Podcast Summary: How I Invest with David Weisburd

Episode E261: How Sovereign Wealth Funds Create Alpha w/ Peter Madsen

Date: December 12, 2025
Host: David Weisburd
Guest: Peter Madsen, CIO, Utah’s Sovereign Wealth Fund

Overview

This episode features a deep-dive interview with Peter Madsen, CIO of Utah’s Sovereign Wealth Fund, exploring how sovereign wealth funds (SWFs) create alpha, build diversified portfolios, and navigate the challenges and opportunities unique to their mandates. Weisburd and Madsen cover topics ranging from active vs. passive strategies, factor-based investing, private markets, the evolving nature of small-cap equities, leveraging AI in manager selection, and how sovereigns differ from pensions and endowments.

Key Discussion Points & Insights

1. Peter Madsen’s Journey to the Utah Sovereign Wealth Fund

• Transition from London to Utah:
  Madsen discusses leaving the fund-of-funds industry as investors shifted to private markets, leading him toward the unique opportunity to build up Utah’s sovereign wealth fund from scratch.

  “The last dying breaths … of the fund to fund industry were taking place … Utah has the sovereign wealth fund and … there was no office. So the effort was new in terms of professionalizing it and I would be the first hire…” (01:06)

• Experience with similar entities in Oklahoma helped prepare him for the structure and growth potential of SWFs.

2. The Importance of Market Context for Fund Managers

• Skill vs. Market Luck:
  Madsen notes the decline of fund-of-funds was driven more by shifting investor preferences and not necessarily market inadequacy, emphasizing mean reversion and cycles in market favorability.

  “Mean reversion is real … especially active management … it comes and goes in waves for the most part.” (02:44)

3. Active vs. Passive Investing & Factor Approaches

• Nuanced Middle Ground:
  While passive can serve as a liquidity sleeve, Madsen warns that passive benchmarks are inherently active choices, can become concentrated (momentum-driven), and mostly mitigate career or benchmark risk rather than true economic risk.

  “If you look at passive benchmarks, they’re sort of an active decision … they tend to be momentum in nature … each cycle they tend to become more and more concentrated or less diversified.” (03:47)

• Rules-Based Strategies:
  Utah employs factor-based, rules-driven strategies (value, momentum, quality) in public equity, balancing tracking error, cost, and diversification. (04:00–04:47)

4. The Value vs. Growth Debate, Small Caps, and Market Structure

• Value & Mean Reversion:
  Value remains cyclical and will likely return, but macro and structural changes (e.g., AI, monetary policy) have extended current cycles.

  “I think value will make its way back … it is cyclical … post-GFC … now with the AI … it’s just extending that cycle.” (05:18)

• Small Cap Premium Under Scrutiny:
  Madsen and the host agree the nature of small caps has changed; high-quality, truly “small” companies rarely go public early. The small-cap premium is more likely found today in private equity.

  “Companies used to go public earlier … now they go public at massive scale.” (07:00)

5. Evolving Portfolio Allocation: From Small Caps to Private Equity

• Markowitz, Risk Parity, & the ‘Naive’ Portfolio:
  Madsen recounts starting with an equal-weight allocation across broad asset classes, referencing Markowitz and academic research on diversification.

  “The best diversification is just to go 50/50. And that’s the naive approach … from an academic perspective, the best diversification, if you will.” (08:16)

• Over time, exposure shifted from public small caps to private equity as they operationalized their redefined view of market structure and private market opportunity.

  “We started with what if we were equal weighted... [then] we took down the small cap exposure and moved it into private equity.” (07:46–09:00)

6. The Limits of Sharpe Ratio Optimization

• Sharpe Ratio’s Pitfalls:
  Madsen pushes back on Sharpe as a singular metric—calling it “a perverse indicator”—citing flawed assumptions and the practical impossibility of optimizing on a single variable with perfect hindsight.

  “Sharpe ratio is a perverse indicator … If you’re optimizing on Sharpe … you’re sort of top ticking …” (10:22)

• Instead, he argues for return-driven optimization in line with actual needs and survival through volatility. (11:10)

7. Purpose-Driven, Factor-Based Portfolio Construction

• Broad Categories with Flexible Mandates:
  Utah structures its portfolio around broad categories like ‘Growth’ (which can include both public and private equity) and lets factor exposures, rather than structure, dictate allocation.

