Capital Allocators – Inside the Institutional Investment Industry Episode: [REPLAY] David Zorob - The Path to a Hedge Fund Launch (EP.96) Release Date: March 3, 2025

In episode 96 of Capital Allocators, host Ted Seides engages in an insightful conversation with David Zorob, the founder of Parsifal Capital, a newly launched hedge fund. Drawing from David's extensive 15-year career in research, portfolio management, investment banking, and private equity, this episode delves into the intricacies of launching a hedge fund, David's investment philosophy, and the challenges faced by emerging fund managers in today’s institutional landscape.

Career Path and Foundations

David Zorob begins by reflecting on his diverse career trajectory, emphasizing the foundational experiences that shaped his investment approach. Starting at Merrill Lynch in a traditional two-year banking program, David gained early exposure to high-yield markets during the post-Drexel era. He notes, “[Time at Merrill] was really about capital preservation. … It really stayed with me throughout my career” ([05:20]).

Transitioning to Texas Pacific Group (now TPG Capital), David was thrust into the dynamic world of private equity, working on complex buyouts such as Continental Airlines. This period allowed him to experience the “principle side” of investing, providing a stark contrast to his earlier credit-focused role.

After earning his MBA from Columbia Business School, David joined Hawkshaw Capital, a day-zero startup, where he was instrumental in developing their short strategy and portfolio management. His tenure there, spanning seven years, was marked by significant growth and hands-on experience in public markets.

Investment Philosophy and Strategy

David articulates a robust investment philosophy rooted in flexibility and capital preservation. At Parsifal Capital, he emphasizes the importance of not being confined to narrowly defined strategies, stating, “…we give them very strong financial incentives. … They’re going to make bad decisions along the way.” ([24:15]). He criticizes the institutional trend of pigeonholing managers, arguing that it stifles performance by restricting strategic adaptability.

Parsifal Capital’s approach is characterized by high active share and concentrated portfolios. David explains, “We’re only going to be long, say about 20 securities. The top 10 will be 60 to 70% of what we do.” ([28:17]). This concentration allows for deeper conviction in each investment while maintaining a diversified exposure across various risk premiums, including traditional long-short, event-driven, special situations, equity credit, and volatility.

Challenges of Launching Parsifal Capital

Launching Parsifal Capital presented David with numerous challenges, more daunting than he initially anticipated. He shares, “The demands to start a business today and a hedge fund today are, I think, just harder than it’s ever been.” ([34:12]). Institutional demands now necessitate best-in-class infrastructure from day one, requiring strategic partnerships, robust operational frameworks, and comprehensive risk management systems.

David highlights the personal toll of founding a hedge fund, stating, “You don’t turn this job off ever. That’s your fiduciary.” ([34:12]). The relentless commitment demands a stable personal life, a balance he maintains thanks to his supportive family.

Talent Acquisition and Team Building

Recognizing that human capital is paramount, David outlines his approach to talent acquisition. He seeks individuals who are their own harshest self-critics, stating, “We’re looking for kids who are their own harshest self critics… more demanding of themselves than we as coaches, the university, their parents can be.” ([20:35]). Emphasizing work ethic, team play, and the ability to handle failure, David ensures that his team aligns with Parsifal’s culture of excellence and resilience.

Portfolio Management and Concentration

David delves into the mechanics of portfolio construction at Parsifal Capital, focusing on active share and concentrated holdings. He emphasizes the importance of high conviction investments, aiming for positions that can double over three years with substantial downside protection. “We underwrite positions that we think can double over a three-year period with about 25, 30% downside.” ([30:33]).

This strategy is built on variant views, where David believes that expectations drive security prices. By targeting significant value discrepancies, Parsifal seeks to capitalize on both upward and downward market movements, maintaining a disciplined approach to risk management.

Short Selling and Market Efficiency

A seasoned short seller, David discusses the nuanced role of shorting in portfolio strategy. Despite inherent challenges—such as risk management and increased costs in low-rate environments—he finds shorting intellectually rewarding and essential for market efficiency. “Shorting is hard, but it makes me a better investor… the market finds frauds.” ([31:43]).

