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Educational Alpha
S3: Conversation with Steve Novakovic, Managing Director, Educational Programs, CAIA Association
00:50:49
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- [00:05]
Bill Kelly
Welcome to Educational Alpha. I'm Bill Kelly, your host, bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com in this.
- [01:01]
Steve Nabakovich
Episode, Bill welcomes Steve Nabakovich, Managing Director of Educational Programs for CAIA association, to discuss the evolving nature of endowment investing, the growing role of total portfolio approaches, and the shifting responsibilities of asset allocators. Steve shares his journey from working at the Cornell University Investment Office to shaping the KAYA curriculum, emphasizing how events like the global financial crisis and modern portfolio theory shaped his views. They also explore the role of diversification in portfolio construction, the importance of due diligence in manager selection, the rising impact of retail democratization, and the ethical foundation needed to support long term credibility in the profession. Steve further outlines how KAYA is adapting its curriculum, introducing proprietary ethical principles and leading with new educational tools like the UNIFI platform.
- [01:51]
Bill Kelly
Steve Nabakovic welcome to Educational Alpha.
- [01:54]
Steve Nabakovich
Thanks for having me Bill. Excited to be here.
- [01:56]
Bill Kelly
It's going to be an excellent discussion and being out of CAIA for 4ish months, it's a gift that keeps on giving to me. I have a global network of friends both within CAYA and you fall into that category and outside of CAIA where you once fell into that category. Success has many parents but I'm going to take credit. First you finding me and me then bringing you into CAIA which I feel so good about the role that you play and person sitting in that seat and I think by the end of this discussion I think the listeners are not going to require much convincing that you sit in a very very important seat. True to format of this program, I'll ask you to give a little bit on your background and maybe to complete my circle of life with you. I did not know you at all and I think you blindly reached out to me I think on LinkedIn and asked me to come in and do a guest lecture when you were an adjunct at Ithaca and I really enjoyed your style and approach as a teacher and enjoyed the classroom and as they say the rest is history. But maybe I'll let you fill in some of the blanks.
- [03:04]
Steve Nabakovich
Yeah, really fortunate timing to make an introduction and have you come in. And the rest is history, as they say. It was a great experience to get to see you in action in the classroom, and everyone talks about how fantastic of a presenter you are and your skill as an orator, and I got to see that up front, and it was awesome. It was great to then be able to connect and move on, to become a big part of CAIA now after having been a member of Kaya for almost a decade prior to joining as an employee. So it's awesome.
- [03:34]
Bill Kelly
You have an interesting story and it's going to be germane to this conversation, both your time at the Cornell Endowment and your very interesting reason to leave, where your wife Joanne is an equestrian coach. And unless she's going to take care of the stables in Central park, not exactly a transferable skill set to New York City. So maybe you talk a little bit about the formative experience there and that's going to play into the rest of this conversation.
- [04:00]
Steve Nabakovich
Absolutely. So I started my career in 2005 at the Cornell University investment office. I couldn't have asked for a better starting gig in a couple of ways. Number one, to be with one of the most sophisticated institutional investors in the world. You get exposed to everything when you're an undergrad in college. It doesn't matter what program you're going to. For the most part, you're just learning about stocks and bonds. You have no idea what else is out there. I sort of got lucky to stumble into the job that I had out of college, but then to be able to have my eyes opened to a broader world of finance that I didn't know exist was just so fortunate, but also amazing to learn about hedge funds and private equity and real estate and all that. And this was at a time when alternatives were still not fully mainstream per se, from a media standpoint. From an investing standpoint. Talk about private debt. For a lot of folks, private debt is something that's kind of newish in the last couple of years. Well, Cornell had been in private debt for a decade already at that point, and that was an important part of our investment portfolio. But I got to watch it as it was still probably described as being a nascent part of the industry and growing and participate in that. And then the other element that was just so rewarding about my timing is A, I got to go to a great place to just be exposed to the industry, but then, B, I mentioned I started in 2005. Three years later, great financial crisis. If everybody could start their job at a time of volatility and craziness, that's when you learn the most. You know, it's like you don't really wish it upon people, but you learn so much in those environments. I was fortunate to working in a job that I knew had some job security. I know a lot of people in the industry had a lot of concerns and may have lost their job during that stretch. But you learn so much in a crisis and you learn about things that you would have never been exposed to. Operational due diligence, risk management, those types of things that people don't think about when life is good. And so it really forms you and trains you in a way that you can't get trained in any other way. That was really kind of the roots of my career. Getting to spend a lot of time across the world of alternate investments until segueing into academia and then now with Kaya kind of a foot in each door of being the educational programs leader here and getting to teach folks about what's going on in the world of alternative investments and allocating.
