Blackstone's King of Hedge Funds on Alt Investing Right Now

Summary

Odd Lots Podcast Summary: "Blackstone's King of Hedge Funds on Alt Investing Right Now"
Host: Joe Weisenthal and Tracy Alloway
Guest: Joe Dowling, Blackstone’s Global Head of Multi-Asset Investing
Release Date: May 1, 2025

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1. Introduction

In this insightful episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway engage in a comprehensive discussion with Joe Dowling, Blackstone’s Global Head of Multi-Asset Investing. Known as the "king of hedge funds" in Bloomberg's coverage, Dowling brings extensive expertise on alternative investing, university endowments, and the evolving landscape of private assets.

2. Shifting Landscape of Alternative Investments

Tracy Alloway opens the conversation by highlighting the rapid changes in the alternative investment space. Just a few months prior, private credit and multi-strategy hedge funds (multi-strats) were lauded as the new stars on Wall Street. However, recent headlines indicate a shift, with concerns over economic slowdowns potentially triggering significant downturns in private assets.

Joe Dowling acknowledges this shift, emphasizing the importance of understanding the mindset of major asset allocators like university endowments and pension funds. He notes, “These huge pools of money… they're in a new era for all kinds of different reasons” (02:21).

3. University Endowments and Tax Implications

A pivotal topic is the evolving role of university endowments in alternative investing, especially in light of proposed tax changes. Dowling discusses Yale University's consideration of selling some of its private equity stakes in the secondary market, a move signaling stress within the system. He explains, “With regards to taxes… they have to continue to use the private markets” (06:04), highlighting the potential increase in the endowment tax from 1.4% to 21%, which could drastically alter investment strategies.

Tracy Alloway probes further, questioning the impact of these tax changes on endowment returns and their investment approaches. Dowling responds by breaking down performance metrics, noting that while short-term returns have been lackluster, long-term strategies remain robust. He states, “Over the past 10 years, the top quartile has outperformed the global 6040 by 160 basis points” (08:47).

4. Performance of Endowments

Dowling provides a detailed analysis of endowment performance, contrasting short-term underperformance with long-term successes. He shares, “If you have a billion-dollar portfolio… that's a $288 million difference” (10:20), illustrating the substantial impact of sustained, high-performing investments over time. This underscores the advantage of endowments’ long-term horizons, allowing them to capitalize on market dislocations and maintain stability amid volatility.

5. Managing Endowment Pressures

The conversation delves into the inherent conflicts between university administrations wanting to spend endowment funds and the investment committees focused on maintaining long-term growth. Dowling recounts his experience at Brown University, emphasizing the need to “show them exactly what small differences in compounding over long periods of time add up to” (11:42). This approach helps balance immediate financial needs with future financial health.

6. Due Diligence in Hedge Funds and Multi-Strat Models

Joe Weisenthal shifts the focus to hedge funds, specifically multi-strategy models. Dowling explains the rise of multi-strats as a tiered talent approach, where top players like Millennium and Citadel deliver consistent, high-Sharpe returns that are uncorrelated to traditional markets. He asserts, “Results have spoken for themselves” (25:00), highlighting the resilience and attractiveness of multi-strats even during turbulent times.

Dowling also addresses the challenges posed by new entrants in the multi-strat space. While the top-tier funds remain robust, he expresses concern over the sustainability and performance of newer, emerging managers who may lack the sophisticated infrastructure and risk management systems of established players (26:32).

7. Innovation and Competitive Advantage in Multi-Strat Hedge Funds

Innovation is a cornerstone of successful multi-strat hedge funds. Dowling cites advancements in quantitative methods and AI as key drivers. “What’s going on in quant just… is absolutely unbelievable” (35:13). He underscores the importance of technology and data in maintaining a competitive edge, making it difficult for smaller or newer firms to replicate the success of giants like Blackstone.

8. Building and Managing High-Performance Teams

Transitioning from his role at Brown University to Blackstone, Dowling discusses the complexities of managing larger teams while maintaining high standards. He emphasizes delegation and clear communication as vital elements, stating, “The biggest change for me was becoming a better manager of large groups of people” (44:52). Dowling also shares insights into fostering a culture of continuous improvement, inspired by principles from James Clear’s Atomic Habits.

9. Career Advice for Aspiring Finance Professionals

Addressing listeners interested in finance careers, Dowling advises cultivating curiosity and deep knowledge. “If you’re curious and passionate, no one will beat you, no one will outwork you” (42:47). He encourages aspiring professionals to engage deeply with their fields, leverage networks, and maintain a strong work ethic to achieve success.

10. Conclusion and Key Takeaways

The episode concludes with Dowling’s reflections on the current state and future of alternative investments. He remains optimistic about the adaptability and resilience of well-managed endowments and hedge funds, despite looming challenges like increased taxation and market volatility. Dowling reiterates the importance of innovation, disciplined investment strategies, and robust team dynamics in navigating the complex landscape of alternative investments.

Closing Remarks:
Tracy Alloway and Joe Weisenthal wrap up the discussion by highlighting the enduring value of long-term investment strategies and the significant role that university endowments and multi-strat hedge funds play in the broader financial ecosystem.

