← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Mark Sullivan and Roberto Isch – Hedge Fund Investing at Wellington (EP.427)
00:54:08
Mark Sullivan and Roberto Isch are Partners at Wellington Management, the $1.3 trillion privately owned firm. Mark is the Head of the Hedge Fund Group and Roberto is a Risk and Portfolio Manager. Wellington began its hedge fund strategies in the...
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- [00:00]
Mark Sullivan
Foreign.
- [00:05]
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. You can join our mailing list and access Premium content@capitalallocators.com All opinions expressed by.
- [00:33]
Roberto Ish
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.
- [00:51]
Ted Seides
My guests on today's Sponsored Insight are Mark Sullivan and Roberto Ish partners at Wellington Management, the $1.3 trillion privately owned firm. Mark is the head of the hedge and Roberto is a risk and portfolio manager. Wellington began its hedge fund strategies in the mid-1990s. Their activities started with a series of long biased sector specialist strategies, added a multi asset fund of funds and most recently built a market neutral platform overseen by Mark and Roberta. Our conversation covers the history and current state of hedge fund investing at Wellington, including the client led development of product offerings and the manager selection, portfolio construction and risk management of the group's third generation strategy.
- [01:41]
Unknown
Before we get going, we have some exciting news At Capital Allocators we're hiring we are looking for a Head of Business Development to really lead all relationship building efforts with you, our community, the followers in the institutional investment space. The role will involve all aspects of external facing engagements. That's our gatherings, whether it's our summits or our universities. From planning to leading correspondence with managers and allocators to marketing the events that have open registration to hosting. The role will also collaborate with existing sponsors and establish new sponsor relationships and then the role will take on any new initiatives that arise. We're always experimenting with new things and we anticipate this person being a leader in those new initiatives. Ideal candidates are someone with 5 to 10 years of experience in financial services or investment management, especially in client facing roles. That could be investor relations, Gap, Intro, maybe it's software sales Institutional investors? Really what's most important is that this person is passionate about our mission of bridging knowledge gaps and making valuable connections for institutional investors. And without question they are a fan of the podcast. The job spec is in the show notes if you're interested in learning more and applying. It's also on our website@capitalallocators.com about that's capitalallocators.com about. Scroll all the way to the bottom of the page. Thanks so much for spreading the word about Capital Alloc and our head of business development job opening.
- [03:11]
Ted Seides
Please enjoy my conversation with Mark Sullivan and Roberto Ish. Mark Roberto, thanks so much for joining me.
- [03:19]
Roberto Ish
Great to be here Ted.
- [03:20]
Ted Seides
Would love to dive back into what brought you each to this path of hedge funds at Wellington.
- [03:27]
Mark Sullivan
I've been at Wellington for almost 26 years. It's the only place I've ever worked in my career and started here right out of undergrad and joined the firm not knowing that much what a buy side firm did in the early days of my time here was able to rotate into our fixed income quant department and start working with our new but growing global fixed income team. And the start there was actually a global fixed income benchmark relative business. And as we went through time we evolved that to become an absolute return focused business ultimately into a macro hedge fund business which I took the lead of in 2017 and then added responsibility for our broader hedge Fund platform in 2020. And so I was always drawn to the hedge fund world because I think of it as the purest form of active management that exists in our industry. There's clarity of what you're trying to do. There was indexes in long only that created inefficiencies and things that you had to do that weren't necessarily in pursuit of of alpha all the time. That's where I wanted to be, was working in the hedge fund space.
- [04:36]
Roberto Ish
Roberto I started my career at FactSet Research Systems, which is a financial software firm and there I was a consultant for a couple years so generalist on the software platform and then I went into quant and Risk and I had a mentor at FactSet who gave me a lot of things that I still take to heart to this day. But one thing I will forever be thankful for was how picky he was in terms of waiting for the right opportunity to jump over to the client side. For me, coming right out of school, Facts out gives you a great toolkit. It lets you hunt your own food, if you will. If you're looking for an answer to a research problem and how to manipulate data and that makes you really attractive to folks on the investment side. But I saw my mentor week in and week out turn down offers from our clients and I would ask him why did you do that? And he was like, well, the grass isn't always greener and there might be a point where I want to leave VAXA but for now, I'm happy, I'm learning, and I'll wait for the right opportunity. And then the right opportunity for him was when Wellington came calling that said something to me. When he left, I did look out the door and say, ooh, there was somebody I was really learning from. Maybe now I'll consider looking. And jokingly I told him, take me with you. And he said, give me a year. And then sure enough, a year later, I found myself here at Wellington working in the same group he did. And I came over here as an investment risk analyst. And even though I was 95% equities when I was at FactSet, when I came over here, the hope was that I could help build out some of our risk infrastructure around hedge funds and multi asset class out of Serendipity. I started working predominantly with folks in alternatives and different asset classes and really got to know the hedge fund PM's here at Wellington. Well, my interest in them just kept growing and it's been one of my key focuses ever since I got here.
