Podcast Summary
The Evolution of Hedge Funds and the Importance of Adaptability: Despite challenges like declining interest rates and fee pressure, hedge funds continue to attract passionate investors and professionals. Adaptability and building relationships are crucial in the evolving investment industry.
The investment industry is evolving, and hedge funds are facing new challenges such as declining interest rates and increasing pressure to reduce fees. Despite these challenges, the industry continues to attract passionate investors and professionals, as evidenced by the organic growth and success of podcasts like "Invest Like the Best." The conversation between Patrick O'Shaughnessy, Ted Sides, and Brent Beshore highlights the importance of adaptability and the value of building relationships within the industry. They discuss the changing landscape of hedge funds and the potential impact of fee structures on the future of the industry. The conversation also touches on the importance of continuous learning and the value of sharing knowledge and experiences with others. Overall, the podcast episode underscores the importance of staying informed and engaged in the investment industry, even in the face of challenges and change.
The future of asset management: shifting towards performance-based fees and lower management fees: The asset management industry is evolving towards performance-based fees and lower management fees, as decreasing returns and high fees make it challenging for new entrants to compete. Private equity's focus on adding value offers insights into this transformation, and the goal is to create a more aligned incentive structure for investors and asset managers.
The traditional business model of asset management, particularly in hedge funds, is facing significant changes due to decreasing returns and high management fees. This makes it challenging for new entrants to compete and sustain their operations. The future of asset management may involve a shift towards performance-based fees and a reduction in high management fees. However, the transition is not clear, and there is significant institutional inertia to overcome. The private equity world, with its focus on adding value to businesses, may offer some insights into this transformation. As the industry evolves, there is a growing expectation that fees will be more closely tied to actual asset management and less to enriching the managers. This could lead to a greater emphasis on capital deployment and a shift away from the current heads-I-win, tails-you-lose structure. Ultimately, the goal is to create a more aligned incentive structure that benefits both investors and asset managers.
Challenges for Active Investment Management: Despite difficulties in shorting and high fees, allocators can find opportunities in inefficient markets, like Asian markets and less trafficked sectors. Understanding underlying fundamentals is crucial when evaluating alternatives.
The traditional model of active investment management, particularly in hedge funds, is facing challenges due to high fees and difficulty in generating alpha, especially on the short side. The long side, however, has shown success even in a strong equity market. Allocators should look for pockets of opportunity where there is still inefficiency, such as in Asian markets or less trafficked sectors. The reasons for the traffic patterns in certain sectors may be due to perceived winners and losers, or simply a snowball effect of big names entering those sectors early. It's important for allocators to understand the underlying fundamentals of return when evaluating alternative investment options. In this environment, shorting has become increasingly difficult due to low interest rates and increased crowding, making it hard for investors to make money on the short side. The trend of underperformance of the aggregate in the long only space due to high fees is a significant issue, and allocators need to carefully consider the value they are getting for their investment.
Identifying Skilled Hedge Fund Managers: A Challenging Task: Despite the potential for strong returns from skilled hedge fund managers, it's increasingly difficult to identify them due to market conditions and changes in informational edges.
While it's possible to identify and invest in skilled hedge fund managers who can deliver strong returns, it's becoming increasingly challenging due to the efficiency of capital allocation and the quick growth of perceived talent. The size of a manager may not necessarily impact their performance, but the broader investable universe of smaller managers has been less advantageous in recent market conditions. Academic studies on the subject are inconclusive, and the definition of "small" managers in these studies is often not investable for most allocators. The dominance of cap-weighted returns in the market has overshadowed any skill that may be present in the small to mid cap space. When considering potential edges for investors, it's essential to evaluate whether the edge is structural, sustainable, and persistent, and the informational edge discussed earlier has drastically changed due to advancements in technology and access to information. For instance, short selling, which was once a significant informational edge, has become more challenging due to increased competition and transparency.