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Notable Quotes

• Joe Dowling [02:21]: “These huge pools of money… they're in a new era for all kinds of different reasons.”

• Joe Dowling [06:04]: “With regards to taxes… they have to continue to use the private markets.”

• Joe Dowling [08:47]: “Over the past 10 years, the top quartile has outperformed the global 6040 by 160 basis points.”

• Joe Dowling [25:00]: “Results have spoken for themselves.”

• Joe Dowling [35:13]: “What’s going on in quant just… is absolutely unbelievable.”

• Joe Dowling [42:47]: “If you’re curious and passionate, no one will beat you, no one will outwork you.”

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Key Insights

• Endowment Strategy: University endowments thrive on long-term investment horizons, allowing them to capitalize on illiquidity premiums and sustain growth despite market fluctuations.

• Tax Implications: Proposed increases in endowment taxes may compel institutions to adjust their investment strategies, potentially increasing reliance on private markets.

• Multi-Strategy Hedge Funds: These funds offer consistent, high-Sharpe returns by diversifying across various strategies and maintaining low correlation with traditional asset classes.

• Innovation and Technology: Advanced quantitative methods and AI are critical for maintaining competitive advantages in the hedge fund industry.

• Management and Team Dynamics: Effective delegation, clear communication, and continuous improvement are essential for managing large, high-performing investment teams.

• Career Development: Curiosity, passion, and deep knowledge are crucial for success in the finance industry, alongside leveraging professional networks.

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For those interested in delving deeper into the intricate world of alternative investments, hedge funds, and university endowments, this episode of Odd Lots provides a wealth of knowledge and expert perspectives from one of the industry's leading figures.

Transcript

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[Tracy Alloway]

Bloomberg Audio Studios podcasts Radio News hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

So Joe, you know what I realized two months ago, just two months ago, we were still getting a bunch of headlines about how private credit was the hot new thing on Wall street and how multi strategy hedge funds pod shops were, were huge and growing. And we've done quite a few episodes on these respective topics. But you know, just a couple months later, the headlines are starting to look very, very different. And there's concern that if we get a substantial economic slowdown, you're going to get some sort of big blow up in private assets and things like private credit, private equity. You know, a lot of people have been predicting that might happen for a while and then when it comes to multi strats, we've already seen a lot of, a lot of talk about pain at the pod shops given all the recent market volatility. So everything is feeling a little different right now.

[Joe Weisenthal]

Well, we are recording this on April 22nd and we got a headline. This, this has been in the news for a few days, but I guess it's just been confirmed. So speaking of the asset allocators, where's the real money come in from? And they're wealthy families and wealthy, but the real big money is in these huge pots of money. Whether we're talking about teachers, which if those in the know, the Ontario Teachers Pension or of course, university endowments. We got a headline today again, it's been out in the news for a few days. Yale considering selling in the secondary market some of its private equity stakes. So these huge pools of money that are really upstream from the private credits of the world and upstream from the hedge fund multi strats of the world, they're in a new era for all kinds of different reasons. And so to even understand these various alts, we have to understand how the people who fund the alts are thinking right now.

[Tracy Alloway]

I am so glad that you mentioned all of that because that was a perfect intro. But also Yale specifically, because we all know that the, the emphasis on alts was pioneered by David Swensen over at Yale. And since then, you know, alts have been a big thing, not just in university endowments, but in lots of different types of institutional investing. So I am very pleased to say that we do in fact have the perfect guest to talk about all of this. We're going to be speaking with Joe Dowling, Blackstone's global head of multi asset investing. He previously ran Brown universities and this was one of the best performing endowments at that time. He did that for a decade before he joined Blackstone about four years ago. He's been called the king of hedge funds in some of our own Bloomberg coverage. So really, who better to talk about things like alternative investing, university endowments, and what's going on right now in private assets than Joe? So, Joe, Joe D, welcome to the show.

[Joe Dowling]

Thank you, Tracy and Joe, thanks for having me.

[Joe Weisenthal]

Can we make this a four hour episode? I already have so many questions anyway. Go, Tracy.

[Tracy Alloway]

Okay, so first off, I'm going to have to be very careful in how I address each Joe, respectively. But other than that. Okay, so one of the things, you know, Joe and I have kind of nibbled at the edges of the university endowment model. And one of the things that we know for sure right now is that they are very large pools of capital, you know, worth billions and billions of dollars. And for that reason, we often see them paired to things like pension funds, maybe sovereign wealth funds. In your experience, are there differences between, you know, running a university endowment, investing for an endowment versus investing for, you know, traditional large institutional funds?

[Joe Dowling]

Absolutely. But let's set the table with just how big the universe is, because I think that'll help US.

[Tracy Alloway]

Please.

[Joe Dowling]

There's 650 US endowments with a combined assets of 875 billion. That's from Nacubo. I'm using NACUBO data. But the average endowment is only 1.3 billion in assets under management, and the median is 235 million.

[Tracy Alloway]

I appreciate that you came prepared with.