- [06:12]
Bill Kelly
Thanks for that, Steven. Before we leave, the past and this line of questioning, so to speak, is very much relevant to the now and the future. And just by happenstance, not coordinated. We're recording this the very last days of April, and this episode's going to come out in the first week in May, I think a week from today. And the episode being dropped today is with your former Cornell colleague Roger Vincent, who I got to know. I forget it was through you or I forget the exact lineage that got me there, but certainly a lot of mutual respect. I know, but that discussion was recorded several weeks ago, and I think we might have been into this liberation day, but we didn't really get into the endowment model as much as I recall. The episode may tell me something different, but it is an evolving story. And it's interesting when you just mentioned you were at the endowment during the great financial crisis when a lot of these endowments had to put some merchandise back on the market because they have capital calls that need to be met. And the pesky corporation asks for 5% a year. And you do have to have some dry powder to pay for maybe other expenses that come up when crises like this hit. So now we're staring in the face of terrorists and liberation days and lawsuits between universities and the federal government, and it's causing these universities not only to take on a fair amount of debt on the other side of their balance sheet. But to rethink the asset allocation. There's a lot going on there, and you're not in this mix anymore. So you can be a semi or fully informed bystander however you want to approach this. But maybe your views on what this means vis a vis the endowment model that you knew circa 2005 through the GFC, and what it means vis a vis TPA and the machinations and pivoting that are required by any investor of scale.
- [08:07]
Steve Nabakovich
Yeah, I mean, there's a lot to unpack there. At the end of the day, it's going to be a bit of a unique answer for every institution. Let's go back to 2008 for a moment and think about how all the different institutions responded during that crisis. You mentioned the endowment has a payout. That's one of the most important aspects, the whole reason the endowment exists, if you will. What we don't think about is how impactful that payout is or how meaningful that payout is for each organization behind that endowment. And what I mean by that is what percentage of the budget that the organization spends is supported by that endowment. All endowments have a quote, unquote, 5%, plus or minus payout. But that might represent half of the annual budget. It might represent 20% of the annual budget. It might represent 10% of the annual budget. Right. It just depends on the size of the budget, the size of the endowment, and all those things. When you have a time of crisis where, like, assets fall and Even though the 5% payout is still the same, the asset base is smaller, and so the number coming is a little bit lower, that can have a huge impact depending on how proportional it is to the overall budget. The organizations, the universities that had that greater of a reliance on the endowment were not much more. I don't know if trouble is the right word, not much more challenged than those where maybe the endowment represented 10% of the budget or 10% of the revenue, whatever you'd want to call it in a given year. The other thing, too, to keep in mind is that what are other sources of funds? Tuition, of course, but then gifts. Not surprisingly, gifts are also correlated with how markets are moving, too. So you've got this sort of double whammy of markets declining, and then your payout may be impacted, and then you're also gifts are getting impacted. And so that puts a lot of stress and pressure on organizations that sort of have a disproportionate amount of their funds coming from those areas. And then you have your trustees or other fiduciaries who then say, well, what can we do to stem this tide? You ask questions about can you raise more funds from the endowment, do special payouts, things of that nature. And that leads into your question sort of around liquidity and whether or not the endowment model can support that type of chaos and uncertainty that exists in the marketplace. And there's a lot more to unpack there. But I'll pause for a second to see if there's anything else you wanted to unravel before further going down that path.
- [10:17]
Bill Kelly
Maybe a couple of things not directly responsive to that, maybe partially, but also maybe in bigger totality of the conversation as I think about the evolution. And you can choose another word of the endowment model to tpa, something that I think remains sacrosanct, which is manager selection. It certainly the endowments, and I think Harvard as an example, goes back to the 1800s. So they were a pool of capital before the private markets even existed. So to have that kind of manager selection early with exclusivity and relationships is a big, big plus. I don't know the merchandise that's on sale now to reach the liquidity goal they're looking at, but I suspect that if it's of a certain vintage, it probably could be trading above par and maybe at an attractive value. I simply don't know. But also I look at what does this mean vis a vis tpa. And cash is an asset class. And if TPA means anti bucketing and every portfolio idea is competing with the next one out there when there's a need to get more liquid, cash is the ultimate TPA play. So again, packed a lot in there for you to unpack. But I guess maybe commenting on both manager selection and how the endowment model reconciles with tpa.
- [11:42]
Steve Nabakovich
So I think that your common manager selection is one that I got to see evolve firsthand while I was at the university. Which is to say that going back, way back, back, there's no question that there was a perspective that you could harvest alpha across pretty much any asset class or any strategy. As we've advanced and evolved, the markets have become more efficient thanks to technology and so forth. Increasingly, we're questioning whether or not their alpha is easy to come by or even exist in certain markets. And looking at endowments, that's one thing you can see front and center is that going back to the 50s, 60s, 70s, 80s, whatever, you'd have active management in every strategy. We had active managers in the equity portfolios, active managers and Fixed income portfolios, hedge funds obviously were harvesting a lot of alpha, so on and so forth. Today, if you look at what a lot of the average endowments do, there's more and more passive in those portfolios, certainly in public markets in particular, whether it be in large cap equities in the US or even in fixed income markets, potentially that's been a big shift. And so manager selection is something that's of essential importance. When you feel like there's alpha to be had and inefficiencies that can be taken advantage of by skilled expertise. In areas where you don't feel like you're earning that premium, you're seeing more and more investors sort of shift over to just accessing the beta. And so that's one trend that I think is taking place irrespective of whether or not you're in the endowment model, TPA model, or what that will be. And to a certain degree, when you're in beta, that does help with liquidity. You don't have to worry about manager lockups necessarily, or any kind of notice periods and so forth. If you just have exposure to the S&P 500 via an index or an ETF, that liquidity is quite great. And the endowment model always viewed liquidity as being sourced from your equity portfolio. Predominantly, fixed income is a very small portion of most endowments, and so you'd use your equity portfolios to your liquidity source, which is great when markets are sideways or up, but obviously a problem when markets are going down. And that's what adds to the crisis and chaos. To your point, that's sort of another thing that endowments have to kind of think about. More so in today's environment is does it still make sense to have equities be a primary means of liquidity or sources of liquidity for them, or do you start to put greater emphasis on cash or tolerance for holding cash? There's good reasons why not, and I'll go into those in a moment.
