Throw Down the Field

When I ran a hedge fund, I was fond of quoting legendary Ohio State football coach Woody Hayes, who said, “Three yards and a cloud of dust” as a way of conveying a conservative, grind to the goal line strategy. One day, a colleague pointed out that if we took that approach we would have to punt on fourth down. He was proven right.

Hayes is also quoted as saying, “Only three things can happen when you pass (a completion, an incompletion and an interception) and two of them are bad.” That may be true but it’s also true that if you run the ball on every play, you may fumble, gain limited yardage and run out of time.

Throw down the field. Change it up. Go beyond ball possession and score. Otherwise, you will preserve capital by not fumbling but investors will take the ball back when they don’t see enough points on the board. This is especially true of emerging managers, who have a limited timeframe to prove themselves.

Game plan for emerging managers

  1. Hire a great team. You don’t need a big group but you need experienced professionals with impeccable integrity. Find a CFO, an all-star admin and a portfolio manager who’s an expert in a strategy that’s out of favor and countercyclical to yours. This will allow you two to develop trust and rapport and then diversify when your strategies shift. Yes, you need an admin. No, you don’t need an analyst. It’s 2016 and you don’t need a 1950s-style secretary. But a college-educated, diligent person who is detail-oriented and technologically proficient will save you a lot of time so you can focus on investing. Skip the analyst. Times have changed. You have the data and tools at your fingertips and you need to be in the weeds to know your positions inside and out
  2. Invest in the business. Beyond your investment in the limited partnership, invest a material amount of money in the general partnership. Set aside enough working capital to fund your team and operations for three years. This commitment will demonstrate seriousness to your investors, who may worry about business risk, and provide stability for your colleagues so they focus on work instead of worrying about their paychecks
  3. Trust your team. You must focus exclusively on investing. You need to generate performance or no one’s going to care about your firm. You hired a great team, now let them perform. Trust them to do their jobs; you do yours
  4. Cull the herd. If someone is not doing their job, give them a clear, firm warning and try hard to rehabilitate them. If they show no progress, remove and replace them quickly. I don’t mean to sound harsh but people rise or fall. No one is perfect. Everyone makes mistakes. Still, if someone does not possess the fundamental qualities necessary to fulfill their responsibilities, it will only get worse. Their desperation and your frustration will be palpable and apparent to your colleagues. The struggling person needs to move on and find a job they’re good at doing. You have a responsibility to your investors, your other colleagues and yourself to make sure your firm is a meritocracy. The people who remain will be assured and uplifted by your leadership and the confirmation that you value their performance
  5. Raise money from anyone reputable and trustworthy who wants to invest with you. This may mean reducing your fees to attract Founders’ Shares. The fee structure doesn’t matter as long as you can cover operating expenses. Take money at 1/10 instead of 2/20. Take money at 1/0. It doesn’t matter. You are building a business for the long-term and you need assets under management. If this works, there will be plenty of fees in the future
  6. Don’t accept assets from fast money. You cannot manage a portfolio or operate a business with volatile AUM. You want to build your firm steadily with investors who are committed and supportive. There is no upside and lots of downside to raising capital from investors who don’t understand what you do and won’t stick with you while you work hard to generate results
  7. Control risk. Limiting your downside in each investment and in the aggregate portfolio are your paramount responsibilities. It’s okay to be wrong but you need to live to fight another day. Don’t be arrogant or reckless. Hedge your book, buy protection, don’t be too concentrated. Avoid arrogance and remember you may not always be right
  8. Execute your plan. Set goals and pursue them diligently. Stick to your strategy. Investors expect you to do what you know how to do. Don’t be the guy who tries to compete on a field where he doesn’t belong. You’re going to get your head taken off by the guy on the other side and then by your investors. You deserve it both times
  9. Adapt as you go. Call an audible when you see an opportunity to capitalize. Continually refine and innovate. Don’t allow for style drift but periodically revisit and reaffirm your goals. It’s fine to change them in a thoughtful way with facts, reflection and intellectual honesty
  10. Believe in yourself and your team. Don’t get down. Don’t get discouraged. Stay confident, upbeat and positive. You can do this. People will say discouraging things to you, sometimes inadvertently, sometimes not. Don’t listen to them. Remain devoted and driven. If you perform responsibly, you will raise assets

Put points on the board

Thrown down the field. Be bold. Resist the temptation of Hail Mary passes and the trap of solely protecting the ball. March to the end zone with a deliberate strategy of decisive passes. Otherwise, your investors will give the ball to someone else. Investment management is competitive, hard and measurable. There’s a scoreboard and you have to put points on it. You can do this. You have the talent and the team. Now go win.