← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Jon Glidden - Delta Airlines Pension Fund Turnaround (EP.417)
00:56:32
Jon Glidden is the CIO of Delta Air Lines, where he oversees the company’s $16 billion pension fund. Jon joined Delta in 2011, when the plan had $7.5 billion in assets, a $13 billion underfunded liability, and the highest actuarial expected rate of...
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- [00:02]
Michael Lefell
Capital Allocators is brought to you by ten east, an investment platform for sophisticated investors to access private markets. Ten east brings benefits of having your own family office without the cost and headaches of doing so. It's founded and led by Michael Lefell, former Deputy Executive Managing member of Davidson Kempner. Michael and his investment team offer members the opportunity to co invest by offering at their discretion. Michael and his team source, diligence and commit material personal capital to each investment. The opportunities shared on the tennis platform offer exposure to private credit, real estate, niche venture and private equity and other idiosyncratic investments that typically aren't available through traditional channels. The principals have over a decade track record of investing in these types of exposures across more than 350 transactions post investment. The Tenes team conducts ongoing monitoring and reporting just to you'd expect from an institutional investment organization. I've known Michael for about a decade and after becoming impressed by the quality of 10 east offerings, its research process and high quality investment team, I became an advisor to the organization and investor in multiple offerings. You can learn more and join me as a member at 10 East CO. That's the number.
- [01:25]
Ted Seides
10 East Coast Capital Allocators is also.
- [01:31]
SRS Acquiam
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- [02:33]
Ted Seides
Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital.
- [02:52]
SRS Acquiam
You can join our mailing list and.
- [02:54]
Ted Seides
Access Premium content@capitalallocators.com All opinions expressed by.
- [03:01]
TED and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.
- [03:19]
My guest on today's show is John Glidden, the chief Investment Officer of Delta Airlines, where he oversees the company's $16 billion pension fund. John joined Delta in 20002011 when the plan had $7.5 billion in assets, a $13 billion underfunded liability, and the highest actuarial expected rate of return at 9% of any company in the S&P 500, despite a funded status that threatened the solvency of the company 13 years ago. Investment performance combined with corporate contributions that offset planned payouts have improved Delta's funding status from 42% to 102% today, creating the large, largest corporate pension turnaround in history. Our conversation discusses John's independent thinking and innovative approach that led to this incredible feat. We start with his naval and investment background and then cover the four forces that drive his investment Portable Alpha private equity portfolio, construction and governance, and the implementation of each before we get going. We're in the home stretch leading into Capital Allocators University for Investor Relations and Business Development Professionals. It's crunch time. We're almost sold out and registration closes next Monday, November 25th. Our instructors are putting the finishing touches on their presentations and the content looks amazing. We're excited to share insights about the playing field and success in IR and VD roles from allocators managers, brand experts, conference providers and chief investment officers. Last chance to dance and we hope to see you in New York City on December 3rd and 4th. Hop on our website at capitalallocators.com university this week to register. Thanks for spreading the word about Capital Allocators University for Investor Relations and Business Development Professionals. Please enjoy my conversation with John Glidden.
- [05:28]
John Glidden
John, great to be here with you.
- [05:30]
Ted Seides
Hey Ted, it's a real honor to be here.
- [05:32]
John Glidden
Why don't you take me back to your path that ultimately led to this seat at Delta?
- [05:37]
Ted Seides
I grew up in a place called Newport News, Virginia. I grew up in a Navy family. My dad was a submariner. My mom really ran the house. My parents are the first heroes in this story. They didn't make a ton of money, but they always saved. I can recall that for a couple of birthdays I would get stock certificates for utilities. He was a nuclear submariner. So Detroit Edison, Central Illinois's public service, the stock certificates, they looked awesome. The dividends were nice but didn't really pay that much attention to it at the time, that's where things started. When it was time for me to go to college. I was pretty good at math, I was pretty good at science. I ended up taking a Navy ROTC scholarship to go to school and to help out around the house as well. So I was a mechanical engineer at Georgia Tech Thermal Systems. Really thought that I wanted to do alternative sources of energy. Now of course I knew exactly what I was going to do when I left Georgia Tech. I was going to be a naval officer. So I took a lot of very challenging mechanical engineering classes. They make you take one business class to graduate. The thrust of the business class that I took was time value of money. I'd never really thought about compounding at all. And the math is really simple. But it really opened my eyes. That was my senior year of college. And then of course I go straight in the Navy. I was a surface warfare officer on my first ship. I was the Tomahawk missile officer on a brand new destroyer. And this is crazy, I qualified what they call officer of the deck on my 23rd birthday, which meant that I would be operationally in charge of a billion dollar warship that had nuclear capable missiles on it. I also owned half of the launch codes. I'm 23 years old so you know, that was a lot of responsibility. My second ship was a patrol coastal. I was a weapons and boarding officer. We worked with foreign Navies to enforce UN sanctions. And we're also taxicab for the SEALs. So if the seals wanted to do insertion or extraction, they'd use us sometimes if the water was a little bit rough in the Navy I didn't make much, but I didn't spend hardly anything. My savings rate was about 70%. I talked about this time value of money and I'm just hooked on investing, but I know that I don't know anything. So my brilliant strategy at the time was about 50% dogs of the Dow and 50% growth stocks. This is 1994 