Link: https://capitalallocatorspodcast.com/2018/10/21/tsai/
About Andrew: Chalkstream CIO (Pete Muller’s family office + FOF)
Trading
Ex-Susquehanna, ex-Lehman fixed income arb, founder of quant hedge fund
Pivot to founder
Urban Fetch: was a pivot from a failed hedge fund. Used the PHds to solve the logistics problem of deliveries. Knew this was the real business, to outsource those algorithms while the actual delivery service was money losing. Company was valued in hundreds of millions pre-dot com burst but VC didn’t want to sell yet since they need to be hogs on the few winners in their portfolio. Since Andrew came from the GS/AQR school of ‘long value, short growth’ quant world he was uncomfortable being ‘long growth’ but failed to “pound on the table” to sell. The window closed for them to sell with the crash.
Hired as CEO
After Urban Fetch, Carlyle group invited him to be a CEO of one of their portfolio companies. This gave him the first exposure to long term investing horizons that is more typical of corporate leaders in contrast to the the more transactional disposition of trading and much of finance/banking world. PE investors try to ‘move the spread in their favor’ by using their resources to influence the business whether its expertise or connections to get their hands dirty.
Meets Peter Muller
Pete Muller thought he handled the closures of Urban Fetch and prior hedge fund well, continuing to try when others might have “crawled into a ball”
General investing strategy is value-oriented, optionality (sub-prime CDS, CDS on large Japanese companies in secular declining industries as China hard landing contagion hedge), low or no beta, small capacity constrained strategies like power trading. Concentrated bets. They have an intrinsic mistrust of correlations when considering traditional asset management since they are so dependent on capital flows and thus distortion. They prefer strategies that are natively unrelated to broader markets. Instead of filling asset allocation buckets, they search for potentially mispriced bets. They categorize bets according to themes instead (ie small-cap regional banks, Japan trade, Korea trade, power trading). They only get involved in trades that they deep dive into.
Quantitative market making in spaces that have lots of dispersion (ie power trading)
Focus on spaces where active management can add value.
They focus on “space, team, and alignment” when evaluating a manager
If you believe in your team and strategy, rule #1 is ‘stay in business’. Need long term focused capital which was a credit to how AQR survived the 1997 currency and quant meltdowns despite being a recent launch. Long value, short growth didn’t start working til post 2000 bust!
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