fund business changed from when you started investing in hedge funds yeah what did that world look like who are the characters and how did they have the day invest and how is it kind of morphed over time yeah you know it's it's it's really fun again to talk about this particular table because it's fresh and yeah I spent a lot of time thinking about about the hedge fund business and in my life and career and you know I came out of the asset management the long lonely asset management side came into the university and that was just at the time where universities were starting to think about investing in hedge funds and and so I dutifully trotted off to New York and and met with the handful of players because what people forget he's no aw Jones founded this right you know 1949 and then 1966 it was the article you know he was a fortune editor and fortunately wrote the article the Jones no one keeps up with and but what happened is that attracted everybody into the industry from 66 into 72 and then boom the 73-74 wipeout occurs and 85% of them went out of business because they didn't hedge that's where we lost the D used when a Debbie Jones called it hedge funds and then the D got lost from 66 to 72 and then boom they went out of business because they were just levered long so you had a handful of people he had Soros had Steinhardt you had Robertson and Julian you know if you think about it by starting as fun in 1980 you know kind of post that crisis he came in and really single-handedly from 80 to 86 may have saved the hedge fund business as we know it today because he was the one that they called The Wizard of Wall Street he was a great stock picker and suddenly hedge funds were hot now there were still only about 20 or 25 of them that you get even vest in less than a billion dollars of total assets if you can believe that and so I start looking at him in the early 90s and now Tigers been around 10 years and there's a few other new ones but still not very many names out there and there were some bigger macro guys who had kind of spun out of the the Soros crowd and there are a few event-driven guys who had spun out of Goldman Sachs you had Farrell on starting and and a number of those and Richard Perry had started a fund and a lot of the Goldman Sachs alums had had come out and so you're starting to see some some real meaningful growth but started there with very small number and and it was basically you know investing with the early winners and then you started to see the migration out of Tiger so you had Lee Ainsley leave and you had Blue Ridge start had Lone Pine start and these were not brand names and in fact you know no one was even sure some of these kids were gonna make it because they were still pretty young guys and we backed a number of them very early on and and became very immersed in the whole culture of long/short equity and really long short equity that now became the place to go so macro which it had its heyday in the 80s kind of started to fade away a little bit into the 90s and then this event-driven stuff started to kick in and that whole concept of absolute return and enhanced fixed income really started to grow and that business has boomed and you look forms like Citadel and and others that have become you know tens plural of billions of dollars but long/short equity to me was always the place I wanted to spend a lot of time and focus and we've always had this desire to be early you know to invest with people when they're small and still nimble and don't have so much money that they can't you know compete but for a couple hundred names globally around the world so what we've seen is the biggest change in my mind has been you have the old guard right this still has decent amount of capital and the returns are kind of pedestrian and more institutional and as we were talking about earlier you have two sovereign wealth funds and others that poured money into those because everybody knew them and of course you know you put money in bridgewater of course you put money in a goldman sachs alum or of course you put money in Farallon and i think the return streams have been only okay and then you have there's another reason behind that I think is because as the owners became rich they look like a bond absolutely they just don't want their money to go off that's a good point you know the risk tolerance of the owner as his proportion of the capital changes absolutely changes and we saw this with Soros right when he was originally managing capital shooting for 40 50 % returns everybody loved it but no one was invested and then some people invested and they had a nice run he was making 30% returns and I remember we got up to about five or six billion and he basically said you know guys I'm already rich I can't only want to make fifteen and I know that's not what you guys want so you're gonna want 30s you go chase somebody else and so he shrunk down and then he still made 30% but now it was all his money and then he eventually turned into a family office but I think you know he's unusual he kept that same level of desire and and risk tolerance whereas the average manager you know when they have $100,000 in the fund they're gonna shoot the lights out because what was a hundred thousand does matter if you got a hundred million in the fund oh now I need a little bit more safety if I got a billion dollars in the fund to your point I need a bond I don't really care yeah and I see that you see these giant hedge fund groups of people I knew from the past were incredible return generators yes don't generate returns anymore right and I don't think they want to and I think the pension fund industry that's needs bond like it need bond like instruments sing well okay fine I can get out of breath and how it or the crest or whoever it is no that's your point it's it's about liquidity