Podcast Summary: Masters in Business – "The Absolute Return Revival with Tony Yoseloff"

Introduction

In this episode of Masters in Business, hosted by Barry Ritholtz on Bloomberg Radio, Barry engages in an in-depth conversation with Tony Yoseloff, the Chief Investment Officer and Managing Partner at Davidson Kempner. With over 27 years at Davidson Kempner, Yoseloff brings a wealth of experience in distressed credit and opportunistic investing, offering listeners valuable insights into the evolving landscape of absolute return strategies and alternative investments.

Background and Career Path

Tony Yoseloff’s journey into the world of investing is both unconventional and enlightening. Starting with an academic foundation, Yoseloff holds degrees from Princeton’s School of Public and International Affairs and a joint J.D./MBA from Columbia University. Reflecting on his early career choices, Yoseloff explains, “It was really during my time at Princeton and during my time at Columbia where I made the decision to pursue money management as a career instead of something in public policy” (03:39).

Despite an initial interest in law and public policy, Yoseloff transitioned into the financial sector, joining Davidson Kempner in 1999—just as the dot-com bubble was nearing its peak. This decision was influenced by a unique opportunity at Davidson Kempner, where he became one of the few specialized in distressed debt, a nascent field at the time.

Investing Philosophies and Strategies at Davidson Kempner

At Davidson Kempner, Yoseloff focuses on a blend of opportunistic credit and event-driven investing. He describes their approach as a “master class in how to think about risk, how to think about diversification, how to put together a portfolio of alternatives that is both non-correlated to your core equity portfolio, but simultaneously creates a form of offset or ballast to the volatility of equities” (01:17).

Davidson Kempner emphasizes investing alongside their clients, ensuring alignment of interests. Yoseloff states, “We are by far the largest single investor collectively in our funds... we want to invest our own money side by side with our LPs” (17:11). This commitment reinforces the firm’s dedication to prudent and effective investment strategies.

Historical Investing Cycles and Their Implications

Yoseloff reflects on various financial crises, from the Asian contagion and Russian ruble default in the late 1990s to the global financial crisis (GFC) and the COVID-19 pandemic. He underscores the predictable nature of some crises, noting, “The dot com bubble or the GFC... were all predictable by people who were following markets” (20:37). However, the pandemic presented a unique challenge, being less predictable due to its unprecedented nature.

These experiences have shaped Davidson Kempner’s resilience and adaptive strategies, with Yoseloff highlighting the importance of maintaining composure and learning from each crisis.

The Absolute Return Revival

A significant portion of the discussion centers on the resurgence of absolute return strategies. Yoseloff explains that absolute return strategies have evolved from merely diversifying portfolios to becoming primary drivers of returns. In Davidson Kempner’s recent white paper, "The Party is Just Getting Started," Yoseloff outlines how higher interest rates and market dispersion have enhanced the performance of absolute return strategies. He notes, “By 2024, absolute return strategies collectively had their best year in a very long time” (27:22).

Yoseloff attributes this revival to factors such as higher rates and increased dispersion in both credit and equity markets. This environment allows absolute return strategies to achieve better performance by capitalizing on inefficiencies and providing strong diversification benefits.

Mergers & Acquisitions (M&A) Revival

Yoseloff anticipates a revival in M&A activity, attributing it to pent-up demand and a more accommodating antitrust environment. He suggests that changes in antitrust policies under different administrations have created opportunities for consolidation, stating, “You've got a number of management teams and boards that we think have been sitting on the sideline... there are a lot of businesses that deserve to be consolidated” (61:27).

This expected surge in M&A activity aligns with Davidson Kempner’s strategic focus on event-driven investing, positioning the firm to leverage these opportunities for substantial returns.

Real Estate Investments

The conversation delves into real estate as a critical component of Davidson Kempner’s investment portfolio. Yoseloff emphasizes an opportunistic approach, investing across various geographies and property types to harness dispersion in the market. He explains, “We don't limit ourselves by geography... we're happy to invest in self-storage or industrial or data centers or residential or whatever it is that we think provides the best risk return” (64:12).