- [14:03]
Bill Kelly
There are people that put the knock on the endowment model and knock on private markets, and I think maybe somewhat misunderstood in terms of where Kaya fits into this ecosystem, is that Kaya is not for or against alternatives. They're for diversification. Sylvia Kwan, who's a Kaya member, a friend of Kaya, friend of mine, now the CEO and CIO of Ellevest, I was on a panel with her a couple of years ago with some very learned investments and Mark Anson of the Common Fund and former Kaya board members in the audience and a lot of views. But she summed it up so very, very well when we talked about accessing alts and she said she tries to get uncorrelated risk premia for her clients and if she can't find that in the public market, she looks privately and it's interesting. I don't know if this data exists, Steven. You more than me would know if it does. But a favorite chart of mine, and I might have used this one day in a certain classroom in Ithaca virtually was back in 1982. There were 24 private equity general partners in the entire world. I'm not sure if we made a distinction between venture buyout and growth. It was just private equity of those 24, I would think, and I've made the statement on this platform before, Alpha was there for the taking. But what I don't know is I don't think Preqin existed back then. I don't think PitchBook existed back then. And I never recalled seeing charts around performance dispersion circa 1982, but it is alive and well today. And if that 24 number of GPs has now been segmented to different types of market cap and there's over 10,000 of them, a natural byproduct is very wide performance dispersion. Nobody wants to be the median, but the median is the median. And those returns are pedestrian at best. And if you rinse them through a public market equivalent, they kind of look like the time weighted return I could get in the S&P 500. But the distance of travel between that median to the top quartile is thousands of basis points and therein lies the opportunity set. So again, I happen to be very verbose with my statements with no question at the end. But I'm just throwing that in as maybe a last point before we turn the page and maybe move on to what Kaya is doing about this.
- [16:34]
Steve Nabakovich
I think the last couple things I would just say about the endowment model for people to keep in mind is we always got the question is like when is too big too big, right? Like, oh my gosh, Harvard, yeah, whatever. They have 30, 40, $50 billion. Do they need that much money? I think that's a very sort of fair question to ask. I'm not suggesting that it's a bad question. The notion then that it's just so simple to sell half of that and distribute it out or so forth, that's more complicated. And what I mean is is that the endowment exists because people often give donations, right? Well, those donations aren't always completely just unrestricted Donations, a lot of times they are restricted and for specific causes. The whole point of endowment sometimes is people can say, hey, I want to fund a certain thing, I want to fund a certain program. And barring extreme circumstances, the fiduciary is responsible for that endowment, are not allowed to use those funds for anything other than specific restrictions that were placed on it by the donor. So when people go, oh my gosh, like, why is it that so and so has to do a secondary sale? Or why can't they just liquidate part of the endowment and give it out? It's like, well, you know, it might be the case that only 20% is unrestricted. And so I think that's something that people need to be keeping in mind is that the pool itself, you can do whatever you want to with that pool in terms of how you allocate it, but in terms of then distributing it, a lot of times you have your hands tied with the way the money came in and what the donor required you to do with the proceeds from a use standpoint. So that's one thing I think people need to keep in mind. The other thing too is that endowments, their goal is to be in existence in perpetuity, meaning forever. At the end of the day, your goal is to maintain the real purchasing power of those funds. I donated money so that you could fund a research program. I want it to be the case that every single year that 5% payout continues to be able to impact the exact same way every single year, so meet inflation expectations. So that means that off the top, I'm giving out 5% roughly every single year. So I need to earn that back so that my pool doesn't shrink. Number one, there are costs associated with running this, the human capital that's there, and so forth. And then there's inflation to make sure that you maintain the real growth of that capital. And so when you put a couple percentage of points of inflation together, plus the payout, plus whatever costs there are to run this, you're talking about needing a return of 7, 8 plus percent per year just to maintain your purchasing power. Right. And so when people go and say, boy, endowments are really aggressive in their positioning, they have a lot of alts. Well, that's a big part as to why that's the case. I know that everyone goes, oh, you could have just done all stocks the last decade and a half because the US Market did so great. But that's a very naive comment in the sense that how many times have we had a 15 year stretch with equities performing at double digits annualized over that time period, that's just not something you can bank on happening over and over and over again. And then to your point on diversification, you would be a terrible fiduciary if you basically put all of your money into the stock market. That's just not a good, well diversified portfolio. And so alts typically are viewed as a source of diversification. But B can get some greater return, greater risk into your portfolio, which will be needed to get that 8% plus return that you need to maintain your purchasing power. And that's something that all endowments have to deal with. And a big part as to why that sort of endowment model makes sense there.
