The transcript from this week’s MiB: Ilana Weinstein of The IDW Group, is below.
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VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This weekend on the podcast, I have an extra special guest and this was a master class in what is going on in the alternative space.
Ilana Weinstein is uniquely situated to understand hedge funds, venture capital, private equity, the demands of scaling a billion-dollar firm into a $40 billion firm, who was moving around from firm to firm, who are the most talented people in the space, what is going on with outflows from hedge funds and why. I don’t know how to describe this except to say this is absolutely an incredible discussion from a person uniquely situated in a one-off vantage point to understand exactly what’s taking place in the space.
So, with no further ado, my conversation with Ilana Weinstein.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Ilana Weinstein. She is the Founder and CEO of the IDW Group, a leading boutique for hedge funds, private equity and family offices in search of top investment talent.
Previously, she worked at such august firms as Goldman Sachs and the Boston Consulting Group. She got her undergraduate degree from the University of Pennsylvania and her MBA from Harvard. Ilana Weinstein, welcome to Bloomberg Radio and I add that because I’ve seen you on Bloomberg TV many times but I don’t recall ever hearing you on Bloomberg Radio.
ILANA WEINSTEIN, FOUNDER, CEO, IDW GROUP: This is my first time, Barry.
RITHOLTZ: So, you’ve been in the asset management industry for more than two decades. How did you end up on the recruiting side?
WEINSTEIN: The short answer is I was really young and I was still trying to figure out what I wanted to be when I grew up literally. I’d gone to HBS after a year at Goldman. So, I literally went from Penn from my dorm room to my parents’ home, worked to Goldman for a year and then went to HBS.
And just to go back and answer your question, I ended up going to the Boston Consulting Group really because I felt I needed to get a post-MBA to my MBA. I wanted to figure out what path I wanted to take, what sorts of problems I wanted to solve, what industries were interesting to me.
And this is in the — I was in my late 20s, this is in the mid-90s. So, the dot com because that’s of course what we call it back then.
WEINSTEIN: The dot com bubble was just bubbling and within a year and a half, my entire class of MBAs at BCG, the class I entered with, was gone. So, I was literally — they’d all gone to California to seek their — start the next whatever.
RITHOLTZ: Give me a big fat sluggish stock options and a stock that just goes up by 10 percent a day and everybody jumped at it.
WEINSTEIN: And done. Right. You can imagine how that ended for most of them.
RITHOLTZ: It depends on if they knew when to hit the bid or not. If they were smart and took off some risks, not too bad. The people who didn’t?
WEINSTEIN: So, they’d gone to try to start dot com companies and I — that wasn’t my gig. I wasn’t — I realized I didn’t really — I’d learned a lot at BCG. I didn’t want to be a management consultant as a career path and I still was figuring out what do I want to do.
And before I committed to any particular pathway, I figured I would jump into another milieu where I could learn again more about companies and functions and just figure out where I wanted to commit to. And so, I joined a large recruiting firm thinking that would give me a purview and as it turned out, I was really good at it ..
WEINSTEIN: … and I fell into — I quickly joined their financial services practice and that’s how I ended up in recruiting.
RITHOLTZ: And so, you ended up focusing a little further along in your career on hedge funds, private equity, family offices.
WEINSTEIN: So, what happened was after about a year or two there, the dot com bubble burst and there — this was this big search firm I was at, their financial services practice was really focused more on investment banking, equities, traditional asset management, sort of what I’ll call older school businesses compared to what I really fell into and started to focus on, which was back in the late ’90s, early 2000 as you’ll remember, these were the — this is what was fueling the sell side, this is where the action was.
It was the prop groups and it was these new first-of-their-kind-type financial products. It was called — so, it was credit correlation, asset swaps, it wasn’t even called credit derivatives back then.
WEINSTEIN: Highly structured first of their kind derivatives types of transactions. That’s what we were focused on for the sell side clients that I was working with and that’s where the juice was.
And all of a sudden, I developed my own business which was on fire within this big firm and it just became obvious after a few years to me to really try to do this on my own given I was acting effectively independently within a larger construct which was having issues at that time.
RITHOLTZ: So, let’s talk also about the timing. As you were explaining that, I began to think about the timing. If we go back 20, 25 years, what were there, 200, 400 hedge funds? Today, there is 11,000. Your timing into that ramp-up could not have been any better.
WEINSTEIN: It was perfect, Barry, right? I planned it perfectly.
RITHOLTZ: Right. I mean, so, all these — Goldman Sachs is infamous for saying to a group of traders who they smell might be itching the head out, hey, why don’t you guys go set up a hedge fund, we’ll get you capital, will prime broker for you and will steer some potential clients to you, and that’s how they built an immense prime brokerage business. How much was the Goldman Sachs’ connection helpful or as you as an analyst …
WEINSTEIN: It had not …
RITHOLTZ: … really is a different …
WEINSTEIN: I was literally just understand — I started at Goldman in the middle of my senior year Penn. I mean, I — because I just was — I don’t know, I was stupid. I was like working — I just — I got through all my classes. I didn’t have enough fun in college …
WEINSTEIN: … is the bottom line.
RITHOLTZ: It sounds it.
WEINSTEIN: Making up for — trying to make up for a lost time now.
WEINSTEIN: But I was finished with my classes. I started middle of my senior year and I was out within literally a year to HBS. So, think about it, I was — I hadn’t even graduated from college. So, this was — it wasn’t — that was not what really kind of what really jumpstarted my business.
What it was however, you are correct in signaling the sell side as a driver of hedge fund talent because back then, it was the prop groups that were the precursors to hedge funds.
WEINSTEIN: It was these, again, high-octane — and these were the guys who got paid the most on the sell side at that time, right?
RITHOLTZ: And even still felt like they weren’t capturing as much of their P&L as they wanted.
WEINSTEIN: Well, it — within a sell side contacts, they were doing as well as they possibly could.
WEINSTEIN: Back then, you could be a superstar prop trader and earning 20, 30, 40 million bucks a year with which doesn’t happen anymore.
RITHOLTZ: Come on. Right.
WEINSTEIN: You could be — you could be earning more certainly than the CEO. But their buddies were leaving, many of whom were Goldman partners or just were — just like, again, high-octane prop traders from Credit Suisse, from Deutsche Bank, from Morgan Stanley, from JPMorgan, and they were setting up shop.
And remember back then, you could start with 50 and scale to a billion …
WEINSTEIN: … very quickly.
RITHOLTZ: Yes. Yes.
WEINSTEIN: And so — and all of a sudden, there’s no headwinds from any other part of the bank, there’s no cap at all in terms of how you get paid, you can do whatever you want. And if you’re an entrepreneurial person who is a great investment professional and that’s your passion and that’s what you want to do, why be part of a bank? There was no headwinds to getting into this business and scaling if you could produce the goods. And back then, you could do that a lot more easily.
RITHOLTZ: Quite fascinating. Let’s talk a little bit, Ilana, about how your business works. Do hedge funds and family offices come to you looking for slots to fill? Are the traders and fund managers reaching out to you? What is the structure like?
WEINSTEIN: So, let me back up and tell you which I’m actually quite proud of. We’ve been in business for almost 17 years, 17 this February. Most of our clients, we’ve been working with practically, if not since the beginning, certainly, within the first few years of inception of IDW.
So, what that means is we’re — we really know their business, we’ve helped them build their business and, yes, they are coming to us for specific assignments whether it’s — and the common thread being they’re all senior people who can move the needle, whether it’s someone to do via TMT PM for equities, someone to run in emerging markets business, someone to build and run distress.
But at the same time, and this goes back perhaps to my BCG background, I really — our role — my firm’s role is to also be an advisor to them as well as to the market. So, it’s –I’ll give two assignments we’re working on today and the genesis of it. Each one is arguably for one of the biggest and most sophisticated hedge funds in the world.
One, I started talking with the founder at the end of the summer about a new business he wants to build. He runs a $40 billion hedge fund, super successful, and he wants to create something wholly other than what he does today.
So, we’re helping him find somebody who could oversee that and build that. That’s a very sophisticated person …
RITHOLTZ: For sure.
WEINSTEIN: … who’s not — this isn’t someone looking for a job. This is somebody who has actually had great success with what they’ve done in the past and this is kind of an interesting maybe Chapter 2. And as successful as they’ve been, it’s an opportunity for even greater wealth creation.
The second example I’ll give you is another client that is almost as big and, again, these are two of the most successful hedge funds in the world. Very forward-thinking guys. This is a client we’ve worked with for a long time.
I came to him and I said to him, there — I see an arb in the market right now. There is a universe of people who are really talented and are staying where they are not because they’re happy but because a better option doesn’t exist and if you created this, I think you could capture that alpha, right, this group of individuals that have been phenomenal P&L generators even in the last few years where it’s been very difficult. He’s now building that business.
So, it’s both working on discrete assignments for our clients as well as coming to them with advice about where to take their — how to take their funds forward.
RITHOLTZ: That’s fascinating. So, if someone comes to you and they’re looking to fill a specific role, what is your thought process like when you’re trying to say who do I know that might be a good fit for this or if I don’t know anybody in particular who comes to mind, how do you go about creating a pool of applicants that could fill that role?
WEINSTEIN: Well, after, again, almost two decades doing this, we typically …
RITHOLTZ: You know most of the players today.
WEINSTEIN: We kind of know — I’m not going to go so far as to say we have the answer before we begin although that is often correct. Like actually formally begin the search.
RITHOLTZ: Like someone says something you like, I know — in the back of your head, I have just the person.
WEINSTEIN: Well, we’ve done so much work in every conceivable asset class. So, many times that when we start something, it’s rarely truly brand new. What it can be — because certain strategies are more cyclical than others.
So, for example, when we did the — here’s a good example, when we did the head of emerging markets for one of our clients, he asked me how much work we’ve done in EM and I told him we had done a fair bit of work this is going back a few years but because it’s a cyclical strategy not for a while.
WEINSTEIN: So, there, what we did is we threw a lasso over the universe sort of as we knew it from when we last left off and when that strategy was last en vogue and it was a pretty sizable universe.
But — and this was a global search as well, right, because it’s a head of emerging markets, it’s — the person could sit here or could sit in London and we just dived in. And we build a tapestry of who the best people are, which is both by meeting people that we already know to be good, but even if we have no idea, the reality is we’re doing so much work in other areas whether it’s credit, rates, macro.
And if we’re doing work in a multi-strat and we have the credit candidates or the equities candidates in play, they will also have perspective on who is good in EM, right, whether it’s at their firm or they may know someone that they respect in another firm. And the common theme is these are people — we’re reaching out to people who have — who we view as best in class and talented people tend to recommend other talented people. So, we very quickly form a picture of who the best people are.