it's about fixed income substitute it's about low correlation and so they've institutionalized the business heck you can't have three trillion dollars of alpha generators you just not gonna have it right and she's not gonna happen so what you've got to have is some number of trillions of dollars of good core diversifying assets and look if I'm a big pension fund and I have a seven and a half percent actuarial rate all I need to make a seven F I don't need to make fifteen I don't need to make twenty five I need to make seven and a half so if I can do that with some semblance of you know low volatility and it can be uncorrelated with my equity assets meaning it doesn't get crushed if we have another or when not if when we have another correction then that's a positive but I do think it it's changed a lot of the nature of the business and then you've got the other problem with the increased regulation on banks which used to be playing a big role in hedge funds yeah what talks about there's too much money in hedge funds I think there's not enough because what people are forgetting is for every dollars going into hedge funds probably two dollars have come out of the banks prop desk so it's probably less money trading the strategies today than there used to be yeah when I was a Goldman the golden prop desk was by far the world's largest hedge fund by far just not known I had several prop tests micro guys know the relative value no initial six guys that were huge and they and you think about a lot of the alums that came out of there you know they benefited by still having their old guard friends still inside the prop desk so there was a lot of good information exchanged but when you put that Chinese wall it's it's not necessarily a good thing I don't think no and Chinese wall at the wrong term but when you when you put that that you can't do prop trading it lessens the amount of liquidity in the markets and less liquidity is never a good thing so do you think returns generally in the hedge fund space have come down as more money's come into it and more the pension money's come into it that wants a different return yeah you're right and I guess I can couldn't argue I don't have the data to support that but I wouldn't argue with the premise at all but I would say that there's also probably a flattening out and an increasing of the tails so you've got some that I think are benefiting greatly and they're taking advantage of anomalies that exists because prop desks don't exist as much and I think there's a lot of people that probably shouldn't be in the business and they're generating poor returns and you know say that they're you know 40,000 hedge funds who say what are you talking about there's only 10,000 I say yeah but we've met all 10,000 they're all in the top quartile so somewhere the 30,000 bad I've never met a bad one they're all top quartile so but even in the 10,000 the reality number right there are 10,000 good managers it's impossible so let's say there's a thousand that are you know really quality and even within that there's probably a few hundred so why are those other ones get funded well hope springs eternal and some are good marketers and lots of lots of reasons but at the end of the day you do have to generate good returns how do you pick funds now so now you've got a huge universe yeah as you said there's a bit of dross in there yeah there's a whole group in the middle that you don't really know what to do how do you how do you find value in there yeah the winners you know I've always approached it the same way and I'm I'm probably on if there's a continuum between quant and qualitative I'm probably too far on the qualitative some would say and not enough on the quantitative and yeah but we all have our Styles so I'm much more on the qualitative side and and part of this is I've been very lucky I've got to hang out with some incredible people in the industry over a lot of years and and I learned a lot you know spending time people like Julian and and others and and so my big thing for for a manager is competitiveness right I'm looking for just people who are competitive about everything and you know the and I don't mean in a negative sense I mean there's there's extremes like where people get so competitive that they have to bet on every shot in a golf game I mean but I'm just talking about people who want to win yeah and and really hate to lose and then you know I'm looking for a core intelligence but more I'm looking for intellect people who are intellectually curious people who you know I don't want the 1600 SAT quant guru you know I want the person who's got a little you know street sense and a little bit of that ability to to have that second order thinking you know natural gas prices fall what does that mean for polypropylene producers or what does that mean for railroad like railroads you know who me more oil produced in the Bakken there's no pipeline well why is there no pipeline what we can talk about that but there's no pipeline well someone owns the railroad so they're gonna ship it in the railroad cars so let's buy the railroads so that's second yeah what we call it or I call it the knock-on effect and I think that's the key to good thinking in financial markets is you don't look at the obvious thing in the office of that yes yes some third order thinking yeah sometimes that has a much bigger potential move than the major major thing yeah the ability to to think one and two steps out is clearly important and that's what I'm saying it's more intellect than intelligence and that street smarts and then I also am looking for people of character just unquestioned character and integrity you know if you cheat on you know cheat on golf you're gonna cheat on me you cheat on the test you're gonna cheat on me so I really want people of high caliber integra