With rates rising, David anticipates improved conditions for short selling, expecting lower frictional costs and normalized price signals. This optimism is grounded in his belief that fewer competitors in the short space will enhance Parsifal’s ability to exploit market inefficiencies.

Global Exposure and Market Selection

Parsifal Capital adopts a bottoms-up approach to global investing, meticulously filtering opportunities across various regions. While maintaining significant exposure to North America, South America, Western Europe, and Japan, David strategically avoids markets with unfavorable conditions, such as Russia and certain emerging markets. “We’re very bottoms up… if our bottoms up takes us into these markets, we’re happy to go there.” ([40:50]).

He underscores the importance of flexibility, allowing Parsifal to pivot based on global economic indicators and market conditions, maintaining vigilance against slowing global growth trends.

Mentorship and Personal Development

Throughout his career, mentorship has played a crucial role in David’s development. He credits mentors like Greg Margolis at Merrill Lynch and principals at Hawkshaw Capital for instilling rigorous analytical skills and principled decision-making. “You have to seek out mentors.” ([14:30]).

David also shares personal anecdotes illustrating the value of patience and long-term thinking, both of which have been instrumental in his investment journey. His upbringing in a modest, hardworking family further reinforced these values, shaping his approach to both life and investing.

Q&A Highlights

During the Q&A segment, David addresses key topics such as portfolio concentration and global investment strategies. When asked about the utility of lower-weighted holdings in his concentrated portfolio, he explains the dynamic process of adjusting positions based on ongoing analysis and conviction. “We have to be able to identify opportunities, analyze them, and monetize them.” ([38:15]).

He also discusses the difficulty of pushing back against institutional constraints, advocating for alignment with like-minded allocators to maintain strategic flexibility. “If you can get to a proper level of scale through natural returns and having a group of like-minded partners.” ([44:47]).

Personal Insights and Life Lessons

David offers a glimpse into his personal life, highlighting his love for reading and nature. He emphasizes the importance of staying engaged and passionate about one’s work, drawing inspiration from his parents’ relentless work ethic. “My father still practices full-time; that work, that engagement, that passion is like the fountain of youth for him.” ([46:47]).

Reflecting on life’s fleeting moments, David expresses a desire to be more present, cherishing key life events with his family. “Trying to be as much in the moment at these key points in your life.” ([48:15]).

Conclusion

David Zorob’s journey from a credit analyst to the founder of Parsifal Capital offers a compelling narrative of resilience, strategic flexibility, and unwavering commitment to performance. His insights into the evolving hedge fund landscape, coupled with a disciplined investment philosophy, provide valuable lessons for aspiring fund managers and seasoned investors alike. By fostering a culture of excellence and adaptability, Parsifal Capital is poised to navigate the complexities of institutional investing with integrity and foresight.

“Everything we’re doing at Parsifal is focused around one goal, which is generating outstanding performance and doing it with a like-minded group of partners.” ([24:15])

Notable Quotes:

• David Zorob [05:20]: “When you lend someone money, you worry about one thing above all else, which is I lend you money and I want to get paid back.”

• David Zorob [14:30]: “You have to seek out mentors.”

• David Zorob [24:15]: “I think it's the institutionalization of alternatives. It's been good for me and for many, but not good for returns.”

• David Zorob [28:17]: “We’re only going to be long, say about 20 securities. The top 10 will be 60 to 70% of what we do.”

• David Zorob [34:12]: “You don’t turn this job off ever. That’s your fiduciary.”

• David Zorob [30:33]: “We underwrite positions that we think can double over a three-year period with about 25, 30% downside.”

• David Zorob [31:43]: “Shorting is hard, but it makes me a better investor… the market finds frauds.”

• David Zorob [46:47]: “My father still practices full-time; that work, that engagement, that passion is like the fountain of youth for him.”

• David Zorob [48:15]: “Trying to be as much in the moment at these key points in your life.”

This episode serves as a valuable resource for anyone interested in the nuances of hedge fund management, the importance of strategic flexibility, and the personal dedication required to succeed in the competitive investment landscape.