A Hallmark of Great Investors
Plus: My take on multi-strategy managers and the OpenAI fiasco
This week’s post is more of a round-up, with a special offer at the end.
Multi-Strategy Managers
Multi-strat managers have been in the news recently:
Sir Paul Marshall complained of Ronaldo style signing on bonuses for top hedge fund managers
Schonfeld Strategic Advisors abandoned talks with Millennium Management
The FT profiled Millennium after 75 year old Izzy Englander had reshuffled the organisation.
The multi-strategy hedge fund firms, of which Millennium is the largest with $60bn AUM and over 5000 people globally, have been attracting a lot of capital, thanks to good returns.
One peculiar feature of their model is that the infamous “2 and 20” fee structure is apparently inappropriate. Instead, they charge a minimum management fee, pass through costs including salaries and signing-on bonuses, and take 20-30% of the profits. To be fair, Millennium has averaged an astonishing 14% pa, according to the FT, after these charges.
Marshall was complaining as his fund, Marshall Wace, the largest hedge fund in Europe with $64bn AUM, has to compete with the multi-strat firms (or pod shops) for talent. And, perhaps unsurprisingly given the end investors pay the bill, the pod shops are paying 8-figure sign-on fees to attract top talent. In order to compete for talent, Marshall Wace’s Eureka Fund (managed by Sir Paul) is reported to have added a 0.75% of AUM compensation surcharge to reward its best performers. Marshall Wace Asset Management Limited had earnings of over £1bn last year on turnover of £1.6bn. Imagine what Izzy Englander took home………
Again per the FT, Schonfeld managed to raise an additional $3bn in AUM to keep going and the merger talks with Millennium were abandoned. And Millennium may just have grown too big for Englander to keep on top of all the fund managers. One friend that worked there complained of the intra-day calls from the big boss telling him to cut risk. Englander has now put in place a new organisational structure which has divided responsibilities for oversight of managers.
The current fad for multi-strategy firms is worthy of further consideration as I think the premise is questionable. All of these firms severely limit the risk that their managers are allowed to take, which makes some sense. But if you don’t take risk, you cannot make returns – that is an infallible rule of investing, it seems. Hence they juice the returns by employing as much as 10x leverage.
Apparently, some believe this is a good and even sustainable business model. How is beyond me, so I want to spend some time exploring it and will return to the topic in a future issue. Englander is clearly an incredible manager and has proven the business model if he is at the helm. Perhaps Dimitri Balyasny and a few others are similar.
But a huge amount of assets is now controlled by this sub-sector and with the leverage, a massive amount of capital is employed. And they all seem to be doing the same thing – for example, trading over results is popular and is surely not a low-risk game.
If you work for a pod shop, please email me and let’s have a chat.
A Podcast Worth Your Time
My podcast with Sebastian Lyon is proving to be one of my most popular. Simple reason – pure common sense and no airs or graces.
I really enjoyed our discussion. Sebastian's investing philosophy favours the simple over the complex. He has an art of clarifying issues and making them comprehensible. And I think that is one quality of a truly excellent investor - Warren Buffett is obviously the exemplar.
I think many private investors are drawn to the complex and to the risky. Everyone enjoys talking about their big wins down the pub. Sebastian's approach is the opposite and it works.
His model clearly resonates with my audience –invest in quality companies, dial risk up and down depending on valuation, and keep things simple.
Of course, it’s easier to talk about than implement. But it’s absolutely worth an hour of your time hearing how he does it. You cannot fail to learn something from this discussion. I certainly did.
AI
Like everyone, I have been fascinated by the tale of Sam Altman’s departure from and return to OpenAI. Imagine if this had happened in a couple of months after outsiders had invested at a price tag of $86bn. I have no idea of the reason behind the debacle and have been bemused by the streams of Substacks idolising Satya Nadella for apparently rescuing the situation.
I haven’t seen anyone ask one simple question. Nadella invested $13bn of shareholders’ money in a start-up. Why didn’t he ask if there was proper governance? I know Microsoft is a huge company and it can afford to punt $13bn. That’s not the point. Why invest in a company whose board lacks enough grown-ups to avoid this sort of mess?
I like to invest in companies where the board is there to represent my interests. I think you should always check the board composition and I flag this in my course, How to Pick Winning Stocks, and in the Analyst Academy – more on this in a second.
Black Friday
I understand some of you are fed up hearing about my investing courses. But once a year, we have a sale. I know some of you wait for this time of year. So if you are one of those value investors waiting for an opportunity to buy at a discount, you should read on.
For a limited time, we are offering my free Substack subscribers £100 off two of our most popular courses. Premium subscribers get an even better deal – see below.
Free subscribers can use the coupon code BF23 at checkout to get £100 off:
How to Read a Balance Sheet and
But, don’t hang around. This offer expires on Friday December 15th and there won’t be another money-off deal until next year. Unlike some vendors, we see no reason to discount our courses continuously - we believe they already offer great value. If you choose your own equities, this could be the highest ROI decision you make all year.