[Joe Weisenthal]

Numbers when you see a headline, Yale considering a private equity stake amid its funding turmoil. Some reports have said it's up to $6 billion. How big of a deal is this? Like how. How much of an earthquake is that? This entity, which we associate with long term willingness to hold on to illiquid stakes, timber, so forth. How big of a deal is this?

[Joe Dowling]

I think it's a big deal because it's showing stress in the system. And the $6 billion number is also a number that I've heard from outside investors who are actually looking at the portfolio. And what it signals to me is that Yale, who's been a pioneer, is being proactive. They have a new cio. Remember David Swensen, who you quoted in the beginning, was the person who really pioneered the endowment model. But they have a new cio, and I think it's a sign that he's going to put his own stamp on the Yale endowment. Not surprising with what's happening in the political environment with the endowment tax, which is currently at 1.4%, being considered to go to up to 20%.

[Joe Weisenthal]

Whoa.

[Joe Dowling]

So that's, that's, that's a. Yeah, that's a big, big number. So with regards to taxes, you might remember during Trump's first administration, under the Tax Cuts and jobs act of 2017, they introduced the first endowment tax, and it was a 1.4% excise tax on net investment income for, really, the wealthiest endowments. And how did they define that? What they did was they took the total value of the endowment and divided it by the number of students. And if it was over $500,000, then you were subject to that tax. And now what's been proposed is an increase from 1.4% to 21%. Now, what that would result in is 70 billion of extra revenue over 10 years. And I'm assuming there the average endowment return is 7.5% to get to those figures. So call it 7 billion a year of additional taxes. And it's gonna change, really, the way endowments are managed. They're gonna need to be more tax conscious. They're gonna need to target higher rates of return. And I think they're going to have to continue to use the private markets.

[Tracy Alloway]

Huh. So talk to us about how important was that special tax status to returns over the years? Because also, if I look at returns recently over the past three years or so, they've already been lackluster. So I imagine with the additional tax pressure, that's going to be pretty painful. And then when you say endowments are going to have to be more tax conscious, what does that actually mean? Is that like investing in munis? I guess you already mentioned private credit, but what can endowments actually do here?

[Joe Dowling]

Yep. So a couple things. One, I want to address performance because you're entirely right. If you look at short term performance over the last three years, a global 6040 portfolios outperformed US endowments. The average US endowment return, okay, underperformed the global 6040 by 6.8% or 340 basis points per annum. The top quartile endowment returns underperformed by 250 basis points annually. Now that's over three years and we all know investors tend to be short term. If you look at the five year number, okay, the average endowment has returned 8.3% and has outperformed a global 6040 by 170 basis points. And the top quartile has outperformed by 250 basis points over 10 years. The numbers are even more consistent with those figures. So over the past 10 years, the top quartile has outperformed the global 6040 by 160 basis points. And even ready for this, the bottom quartile, okay, has outperformed a 6040 portfolio by 30 basis points annually. Okay, let's translate that though. Okay, so let's say you have a billion dollar portfolio. If you have top quartile performance versus a global 6040 over the 10 year period, that's a $288 million difference.

[Joe Weisenthal]

Wow.

[Joe Dowling]

So we're talking big numbers here.

[Joe Weisenthal]

And this is the nice thing about being an endowment is that you don't have an LP that's going to withdraw. You have one captive lp. And so in theory, this is why they have the capacity to make these long term relatively illiquid alpha generating investments. Strictly because there's just none of that sort of short term demand for withdrawals.

[Joe Dowling]

Absolutely. And I think that's the advantage of the endowment model is that you're able to think really long term about asset allocation and basically to take advantage of for selling and dislocations in the market. And that's really what separates the top quartile from really the median and the bottom quartile.

[Tracy Alloway]

But when you were at Brown, for instance, did you ever feel some sort of short term pressure? Maybe, you know, maybe not just because you had to report returns? I think on a yearly basis, but maybe because the university needed a bunch of money suddenly for some big project, I don't know, a new building or something. I get the point that endowments are investing on a very long time horizon, but on the other hand, I feel like there must be moments where you do have to come up with the money.

[Joe Dowling]

You know, you're pointing out something that a lot of people don't think about, which is that there's a fundamental conflict between the administration and then the management of the endowment. Obviously, the administration would like to spend the money to work on projects, and there are a lot of important projects out there. But as a steward of the endowment, you actually have to work with your investment committee to show them exactly what we were just talking about, which is small differences in compounding over long periods of time add up to huge, huge numbers. So what I did, and with my team, we would constantly show them over 10, 20, and 30 years what taking a higher distribution would cost the endowment. And that really allowed us to sort of do our job long term and think long term. But the answer to your question is yes. Yes, it's the performance derby. Every year. It's like college sports and everyone's waiting for those numbers to come out.

[Public Ad]

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[Tracy Alloway]

Or via livestream on May 13th for Bloomberg's Winning the Innovation Game Modernizing It Without Disruption Event and networking reception. This event will gather executives to share experiences and provide insights into strategies for implementing groundbreaking AI, cybersecurity and data management technologies that will transform your workplace. This program is proudly sponsored by by Rocket software. [e-mail] innovation.