to 1999. This was brilliant. Except for the dogs of the DAO piece, the growth stocks. That was brilliant. I love the Navy. I really got hooked on investing while I was in the Navy. I knew that I wanted to retool, I wanted to learn about investing, I wanted to learn everything there was and learn about the industry and what jobs are out there. So I went to Emory University as a full time MBA student. I got to tell you, if you want to find somebody happy at a full time MBA program, find the ex military guys. It was fantastic. It was a crazy Time I started in 1999, it was the peak craziness of the tech bubble. And you had stuff like Palm Pilots that was all the rage among like business school class. When 3Com said that they were going to spin out Palm, there was this enormous gap. You could do merger arbitrage, like very obviously I was alpha rack, just a real arbitrage junkie. I read as much as I could back in those days. I ran probably the world's smallest and only closed end fund merger arbitrage strategy when I was going to school. There are a couple of things that really stuck with me from my time at Emory. The first one, it's like day one in a portfolio management class. You've got an efficient frontier, you got a risk free rate and you got your capital market line. Well, the capital market line keeps going up and the efficient frontier curves. I'm like, well, it looks like you should stay on that capital market line. That looks like a good deal. Well, how do you do that? Well, if you can borrow at the risk free rate, you can just lever your tangent portfolio. You can make more money per unit of risk. Well, can you do that? Can you borrow at the risk free rate? Some people can. You can do it through the use of derivatives. And this is a new concept for me. So that one stuck in my mind. Something else that stuck in my mind was a case study we did on Pimco Stocks Plus. And this is the idea that it's really hard to beat equity indices by picking stocks in a constrained manner. But what Pimco did, they pair AN S&P 500 derivative on top of a bond portfolio. So then they get some alpha, some duration, some credit, and they beat the index that way. And they did it. Now how did they do it? They used derivatives, they used leverage. There's that word again. These concepts again. Another thing from my time at Emory, I did an internship with Lazard with their private real estate group. So now we moved into 2000. At this point, the bubble just burst. They owned a lot of assisted living facilities and assisted living facilities were tremendously out of favor at that time because they weren't growth, they weren't new economy, they were boring, stodgy old companies actually lived in an ATRIA up on West 86th Street. My job for that summer was to go around the Northeast to go throughout the Midwest and go from Atria to Atria and interview management and take pictures and look at financials and build. And it was really interesting. That's really where I started to get private markets A little bit. The ability to buy under managed assets, bring in thoughtful ownership and management and squeeze some real returns out of it. 2001 is when I graduated from Emory. It was a pretty lousy time to graduate from business school. I wasn't super thrilled about the job offers I had at the time, so I extended school a year. I went to University of Chicago for financial math. I wanted to learn everything I could about derivatives. And what better place to go than University of Chicago? Hang out around the Merc a little bit and find out how that worked. The other thing going back to school did for me, it gave me an opportunity for a second internship. So Emory was heavily concentrated in Coca Cola stock and they were getting ready to diversify the portfolio. So I was able to get an internship with Emory with the endowment before I went to University of Chicago. I ended up going back to Emory full time after I finished at Chicago. You don't end up doing a podcast with you, Ted, unless you've been impacted by a lot of really amazing people. And this is one of the first ones. A guy named Matt Wright. He was hired by Mary Cahill. Mary and Matt were part of the Myra Drucker tree at the Xerox pension. Once upon a time, Mary came down to be the chief investment officer at Emory. Matt was a quant at B of A after Xerox and Mary brought him in to run public markets. And he's a great investor and he's an even better person. So he's quant. He's the one who introduced me to the idea of portable alpha. I knew that's what Stocks plus was. It was a great time for me. Every time a journal of portfolio management came in, I could read it from COVID to cover. Emory, even back in those days was 6 billion. We sold $3 billion worth of coca Cola stock in the pretty early days. And since I was on the public, it was like, hey, here's a billion dollars. Go build a hedge fund portfolio. We worked with two fund to funds and Ted, maybe you remember this. We gave 50 million to one fund to fund, $50 million to another fund of fund and we invested the other 900 million directly. We diligence protege to potentially participate in that. A long time ago it worked. We beat benchmarks by 200 basis points on this portable Alpha portfolio we had. It also allowed the private team with Mary and with Julie Vollenweider and Elena Kaprevitz to write bigger checks and write more checks on the private side. So I start getting all these ideas in my mind. I grew up in the physical sciences from an educational perspective, but I work in the dismal science. I know that for years I'm thinking about these four forces. Is there a better way out there? So you've got a private markets force, this ability to buy under managed assets, potentially at a discount. Of course, there's been a tremendous tailwind for those strategies with a wave of money coming in. Sometimes financial engineering is a plus, sometimes it'll be a minus. But you've got this private market force. You've got this portable alpha force, the ability to work with unconstrained market neutral managers to beat a borrowing cost. Then you've got the portfolio construction force. It's better to be on the capital market line than it is to be on the efficient frontier. That's how you can unlock some of that power through the use of derivatives and leverage. A governance force as well. How different can you look from your peers? How much leverage can you really use? How can you tell this story to keep people on side and not give up on the strategy when times get tough? And then Ted the recruiter calls talking about the Delta position.
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John Glidden
Where were you sitting at the time?
