Apr 28, 2015, 4:47 AM ETFireside Chat, Panel, Conference Presentation

The Intangibles of Building a Great Hedge Fund: People as an Asset Class

Hedge fund assets grew 31% in the last two years and 67% since the 2008 financial crisis, reaching nearly $3 trillion.
The industry follows a "90-10 rule": only 11% of the ~5,000 tracked funds manage 92% of total assets (approx. $2.8 trillion).
Blackstone's alternative asset management unit, led by Gideon Berger, represents the largest client in the industry with a $70 billion allocation.

Jason Karp (Turbion) argues that investing in people offers more duration, yield, and optionality than investing in stocks.
Karp notes that successful firms prioritize training and investing in human capital to generate asymmetric rewards.
Alex Klaben (Sequana) asserts that great investors distinguish themselves by using analogies to simplify complex situations into core investment principles.
Ken Griffin (Citadel) defines the "art" of investing as the ability to differentiate one's view from market consensus and predict how the market will incorporate new information.

Griffin observes that many managers remain at the $200 million scale not due to inability, but because they prefer the "joy" of direct investing over building complex organizations.
Gideon Berger emphasizes that seed capital providers look for "hard work" and "character" (specifically the ability to withstand adversity) rather than just past track records.
Citadel's growth is attributed to three pillars: a culture of learning, a "hustle" ethos of forward-leaning action, and early adoption of delegation to manage 24-hour global markets.
Berger notes that while tenure is often praised, turnover is a healthy necessity that creates "white space" for new talent and corrects hiring mistakes.

Personality Screening: Turbion uses CIA-trained interrogators to assess candidates, specifically screening for "openness to change" and "grit" (resilience).
Hiring Categories: Karp categorizes hires as "excellent" (open to change, resilient), "dangerous" (brilliant but impervious to feedback and reckless), or "nuisance" (hyper-neurotic and toxic).
Performance Reality: Even the best diversified investors succeed only ~60% of the time; managing this requires a culture where mistakes are treated as learning opportunities.
Resource Allocation: Griffin advises managers to coach the top 10% of their team to extract marginal gains, while allowing the bottom decile to "sink or swim."
Burnout and Growth: Successful managers often face burnout after 20 years of specializing; firms must offer new challenges or "white space" to retain top talent.

Platform Advantage: Jason Karp argues multi-manager platforms provide durability by diversifying risk and allowing for the incubation of talent without exposing investors to large, early-stage errors.
Key-Man Risk: Klaben contends that single-manager funds offer a clearer line of accountability and purpose ("Why") that attracts entrepreneurial talent seeking volatility and ownership.
Investor Perspective: Berger states that while key-man funds offer higher potential returns, multi-manager platforms provide better risk management and consistency, similar to a casino model needing a 51% win rate on uncorrelated bets.
Incubation Strategy: Successful transitions often involve incubating talent within a platform for years to allow for small mistakes before they manage their own capital.

Short-Termism: Griffin attributes much of the perceived short-termism in hedge funds to institutional clients' inability to tolerate long-term volatility, forcing managers to focus on quarterly performance.
Risk Appetite: Clients now demand lower volatility than in the 1990s, leading to a supply of products that prioritize capital preservation over asymmetric upside.
Alignment Issues: Griffin suggests that requiring managers to invest their entire net worth in the fund may paradoxically reduce risk appetite due to personal livelihood exposure.
Institutional Sophistication: Griffin disputes the notion that institutions are inherently short-sighted, citing their continued support of Citadel during the 2008 crisis following transparent communication.
Future Outlook: Berger predicts that patience and the willingness to endure volatility will be more rewarded as the industry becomes more crowded and sophisticated.