[Joe Weisenthal]

You know, so much in finance and these questions, whether we're talking about the university's board having a manager or having an endowment manager, whether we're talking about the endowment manager allocating to multi strategy hedge funds, when we're talking about the hedge fund compensating the PMs, it's like principal agent problems all the way down. And even though you have that captive LP and you don't have to worry about withdrawals, you still have to worry about career risk. Right. Like, because an endowment manager can get 100%. And so it's like, it's really at every chain. It's like this constant puzzle of trying to get each link in the chain aligned and for some sort of, you know, everyone's optimal, optimal performance.

[Joe Dowling]

But it's interesting, in my new seat, I get to meet all of the CIOs across the country. And I will tell you, the talent pool is extremely, extremely deep. And so many of them, when I go in and talk to them, I'm actually learning just as much as I, I hope I'm educating. It's, it's really amazing the level of sophistication of, of these endowments. I've been super impressed and I didn't get that at Brown because you don't have that much interaction because you're competing with people. Yeah, right. I didn't think David Swensen was going to call me up and give me his best, best manager. That just is not going to happen.

[Tracy Alloway]

Since you brought up Swensen, talk to us. You know, let's just go back in time in history and talk to us about the rise of all investing at university endowments. Is it really just as simple as, you know, endowments have long term investing horizons and so illiquid assets that need to be held onto for a long time are a really good match. Is that, is that the story that's.

[Joe Dowling]

At the heart of it, which is if you have long term money, you should be able to use the illiquidity premium and you should be able to earn more. And I think that's what David and many of the CIOs realized and they had the long term capital to do that and it's worked. And what's also amazing is the percentage of alternatives that these firms own that the endowments invest in. So the average high performing endowment has 55% of their assets and alternatives.

[Tracy Alloway]

Wow.

[Joe Dowling]

The top quartile and the Ivy Leagues all have over 65% in alternatives, and they've worked. And I think people are trying to call the demise of alternatives and especially even the endowment model. And I don't think we have the evidence yet that it's broken.

[Tracy Alloway]

One thing I always wanted to ask someone who actually works at an endowment, and in fact, you led the endowment, but do you just have like hedge funds and private equity just knocking at your door and constantly pitching new things to you? How do you make that initial connection between, you know, a potential. Not client, manager. Manager. Between a potential manager.

[Joe Dowling]

That's a great question. So I think that you have a choice when you're an allocator and an investor, which is you can lead or you can be led. And so the answer is, we always had people coming and trying to pitch us. But what I always encourage my team to do was to research deeply markets or big, deep alpha ponds. So let me give you a specific example. Biotechnology. So what I would say to the team is, wow, biotech stocks, 25% of them are trading under cash right now. Let's go do some research on that segment. And then they would go out and market map biotechnology, giving us all the different types of players in their approach. And that's how you get context. How you end up being a mediocre investor is just getting the flavor of the day. And usually the flavor of the day is traveling around the country. And as contrarians, what we like to do is to pick things that were sort of off consensus, not loved. One of my favorite expressions I used to say to my team was, what would make you really uncomfortable to recommend in front of an investment committee? If it makes you really uncomfortable, go research it.

[Joe Weisenthal]

One of the things you mentioned is that, you know, one of the nice things about endowments is they can be the ones who buy when everyone is selling. And typically there's true. So let's just, you know, this Yale headline that we got, and you said it's a big deal. We're in this sort of confluence of event where universities are. They're anxious about their money that's coming from the federal government. They're anxious about foreign students continuing to come to the U.S. there's obviously the market decline itself. So are we in a moment where there is some inability or some constraints on the endowment to be. I don't know if buyers of last resort, but the opportunistic investors of the moment? Like, is this actually a moment where that's under threat? And the endowment tax, as you mentioned?

[Joe Dowling]

Well, I think it's endowment tax. I Think it's a lot of the NIH funding at these schools combined with a perfect storm of markets receding. And so these models are being challenged. Right? So I think the people who are playing offense and are being proactive, and I would probably put Yale in that, that category, are going out and testing the market and saying, you know, where is my liquidity? I just take a step back on private equity because that's what they've, they've gone out and, and, and are trying to sell. If you look at the asset class, I think it is a fantastic asset class. And I want, I want to just talk about this. I don't work in private equity at Blackstone, so I'm, I'm, I have my endowment hat on. But I want you to think about the value proposition. The value proposition is that I'm investing in the largest universe of companies out there, which are private companies with experts who I'm lending money to in terms of a management fee, because that management fee comes back to me, the investor. And then we calculate an 8% preferred return before the manager makes 8% any money. And if you think about it, 8 to 10% is about what the stock market has done over the last 50 years. So the value proposition is I, the manager, until I add value over that, public market will not earn any incentive fees and I will pay you back. That structure in itself protects investors. And even in the fourth quartile, and I'm quoting Cambridge and Associates data now, even in the fourth, fourth quartile of buyout managers and the Cambridge database changes every month, but call it over 1200 managers, even the 4th quartile is positive over a rolling 10 year basis. It's a good asset class. But what I always hear is the doubters and they want to say there's too much dry powder and capital is not being returned or it's hard to deploy, or it's hard to deploy. And the reality is it has been hard to get capital back for the last three years. Public markets are closed. Mergers are not accelerating like we thought they were. So the longer this goes on, the more this endowment model, Joe, to your point, is going to be challenged. It is definitely challenging, but I think the smart endowments are already taking action, action to grab for that liquidity. And think about it, 10 years ago there was no deep secondary market. The thought that you could sell, okay, $6 billion of private equity assets, it's pretty amazing.

