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Top Traders Unplugged | Episode #110
“I learned everything I ever needed to know about systematic and
quantitative investing even before I set foot in the field because
systematic and quantitative investing, at the end of the day, is about
discipline” ~ Alan Sheen
The following eBook serves as a detailed transcript of Episode #110 of the Top Traders Unplugged
Podcast. You can find show notes and more information on this episode right here:
toptradersunplugged.com/110
I sincerely hope these interviews serve as a useful resource for you in your career and endeavors
in the world of trading. If you have indeed enjoyed these shows, please consider giving the
podcast a rating and review on iTunes. It would help spread this knowledge to traders
everywhere.
As you read this transcript, remember to keep two things in mind: all the discussion that we’ll
have about investment performance is about the past, and PAST PERFORMANCE DOES NOT
GUARANTEE OR EVEN INFER ANYTHING ABOUT FUTURE PERFORMANCE. Also understand that
there’s a significant risk of financial loss with all investment strategies and you need to request
and understand the specific risks, from the investment manager, about their products before you
make investment decisions.
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Top Traders Unplugged | Episode #110
Niels: Hey everyone, and welcome back to another edition of Top Traders Unplugged, where
today I'm joined by Alan Sheen, who is the Founder and CIO at Dalton Street Capital, based in
Sydney Australia, and, I'm pretty sure, the first Australian manager on the podcast. So, first
off, Al, thanks so much for coming on the podcast with me today. I'm very excited to be able
to speak to you today and about our conversation in general.
Alan: Thank you very much, Niels, the feeling's mutual.
Niels: Good stuff. Now, I want to kick-off, as usual, by framing what we're going to talk about
today by getting a better understanding of your journey into the rules-based world of
investing, which even today, I think, is not fully appreciated by enough investors. So, why
don't you take us back to how it all began and how you got to where you are today.
Alan: Well, I'll probably have to go back to almost childhood just to give a bit of an
understanding about my thinking behind what I planned to do as an adult, so to speak. My
background is that I was born and raised in a very small country town. It was under 2,000
people, in a state in Australia called New South Wales. We call it the Outback. A lot of people
think of Crocodile Dundee and where the goings-on, and the crocodiles, and everything was
filmed. Ours was a little bit like that but more kangaroo, sheep, and cattle.
I enjoyed that upbringing. I was very, very good at math and so on, not so good at the social
sciences and the English part. I guess, notwithstanding that, I spent the majority of my time on
the sporting field. I think with a lot of kids or children that grow up in small towns, there's not
much to do, so you throw yourself into sports. That was everything from well-known sports
here in Australia like Rugby League and Rugby Union, and in the summertime, it was generally
water polo, which is really just Rugby Union in the pool. A lot of people don't realize what's
going on underneath the water.
Yeah, so my focus was that whilst I did well at school in math and science, I was very much
focused on my sport, and I thought I'd go about pursuing a career as a professional sportsman,
as I'm sure you don't have to convince too many young boys to focus on. But, fortunately, my
father, who was an amateur sportsman but also had an engineering background, suggested
that I do as my two older brothers did at the time which was to go into engineering. Luckily, I
guess, his advice was sound because I had a career-ending injury at only twenty years of age,
or I should say a sporting career-ending injury. So, it was very good advice on the part of my
father.
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Top Traders Unplugged | Episode #110
Niels: Absolutely, so, from small town, interested in math, engineering, what happens next?
Alan: To actually apply what I was interested in, I left the small town and moved to the city
and undertook studies in aeronautical engineering. My father was in electrical engineering. I
had one brother mechanical and one brother electronics, so it made sense for me to go and
do aeronautical engineering just to spread the love across the engineering field.
I actually did my studies through the military here in Australia. There are a couple of
advantages to that, actually. In the military, they actually provide you with your education for
free, and at the same time, you're paid a full-time salary to do that. So, whilst it was, I guess, a
challenge whilst my contemporaries and friends were having two months off in the summer.
At university, I was out running around, learning how to be a person in the military, and
learning how to march and shoot and do all those activities that you learn in the military.