- [14:32]
Ted Seides
I had joined Wilmington Trust. I left Emory in 07. Matt had gone to go be the chief investment officer for Vanderbilt University. I ran a manager selection for Wilmington Trust. I had my own 10 to 12 person team and I had my own P and L. That's really what I wanted. I wanted decision making authority. I was at Wilmington Trust from 2007 to 2011 in the first call. And I got really lucky here, Ted, because on that first call, they're like, the job at Delta's open. What do you think? And I'm like, it's an airline. They're just coming out of bankruptcy. That sounds awful. I want to go back to the E and F world. That sounds terrible. Thanks for calling. I appreciate you thinking about me. Keep my name on file, but I'm not interested. No, thank you. Wilmington Trust ended up getting taken under several years after the end of the financial crisis by M and T Bank out of Baltimore. So I worked in Atlanta. Wilmington Trust in Delaware. M and T Bank is in Baltimore. They were like, congratulations, John. We want you to run manager selection for the combined entity. I've got a little family at home. My wife is amazing. We had two little kids at home. And I was working out of Baltimore two days a week and trying to hold everything together. And I was like, I'm just not having fun. Squeezing banks together is not a lot of fun. So I called back the recruiter. Is that Delta thing still going on? And thankfully it was probably four to six months had passed. I talked to the recruiter. That goes pretty well. The truest hero in this story that we're about to talk about is Paul Jacobson. He was the treasurer of Delta at the time. He went on to be the CFO of Delta. He's now the CFO at General Motors. So I sit down, just have drinks with Paul, and it's a job I don't necessarily want, which is not a bad way to interview probably. And I've got these four forces on my mind. I'm sitting down with Paul and I'm like, paul, I think we need to do three things. I think we need to strive for a more balanced portfolio. I think we achieve that more balanced portfolio by leveraging a portfolio and using derivatives. And I think we need to aggressively pursue Alpha. So I used all the bad words I could think about. We need to use leverage, we need to use derivatives, we need to run a high expense ratio implementation. What do you think? Some backstory on this is Delta had some really unique needs. The pension today 16 billion. Back in those days, the pension was more like 7 billion. And it was 14 billion underfunded on a company with a market cap of $7 billion. Funded status was hovering in the upper 30s, low 40s. So it was the worst funded major pension plan in America. Delta used to have a large, proud, very good internal pension management team. They were early adopters of venture capital, early adopters of private equity. They did club deals. The corporate pension world's a little bit unusual. The CIOs are as collaborative as they are. Delta was 115% funded in 1999. Then there was the bursting of the tech bubble. That was tough for Delta. Then there was nine, 11, very difficult, obviously for New York City, difficult for Delta, the airline industry as well. That put Delta on a course towards bankruptcy. So comp wasn't great. Job security wasn't great. Delta ends up going into bankruptcy. The team goes from like 25 to 7. They come out of bankruptcy in 07 and what do we want to do? Rebuild a pension team, try something else. Delta at that time in 07 had a 17 year window from the government to try to make everything right. So Delta at that time was like, you know what? Our needs aren't that great. We need a simple low cost solution. 60, 40 with a little bit of Alpha probably gets us there. That was the thought process in 07. And you could say it was A pretty rational thought process. They completely outsourced the plans from 2007 until I joined in 2011. And they wanted a simple low cost solution. That's what Delta wanted. That's what Delta got. They ran into the financial crisis, which they didn't see coming. A lot of people didn't see coming. If your plan's down 26 and maybe the spending rate was only 12% back then, 14% back then, that's a massive loss of assets. And even though Delta had this legislative 17 year window called Airline relief to make things right, that's when the mandatory contributions really started to become material at the enterprise level for Delta. And that's when Delta was like, you know what? This simple solution's not going to work for us anymore. We need somebody internally to really sweat this stuff. And they had a pretty high expected return target as well, which was 9%. This is part of the reason why I said no the first time around. But I was like, some of these thoughts that I've got in my head about how to do things a little bit differently, it actually could be a good fit. Paul was like, what do you think about the 9%? I'm like, I think we can do it. And I don't think anyone had said that to him before. So he's like, well, come on, let's see. I don't really understand everything you're talking about, but walk me through it and let's see if we can bring this to life.
- [19:41]
John Glidden
So you have this big hole to climb out of. You've got these four forces you think of driving returns. How did you think about how to tackle this problem using the forces that you had in mind?
- [19:52]
Ted Seides
I'd love to give you an elegant top down story, but I'm going to give you a bottom up story instead. I think probably with a public equity oriented portfolio, if markets are accommodating, I think maybe we can get 8. If markets aren't accommodating, we needed hedging. So I need two points of alpha. I guess Alpha's all hope to some degree. But we need a real, real chance of 2 points of alpha per year. And that's not an easy thing to do. I mean it's a pretty high target. What does the solution look like? I need two points alpha. How am I going to get two points of alpha? Well, I'm going to go 30% privates. So I figure if we can go 30% privates, we can outperform Publix by four points on that. That's 120 basis points at the overall plan level. That's part of it. In my mind, we saw this huge spending rate. If Delta does poorly, we've got a real challenge because of our spending rate. So that's about as illiquid as I thought we could be then. Portable alpha, second force. Let's go 40% market neutral hedge funds. If my 40% market neutral hedge funds can outperform my borrowing cost by 3%, that's another 120 basis points. So if I can get 120 basis points out of the privates, if I can get 120 basis points out of the hedge funds, that's going to give me 240 basis points. So that's 30% privates, that's 40% hedge funds. We've got 10% cash. The other 20% of our capital has gone to a variety of things through time. There's always been an allocation to pretty spicy risk parity in there. We also have an emerging manager program that's been in place for quite some time. Hedging. We allocate some assets for hedging. If you think about it, I've spent all of my dollars now, so that's going to add up to 100% of dollars. But there's that one thing, that third force, that portfolio construction force. How do we go out on that capital market line? How do we prudently use leverage to increase the expected return of the portfolio to get us to that 10% gross that we need to get to? So let's borrow 50% of plan assets using derivatives. Let's put a 50% beta overlay on top of the portfolio that I've walked you through. At the beginning, we needed pretty substantial beta returns. In these early days. It was significantly equity centric. We go back to July of 2014, and that's the portfolio. 30% privates, 40% hedge funds, 10% cash. Borrow 50%. You've got this other 20% funded stuff in case you've got a liquidity event if you really need it. That's what the portfolio looked like back in 2014.
- [22:40]
John Glidden
Let's dive through each of those component pieces. Maybe start with the 10% cash. How do you think about cash in light of these needs for such high return objectives?