And the other thing, Barry, is just good old-fashioned hard work. When we do a search, any search, we’re typically going through maybe 200, 300 people even though I know the answer is within 10 to 15 of those. We just want to make sure we’re leaving no stone unturned and also building our own depth and breadth of knowledge.
RITHOLTZ: So, when you make a final recommendation to a firm, I imagine this varies from firm to firms. Do some firm say, find me the guy and I’ll hire them, or do firm say, give me your best, I don’t know, three choices and will interview? What’s the range like?
WEINSTEIN: It’s really — it’s usually iterative because again there is a best three choices in its basest form which is people who are — who can generate — who are the people who can generate consistent P&L over time that meet with our — with — that meet with our investing — our investment parameters.
But your version of who those best three people are may be different than someone else’s. Part of it is cultural fit.
RITHOLTZ: That was my next question literally.
WEINSTEIN: Part of it is just how flexible you, as a founder, are going to be with respect to giving them. You may say you’re going to give them a fair degree of — a lot of autonomy but they may need more than what you’re willing to give them.
They — and then there were just nuances. They may — you may say you’re open to somebody who runs in a manner that’s quite that concentrated and volatile but their version of concentration and volatility may be too much for you.
So, there’s a lot of nuances where we, you and I, need to iterate on truly who the best, quote, “three” are and the way we work is I’m not going to — we’re not going to throw 50 — we’re going to do the work of meeting all the people but we’re going to have you meet let’s call it 15 to 20.
RITHOLTZ: That many.
WEINSTEIN: Yes. And they want, too, as well because we’re talking about really good people and they’re going to learn something.
WEINSTEIN: They’re going to learn how other funds are set up. They’re going to learn how other — how — they’re going to get ideas from these people, right? They’re may be — let’s say it’s a long-short equity search. There may be things that the candidates are in that are actually helpful for the founder to know about.
So, if I told you that a search is a portal to meeting the top 15, 20 people in your universe, you would take every one of those meetings. That’s a good use of your time.
RITHOLTZ: So, this isn’t just I need a guy to do this, get me somebody.
RITHOLTZ: This is a whole big holistic process that’s really a two-way street with a lot of exchange of information and ideas.
WEINSTEIN: That is the only way we work and it’s — and I will tell you, we’re doing a search right now where the founder was candid with me. He may not even end up hiring someone. He just sees an opportunity that he may, may being the operative word, want to capitalize upon and wants to meet the smartest people who do this out there and then let’s iterate on what makes sense.
So, that’s not that different than BCG where I had to sort of help a CEO draw a conclusion on whether to enter a market …
WEINSTEIN: … and the way we went about that was through competitive benchmarking and speaking to other really smart people who sat in competitive companies and would help us to help him figure it out.
RITHOLTZ: So, here’s the obvious business question, typically, headhunting and recruitment firms get paid when the hirer is placed. If someone says you, hey, I may or may not hire this person but do all this work, you have to set up a different sort of …
WEINSTEIN: No. No.
RITHOLTZ: … consulting relationship?
WEINSTEIN: We are retained firm. We don’t do any work without …
RITHOLTZ: Got you.
WEINSTEIN: … without being retained ….
RITHOLTZ: So, it’s a very different structure than the old school …
WEINSTEIN: No. We are at the risk of being totally immodest, I will tell you, for a variety of reasons. I don’t think we look like anybody else. The most prominent one of which is our — the level we work at and the access to the people that we have.
So, it’s — yes, there were discrete roles that founders need to fill, yes, we are hired to complete those searches, but they tend to be really important searches that will move the needle for the fund. And if it’s a fund, that’s — let’s call it somewhere between 10 and 40 billion, that’s a really important person.
WEINSTEIN: And it’s not about who’s looking for a job, it’s not about who’s available, it’s — that’s not how we comment things. If you think of a Venn diagram, one bubble being best in class and there are very few people in any asset class I put into that bubble that are really that good, again, there’s all the work we do to make sure we’re leaving no stone unturned, but I really have a firm view on who is best in class.
My firm does before we start any search. That’s why I say we sort of know the answer but we just want it — we do all the work to make sure we’re not missing anybody.
The second bubble is people who were disenfranchised, miserable, looking for jobs. If there’s an overlap and these days, for a variety of reasons, we can get into, there’s probably more of an overlap than ever before.
WEINSTEIN: That’s a happy coincidence. It makes our job a little bit easier. All we care about is that first bubble. And really talented people who are — who have accomplished something special, this would not be an unusual profile of a candidate, somebody who oversees $5 billion where they sit today has had triple digit P&L every year for the last specifically …
RITHOLTZ: Triple digit.
RITHOLTZ: Not even double digit.
WEINSTEIN: No. No. No. Triple digit …
RITHOLTZ: This is a rockstar.
WEINSTEIN: This is an actual candidate.
WEINSTEIN: And this isn’t an outlier. This is — like this is everyday what we do. So, 5 billion, triple digit P&L, and the last four years have been really, really difficult. So, that’s quite an accomplishment, right? Much tougher environment …
WEINSTEIN: … which we can talk about. And compensation for him has typically been between 20 and 30 a year. He’s not looking for a job and he’s in a great firm by the way …
WEINSTEIN: … which is not at all facing the issues other firms are facing. He’s coming in to talk to me and my team because he wants to understand given what we do, given all the smart people we meet and the clients we have and everything we see across the entire hedge fund landscape. In my — what do you think about the structure of where I’m sitting? What is — what else exists out there? Here’s what I’ve built. Do I take my bag of tricks and do something different and then what does different look like? What’s your compensation look like for me?
It’s an advisory meeting and in that, it is our job to understand everything about his firm before he walks in which we know why. We know because we’ve met plenty of other people at that firm …
WEINSTEIN: … constantly and also understand what all his other options look like. S, we have to have deep intelligence on all the other funds that he could theoretically think about and then have a point of view on which of our clients could make sense.
And there are times — there isn’t — although it’s rare, there isn’t something else because our clients tend to be very innovative and creative to attract someone like that. There were times he should stay exactly where he’s at. But more often than not, we can set something up that is structurally superior to where he is even at that level. That’s a very different dynamic than somebody who like — needs a job.
RITHOLTZ: Quite fascinating. Let’s jump into something you alluded to earlier. The past decade has not been especially kind to most hedge funds. A lot of them have been struggling.
First question, from your unique vantage point, why is that? And second, what can they do to turn things around?
WEINSTEIN: Okay. So, I don’t know that it’s been the past decade. I think it’s more from 2015 on.
WEINSTEIN: Okay. So …
RITHOLTZ: We could …
RITHOLTZ: That’s a whole longer discussion?
WEINSTEIN: That’s a whole longer discussion we can talk. But …
RITHOLTZ: But it’s certainly been tough.
WEINSTEIN: It’s been a very, very tough environment. But I — but let’s talk about what’s going on and we’ll get to timing. And let’s juxtapose it to when I started which we talked about earlier which was 2003. That’s when I started my firm.
Five hundred billion of assets under management, 3.000 hedge funds. As you said, Barry, now, there’s 11,000 hedge funds and 3.5 trillion …
WEINSTEIN: … of AUM.
WEINSTEIN: A lot of that growth actually came post-crisis. At the time of — 2008 was 1.4 trillion, now, it’s 3.5. That’s a lot of growth actually in the last 10 years.
RITHOLTZ: Now, is that organic growth of assets or is that just capital flowing?
WEINSTEIN: Capital flowing in literally especially post-crisis, right? That’s when you saw the shift, right, and that’s also — you mentioned earlier we do, which we do, work to find investment talent for the hedge fund industry.
But we also do work to find — and this is when this started, was in 2008, we have a very meaty practice looking at noninvestment talent across functions like president, COO, head of marketing …
RITHOLTZ: Meaning, the noninvestment …
RITHOLTZ: … administrator side …
WEINSTEIN: Yes. But …
RITHOLTZ: … operation side.
WEINSTEIN: Well, yes. But senior. But what would — what really drove that was post-crisis. You saw all the shift from fund to funds and high net worth, LPs to institutional LPs.
WEINSTEIN: Because they realized that had they invested in a hedge fund, they would have done much better than buying the market, right? Most hedge funds were down — they were down but they were down half as much as the S&P …
RITHOLTZ: That’s right.
WEINSTEIN: … on average.
RITHOLTZ: That’s about right. Yes.
WEINSTEIN: So, institutions said, well, wait a second, this is like — this is an asset class that we should be investing in. And so, all of a sudden, hedge funds had to look — they had to grow up, right? It was no …
RITHOLTZ: Meaning legal compliance, accounting …
WEINSTEIN: All of that stuff. Right.
RITHOLTZ: … operations, trading.
WEINSTEIN: So, we were suddenly …
RITHOLTZ: They couldn’t just be a fly-by-night sort of a couple of guys working …
WEINSTEIN: Which is what it was.
WEINSTEIN: Right. So, we were brought in. All these founders that we did work for on the investing side said, wait a second, my head of marketing isn’t going to cut it anymore, my COO isn’t getting cut, so we had to revamp these funds …
RITHOLTZ: That’s interesting.
WEINSTEIN: … and make them institutional, right? So, they would be attractive to institutional piece. So, what happened is you saw all this institutional money pouring into the — and — pouring into the hedge fund world and institutional LPs were also far less sophisticated back then about hedge funds because it was a new asset class to them.
So, what …
WEINSTEIN: So, we’re — so, what happened? So, we went — so, you had this huge growth of funds, tremendous amount of capital pouring into the industry, technology became much more sophisticated, right, think about technology in 2003 to today.
So, today, everyone has access to the same information. That’s why it’s so — that’s why scale is so important in this business to have the ability, to have data science and quant and a machine internally that can turn that data into alpha signals.
Very few funds do that successfully but it gives their people a tremendous leg up if they do create that in-house. So, everyone has access to the same data. Information is much more transparent.
WEINSTEIN: Also, since 2003 to date, you have the platforms. When I say the platforms, I talk about the multi-managers like Citadel and …
WEINSTEIN: … Point72 and Millennium and Balyasny. These guys exploded.
WEINSTEIN: They got so much bigger. You have all these PMs now sitting at these shops. And so, many more eyes and ears at conferences and behind a shorting model that can suss out underperformance.
So, if management says something squishy at a conference, it used to have three to six months for that underperformance to get priced fully.
WEINSTEIN: Now, that happens in two days.
