Ahead of the Hedgeweek Emerging Managers US Summit, Bernie Yu, Chief Investment Officer at Patronus Capital Management, talks to us about being fiscally conservative in pursuing aggressive growth, investing in young talent and understanding the entrepreneurial spirit.
Hedgeweek (HW): What is the outlook for emerging hedge funds in 2024? What excites you about the opportunity set?
Bernie Yu (BY): What’s most exciting is the fact that there seems to be a change in the winds with allocating to multi-strategy hedge funds. Since the mid-2010s, there’s been a massive attraction to multi-strats which has now hit somewhat of a critical mass. We were recently at the Global Alts Conference in Miami and a lot of the investors we spoke to are sick and tired of the fees: it’s not so much the headline fees but more so the pass-through costs that they’re worried about.
I think liquidity is at the forefront of people’s minds right now. In general, emerging or smaller hedge funds are not tied up in heavy capital investments, so investors feel like they have a higher liquidity if it’s just a small investment relative to their overall portfolio, as opposed to being tied up for two to five years at a large multi-strat.
HW: What are the biggest challenges you’ve faced in developing your business?
BY: For us, it’s been a combination of track record and the risk-free rate.
It’s a chicken and the egg problem: we need about three years of track record with meaningful AUM, but how do we get the AUM without the track record? That’s why we have turned to high-net-worth individuals, friends and family to start, and then slowly bootstrapped that into larger family offices and hopefully into larger institutions.
When people have seen the track record and have seen what has or hasn’t worked, they’re happy to pay higher fees. At the end of the day, they’re willing to pay for performance. Also, allocators tend to lean more towards higher performance-based fees and lower rates.
A lot of people want excess returns. For the longest time, when we were in a zero-interest rate environment, that just meant regular returns. Now that we’ve shifted to a somewhat normal interest rate environment, that has changed to excess returns, so investors are trying to be a bit cleverer in terms of their fee structures and putting in hurdles. For example, you’ll only get paid performance in excess of the risk-free rate.
HW: How is new technology proving helpful?
BY: Technology has supported, but not spearheaded our development: it’s been there to buffer any unexpected changes in our business. For example, if we were looking to deploy three strategies, we would consider hiring portfolio managers or traders to manage them. If one of those strategies doesn’t turn out to be viable and had we hired those two traders, we would have had an unnecessary overhead. But with technology, we can plan out those three strategies and our overhead doesn’t change.
This is somewhat of an oxymoron, but it’s a conservative way to aggressively grow the business. Aggressive in the sense of trying new strategies and new things, but (fiscally) conservative in managing your overheads and your promise. I think technology is a great way to do that, though I am still a bit sceptical in using technology to find your alpha, to spearhead your growth and find new strategies. If you have an algorithm leading the charge, there’s not much of an intuitive check. If things go right, that’s great, but if things go wrong, they go horribly wrong.
HW: What do you plan to scale in the coming two to four years?
BY: We want to build out strategies that are solid. We’re a very concentrated style of hedge fund because we believe that if you’re going to do something, do it right. Diversification is insurance against ignorance — I think that was the Warren Buffett quote. I believe that if you just randomly start a bunch of strategies without committing to one and fully seeing it through, then you’re just creating a lot of technical debt and unknowns in your business, which is never good.
Universities are another avenue we’d like to scale, whether through sponsoring programmes or taking on more internships. We recently sponsored one of the University of Chicago’s Capstone industry experience projects, for example. It not only increases our exposure and brand awareness, but there’s also a lot of young, cheap talent who are there to be moulded and nurtured to be the kind of portfolio managers or traders that we would like. I think there’s a lot we can give back to the community by demystifying the worlds of hedge funds and asset management, and in turn, getting young, hungry and academically minded folks.
HW: Will you be drawing on some of these themes during your panel at the June summit?
BY: There is a lot to be said about the entrepreneurial spirit, which I think is the biggest distinction between being absorbed into a pod and being an emerging hedge fund. There’s so much more to running a hedge fund than just investing when you have your own business. For example, you never really have to worry about marketing if you’re in a pod, you just focus on making the right investments. It teaches you every facet of the business and gives you a broader skillset beyond asset management, and I think that is something you don’t really appreciate until you’re actually doing it.
When you asked me about the challenges of developing the business, about 50% of those are investments, but the other 50% is just, how do I grow the business? What kind of people should I hire? It’s that trade-off between the types of strategies: if you’re at a multi-strategy firm, you work on a strategy and ask for more money to deploy it, whereas at an emerging manager, you have people to look after and it’s more of a business. You are more diversified, in a way, because you can pivot from whatever you’re currently doing to something else.
Whether I will be steering the conversation towards these topics remains unclear, but if asked, I will always voice an opinion — I like to have an opinion on everything, and I’m happy to share my thoughts and personal experience. I would stick to what I have seen and what I believe, based on what I’ve been reading in the news and conversations with fellow portfolio managers and people in the industry.
HW: What are you hoping to gain from the day?
BY: As an emerging manager, the most important thing is getting your name out there. We hope that by doing this, we can get more exposure and allocators can see us. Also, just learning about what other people do, not for the sake of wanting to do it myself, but more out of intellectual curiosity.
Want to learn more? Join us at the Hedgeweek US Emerging Managers Summit on Thursday, June 6 at Convene 101 Park Avenue, New York. Register for your complimentary pass here.
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