- [22:50]
Ted Seides
Truthfully, the cash was a little bit higher back in those days and the alpha projection was a little bit lower back in those days. The way we thought about it is what does our beta overlay look like? Let's look at that beta overlay in isolation. We've got A pretty substantial hedge fund portfolio. We really paid a lot of attention to our 90 day VAR. So what does a 2 standard deviation 90 day VAR look like? What does a 3 standard deviation 90 day VAR look Like? What's 2 standard deviation look like? If all correlations go to 1, I want to see 3 months of benefit payments. Benefit payments are not immaterial. So we pay out over $100 million a month. That's a high, high, high spending rate. You're thinking about that 90 day point because most of my hedge funds are something like quarterly 90. So if I can withstand 90 days, hopefully we'll have a couple of outs. We're going to have delta. That's a possible out. Of course, I said we're equity centric and something's bad for equities. It's probably bad for delta too. And we know that going in. We've got the hedging portfolio, that's a possibility. And then we've got our hedge funds. That's another place that we can draw capital from. And so we figured that. How much cash do you want to put behind your, your notional program? And we created our own language around all this. And Amanda Kogar, particularly on my team, was great about clearness of communication, both in a concise written sense. Dashboards and these kinds of things, as well as one on one meetings with my investment committee. But we figured if you're going to have an equity centric overlay, you need to set aside 35 to 40% of the notional value in cash. So that's what we did in those early days. We created something that we call the golden rule. So we've got a notional value of our beta overlay. Every notional dollar needs to be backed by either cash or hedge funds. That's the golden rule. And eventually we relaxed it a little bit and put ranges around it. That's how some of these numbers came to be. And then even within cash, government money market fund, two of the most dangerous words out there. We did do some enhanced cash. I think we were pretty smart about enhanced cash. The rules there are, it needs to be liquid. I can't take more than a 25bp 50bp haircut on it. So treasury cash and carry. It's been a good strategy to this day. It's a better strategy than it probably should be. It probably pays you more than you should. Japanese cross currency basis, precious metal cash and carry more recently. And we wouldn't have done this in the early days, but there's some interesting short term Dealer funding trades that are out there. So that's really the cash portfolio.
- [25:25]
John Glidden
How did you decide how to populate that hedge fund portfolio to drive that 3% alpha you're shooting for?
- [25:33]
Ted Seides
This is portable alpha. We need to be super tight on our beta. I've been doing portable alpha with Matt since 2002, 2003. I've seen a bunch of stuff that can happen and I understand you can calculate all these parameters and all these metrics, but it's not 100% when you're talking about forward looking projections. But we want it to be really tight on the portfolio. If we think about what that hedge fund portfolio looks like, we really kind of wanted to target a beta of around 0.1. So pot shops are well represented in our portfolio and they have been since the early days. They make me a little bit nervous in terms of derivatives, but I think in terms of the risk management processes that they've got their ability to attract talent. It's been a great investment for us. Relative value and fixed income relative value are points of particular focus for us. We've got a pretty substantial allocation of the multi strats. We do have equity long short specialists. I know that's a bit of a dying industry, but I do think it's possible to develop deep expertise in pretty narrow parts of the market. I know that's what the pod shops suck up, but there's still some folks out there fighting it on their own. And then we've got quite a few macro traders in there as well. In the early days they were like no credit, no credit. Credit's got too much skew, it's got too much kurtosis. It was too bad in 08. Nowadays we actually do let some credit in there, but the derivative overlay looks a lot different. And then we try not to really constrain it that much. The idea here is that unconstrained, talented hedge fund managers have a better chance of beating a risk free rate than highly constrained long only managers have the probability of beating a benchmark. You are investing in hedge funds because you want the best of the best to beat your borrowing costs. By looking for market seams all over the globe. We'll typically have around 40 funds at any time. Maybe we'll have 5 co invests or something along those lines. That might sound like a lot to some people. I'm almost 25 years into portable alpha. I've seen a lot of the stuff that can go wrong and there's unknown unknowns out there. I don't know what the next degrossing event's going to be, but I know that it exists. I can tell you what the historic correlation between my managers are, but I can also tell you there's going to be environments where they look more correlated than I expect them to look. The only way to get around some of that skew risk, some of that kurtosis risk, is to just increase the number of managers that you work with. Some people don't buy into that. I most definitely do.
- [27:59]
John Glidden
So within those strategy categories that fit your risk parameters and that goal for diversification to prevent the unknown unknowns, how do you go about deciding who, in your words, is the best of the best?
- [28:12]
Ted Seides
This is something I've got better at. Through time is really drilling in on the people side. We're looking for a profile beta 0.1 or lower. There's some great 40 beta managers out there. If you're paying 20% incentive on 40 beta, you gotta be damn good at manager selection. Some people can do it, I can't. That eliminates a lot of the universe and we've known a lot of the universe for decades. So a lot of the long established players and then a lot of the spin outs of the long established players and then you're just looking for interesting stories as well. Who's out there that might be doing something a little bit different, Maybe something that you really haven't heard before? I still have a convert, our manager that's been phenomenal. I don't know how they've been so phenomenal for so long, but we still have some.
- [28:57]
John Glidden
How about turning to the private markets? That 30%. How did you think about how you wanted to invest in that space?
- [29:04]
Ted Seides
The private portfolio was very mature in 1999. By time you get to 2014, it had become immature. And this is all professional credibility because I'm telling people, leverage derivatives Alpha 9% 10% we can do this. This is going to work. The last thing I want to do is show a bunch of negative time weighted returns is we're firing up this private market portfolio. So private portfolio took a while to build into this. 15% private equity, 9% private credit, 6% private real assets. Within that for the private equity and the private real assets. 50% primaries, 30% secondaries, 20% co invests. I want to put some wins on the board. I do not want J curve. J curve could derail my entire story. That was the blueprint for the private portfolios and it's actually still where we are today. So it's been a decade and that structure served us well, but it's probably time to rethink some of those allocations.
- [30:10]
John Glidden
You didn't mention venture capital in that mix. How did you think about venture?
- [30:13]
Ted Seides
Want to be very cautious with venture because it is the longest duration asset class. But we targeted in that 5 to 10% range of the private equity exposure is about what we wanted venture capital to be. We actually probably do a little bit more venture now even than we did back then. And venture was mostly primary. So let's try to get into the best names. And obviously that was phenomenal in 2021. I mean private equity was pretty phenomen phenomenal in 2021 as well. I think we've probably paid the price a little bit since then.