you know if you're gonna fudge the number when no one's looking what about when it's really important you know you're gonna fudge a little mark oh it's only a nickel well what about when it's 25 cents or 50 cents so I'm really looking for for people who have have high integrity you know another one for me is is collaborative spirit you know can you work well as a member of a team because one thing I think I've come to learn is as much an individual sport as this is it really isn't it looks like an individual individual sport you've got the name brand on the front but there's always a support team and if that team doesn't support the leader I find that you don't get really great results so you got to have that ability to to work with people and collaborate with people so what if you look back upon some of the hedge funds you invest in the early days they were the big winners and who did you really screw up with oh man both sides so yes that I we've been very lucky and we we came into the business at the right time meaning it was it was the boom period and and so we really we really did get to invest in in all the great ones I mean you know we were early investors in Blue Ridge and and John Griffin we early investors in Lone Pine and we were early investors in Viking I mean I remember remember the story of ondrea's coming out of viking and he's trying to tell me how you know they're gonna be three equal partners but I am the CIO and okay that's good and he's going on he says now remember there are three of us he's equal partners but I in the sea how I run the CIO Porsche well okay I got it you are the CIO and that's really important because you understand Viking he is the CIO he is the leader and he's created this structure in this infrastructure like the military guy that he is that allows the team to prosper but it was very important that they had a single leader and having a three headed leadership wouldn't have worked but it was so funny listening to a say but you know and Ken Griffin I wasn't there when he was doing out of his dorm room but it wasn't that long after so and I think I'd say about Canada Canton is a better trader than all his traders he's a better accountant in a CFO he's a better lawyer than a General Counsel he's just better at everything I mean the guy is truly dazzling but he's also built an infrastructure and a team that's second to none I mean he has more tech people than most people have investment people so truly truly dazzling but I've had some some real clunkers the kind of returns of that before we go to the clunkers well the kind of returns of those guys like maverick cuz some people won't be familiar with these funds how do they do yeah you know you look at lone pine for example you know Steve Mandell you know they've compounded close to 20% for almost 25 years compounded per year that's an extraordinary number and you know you look at Blue Ridge I think it's the same number in the low 20s you know Citadel Citadel is is in the high teens because they had the one bad in 2008 when you know the world was imploding and crazy as all the assets they had were not impaired but the banks were calling the loans to try to seize the assets so they could sell them in a tarp and make money there's something wrong with that but okay but it happened and so you know these guys have compounded it at very high levels for a very long period of time and it was very very hard but you know we've invested with hundreds plural of managers over the years and we've had our share of of really bad ones as well as really good ones and I think one of the common characteristics of the bad ones is they didn't appreciate the operational side of the business so they didn't spend time having an equal partner come in as a head of operations so they could focus on investing and I think one of the genius moves and Paul Tudor Jones is having mark Dalton who takes care of it all the business so Paul can focus on trading and you know they've compounded again in the teens for coming up on 30 years but I think the other thing that we we misjudged was people's ability to not give in to the temptation of size so you know when we'd be early with somebody and we'd have good returns and then they'd grow very large in the private side I was actually pretty good historically just not doing the next fund and the public side we tend to give people a little bit too much rope too much benefit of the doubt and that you know change as you mentioned earlier about how their risk tolerance changes and and the return stream changes so that's been disappointing from time to time it's kind of overstaying the welcome and I think there are examples out there of big funds that got to that point returns got lousy teams then spun out and we've been fortunate to invest with those teams over the years which I do like that element of this business it's a it's a birth and death thing which is kind of fun and do you look at the hedge fund portfolio like somebody would trade stocks with a lot of people don't understand how you do great so you do kind of cut your losers run your winners you know how do you how do you think about all of that process such a good question no one ask that question that's that's like a phenomenal question because it is exactly like a portfolio and you should think about it like a portfolio I think the problem for most people is they don't appreciate portfolio construction you know there's four steps and investing asset allocation you know where am I gonna be what geography or what asset class then there's manager selection you know am I gonna give you capital I'm going to give Steve Kaplan or me give ondrea's capital and then there's portfolio construction all right if I pick the three of you the average person just says one-third each and I'm going to rebalance well why well what