I think, ultimately, it worked out really well. I was assigned, after my studies, to a research and
development unit in an area of the Air Force that, I guess, in some respects, is kept relatively
secret. I spent eight years, at the start of my career, researching gas turbine engines, or jet
engines, for another word. It was, actually, a wonderful experience and not too different from
the experience that I have today.
Really, our role is when people hear that, "Oh gosh, you're working on jet engines, or you're
doing research and development on them, that you must be purely trying to make them go
faster." Nothing could be, actually, further from the truth. The primary role in research and
development of gas turbine engines is to make sure that they don't stop, first and foremost,
because that's quite an important aspect to the passengers and pilots on the plane. As an
intended consequence, but also sometimes as an unintended consequence is that they would,
actually, perform better and be more fuel-efficient and many other aspects that you'd like to
see in any mechanical device.
I think, and I guess I look at what I do today as it is not too dissimilar. I'm basically applying
math and science to (and I hate to use this word), but to engineer client portfolios; to, first
and foremost, make sure that they don't stop, make sure that they don't lose their capital,
number one. As an intended consequence, and as we know in our industry, sometimes an
unintended consequence, they do go faster, they do make a little bit more money over and
above what the investor has allocated. So, to me, I feel as if I've been doing the same thing
since I left school.
And another aspect that I learned, particularly in the gas turbine engines, what a lot of people
don't realize is the simplicity of a gas turbine engine or a jet engine. In actuality, there is only
one true moving part in a gas turbine engine, and that's the turbine shaft. Hanging off that
turbine shaft is the turbine veins, and the compressor veins, and the combustion chambers,
and everything is actually hanging off that one moving piece.
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Top Traders Unplugged | Episode #110
I think that really alerted me when I started considering applying my skills to finance, that I
should be looking for the simplest outcome. Really, when you think about it, jet engines have
changed our lives. We don't have to sit on a ship, traveling months at a time to go from, let's
say Australia to England. Or from England to Australia as a convict, unfortunately. It has
changed our whole lives, and I looked at the initial models that I built inside the finance world,
and I was very cognizant of the fact that whilst it was intellectually challenging and it certainly
used your intelligence to come up with very complex algorithms, I just fell back onto my
original training and just said, "Occam's razor. You want to go with the simplest idea."
Niels: Yeah, absolutely, that's quite fascinating. Just staying with the military, just for a few
minutes here, what would you say that your experience inside the military... How would you
say that it has helped you compared to not having it at all? Is there something really specific
that you took away from it other than the specifics of learning about jet engines, of course?
Alan: I think I... I have a friend of mine who is a lawyer, and he's incredibly argumentative,
and he always uses the excuse, "Well, of course, I'm argumentative I'm a lawyer." And my
comment always is to him is, "no, no, you were argumentative when we were children, that's
why you decided to become a lawyer and use that skill set."
I grew up... My father spent time in the military before he went into his field of choosing. And I
grew up in quite a structured family. We all have a certain mentality about us. I guess that's,
again, I'm not a certain way because I chose the military or engineering, I was that way, and it
worked well for me. I think that helped me become a success in sports as well.
I do say that the clients, sometimes... I have heard someone on your podcast say this before,
that, "I learned all I ever needed to know about systematic and quantitative investing even
before I set foot in the field," because systematic and quantitative investing, at the end of the
day, is about discipline. We can actually carry that through to fundamental investing. It
doesn't matter how good your model is, how well you know your company, how close you are
to the CEO if you don't have the discipline to deploy that knowledge in a systematic manner
you might as well throw out the model.
So, the military was a great experience for me. It tested my intellectual knowledge, it tested
my discipline, and another couple of aspects from the military was that I don't feel any stress
in this industry. We can have massive days for us, against us, clients booting us up when we're
having a tough time, or even if we have situations where we're really struggling to develop
models sometimes, and I just don't feel the stress. I think having spent time in the military
where you're put in situations where (it sounds cliché but) your life and the life of your cohort
is a risk. When you're sitting in an air-conditioned office, in a suit and tie and really just losing
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Top Traders Unplugged | Episode #110
a couple of dollars or making a couple of dollars here and there, to me, it's an enjoyable
experience, and there's no stress what-so-ever.