- [06:38]
Ted Seides
So when Jean was on the show a couple of weeks ago, she talked about Wellington getting into hedge funds, even predating mark in the mid-90s. And I'd love you to take me back from the perspective of just the hedge fund group of how did this all start at Wellington?
- [06:52]
Mark Sullivan
It wasn't necessarily a big strategic decision at the time. It was actually much more about retaining an incredibly talented investor at the firm. And so Nick Adams, Julian Robertson, knew him well and had approached him to leave Wellington, join him and launch a hedge fund. And so Nick actually quit and was on his way out the door. And the CEO at the time, Bob Dorn, said, nick, come in to my office tomorrow, I want to see you and talk about this. And so Nick came in and saw him and he asked him, why are you leaving? You seem like a great fit for Wellington. We love you. And Nick said, well, yes, all that's true, but I really have a passion for pursuing hedge fund investing and Wellington doesn't do that. And Bob Dorn said, well, we do now, Please stay. And Julian was part of the original capital that helped seed it and that really started the business. Nick, to his great credit, continues to be one of our top hedge fund managers here at Wellington. But that really is what kicked it off.
- [07:52]
Ted Seides
So in that first wave of the hedge fund around Nick, what did the hedge fund platform become at Wellington?
- [08:00]
Mark Sullivan
Wellington grew up as a collection of investment boutiques held together with this private partnership structure. And so the way hedge funds grew was that investment teams would suggest, hey, we have a skill set that we think could be useful to clients in a hedge fund form. Over time, we accumulated a number of single strategy LP funds. In 2019, the firm did a review of our alternatives business and the conclusion of that was that the business that we had was pretty good, but that the firm has the potential for it to be a great business. But to get there, pursuing it bottom up was no longer the most likely way to unlock that potential. We needed to add a top down strategic component to it.
- [08:50]
Ted Seides
What was the first iteration of trying to package it differently from a series of single strategy funds?
- [08:59]
Roberto Ish
The original iteration is now running on its 23rd or 24th year, but it was essentially instead of having our clients pick one fund or two fund, whether it be thematic or focusing on a sector, is saying, we can take the best of what's at Wellington, package it in one global diversified strategy for you and you don't have to go around and pick and you can do due diligence on the firm and the talent underneath the hood. And it's still something that we are having a lot of success with to this day, both in terms of thinking how to best unlock what's in the platform and really take advantage of the breadth. There's been just a lot of evolution on the way from there, moving from just relying on those original funds that were equity focused, long biased, to really saying, how do we take advantage of all the other talent we have here at Wellington?
- [09:53]
Ted Seides
How did you put all that together?
- [09:55]
Roberto Ish
I'm a fortunate person who inherited the responsibility for continuing to shepherd. This second gentleman is moving beyond just the equity side of the house and taking advantage of macro and credit risk takers. And now entering into our third generation, it's moving beyond that and being able to lean into all the alpha sources that we have access to here at Wellington, doing so in an integrated way, in a unified way where we could add precision and lean into conviction where we can to deliver on outcomes that our clients are looking for.
- [10:33]
Ted Seides
When you set out for this Gen 3 version of the product, how did you think about what that objective was that you were hearing from your clients that you're going to try to deliver?
- [10:44]
Mark Sullivan
So maybe go back five years on this. When I came into the role of head of the hedge fund group and started to look at what we were doing across the entirety of the hedge fund business, we had fallen a little bit out of step with the evolution of the hedge fund business in terms of what clients wanted and how it was being delivered. What was clear as we did the evaluation is we had the skill sets, we had really strong investment capabilities, but that we needed to be open minded to evolving the objectives of some of those teams such that they would align better with where the market had gotten to. And if you look at how hedge funds have evolved in terms of their use in the client portfolio, they've evolved a lot post gfc. And that's in a backdrop where assets allocated to the hedge fund industry has increased, but that's largely been driven by performance of the funds themselves, not necessarily new money flowing into it. Furthermore, if you look at underneath the surface of that, what's been happening is that a lot of clients have been allocating to hedge funds for diversifying strategy that can give you a high Sharpe ratio, no correlation to market risk, et cetera. That part of the market has grown dramatically over the last 10 plus years. And at the same time, the more return seeking part of a client's hedge fund portfolio actually has been shrinking. And a lot of that money has been reallocated into private markets as a better potential place to try and deliver on that return seeking part of the allocation. And so as we looked at our business and said okay, how do we take the skill sets we have and put them into a package that better aligns to where we think the client need is, which is more in this diversifying strategies category, part of that answer is at the individual strategy level. And so an example is we took one team that was running more of a long biased sector approach. They evaluated the team's skillset, said this seems really good. They're very, very strong at idiosyncratic risk taking. They also have a skill at subsector rotation within the broader sector. And if we change the objectives of what they're doing to delivering more of a market neutral return, which is a useful piece of what we would describe as the third generation version of multistrad. So we did that across the whole lineup. And then the other aspect of this was thinking about the package that we're putting it into. In our first and second generation approaches to multi strat, we were largely relying on more fund to funds type structures which have limitations in terms of the flexibility around your allocation process, the use of leverage efficiently, the benefits of netting, but also the ability for Roberto and team to manage the overall shape of the portfolio on a daily basis. And so we launched a new version of this, the modern version of how a multi strat fund is structured and run.