if this person is twice as good so maybe they should get sixty and the other two should split forty so that's the way we really think about it is that portfolio construction the last step of security selection and that's what we're outsourcing when we use an external manager but that portfolio construction is so important and we start from a top-down perspective isn't all the silence it's definitely art it's dead look people try to quantify it but you can't because we're talking about human beings we're not talking about numbers on a page and and I think a lot of people have tried to quantify it and it hasn't been successful but ultimately you said it right we're gonna press our winners and we're going to you know call our losers a lot of people double down right and there's this thing and I tweet this a lot on on the internet on Twitter so at Mark usko right and I say hashtag winners press winners hashtag losers average losers there's the famous sign of Paul Tudor Jones sitting under the losers average losers sign at his dorm room or whatever and it's true but most people they buy something at ten it goes to five they want to buy more instead of saying well I'm just wrong and I'm gonna move on to the next good idea and Soros says it best is the only reason I'm rich is because I realized my mistakes faster and correct them and move on to the next good idea so the same thing is true in managing a portfolio of managers is you know people go through periods where something happens they get divorced they lose a child they you know get red Ferrari syndrome where they get distracted you know there's a famous story about the guy out in California at 17 Ferraris and a staff of ten taking care of his Ferraris why didn't he spend almost I'm managing my money or the guy who kept me waiting his office for an hour where he met with his architect like guess what we're not investing there so those are real and people do have those experiences life experiences that impact the way they're going to be able to manage so we have to constantly vigilant and understand the relationships we have with the managers but the other thing we try to do really diligently and it's hard it's part of the hardest thing to do in the business is when a manager that we have a great long-term track record with and history with has has had a tough period we actually will give them more money so unlike a security where I do want to you know cut my losers short if I really believe in the manager and I believe they're just their styles out of favour or nothing's changed I will give them more capital and conversely if a manager gets on a big run okay I will take capital back because I think the cycles going to shift and they'll go out of favor now that's different than a security like if you have a security a company that's just executing really really well you know you want to keep adding to it and that was the one things I said that made Julian a great investor is he had this uncanny ability to double up whereas most people double down so I think it's subtly different in that when we're looking at securities that winners press winners and losers average losers really works in managers as long as nothing's changed we'll trim our winners and give to our losers now if we think something's changed either their asset base has gotten too big they've changed their style their strategy or they're going through on these life situations then we'll cut and last questions later and I think that that gives us a little bit of an edge because a manager ultimately is a relationship if you're an alligator you're giving money to a manager you have a relationship and if you support someone in that difficult time they remember it and there's usually a symbiotic relationship that you you benefit from and how do you look at I guess you you're more intuitive and using experience but how do you look when somebody loses money when do you say okay enough enough yeah and I need to question whether your Styles out of favor or happy how do you go through that process ah because there's a hedge fund manager on the other side I've been running hedge funds before yeah it's that awful process of never knowing how somebody's going to judge a bad month no no it's that is the the ten billion dollar question and and I don't think we're we're perfect at it by any stretch of the imagination but I do think you're not your word again is perfect it's it's intuition and it's just pattern recognition and it's 10,000 hours when I was first doing this I was lousy at it I mean I was really lousy at it because it you get sucked into the glamour and the media and the hype and and you're paying attention the numbers and I remember going into a manager's office and I had this spreadsheet that I had done and I had all the numbers laid out and he just eviscerated me because the numbers were talking about the past and he was talking about the future and and it was this epiphany moment of saying no no what you need to do is be able to evaluate the person and their ability to generate alpha because they have edge and what is that edge that edge is either an information edge it's an intellectual edge it's a modeling edge it's a relationship edge you know again one of the things that I think the early hedge fund managers had better than anything is a couple things one they were older right they started their firms later in life you know Julian was 48 Soros was 49 Cooperman was 48 so they had these big networks in these relationship sinks that they could dip into and so when when we kind of think about how is somebody doing one month don't care don't even really know how someone's done in a month if I see a pattern emerging and there's a divergence from what my expectations are like when I go into meetings I don't look at performance like if I go in to meet with you you