WEINSTEIN: So, the window of efficiency, right, for performance has gotten much smaller and LPs, as I said, have gotten much more sophisticated. And so, with all of this, returns have come down because the industry is so much more crowded.
And liquidity, right, mutual funds and retail have shrunk. So, there’s far less liquidity now than there was back then. Fewer companies are going public, right?
With increased regulation and scrutiny, CEOs are like, I don’t want to go public with my tech company. I can just go the — go to what, to big tech private equity firm and get funded that way. I don’t have to subject myself to this.
So, for all of those reasons, it’s become far more difficult to generate alpha and what you see literally the last good year for most of these funds, and when I say most, one other sort of clarification point, we talked about 11,000 hedge funds, most of them are single manager funds. They’re not multi-managers …
WEINSTEIN: … and they’re not multi-strats although — so, the actual number of hedge funds, the individual hedge funds tend to be single manager funds.
RITHOLTZ: Meaning 6,000, 8,000, what sort of number is …
WEINSTEIN: Probably. Yes. I mean, I don’t know the exact number but that’s the majority of funds just because in order to be — think about it, there aren’t — who — there’s not that many other funds you can name that are multi-managers.
WEINSTEIN: Right. And in terms of multi-strats, those would be funds like Davidson Kempner, GoldenTree, Angelo Gordon. These are behemoths that are in multiple strategies and managing 30 billion or whatever it is dollars.
There aren’t that many funds that look like that. Most funds are actually quite small. Most hedge funds are — I think the two thirds of hedge funds are 250 million or less.
WEINSTEIN: So, this is like a cottage industry of two-bit players for the most part but …
RITHOLTZ: Wait, I have to jump in and ask you this question because you said something previously that you just reminded me of which is it’s a myth that being a hedge fund manager is the route to personal riches. I’m paraphrasing somewhat but you’ve said that previously, your explanation of this that the vast majority of hedge funds are single manager funds with a couple hundred million dollars, is that what underlies that statement?
Quote, you told the “Wall Street Journal,” “the biggest myth about working out a hedge fund it is a quick way to earn great riches.” Is that what’s underlying that?
WEINSTEIN: That’s absolutely part of what’s underlying that and the other piece, which I was getting to that’s underlying that, is now the difficulty of generating alpha. So, returns have come — so, yes, most funds are small, they’re inconsequential. You’re not going to make a lot of money managing like a couple hundred million …
WEINSTEIN: … and many of them are even smaller than that and they’re not going to exist, most of these guys in — or they’ll just be Okay managing a little bit of money and that’s …
RITHOLTZ: Money along.
WEINSTEIN: … that’s a different business model. That’s not what you and I are talking about, right?
WEINSTEIN: That’s not our client base and that’s typically — and those small guys, they’re lucky if they’re in our office because what we’re doing with them is we’re popping them into bigger funds.
WEINSTEIN: We do a lot of acquisition of hedge funds as well. So, they’ll get gobbled up by the bigger players if they’re any good and they should be thankful for that because they’ll have now a lot more capital resources and artillery, for lack of a better word, to be successful.
RITHOLTZ: Are they being gobbled up because of their alpha generation or is it because of their assets or it was more of an acqui-hire?
WEINSTEIN: A fund like Citadel doesn’t need the assets of a $250 million fund.
WEINSTEIN: Far front. That $250 million fund needs Citadel because they can’t grow, they don’t have scale, they can’t compete for resources, talent capital, they are inconsequential.
However, if they’ve had good returns, that’s a great place for them to be because now they can scale that business.
RITHOLTZ: So, that becomes an acqui-hire, is that a fair tech term to use?
RITHOLTZ: Yes. It’s an acquisition where effectively you’re hiring …
WEINSTEIN: Yes. That’s exactly what it is. So, there’s a lot of that that we do as well. But let me, because this is important point, come back to why — to where we are today, Okay, because we are in a very different place today than we were when this industry first started, when we — when IDW first started.
So, when you look at returns for most funds, again, single manager funds, it’s like you look at ’15, ’16, ’17 and ’18, the last four full years. It’s really bad.
WEINSTEIN: If you add up the cumulative return, it’s a sea of red.
WEINSTEIN: And pointing to this …
RITHOLTZ: Not even positive. Negative returns.
WEINSTEIN: For a great number of them. Yes. It’s like if you add them up, it’s basically flat to down.
WEINSTEIN: And, look, I think it’s just — again, it’s a more difficult environment, it’s harder to generate alpha.
WEINSTEIN: And also, if — when returns come down, when we’re talking about fees, if returns come down, it’s very difficult to justify that 2-and-20 fee structure. I’ll give you a discrete example.
If I’m a fund that historically generated in the good old days 25 to 40 percent returns and by the way, these guys …
RITHOLTZ: Those were the good old days.
WEINSTEIN: … love to quote inception to date returns …
WEINSTEIN: … which is like nonsense. I mean, you have to — they have to say that’s great. Now, let’s talk about 2015 onwards.
WEINSTEIN: Okay. And then they’re like, go quiet. It’s not good. So, if you look at the returns of these funds, again, very bad for the last four years and you look at asset flows in the industry. They are reflective of what is going on.
The total amount of net outflows in 2018 was 37 billion. Do you know where were at to date in terms of net outflows?
RITHOLTZ: For 2019.
RITHOLTZ: Go ahead.
WEINSTEIN: Over 60 billion.
WEINSTEIN: And 2018 was a year we saw a lot of big funds shutdown, right? We saw Highfields chose to shut down. Tourbillon shutdown. Criterion, Ivory, Folger Hill, Glenhill, Threebase, I mean, I can go on and on and on.
WEINSTEIN: And yet, we are 50 percent higher this year than last year in terms of net outflows to the industry. So, LPs are pretty disappointed in terms of where things are at.
And so, back to my example, if I’m a fund which returned let’s say — let’s just say, I know it’s up higher, but let’s say the S&P is up 15 percent and I’m a fund, a long-short equity fund that runs 50 percent net long. That means 50 percent of my return one could get, an LP could get than from just buying the S&P
WEINSTEIN: And let’s say I’m up in line with the S&P this year. So, 50 percent is beta, right? 50 percent of my return …
RITHOLTZ: Well, but when you’re a long-short, your risk parameters are very different and …
WEINSTEIN: No. But if I’m running net 50 percent long …
WEINSTEIN: … that means that 50 percent is correlates to the S&P.
WEINSTEIN: That’s what that means.
WEINSTEIN: So, 50 percent is beta and 50 percent is outlook. So, if I’m 15 and the S&P is up 15 percent, only 7.5 percent is alpha yet I’m charging two and 20 …
WEINSTEIN: … and that 20 percent is on both alpha and beta. So, 20 percent of 15 percent is three percent. Three plus two is five. I’m charging five percent on AUM.
Five percent divided by 7.5 percent, just follow me with the math and your listeners can sort of …
RITHOLTZ: They can keep up.
WEINSTEIN: Yes. I’m sure they can. Kind of work this out for themselves.
RITHOLTZ: It’s a mathy group.
WEINSTEIN: It’s a mathy group. That means two thirds of the alpha by that equation is going to me, the hedge manager …
RITHOLTZ: To the manager. Yes.
WEINSTEIN: … and one third to the LPs. That’s not a winning construct.
RITHOLTZ: That’s not sustainable.
WEINSTEIN: But then you have hedge funds like the multi-managers where it’s all alpha. Everything they generate is alpha. It’s uncorrelated. It’s low volatility. That’s why — and so, that’s a totally defensible business model.
And jumping on to another subject, the startup environment, while so few funds can scale and we have so — we have more closures than startups these days, the exception to that rule are funds that splinter off from the successful multi-managers.
That’s why we saw ExodusPoint have the biggest launch in hedge fund history last year at 8 billion. That’s why this year, you see Woodline and Candlestick to Citadel’s spin-outs launch with anywhere — somewhere between one and three billion. Candlestick I think was between one and two and will be — and Woodline is between two and three.
These are exceptions that proved the rule and also shine the light on the efficiency of this — of the hedge fund universe. You have hedge funds that are struggling to come up with the fee structure that can address the lack of value creation and then you have funds like Element that are charging two and 40. Again, it’s efficiency.
RITHOLTZ: Our last — I mean, you discussed all sorts of really fascinating things. I wanted to circle back to in particular about the shifts and where institutions are putting their money and the fee structure.
So, let’s start with the fees. One of the things I’ve seen that’s been kind of interesting and you explained earlier why institutions hate to pay alpha prices for beta is the rise of a so-called fulcrum fee where there is a very modest fee on assets and the actual profit sharing fee, the typical two and 20 part of the fee, is not on what the S&P provides but only on the excess performance.
So, it might be, instead of two and 20, 25 basis points and 30. What do you think of those sorts of fee structures? Do they have any longevity?
WEINSTEIN: I think that we need to move to a model which is closer for — if you’re — if funds are going to charge what they charge whatever — which is sizable, we need to move to a structure where LPs are paying for alpha. That’s the bottom line.
So, whether it is they lower their fees or they just charge on alpha, that has to be where the industry is going and/or here’s another thought, there are hedge funds which really, and this is true of a lot of the single manager long-short equity cubs — long-short equity funds whether Tiger Cubs or related, some of these guys are really best at generating long alpha.
They’re really not that good on the short side and if you look closely at the composition of their return, the shorts are actually volatility enhancers and alpha detractors. But they have to short because they’re hedge funds, right?
WEINSTEIN: They can’t two and 20 without — with just having a long-only model.
RITHOLTZ: And it’s very hard to short when the market has, at least for the first half of this bull market, just rampaged straight up from ’09 to let’s call it 2015.
WEINSTEIN: It’s just — it’s not they’re — they’re not — it’s not what they do best. There are — and they’re also not set up to do it as well as the multi-managers that have much broader and deeper resources to help these guys be successful with respect to managing factor volatility and coming up with single name alpha shorts.
So, the best thing these more concentrated directional managers could do would be to say, Okay, I’m best at generating long alpha, therefore, let me set myself up in a way where I — maybe they create an alternative long-only fund where — and I think this is the way of — this is how a lot of these funds are going to go.
I mean, you recently saw in the last year Soroban really converted most of their assets to long-only. And so, the idea being, if I’m best at generating long alpha and I’m not that good at managing short-term volatility and coming up with alpha shorts — alpha generating single name shorts but I need two to three or four years to let my thesis play out, then you know what, maybe you just charge on alpha at the end of that time period.
And so, you have duration …
RITHOLTZ: That’s a very different structure.