- [13:53]
Ted Seides
So I'd love to dive into how you're making it work. One of the things Mark touched on was you identified that your portfolio managers have skill. There is alpha there. What went into that assessment?
- [14:05]
Roberto Ish
Talent's what makes this work. We couldn't do it without the PM teams we have here, without their skill sets, without their discipline. And there's a lot that somebody like myself and my team can do from a portfolio construction, a risk management process to give us the best chance of success. But we can't make it work unless we have that talent underneath the hood driving those returns. When it comes to how do we utilize that talent, I think of it as having three core roles. One is that manager research and strategy selection. Two is portfolio construction and third is risk management and hedging. That manager research process is what really sets the table for us. For every strategy, for every PM team we have here at the firm, we have a view on the role that they can play in our portfolios, the kind of risk that they're going to bring to the table, and then ultimately an evaluation of what we call residual. But that's skill, their ability to generate alpha above and beyond that.
- [15:09]
Mark Sullivan
My role as head of the hedge fund business is to be responsible for the teams that we have. And Roberto's job as the allocator to running our multi strat hedge fund products is manager selection and allocation risk oversight of those funds on a daily basis and then working with me for me to understand what are you missing in the lineup. So when I came into the role, we did an inventory evaluating each of the existing team's investment skill and wanted to re underwrite. Do we have conviction that this team that has a skill set that is useful in hedge fund form. The second thing we did after validating whether the team had investment skills was look at the objectives. Say is the way that the strategy is defined in terms of what it's trying to achieve, consistent with the skillset we believe this team to have. And then the final piece we looked at was about the concept of focus and resourcing. I believe really strongly that to perform at the level required to be successful requires it to be almost the only thing you do. The idea that you're going to do that part time and succeed I think is a bad assumption. And then the part relates more specifically to Wellington, which is Wellington has, I think a very unique and strong starting point as an investment platform for a hedge fund team. But we also recognize it's not complete. And so one of the other things we looked at was adding dedicated analyst resources to the hedge fund managers to fill in that gap. And so what are some of those gaps? The short book. So building the single name short book and doing the depth of work required to have conviction in shorts. And then the other reason is to help manage shorter horizons. We want our hedge fund managers running concentrated books. We're using leverage. They can't just ride through many bad quarters in pursuit of a long term idea. They're going to have to risk manage those shorter horizons and we want to make sure that they have the analyst depth to do that. The result of all that was we concluded whether to keep things, evolve things or close things. And that's really positioned us well now to have a platform that we have conviction in everything that we have and that is either being used as a building block in our multi strata offerings, or being used as single strategy offerings that specific client needs.
- [17:37]
Ted Seides
How do you go about developing that conviction in an individual portfolio manager and their team?
- [17:43]
Mark Sullivan
For me, the starting point is the philosophy and process of the investment team. Why is it that you think you can beat the market, which is very, very hard to do in the process part, the three sub components of an investment process. So it's idea generation, capital allocation of those ideas and then risk management of the collection of ideas that you're generating. If you do that at a granular level, it gives you insight into the type of portfolio you should see from that team. If you go through that whole process and the conclusion is this is a team, that their strength is idiosyncratic risk taking, then when you look at the portfolio, you should see a portfolio where 80%, give or take of the risk is idiosyncratic risk. And that is how you start to build conviction and differentiate between luck and skill.
- [18:35]
Roberto Ish
One way I summarize it is you've got to have a mosaic of quantitative and qualitative. From the perspective of you could have all the data in the world, but some of that context really helps complete the puzzle. And for us, part of our edge here is just how much transparency and access we get with these risk takers. When PM teams here in our hedge fund platform are part of Wellington, they're part of the full ecosystem. And it's just as if they were benchmark relative long only pm, they are here, they are not off on an island, they're not siloed, they're participating in our investment dialogue. And obviously we have the transparency on the quantitative side. We see all the positions on a live basis, we see their trades. But just as importantly, we're able to read their research notes, we hear their comments in our morning meeting, we can walk into their office and pick up the phone and see how they're reacting when they're doing well and see how they're reacting when they're facing some headwinds. And that transparency into that philosophy and process is what can give us more conviction to the belief that we can rely on the data we're seeing quantitatively, that we can make sure it's repeatable. And that manager research process I mentioned earlier, the ultimate outcome is we want to have a forensic understanding of the alpha pattern that these PMs are going to bring to the table and how that alpha pattern is going to fit with the other PMs and ultimately set us up to meet the objectives that our clients have set forth. A little bit of this is art in terms of blending the two and we have a lot of tools. When I was at FactSet and I thought everything was great and grandiose in terms of all the data I could get, but it's more of how do you take that data and put it into context that's relevant and actionable from our standpoint, it's being able to have that point of view of what's relevant and actionable. And then how do we marry that with everything we know? From a qualitative side, as you've gone.