got five years performance I don't even know it I don't look at it I don't want to know I want to hear your story I want you to tell me how you think and how you think about the world and then I want to go back and check the footprints in the sand because you tell me you're a growth manager and you underperformed in a period like the last five years I'm gonna go oh I don't get it whereas if you say you're a value manager and you outperformed in the last five years I'm gonna tell me you're lying to me so I don't really want to know a priori what somebody has done and so when when we look at at performance it's more of a symptom right it's like a cough you have the coffee cuz you already sick you should have avoided getting sick and so we try to cut it off at the pass by staying close to people getting to know them understanding where they are in their life and but why wouldn't you if you're giving them money to run and you have to have your trust and faith so therefore you want to know them if I'm going to give you money I know I don't know what you're doing with it how you think about there are so many people that show up once a year maybe if they're lucky we'll just look at the numbers yeah just look at the numbers or just look at the numbers yeah and ultimately that I think the numbers are symptom right they're just there's something that happened because other things were happening and we've got a good one just this morning we learned that there's a very famous hedge fund that one of the principles there's really two principles one of them is leaving now what does that mean does that mean that that principle finalists decided they're gonna go doing our own and you know one plus one will be you know they'll raise more money together and they'll still collaborate or is it hey there's a rift and now it's gonna sink both ships or what is it so we're gonna have to dig in and find out what's actually going on with that is it a divorce is it a hey little brother you go off and do this and we'll be better together it can be many different things so it's more I think it's more of a people business than people understand yes because you know knowing the business for a long time as well there was a lot of people who didn't understand that and they were always the best investors that people understand who bought into you your ethos what you're trying to do was supportive and the worst people the people who just look at your numbers how'd you do the first three months then run out so fast so I met a emerging managers conference you know that Morgan Stanley always puts on out in the garden city in out on Long Island I always says why are they doing it way out here it's cuz once you get you here you can't leave okay going to other meetings in the city and you're stuck it's you know an hour away and it was great and so but I remember quizzing this guy and he's a new startup manager he basically made ten basis points for the first six months just know volatility so what do you have it flow yeah mostly cash and yeah I got a couple positions on and doing I said I can't if I got you and he says oh well I just can't afford to lose money in the first six months I said what are you talking about and this woman from a Swiss fund of funds that say it's always fun the bunch every time she jumps up she says absolutely I would never give money to someone who lost money in the first six months how do you know what they're doing because how do you know they're not gonna lose all your money in the seventh month if you don't know what they're doing up into so I just I just thought it was it was a very strange day when in the first three months or six months you're not getting their strategy no you don't have no idea so yeah you have you're actually investing in something entirely different yeah and so I guess you know I shouldn't say anything just I mean I didn't you didn't name no you didn't name names and I didn't even know her but it was one of those things where I shouldn't disparage in the sense that maybe she'd done all the work and actually really knew this guy Col Joe it's totally possible but what I what I got from the comment was all I care about is the numbers no you can't just only hear about the numbers because the number doesn't give you any information if what we just found out is just sitting in cash so how let's say you're a new guy and I think a lot of people watching this would be a lot of people who want to start hedge funds or think about leading a bank or whatever it is what's your advice about that whole process what they should do yeah we should do and yeah a couple things I mean one make sure well then it's true of career and life generally makes you have good mentors and I would say think about the four people you spend the most time with that's what you'll become so I like hanging out with you so you know you got to hang out with people that make you better smarter than you et cetera so that's one so and also by having a good mentor that you can talk about when you're doing a start-up really important because people will connote your new firm with that person's success so have that mentor that and they don't even have to be an investor or seed or they said be somebody that ouch for you and your character second thing is you know be honest and be open about what is your gonna do right if you have something that has edge or you have something that's unique talk about it don't give me the drivel I say you know most pitch books I can pick the two pages that matter and the other 18 pages throw away because they're all the same so figure out what those two pages are and really focus on that you know what makes you different what do you have edge do you have experience do you have knowledge do you have relationships that make you more able to generate alpha in the future I would