Niels: Yeah, well, speaking about stress, I guess dealing with jet engines and, in particular, the
fact that you're trying to avoid them stopping mid-air, I guess it could also teach you about
thinking in probabilities rather than possibilities. That leads me into something I've seen you
mention, which is also how you got involved in the quantitative investing. It wasn't really from
just reading financial books. I saw references to people like Charles Darwin, inspiring you. So,
back to the probabilities versus possibilities, behavioral finance seems to be something that is
important to you. So, can we talk a little bit about that?
Alan: Absolutely, it's also that another aspect is alignment of interest. One thing that I love
about our industry is the alignment of interest. Some people don't charge any base
management fee, some people charge a small one, and we have a performance fee aligned to
the interest of the client.
I had that experience in the military. Once you fix or do some modification on that jet engine
and you sign it off, when that engine goes back into the aircraft, you, as the person signing it
off, jumps in the back seat with the pilot. So, therefore, that is true alignment of interest. That
was very revealing to me because I thought, "Now I think this is fair, how can I sign off on this
and do the work and then send some chump up into the air and go, 'Well, good luck with that.
I hope to see you back on the ground at some stage.'" No, no, you'd be in your flight suit and
heading up there with them.
So, it's definitely alignment of interest. It's very similar to what we do now. I think I learned a
lot about that probability is the exact right word. I think that what I found difficult when I
came out of engineering and went into finance is this desire, this almost religious experience
of trying to predict; that people were trying to predict where the market's going, where the
dollar's going, where earnings are going to be. I found it absolutely stunning that this is how
people thought.
I just thought, well, no, no, we just work on probabilities. We have rules or principles of
engineering that we have to follow; otherwise, the plane falls out of the sky, or the bridge falls
down, or the building falls over. I was stunned when I came into the investment market and
just realized that the mentality was "have a hunch, bid a bunch," it was quite extraordinary. I
just liked the idea of if I can (I hate to compare it to a casino but) just increase my probabilities
very slightly and do that many times over, we can produce a very successful outcome for our
client capital.
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Top Traders Unplugged | Episode #110
Niels: Do you think (staying on the topic of behavioral finance) if more people knew about
that and studied it a bit more, that more people would ford to the side of how we look at how
you should become an investor, meaning being a rules-based investor rather than doing it on
your intuition?
Alan: I think so. It's coming back to my experience reading the Origin of Species by Charles
Darwin. That probably gives you a little bit of insight into my personality that I enjoy reading
those types of books. I don't know if you've had the opportunity to read it, Niels, but it would
have to have the world's longest sentences in it. It's quite an incredible book in that sense. So,
it is hard going.
My biggest takeaway... I was just reading it for interest, and I wasn't thinking so much about
finance until (it's under the natural selection chapter, I think it's probably ninety or ninety-five
pages, depending which version of the book you have), it was just a very simple diagram of
what... I think a lot of people don't realize in the origin of species, everyone thinks it's about
human beings. It has nothing to do with human beings. Darwin speaks about plants and
pigeons, predominantly.
So, he has this diagram of the breeding of pigeons, but it could be anything, he's allowed you
to think of it as anything. You start with a black and a white pigeon, and you mate them. At
the bottom, out of that first mating, comes a very dark gray, or what you'd expect to be out of
a black and white pigeon. He goes through regenerations and generations, and after the tenth
generation, he's there looking and observing the pigeons.
Physically they look very different in the sense of their colors. But once he tests their
behaviors, they're exactly the same as those first two pigeons. That's when I started thinking
about, "OK, we have a bit of an issue in finance, of what I could observe very early on, and that
is that if you look at the top manager for one, two, three, years running and pretty much
guaranteed they're going to be the bottom manager for the next two, three years running."
I say, "What's going on here?" There has to be some behavioral basis to it. I think what I came
to, I guess, to my conclusion, was that humans, no matter how far we've evolved, no matter
who we mate with, no matter how intelligent we think we've become, our behavior doesn't
change.