- [30:43]
John Glidden
On the primaries in private equity. What types of managers did you choose?
- [30:49]
Ted Seides
Buyout dominated, especially in those early days. It was very equity centric exposure. So I've got some private diversifiers. So it's pretty much lower middle market, core middle market, upper middle market and some of the big ones. So it was buyout centric, US centric.
- [31:06]
John Glidden
So this last 20%, there's hedging risk parity, there's inflation, there's emerging managers. How did you think about what the goal is for that group together?
- [31:15]
Ted Seides
I'll start with the hedging at the beginning because that is vital to the story. And this is surreal because I'm sitting there in 2013 sitting with Paul Jacobson and Ed Bastian in the conference room outside of Ed's office. So again, Ed is still the president at the time and we are building hedging programs together. That gives you an idea of the extent of enterprise risk that continued to come from the pension funds in those days. So we had four or five components to our hedging program. We did some programmatic high certainty stuff. So we did 9075 put spreads, depended on what skew was a little bit. We would tweak some of that. We would tweak the attachment points a little bit. We had call it a Libor floor kind of strategy where we were long call options on call it the two year part of the Libor curve. It was a make money strategy like in an upward sloping yield curve you can actually make money on that. But then if rates really collapse, you can make three times, four times, five times your money. Less certainty there, but a lot of convexity that you got for getting it and maybe not quite as much bleed as you would see in a 9075 put spread. Third component was long volume. Yes. This is wishing for A little bit of magic here. Can we work with volatility oriented managers to say we don't want this part to bleed that much. I don't want to lose more than 10%, more than 15%, more than 20%. And I understand that's going to impact the convexity that I'm able to squeeze out of the positions. But it's also a funded position. Those first two, those are premium spend strategies with long volatility. You've got capital in there. We also had funded managed futures positions and this is approximate hedging. And then we actually had some more liquid, less expensive macro managers as well. If something happens, maybe they'll be on the right side of it, maybe they'll be on the wrong side of it. But you start to staple all of that stuff together and there's 4%, 6% of all of my capital is invested in those strategies. When something happens, and by the way, in March of 2020, something did happen. Option profitability. That's going to be the first thing I go. But then is there profitability in long volume? Give me that. Is there profitability in managed futures? Give me that. And then one of the next places you might go is I'm going to hollow out those exposures altogether. Give me my capital back as well. And then as we're thinking about it, we did all of the scenario analysis. What is a bad environment for Delta? When might Delta not be able to stand up to that pledge that they made in those early days, which is we're going to pay the 5% mandatory and if you don't hit a 9% expected return, we're going to stand up and make it like you did, make a 9% return. When might Delta not be able to honor that? And what do we do in that case? That's the thought process of that other 20%. There's always been risk parity in there. I'm going through my liquidity waterfall. If equities really, really tank, where am I going for money? I've got my prime, I've got my govies, I got my enhanced cash, I've got my hedge portfolio. This other stuff, that's the next place I'm going. Because I got those two Alpha engines, I've got privates and I got portable alpha and I don't want to touch those.
- [34:27]
John Glidden
There's a lot of relatively complex strategies going on in that bucket. How did you go about implementing my team's amazing.
- [34:36]
Ted Seides
There's only six of us. I've got my deputy cio, Amanda Kogar, my chief Operating officer, Dmitry Voronkov and my Director of investments, Nick Alif. The four of us have been together on this journey for over the past 10 years. We've been joined a little bit more recently by Mark Fong Wu and by Madison Woolley. We knew that we needed help from the outset. We're very engaged with hedge funds, we're very engaged with privates, but we've got consultants in both of those places because my team is not going to be able to monitor the entire universe either on the hedge fund side or the private side. So we need help there. Two more names that were pretty instrumental as we went through this process is Jeff Scott and Omer Tureen. So Jeff spent some time at Dow and he was the CIO out at Alaska permanent. Once upon a time he worked in Microsoft's Treasury Department as well. Omer worked with Jeff in Microsoft's Treasury Department. And I mean, they got it. There's not a lot of people that are like, I understand. And even that first concept, I want to walk on the capital market line, not on the efficient frontier. We need to figure out a way to make that happen. You can try to help me do that or you can be a believer and you can say, john, you're wrong on this or you're wrong on that. Think about this. So we've always had quite a few consultants. I need other people to argue with me. I need other people to say, you're wrong. Did you think about this? This is your weakest assumption. Your scenario analysis is wrong here. How do you do this? So trying to align external resources to help augment what we do on the inside.
- [36:08]
John Glidden
One of the challenges with going out on the capital markets line to achieve higher return is you also have to accept some amount of extra risk. Curious how you think about risk management in this plan.
- [36:19]
Ted Seides
It changed in the early days. It was don't be a source of a second bankruptcy for Delta. It was that tight, tight, tight integration. How do we try to hit the return targets without really putting Delta in a position that they can't come back from economically? I think our hedge portfolio got up to be as much as 8% of plan assets in those days. It was more of an asset only consideration back then. I was in it for Sharpe as funded status started to increase. But that's when we started to think, what's our gap funded status, volatility and stuff like that. But in those early days through 2017, it was tight integration with Delta. We need to keep this plan alive. We want to avoid A second bankruptcy. We want to avoid terminating the plans and having to work with the government and work with pbgc. That is what risk was. So how do we try to get as much return as we can? And it was that hedging program. In understanding this pledge of Delta, they've got to make the mandatory, but we're going to be there to augment if you don't hit the 9%. I mean, that was really risk management, keeping the plan alive in as many scenarios as we possibly could.
- [37:29]
John Glidden
How did you think about some of the common levers of risk?