- [20:02]
Bill Kelly
This has all been very good table setting, Steve, and we're about maybe at the halfway point of our time together today, and in the second half I want to take part of this conversation and talk about what it means vis a vis the the kayak curriculum democratization, which is a favorite topic on this platform and one of mine because it is two sides of the same coin in terms of opportunity and risks and some things that scare me a lot. And then finish up with the future of credentialing. So maybe starting with the curriculum. You have a very difficult job, but fortunately you have a lot of subcontractors out there which are some of the smartest investors in the world. So you can know what they know, see what they worry about, see where they see opportunities. And that I know from history, informs the curriculum in a very, very big way. So you can run with that. But maybe just to prompt it a little bit. Geopolitical risk is something that's relatively new to the curriculum, and we are long geopolitical risk across the spectrum. But we began these conversations probably going back to almost the day you arrived. I would like to think that Kaya had very good forethought in introducing something that now is driving probably most of the volatility in the market. And volatility, as scary as it can be, if you can maybe understand it, which is part of the problem, volatility does beget alpha. So maybe talk about the advancement of the curriculum, maybe what's been added, and if there's a short list of things you're thinking about going forward without getting the test prep providers all up in arms, that would be good to know.
- [21:42]
Steve Nabakovich
You and all of your listeners already know this, but one of the things that I discovered when I entered into the industry and graduated from college was that your learning doesn't stop after you get handed your diploma. Right. The other thing that was part of that too was your first couple days, you feel like you have to prove that you earned your paycheck and you hand something to your boss at the end of every day saying, look what I did. And then finally one day you kind of had a day where you didn't hand them something because you spent time reading reports or doing other knowledge gaining and you went, wait a second, I just got paid to read. It was like, no, that's important. Your employer wants you to grow and learn and become smarter so you can do even that much more for them. And it was kind of a little bit of a mind blowing thing for me. One of the greatest things now about the current position I'm in is that it's like I get to do learning on steroids for myself, which is just awesome. But then to your point, it's funneling all that and figuring out what we want to pass on to our next candidates and learners and our community at large. The thing that, you know, we try to find that balance of is you don't want to be on the bleeding edge, but you certainly want to be on the leading edge. So geopolitics is a really good example of us sort of being on the leading edge there. And that was some really exciting stuff to bring into the curriculum and create some material that could help allocators think about how to manage geopolitics and incorporate the analysis into their asset allocation process. Whether you're talking about tpa, SAA or whatever the case may be, you know, going forward, kind of looking at the next year or two. The biggest announcement that we had is Kia taking its first step into having its own ethical principles. For 20 plus years, we were really delighted to partner with our friends at CFA Institute and take advantage of their code of conduct. But we realized that increasingly it was time for us to have our own voice there. The world of alts is different from the world of traditional investments in a lot of ways. The CFA code is a little bit more fine tuned for traditional investors and may not cover all the complexities of allocators and alternative investments. And so I was really proud of the fact that we develop our own set that we can hang out and showcase the world, what we're all about, the integrity that we really promote a client first mindset that's so important to us. So I know that that's kind of something that most people are not excited about necessarily. Talking about ethics is probably going to cause a lot of people to turn off the podcast and go somewhere else. But as a Kaya member, I hope people are as proud as I am about that advancement. If there isn't a topic more important than ethics, I'm not sure what it is. So that's just something that makes me beam inside to know that we've put this together and we have our voice there for the first time as a sort of a standalone. So that's one I'm going to kind of be really proud of, in particular.
- [24:21]
Bill Kelly
As you should be, Steve. And maybe just a quick pause in that because it's a favorite topic of mine as well. I've had this conversation with a lot of people, including John Bowman and some folks at his former employer, the CFA Institute. I don't know. And I'm of the mindset, I don't think we ever can be a profession because it's too complicated of an industry and it started hundreds and hundreds of years ago. And a credential or ethics was not a founding principle. I go back to the Buttonwood agreement and I think a founding principle was more collusion on pricing than anything else when these two dozen brokers got together on Broad Street. But that doesn't mean we shouldn't try and try very, very hard to bring a greater degree of professionalism to this industry and having organizations that, not just by slogan, make this part of their offering in terms of their culture. So, so very important. We do have a fiduciary responsibility, but we're still debating about suitability versus best interest standards in 2025, which to me is kind of absurd.