also say that you know find people that want to get to know you right whether it's you or me or others that actually want to know what you're doing not just send me the numbers and you know put you in a database and I'll monitor you and six months from now maybe I'll get back to you that's not interesting and then finally I would say make sure that you solve the operational question first you know do you have a good partner that's coming in to take care of the back-office and the operations and the infrastructure so that you can spend your time on the investment side and the team management side because the biggest difference between going from an analyst who's generating ideas for another portfolio manager and being a portfolio manager is it's harder than you think and I think one of the big things for me is there are a lot of people who should never become portfolio managers they should be analysts it doesn't mean they're less good but it's likely Cooperman says it says there's one portfolio manager at my shop and that's me all these other guys they might be 55 60 years old but they're analysts and they love it because they're the best analyst in the world but they have no aspiration to be a portfolio manager so think what you're good at and make sure you're not trying to become something that you're not so if you if you are a great analyst right be a great analyst if you think you have portfolio management talent make sure that you have great analytical talent around you and great infrastructure around you so that you can focus on being portfolio manager and how about the question that comes up for a lot of people is volatility because as you know I mean we the kind of old-school macro guys who are volatile and we understand that the lumpy returns that's fine you need to people struggle where they should fit in the volatility spectrum because they want to please people as opposed to this is my product do you like coca-cola because I make it or not but you competent coke is another product they do it I think the challenge we have now is is Willy Sutton syndrome you know that's Willy Sutton the famous bank robber why do you rob banks let's really keep the money so I think that's the problem is you know where's all the money sovereign wealth funds big pension funds big consultants so what do they want they want institutional quality they want big asset base they want low volatility they want you know oatmeal well the problem is that if you're a start-up is you don't have a big asset base you may be able to generate low volatility returns or so your model tells you you can but you're not gonna get the chance because you don't have the infrastructure you don't check all the boxes to be big so where you gonna go well you're gonna have to go to a seeder you're gonna go to a family you're gonna have to go to the people who want that to take that risk on you as a p.m. now what are those people want they want the old-school macro kind of returns they want the lumpy they want the you know rough 15 not the smooth eight yeah I I want 15 not eight and you know Drock talks about this on the thing he did on Bloomberg says you know when we were running back in the early days you know our goal was to make 20 percent returns now the goal is to make eight percent risk-adjusted what does that mean right give me twenty percent returns guys and so as a start-up you got to choose do you have the ability to get enough capital from somebody whoever it is you know friend the cousin or whatever to get you to that critical mass where you can check the boxes for the institutions to give you low vol capital you want to do that fantastic and you know if you come out from the right pedigree right you're coming out of goldman sachs you're coming out of Morgan Stanley you're coming out of Bridgewater you're coming yeah that might work and that's great and I don't begrudge those people building those firms because they're gonna generate nice stable returns for big pools accountant there was a need for 30 kinds of returns particularly in the fixed-income environment it's a huge need and why would you own bonds here only three things can happen two of them are bad okay you can hold them and it straights kind of stay flat but inflation comes back and you lose money you gonna hold them that's bad you can hold them and it's rates go up and you lose money that's worse or you can hold them and we turn it into Japan and you make money and I think that's better I think but it doesn't sound very good to me but ultimately fixed income I think is gonna be less attractive then equity market neutral merger arbitrage and the like but again you gotta have size to get the institutional capital so it's chicken in the egg problem so you know if you want to be in the business I would say go where your edges you know are do you have edge in information acquisition well that edge is mostly gone you know in the old days richard treehouse you know he had it right he was the first customer of bondage and news edge and he got information before other people not illegal information he just got it faster because he could get it now high-frequency traders get it before you and i'll ever get it forget it so it's not about information access today it's about information synthesis can you determine what's important and what's not important there's so much not important and if you can really focus unimportant and you have that edge that's a great edge you know do you have a modeling edge that's still possible not not as possible because most of the models have already been thought of but there's some I think enhancements there that you can you can make you know do you have a team edge you know a fundamental research edge you know relationships companies I met a guy the other day who it was an investment banker in health care Suez