[Tracy Alloway]

It's definitely different to how it used to be. But just on the PE point you described your sort of research process earlier. And you gave an example in the case of biotech. But if you're researching those ideas, your team is trying to find alpha itself. What's the benefit of investing in a third party like private equity or like a hedge fund versus just investing directly?

[Joe Dowling]

Yeah, it would be almost impossible to recreate the type of competitive advantage that the managers that we invested in Brown had. And I think that trying to do it direct at an endowment, you have a smaller team, you have less resources, you have one investment committee at Blackstone, you're constantly iterating, you have multiple investment committees, you have multiple oversight, you have a risk committee. And you have just so much more data, so much more information. That's why it's such a competitive advantage. The concept of scale is so powerful. So when I transitioned from Brown to Blackstone, I was overwhelmed at the power of the scale, the data, the manager access. If I could have run the Brown endowment portfolio on the Blackstone platform, I would have really made money.

[Tracy Alloway]

Well, you did make real money. I mean, while you were at Brown, even without the Blackstone port platform.

[Joe Weisenthal]

Let's talk about hedge funds. Real big picture. How would you describe the reasons for the rise of the multi strategy model? Why has that model even more than the single manage? How would you characterize it? Why that particular flavor of hedge fund has become so popular?

[Joe Dowling]

Sure, I think that when I think about the multi strat world, I think about a tiering of talent. And it's clear to me that that Millennium Citadel and the top players have really distinguished themselves and they've done that by providing a very, very consistent return with a high sharpe that is completely uncorrelated to stocks and bonds, which is nirvana for a manager. Because what people realized, and Joe, the wake up call was in 2022 when stocks and bonds were both down high teens and the millenniums and citadels of the world earned their standard returns, which are call it 12% plus. That is what you want in your portfolio as a true diversifier and something that provides ballast so they have unlimited demand.

[Joe Weisenthal]

So the results have spoke for themselves.

[Joe Dowling]

Results have spoke for themselves. And you know, these are not easy things to recreate. If you look at Millennium, it has more employees than Blackstone.

[Tracy Alloway]

Wow, that's crazy. Okay, then give us some, give us some color on the past couple of weeks. I can't believe it's only been 20 days since Liberation Day on April 2nd. But what's your impression of what it was like at the multistrats over the past month or so?

[Joe Dowling]

Yeah, it's interesting. Obviously it's in the headlines that they're down, but they're really not down that much. If being down 1% is a crime in this environment, I'll take that asset class all day long. But what has happened is it's been the fastest growing asset class among hedge funds. Goldman Sachs quotes that that multi strat universe has been growing 16% year over year and their data is pretty good. It matches ours pretty closely. But what's happened is that there have been a lot of new entrants and the new entrants are the area that I worry about because in order to get the type of diversification that you need, you need amazing technology, you need a lot of teams. Okay, let me be specific. There's over 300 teams at Millennium Trading. That is a very hard thing to recreate. Risk management systems and a culture of performance and excellence, they're really hard to recreate. So I think if there's a problem, it's going to be in these new emerging managers. It's not going to be with the top tier.

[Joe Weisenthal]

Can you talk a little bit more about the due diligence process on a multistrad because okay, you have the top line returns and there's a line and as you said, it's been a really good line and it's extraordinary. Even outside of the very elites, it's been just extremely impressive. And then you can point to, okay, even in 2022 when stocks and bonds were both down, they produced good returns. So again, further impressive. Is there a further level where when you're probing a multi strat manager that you can look to discover whether the pods themselves are truly uncorrelated and can be expected to deliver uncorrelated returns in the future?

[Joe Dowling]

Yes, and that's our job. And I mean when you think about the quality of earnings of a company, let's say the average S and P company that reports the analysts all focus on quality of earnings, we focus on quality of return. How diversified is that return? What subsectors is it coming from? How many managers have been on the platform for X period of time? How many of them account for? You know what, what's the breakdown of the, of who's making the profit, how diversified is that across strategies, etc. So that's what we spend a lot of time.

[Public Ad]

You know what's great about your investment account with the big guys? It's actually a time machine. Log in and zoom. Welcome back to 1999. It's time for an upgrade at public.com you can invest in almost everything stocks, bonds, options and more. You can even put your cash to work at an industry leading 4.1% APY. But the real game changer Public was designed this century. The Experience Experience is clean, intuitive and just makes sense. Look, if you're still on one of those legacy platforms, we get it. Change is hard, but so is building your wealth on outdated tech. Discover why NerdWallet gave public 5 stars for its ease of use and investment selection and leave your clunky, outdated platform behind. Go to public.com podcast and fund your account in five minutes or less. They'll even give you up to $10,000 when you transfer your investment. Only at public.com paid for by Public Investing Inc. Member FINRA and SIPC. Full disclosures at public.com disclosures join us.