The interesting aspect of the diagram in the Origin of Species, in natural selection, is that it
appeared to be, I guess, ten generations. But, in the fine print of that page, Darwin had
written that this indicates ten thousand generations. So, for all intents and purposes, his
takeaway, as humans, even though he doesn't mention it specifically in the book, but he
mentions it later in subsequent writings is, we're still acting as though we're running around
the Africa savannah two hundred and fifty thousand years ago. Our behaviors have not
changed, and those behaviors are driven by fear and greed. That formed the basis of the
model that we run today.
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Top Traders Unplugged | Episode #110
Niels: Yeah, and certainly, also, the whole concept of trend following, that we often talk
about here, on the podcast, yet it's still very important for people to kind of accept that these
are things that are very unlikely to ever change.
Now, clearly, you have an entrepreneurial gene that allowed you, later in life, to set up your
current company. But, before we go to that, there is a little bit of a gap from the military and
to the founding of Dalton Street Capital. So, maybe you want to tell us a little bit about what
happened in the middle there, and then we'll start talking specifically about how you've gone
about setting up your current firm.
Alan: Indeed, so it would have been around 1994 that I left the military. I had a deep interest
in finance and applying, I guess... Actually, no, I didn't have a deep interest in finance, I had a
deep interest in money, which is not very hard to have a young man interested in money. But
mine was from the point of view of how do I apply what I've learned - math and science - to
finance?
I went around using what limited amount of contacts I had trying to secure a job in
investments. The only job I was able to secure was a job as a fundamental investment analyst.
This was '94 and, I guess, particularly in Australia, at the time, Quant wasn't known of. People
sort of looked at you very, very funny. Of the people who were interviewing me, I only came
across one person who was an ex-engineer and also had a degree as a doctor, as well. We hit
it off straight away. He was the only person that I ever came across with that background for
many, many years.
But, notwithstanding, I was offered a role, it was a family office, and I was offered a role, and
two years into this journey of fundamental investment analyst (which this person had an
engineering background and very science bent), I was still fundamental. What I found is I just
found it very, very difficult coming from a background of, I guess, engineering principles, rules
that have stood the test of time, not letting emotions, or feelings, or opinions get in the way of
constructing, I guess, whether it be an aircraft engine or modification, the concept of (what's
the best word I can use) the pseudoscience. I know that's almost offensive, but I saw it as
pseudoscience.
After two years of being a fundamental investment analyst, and looking at companies, and
listening to company executives tell me how wonderful they were, and their companies were,
I just thought that this doesn't make sense to me. We're abdicating our responsibility to make
good investment decisions and research based on people's opinions. I actually resigned. I
submitted my resignation, and I said, "Look, this doesn't make any sense to me, and I'm
heading back to engineering."
It was just fortunate, at the time, that I was doing studies in mathematics (again, this probably
says a bit about me), just for fun. I met a couple of guys who were Quants. I'd never heard of
them before in my life. They were talking about this new index (this was '96) this new index
called the VIX Index. "It's incredible. Have you seen this index, Al? It's based on fear and
8
Top Traders Unplugged | Episode #110
greed." I went, oh, I just read about fear and greed and behaviors like anchoring, incredible
human behaviors that, no matter how well we know them, or how much we know that we're
actually displaying them ourselves, we just cannot escape them.
This is work by well-known authors like Kahneman and Tversky and Bray, and less well-known
authors like Phil Tetlock. And I thought, "Well, hey, this is really interesting." So, I think after (it
was a night class), I went into work the next day and quickly rescinded my resignation and
hoping that they were kind enough to let me stay there and undertake this thing called Quant.
I just immersed myself in it and, thinking back to my days in engineering, and thinking to
myself, "How can I come up with an idea?" The genesis of it was that we were looking at
putting in place a hedging strategy for our equity funds at the time. There is an unusual
phenomenon that occurs here, in the Asia Pacific region, it was interesting, I was talking to
Mike Adam. As you know Mike the “A” in AHL, and he was telling me (this was only the start of
this year) that he's been in the industry for, gosh, thirty, forty-odd years and he's really only
found, what is it, two ways to make money. He found those two ways in the first two years. He
spent the last thirty-eight, and millions of dollars, and hundreds of millions of man-hours
trying to find the third and couldn't find it. It appears as though the third is something along
the lines of what we do where we apply, I guess, another version of behavioral finance, but it
is actually unique to this region.