Hedge funds once gained an edge through unconventional means, now must adapt to new information sources and analysis methods: As technology advances and data becomes more accessible, hedge funds must explore new areas like social media sentiment and changing company landscapes to maintain a competitive edge
In the past, hedge funds like the Feshbachs gained an edge by acquiring information before others through unconventional means, such as hiring college interns to access reports at the Library of Congress before they were publicly available. This allowed them to make informed investment decisions ahead of the competition. However, as technology advances and more data becomes readily available, the landscape for finding profitable investment signals is changing. The question now is what new areas of information or analysis will provide a sustainable edge in the future. Some possibilities include social media sentiment and the evolving landscape of publicly traded companies due to changing SEC rules and the rise of asset light businesses. Ultimately, the future of hedge funds and investing will depend on the ability to adapt to new information sources and analysis methods.
Changes in business landscape impact valuation methods: Focus on value industries with moats and higher returns, as high-growth, high-burn companies stay private longer, challenging traditional valuation methods.
The business landscape has undergone significant changes in the last 50 years, driven by the availability of data, the Internet, connectivity, and the platform business model. These changes have led to high-growth, high-burn companies staying private for longer periods, challenging traditional valuation methods. The price component of returns has run away, leading to outlandish prices that may not be sustainable. Therefore, it's crucial for investors to focus on value today and consider industries with moats tied to the owner and higher average returns. These industries may not be the most attractive initially but can offer better long-term opportunities. Within each industry, the most obvious places to participate often have the lowest returns, and success lies in identifying providers around those areas with higher returns. For instance, in the real estate industry, the most obvious place to participate is being a realtor, but the real money is made by selling goods and services to realtors. Similarly, in the wine industry, which is typically a terrible business, companies that supply barrels or offer other essential services can be incredibly successful.
Identifying hidden opportunities in industries: Despite popular narratives, industries have counterintuitive trends with favorable economics. Patience and identifying non-obvious subcomponents or business-to-business roles can lead to significant profits.
Every industry, even those that seem glamorous or established, have hidden opportunities with favorable economics. These opportunities often lie in non-obvious subcomponents or business-to-business roles that support the industry but may go unnoticed. For instance, in the media industry, despite the popular narrative of newspapers being a dying business, there are still significant profits to be made in print. The key is to identify these counterintuitive trends and have the patience to stay the course, even when the market may be pushing in a different direction. Another observation is that as industries and markets change at an increasingly rapid pace, the role of luck in investment outcomes becomes more significant. Old strategies that have proven successful in the past, such as focusing on long-term investments and having a longer attention span, may once again come into favor during periods of low returns.
Longer-term capital structures offer advantages for identifying undervalued securities: Long-term investors can benefit from longer-duration structures, but they require a proven track record, long-term focus, and ability to withstand market volatility.
Longer duration capital structures offer an advantage for investors and allocators in identifying undervalued securities or situations with uncertain event timelines. However, this approach comes with significant risks, such as lack of institutionalization and the challenge of navigating through market cycles. Allocators or investors committed to long-duration investments should have a proven track record, a long-term focus, and the ability to withstand market volatility. Private equity firms, for instance, have an advantage due to longer investment horizons and the absence of mark-to-market pressures. For investors, a long-term focus, flexibility, and the ability to make decisions based on the business's long-term potential are crucial when partnering with an investment firm.
Investing during uncertain times and understanding complexities: Success requires a steady source of capital and the courage to invest during market volatility. Gaining a deeper understanding of complex jobs and industries provides valuable perspective. Don't make assumptions and embrace uncertainty for greater resilience.
Having a steady source of capital and the courage to invest during uncertain times is crucial for success. Contrary to popular belief, many investors shy away from buying when markets are volatile. However, being the buyer of choice in such situations can lead to significant opportunities. Additionally, gaining a deeper understanding of the complexity and challenges of various jobs and industries can provide valuable perspective. As individuals, we often underestimate the difficulties others face and assume their lives or jobs are easier than ours. However, upon closer examination, we realize that everything is hard and requires dedication and effort. Another key insight is the importance of not making assumptions. The unpredictability of life and business means that we can't know for certain what will happen next. Embracing this uncertainty and questioning our assumptions can lead to greater resilience and adaptability.