[Tracy Alloway]

In New York or via livestream on May 13th for Bloomberg's Winning the Innovation Game Modernizing It Without Disruption event and networking reception. This event will gather executives to share experiences and provide insights into strategies for implementing groundbreaking AI, cybersecurity and data management technologies that will transform your workplace. This program is proudly sponsored by Rocket software. [e-mail] innovation when you're doing the due.

[Joe Weisenthal]

Diligence, can you talk to pod managers? Like how much pro, how deep into the system are you is an outside investor able to get?

[Joe Dowling]

If you have a good long term relationship and you're a large allocator of capital, we get a lot of information to make a very, very good decision. I think if you're just trying to do it on your own, you have no shot.

[Tracy Alloway]

Yeah, it sounds like you're trying to build a diversified portfolio of multi strat exposure. How do you get a good sense of what each multi strategy firm, each pod shop is actually good at doing?

[Joe Dowling]

Ironically, they have very different approaches, so it's not as hard as you think. The differences between a Citadel and a Millennium are extensive.

[Joe Weisenthal]

Interesting.

[Joe Dowling]

And so when you start peeling back all of the different avenues of how they make money, you you start to see how really how different they are fundamentally. And I think you can see that as an outsider. If you examine 13 Fs and you see after periods of volatility who's adding to positions and who's subtracting to positions. So if you look at March of 2020, you get a pretty good insight into who's doing, can you say a little bit more?

[Joe Weisenthal]

What do those differences look like?

[Joe Dowling]

So for the more trading oriented managers, they're shrinking their balance sheet, they're cutting their balance sheet and then there's a group of managers that are calculating intrinsic value. So they're actually, as those investments are going down, they're actually adding to them. And if you look at a historical volume, you can see it in historical volume. So some of the multi strat managers are very tight in their volume calculations and they stay around 4%. Others that are more intrinsic value oriented are up as high as 8%. It's just two different ways of getting at the same thing. Some people hedge from the top of the house, some people don't. Again, the styles, when you really get down into it, very different methodologies.

[Joe Weisenthal]

So you mentioned that one of your concerns is in the new. It's very hard to recreate a 300 pod, a team of 300 quality pods. It's really hard to recreate that tech. But some might do it and some might try. I'm trying to think of the science equivalent, a law of the conservation of alpha somehow that the structure of these multi strat hedge funds have been able to deliver superior returns on a range of market environments. Is there some sort of intrinsic limit to how many entities can try to capture this alpha such that it all degrades, or is it really just a matter of some just won't have the skills to do it?

[Joe Dowling]

I think it's a combination of both. But look, there are pockets of alpha in the market that get overcrowded. And we've seen this in the area of index additions and subtractions where a lot of capital gets thrown at the area and they don't make money or they lose a lot of money, but then the capital quickly retreats and goes and finds a new pocket. And one thing about these organizations is they are very innovative. And if you look at senior management, this is some of the best investment talent that I've seen. They're coming from very high quality firms and they are innovating all of the time, both in technology, in scope of markets, in how they're joint venturing with people. They're very, very innovative. But obviously their capacity is constrained. Right? But they have unlimited demand and that's why they've been able to lengthen their terms. So many of them gone from quarterly liquidity to five year liquidity. And that's a testament, Joe, to the fact that the model's working.

[Tracy Alloway]

Can you give us a concrete example of innovation? Because I feel like people use that word a lot and it's sort of nebulous in many ways. But what are you saying that is actually innovative or what has struck you as particularly original and creative.

[Joe Dowling]

Recently I think there's a ton of examples on the quant side and quant will be something we should return to when we talk about Brown because one of the traditional David Swenson tenants was not to invest in quant. And yet Brown was the largest investor in the Ivy League in quant. And that's one of the big differences. When people ask me, where did you differentiate yourself? So what's going on in quant just in the systems using AI at these firms is absolutely unbelievable. And there are firms out there that while they're capacity constrained, they make money every day. We're invested in some managers that make money every single day. And it always blows my mind.

[Joe Weisenthal]

What does quant mean? Tracy knows that sometimes I don't know the basic definitions of word. Like how many times I've asked Tracy to define what fintech means. Well, just quant.

[Tracy Alloway]

Joe's being very modest. He knows what all these things are. No, I don't choose like the terms that actually don't have a good definition. Right.

[Joe Weisenthal]

What does quant mean?

[Joe Dowling]

I think it's the application of quantitative methodologies towards markets to analyze large sets of data and come up with patterns or correlations or anomalies of things that happen, divergences between say the futures and the cash market. So everyone talks about the basis trade, right? So the basis trade is simply I'm going to buy a Treasury, I'm going to sell the future and I'm going to capture that convergence because the futures should trade at a premium. I'm going to capture that convergence and I'm allowed to lever that trade because the convergence I'm capturing a very small like absolute spread. So I'm levering that 60 to 80 times. So the ability to rapidly identify those alphas, some people call them alphas, you can call them anomalies in the market that can be exploited. Some of them are high frequency, beating someone to a trade, serving as a market maker.

