从人身上寻找Alpha

Welcome, Milana. Few people have had the vantage point that you’ve had over the last 2 decades evaluating investment talent. When you meet someone for the first time, what are you really trying to understand about them?

You guys have been listening to idea pitches all day long. But if I can pitch this, talent is the only thing with durability, right? Ideas come and go. So, just a little plug for our session: They saved the best for last.

1. Looking Beyond the Paper

What do we look for beyond paper? We don’t get a lot of paper. We’re after the best people in the industry. What we’re looking for is—and they’re typically not looking; they’re not disenfranchised, and we don’t have résumés—so our archaeological dig is really about whether these special people are that special.

We’re looking at things that might show up on paper, like the P&L. We’re going into the quality of the P&L. How much is beta? Is their sector or industry in favor? How much of the idea generation came from the founder or CIO, or from idea dinners like you have? How much of this is independent research? How repeatable is the process?

If they’re in a risk-taking seat, can they move their feet quickly and pivot, degross, and regross? I find that very few people are good at the risk-management piece of this job. How intellectually flexible are they? Can they go long something they’ve gone short?

What is their approach to human capital? We get answers like, “I think I’d be good at building a team because I have high EQ.” Not a good answer. We’re looking for a really substantive approach to how they’re going to attract, develop, mentor, and retain talent. You guys see all the headlines out there about talent wars and gazumping. It’s the hardest thing in the world to do. I’m not just saying that because we do it for a living.

I also look at whether, if we’re looking for someone to build a business and they run something substantial where they’re at, they’ve had to hustle and create something from nothing, or whether there was a lot of ease, given where they’re sitting, in terms of being able to build it. Those are the sorts of things we look at under the hood.

What I will tell you is that it’s a good insight into how special they are if they can answer these questions in a substantive way. But you don’t really know, Jawad, until somebody is in the seat, under pressure, and in control. We have a lot of back-and-forth in these meetings. We don’t accept what they tell us at face value. We challenge them to get to the heart of the truth of who they are and what they’re capable of, but also to see how they react in a situation like that. To the extent that there’s some emotional fragility or insecurity, that’s not a good sign.

Are there some common threads that you see that lead to successful outcomes?

Okay, so are we going really under the hood? Let’s do it. I need water for this. Okay, so—deep, deep.

2. The Traits of Special Investors

There are certain things that I do think are strong indicators of whether somebody is special. The first is innate self-confidence. I find that special people have had success at an early age, and there’s a compounding effect to confidence, right? It builds with each win, much like with investing. You can take more risk when you’re up.

Special people have a unique ability to articulate their superpower. What are they really best at? Very few people can answer that with clarity, precision, and fire in their eyes. We get really mushy answers to that all the time.

Finally, there are a lot of things, but we’re limited on time. I’d say the other thing that’s really important is, for lack of a better word, their pride in their battle scars. Whether it’s performance, we’ll meet people who will spend more time on the one bad—might not even be the right word—slightly down year they had than on all the good stuff, because they were so pissed off about that one not-so-good year.

They’ll dig into the bets they made that didn’t go their way and what they learned from them. They’ll dig into the unintended bets they now see they made, and then they’ll talk about how they retooled their entire risk process to address the blind spots they’re now attuned to.

There’s also the personal side. I think special people tend to have a chip on their shoulder. There’s some searing, historic thing that they had to overcome that left an imprint, whether it was a learning disability or a speech impediment. I was bullied at a young age, and that definitely drove me. I think this general underdog syndrome is important because public markets test your resolve.

It is inherently contrarian to take a differentiated point of view, long or short, versus an established consensus. It’s defiant and a little scary, and I think that rugged self-belief and confidence only comes from having lived through some stuff, not from privilege and things having been easy. There are still people who may have had early success and lots of opportunity, yet they’re unable to build enduring careers.

So, where does it usually start to go wrong?

3. The Five Failure Modes

There are 5 failure modes. We don’t have time to dig into all of them, but they are lacking the right growth mindset. We all understand that if we’re not growing, we’re shrinking, right? We get that. That’s not a news flash.

But people meet with us and say it’s the wrong time to make a move because there’s still so much left to learn where they’re at. Or they’ll say, “I’ll leave when I feel like I’ve exhausted my growth where I’m at.” That’s the wrong approach. It’s a very insular way of looking at things because there’s a whole world out there, right? What you should be thinking about is what the growth curve and pace are where you’re at relative to someplace else.

I tell people, like, in 3 years from now, let’s say, Jawad, you were at a directional long/short equity fund and you said that to me. If I think you have it in you to progress to the next level and you want to be a PM—let’s say you’re an analyst, or you’re still pitching ideas to the founder—then, by definition, you may be a partner, but you’re not a PM, technically, whatever your title is.