Finding joy in effortless activities: Identifying enjoyable, effortless activities can lead to personal growth and fulfillment. Talent and hard work are necessary for success, and everyone's journey is unique. Reach out for help and focus on adding value to others during tough times.
Finding something you truly enjoy doing and doing it without any expectation of return is a powerful way to use your free time. This concept, while not easy, can lead to a point where the effort put in is compensated by inbound help or opportunities. It's essential to identify activities that feel effortless to you, even if they appear challenging from the outside. These activities can serve as a source of personal growth and fulfillment. Additionally, understanding that both talent and hard work are necessary for success, and that everyone's journey is unique, can provide valuable perspective during times of transition or challenge. Reaching out for help and getting outside of yourself are crucial tools for navigating tough periods and maintaining a focus on being of value to others.
Maximizing strategic costs and cutting non-strategic costs for business improvement: Focusing on business fundamentals can lead to growth through strategic cost investments and cost-cutting, but effective metrics, strategy, and talent are crucial.
Focusing on the fundamentals of a business, often referred to as "business hygiene," can lead to significant improvements. This includes maximizing strategic costs, such as advertising, and cutting non-strategic costs to the bone. While many businesses focus on the cost-cutting aspect, the upside is that investing in areas that contribute to growth can create a competitive advantage. For example, outspending competitors on advertising can help build a moat around the business. However, it's important to have good metrics, strategy, and talented people to make these investments effective. A book that could provide valuable insights is one on incentives in businesses, as understanding how different managers and situations are incentivized can lead to successful outcomes.
Aligning incentives for 5x to 10x improvements: The 3 gs mindset emphasizes the importance of aligning incentives between different levels of an organization for significant gains. Practical examples and applications of behavioral finance concepts are needed for better decision making and success.
Aligning incentives between different levels of an organization can lead to significant gains. This concept, which the speaker refers to as the "3 gs mindset," can result in 5x to 10x improvements rather than small percentage increases. The speaker emphasizes the importance of this alignment and encourages more research and discussion on the topic. He also mentions the need for practical examples and applications of behavioral finance concepts, as opposed to just theoretical studies. The speaker recommends a book that highlights the damaging effects of chasing returns, which can lead to a performance chase even in seemingly obvious investments like the S&P 500. He also mentions another book that focuses on building a bridge of knowledge and life lessons that are often not passed down from parents or other mentors. These insights can help individuals and organizations make better decisions and achieve greater success.
Understanding Major Industries: A Comprehensive Guide: Gain insights into major industries through a comprehensive guide, including current state, key variables, and qualitative and quantitative perspectives. Emphasis on return on invested capital as a valuable metric for evaluating industries.
There is a wealth of common knowledge about various industries that is not readily accessible to the general public. This information, which could be valuable for personal growth and investment decisions, is often shared among industry insiders and can be difficult to obtain. A suggested solution is the creation of a book that provides a comprehensive overview of major industries, including their current state, key variables, and qualitative and quantitative perspectives. Such a resource could serve as a valuable tool for individuals looking to expand their understanding of various industries and mental models. Additionally, the importance of return on invested capital as a metric for evaluating industries was emphasized, as it can provide insights into a company's true financial performance beyond profit margins. Overall, the discussion highlighted the value of gaining a deep understanding of various industries and the potential benefits of making this information more accessible to a wider audience.
Low-interest-rates masking financial instability: When interest rates rise, many businesses may not sustain, leading to a purge with far-reaching consequences. Understanding mental models like compounding can help make informed decisions.
The current low-interest-rate environment has masked the financial instability of many businesses, and when interest rates rise, a significant number of businesses may not be able to sustain their operations, leading to a purge. This purge could have far-reaching consequences, affecting various sectors and credit markets. Additionally, having a solid understanding of mental models and their nuances can be crucial in making informed decisions and navigating complex situations. Compounding is one such mental model that can have profound impacts in various aspects of life, from business to health, and can lead to nonlinear effects when applied consistently over time.
