Alternative Investments Podcast (Clip 6 of 8) – Alternative Investments Figureheads

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MEET THE REST OF THE TEAM

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 Episode 4 Podcast/audio/video Clip (6 of 8)

Working with Strategic Capital on Alternative Investment Strategies

Meet Don Simoneaux – Alternative Investments Waterloo Capital

Don Simoneaux and Bobby Russell talk about market changes based on figureheads in the Alternative Investment space; and how Strategic Capital finds and assesses alternative investment opportunities

Moderator: And talk a little bit about kind of the cult of personality that’s come along with Alternative Investments sometimes in its past I want to mention guys like Carl Icahn in the 70s and 80s and guys like Bill Ackman today how much of what’s being said in sound bites for three minutes on CNBC is moving the alternative Investments market, and how how does that influence kind of what you guys are doing in the back office role even though you’re a figurehead for Waterloo, you also maintain a back office role at some level can you talk a little bit about how that moves the markets or or how that influences the way that you make decisions on a daily? 

Don Simoneaux (Director of Alternative Investments, Waterloo Capital): Yeah, so let’s be clear in the the hedge fund space one strategy within the hedge fund strategy buckets is activists and investors and it’s the idea that a manager can take a position in a stock and then go public and speak their book; Carl icahn’s done this Bill Ackman has absolutely done this so they’re building a position and they’ll go to the public and say oh well you know we think that Herbalife for instance is you know a fraud or a Ponzi scheme so you know we have a short position on it and we’re going to tell you why we have that short position and it absolutely moves the market. Now whether or not the compliance around what can be said and all that – that gets a little complicated so we won’t go too in depth from the that side but the cult of personality is Alive and Well in the hedge fund space these managers are calculated and know exactly what they need to say to move a position in their book and that’s that’s what they’re the investors that invest in those funds pay them for. 

Don Simoneaux (continued): You know we we’ve always had more of a focus especially in the hedge fund side in really trying to create Diversified uncorrelated strategies in that space that’s just kind of our philosophy when it comes to hedge fund Investments and we’ve kind of steered away from some of the you know more verbose activist managers 

Moderator: Is that mostly from a diversification perspective or a liquidity perspective or is that risk management? 

Don Simoneaux (Director of Alternative Investments, Waterloo Capital): It’s risk management met primarily for us because a lot of these strategies are taking really concentrated positions and individual stocks and Levering the fund against those positions and so you know the individual client it’s probably a lot of times maybe not appropriate for that level of risk that you might be taking in a fund like that to where I mean you kind of look at some of the large funds like Ackman’s Pershing Square fund, you know, I think they had a great year last year I think they were up you know 20 to 30 percent; in previous years they were down 20 to 30 percent – that sort of volatility might not be appropriate for an individual investor that are really trying to you know invest with a shorter time Horizon than you think about a perpetual institutional allocator so, you know risk Management’s important and additionally we’re investing in manager skill in the alternative space and for us, we really try to incorporate a lot of these strategies into a diversified portfolio to allow our clients to earn higher risk adjusted return and meet their objective ideally with less risk over time and that’s how we think about the alternative space. 

Moderator: Sure, and as you as you vet those managers, or those funds, or those tools within the space what what is an appropriate timeline in your mind from you know from a vetting perspective how long do you look back and and what do you look at you know when you’re evaluating as someone who’s bringing it to the masses so to speak? 

Don Simoneaux (Director of Alternative Investments, Waterloo Capital): Sure, so our process really kind of starts on idea formation so we do a lot of research; we publish a lot of research here at Waterloo; we just released our annual outlook, but we try to find certain areas of the market that we want exposure to. So, over the last few years we’ve been really active in private credit and direct lending just kind of based on our bearish view of public bonds and our anticipation of higher interest rates and so you know our thesis there was okay let’s try to find investments in private credit that might have a floating rate component be back by hard asset collateral to where if we get a pop in interest rates you know we’re not going to be as affected from a valuation perspective so like last year public Bonds were down I think the aggregate Bond index was down 13% and a lot of our private credit strategies were up you know seven to twelve percent that sort of outperformance really kind of starts with you know creating a thesis so that that’s number one. 

Don Simoneaux (continued): Number two: we’ll go out and you know look across the market and try to evaluate all right what managers are implementing this strategy better than others. We have a few different ways that we can do that from a quantitative and qualitative perspective. 

Don Simoneaux (continued): We have initial meetings we have conversations we get access to data rooms we’ll go through and spend a lot of times six months getting comfortable with a manager and then once we’ve gotten to the point narrowed down our funnel to maybe one or three managers in space we’ll go ahead and do a full due diligence we’ll go to the manager’s office really try to understand their strategy back office operations there’s two different types of due diligence when you’re thinking about private markets you have your investment level due diligence where you’re trying to understand a strategy; looking at their track record; looking at the manager’s background and their ability to you know replicate the strategy that they’ve implemented past. 

Don Simoneaux (continued): And secondly there’s operational due diligence that is just as important as the investment level to do, to where we want to make sure the firm has the proper checks and procedures to administer the fund; protect client assets, and you know generally be able to execute the strategy from a business perspective. And both of those are equally as important and we spent a lot of time getting to understand exactly how these firms – their business works. We’ll write out our due diligence memorandum; we’ll share that with our clients and we spend a lot of time with our clients to really make sure they understand not only the firm that they’re investing in, but the strategy; the managers and how that fits in with their overall portfolio.