WEINSTEIN: And it’s a totally different structure but that’s the point you, need to figure out what you’re best at. It’s so hard now to generate consistent alpha. And you need to figure out what structure is going to enable you to be competitive and that may mean locking up capital for a longer period of time and charging less or just charging on alpha.
But the idea that one-size-fits-all when it comes to fees, no matter what your investing style is or how much beta you employ, is ridiculous. The guy charging two — it’s the same fee structure for the guy running net 30 and running net 60. So, I think there should be a hurdle with respect to how much is alpha and how much is beta.
RITHOLTZ: You mentioned how many of hedge fund closings that were in 2018. Typically, when a fund shuts down, does that money leave the space or does it just rotate to a different hedge fund at least from an institutional perspective?
WEINSTEIN: Well, given the trend line I shared with you earlier which is we have now 60 billion of net outflows to the industry, that’s net outflows. I think money is actually leaving the industry. That’s where I think things are going.
And so, it could go to another fund but the problem is there are so few good options. It doesn’t want to go to another fund that has had the same meh or crappy performance.
WEINSTEIN: A lot of the better funds candidly are closed.
WEINSTEIN: That’s the truth.
RITHOLTZ: Yes. For sure.
WEINSTEIN: And that’s why you see when guys splinter off from the funds that are closed and LPs are salivating for access, too. They’re the ones that scale overnight and they’re only so many of those.
So, that’s why I think we’re seeing the aggregate amount of net outflows and also the trend line. The thing on the trend line is the only other year in hedge fund history where we had four consecutive quarters of net outflows was 2008 to 2009.
RITHOLTZ: Really? That’s amazing.
WEINSTEIN: We’re probably — Q1 2019 was the only other time in hedge fund history we saw four consecutive quarters and that was — and Q1 2019, this year, we have 15 billion of net outflows. We’re now at 60 something. So, I guarantee you, we’re now on our sixth quarter of net outflows.
WEINSTEIN: That is first time ever in hedge fund history.
RITHOLTZ: Wow. That’s amazing. So, the — I don’t want to call it the flavor of the month, it’s a little too glib. But it’s clear that private equity is the shiny new thing. Lots of money seems to be flowing in that direction. Is that who is the beneficiary of the outflows from hedge funds as if you’re an institution and you know you’re expected returns for equity is going to be five or six percent and bonds are yielding less than two percent and alternatives are promising eight, nine, 10 percent, do these outflows end up going to private equity?
WEINSTEIN: They do. But interestingly — and it’s true that in the last four or five years, while hedge funds have suffered because the returns have come down and for most of them, fees have had to readjust or in the process of readjusting, private equity was — had the hot hand because rates were low and it was easier to buy companies.
I think that — but it’s — but I think what we’re seeing now is the merging of public and private. You see private equity firms trying to get into the public markets. You see hedge funds developing their private investing expertise. And so, I think each one is trying to capitalize upon the other’s revenue stream.
RITHOLTZ: That’s quite interesting. One of the things I read about you that I thought was pretty amusing, there was an event or gala that you helped put together earlier this year and one of the coproducers of the gala was Stevie Cohen of now Point72 and he discussed what a challenge it’s been for so many hedge funds and basically said, no one’s winning the hedge fund game, there’s this recruitment process where people go from one fund to another to another and the only one who wins is you. He kind of dragged you a little bit.
WEINSTEIN: No. No. No. It was — no, just to be clear, the gala was in honor of me.
WEINSTEIN: I was being honored. So, we …
RITHOLTZ: So, it’s a little bit of roasting taking place.
WEINSTEIN: There’s a little bit of roasting. I think — I hope I think it was — he was introducing me. I was the honoree. So, I think it was mentioned …
RITHOLTZ: So, it’s good nature and Okay.
WEINSTEIN: But it’s also a …
RITHOLTZ: Because when you read it, it’s like, wow, Stevie Cohen is really dragging Ilana.
RITHOLTZ: But it’s nothing like that.
WEINSTEIN: I don’t think it was seen that way. I think his point was there is a war for talent because they’re so little of it, right?
WEINSTEIN: They’re only — I said it myself, there are only so many people I put in that first bubble of best in class in each asset class.
WEINSTEIN: That is true and you see it with the returns of funds. There’s only so many funds that are performing and only so many people within those funds.
RITHOLTZ: P&Ls don’t lie.
WEINSTEIN: P&L doesn’t lie. That’s what I love about this industry. It’s real time. It’s mark to market. You know where you stand at all times.
But — and we — so, that is true, there’s an intense competition to attract the best. It is also true we tend to be in the mix of it. But the other thing that’s true is as much as there are only so many good people, there are also so — there are only so many places those people are going to be attracted to.
And Steve runs a great shop, Point72 is one of them. Other places like Citadel, Millennium, Davidson Kempner, GoldenTree, there are places that have built something unique and are going to be able to do something special to attract talent and make them more successful because of the very fact that they are on those a– t those funds or on those platforms.
And that’s what creates a symbiotic relationship between talent and the best places that exist and myself. At the end of the day, we, IDW, have been very deliberate about who we choose to work with. I mean, I’m not going to name names but there plenty …
RITHOLTZ: You just did.
WEINSTEIN: No. No. No. In terms of the ones we choose not to work with.
WEINSTEIN: But because we need — as good as I’d like to think we are, at the end of the day, the people we are dealing with on the talent side, they are very sophisticated, they are very smart and they’re not going to go someplace that isn’t a market step-up from where they are today with a pathway that is unique and nor would I feel good about trying to convince them to do that.
So, I have tremendous conviction around the — I have to have tremendous conviction around what — around our clients and what they built and what they can provide for talent. And so, again, I think it was a joke. But at the end of the day, there are only so many places that also talent really wants to go.
RITHOLTZ: Can you stick around a bit? I have so many more questions.
RITHOLTZ: We have been speaking with Ilana Weinstein. She is the Founder and CEO of the IDW Group, a leading boutique for hedge funds, family offices and private equity searching out top talent.
If you enjoy this conversation, well, be sure and come back for the podcast after this where we keep the tape rolling and continue discussing all things hedge fund and alternatives. You can find that at iTunes, Google podcast, Stitcher, Spotify, wherever you find our podcasts are sold.
We love your comments, feedback, and suggestions. Write to us at MIBpodcast@Bloomberg.net Give us a review on Apple iTunes. Check out my weekly column on Bloomberg.com. Follow me on Twitter @Ritholtz. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.
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Welcome to the podcast. Ilana, thank you so much for doing this. I’ve been looking forward to this. You really are somebody who is maybe in one of the most unique spots in the entire alternative space.
You see everything. You know everybody. Your perspective as to what’s going on in hedge funds, private equity, and maybe not quite as much venture capital but I know that’s certainly an area that is not outside your observations.
Is unique too strong a word? I don’t think anybody else has the vantage point that you do about what’s going on in the industry.
WEINSTEIN: I mean, yes, it’s completely accurate because …
RITHOLTZ: I mean, I hope that doesn’t sound like a blowing smoke or anything.
WEINSTEIN: No. No. No. It’s accurate precisely because what we do every day is meet with the most talented people in the industry not because they’re looking for jobs but because they want our perspective and it’s a virtuous loop.
If all you do is meet with really smart people that are best in class, you build a picture, a composite of what is driving the industry and what the opportunity set is and where it’s going. And so, we have — so, we have insight into what is going on at every single fund, who is making money, how lumpy the pool of talent is, how precarious each fund is, like what situation they’re in.
Like, I mean, I often say, if LPs knew what we know, they’d be pulling capital left, right and center and reallocating to the places that we tell them to.
I have a very clear sense as does my team on what’s what. And I don’t think anyone else does because the level we’re recruiting at, both in terms of breath and just the sheer talent that we have coming in the door across every asset class and every geography I think is second to none.
And it does give us insight into what to look for and what differentiates the BS from the non-BS, the good from the great. There is — there are really specific things we’re looking for.
RITHOLTZ: So, let me ask you a little bit about something related to that. When I look at different funds and I’ve spoken to a lot of people from a lot of different funds, very different personalities who founded them, who are running them, the corporate cultures seem to vary dramatically. Oaktree Capital, very different than Bridgewater, very different than Point72, how important, when you are looking to match somebody for a very senior position is that corporate culture?
WEINSTEIN: It’s definitely important, but I don’t know that there’s a — is much variability as you as you might think.
RITHOLTZ: Am I overemphasizing Bridgewater because it’s such a unique …
WEINSTEIN: I mean. Yes. That’s sort of an outlier into itself.
WEINSTEIN: Right. So, let’s just stick to …
RITHOLTZ: And by the way, full disclosure, I’ve had Ray on three times, I love him, I’m fascinated by him, he’s a brilliant guy. Some people find him quirky, I just find him really fascinating. But there can be no doubt that Bridgewater is not the typical …
WEINSTEIN: Right. So …
RITHOLTZ: … corporate culture.
WEINSTEIN: So, let’s put that sort of to the side. I think the biggest differentiators are how much it’s — look, no one wants to work in a jerky culture. So, and neither do I want to work with jerky founders. That’s not …
WEINSTEIN: … amusing intentionally and a nicer word.
RITHOLTZ: The no …
WEINSTEIN: The real one I’m thinking — yes. Exactly.
RITHOLTZ: The no A-hole rule.
RITHOLTZ: … is what everybody refers to.
WEINSTEIN: Right. That’s really what — right. So, that’s consistent. That’s not …
WEINSTEIN: And people — and at the end of the day, what’s really interesting to me is there are certain founders who our dear clients and friends of mine who — there’s this perception that they are like big bad wolf and really just tough and make crazy decisions like I can be there one day and blown out the next.
And the reality is, these are some of the most measured, down-to-earth, and I will say it, good people I know, but they also have great commercial instincts and are not afraid to make tough decisions. And if you’re really talented, you want to be in an environment where you can shine and aren’t going to be dragged down by a bunch of deadwood around you …
WEINSTEIN: … where your compensation gets netted every year because the a founder is just like too wimpy to make tough decisions. So …
RITHOLTZ: So, let me push back on you a little bit. There — I won’t even say the funds because we’ll see if you have a sense of what I’m talking about. There are funds where people get hired at and they know from the day they’re hired, I will eventually be fired for either good cause or not because that’s the way this manager operates. Is that a fair assessment about some funds?
WEINSTEIN: No. I don’t — I mean, I don’t — there may be funds that fall in that category, that’s not my client base. It’s really not.
There are — I come back to there are — I think the best founders are also great business builders and when they look at their investment talent, they don’t view it differently than a portfolio. They double down on the winners and they cut their losers.