  “We run a factor model … try to have straightforward benchmarks that also represent the factor.” (11:56)

• Holistic Factor View:
  Madsen details the use of factor models to understand risk exposures (equity beta, interest rates, credit, etc.), warning of the limitations of purely holdings-based risk systems. (13:20–14:57)

8. Practical Tools for Factor Analytics

• Originally used MPI Markov Process International, but switched to Venn by Two Sigma for its user-friendliness and web integration—essential for smaller teams. (15:01)

9. Approach to Private/Venture Allocation

• Early-Stage, Smaller Funds Over Big Brands:
  Madsen describes forgoing pursuit of top-tier, brand-name venture funds, instead allocating to sub-$100M vehicles (super angels, emerging GPs), especially in less competitive markets, to maximize odds of outsized returns.

  “If you even have a hundred million dollar fund, you kind of need five unicorns to get a 5x … the smaller the check size, the smaller the fund size, the smaller the deal size, it seems a lot easier.” (19:30)

• Collaborative Model & Fund-of-Fund Wisdom:
  Shared learnings from working with firms like Sindana and Pattern, leveraging their data and network for manager selection and education.

  “We were drinking the Kool Aid from Michael [Sindana] and his team… There’s been a lot more thoughtfulness around fund size, portfolio construction.” (19:32, 21:53)

10. Collaborative, Commercialized Consultant Relationships

• Blending Internal and External Bandwidth:
  Utah has moved from traditional consultants to more commercial relationships, trading capital or anchor LP positions for research, fee discounts, or database access—frees up internal bandwidth and enhances co-invest structuring for higher net returns.

  “...able to structure co-invest accounts that are with minimal expenses … That kind of, call it like ‘structure alpha’ … we have that uplift.” (24:30–27:30)

  • Notable Insight: Lowering fund expenses (e.g., mixing 2/20 and 0/0 co-invests) can add ~3% portfolio alpha. (28:07)

11. AI in Investment Analysis and Due Diligence

• Adopting AI Cautiously:
  Early enthusiasm for ChatGPT was tempered by confidentiality constraints. More recently, leveraged corporate-grade solutions and vertical-specific software for automating data compilation, criteria scoring, and summarization—but always as a support tool, not as a decision-maker.

  “It does not make investment decisions for us, doesn’t make any decisions for us. And not yet. … It’s just leverage for the team … it affords us time to think ...” (28:41–33:00)

12. Unique Aspects of Sovereign Wealth Fund Investing

• Permanent/Perpetual Capital:
  Major difference from endowments/pensions is permanently endowed capital, making distribution management and beneficiary continuity key areas of focus. In Utah, beneficiaries are K-12 schools, funded by income from land and natural resources.

  “For us, we’re permanent capital, or perpetual capital ... the beneficiaries are K through 12 public schools ... That check goes directly to those schools.” (33:22)

Notable Quotes & Memorable Moments

• On portfolio construction:
  “The best diversification is just to go 50, 50. And that’s the naive approach…from an academic perspective, the best diversification, if you will.”
  —Peter Madsen (08:16)
• On Sharpe Ratio:
  “Sharpe ratio is a perverse indicator … If you’re optimizing on Sharpe … you’re sort of top ticking.”
  —Peter Madsen (10:22)
• On the small-cap shift:
  “Our focus in private markets is really…maybe the small cap premium is actually in private equity in very small micro, lower middle market.”
  —Peter Madsen (07:00)
• On fee ‘structure alpha’:
  “If you have half of your funds in a 2 and 20, half in a co-invest with 0 and 0, you’re actually getting 3% alpha across the entire portfolio.”
  —David Weisburd referencing Prof. Steve Kaplan (28:07)

Timestamps for Key Segments

• Peter’s career journey and SWF origins: 00:00–02:01
• Active vs. Passive and factor investing: 03:21–05:18
• Small cap market changes: 06:25–07:35
• Equal-weight portfolios & shift to privates: 07:46–09:55
• Sharpe ratio critique: 10:13–11:46
• Purpose-driven, factor-based investing: 11:56–14:57
• Analytics software (Venn): 15:01
• Private/venture strategy & fund selection: 17:32–21:53
• Collaborative model and structure alpha: 24:30–28:07
• AI for manager research: 28:34–33:14
• Sovereign vs. endowment investing: 33:14–34:10

Closing Reflection

Madsen’s approach blends academic rigor, pragmatic adaptation, and an openness to structural innovation in both public and private markets. His candid assessments of industry dogma (like Sharpe ratio optimization) and willingness to explore new models (factor-based allocation, commercial collaborations, and AI-augmented due diligence) offer a blueprint for forward-thinking institutional investing—valuable not just for sovereigns, but for any sophisticated asset owner.