Why this former bank trader and hedge fund manager feels he's best off in long-only asset management
If you want to move to the buy-side, you're probably thinking of joining a hedge fund. Venkatesh “Venk” Reddy has gone the other way. He left the alts world to launch a traditional mutual fund.
Reddy's resume include stints on the sell-side (he was an equity derivatives trader at Banc of America Securities) and in hedge funds. He founded Laurel Ridge Asset Management, a multi-strategy market neutral fund. He also worked a stint at Pine River Capital Management, another hedge fund. Now he's managing partner and chief investment officer of Zeo Capital Advisors, which manages a long-only fixed income mutual fund and is planning to grow its investment product offerings.
Here’s why Reddy decided to leave the sell-side and later hedge funds to embrace long-only asset management.
Success in hedge funds is increasingly about getting lucky
"The hedge fund space is very crowded, and managers are rarely rewarded for being cautious; investors typically require equity-like returns from their hedge fund portfolios. To do that well, you have to get lucky with timing, because the types of strategies that hedge fund investors want go in and out of favor quickly.
For someone like me whose approach to investing is more about long-term stability, I was drawn to the less-crowded opportunity to build a business to address our investors’ under-served needs by solving complicated risk problems using straightforward strategies that are easy to understand but not easy to execute.
We started with an investment strategy designed to provide low-volatility absolute returns regardless of what happens in the markets. This kind of strategy is most appropriate in the form of a mutual fund, which provides our investors ease of access, lower fees, an independent board of directors, external regulatory oversight and simplicity of year-end reporting."
Success in long-only asset management is all about delivering low volatility returns
It is a misconception that long-only investors do less work or perform different types of analysis than hedge fund managers. Rather, the effort is strategy-specific.
Ultimately, the task is always the same: to identify risks, assess the consequences of those risks and combine different risks to meet the mandate of the investors. Great managers can apply this skillset to any strategy within their asset-class expertise, regardless of whether it is long-only or more complicated.
As for Zeo, on the investment side, we value an audit background – specifically the transaction-services teams evaluating potential M&A deals. Given our fundamental approach in providing a low-volatility product, it is important to understand what could go wrong in an industry, how a company could fail and the implications of investing in different parts of the capital structure. The audit mindset helps us to identify good companies in an overlooked market segment in order to deliver the low-volatility returns our investors expect."
Success in a bank is all about negating downside risk
"I will start off by saying that I wouldn’t be where I am today if I hadn’t had the sell-side experience. There is a valuable education in seeing the capital markets from the bank perspective. However, the buy side of the business has a very different risk mindset.
First, the typical trader on the sell-side is mostly trying not to lose money because his primary goal is to retain commission – or equivalent such as trading spreads – paid by customers.
On top of that, the sell-side trader is trading with customers that probably know more about a particular situation than he does but still expect him to take risk to facilitate their orders. It’s rather unfair, which is why the incentives of the sell-side trader can vary from firm to firm – some banks want risk-takers while some want risk-reducers."
Trading in a hedge fund can blow up your career
"On the other hand, the buy-side trader starts every day with a mandate to make money, so the need to take risk is even more important. But too much risk-taking can bring about an unexpected and early demise to both a fund and a career."
A fund facilitated by quantitative tools is better than a quant fund
"I am a firm believer that technology is best used to facilitate rather than replace human decision-making when it comes to investing.
There is an old saying that a quant strategy works until it doesn’t. That is, paradigmatic shifts are generally difficult for true quant strategies to handle because models are not typically designed to question the validity of their own inputs.
Humans, on the other hand, are much better at thinking outside the algorithm, so to speak. Fundamental strategies tend to be less complicated even as they require deep-dive analysis.
If technology can help free us of the commoditized work that takes up 80% of our time – for example, by helping to screen out subpar investments earlier in the investment process – then the analyst can be five times more efficient, which I believe would lead to a better fundamental portfolio."
Photo courtesy of Zeo Capital Advisors