And and that’s what I want if I am a talented investment professional because the biggest issue in this industry from talent’s perspective is not compensation deflation, it’s if a fund does poorly and I did poorly, it’s a pay-for-performance industry.
WEINSTEIN: I get that I’m not going to get paid and I’m Okay with that. The biggest issue is when I sit at a fund and this is not exceptional, what I’m telling you. This is par for the course. I sit at a fund that is 8 billion of AUM or 10 billion, Okay? These are big funds and I am one of two or three people that consistently drive P&L every single year.
And remember, the last three or four years have been really tough, present year excluded. But again, a lot of beta in the returns for this year and also snap back from being down last year, right? Just riding the market back up.
So, you look for those — the last four years excluding this year and even this year, I am the — I am one of two or three primary P&L drivers at a fund which has sizable assets and what are the other people doing? Year after year, they’re not pulling their weight, they’re not really contributing, and I’m getting netted because the founder has to take from my pocket to pay them.
WEINSTEIN: So …
RITHOLTZ: Those guys have to head out the door after that.
WEINSTEIN: Right. So, this idea of, like, I have job security but at the end of the day, well — of course, you do. You’re the star within the fund and the bigger question is why did the other people have job security? They should be — look, a funder has a fiduciary duty to his LPs to be retiring and retaining the best people and part of retaining them is getting rid of the ones that aren’t performing and making room for better people.
RITHOLTZ: Am I hearing you say that people in hedge funds are cutthroat and you’re suggesting some of them aren’t cutthroat enough then or say, less emotionally, less inflammatory. There are a lot of funds that simply aren’t acting as a meritocracy?
WEINSTEIN: I think that founders are often very loath to make tough decisions and we can call that not acting as a meritocracy or not being cutthroat or just candidly being wimps. I think that there is an element of the optics of, ooh, what are LPs going to think if I fire these three people?
LPs would be very smart when they do their older operational due diligence if I was an LP, here’s what I would be asking. I’d want to know …
RITHOLTZ: That’s a question I have for you, by the way.
WEINSTEIN: Yes. Okay. Let’s …
RITHOLTZ: What — so, let me ask you the question. What should LPs be doing and what aren’t they doing today?
WEINSTEIN: So …
RITHOLTZ: And everybody knows LPs limited partners, not the fund managers or the actual general partnership.
WEINSTEIN: I think that they should — they should find out from the founder. And it’s hard because if it’s a single manager fund, the founder at the end of the day, is the ultimate decisionmaker …
WEINSTEIN: … of what goes in to the portfolio and how the portfolio is constructed. But ask him. And I’m going to long/short equities, one, because it’s 40 percent of the hedge fund universe, and two, just to be illustrative, it’s an easy example to understand. Ask him, Okay, where did your winners come from this year? In what industry?
Was it industrials? Was TM? Was it healthcare? It was healthcare. What about last year? What drove P&L? Again, it was healthcare and industrials, what about the year before? What about the year before? What about the year before?
And we get that at the end of the day, the founder, again, is the ultimate decisionmaker. But again, just behind the scenes, that’s more gray than you — those people have tremendous influence if they’re senior and they’re good on the on the portfolio.
So, LPs should also be asking where did — where were your biggest losers? And you’re going to see patterns across the biggest winners and across the biggest losers. And then, they should be asking the founder, what are doing about getting rid of the guys who are covering the three sectors that actually have been a net drain on P&L? What you doing about developing the three sector heads that have generated the most P&L? How do you manage paying those guys we you have — to when you have these other guys that you have to pay?
WEINSTEIN: Like these are the tough questions that founders really need to be held accountable for and also LP should be looking at who left. Were those people that were P&L generators to the fund or were those people that were — that were pushed out, right, because they didn’t do well? And if what they’re seeing is a trend line of the best people leaving and they have to figure out a way to get at that, we know that because we’re interviewing these people and we see the composite of the entire P&L of the fund and who did what.
If the best people are leaving, you should be pulling capital and if the — and if the people who did not make money are the ones who are leaving and being managed out, then you should deploy because that’s a founder who understands how to manage his team and his managing them, again, like a portfolio, unemotionally and making decisions in their best interest.
RITHOLTZ: So, you’re really answering a question I was about to ask you which is what should founders do to retain their best people? And what you’re effectively saying is pay and bonus the high performers and cut loose the people or the nonperformers?
WEINSTEIN: And I’ll go one further. I think that founders need to be willing to go to zero for themselves in times where they don’t have much of a performance fee and that has been true for the last four years. Even this year, a lot of funds may be doing better but they have a high watermark from the previous year or group of years.
RITHOLTZ: Meaning that what you took as a profit, as a the 20 percent profit distribution, once we fall off of those market highs, you don’t take another profit distribution till you get back over that …
WEINSTEIN: Yes. If you lost money last year, you first have to make that back up before you start to get paid, right?
WEINSTEIN: So, if I’m a guy who, for the last three or four years has generated tremendous P&L for the firm and there are guys who come in to meet with us who literally are 100 percent of the P&L of the fund or 150 percent of the P&L of the fund …
RITHOLTZ: Meaning other people are a drag on the returns.
WEINSTEIN: Exactly. If the founder would be wise to go in to his pocket, go into his management fee and pay that person, right, so that they …
RITHOLTZ: That’s what they need to do to retain them.
WEINSTEIN: That’s what they need to do and also be clear about how they’re coming up with the number. For many of these guys, if they’re not sitting at a multi-manager which is formulaic or they don’t have — even if they have points in the fund, a lot of the times, how — there’s a jump ball which is discretionary.
If they don’t — if the absolute number is disappointing because times are not good and there isn’t much of a performance fee and also assets have dwindled so the management fee is smaller, founders need to give people insight into how they’re coming up with the numbers. So, it’s not this black box.
They — again, it comes back to running a business, not just managing the P&L, and that’s a mind shift for a lot of founders because they grew up but they know best is investing, right? Not managing people. They need to manage their fund like a business, not — because — not like a kleptocracy which is how a lot of these guys view it. That work bit.
RITHOLTZ: A kleptocracy. So, let me flip the question from what founders need to do to retain their best pp to some of those best people, that talent. What are they looking for? What makes them decide not only that I’m ready to move but I’m going to go there or here. What — what are they looking for?
WEINSTEIN: So, the most important — so the things they are looking for haven’t changed. They’re just more difficult today to come by. They’re looking for stability, right? When you see funds like big funds, back in — we started with Eton Park and Perry going out of business and then all the others I mentioned last year and there’ll be more to come, that means that there’s no more Terra Firma under their feet.
And by the way, you even look at funds that are still — that are big, that are well-known names, they’re still existing today. It may be interesting for your listeners to look at the AUM drops of these funds. GreenLlight, Okay? And this is, by the way, I’m going back to not circa 2003 or 2000 — look, say, right before the crisis, 2007 or …
WEINSTEIN: I’m talking about in the last few years, so this is how precipitous the AUM drops were, GreenLight was 12 billion, now it’s three sub 3 billion. Corvex was 7 billion, now it’s 2 billion. Discovery was 15 billion, now it’s 3 billion. Fir Tree was 13 billion, now it’s 5 billion. Scopia, a year ago, one year ago, 2018, was almost 7 billion. You know what it is today? Under 2 billion.
WEINSTEIN: So, these are, again, like only so many funds even get into the billion-dollar territory, right? So, these are the — these are the sort of the bigger names, the bigger guys, and they are a shell of their former selves. So, stability is like very hard to come by these days. And you may think, oh, that’s a well-known fund, that’s stable. Nuh-uh, not the case.
The second thing that’s really important is netting which we talked about, not being in a construct where you’re not going to continuously get netted, right?
RITHOLTZ: I mean, by netted, you mean your payment is a little bit of a kibbutz where you’re not necessarily winning all of your P&L like it’s spreading around to the whole organization?
WEINSTEIN: As a guy just said to me the other day and I love this phrase and I told him I’m going to steel it, he said I feel like labor arbitrage. That’s what’s going on …
RITHOLTZ: In other words, you’re a high-performer, they’re a low performer and everybody …
WEINSTEIN: I’m generating all these P&L.A. No one else around here is pulling their weight, and every year, I’m paid a fraction of what I should be paid. So …
RITHOLTZ: That’s a guy ripe to be moving on.
WEINSTEIN: A 100 percent.
WEINSTEIN: A 100 percent.
RITHOLTZ: And does management not understand the frustration of a high performer? Like, we are not talking about a low octane sort of people work on an hourly basis. This is — these are people who are willing to live and die on eating what they kill and it’s a really aggressive industry. It sounds like some firms are sort of trying to soften it and make it more of a group kumbaya thing.
WEINSTEIN: Yes. I think there’s a — look, there’s a lot of inertia in this industry. We saw this with LPs, too. This pace of net outflows is only just picking up now. For a long time, LPs were sort of just hoping things would get better.
RITHOLTZ: Well, the consultants always say to them, hey, this is an off year, just …
RITHOLTZ: … give them another two or three years and we’ll be fine and after 10 years of hearing that, people finally figured out. It ain’t going to be fine.
WEINSTEIN: Right. You’re right.
So, I think there’s an element of hoping that things change, hoping that the performance gets better, and you know you have to understand, these senior people that we’re speaking to have been where they been for — in many cases, over a decade. They’ve a real relationship with the founder, they helped build the fund, they are partners where they’re sitting.
So, it’s not as transactional as one might think and I — and they feel loyal, they feel embedded. But at a certain point, the chickens do come home to roost and I think we’re kind of at that tipping point. We really are at a tipping point in the industry, both with respect to frustration on the part of talent, frustration on the part of LPs, and I think that it’s — the shakeout is it’s happening we see we see money leaving the industry and the guys who figured it out are the absolute clear winners.
And they’re going to gobble up the best talent and that’s — they represent stability, they don’t net their talent. And the other few things just to answer your question, are that these guys do best of the winners, talent also — what you asked me what talent is looking for, they want to be made better, they want to improve.
So, in an environment where returns are so hard to come by, how can I be better at shorting? How can I better at managing volatility? What — how do I improve? And the best places which are typically that have really sophisticated technology and data and risk management are the best multi-managers, they give these guys an unbelievable feedback loop.
So, they say to them, listen, let’s look at your P&L.A. You are — a lot of it came from — it’s actually not like a lot of it came from beta or came from factor exposure, that’s not repeatable. So, giving them transparency into how they make money sets them up for better success in the future and there are very few places that have the same tools and resources as some of the guys that I mentioned.
RITHOLTZ: All the big scalable giant shops that that are not afraid to spend their money.