- [20:46]
Ted Seides
Through that work, how many of the 60 some boutiques at Wellington have become part of this multi strategy platform?
- [20:55]
Roberto Ish
On the hedge fund platform, we utilize just about every PM team in one of these strategies or another. We've launched this new Generation starting with 25pm teams, and I don't know if that's the perfect number forever, but it is a roster of PMs that we're very happy to go into battle with. And we have a lot of conviction that we are set up really well, not just for the short term, but for the medium and long term to be able to meet our objectives with this group of risk takers.
- [21:26]
Ted Seides
As you think about growing and building talent on the hedge fund platform particularly that's not already inside of Wellington. How do you think about that competitive landscape for talent?
- [21:38]
Mark Sullivan
As anybody who follows the financial press will have read, there's articles on a pretty regular cadence of the war for talent. And what I'd say is it's real. What we do is a globally scaled performance industry. Like other things, whether it's pro sports, the orchestra, the ballet, whatever it might be, these are industries where you need to find and develop the best investors, in our case, or the best quarterback, or the best ballerina. Whatever it might be, if you're going to be among the best. Overall, we think a lot about what does Wellington offer such that it's an attractive destination for the best investors in the world to come and want to stay for their careers. And when I think about that question as it relates to hedge fund investors, I really think it breaks into three categories. The first is compensation. This is a highly compensated activity for those that are really good at it. And that is probably 50, 60% of the weight that most people will consider is, I think, the unique feature of Wellington in that context, in addition to the way we think about compensating for performance, is also the opportunity to become an equity holder of the firm over time. The second piece relates more to our ability to support you and help you as an investor to be the best version of yourself. Because you think about most hedge fund compensation models out there. They all have some form of a percent of P and L feature to them. And it doesn't take a rocket scientist to figure out that it's the percent times a number. And for that percent to result in a meaningful number, you have to make a lot of money as a trader or a pm. A discerning PM will think hard about whether the platform they're going to sets them up well to be successful and be the best version of themselves. And then the third piece is the culture of the firm. This is where I think Wellington is pretty differentiated. A lot of the hedge fund industry tilts more towards what I would describe as a more mercenary model. And ties to most of the compensation models are specifically 100% formulaic, based on your P and L and not much else. At Wellington. It's really designed to incent excellence as an investor, but also to collaborate across disciplines. That, again, I think is mostly backed up by the ownership model and the partnership model over time. We're looking for the people that really believe that being part of an investment ecosystem that has a diverse set of specialist investors around them who actually have an incentive to have symbiotic relationships with you, will make them better and that they will therefore want to make the place better. Now, that's not everybody, but those are the people that tend to thrive here. And those three components are really how we think about attracting talent to the firm.
- [24:42]
Ted Seides
Roberto, you mentioned that one of the aspects of this generation 3 platform is you can change the risk parameters that a particular individual portfolio manager is deploying to customize it for the market neutral platform. I'm curious from their perspective, sometimes someone is accustomed to certain position Sizes, certain number of positions, certain number of short positions, as it were. What have you found when you're changing that complexion of how the portfolio manager thinks about how they go about their day to day?
- [25:20]
Roberto Ish
We haven't asked any PM to do anything differently and I think that's critical. We don't feel the need that we need to ask any of these PM teams to do something that they're not already good at. If we're asking them to run their portfolio in a different way, it probably means that there isn't a fit already and rather we're trying to create something that isn't necessarily there. But what this new platform does allow us to do is to say I have really high conviction in Manager X. Manager X runs a long biased portfolio. We believe beyond that beta that comes with his alpha pattern, there is a lot of skill in idiosyncratic risk taking. We have the transparency in terms of what those factor leanings and other exposures are that we could actually say you have a role to play in this portfolio. But we're going to take some of that beta out of it. We're going to utilize with a lot of precision what that beta is and how we want to reduce it. So we can still utilize that PM and lean into some of that idiosyncratic skill without maybe having that structural beta. But at different points in time, if we need a little bit more beta in the portfolio, that's a lever where we can then release our foot off the gas on that hedging. But we aren't asking anyone to do anything different. But that is that flexibility that the new platform is affording us.