Real estate, particularly in high-demand areas like New York City, offers unique challenges and opportunities. Yoseloff discusses the complexities of converting office spaces to residential units, highlighting specific market dynamics that influence investment decisions.

Managing Risk Across Diverse Strategies

Managing risk is paramount in Davidson Kempner’s multifaceted investment approach. Yoseloff outlines a comprehensive risk management framework that examines both individual strategies and their interconnections. “We have a framework where we look at individual strategies... and then we try to look at risk across strategies” (76:00).

He emphasizes stress testing investments against various crisis scenarios, ensuring that even in adverse conditions, the portfolio remains resilient. This meticulous approach allows Davidson Kempner to safeguard capital while exploring high-yield opportunities.

Roles in Investment Committees

Beyond his role at Davidson Kempner, Yoseloff serves on the investment committees of prestigious institutions such as the New York Public Library, New York Presbyterian, and Princeton University’s endowment. He shares, “Each of those committees has a different approach in how they want to run their portfolios and manage their portfolios” (78:16).

These roles provide Yoseloff with broader perspectives on institutional investing, enriching his expertise and informing his strategies at Davidson Kempner. His involvement underscores a commitment to stewardship and the application of sophisticated investment principles across various sectors.

Advice for Recent Graduates

Yoseloff offers invaluable advice for aspiring investors. Drawing from his experiences, he suggests, “The best way to learn how to invest is to actually invest. If you get a chance to go into an investment firm, take it” (89:42). He encourages new graduates to pursue opportunities in investment early, emphasizing hands-on experience over theoretical knowledge.

Additionally, Yoseloff advises against getting caught in overly competitive environments like top-tier banks unless one is prepared for the intense demands. Instead, he recommends finding firms where one can grow and contribute meaningfully, as he did with Davidson Kempner.

Personal Interests and Reading Recommendations

When not immersed in investment strategies, Yoseloff enjoys unwinding through sports, news, and historical dramas. He is particularly excited about upcoming seasons of White Lotus and Gilded Age. His reading list includes classics like Only the Paranoid Survive by Andy Grove and Reminiscences of a Stock Market Operator by Edwin Lefèvre, which have significantly influenced his investment philosophy.

Conclusion

Tony Yoseloff’s extensive career at Davidson Kempner offers a blueprint for navigating the complexities of distressed credit and opportunistic investing. His insights into the revival of absolute return strategies, coupled with a disciplined approach to risk management and a commitment to institutional stewardship, provide a comprehensive understanding of modern alternative investments. For those interested in the intricate dance of risk and reward in the financial markets, Yoseloff’s perspectives are both enlightening and inspiring.

Notable Quotes

• “What are you doing to stay entertained when you're not at work, what are you watching or listening?” (83:39)

• “We require all of our partners to reinvest a substantial majority of their net worth back into the funds every year.” (17:13)

• “We do a lot of up down analysis in what we're doing, right. We try to really stress test investments.” (20:01)

• “The risk arbitrage mantra is what can you make if your deal closes? And that's a pretty defined amount of money.” (77:46)

Timestamps Overview

• ** [03:39] Yoseloff discusses his transition from law to finance.

• ** [17:11] Yoseloff explains Davidson Kempner’s investment alignment with LPs.

• ** [20:37] Yoseloff on predictability of financial crises.

• ** [27:22] Yoseloff introduces "The Party is Just Getting Started" white paper.

• ** [64:12] Yoseloff on opportunistic real estate investing.

• ** [76:00] Yoseloff details Davidson Kempner’s risk management framework.

• ** [78:16] Yoseloff’s roles on investment committees for major institutions.

• ** [89:42] Yoseloff’s advice for recent graduates entering investing.

For those interested in exploring more conversations like this, Masters in Business offers over 500 episodes detailing the insights of leading figures in markets, investing, and business. Tune in through your preferred podcast platform to continue your journey into the world of business mastery.