Niels: OK, so, when did you start formulating what has become the strategy that you then
continue to trade at Dalton when you founded that?
Alan: I think it's, it's like a lot of strategies. If someone came to me and said, "Look, I have
three years worth of backtesting on this new index called the VIX." I'd say, well, I think you
need a little bit more than that. But that's what I had. The VIX had started trading in 1993. I
developed this model in '96 with only three years worth of backtesting. I was fortunate
enough that the person that was allocating the capital, at the time, didn't give me much.
Actually, he gave me a hundred thousand dollars to allocate to this strategy. We started
trading one futures contract, and that was just the SPY, in Australia. So, the futures contract
over the equity index here in Australia.
What it was, I'd developed this model that was meant to be a hedging model for the equities
that we were holding in Australia, but it was so good it over hedged and wiped out all the
profits of the equities basket. I thought, "Well, that didn't work the way you thought it did, but
it's as simple as how about if you invert the algorithm, how does that look?" It did, it was no
longer a hedging strategy, it was a managed futures strategy. It was just a short-term,
behavioral based, managed futures strategy. I didn't know it at the time, though.
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Top Traders Unplugged | Episode #110
Niels: That's what I was going to ask you. Did you know that there was something called
managed futures?
Alan: I didn't know, for many years, that there was a thing called managed futures. I was
completely oblivious to this. I think, also, working in a very small, family office, [contributed]
as well, as it was very insular. I guess I was focused, and look, I was probably focusing on
looking in rather than looking out, as well.
I still remember one unique aspect of our strategies is that we use, instead of using cash as
collateral, we use an equity basket as collateral. That was really an unintended consequence
of the person that I was working for, and their money, they just, when I came up with this
strategy, and they didn't know a whole lot about futures, and I said, "Well, if we want to trade
these futures we need to put cash on deposit at the futures broker."
"Well, I'm not going to do that, I'm not going to put that at risk. We don't carry a lot of cash."
So, I went back to the broker, and I asked, "Can I put my car up? Can I put up my apartment, at
the time, up? What will you take as collateral?" I knew the broker a little bit, and he said,
"Well, I know, Al, that you run an equity portfolio." Which I had been doing for a number of
years. He said, "Well, I'm happy for you to put that equity portfolio up. We'll take a bit of a
haircut on it, but if you want to allocate that, that's fine." Fortunately, I was able to put that
up.
Again, I had no knowledge of the relationship between managed futures and equities, for
example. I had no idea that they were uncorrelated. I had no idea that they became negatively
correlated in periods of high volatility or very low volatility. I think we all know this in this
industry, sometimes these happy accidents occur and we just are lucky enough to stumble
across them.
Niels: I'll probably come back to this whole part of the collateral a little bit later when we dive
into the strategy. But, as I mentioned, at some point, you decide to go your own way after a
long career at bigger shops.. So, I'm interested in always finding out a little bit more about the
thought process that went into that decision, and also a little bit about how you decided to
structure the company the way that you did because, as far as I'm aware, you didn't start it
completely on your own, so to speak, so why don't you tell us a little bit about that.
Alan: Yes, well, I spent most of my time at either family offices or fund managers. So, I was
running this managed futures strategy aside many asset managers who were traditionally long
only equities, or long only bonds. So, I was always the unusual person, well one, because I was
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Top Traders Unplugged | Episode #110
Quant, but two because I was always inside a traditional shop.
Look, I'd done relatively well out of it. It was a fortunate structure whereby whilst I worked at
a couple of firms (the last firm being Credit Suisse, heading up the Proprietary Trading Desk), I
always kept the ownership of the intellectual property. So, if I joined a new firm, I would join
the firm with two documents, essentially: the signed letter of employment and a legal letter
saying that I maintained all the rights and ownership of the model.