- [37:34]
Ted Seides
It's all related to how much cash are you going to put behind the notional value of your portfolio? What does your derivative overlay look like? What does your net cash position look like? How much of a liquidity waterfall do you have? At some point you start cutting muscle as you go through that. That's really it. I mean, you've got investment risk and the liquidity risk and the liquidity risk really is. What's your hedge portfolio look like and where are you going to go for cash if you can't get it from Delta? And you've exhausted everything else? You've got to start looking at your risk parity portfolio at your. Your inflation hedging portfolio, at your emerging manager portfolio. You've got to start to look at where you're going to draw some of this.
- [38:16]
John Glidden
Somewhere along the way you've hit bumps in the roads you could think of. 2011 was a tricky year for some of the hedge fund strategies, certainly in the early time period during COVID March 2020, what happened in those interim periods when things probably weren't working along the smooth trajectory of generating returns?
- [38:33]
Ted Seides
Yeah. So I joined in October of 11. So I missed the worst of the euro crisis that was going on. 2015 was not a great year. So in terms of total return and alpha generation and Paul was there and Delta was there, all the hard work of the Delta employees and the thoughtful corporate capital allocation process, Delta did make it whole. And then 2018 was difficult. The fourth quarter was difficult and we still had a little bit of smart beta which did not work. It was great. It was phenomenal for a long time and then it wasn't and. But it wasn't really a challenge. All of the risk management systems that we had in place worked fine. So it never really got that uncomfortable. 2020 is a different story.
- [39:17]
John Glidden
So why don't you go through 2020?
- [39:19]
Ted Seides
2019 was a phenomenal year, so funded status organically is probably 75% or so. We've reduced the notional value of equity in our hedge overlay, but we still have quite a lot. We think we're in pretty good shape. But Covid was tough because Covid was equities down 35% in five weeks. 35% isn't necessarily a problem. You combine that with the five weeks and that's a real challenge. So we had to go through all of the steps. The first thing we did, even on the 10 year, got down to like 50 or 60 basis points pretty early in that process. Look, there's no juice left in that trade. Give me all of that. I'm completely unwinding that Libor floor strategy. Here's $450 million. Okay, that's good profits. Now. Equity's gone below our 70% attachment point on our put spreads. What's the point of keeping those around? Let's monetize everything now. Of course, as I'm doing this, the beta of the portfolio is starting to increase because you're unwinding some of the hedge behind this. How's Longvault doing? Can take those profits. And that's early. That's like middle march. We had 3 billion in net margin calls around the worst of the COVID timefra. So we went into Covid reserving about 3 billion in cash behind our derivative portfolio. You've got the one prime directive of portable alpha. Do not let the markets push you out of your beta position. Do not let the markets push you out of your alpha positions. That's why that extra 20% is there and the hedges there. But we got to the point. Okay, now, March 19th, 20th. I need the long volatility capital, not just the profits. I need the capital. Managed futures guys actually did a pretty good job. Give me the profits. That's easy. Give me part of the capital. Which of our macro managers are doing a pretty good job of our separate account? I've got to unwind. Some of that definitely draws on capital, but I was able to pull a billion dollars of profits from the option strategies and from the long volume Strategy. So that's 3 billion in cash, 3 billion in margin call. I pulled a billion in profits. And then talking about 8% was kind of the value of my hedging portfolio. I had to unwind $750 million of that or so. And then we get to March 23, 2020. Delta's revenues are down 97%. I can't go to Delta for liquidity. Look, this has been tough. All the hedging has worked way better than we Possibly thought it could. We're taking off hedges, which is what we agreed that we would do when the world goes on sale. We actually want to increase our beta. So we've got that going on. We are in our red zone. And this is intraday. We're going to take the rest of our capital back from our managed futures managers, from our separate account macro managers. We're probably going to liquidate the bond portfolios of our diverse and emerging manager program. And I'm going to violate the prime directive. I'm going to submit a $1 billion redemption request for my Portable Alpha engine for my hedge funds. So I'm typing this, and that was the day that Powell comes out and gives his whatever it takes moment. That was fortunate. So 35% in five weeks was a challenge. If it would have been 50% in nine or 10 weeks, it would have been a real challenge. We start with the fat, with the profits. You got to start cutting a little bit of muscle and then there's deeper cuts as you go along. It took our funded status, so we were probably at 75 before COVID got down to 63. At the trough of COVID we went from 63 to 85 organically in 16 or 18 months with what the markets gave us in 2020 and in 2021, portable alpha was phenomenal and we were able to actually rescind all of the redemption requests we submitted as we get into 2021, Delta put out 20 billion in debt. Nine billion of that was backed by the crown jewel, which is the Sky Miles program. They lost their investment grade credit rating. But Even by middle 2021, Delta was okay from a cash perspective. And you're starting to see some light at the end of the tunnel on the COVID thing and what corporate cash flow might look like. They're like, take this billion five, let's get up to 92% funded. It's an ambitious goal to get the two points of alpha. It's an ambitious goal to get the 10% in terms of performance we did from 2011 to 2021 when we got that infusion. Portable Alpha was perfect. It was almost on top of my numbers that added over 120 basis points per year at the overall plan level. I was probably too ambitious and maybe a little too risk averse on what we did on the private side. So I wanted the privates to give us 120. It actually gave us 60. Some of which was because I had to rebuild the portfolio and it took some time to get money in the ground. The plan largely worked, so we compounded at over 10% from 2011 to 2021. We didn't quite get our 200 basis points of Alpha, but we were really close. 180, 190 basis points of alpha. And then we've really been able to ratchet down the risk. From that point, we've gone from 38 to 102. That's where we are today. I'm blown away with the role that Delta plays in this whole story. They've been incredible. It's been such a team effort to get to where we're going, and I'll be curious to see what comes next.