[Tracy Alloway]

So you mentioned that when you were at Brown you, you didn't follow the Swenson model when it came to quantitative investing. Why was that?

[Joe Dowling]

Well, I think to, to put up really good returns you have to figure out one, what your competitive advantage is and two, you have to be an independent thinker and not follow the herd. And that's what we did at Brown. And I'll tell you how we created our competitive advantage because I owe it to the alumni. What we did a really good job was creating a network of alumni in each asset class so we would work with our investment committee. But we would also reach out to some of the best investors on the planet by industry. And I would actually go and present our portfolio in that asset class and say, what do you think? Where can we do better? Who would you recommend we look at? How would you structure this? And so that was one of the secrets I think of us, which is using that network effect. Now Joe, back to your comment. Most people don't like to do that because they're exposing themselves the same way that they feel pressure. They don't want people opining on what they were doing. But I was willing philosophically to have that kind of open transparency so that I could learn and benefit from the Brown ecosystem. And I always used to have this expression was I would go to people and I would say, what do you have to feed the bear? Because it's the brown bear. So feed the bear. Give us your best co investments. And I have an unbelievable all star alumni cast and they carried Brown to greatness. I happen to shepherd the process with an incredible team.

[Tracy Alloway]

Joe, what was your college mascot, out of curiosity? The Texas Longhorns, of course, which one.

[Joe Weisenthal]

Day, if, by the way, if the. If one day we'll do a proper interview with the. The head of you. Tim Ko. It does seem like an investing and this includes VC investing too. Like you probably, you want to see a lot of pitches, don't you? Right. Like you can't hit a home run. And so it sounds like that alumni network or whatever it is, it's like you don't have to say, you might just say yes to one out of every thousand, whatever. But you want to see a lot.

[Joe Dowling]

It sounds like you want to see a lot.

[Joe Weisenthal]

It seems like that's a huge part of the game just waiting for that fastball down the middle until you see it 100%.

[Joe Dowling]

And you know, each asset class has so many nuances and you know, to have someone who can help out their endowment as an alumnus, it's, it's rewarding but you also have to, you know, there are risks associated with that also. So saying no became an art.

[Tracy Alloway]

So you are now head of multi asset Investing at Blackstone, as we've mentioned. And I think when you were initially hired you were head or co head maybe of Blackstone Alternative Asset Management. And my impression of what you were hired to do was was basically try to make that group more competitive, which you know, when we're talking about nebulous words, I think competitive is up there with innovation or innovative probably. What does that mean exactly? If Someone says, I want to make our alternative asset investing business or our hedge fund business more competitive. What do you do?

[Joe Dowling]

So I think about it as going from good to great. And you do that not by making dramatic changes, but like James Clear in Atomic Habits. I don't know if either of you have read that book, haven't read it yet. It's actually worth it. But he talks in his book about how it's the little constant improvements all stacked on each other that create greatness. And really our group embraces that principle and that's embedded in our culture. And so what does great mean? Great means top quartile returns. Great means top quartile risk statistics, a high sharpe consistency. And, you know, knock on wood, we're delivering that over, you know, since I've been there. And it's, it's really the result of the great team that I have. I have an amazing team.

[Joe Weisenthal]

By the way, Tracy, Richard hall is the CEO and CIO of utimco. I couldn't remember his name for a second, but putting it out there. If anyone at you Timco is listening to this episode, here's a standing invite to come on. To come on the.

[Joe Dowling]

Rich would be a great guest. I know him personally, super smart. We should call him out.

[Joe Weisenthal]

Joe has.

[Joe Dowling]

And we would come and join. I'll come and join.

[Tracy Alloway]

That'd be fun.

[Joe Weisenthal]

That'd be such a blast. The call has been put out. Rich, let's make this happen. I just have one last question. You know, you talk about your team and how important that is, and I like to ask this someone, maybe they're in college, maybe they're studying finance, maybe they're thinking about studying finance. What is the path for someone who wants to be on one of these teams? Maybe they want to work for their own university's team or whatever it is. What should someone be studying and try to do right now?

[Joe Dowling]

Yeah, Joe, it's a great question. I think the number one trait is to be really, really curious. And I know that sounds trite, but I had no idea that I would be at Blackstone. I had no idea that I would be at Brown University. But everything that I did, I was fundamentally curious about and wanted to really be good at it. And so when you're curious and you go deep and you learn and you're a practitioner, people will tap you on the shoulder, you know, I had never met John Gray. I was at Brown University and I got a phone call that John Gray wanted to have dinner with me. And it was after an article had come out in the Wall Street Journal on the success of the Brown team and how we had gone to number one in the Ivy League over every time period. So I wasn't expecting that. That wasn't in the game plan. And I had dinner with John, and the next thing you know, In January of 2021, I started at Blackstone. And it's been incredible. My advice to people is I tell this to all of our younger people. Try to be a 9 or a 10 out of 10 every day. Don't overly plan out your career. Be really curious. Because if you're curious and passionate, no one will beat you, no one will outwork you, and no one will, you know, have more depth of knowledge in a topic.