- [25:33]
Steve Nabakovich
So then going back to your question and kind of finishing that off, we revise our curriculum every single year, right? And so there's the question every year, oh, what'd you add? What's new? And going back to my days at Cornell, it's like one answer people are thinking you're going to give is like, well, what's that new investment that's out there? What's that new strategy that exists? So I was there for a dozen years. Arguably there was maybe one asset class that kind of poof appeared in that 12 year period. And that would have been infrastructure. And it's not like new asset classes just come about every single year, that new investment strategies universes just come up all the time. It's a very increasingly rare occurrence that something like that happens. So in any given year, it's not like we're suddenly adding 200 new pages on a new strategy or new investment. The most recent one that I'd say Kind of appeared, if you will, would be digital assets crypto that took time to find its way into the institutional investor world, but it's there now. And so we've got material on that and are continuing to add material that's designed to support institutional investors work in that marketplace. But we're always looking at what sort of increasing in portfolios, what is evolving. So examples of that would be growth equity. That's an area that's been around for a while, but is evolving, becoming more prominent as a standalone strategy, sub asset class, whatever category you want to use. Infrastructure I mentioned was one of those ones that in my view grew out into prominence during my time at Cornell. That's an area that we continue to add as that works its way across the industry. The other thing that's really Kai has been talking about quite a bit, this sort of goes to your sort of TPA endowment model type question is the evolving limited partner and the tools that they need to further manage their portfolio. Again, going back to my Cornell time, which is not to say all endowments go this way, but my experience at Cornell is we were basically just fund investors, period, end of story. Had a little bit of co investments, but not really didn't do any direct investments and secondaries. At the time there was no such thing as a GP LED secondary. There's an LP LED secondary and you only did a secondary when you were in a bit of a crisis mode. You needed liquidity or you just had dregs in your portfolio or trying to get out, get 70 cents on the dollar or whatever type of a thing. But now all these tools are must haves for LPs if you don't have a co investment program, if you're not thinking about secondaries more tactically, if you don't know how to underwrite a GP LED secondary, et cetera, et cetera, you're not using some of the quivers in your bow, if that's the right phrase. And so we're adding more material there to help support that next generation investor to take advantage of all of their tools. And the last thing I want to say about this is going back to the TPA point, I was involved in the research and the production of our TPA material and it was a really great experience for me to understand what it was all about. You're talking about that flexibility, getting rid of the buckets and categories, competition for capital. I was in Toronto a couple times in April talking with more of our TPA friends and I heard another comment that really further unlocked TPA and competition for capital for me in a way that I hadn't heard it before. And so previously I'd really thought about tpa. This competition for capital and this lack of buckets is this notion of you're not trying to force a hedge fund allocation and you're thinking about competition for capital across buckets and strategies. But then they added that layer of. But we're also thinking about it across access too. If I'm a TPA person, particularly in the Maple model as an example, where direct investing is a commonality, you're not only thinking about do I want to do real estate versus private equity, but then you're saying, okay, within real estate, do I want to do it directly, do I want to do it through co investments, do I want to do it through secondaries, do you want to do fund managers? And now you have this sort of like matrix where you're not only going across horizontally strategies, but then you're going vertically within the strategy of how do I want to access this? And this is where LPs are now with this flexibility of you're not just looking on one dimension, right? You're now looking at multiple layers and multiple dimensions of what risk premium am I targeting and how am I going to access it? And that's kind of that next level that I think is really interesting, but is essential, I think, for allocators to truly add value. And the last thing I'll say about it going back to my time in Toronto, is one of the allocators was talking about the decision process they were making and they ultimately landed on leaning more into CO investments of late. And their analysis was is that they were adding 500 basis points to value by going the co investment route relative to what they were doing previously because they were able to be more harsh in negotiating with fees and get that fee down. And then they felt that they could use their value adding skill to assess and select CO investments that they really had high conviction in. And so that combination of beating up on fees and using a bit of a direct skill, but in a different way through co investments, it was a huge source of value add for them. And so I just think that further amplifies A the power of tpa, but B, the kind of the tools now that allocators need to take advantage of if they're really going to distinguish themselves and earn as much as possible in the marketplace.