Understanding your circle of competence and trusting intuition: Successful decision-making relies on a deep understanding of your expertise and trusting your intuition, which is a finely tuned algorithm based on experience. Trusting the intuition of competent individuals can lead to compounding returns.
Having a deep understanding of your circle of competence and trusting your intuition are key to making successful decisions. Those who have done well in history have figured out what they know best and continually push the boundaries of their knowledge, while also trusting their instincts. Intuition, which can be seen as a finely tuned algorithm based on experience, is often overlooked in today's algorithm-driven world, but it is a powerful tool when used in conjunction with a strong foundation of knowledge. Trusting the intuition of competent individuals, particularly in areas they are experts, can lead to compounding returns that are difficult to replicate.
Investing in individuals with deep expertise: Investing in individuals with deep knowledge and application of that knowledge can lead to significant financial and personal returns.
Investing in individuals with deep expertise and knowledge in a specific area can lead to significant returns, both financially and personally. The speaker expresses admiration for individuals like Brent, who have dedicated their time to buying and improving tiny companies, and suggests that investing in such individuals could yield excellent outcomes. He also emphasizes the importance of investing in oneself and deepening one's knowledge and relationships. The speaker admits his lack of experience and confidence in public markets and instead plans to invest his daughters' retirement funds in the S&P 500. He encourages investing in people with deep knowledge and application of that knowledge, and suggests that such investments may not only result in financial returns but also lead to discovering amazing things. The speaker himself sees himself as a lifelong learner and researcher and does not plan to retire.
The importance of market value in our work: The joy of learning and researching new things is important, but ensuring there's a market for our skills and expertise is crucial for personal growth and financial success.
The price people are willing to pay for what we do is an essential factor in determining the value of our work. While the joy of learning and researching new things is important, it's equally crucial to ensure that there's a market for our skills and expertise. Bill Gurley's quote, "You haven't accomplished anything until you're liquid," emphasizes this idea. However, finding the balance between growth and subtraction, engagement with smart people, and leisure activities is also essential for personal growth and happiness. Some people may retire as a concept they've been driving towards, while others may find fulfillment in their work and continue to do it throughout their lives. The challenge lies in finding the flow and doing work that we enjoy and are good at, making retirement an unnecessary concept. The notion of retirement evolving over time and being rare when we find both success and fulfillment in our day-to-day work is an interesting concept to ponder.
Discovering a Fulfilling Career and New Perspectives: Explore unconventional ideas for health from Peter Attia, find joy and happiness in 'The Book of Joy', and consider potential downsides in 'The Systems Bible'. Embrace open-mindedness, gratitude, and continuous learning.
Finding a career that meets financial objectives and provides daily fulfillment is a rare and fortunate occurrence. The speaker shares his gratitude for having found such a career and recommends the podcast guest Peter Attia for his unique ideas in health. He also suggests the book "The Book of Joy" for its insights on joy and happiness, and "The Systems Bible" for its perspective on the potential downsides of building systems. The speaker emphasizes the importance of questioning common opinions and considering new perspectives, as demonstrated by these recommendations. Overall, the conversation highlights the value of open-mindedness, gratitude, and continuous learning.
Exploring faith with clarity and insight: This book offers a comprehensive exploration of faith alternatives and provides clarity and understanding, making it valuable for anyone interested in exploring or deepening their faith.
"Making Sense of God" by Tim Keller is a thought-provoking book that provides clarity and insight into various perspectives on faith. Regardless of one's current faith journey, this book offers a comprehensive exploration of the alternatives to faith and helps individuals understand the cohesive worldview they have accepted. It is a valuable read that can provide clarity and understanding, and it offers a unique perspective into how others think and live. The speaker highly recommends this book to anyone interested in exploring faith or deepening their current understanding.