- [44:46]
John Glidden
So anytime you have a hedging program that works because the market sells off, and as you said, you then tap that liquidity, you have to think about how do you reset it at some point in time so you get through. Covid, your portfolio looks totally different than it did three months ago. How did you think about recalibrating the program to where you started with this balance between the privates and the liquidity bucket and the hedge fund.
- [45:13]
Ted Seides
The idea was from the outset, the 30% privates never changes, the 40% hedge funds never change. The only thing that changes is the nature of the derivative overlay and what we do with that other 20%. So we just reran all of the same calculations. And it's like, you know what? We don't need to reserve as much cash anymore. We don't really need equity hedges anymore. Our hedge ratio, 60%, 70%, something like that. So some exposure to a collapse in rates is still a good exposure for us. So we've been able to change some of what's in that other 20%, but that's it. It was designed that way from the outset. The beta overlay let that change, let the hedge portfolio change. We don't do managed futures anymore. We don't do separate account macro, low cost, highly liquid stuff. We don't do that anymore. We just don't need to. We think we can get to a better overall risk. Adjusted return, liquidity, adjusted return from that there.
- [46:11]
John Glidden
As you look back on this path, what do you think were the key drivers of your success in taking this from 30s to 102% funded is Delta.
- [46:21]
Ted Seides
We had a plan. I'd worked with Amanda at Wilmington Trust as well. So we'd been building this plan together. We talked a lot about what that plan should look like and how can we make it better. And we held it up to Paul Jacobson, Ken Morge, Ed Bastian, Board of Directors Jeff Scott Omer Terrain's phenomenal Delta making $11 billion of contributions into the plan from 2012 to 2021. Now, we paid out $13 billion in benefit payments during that same time frame, but they offset a majority of the cash outflows of the plan, which allowed the assets to really grow. Without hardworking Delta employees in that disciplined capital allocation, we didn't have dividends in those days. We didn' lot of buybacks in those days until we get that investment grade credit rating back. Without Delta's steadfast support in this, it wouldn't have happened. And then I think, without really trying to hold this plan up to scrutiny, another thing throughout my whole career, Cliff Asness, what do you think about this? I don't know Ray quite as well, but I know a lot of people at Bridgewater. What do you think about this? I've been influenced by you in making this plan. What do you think about this? Where are the weaknesses? It's an awesome thing about being a cio. We get to talk to so many brilliant people. It's a tremendous honor and responsibility to do what we do. I think it's some of it. I mean, it's such an amazing Delta story. I'm so proud to have been one part of it.
- [47:52]
John Glidden
When other folks come to you and look at what's happened and ask you for advice, what are the key things that you tell someone else that's in a similar position to where you were a decade ago?
- [48:04]
Ted Seides
You need to have a governance that embraces this. From the outset, Delta was willing to look a little bit different on the investment side because their investment needs were different. And Paul understood that. And Paul got promoted to cfo. He was the executive champion. And I met with Ed, of course, on a monthly basis. And Ed's had my back this whole time as well. My 13 years at Delta, Ed's always been there to have my back. And then just meet with your committee members one on one, make sure they understand you've got to be able to tell the story concisely and simply. You've got to be able to tell the story, and you've got to be able to give control to your governance. If the governance is not going to accept what you're trying to do, you can't do it. The governance has to buy into what the vision is.
- [48:58]
John Glidden
How do you reflect back on the original four forces and the investment process that you saw as the potential driver of this?
- [49:06]
Ted Seides
It's very much still the way I view the world. I mean, it's why we're still 30% privates. It's why we're still 40% hedge funds. It's why we're still 140% is what our asset allocation adds up to. It doesn't matter what the problem is. Our problem now is we want to continue to grow our GAAP Funded status to 105 to 110 to give Delta maximum flexibility. If they want to engage in pension risk transfer, they can do it without any additional cash. If they want to look at ways to use the excess funding in a way that's mutually beneficial to the company and to the company's employees, they'll be in a position to do that as well. There's all kinds of funky nonlinearities of pension management and one that we're facing now is we're looking at mandatory contributions. I'll skip as to why it is, but yeah, we don't want GAAP funded status to go down. We want to grow it gradually and we want to minimize what those mandatory contributions are. If you can start from a place of two points of alpha, everything else is so much easier. And if you can run a more balanced portfolio, if you can run a higher sharp portfolio, it just makes it easier. It almost doesn't matter what the problem is. You start with your alpha. Those first two forces private force, your portable alpha force. You combine a more efficient asset allocation by going out on the capital market line a little bit, it's going to make any investment problem somewhat easier.
- [50:28]
John Glidden
What have you learned along the way from your original process?
- [50:32]
Ted Seides
The biggest one is I thought I was about as pessimistic as I could possibly be, but I wasn't pessimistic enough in terms of we didn't model down 35 in five weeks. I know this lesson. Financial crisis is not a problem for the portfolio that we run today because you get some correlation benefit between stocks and bonds. You got some of that during COVID You definitely didn't get it in 2022. 2022 was tough.
- [50:57]
John Glidden
How about on the implementation of the strategies?
- [51:00]
Ted Seides
I've known that Delta was going to be headcount constrained on this process. Again, we froze in 06. These are legacy assets. If you want to do this, if you want to have 70 or 75% of your assets and alternatives, you need a large team of well paid specialists. And it was clear that that just wasn't going to be able to happen at a different place. Place that would have been my preference. That is a more aligned, less expensive way to do things couldn't do it there. So you really do need to have the right partners. And we've seen good partners and we've seen partners that didn't quite fit. So, I mean, people will say extension of staff a lot, but I mean it. I want to be able to talk to anyone. Amanda can talk to anyone. Demetri can talk to anyone. Nick can talk to anyone. Why this manager? What's your process? We like them. Do you like them? You need to have the right partner. And that's a tough model. That's not a great scale model, it's not a great margin model because I am going to be needy in terms of resources and I'm going to be sensitive in terms of cost. And sometimes we've seen models like that that work. On our hedge fund side, everything continues to work great. It's harder to do on the private side. Side we've looked at is discretionary. The right model is quasi discretionary. The right model to some of the specialty consultants, should they play a role. You've got to find the right partners and you've got to try to use them in the best way you can. And you've got to insert yourself into the process and then they get bought. Then there's mergers and acquisitions and everything that you've got to try to contend with.