- [26:53]
Mark Sullivan
If you think about a multi strat hedge fund platform, I generally think there are two ways you can go about that. One is you specifically make sure that every component part you're going to use has been constrained such that it is as pure a form of alpha as you can make it. And then you put them all together. And your hope is that when you put them all together, the aggregate portfolio doesn't need a lot of adjustment. The other way you can do it, which is how we do it, which is you say you want to open up your ability to get diversity by taking alpha from wherever you can find it in different forms, using those pieces and pulling them together, and then managing the aggregated shape of the portfolio every day to ensure that it's meeting those objectives. Given our platform, we think it's better aligned to that second form.
- [27:44]
Ted Seides
Once you bring in this group of portfolio managers into some initial portfolio, how do you think about the capital allocation changes over time and what drives you to want to lean into a certain strategy or away from another one?
- [28:00]
Roberto Ish
We think of portfolio construction across three important dimensions. One is a risk based, really focused on concentration. The other is a factor based and then most importantly it's an extreme based. We've done our homework on the manager research side in terms of the role these PMs are going to play, the kind of risk they're bringing of the table, and have that understanding of how that alpha pattern is going to manifest itself across different parts of the cycle, across different market environments and most importantly across the extremes. We do believe our allocations are probably a little bit more sticky than you might find elsewhere in the medium and the long term. Over the short term, all best laid plans can go astray. And that's really where that risk management and hedging component comes onto the table. And so we think of ourselves as having four layers of risk management. The first is a priori having the alignment of expectations and objectives which each of these PM teams. So all that work we did up front with the manager research process, making sure that these PMs understand how we are going to utilize them, what role they're going to be playing, that there's alignment between that role and that process, and how they believe they can generate alpha for our clients. And that sets the table because they know what we expect them to do and what we expect them not to do. The second layer is ongoing risk monitoring. We leverage external vendors to have a point of view on our risk on a live basis. We have an internally developed, very robust multi asset class risk model that covers every asset type we trade. And those are really, really useful for us to say where are we potentially straying away from balance? Where are we potentially straying away from that risk based, factor based and extreme based concept that we might have to react? And then we can use our center book to hedge that back and we lean on our experts and our global derivatives team to figure out is there a way we can elegantly do this and cost effectively do this by hedging out some beta but maintaining the alpha? If not, we're willing to just take the opposite side with delta 1 instruments. And then if we can't find a really good solution, or if we're seeing that this bubbling concentration risk that we're trying to address is not a one time thing, but maybe it's happened twice or three times in a more short term period, then we probably have an allocation problem that's going to lead us to make a capital allocation decision to iron that out. But we're not necessarily in the alpha timing business. Rather we're really going to rely on the portfolio construction and risk management and all that homework we did in the manager research front to say if we're set up this way, this will lead to success. And then we just got to manage around the more short term turbulence.
- [31:04]
Ted Seides
That happens a lot when you put the portfolio together. What are the quantitative metrics around the exposures that you're comfortable with at that risk level, factor level and extreme level?
- [31:17]
Roberto Ish
There's a few components to that and I think the first one maybe to start with is we want balance. This is a very diversified strategy. We want to utilize the breadth of Wellington. That means we don't want to rely on any 1pm team, we don't want to rely on any one type of thematic bet, we don't want to rely on any one sector or region or asset class doing well for success. So we're really focused on balance. We do a lot of work cataloging what are ranges of exposures that we're comfortable with. All of our reporting that we see on a daily basis and all of our risk management tools have these guardrails in mind to highlight to us. This is starting to move out of that comfort range. Let's dig into it in particular. The stress testing piece is very important and the reason for that is most of the time what you're looking at, if you're looking at a predicted beta or a predicted volume number is a one standard deviation 68% confidence interval, best guess average of what the next three to six months are going to look like. If they looked like the last 6, 12, 18 or whatever the look back period is. But it's when those one standard deviation events become 2, 3, 4, 5, 6 and you can remember that those were supposed to be once in a lifetime and now they happen every three months. That's what typically causes a fund like this to not succeed. And so we have a lot of focus on making sure that on an ex ante basis this portfolio is not put into a place where we wouldn't be comfortable with the outcome if our PMs are wrong.
- [33:00]
Ted Seides
In a lot of the platform hedge funds that you might consider peers in this strategy, there is this steady beat of churn of the underlying portfolio managers. Curious how you think about that. When the portfolio managers are all within.