knows all these health care CEOs that's edge right again not insider trading kind of edge it should edge he he has information and they're actually investing in his fund that's huge edge so whether it's domain expertise or a better ability to you know but but even the better ability I was gonna say better ability to acquire unique insights like you know I was talking this one manager years ago and he was the first guy that said Apple would sell a million iPods know some people what's an iPod but he's the first one said they're gonna sell million iPods and absolutely okay I'll bite no why do you know that and he says well I pay college kids to go to the stores and talk to the people selling iPods and you know we get good information on on how many iPods are selling like oh come on said how why would anyone who's working inside one of those stores share any information on sales says are you kidding me yes someone making minimum wage what they think they'll talk to you all day long they say they're not they're not sharing anything that's proprietary or anything that's they're just talking I'm saying we're selling tons of these things and you know he made lots of money and apples been a great story so but now suppose that's expert networks you know supposed to do that and like what that's just good hard due diligence yeah I think but you know I think it is a trickier environment because you have to be careful about you know staying on the right side of the line I think it's all about integrity yeah so going back just looping back now to where we started the beginning of this conversation if I listen to what you're talking about the hedge fund world and how I think about in seeing the returns lowering because people are being forced to lower returns there's bond light return it kind of means that there's a whole spectrum of style which is the higher volatility high return style yeah that is so wildly out of favor ah that it's probably should be in favor brilliant insight right brilliant insight man and that's absolutely the case that that to me it's all about tactical funds today is about people who were willing to take calculated risks and and really get big when they have an edge and you know I wrote about this and two letters ago I wrote two hours ago over at all about Soros last one I wrote all about Julian kind of two of my heroes and the last one I wrote about Soros is you know his big thing about Druckenmiller is you know when you have an edge be a pig I mean literally be a pig and you could never be too big and people say no no you have to be diversified and you can't know when you get real edge on something you have real knowledge about a sector and in geography or an undervalued asset something that's sold off and you really get that edge be a big and I think it's it's not a big been a big change for me in my life and career and that you know I started as a fixed income guy kind of boring insurance company then I was working for a disciplined equity shop is actually a quant shop and we ran models and we'd pick stocks quote unquote we ran models and then I get into the endowment world I learned all about diversification and we're gonna have a fifteen percent allocation to hedge funds a ten percent allocation of private and a twenty percent allocation to energy and you know all these allocation percentages and weed rebalance and and what I've come to in the last couple years part of it is this shrinking of cycles part of it is the point that you said of you don't need that many good ideas a year now I really do believe that it's time to concentrate on what you think are your best ideas and we're doing that in our vehicle we have this hybrid fund that's a mix of hedge funds and a direct portfolio that we run kind of like the old soros quantum fund and you know we allocate to a smaller number of managers that we really really like that we think are emerging and a lot of talent and then we synthesize their best ideas and we double up on their best ideas and it's a great model in its crushin source has a similar model so that's exactly great idea all right and look I don't have a lot of good ideas but I steal from the best and so let's talk a little bit about markets and you know let's talk about firstly the big picture thing which was where's the great opportunity going forward the big thing week of a big secular thing we can yeah grab hold office yeah do you see anything anything super cheap well there's a lot of questions in there all right no that's all good but there's a lot of questions in there so you know I think there's only four things that you can own in the whole world stocks bonds currencies and commodities that's it right real estate not an asset class you either on the equity the deal the debt of the deal or their land their commodity private equity common stock preferred stock or a convertible bond in an illiquid company it's still stock or a bond it's not something different and use leverage so every it can be broken down to those for equity debt currencies and commodities so if we look across those four categories today I think debt is pretty unattractive unless you're originating it yourself if you're originating and making direct lending fantastic business 9 10 11 percent coupon one or two percent warrant coverage two points upfront two points on the back end fifteen percent glorious business but you have to have good origination you have to be able to underwrite but good business versus traditional fixed income note no sweat I think there are some some distressed debt opportunities they're starting to look interesting and I think there'll be more there was one in energy and I think there'd be a second bite at that Apple here coming up so be patient on that one if you look at at equities you know I think if you go around the world and break it into the