Thread by @hfreflection

ALLOCATORS: PART 1

I have been grilled by many existing and potential LPs of our fund. Here is a compendium of my favorite, most insightful questions and other observations that I hope can be useful for people trying to choose strangers to manage their money. A 🧵:

1) After a few successful years of performance and AUM growth, one of our LPs sat us down for “the talk”. I call it this because I think he’s done this to many other fledging funds before us. The essence of the speech was: “Do you want to be good or great?”.

I wanted to be great. Most fund managers are going to say that. But what “great” means to you and what sacrifices you are willing to make to be great are revealing. To me, great means many years of good LT risk adjusted returns.

What will I sacrifice to be great? AUM growth, my own economics, my leisure time, my ego. What won’t I sacrifice? My family time, my values, my employees, my passion for investing, and my interests. I don’t know if there is a right answer, but there are revealing ones.

2) Mistake questions - PMs should admit mistakes. When they admit mistakes, they should blame themselves. They should not blame their analysts or the market. Occasionally, PMs can blame bad luck. At minimum, PMs should admit mistakes of judgment.

3) How do you size positions - this is a revealing risk mgmt question. If you want to avoid funds that may blow up, shy away from someone who answers we run concentrated and size on conviction. These two criteria, to exclusion of others, are problematic.

Ppl who run concentrated tend to have trouble changing their minds. Combine that with conviction and you have a lethal combo of overconfidence and stubbornness. If you want funds that won’t blow up, there should be some mention of risk-based sizing.

4) Boats, houses, cars - I am a (relatively) simple person. My partner is less so. He has a fancy house, a fancy car, and a fancy boat. He enjoys his money, but he still works hard and is focused. This question is a lazy and sometimes inaccurate shortcut to motivation issues.

5) Why do you do still do this? This is a better version of the prior question. In this biz, if you are good, not a crazy spender, and get at least a little lucky, at some point you don’t need to work anymore. So why do you?

I still invest because I don’t know what else I’d do. It’s fun. It facilitates, for me, a balanced life. I like my team. I like having LPs. Maybe some day I’ll find something better. But until I do, this is what I do. And if this is what I do I’m going try to be great at it.

6) Allocators / fund managers, what are some of your favorite questions you’ve received or asked over time?

@bucketshopcap, @rsandler21969, @JamieMazur2, @joelmcohen, @GrahamDuncanNYC, @alpha_exposure