- [33:16]
Mark Sullivan
The Wellington umbrella, hedge fund fail rates are extremely high. You have to be able to to deliver the returns required to meet client Objectives and we have to hold that standard. I think there's a number of different ways to go about it. Ours leans towards giving PM teams a little bit more room with a little more time. That's actually very intentional because we think that's aligned to where we think the edge of the firm is. So Wellington's edge is not in very short horizons. We are not a high frequency firm. We're not even saying we're going to win by getting the next quarter right. Every time on a stock, our edge is a little bit longer than that. And so that shows up in two ways. One is the way in which we define the risk parameters that we expect PMs to run within. We give them a little latitude around zero on things like market tilts, sector tilts, factor tilts, with the expectation that over time the returns they generate won't have a systematic bias to any of those things, but that they're not forced to do a lot of risk management trading every day to match the risk model. We want them to be in a position where they can focus on their best ideas and do trades that help extract as much value from those best ideas. The other way that manifests itself is how we define the drawdown protocol, which we probably have a little bit longer horizon than I think what's typical. This goes to the idea we want to give our PM team sufficient time to prove their skill out and not necessarily cut them off at the first bad trade. I actually think that in my experience, some of the absolute best development that occurs in an investor's development process happens in periods of stress. They say pressure makes diamonds. It's sort of the same idea with PMs. The pressure of a drawdown often creates the innovation to get better. If you just fire people at that point, someone else gets the benefit. We've certainly been the beneficiary of that. I could give you examples of PMs that have left some other places because they were stopped out, learned a great amount from it and have been very successful on our platform.
- [35:36]
Roberto Ish
The other side to that is if you start with the idea that if I go from A to B, I'm immediately going to get stopped out. When you start inching towards B, you start behaving differently. Instead of playing to win, you might just be playing not to lose. And as an allocator, when you have a PM that's doing that, you're probably not getting the process that you underwrote. That's not to say that that loss aversion and the discipline when things Aren't going well, aren't really important in the success. But if you have a little bit more wiggle room, you have actually a better chance of the process that worked coming through and getting to the other side of the drawdown. For a pmt, we have an agreement and we have an understanding before we allocate capital in terms of what our procedure is going to be and where are the points along that process where there's going to be a catalyst for a conversation or a catalyst for a capital change. We always reserve the right to act around that and maybe to act quicker than might be called for, where it's just bad process or stubborn positioning or I'm right, the market's wrong. But having that conversation beforehand, having that down on paper in terms of what the expectations are, makes what is inevitably a really tough conversation a lot easier with somebody that you're a colleague with. Unfortunately, it's a reality and we go through it every year, but it is easier to point to having done all the work ahead of time as to what those expectations are, and then you just have to have that conversation. I joke sometimes that for folks who are in an allocator role at a place like Wellington, you might not get a lot of invites to retirement parties, but it's just kind of the price of doing business.
- [37:39]
Ted Seides
Where are you comfortable taking risk outside of a neutral portfolio, positioning across the different strategies?
- [37:47]
Roberto Ish
Within this platform, we have some directional risk takers, and particularly on the macro side, but the hurdle there is obviously a little bit higher. There has to be asymmetry in terms of what happens when you're right versus what happens when you're wrong, because that's a different type of risk you're bringing to the portfolio. We have directional risk takers in rates, we have directional risk takers in fx, we have some that do it in equity. Those that we are giving that lever to can do it in a way that is appropriately risk managed, that for us is appropriately sized within the portfolio, and most importantly, when they're going to be in drawdown, that there's still enough balance in the rest of the portfolio, that we have enough drawdown diversification, that it's not going to put the overall client experience outside of expectations and putting us at risk of permanent capital loss.
- [38:43]
Ted Seides
How have you thought about the degree of leverage to magnify these sources of alpha within the portfolio manager streams?
- [38:51]
Roberto Ish
So for us, if you look at the spectrum of what's out there, we're probably going to be on the lower end of the amount of leverage we deploy, we want to be on the client friendly side across multiple dimensions, one of which is liquidity. And we want to be able to stay in that level. And so we don't think we necessarily have to tack on turn of leverage after turn of leverage after turn of leverage to meet our objectives. And as long as we are set up appropriately and believe we can meet those objectives and expectations from our clients, we're going to stay that way. And I think part of this goes to having that breadth of alpha and breadth in terms of types of alpha. We're not going to have a stack of five or six managers all playing in the exact same space, generating alpha in the exact same type of format. We might have a little modicum of overlap between opportunity sets, but really we're going to pick what we believe to be the best in each of those opportunity sets. And that leads us to have more complementarity, I believe. And it removes the need for us to have multiple turns of leverage because it's only one way of doing things. And then we've stripped out all the factor risk, et cetera, and need that to reach our targets.
- [40:17]
Ted Seides
You mentioned the centerbook as a hedging mechanism or a way to mitigate risk. I'm curious if there are other ways you use the centerbook as well.