- [30:44]
Bill Kelly
So, a helpful summary and before we leave curriculum, maybe a rhetorical observation on secondaries and then maybe finish with one final question. Jan Robards from Dawson was on with me about six months or so ago and he had an interesting observation which stuck with me and I've thought a lot about it, which is by 2030, the secondary space in the private capital and maybe here the equity more than the debt will be a trillion dollars. A lot of people think that he's crazy and it's a big number. If he's crazy, he's probably got the number too low, in my opinion. And listening to you just now, Steve, as a secondary market circa 2005-8, when you were at Cornell, probably a place where you went kind of holding your nose and maybe Cornell had better bid ask spreads. But even today it's gotten a little bit more efficient. But it has become a very interesting exit and entry point for asset owners. You can get very good vintage year diversification. Asset owners are selling not out of stress, but maybe they want to get into that next vintage year fund. But even today the secondary space is about 1% of the total capital. So I think in order to have a more efficient market, and this may be a good segue toward democratization in a moment, you need to have more liquidity in secondary space. And we can't possibly be promising 5% quarterly liquidity in an interval fund when the market's only delivering 1%. Somebody is taking that into inventory at a nav that is not subject to thorough price discovery. And I think that could be a risk or a reward depending on which side you're on. One other thing, you can comment on that or not, because I do want to move on to democratization. But I had lunch yesterday with the crowd at FTP and Alpha Development that's taken over the FDP credential and I'm on the advisory board there and very smart group. A free ranging discussion on a lot of different things. But one of the observations they brought up was, and maybe this is what occurred to me in the course of the conversation, I made the analogy that being of a certain vintage year myself, I have a very good sense of direction. I know north, south, east, west. And my wife Liz is amazed when I'm taking shortcuts and I end up in a spot which never occurred to her. So I think she's just born with less directional input than I was. But I look at my kids, they don't memorize phone numbers anymore. They rely on an app to get them from point A to point B. And they can get the most efficient route through ways. They know where the traffic jams are, they know where the Cops are taking radar, but they don't have a sense of direction. And I think some of these basics, including understanding the times tables, make sense. And one of the criticisms I sometimes see of the KAYA curriculum, list upon list upon list, and I say that should be by design. When I think about certain acronyms like FTX and sbf, there's a list of things you should have assumed. And if you're going to rely on somebody else's due diligence, at least understand what they looked at and what they didn't because collectively there are blind spots. And I think the more we leave this to chance, I think the more risks we have. So I think we should utilize some of these tools that are available to us. But you have to have a wholesome curriculum where you're actually coming away understanding a little bit of the basic times tables of what it means to be an investor.
- [34:20]
Steve Nabakovich
This is such a great question, right? Because it's something I think about all the time of, like, how important is it for us to, if you will, force our candidates to memorize certain things? Another analogy would be sort of the calculator, like, oh, why do I have to know this formula if I can do it on my calculator? Or why do I even have a calculator if I can do it on a spreadsheet, whatever the case may be, Right. It's all a fair question. There's a couple answers that immediately come to my mind. The analogy I'd like to use is just reflect on something like, let's say you are in your boss's office and there's a conversation going on. Maybe you're talking to a manager or whatever, and the manager goes and says, you know, hey, last year our Sortino ratio was abc. And your boss mutes the call or whatever, goes, hey, hey, Steve, can you remind me what the Sortino ratio is? If you turn to your boss, give me a second. Let me pull up ChatGPT to tell you what Sortino ratio is. How do you think that conversation would go? Do you think your boss would say, I, oh, no worries. Yeah, absolutely. Take a couple minutes to pull it up on ChatGPT. My guess is 99 out of 100 times your boss would be like, why did I hire you if this is what you're going to do for me? There is a base level of expectation that you just are going to know things. And even though it might sound kind of rote or annoying to memorize it, that's just sort of what's expected of you within Certain positions within the industry. It's just this building of knowledge. Do you have to memorize how to calculate Sortino ratio every single time, or is it okay to just go on to Excel or go into Bloomberg or whatever and have it do it for you? It was maybe a different question, but just the base knowledge of certain things is table stakes, to use a term that you like to use. Now, if your boss turns to you and asks you something that's more complicated and you don't know the answer, and their response is, I'm not offended that you don't know it, then that's a different story. Because there are some things that are so esoteric or complex or niche or whatever that maybe it's not imperative that you have that a down path, but then the follow on to that is. It's one thing to say, okay, great, I know what Sortino ratio is. I have that memorized and can rattle it off. But then what you're really getting at is then the other skill that's so in demand and essential to all of us from a career progression standpoint is then critical thinking and judgment. It's one thing to be able to say, okay, I know how to calculate the Sortino ratio, I know what it is, but there's another thing to say, okay, can I apply it and use my judgment to evaluate what that means and give it context and so forth? That's something that I don't think can be as easily taught at this point, at least through AI tools that are out there. And so that's a skill that CAIA still has a very strong place for developing and supporting with its current and future candidates and members, and something that I expect us to continue to lean into as an important part of our curriculum and our value.