four categories so you've got the US you got Europe you got Japan you got emerging markets and even in emerging markets you've got the commodity countries and the service countries some benefit from lower oil prices some are hurt by it but we think the u.s. is by far the most overvalued and I'm not predicting a crash tomorrow but I think we're closer to a crash than we are you know away from it so I'm saying let's be lighter in US equities there are a couple places within US equities are still reasonably attractive health care is interesting technology is interesting but but overall we think it's pretty inexpensive Europe there's some interesting opportunities particularly like the peripheral European countries and these places where people hate like Greece we love Greece kind of say I love Greece because people understand it or interesting Russia is unbelievably interesting I mean look what's good look people gave it up for dead last year and now it's at 40% this year it's just getting started because it was so cheap and it got really cheaper so but buying things that people hate usually is a pretty good strategy generally speaking you may just may have to be patient you may have to have a longer time horizon but I think that's the business we're supposed to be in you know other parts of Europe I think are looking a little pricey and I'd be a little nervous about the big core countries but even they you can't fight the ECB completely so you know having a little bit if I had to choose between Europe core and us I'd take Europe core and then Japan I love Japan I think Japan over the next decade outperforms the u.s. two or three X so not two or three percent but two or three X so if the u.s. goes up you know 20 percent over the next decade I think you go up 60 80 100 so I think it's gonna be good just sorry about Japan because look there is the debt thing we can't pretend it's not there they're my kind of theory on this is it's kind of price integrity as much like Greece so even if something really bad happened my view is the stock market probably it may pull back and may have a bit of time but it's like to do really well on the back of that it's gonna do really well and I think that's exactly right and I think look they get their debt problem and they know they have to inflate their way out and they're gonna do that by devaluing their currency just playing the simple and so 140 is gonna be in sight and then 160 and then 180 and then 200 and it's not have it tomorrow but look as long as Abby's on sticks around I'm bullish Japan because with this guy he look the Chinese were the best planners right they have you know well I guess sown it's at Softbank is the best is the hundred year plan but but the Chinese are the best planners they have ten year plans and multiple plans you know and and you know Japan has got this this five-year plan under aa base on because he can't be kicked out so I think that's gonna be great and then you drop down into emerging markets we talked about Russia we talked about Greece Saudi looks awesome here they're gonna open up their market people are afraid of it because it's the Kingdom great you guys stay over here and I'll buy it all but I think it's gonna be fantastic we like Africa we think Africa is an extraordinary extraordinary tone we could spend a whole day I just think I could speak to another publicist and we'll come back to Africa some other time but it's Africa's just unbelievably off a huge opportunity and then you know you look it at places like China and Taiwan and India that benefit from lower lower oil prices and I think oil prices are going to stay lower for bit longer than people think because it's the supply shock and Saudi has basically said look it's not just shale it's shale it's solar it's wind all these things are biting into our lifestyle so we're gonna put the price down to a level where we can dominate and we can control it and they're cranking up their production ten point five or whatever they hit the other day so I think it's a longer-term story of them getting back market share keeping prices lower and that benefits yeah I think yeah the curve flattens the whole oil price stays a lot lower for a lot longer there's a brilliant interview with red called dagger Perea yes and on real vision and yeah just kind of change my entire outlook I suddenly realized that if we do go through an NG bust and they can write off all the energy asset statuses they're all the new pipelines the railroads the port's the terminals and all the other stuff then all the people to buy those distress assets eventually that cost of production is collapsing well that's that's the great thing about real vision right is is you're gonna have the big macro stuff but then you can have the laser focused opportunity to interview somebody to talk just about energy or oil or or gold or come on I mean and that's what's really cool is you get to piece all these things together to get a real macro view yeah we get to speak something like you know with your experience that's great well thank you very much never come talk to us and we'll get you definitely back again always good to be with you and thanks for having me [Music] you

Channel: Real Vision Finance

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Keywords: Investing videos, finance videos, finance interviews, finance, finance 101, business finance, finance major, investing, trading, economy, real vision, real vision app, real vision tv, real vision videos, real vision finance, mark yusko, mark yusko youtube, hedge fund manager, hedge fund strategies, hedge fund interview, hedge fund trading, tactical asset allocation vs strategic, choosing a money manager, Investing masterclass, masterclass, real vision masterclass

Id: Dmg1V4KzKn4

Length: 59min 24sec (3564 seconds)

Published: Fri Apr 13 2018