I must admit, I missed out on a couple of jobs at some very well known firms because of that. I
understand why, but fortunately, at places like Credit Suisse, they were happy enough to take
that on board. So, I had done this for, gosh, about nineteen, twenty years and I was thinking,
"OK, I have a young family, and maybe it's time that I just start managing my own money." I
was fortunate enough that I had numerous relationships over the course of many years in the
investment markets, and I was introduced to a friend of a friend who was saying, "Well, hang
on, we're about to set up a boutique incubator, and this is a specialist boutique incubator, so,
we will only partner with managers who have performance fees and have very, very tight
capital constraints."
This was a person who had been running, I think it was, the largest or the second-largest
boutique incubator in Australia, but it was a lot of long-only equities, a lot of long bonds, you
know, the traditional. This wasn't performing as well as it used to.
So yeah, he saw the opportunity to set it up just purely for, I guess, for alternates, for a better
word. So, we were the second fund to join this firm. There's now three. A second group joined
about twelve months ago.
Really, it was an opportunity where I thought, "Well, I'm going to be doing this work, number
one; two, there were two people that I worked with since 2011, at Credit Suisse, that I wanted
to work with me." And I thought, "Well, I have to fund these guys somehow as well." So, I
thought, "We're going to be doing the work anyway. We're going to be paying the staff, why
wouldn't we set this up as a full-fledged operation?"
I guess I've always had a bit of an entrepreneurial spirit. I've always had a second job, so to
speak. So, at school, I used to have jobs: everything from cleaning telephone booths to finding
golf balls and handing them back to the people who lost them and getting them to pay for
them. Even when I was an investment manager, I'd travel to places like... I remember an
instance when I went on holiday to Vietnam, and I was heading just outside Ho Chi Minh City,
a little town called Bin Hoa. I saw these square... gosh, this was back in the late eighties, I saw
these square terra cotta pots lined up along the sides of the road, for next to nothing. It was in
the range of fifty U.S. cents, or something.
So, I managed to figure out where these were being manufactured. I found one of the
manufacturers and handed him (I still remember the exact figure, it was $14,000.00 U.S.), and
I said, "Oh, I look forward to receiving a forty-foot container in Australia in a few months." I
11
Top Traders Unplugged | Episode #110
went back to Australia, and I thought, "That was the fastest way I'm ever going to lose
$14,000.00 in my life."
Sure enough, on time, this container arrived full of terra cotta pots. I loaded them in the back
of (we call a ute in Australia) a pickup truck, and went around to all the nurseries and garden
shops and everything I could think of and sold this forty-foot container of terra cotta pots. I
did that many times over. I think it's just in my blood, maybe that I enjoy that sort of activity.
So, when the opportunity came to, basically, fund my team of people and also work with some
really great guys, and also outsource the aspects of the business that, frankly, I think a lot of
us, as investment managers, don't have a lot of interest in. You set up your funds managers for
business, and you're working away, and your bins overflowing, and you're wondering when
the janitor's going to come in a clean it, and then you go, "Oh, I forgot, I'm the janitor. I need
to empty the bin."
So, it was a great opportunity to partner with a firm called Prodigy Investment Partners, and
they take care of everything from risk, compliance, operations, all of our IT systems, and also
sales and marketing, and also they've helped us with the working capital as well. So, like most
of these boutique incubators, I think a concern for early investors in funds, as you know Niels,
is, "Is this firm a viable firm?"
That's, I guess, an answer that we can actually give potential new investors, that yeah, we
have an agreement in place that we are fully funded for a significant period of time. They've
already shown that they have done it for many, many years with the first boutique that they
partnered with. So, that's part of the reason I was keen to set up my own business, keen to
manage my own money, but there was a great opportunity to work with great people and
allow me to focus on the investments rather than the, I guess, the background work, for a
better word.
Niels: Yeah, I think actually, I think that is a good point. I found, certainly, in my career that a
lot of great traders aren't necessarily great businessmen. So, having some people alongside
you, not just to bounce ideas, but to take some of the workload off is pretty important.