- [40:25]
Roberto Ish
That's definitely the primary. We haven't, for the most part, leaned into it as an alpha enhancing tool. There is that capability. We have the transparency, but the primary focus of it is absolutely to make sure that our risks are aligned where we believe the risk is intentional and that it's sized appropriately, opportunistically. We've leaned into convexity in certain derivative trades that we felt also complemented the positioning we had in the portfolio. And so that's another arrow in the quiver, if you will, but not something that we're predominantly using it for, maybe less on the center book. But part of the nimbleness we have with the new structure is if we have a PM who we see is at max risk utilization, and we have that conversation as to why they're so positive on their opportunity set. They're seeing the ball really well and they have a few catalysts coming up that they believe are really important and a type of opportunity they want to lean into, but they're kind of at the max risk levels. We have that flexibility that if we look across the book and we say, hey, you know, we have the room, we might just lean into that risk taker at that point in time. Similarly speaking, we could do that Also, when some of those risk takers are in drawdown, if they're in drawdown, we understand the drawdown, we understand the sources. It's not because of bad process, it's not because of stubborn positioning. If we look on balance at the book and say we have the room, that might be a really opportune time to recapitalize somebody and lean into that opportunity. So if they had conviction in it before the drawdown and post the drawdown, it looks even more attractive. And it's not a broken thesis or a stubborn position. Those are the kinds of chances that we're willing to take some risk on.
- [42:20]
Ted Seides
As you look across the different portfolio managers, all the different positions you have, I'd love to hear what you're thinking about in the coming year in terms of opportunities, themes and risks.
- [42:33]
Mark Sullivan
We're of the viewer living through a regime change and that many of the characteristics that characterize the last 30 years or so, things like free movement of capital, free movement of labor, increasing global trade, that actually all these things are likely in reverse. Whereas we were in a period of increasing global growth with increasing global trade, which led to a long period of disinflation and a great backdrop for asset prices, we think that's now going the other way. And the other features are the starting point on debt levels that many governments have, the starting point on inflation that many are contending with, and the stickiness of that inflation. And then also that each country has a different starting point in terms of their political systems, starting point on things like debt to gdp, their tolerance for inflation. And that, we think means we're in a period of much more heterogeneous outcomes across countries than we've seen more recently. And I think it's also one where we're going to see more policy volatility. The central banks themselves are finding it difficult to forecast what's happening with growth and inflation. And as a result, you're seeing more weight towards more spot data in their policy making, which is resulting in more volatile policymaking. We really think that's likely to continue. And then the other aspect that we're obviously paying a lot of attention to is geopolitics. The changing relationship between some of the bigger countries like the US and China. And with the new administration coming in, we think many of those themes will be supercharged and again result in higher volatility and I think, more challenging returns for market risk, but potentially a rich environment for active focus, alpha generation. The opportunity sets look interesting in the.
- [44:36]
Roberto Ish
Year ahead from the perspective of higher Volatility, that's a really good thing for these types of strategies. We're supposed to be volume absorbers and if we can withstand that volatility, if we could be the port in the storm and then take advantage of the dislocation after that success for our clients, volatility means more opportunity for these types of strategies. And I think macro is still going to be a dominant component of this. There's going to be some other beta themes out there in terms of AI or GLP1s in healthcare, and we've got experts who can play in those themes. And then there's other areas that are maybe a little bit more forgotten about. And there is no guarantee that it's going to be a great beta, but they're really robust opportunity sets. For alpha. I would highlight energy, I would highlight financials. Those would be two great spots that aren't often thought of as great betas necessarily. Europe would be another example. But for me, I think one of the pieces that is a little counter to maybe some of the narrative that's out there right now. Folks. Talk about market concentration and the Mag 7. Part of the reason we've seen some success in the hedge fund space is you don't have to compete against that. You can have a view, it could be positive, you can ignore it altogether, you don't have to fight that index concentration battle. And that's not something that's necessarily going to change anytime soon.
- [46:08]
Ted Seides
What does success look like on this Gen3 hedge fund platform over the next couple of years?
- [46:15]
Mark Sullivan
First and foremost, performance with the right characteristics, that's critically important. And then it's scaling it. It's building on what we've done to date and expanding our capabilities. Our goal is to attract talent to the platform that can thrive here and take advantage of what makes Wellington unique. And then one of the other things that we also do here is development. We run an incubation approach where we draw from the broad Wellington investment platform and find talent that has a lot of potential but needs to learn and develop the skill sets required to actually be successful in hedge funds. Those are really our two avenues to hopefully scaling.
- [47:00]
Ted Seides
I want to make sure I get a chance to ask both of you a couple of closing questions. What is your favorite hobby or activity outside of work and family?
- [47:08]
Roberto Ish
I like cooking a lot. I don't love doing the dishes, but I like cooking.
- [47:11]
Mark Sullivan
I really enjoy sports that get you out into nature. I do think there's real benefits for me to getting out of the office, out of the city, back into nature a little bit and I like to combine it with sports. I enjoy things like skiing and golf as hobbies that are a distraction from work.