WEINSTEIN: The ones — but that’s the last part of your sentence is key. There are funds — it’s amazing how few funds you scale to their competitive advantage. There’s a fund I’m thinking of which is north of 20 billion.
WEINSTEIN: They have nothing internally. They basically …
WEINSTEIN: No. They have two people that manage half the AUM. Those two people, literally, have like two people underneath them.
WEINSTEIN: And there’s no infrastructure. There’s no …
RITHOLTZ: That’s shocking.
WEINSTEIN: I think there’s like five data scientists at the entire firm. There’s no real — they haven’t built the fund in a way which bestows competitive advantage on its people and the problem with that construct is if the two golden geese leave the fund, there’s no interest — there’s nothing there.
RITHOLTZ: No, they’re there after that.
RITHOLTZ: So, you hinted at something earlier, I want to get explicit about regarding partnerships. How should these firms be thinking about succession planning, not just if the founder is hit by a buy but what happens when they retire? What happens when they want to spend more time away from the office? What should firms be doing about that?
WEINSTEIN: Well, the industry is still relatively young, so we haven’t had that much succession that’s gone on, right? So, the same way — I’m still running IDW and I’d like to think I’m still young, right?
RITHOLTZ: You are.
WEINSTEIN: Thank you. Many of these funds that started about the same time, there’s no succession going on. These guys are in their 40s, right?
WEINSTEIN: But for — but there are some that have done it successfully and I think we can look to them for how to do this. One, it can’t just be one founder and his brain that LPs are investing in, right? And in — and like a bunch of investment analyst around him.
They have to feel like there is an infrastructure there which will continue to do as well with or without him and I think there are two models that lend themselves to it. One is the multi-manager construct where there are multiple PMs, right, that have autonomy and are managing capital and there’s also sophisticated risk management in-house to help them be as successful as possible.
That’s not the founder every day walking the floor …
WEINSTEIN: Making sure these guys are thinking about the world in the right way. And sifting through their ideas and saying this is interesting, this isn’t, let’s size this, let’s short that, this is — this is the car that sort of runs on its own. And then the other model would be the multi-strategy model and we saw this very recently with Tom Kempner stepping down, name on the door, Davidson Kempner, one of the original founders, and turned over the reins to Tony Yosellof.
And they did not miss a beat. And the reason they were able to do this is it’s a real partnership with 14 engaged partners, decision-making is done in unison. This is — that’s not like partnership — a lot of hedge funds partnership is a nice thing to put on the business card, but at the end of the day, it’s still this short of …
RITHOLTZ: There’s a managing partner and that’s it.
WEINSTEIN: It’s — exactly. So, this is — this operates kind of like, I think it was modeled in some ways after the old Goldman Sachs partnership. It really — it’s a group of engaged people who make the important investing and operating decisions for the firm and when they — when Tony moved up, they very wisely took two of their people, of that group of 14, and made them co-deputy managing partners signaling to LPs there’s already a plan in place …
WEINSTEIN: … when and if Tony retires. And the place operates, again, in a way where the strength of the firm and its secret sauce is not just one guy at the top.
RITHOLTZ: So, I have to ask you a question because you and I are both talking about this guy and that guy, guys, guys, guys, what is to be said — I’m going to mansplain the lack of women in hedge funds to you would be pretty hilarious — why are there such a lack of women in the industry? Generally speaking, it’s true in finance. But it is really acute in hedge funds. Why is that and is that ever going to change in our lifetimes?
WEINSTEIN: I have thought about this question a lot. So, there are couple of things. One is there is a Catch 22 at work where, look, people are attracted to industries and into roles where they see people like themselves having success.
RITHOLTZ: Has to be a role model somewhere.
WEINSTEIN: Right. There isn’t right now. So …
RITHOLTZ: Are there any high-profile women hedge fund managers?
WEINSTEIN: There is …
RITHOLTZ: A handful but it’s just a handful.
WEINSTEIN: Really hardly any.
There’s Leda Braga who spun out of BlueCrest and there is Dawn Fitzpatrick who’s the CIO of Soros but those are really the only two that come to mind that run scale businesses. And Dawn didn’t found Soros, right?
WEINSTEIN: That’s — so, that’s a different …
RITHOLTZ: Some guy named Soros, right?
WEINSTEIN: I think so. Yes. Like General Custer’s white horse.
WEINSTEIN: Well, what color was that? So, there are women, quote-unquote, air quotes running funds but they’re two-bit players. Like they don’t — they just — it’s not — they don’t matter.
RITHOLTZ: They’re not big, influential funds.
WEINSTEIN: No. And so — and again, think about the fact that back in ’16, 10 percent of the AUM which was around 2.9 trillion back then was controlled. So, 10 percent of hedge funds controlled 90 percent of AUM.
WEINSTEIN: So, that’s even smaller now.
RITHOLTZ: It is very much a fat head, long tail. It is not a normal distribution.
RITHOLTZ: So, back to women. So, they don’t really have role models. Two, again, the industry is fairly young when you compare it to finance like investment banking or you compare it to consulting or you compare it to medicine, those are all industries that have been around much longer. So, they’ve had more of a chance to catch up for — make it for women to — have a bigger percentage.
RITHOLTZ: But when we look at things like law and medicine and consulting, women are 40 plus percent. When we look at finance, there’s been a lot of gains in the past decade.
But it’s still really tilted towards the male side. I can name two dozen chief economists, market strategist. I mean, there’s tons of women in very visible places today that didn’t exist 20 years ago, but finance is still notorious.
WEINSTEIN: It’s still so much better than the hedge fund industry. It really is — we’re getting there.
RITHOLTZ: That’s where I was going. The hedge fund industry …
WEINSTEIN: So, let’s talk about …
RITHOLTZ: … that the hedge fund industry is worse than finance …
WEINSTEIN: It is so …
RITHOLTZ: … and finance is bad.
RITHOLTZ: That’s my mansplaining about the lack of women and I always find my — I always laugh at myself when I’m like are you mansplaining this to her? She knows more about this stuff than you ever will.
WEINSTEIN: No, I mean, but it’s true. There are so few women.
So, we need to do a better job of pulling women in earlier and explaining to them that this is an industry that is not just hospitable to women, we are dying for women. It is rare that I do a search where the client, at some point, does not say to me we’d love for the successful candidate to be a woman. And the — but the problem is, we have a fiduciary duty to hire the best person, not the best woman.
WEINSTEIN: And so, by the time we get involved which is really at the most senior end of the industry, if you think about a mountain, if at the base, there are so few …
RITHOLTZ: It’s that pool. You start out …
WEINSTEIN: It’s a pool. It gets …
RITHOLTZ: … that’s 95 percent. Right.
WEINSTEIN: And then by the time we get there …
RITHOLTZ: Statistically, it’s the odds are very much against it.
WEINSTEIN: Right. And so, I think that that — that’s the issue as well as the fac that there’s something about the P&L and the volatility of the P&L that is — it’s you can’t control it. Even in private equity …
WEINSTEIN: …. you have more control than you do in the public markets. You have tenure money, you have full information …
WEINSTEIN: … you’re one of eight on a deal team. Trump tweet something the portfolio isn’t going to go haywire.
RITHOLTZ: You’re not mark-to-market. Tick by tick …
WEINSTEIN: You’re not mark-to-market.
RITHOLTZ: … that’s a huge advantage.
WEINSTEIN: So, here, you can be the darling of the industry one moment and be out of business the next. And that is not — that also can be scary. So, I don’t know — I don’t know if that is less appealing to women, but maybe that factors in to it as well.
RITHOLTZ: That’s quite fascinating.
WEINSTEIN: So, in in terms of coming — trying to bring women into the industry earlier on, last week — and I am trying to — I’m doing what I can. Last week, I actually went out to the University of Michigan to be the keynote speaker for the — their undergraduate investment conference which is like the …
RITHOLTZ: Go Blue.
WEINSTEIN: … conference for — exactly — for undergrads.
And, really, to signal to them that this is an industry that wants women and try to encourage all these undergrads to come if they’re interested, like this is a — this is a — this is an industry that is salivating for talent and it is totally meritocratic and if you’re talented, nobody cares if you’re a man, woman, or otherwise. It’s just — this is like — it’s that’s — say — that’s what the focus is on.
And one of the women toward the end, when we had the Q&A, asked me the question of what can women do? How do we become more fearless? How do we go for it? How do we set ourselves up to be more successful in life?
And I answered the question in terms of just having that — you may not have the confidence early on, but that comes with success and building it overtime and just sort of not you going for it. That’s the bottom line.
But I — what bothered me about the question is I do think that there is sometimes a little bit of orientation of like how do we — how can we be — how can we set ourselves up better for success? How can we be more, as she put it, fearless? Why are we coming at the world as though we have a handicap? Everybody’s scared when they’re young. Everybody is scared to make a mistake.
But you just — whether you’re a man or a woman, you have to sort of buck up and as I said, go for it. And this idea that because we’re female, we’re somehow disadvantaged by our very nature pisses me off. And I sort of said that to her.
I said, there’s like this sort of cotton-padded idea that you need special handling or there’s something about you that we need to treat differently. Why?
WEINSTEIN: I mean, as long as we’re all being good actors and behaving correctly, why should we — why we need sort of a different way of treating you? I don’t understand.
RITHOLTZ: Well, that as-long-as is a loaded phrase because I recall the early days in my career on the trading desk, it was horrific. It was …
WEINSTEIN: But that can’t go on anymore and it doesn’t. You see Kent — what happened with Ken Fisher’s comments.
WEINSTEIN: Right. So, it’s not …
RITHOLTZ: And by the way …
WEINSTEIN: … good business. It’s not good business. It’s not going to lead to a successful outcome and a come-back-to. At the end of the day, there is so few talented people. If that person happens to be a woman, there is no hedge fund manager in his right mind that will do anything to make the environment inhospitable to her, not to mention that you can’t get away with that stuff anymore.
RITHOLTZ: So, the world has changed completely.
WEINSTEIN: I don’t know if it’s changed completely. I’m — again, like, we just saw with Fisher, there are still people who act out of turn. But in an industry that is measured minute to minute and you’re only as good as your last P&L, you cannot do things which are going to scare away the very people that can have a real impact on your business. It’s just — it’s so — there’s so much clarity in terms of who the winners and losers are and to have half the population not be a source of talent is insanity and there’s no hedge fund manager that would think that way.
RITHOLTZ: And when we …
WEINSTEIN: That’s going to be successful.