- [37:01]
Bill Kelly
Add a good summary of the approach, Steve and I may or may not have stuck pins in my Nivokovic Voodoo doll as a recent candidate, but having come out the other side now as a very happy and proud member, those underpinnings have stuck with me. And if you embarrass me and ask me to recite any one of these ratios, I might come up a little bit short, but the totality of what I took away from that was just outstanding. So I would say keep on keeping on there. So we're probably going to go into OT here, Steve, but this is a bit of an important home game, which I'm totally fine with. So I do want to talk about the curriculum clearly, and the future of credentialing in a moment. And we can maybe wrap these last two pieces together. But along the investment road comes a bit of a fork and on the one side I have the individual investor, on the other side I have the institutional investor. In terms of optionality and options and risk premia, they should be able to access one and the same. But I do fear that the helpers between the individual owner and the actual GP or asset manager is enormous and it would be very rare unless I was a very big single family office or ultra high net worth that I'm even going to meet the person running my money. So that anonymous approach, approach I don't think is helpful. As I've said on this platform before, I think liquidity in the public markets in terms of what it means to the end investor is a feature, but it is a bug to accumulating wealth and we're taking that same bug and making it part of a feature of democratized access where these leaky windows have a direct effect on my IRR and we haven't even begun to reconcile IRR to time weighted returns. I feel Kaya, under you and Aaron Filback have stepped up and created this unified platform and it'll be interesting to see how this plays out. And I said at the same lunch yesterday when we were talking about democratization, it's quite possible that UNIFI could be as significant to the marketplace as the kayakredential is because you've got more and more people coming in there. And the goal was, and hopefully always will be, is to try to solve for pockets of ignorance and not try to get the totality of a wholesome exam, which still is going to make a lot of sense for a lot of professionals. But what we're hoping, or I shouldn't say we anymore because now I'm on the outside looking in. What CAIO is hoping to accomplish is to create a series of these learning modules, not to make anybody an expert on anything, but to give them the courage and vocabulary and how to approach one of these perhaps new asset classes. So, so I'll let you talk about what that means on the curriculum and then also for unify and democratization.
- [39:48]
Steve Nabakovich
I think the most important thing is that you just have to know what you're buying, right? And that's the biggest challenge for a lot of investors, particularly in the retail space or wealth management space, is if you don't know how to evaluate it, you're uncertain of what you're getting into, then you might be buying something different from what you're expecting. You made the comment about Interval funds and liquidity. Okay, great. They might be advertising that you can get 5% liquidity every whatever quarter or every other half a year, but it's your responsibility to actually look through and say, okay, is that actually available? Is that achievable? What's in there? Starting to see some of these hybrid funds that suggest that they're private debt funds with high liquidity. And you look at it and private debt's actually capped at 20%, 30%, 40%. The rest of it's just high yield bonds. And that's, you know, similar cousins maybe, but it's not the same exposure. Right. You kind of talked about alpha earlier and different risk premiums. What is it that you're trying to get? What is it you're trying to put in your portfolio? Some of these tools that are available now, from a democratization standpoint, they're great. If you're looking to get kind of a beta exposure, don't get me wrong, right. Like it's a way to get access to return streams that are different from what are out there. You can't delude yourself into thinking that. You mentioned the spread between second quartile and first quartile or third quartile and first quartile. If you think that you're going to go and get this first quartile fund investment and returns by going into one of these newer profits products that are more kind of liquid type products, I'm not bullish on that being the outcome. But if you're saying, hey, I believe that the beta profile of private debt is very attractive and worthwhile to be in my client's portfolio, I know there's some liquidity here, but not liquidity I'm going to be counting on then that's great. Put it in, you know, and it could be a great diversifier and access to a different stream of risk. Awesome. But if you're going saying, okay, I'm going to put this in, I'm going to get first quartile returns and if I need to liquidate the whole darn thing in a quarter, that's going to happen. Like, no, don't trick yourself into believing that's what's going to be the case. A lot of, I think what we're doing here is trying to give the tools and information to investors so that they can look through the marketing, look through the vehicle and truly understand what it is they're buying. And then thinking about whether or not those exposures are irrelevant and useful for.
- [42:03]
Bill Kelly
Their clients to just leave us enough time to talk about the future credentialing, maybe an exclamation point on this is that, you know, oftentimes when we have these interval funds, we're maybe appealing to the needs of one cohort of investors, but maybe not all of them. And if I'm in for the long term and have bought with the intention of never selling, but if the market gets very volatile, investors normally hit the exit button and their exit nab is my nav as an investor that believed in this long term and I still maintain and we'll see how this develops. And I think Hamilton Lane and KKR have done some movement in this direction. But as a recent Kayakanadate, as I said on level two, there was one of the required readings on permission blockchains. And I think that could prove to be maybe very interesting in terms of if somebody wants liquidity, they're on the blockchain with me, but they gotta get it from somebody else. And my investment remains fully flush and in line peripassu with the Cayman based fund. And I think that maybe solves for a few problems, but I'll leave that future up to you. And finishing with the future future of credentialing here you have a hard job, Steve. There's the invasion of generative AI and how that can or can't impact credentialing, what the credential does. And here, not just Kaya, here I'm talking about the cpa, the cfa, the cfp. What used to have a pretty long shelf life maybe is not as long so much anymore because what that average candidate needs is changing quite quickly. And they're sitting now next to a data scientist and they may be working with Python and R and they've got to understand how to work with data sets and what it means to overfit. So how do you think about this? And maybe you delegate it to your asset owners around the world, but ultimately you're in charge and it's not an easy job.