- [47:31]
Ted Seides
What's one fact that most people don't know about you?
- [47:35]
Mark Sullivan
So my mom's side of the family is a farming family and growing up we used to spend a few weeks a year out on the farm. It is easy to get stuck in the echo chamber we live in and you can get a little bit detached from what's going on in the real world and what life is like for everybody else. Having that grounding is something that's always in my mind of there's a whole other world out there beyond this echo chamber we live in.
- [48:02]
Roberto Ish
I will say I did not know about that. I think a few folks who know me, they know that both my wife and I are transplants to the Boston area. She grew up in New Orleans and I grew up in D.C. i don't know if a lot of people know that I was a transplant before I got to D.C. so I was actually born in Ecuador. I lived there for the first decade of my life. Both my parents were from there, grandparents, great grandparents. And I still have a lot of family down there. I think maybe out of survival I lost the accent and luckily when I go back my Spanish accent is still intact.
- [48:39]
Ted Seides
What's your biggest pet peeve?
- [48:41]
Roberto Ish
It's hypocrisy in any of the many forms that can take that we experience in day to day life. But the whole concept of do as I say, not as I do really rubs me the wrong way.
- [48:54]
Mark Sullivan
I would say mine is more narratives that guide people that are free of facts. I don't have a lot of time for that.
- [49:03]
Ted Seides
Which two people have had the biggest impact on your professional lives?
- [49:07]
Roberto Ish
My mentor from facts, Tom Simon, who's still here. For him in particular, I'm still in the red and will be in the red for the rest of my career. I could say the same thing about my boss here, Greg Thomas. They've taught me a lot. They've put a lot of faith in what I've been able to do and hopefully I'm able to bring up them and the rest of the team with our success. And I think from both of them, one thing that is particularly good advice that I would recommend to others to think about is there's a risk in not taking risk in the same way that inaction is a decision. I'm very fortunate to be in the position I am and a lot of that is from them instilling that in me, that comfortable isn't always the best.
- [49:54]
Mark Sullivan
For me, it's hard to name just two. And I think that's a testament to Wellington that I've been here for a long time and Wellington itself is designed as a collaborative culture and it really lives. That one I would definitely highlight is Bob Evans. So he was the person that hired me from the Fixed Income Quant group to come work on the global fixed income team when it was new and developing. I can honestly say I didn't really learn how to think until I started working with Bob. And he is the person that got me beyond this is what the textbooks say. This is how markets actually work. He certainly lived the Soros concept of reflexivity and understanding policy and how it reflexes onto markets and then the unintended consequences of that and how to start thinking about markets that way. And then he was also someone who was a risk taker, not just as an investor, but in terms of pushing the organization and pushing each of the people that worked for him to frankly think they're capable of more than they maybe thought they were. Another great mentor is a person named John Sukas, who I've worked really closely with as well. He really, in addition to his very deep market knowledge, with someone who's really thoughtful and strategic about how to build a business.
- [51:15]
Ted Seides
What's the best advice you've ever received?
- [51:18]
Mark Sullivan
Mine comes from John Sukas. There'd be times you get frustrated and he would just remind me, he'd say, listen, we're trying to get from point A to point B. And that might mean that we have to deviate from how we might want to get there. But let's not lose sight of what we're trying to do.
- [51:35]
Roberto Ish
Mine aligns a little bit with that. It's about staying grounded in this business and more of having somebody at this firm of which there are many. And I think more than one person has said this to me in some capacity or another here at Wellington. But this is going to be a humbling business. And even when you're successful, there's going to be a lot of lessons to be learned along the way. And so you have to stay grounded, you have to stay focused, you have to be willing to evolve, take stock of everything going on around you and make sure that you have a way to balance yourself out and be able to come back and be forward looking about what you're trying to do, because you're going to get knocked off course routinely. And even when times are good, it's a humbling business.
- [52:29]
Ted Seides
All right, Last one. What life lesson have you learned that you wish you knew a lot earlier in life?
- [52:35]
Mark Sullivan
You should just be a lot braver about taking risk. It's much more likely you'll regret not having done something than regret that you tried and failed. I wish I could go back to my younger self and just encourage myself to take a lot more risk in a lot more ways earlier in my life than I necessarily did.
- [52:55]
Roberto Ish
Biggest life lesson actually, probably is that there's a lot of folks who have a lot of intelligent things to say. They're all not going to be as loud as you or somebody like myself. There's a lot to be said for not just making sure you take the time to listen, but in some ways find a way to find those people and get them to start talking. They could really impart some wisdom if you give them the opportunity.
- [53:28]
Ted Seides
To Roberto and Mark, thanks so much for sharing all this wisdom about Wellington's hedge fund platform.
- [53:34]
Roberto Ish
Thank you, Ted. It's been a pleasure.
- [53:36]
Ted Seides
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