RITHOLTZ: When we the academic studies on male versus female mutual fund managers, the data shows that the women tend to do better than the men. The women don’t have the same ego issues, they certainly don’t suffer from the test — what some people call testosterone poisoning, that they are more measured and less aggressive in a negative way than the male fund managers.
So, the data even supports female fund managers can outperform male fund managers …
RITHOLTZ: … without any change to who they are, what they do.
WEINSTEIN: Totally. It’s funny. I had drinks with a woman that — I’m not going to name her — but I was so pleased when she did end up being the successful candidate for search we did a year ago. Very successful PM, one of the few who ran a lot of capital where she was. She ran 2 billion, now she’s running 4 billion, has a real team underneath her.
And we were talking about somebody that she recently had to let go and it was just so — I had such a smile playing on my face as she was describing how emotional he was.
WEINSTEIN: And he wasn’t making rational decisions and he was constantly complaining about where his P&L was at. And she’s like, I know where your P&L is at. I’m watching it. Get it with it and fix it.
And so, it — anyway, it’s just a sort of sidebar on there is no difference …
RITHOLTZ: He’s by the emotional men …
WEINSTEIN: I mean, really?
RITHOLTZ: How can we ever trust them?
WEINSTEIN: How can I — exactly. What I have to deal with. Yes.
RITHOLTZ: But you know, that is a genuine perception issue and the reality is how — so this was a question I didn’t get to, but I wanted to ask, you have said the people best suited for this industry are the ones who remain cool under pressure. That’s a quote of yours which certainly is — who’s going to argue with that. How can you identify that in a sort of casual conversation until you see them under pressure? How do you know how they’re going to react?
WEINSTEIN: Well, it’s less about the person — how they act, so to speak. It’s more about the outcome. So, what I’m looking …
RITHOLTZ: in other words, the decision’s not necessarily …
WEINSTEIN: Well, I’m looking at consistent P&L overtime and whether you do that by standing on your head or crossing your fingers and toes and screaming or whatever the case may be, if you can generate particularly in the last for or five years were he’s been so difficult, and there’s not been this tailwind to performance, if you can generate consistent P&L overtime, that to me says you are somebody who possesses a whole bunch of other qualities which come with that.
You’re somebody who is flexible and humble. You are — you’re not so wedded to your positions that you can’t take new inputs and shift on a dime where you need to. You — and so, looking at P&L over a period of time gives me insight as well as some of the what makes some people vulnerable which is the founder is often more volatile than they are and that, again, am I talking about behavior, although that comes with it sometime. If you’re …
RITHOLTZ: You mean decision-making?
WEINSTEIN: I mean decision-making. It’s a guy who comes in to my office and says, this happened two years ago, he sat at a large hedge fund, he was responsible for a big for chunk of it and even though he was doing well, the fund was not. And he had — he was the most robust short — had the most robust short book within the fund which was not the founder strength or skillset.
And the founder came in over the top, took off all his alpha-generating shorts, put on Index shorts, raised a lot of this guy’s P&L.
WEINSTEIN: So, it’s that …
RITHOLTZ: We’ve all seen that.
RITHOLTZ: We’ve all witnessed that elsewhere.
WEINSTEIN: So, enough of that kind of stuff happening is it’s the differentiation between the founder acting out of sort of panic and emotion and not really understanding what’s going on and this guy pointing to consistent P&L and where he’s gotten tripped up is when he’s been overridden by somebody who isn’t taking a more measured approach.
RITHOLTZ: Can we assume that guy is no longer of the fund?
WEINSTEIN: We can.
RITHOLTZ: I have a million more questions for you, but I know I don’t have you all day. So, why don’t I go to some of my favorite questions. This hasn’t been too painful, have it?
WEINSTEIN: It’s been a lot of fun.
RITHOLTZ: I’m so glad you’ve said that.
So, let’s jump — and I don’t know if you’re going to be able to answer this question because you were born in Brooklyn and moved to Manhattan. But let me ask you the question, what was the first car you ever owned, year, make, and model?
WEINSTEIN: Okay, Barry …
RITHOLTZ: You don’t drive?
WEINSTEIN: You got it.
RITHOLTZ: I was the — you were the first person — I’ve been waiting for someone to say that to me.
WEINSTEIN: Well, there you go.
RITHOLTZ: Either — and I was expecting like a millennial to say, oh, I Uber or I …
WEINSTEIN: Right. See, I’m ahead of my time.
RITHOLTZ: You are. So, you never owned a car?
WEINSTEIN: Never owned a car. Never drove a car. I took a few …
WEINSTEIN: I took a few lessons like 10 years ago and I was just like, this is a waste of time. I’m never going to create the muscle memory to know how to do this. I’ll probably kill someone or myself, so let’s …
RITHOLTZ: If we get you on a track, it’s a lot of fun.
RITHOLTZ: You’d be surprised.
WEINSTEIN: Can we do like the — what do you call them, the bumper cars or the …
RITHOLTZ: So, now , those bumpers are all electric. There’s a place called RPM, there’s a bunch of them around. There’s on in Farmingdale. And it’s just the most amount of fun you can have.
WEINSTEIN: I would love that.
RITHOLTZ: It’s a blast.
WEINSTEIN: I should do that with my 15-year-old who tells me in stark contrast to myself, he’s going to have his learners permit when he’s 16 which I’m terrified of, but …
RITHOLTZ: It’s such a different whole generational thing …
WEINSTEIN: … hell bent on having that happen.
RITHOLTZ: … pre-Internet if you lived outside of a major city, a car represented freedom. Now, everybody’s plugged into everything …
WEINSTEIN: I read that. Yes.
RITHOLTZ: … it’s just such a different — so, let’s talk a little bit about you. What’s the most important thing we don’t know about Ilana Weinstein? Although, I think you may have just revealed it.
WEINSTEIN: I think you — I may have just revealed it.
RITHOLTZ: That you never have driven a car. I’ve never driven a car. Yes.
WEINSTEIN: And you know what? Everyone in this industry knows me is like a very — which is true to the point no-nonsense, say-it-like-it-is businesswoman, all true. But, Barry, I do have a soft and gooey center.
RITHOLTZ: Right. I don’t believe that.
WEINSTEIN: It’s true.
RITHOLTZ: What is your soft and gooey center?
WEINSTEIN: Like what? What’s — it’s — meaning what?
RITHOLTZ: So, what is — what is your — so, maybe, this is the thing we don’t know about you. What — you work in a tough industry, male-dominated, very (inaudible), very competitive, what are you soft and gooey about? And you brought this up, not me.
WEINSTEIN: Yes. I mean, it’s just more — it’s my alter ego non-work persona. It’s — you have to have a yin and a yang.
RITHOLTZ: Okay. That’s fair.
WEINSTEIN: And my yang or ying or whatever you want to — whatever the opposite one is that we’re referring to — it’s just you have to enjoy life and that’s a big part of who I am.
RITHOLTZ: Fair enough.
Who are your mentors? Who has influenced your career?
WEINSTEIN: Well, it might be a clichéd answer, but my parents are tremendous mentors. My mom, in particular, even though she was a stay-at-home mom, she is an incredibly bright woman who kind of managed the family, I’d say in some way similarly to a — how a CEO manages his best employees but with lots of love, very — but very no-nonsense, very kind of like the advice I gave this girl at U of M, like get up and go for it. Stop whining, just get it done.
And that gave me — and forcing — and that made me strong and creates wins and then it creates real confidence.
Other mentors were just — I have cultivated great relationships, great relationships with my clients who’ve given me great advice along the way. I mean, everywhere I’ve worked, I’ve just — I’ve had the good fortune of finding great people who I learned a lot from.
RITHOLTZ: Quite interesting. Tell us about your favorite books. What do you like to read when you’re not out recruiting talent?
WEINSTEIN: I love books by — and I think there are some commonality between them. I love Jon Krakauer, Tom Wolfe, Michael Lewis. They all write real stories that are almost read-like thrillers. And Tom Wolfe is fiction but he’s really writing about moments in time that are real.
RITHOLTZ: Right. “Bonfire of the Vanities” was …
WEINSTEIN: Yes. I mean, that’s …
RITHOLTZ: … loosely based on facts.
WEINSTEIN: Right. Even “I Am Charlotte Simmons” is based on real life — do you know that book?
RITHOLTZ: No, I don’t.
WEINSTEIN: It’s great. It’s — I read it a few years ago. It’s a woman’s — young woman’s travails and experience at undergrad. I think it’s — it’s meant to be a big tens type school and everything she goes through. It’s a very thick book.
But I thought it was so on point in terms of what the undergraduate experience is like. I’m sure based on characters that he knew well, maybe in his own family.
RITHOLTZ: Sure. Give us some more book titles. You mentioned a number of authors. I have to think the “Big Short” is right in your sweet spot.
WEINSTEIN: Love. Love. In fact, it’s funny you bring that up. I was on a long flight a few weeks ago and I didn’t reread the book but I did see the movie again. And I actually called a number of my clients and said you have to watch this again. And I made my son watch it again.
It’s so good and I’ve so much respect for how Michael Lewis did that, how he — it’s just it’s so many — it’s a tough subject to understand for a layperson.
WEINSTEIN: He totally explained it well and he takes these stories and builds these — not builds, they were — but brings to life these characters that were interesting and esoteric and dynamic in their own ways and contrarians. And then there’s this — that’s why I call it a thriller, like how is it — how is it all going to come together and how did they figured this out and how did they all sort of end up interweaving. and tells a story which is so multidimensional.
I just thought it’s brilliant.
RITHOLTZ: That is the Michael Lewis formula. Find an esoteric, quirky outsider and weave a narrative, not from the center, but from the people on the periphery who identify in a contrarian basis — wait, what does everybody seem to misunderstand and then the next level is how can we capitalize on it?
WEINSTEIN: And you know what? You just described what we do.
RITHOLTZ: What you do …
WEINSTEIN: What I do.
RITHOLTZ: As a headhunter?
WEINSTEIN: What I do as a headhunter.
WEINSTEIN: It’s finding the people who see who see something — who can come at things differently, who are able to generate alpha consistently overtime in spite of everyone else, and what did they — and what does that mean in terms of where they can be most successful and where the industry is going.
RITHOLTZ: Give me one more book title because I’m curious as to what else you read and then I’m going to share two with you.
RITHOLTZ: I’m going to bet you probably — well, one of them hasn’t come out yet, but one of them, I wonder if you read. Give me on more title.
WEINSTEIN: So, I’m in the middle of one right now which is not something I normally read but someone sent it to me and I’m actually really into it. It’s called “Hacking Darwin.” Have you read this?
RITHOLTZ: I’m family with it. I haven’t read it yet.