- [52:35]
John Glidden
What's exciting you for this next stretch?
- [52:38]
Ted Seides
I love Alpha. I love beating benchmarks. It's what gets me out of bed in the morning. I think we've got a slightly better way. It comes with some moats. Not everybody can do this because not everyone's governance is going to allow them to do this. If you think about this in portable alpha and you take the alpha units and the cash units and you report them into those asset class line items, we're in the top percentile bond manager, top percentile credit manager, top decile equity manager. It's all green. We are top decile in everything we do. And that's against any long only traditional equity manager in the universe. So I want to beat benchmarks, I want to drive Alpha and I want to do it in big numbers. That portable Alpha, that's over $200 million of net value per year for over a decade. 2.25 billion since the inception of the program. Private markets, it's over a billion excess relative to the respective public market since then. A lot of people say you can't beat benchmarks. I think we can and I think we can do it consistently. I love it. I'm as energetic about it as I've ever been. Ted I love beating benchmarks. It's why I'm here. It's why I get out of bed in the morning along with my beautiful family and everything. But I love it. I love everything about it.
- [53:57]
John Glidden
All right, John, I want to make sure I ask you a couple closing questions. What is your favorite hobby or activity outside of work and family?
- [54:04]
Ted Seides
I want to just send my prayers and wishes out to the folks in Tennessee and North Carolina that have been impacted by the hurricane that went through, because that area is one that's very special to me. So we've got a condo in a place called Transylvania county, which is a little bit south of there. We love it up there. There's something that's called the Western Carolina 100. So this is 100 waterfalls in that area. And then there's also something called the Southern Sixers. So these are mountains that are above 6,000ft in either north Carolina or Tennessee. I love hiking in the Western Carolina mountains and I love it especially because my son will often tag along with me, even at 19 years old. Now, it doesn't happen as much as it used to, but I'm telling you, you ever get a chance to go to Black Balsam Mountain in North Carolina and you just either take a tent or you take a hammock and a blanket. I mean, the views are spectacular, the sky is spectacular. There's no sign of humankind anywhere. So hiking up in the North Carolina mountains is really special.
- [55:10]
John Glidden
What's one fact that most people don't know about you?
- [55:14]
Ted Seides
I used to be good at some stuff. I used to be a pretty good runner when I was a kid. I used to be a pretty good swimmer when I was a kid. I found that I've kind of slowed down and running just hurts. I'm 52. I know there's plenty of 52 year olds that are running ultramarathons and marathons. It just hurts. My knees are a mess. I still mess around with swimming. There's something soothing about just having your head in the water and either looking at the bottom of a pool. Because I'm not thinking about portable alpha. I'm not thinking about liquidity management. I'm thinking about efficiency of my strokes and trying to find pain and then trying to deal with pain and work through pain.
- [55:50]
John Glidden
What's your biggest pet peeve?
- [55:51]
Ted Seides
I'll give you one on the investment side, and this is highly tied to how we invest effectively. I borrow money to invest in hedge funds. That's one way to look at it. I would love to see cash hurdles for hedge fund managers. I would love to see that. I don't know that I'm going to get my wish especially we've got a pretty impressive roster of managers. There's a supply demand mismatch. Something else I've learned along the way is anytime I see self before teams, that's a bit of a turn off. But I've been guilty of this. I'm sure I've always been pretty ambitious. I always think, yeah, 10%, we can do that, 2% alpha, we can do that. But one thing I've learned, diversification matters on portfolio construction, but it matters on the decision making process as well. So anytime there's somebody that's like, I have the right answer, I'm not going to listen to you. That's a big pet peeve.
- [56:44]
John Glidden
Which two people have had the biggest impact on your professional life?
- [56:47]
Ted Seides
Matt Wright, he is my mentor in this business. He is a beautiful, beautiful person and he taught me the ropes. He brought the quantitative rigor to show me portable alpha. And then the name that's come up the most is Paul Jacobson. I mean, he is a uniquely talented individual and without him we could have the same investment results and it still wouldn't have worked. Without Paul, it wouldn't have worked. So that's Matt Wright, Paul Jacobson, they're amazing people.
- [57:13]
John Glidden
What's the best advice you've ever received?
- [57:16]
Ted Seides
It's what Paul gave me. He's like, I understand we've got unique needs and you're bringing us a unique solution. I appreciate that and I think it's the right fit. But you need to define success at the outset and do not change the goal posts. So you need to define success and be consistent with it, have expectations in advance and then build guardrails around yourself. That's going to pull the governance infrastructure into play in sufficient time if there's a real problem. I think that's the best advice I've ever gotten.
- [57:47]
John Glidden
All right, John, last one. What life lesson have you learned that you wish you knew a lot earlier in life?
- [57:52]
Ted Seides
The power of the team and working with people and being influenced by other people and not having to have the right answer all the time and to be willing to vote for somebody else's idea if it's better than yours. And as a cio, it doesn't mean you have the right answer. It means you can set up the processes that you hope will improve the probability of you making the right decision in the future. So you don't always have to be right this isn't a one person show. I am not sitting here without all of the myriad of names that we've discussed over the past hour or so.
- [58:24]
John Glidden
Well John, thanks so much for sharing this incredible turnaround story.
- [58:27]
Ted Seides
Thanks Ted. It's been a real honor. Thank you.
- [58:30]
Thanks for listening to the show.
- [58:32]
SRS Acquiam
To learn more or hop on our.
- [58:34]
Ted Seides
Website@Capitalallocators.Com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content.
- [58:44]
SRS Acquiam
Including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.