- [43:59]
Steve Nabakovich
I don't want to come off as sounding naive here because this is something we're thinking about a lot, but I would sort of categorize it. There's a short term answer and then there's a long term answer. In the short term, I still, if anyone were to say, oh yeah, I can do everything I need to do with ChatGPT or any other AI program equivalent, I think that's them being a bit naive. We've all fooled around with it, we've all used it. Everyone knows the term hallucination at this point. Right. Currently, I don't think that we're at a place where we could say that we can fully trust what we're getting when we put in a question. And maybe there's some questions you have higher level of trust versus others, but a lot of your trust comes from the question of how readily available is this information. How many different information sources are there? Well, the world of alts is a very opaque world for the most part, and partly by regulation. Right. If I were to go into ChatGPT and ask a question about small cap buyout funds in Europe, am I confident that it has a lot of data sources that it can pull from to then give intelligent and correct information on that type of a strategy? Maybe, but I don't know that I'd have that 100% confidence. And so in the short term, Kaya continues to be a source of credibility, reliability and confidence that what we're sharing is accurate, complete and appropriate. And I think that that will remain relevant for several years. I don't know when, but it will take some time before we all can say with a high degree of confidence that the questions we're asking the AI bot are going to come back with a high level of confidence that we can just accept that that's true. So that's one thing that I think is really important for us to keep in mind and will continue to be the reason why organizations like Kaya exist and need to exist is that kind of source of truth and credibility. But in the long term, I think it's a very, very fair question. And so that you have to kind of ask yourself, what is it that we're offering? There's still several important answers to that. Some of them include that there's rigor that we can bring and a process that just can't be replicated. With ChatGPT, you know, to say, oh, I had ChatGPT test me on this. But then the other thing too is, look, what can't be replicated is the human element of it. At the end of the day, Kaya is more than just a test. It's more than just a curriculum. It's the people who are around it, it's the community members that participate in our ecosystem. Kaya's got so many touch points beyond just our curriculum, our chapters, our events, our podcasts, our webinars, all that stuff, and you can't replicate that with AI. At the end of the day, to have human connections, human interactions, human engagement, that's the value of the community and that's the value of an organization like Kaya is facilitating that, bringing that together, creating these touch points and creating opportunities to learn and engage with others that's never going to be able to be replicated by an AI tool.
- [46:52]
Bill Kelly
Great capstone observation, Steve. So I'm going to let that sit because it's a great way to end this conversation. But one final question for you. I think we originally had this scheduled after the seasonal break and I'm glad we got it in because I believe there's enough lead time for this current exam here. And I'm not asking you to shill an exam. I'm asking you to jump up and down for why professionalism matters. So how far into the exam window and when is the next exam offering?
- [47:23]
Steve Nabakovich
Our next exam window takes place in September. Registration is open now and will be open for the next few months. We offer our exams every March and every September. If this September is not the right time for you, then there's always next year. But we welcome folks to join our community and take that first step towards showing their interest in being a continuous learner and growing their knowledge and expertise about the world of alternative investments and allocating.
- [47:50]
Bill Kelly
Steve, thanks for a great discussion. And I once was a pretend academic in your classroom, then a colleague and then a friend, and now still a friend and a fellow member. I continue to learn a lot from you and I will put a bold underscore on what CAIA is and it is much more than a curriculum and exam and I continue to learn a lot from the various platforms and touch points and it's just been a fantastic experience for me. And thank you for all that you do.
- [48:20]
Steve Nabakovich
Well, Bill, I appreciate your mentorship over the years and guidance and to use your story about your compass and that your ability to get from one direction to another, I got to see that firsthand. But the other compass that I saw firsthand, that just again, it's maybe the highest compliment I feel like I could pay anybody was your moral compass. I always knew that we were moving in the right direction in that regard with you as our steward, the advocacy that you had for our industry, for our clients, for our members. As a member myself, it just made me so proud to have that association. So I really thank you for that. It was something that I cherish.
- [48:51]
Bill Kelly
Well, hopefully that candle does not go out until I'm six feet under, but I appreciate that, Steve. It's how I've been wired and I had a very important mentor, Desi Heathwood, who's also been on this platform and he's in his 80s. And he did it as a favor to me. I don't think it was his favorite thing to do, but he ingrained on me early on when I was in the asset management business, as we've heard, about this dual responsibility that Bogle talks about, where you have responsibility to partners and shareholders and also clients on the other side. You've got to be transparent when that coin is being pushed one way or the other. But he would always say, what would the client think? What would their reaction be if this was on page one of the Wall Street Journal when people used to buy and read newspapers? And that stuck with me. And it's an important way to end this because so many professionals early on in their career hopefully will be listening to this. Hopefully. Sign up for Kaya. But as you said earlier, and it's a great way to conclude this conversation, you can be the smartest investor. You can understand every aspect of the Kaya curriculum. Nobody's done it yet, I don't believe. But you could get 100% on the exam. But unless you, you have some form of an ethical compass, you're dead to the investor. You're dead certainly to me. And your value in this industry is of very little worth, in my opinion. So a great way to end it, Steve. And you allow me to quickly jump back up on a soapbox. That's very important to me.
- [50:24]
Steve Nabakovich
Absolutely. Couldn't say it better myself. So thank you for that.
- [50:29]
Bill Kelly
Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Chaya association and subscribe to the show at kaya. Org. That's C A I A Org. See you next time.