WEINSTEIN: So, it’s written by this technology futurist.
WEINSTEIN: And it’s all real stuff which is amazing. And these kind of — the premise being we can hack the genetic code the same way you can hack a computer which we know. We can you do things now with the genetic code to make people healthier, to make them smarter. And it’s just — I’m only midway through it, but it’s both the ethical challenges inherent in that as well as the socioeconomic challenges.
We decide some things not at the goal but another country decides it is, does that create sort of a superior population to us? There’s so much in it that I think is interesting and its written in a way that a non-medical person like myself can totally understand.
RITHOLTZ: Jamie Metzl …
RITHOLTZ: … is the author.
RITHOLTZ: Courtesy of Google.
So, the two books I have to ask you about because you kind of described them both. One is “The Spider Network” by I think it’s David Entrust (ph) about the LIBOR manipulation scandal. Same sort of thing where it’s a financial book but it reads like a thriller and all the characters are odd and interesting.
WEINSTEIN: I’m totally going to read that.
RITHOLTZ: Yes. That’s it. And then the new Greg Zuckerman book on renaissance Technologies and Jim Simons, the man who — I’m trying to remember what the title is, “The Man who Solved the Markets.” Another one that read like a thriller and how do we figure out — we figure out commodities and futures, how we apply that and figure out the equities? Really a fascinating — that’s such a unknown entity and there’s so little public information on Renaissance. The Jim Simons book is really quite fascinating.
WEINSTEIN: Thank you. I’m totally picking those two up.
RITHOLTZ: Can I tell you I know who that — the Simons book is just going to crazy only because it’s a black box. No one knows what goes on. And post-election, everything that happened with the Simons partner who had such an impact on of the Trump candidacy, that’s the — I just see that book is blowing up.
I could be completely wrong and when I’m interested in, very often other people aren’t. But I think you would — you, especially, would really appreciate both of those.
WEINSTEIN: Don. I’m totally reading them.
RITHOLTZ: Next question. Tell us about a time you failed and what you learn from the experience?
WEINSTEIN: So, I’m going to site something that happened early on in my career, like, inconsequential looking back. But I remember it because it was so scary and crazy at the time. And this was my first — this is my first job. I was at Goldman and I had done this analysis and submitted it and I got pulled into the partner’s office who ran my division.
And he started reaming me out, like totally carrying on and screaming and yelling and I’m sitting there white-knuckled, grabbing the chair, wondering what the heck did I do?
WEINSTEIN: I worked so hard on this. Like — well, how did I screw this up so badly? And I just — my head was exploding. I was listening to him. I said — I don’t understand. What -because it had been submitted to some other partner that was more senior than him.
WEINSTEIN: So, I can’t make this up. I had left off the middle initial of the partner who is the ultimate recipient of this analysis.
WEINSTEIN: I had left off — I think it was an A. I remember it to this day. I don’t remember his name but I remember the middle initial, it was an A. And it was so insane …
RITHOLTZ: Wait, wait. That’s what he was upset about?
WEINSTEIN: This guy had — his higher up had reamed him out because I, attention to detail, she left off my middle initial. So …
RITHOLTZ: Yes. I can’t see why didn’t stay there more than a couple of months.
WEINSTEIN: Yes. Exactly.
WEINSTEIN: But …
RITHOLTZ: That is just shocking.
WEINSTEIN: It’s crazy. I know.
WEINSTEIN: But you know, what I ended up doing was calling the guy who was the middle initial A guy and asking to meet with him. And we ended up having lunch. And as it turns out, he wasn’t nearly as upset as I think the guy who called me in to his office who was just having a bad day or …
WEINSTEIN: … whatever the case was. But it taught me about dealing with things head-on and not letting someone else speak for me.
WEINSTEIN: And defusing the situation, again, by just having a candid conversation, sort of person to person. And so, it was — I don’t know. It stuck with me because I — it was a ballsy move but it ended up Okay as a result.
RITHOLTZ: Quite interesting. What do you do for fun? What do you do when you’re not up to your elbows in the hedge fund industry?
WEINSTEIN: So I discovered my inner athlete in the last few years. Growing up in New York, I don’t know, I didn’t — like I went to Stuyvesant. It wasn’t — like I was a big sports person. I took ballet.
WEINSTEIN: That was about as athletic as I was.
So, I found that I love cycling. I go on all these cycling trips now. Like all over the world.
RITHOLTZ: Really? I have a buddy who does that. They have a chase van and they …
RITHOLTZ: … went through Italy, they went through …
WEINSTEIN: Totally. I do this in style. I’m not like — I mean, so there is a van that follows us. We stay in phenomenal places. We eat crazy, copious amounts of food because we can. We’re cycling 50-60 miles a day.
RITHOLTZ: Right. You go through 10,000 calories a day. It’s easy.
WEINSTEIN: And it’s great .
WEINSTEIN: You see stuff you would never say as a tourist. You really and — and we pick places that are just — that are like they’re beautiful to cycle.
RITHOLTZ: Where have you — give us a few names.
RITHOLTZ: A few locations.
WEINSTEIN: Provence, Croatia, I other parts of France like Il de Re which is off the coast of La Rochelle. It’s kind of like the Hamptons of the Paris. Costa Rica.
RITHOLTZ: So, really in a …
WEINSTEIN: All over.
RITHOLTZ: … mix of places.
RITHOLTZ: That sounds fascinating.
Let me ask you this question about the industry. What are you most optimistic and most pessimistic about the world of finance?
WEINSTEIN: So, I think that this shakeout is going to be for the better because I really think the industry has gotten tagged with the poor performance of the majority of hedge funds.
WEINSTEIN: And if they go away, then I think what we’re left with are the guys that are actually really delivering on a business model that works for LPs. And so, I’m — as much as this is a painful moment in time for a lot of funds, I think the shakeout will happen the way it’s supposed to.
RITHOLTZ: Before we get to the pessimistic — I meant to quote you something from Jim Chanos.
RITHOLTZ: Who said 30 years ago, there were 100 hedge funds. They all created alpha. Now, this 11,000 hedge funds and it’s those same hundred that are creating the alpha.
Is that a fair statement or is he …
WEINSTEIN: No, I don’t think that’s true or you wouldn’t see funds again like Eton Perry and — I mean, sorry, Eton Park and Perry going out of business or Highfields closing its doors or Blue Ridge closing its doors. Those two were, by choice. The first two were not sure they were.
And again, all those funds that I mentioned that are now shells of their former selves, right, we talked about the AUM drops of funds like GreenLight and Corvex and Discovery and Fir Tree. So, those — that’s not indicative of funds that have delivered great performance for the past four or five years. Again, this year excluded.
RITHOLTZ: Got you.
WEINSTEIN: So, I don’t agree with that. I think now, what is the differentiator are really funds that had set up an infrastructure that bestows competitive advantage to their people.
RITHOLTZ: Got it. So, what’s sort of advice would you give to a recent college grad who is interested in going into finance?
WEINSTEIN: I think they need to — they need to understand whether it’s finance, whether it’s investment banking, or it’s going directly to a hedge fund or really my advice would be no different to whether it’s consulting anything, they need to be prepared to work harder than everybody else if they want to differentiate themselves.
And I tell this to my son all the time. Everyone thinks they work hard. The truth is, as you and I know, Barry most people don’t actually work that hard. And I think particularly with millennials, they — I don’t think people these days, we interview young kids from Goldman even to join our firm, to my firm, they’re not working the way I used to work when I was a Goldman.
And so, I — working hard, that hard and being that overprepared in the beginning is what will set you up for success because you’ll be ready for unexpected questions. It sets up a work ethic which I think just serves you well in life.
And I — that’s the ethos I live by still to this day. It’s the ethos of my firm. It’s just — it’s being paranoid that you’re missing something and making sure that every last stone is uncovered.
RITHOLTZ: I’ve read certain coaches say that given the choice between hard work and talent, I’ll take the hard work. Quite interesting.
And our final question. What do you know about the world of alternatives and talents and recruitment today that you wish you knew 20 plus years ago?
WEINSTEIN: So, I think there’s a special cocktail of art and science that goes in to what makes the best people. And when I look at the people, I thought were good 15, 20 years ago, when I see them now, a lot of these people, I’m like what was I thinking? It’s just what — so, our judgement has certainly become a lot more refined as we’ve seen people evolve through different markets but there are certain things that are common traits is what we’ve distilled from that I know now, that I wish I knew then.
So, those fall into two categories, science and art. On the science front, what we’re looking for is a defined process. We’re looking for people who come at things through systematic research — through systematic independent research, not through talking to their hedge fund buddies. We’re looking for velocity of ideas.
I want somebody who’s constantly thinking out of the box and coming up with things regardless of how tough it may be. I want somebody who can run a scale business, being able to deploy $10 million is different than 100 is different than a billion. For our clients, I need the guy who can deploy $1 billion successfully and generate consistent alpha overtime.
And that goes to my last point on science, I want somebody who can be effective in different kinds of markets, isn’t just a one-trick pony. So, that’s on — that’s a tall order. That’s on the science front.
But you can have people who have great science and no art and can’t really generate P&L. And on the — and art is — it’s a I think it’s a little bit know it when you see it, certainly for us, and I’m not sure how much of it can really be taught. I don’t think you learn this stuff at Wharton or it’s hard to — they just — it’s — there’s a DNA composition to it.
And it comes to passion. I know it when I see it. I know somebody who’s really into their subject matter.
WEINSTEIN: You can’t fake that. Intensity, an intense desire to learn and grow. We spoke about this earlier. Humility — arrogance is a killer in this industry.
WEINSTEIN: It’s what kills performance. You have to be willing to pivot and come at things differently and evolve. And I think — but I do think the art can be made better. If you’re somewhere that can make the signs better and gives you the tools to refine your process and comment research more effectively, then you can — you can have more confidence in terms of relying on things like your non-intellectual judgment and your willingness to take risk and be wrong.
So, I do think there — all those pieces fit together and it’s about being somewhere which can really help you develop the right foundation.
RITHOLTZ: Quite fascinating. Thank you, Ilana, for being so generous with your time.
We have been speaking with Ilana Weinstein of IDW group. If you enjoy this conversation, well, be sure and look up an inch or down an inch on Apple iTunes and you could see any of the previous 300 or so such conversations we’ve had over the past five years.
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I would be remiss if I did not thank the crack staff that helps put this conversation together each week. Michael Boyle is my producer. Atika Valbrun is our project manager. Michael Batnick is my head of research. I’m Barry Ritholz, you’ve been listening to Masters in Business on Bloomberg Radio.
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