A lot of peers in our industry will be listening to our conversation, for sure, and I think,
certainly, it has become much harder to start new firms in our business in recent years. So, I'm
curious a little bit if you can share maybe some of the things that you found. Because this is
only three or four years ago, so it's relatively fresh in your mind, I'm sure. [If you could share
some of the biggest challenges that you came across, or have come across, and maybe also a
little bit about how you dealt with them, so to speak. I think that could be useful for many
people listening.
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Alan: Sure, so we started the business at the end of 2015 and seeded our first fund in July
2016, and then seeded our second fund in March 2018. Look, it's the greatest challenge, and
you've mentioned it many times before, is the raising of capital. That is one of the great
challenges for us, and anyone else I speak to in our industry.
I think the second greatest challenge is just, I guess, getting asset allocators to understand
what we do, that it's not a black box. In fact, this is a more transparent box than you'll ever,
ever receive with a fundamental manager because we certainly can't see into their minds and,
I guess, look for any sort of replication of what they do on a daily basis.
Also, it's really just... and I think this is part of the reason why you set up the podcast, Niels, is
the misconceptions regarding the way we manage money, the way we manage risk, and what
is science and what is pseudoscience? The other aspect, as well, is having the investor commit
for a reasonable period of time. I know a lot of my contemporaries, including yourselves, I
think we often say, "Look, you need to be invested for a minimum of three years, preferably
five, and if you want to really achieve good returns, you need to be in for ten. That's how you
receive your returns.
There was a wonderful study, and I never remember who it was, Peter Lynch who conducted
the study, or Fidelity that conducted the study, when Peter Lynch was running the Fidelity
Magellan Fund, through those years his average return was twenty-nine odd percent. When
the study was done of what the average investor return was, I think it was a tiny fraction. Does
that seem like a credible story, Niels?
Niels: It does. I don't know the specific returns, but there have been many studies that show
that investors, unfortunately, never get the full outcome of a strategy or a market for that
matter.
Alan: No, no, and most recently, I've been... And this is one of the great challenges because
we don't constrain our volatility; we don't target returns; we don't target volatility. What I try
to explain to people is volatility is not risk, volatility is opportunity. What we need to
understand is, I guess we have a lot of famous investors. Let's use Warren Buffet, he's an easy
target to use.
I still remember that (I think in the tick boon), Berkshire Hathaway dropped close to fifty
percent over the course of a couple of years. Buffet was featured on the front cover of Forbes
or Fortune saying he's a has-been, he's done for. I think the stock price dropped to the rock
bottom price of about $40,000. Sure enough, now it's somewhere over $300,000, and he's had
a number of drops of that magnitude. I think, who has actually enjoyed that gain?
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Top Traders Unplugged | Episode #110
I think, in his case, he seems to have, I guess, a group of people who really do idolize him, and
I think he's built an amazing brand. But then, when it comes to what we do, and the way we
explain what we do, we can't really tell the folksy, down-home stories about how we've made
money, or how we love management, or we love the product. It's really challenging. It's a real
challenge for us.
So, what I find I do is I do try, as hard as possible, to personalize the fund. When I say
personalize I mean Al Sheen: this is my background, this is the way I think, this is what lead me
here, and this is how I conduct myself in everyday life, as well, all the way down to referring to
studies. There's a wonderful study in 2016. It was, I can't remember the exact title, something
like Sensation Seeking and Hedge Funds. It was basically to do with hedge fund managers who
own powerful sports cars. It's a wonderful study. If you're interested, I'll send it through.
Essentially, the take away was that managers that drive high powered sports cars, generally,
generate way more investment risk, deliver lower returns, lower sharp ratios, and lower
alphas. So, you're more likely to see a top-performing hedge fund manager driving a
Volkswagen or Volvo instead of a Ferrari or Lamborghini. I still read it, every now and then,
just to jog my memory, in case I see a lovely sports car driving by, and I think, "Oh, it would be
nice to be driving one of those." But I quickly read that paper. I think it was in the Journal of
Finance, just to remind myself, no, I'll stick with my current car...
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