I may tell you that in 3 years from now, you’ll develop a deeper fundamental skill set, have more reps with the founder, and maybe have a broader coverage universe. But are you developing a more robust shorting capability, more idea velocity, a more diversified portfolio, the ability to build a real team—not just 1 or 2 analysts—and the ability to use more sophisticated tools?

If I could take you and put you in this other paradigm and you don’t sacrifice any of the other learning, you’re not just a better version of yourself; you’re a different version. Now we can talk about moving you into a different seat.

They don’t usually step up when the opportunity presents itself. What is it that’s holding them back?

The other things are self-awareness. In terms of what’s holding them back from that, well, that’s one of the other things—it’s fear. I think oftentimes people see that they’ll be able to grow more, not just vertically but also in other ways, horizontally, elsewhere.

Sometimes they aren’t really aware of the challenges that their fund is facing. Their fund might be at a competitive disadvantage. They might not be really aware of how they are, in fact, developing. But let’s say they are. Let’s say they’re completely aware of what their evolution looks like. They often get held back by fear.

They’ll come up with all manner of excuses for why it’s not the right time to leave. “If I stick around a little bit more, maybe I’ll have a better P&L and I’ll be able to optimize for a higher offer.” Or, “The fund is up. Let me stay a little bit longer because I think this is going to be a good year,” as opposed to focusing not on the short term but on the longer-term trajectory.

The other 2 things that I tend to see as common derailers are a lack of a repeatable process and adaptability. People will say things to us when we ask about their process, like, “I have a good sniffer,” “I have good pattern recognition,” or “I use AI effectively.” When the environment changes, if you know what your process is, it’s much easier to adapt it.

What role do incentives play here? How are they perhaps shaping behavior in ways we don’t fully appreciate?

4. The Incentive Trap

I think the industry, by and large, is too short-term-oriented with respect to incentives. If we don’t give people a broader incentive structure, it’s just year in, year out. There’s no nod to duration or to what they’ve done in the past; they’re always optimizing for that year.

You see this with suboptimal risk-taking behavior. If they’re down, they’re going to pile all in to get out of that hole, and if you cut their capital, then they have to take even more risk. That’s not always the right decision, because the idea is, “Well, if I lose, I’m not getting paid anyway, or I’m going to get fired.”

If they’re up, they tend to sit on their hands for the last month of the year to preserve their returns. The best incentive systems that I’ve seen are ones that combine—you always want to have a meritocratic approach to paying talent. You never want to take from Peter, who’s done a great job, to pay Paul, who maybe hasn’t done such a great job, but you want to make sure he doesn’t leave because how will that look to LPs? I don’t want to have turnover.

Founders are incentivized in different ways to hang on to people. I think the best thing is to build scaffolding where you pay everybody what they're worth for the performance in that year, but the slope, the payout, or the points you give somebody changes or goes up when they have maybe hit a certain P&L, or they get promoted to PM or partner and their compensation changes as a result. Maybe when they've put in 5 years of having been able to produce a certain return.

Or maybe you pay them, in addition to their normal compensation, a small percentage on their 10-year cumulative P&L. Maybe you give them a piece of the management fee. These are all things which I think build durability and stickiness and make it harder to take people out, which is not so good for me.

With AI getting better at analysis and pattern recognition, where do you think human edge remains valuable?

5. The Human Investment Edge

It might sound trite, but in our humanness. I think that as data analysis and financial analysis and all things quant get commoditized and outsourced to AI, it's our ability to persuade, to use judgment, and our human connections.

The data only tells us so much, and AI is driven by data, right? Sometimes all the data points to a negative revision, and yet the stock goes up. There are so many things that go into performance—themes, factors, yes, I D O, the underlying economy, et cetera.

But it is maybe the art part of it that is the most important thing, right? AI tools compute, but we comprehend, and I think the edge is in owning the decision.

What still surprises you about people after all these years?

About people? Well, I think we're supposed to be so good at assessing risk for a living. When it comes to assessing the risk of our own careers—the staying put versus making a move and risk-weighting that decision—I think people can be surprisingly lopsided when it comes to doing the risk-reward analysis of what their future should look like.

6. The Great Investor Test

So let's end with a few quick one-liners. First thing that comes to mind.

A great investor is someone who has passion for his or her subject matter, but is not wedded to his or her ideas.

What is the hardest quality to teach?

Hunger. Drive.

The biggest red flag you see early is—

Arrogance and stubbornness. In the end, the business rewards stick-with-it-ness and adaptability. Over time, I've come to value a sense of humor. I think the fiercest competitors I know also know how to laugh at the end of the day, and I love that.

This is such a gift, Elana. Thank you very much.