[Tracy Alloway]

This is the thing, Joe. People sometimes think there's, like, a shortcut to success, but actually, the real secret is just be very good every day.

[Joe Weisenthal]

And knowing a lot. I, you know, I love using that phrase. I think I've said it about all of our good depth of knowledge. Depth of knowledge. Depth of knowledge. There is no substitute for actually knowing stuff.

[Tracy Alloway]

Yeah. Okay, so you've been at Blackstone now for four years. What's been the biggest challenge over that time horizon? So, four years, and what's your biggest challenge right now in the short term, given all the market volatility that we've seen?

[Joe Dowling]

Yeah, I think going from an organization where you had a small team, where you presented to your investment committee, to then going to, you know, we have. Our division is 88 billion, over 300 people. So obviously, the biggest change for me was becoming a better manager of large groups of people and still having. Maintaining a high standard of care in everything that we do, but also not getting in the backswing, whether you're a tennis player or golf player. Of my very talented partners who are helping me drive. And I got some very good advice from John Gray and Brian Gavin, who's our coo, about delegating the importance of. Delegating the importance of clear communication. So I got a lot of help along the way. This is a great environment right now in the market for us because we're in the absolute return business, and we have a lot of volatility, we have a lot of stock dispersion, and that's great for our strategies. Quant loves that. Macro loves that. Our low net equity guys love that. And then our credit is insulated because we're in very, very specialized credit. So it's a good environment. I would say that I haven't seen volatility like this since, like, 2008. I mean, and it's, it's. The market doesn't like uncertainty. Our products like uncertainty and volatility.

[Tracy Alloway]

Are you deploying more risk at the moment or taking on more risk?

[Joe Dowling]

Absolutely. One of the things that our team is really good at is rebalancing into things that are down and trimming those that have done really well. And it's that rebalancing that leads to a lot of consistency. I know John Graham, our earnings call, said that, mentioned that our group had been up 20 straight quarters in a row and 24 months in a row. And I think that's a function of that rebalancing and really robust portfolio construction.

[Tracy Alloway]

All right, Joe Dowling, thank you so much for coming on. Yeah, Joe, that was a, that was an enjoyable conversation. The one thing that really struck me is it is such a. It strikes me as like such a competitive advantage if you can just buy and hold for a really, really long time. Like, that seems to. Maybe this is simplistic, but that seems to be such a key difference.

[Joe Weisenthal]

No, I mean, that's huge.

[Tracy Alloway]

And then you can monetize that like Liquidity Premium, as Joe D. Was saying.

[Joe Weisenthal]

You know, individuals can do that too, which is you just invest in a range of things and then never look at your 401k for.

[Tracy Alloway]

That's right.

[Joe Weisenthal]

We're just really bad at it as humans.

[Tracy Alloway]

It's particularly difficult at the moment, I would say.

[Joe Weisenthal]

No, that was one of those conversations. I mean, I really enjoyed that. Where each specific question could have obviously been an hour long episode. Right. Because we could have talked more about what is the value creation of pe? What is the due diligence process for hedge funds to establish that the multi strat is truly uncorrelated? How stressful are these times for university endowments which thought they had really stable environments? And so it's like a very. There's a lot to go on. I really do feel like it's some like all of these are episodes within themselves. But I thought that was a great overview.

[Tracy Alloway]

Absolutely. And the, the alumni network point was really interesting. I hadn't heard that before, but it absolutely makes sense. Right, because your resource, basically all of your resources kind of. Well, except for government funding, most of your resources come from your alumni. So why not throw in, I guess, knowledge and expertise in addition to actual donations.

[Joe Weisenthal]

People love their universities. You know, this is, I don't know, Tracy. In Europe, is it the same way where like people. I mean, I'm sure like at Oxford and Cambridge, but like. Yeah, there's that same thing where, like, people wear swe church of their universities until they're, like, in their 50s.

[Tracy Alloway]

Well, I personally enjoyed my university. I don't think it's as intense. I feel like it is in the.

[Joe Weisenthal]

U.S. americans really build their identity, by the way. Like, oh, I went to, you know, UT or I went to, you know, Eastern Iowa State or whatever it is. And then their entire personality is like, you know, go Redbirds or whatever the team.

[Tracy Alloway]

You never asked me what our college mascot was.

[Joe Weisenthal]

Oh, that's true. What did you guys have one?

[Tracy Alloway]

So I think this might be one of the reasons why people aren't wearing, like, LSE sweatshirts for the rest of their lives. But our mascot was the the Beaver. That's a good one. Because we're industrious.

[Joe Weisenthal]

That's a great one.

[Tracy Alloway]

It's admirable, for sure. All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carmen Armando, dashiell Bennett at Dashbot and Kalebrooksalebrooks. For more Odd Lots content, go to bloomberg.comoddlots where we have all of our episodes and a daily newsletter that you should subscribe to. And you can chat about all of these topics 24. 7 in our Discord, Discord GG Oddlot.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we talk about how people are actually running these huge pools of capital, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcast and follow the instructions there. Thanks for listening.