Ahead of the Hedgeweek US Leadership Summit, Theodore Katramados, Director & Associate Portfolio Manager at TAG Associates, talks to us about the relationship between volatility and opportunity, niche strategies and the importance of investor education.
Hedgeweek (HW): Tell me about your professional background. You’ve been at TAG Associates for over 18 years: how has your role evolved?
Theodore Katramados (TK): I’ve been in the markets for nearly 35 years — 34 to be exact. I started my career doing counterparty credit risk analysis at the New York Fed, looking at banks and broker dealers, supporting sell-side trading desks and setting up credit lines for trading with hedge funds, determining margin requirements on one-off derivatives deals and generally managing relationships so that we didn’t take any credit hits.
I also spent some time with an Australian bank doing the same, which is where I first learned about hedge funds. This was the mid-1990s, so there weren’t really many hedge funds at thetime. When I joined Lehman in 1997, I started focusing exclusively on hedge funds.
In 2002, I moved over to the buy-side at Citigroup, in their fund of hedge funds group, part of alternatives. But, given my background, I was working in operational due diligence for a few years. When there were changes in the group, I had an opportunity to move to the investment side, so I was effectively covering both IDD and ODD. Then I had the opportunity to move to TAG, and I still cover both here. I co-run a fund of hedge funds with our CEO that will have a 25-year track record as of September 30. Most of our hedge fund dollars are in bespoke client portfolios that tend to look like the fund of funds.
At TAG, my role is the same, but what I look at has changed a bit. Our portfolios have become more concentrated through the years. When I started, we had a lot of managers that were highly correlated to one another, so we cut almost 30 managers to the 15 we have now. We have enough diversification and non-correlation amongst those managers so that we still have very low volatility. I think we’ve certainly done what we’ve set out to do.
I think the other big change is that I’ve come to focus almost exclusively on niche-type managers or off-the-run type strategies. Probably most of what I see is expensive beta, unfortunately, and what I’m looking for is the little sliver that’s not that — through alpha.
HW: What key lessons from your time working with hedge funds have you brought into your current role managing private wealth?
TK: I’ve been doing it for a long time and I’ve met a lot of people. I try to take something from everyone that I meet with, whether it’s managers or other allocators. One of the things I’m hoping to get out of the summit is meeting people I haven’t met before and getting their perspective on things. I’m always listening and trying to pick up on things that are going on, things that people say, anything that might be helpful in my idea generation process, in terms of working in private wealth and focusing primarily on hedge funds, although I do a lot of different things — I’m currently involved in helping launch and co-manage a private credit fund of funds.
Another important role is investor education. In other words, being able to explain to our clients what we do, how we do it and why we’re doing it. Our clients come from a variety of backgrounds; some are in finance and some are not. What I’ve learned is you have to explain different strategies and different investments in different ways to people, based on their background. If someone wants to go into more detail, we can go into more detail, but if they don’t or it’s not their area of expertise, we’re able to synthesise what sort of bet they’re making when they make a certain investment. What will cause things to go well, or poorly? What things should you be looking out for? I think it’s key to make sure that the client knows what the investment is all about.
One of the common problems for us has been the many periods over the last 15 years where volatility has been low. Hedge funds tend to struggle more in that kind of environment, at least the type of funds that we look at. We’re looking at funds that can perform when markets are doing poorly, or generally be a hedge when other strategies are not working well. Two niche strategies that I’m looking at right now are power and electricity trading, as well as freight and shipping derivatives. I think there’s opportunity and there’s volatility in these. Generally, where there’s volatility, there’s opportunity.
HW: How do hedge funds fit into the broader investment strategy for your private wealth clients and what are the primary factors driving high net worth individuals and family offices to allocate more to hedge funds?
TK: We’ve always been big users of alternatives; about a third of our $8.5bn AUM is in alternatives. For us, that’s mostly hedge funds throughout the years. Though there’s been a move toward private equity and private debt in recent years, I would still say hedge funds form the largest portion.
When we went through a long period of zero interest rates, hedge funds were meant to be a fixed income alternative, and in some ways they still are. Rates are higher now, but all the talk is the Fed’s going to begin cutting rates. I think we could be going back to a period where hedge funds are a fixed income alternative again.
If you look at popular bond indices, hedge funds have been an attractive alternative in the last five years or so. Certainly, last three years have been tough for the bond market after a long bull market for fixed income.
The second is to be a hedge against equity market volatility. People tend to believe the market’s never going to go down and see the market seemingly reaching all-time highs almost every day for a long period. Then we got a little bit of volatility last week, and suddenly people were shaken up. Markets will go down again in the future, and when they do, I think hedge funds will be a good source of balance in the portfolio and will serve to cushion the downside.
But again, we look at each client separately. There’s no “house portfolio” if you will. Each client has their own portfolio and investment policy statement. Our clients are all individuals. They have things that they like and don’t like. Some prefer alternative investments more than others. Some prefer certain strategies more than others. Some have a greater risk tolerance. Based on all those criteria, we customize or tailor each client’s portfolio to fit their needs and desires.
HW: How do you see the role of family offices evolving in the hedge fund space over the next five to ten years?
TK: It really varies, whether you’re a single or multi-family office, how large you are and what area. We don’t do this, but I know a lot of family offices help seed or start hedge funds. That’s an area, especially with smaller funds, that is looking to get some capital to get going, which is where family offices can come in handy. They can take a stake in the GP and help a fund get off the ground in exchange for that share of economics.
Another area is family offices helping to drive the discussion around fees and other terms for hedge funds. Again, it depends on size of the fund and family office. Historically, you’ve seen pensions and endowments and foundations driving that because they’ve been bigger, but there is a place for family offices as well.
If you go back to the genesis of the hedge fund industry, there really weren’t very many funds, but a lot of the early investors were family offices — this was before the rise of the mega-size foundations and pension plans. A lot of times when hedge funds wanted to get off the ground, they would have had to deal with family offices. In many cases, it was people talking to friends of theirs who had acquired wealth and were in a position to help them get going, so I think that that will continue.
HW: How is technology influencing your approach to portfolio management and client advisory?
TK: AI is obviously all the rage, but we haven’t used it too much from a manager selection standpoint. In terms of how it drives certain strategies, there’s been a rise in quantitative strategies, so we certainly look at those we’ve invested in.
We use technology to help us in screening managers and narrowing our focus; there’s so many managers out there. But at its core, the hedge fund business is still very much a people business. That was one of the things that we lost during the Covid years. You lose a lot doing calls or meetings over Zoom as opposed to doing them in person. I don’t think technology will ever completely take over the process of manager selection, because there’s no substitute for getting in a room with someone and asking questions about what they do, going to lunch with them and looking at how they relate to their colleagues. A lot of the interpersonal things are often taken for granted, but you can’t really crunch everything down into a number, and I think you really have to trust the people that you’re giving your money to. If you can’t, then you shouldn’t make the investment.
HW: Do you have any personal investment philosophies or principles that guide your approach and will you be drawing on some of those themes during your panel at the summit? What are you hoping to gain from the day?
TK: We’ve always said that we’re in the stay-rich business, not the get-rich business. Capital preservation has always been core to what we do. For us, it’s more important to protect the downside than to squeeze out every last dollar on the upside, because our clients, by definition, are already wealthy. Our job is to keep them that way and to secure the future for them and the next generations.
The next thing that we focus on is our independence. We’re independently owned and operated, so we’re not beholden to any bank or any other firm, and so we operate with a completely open architecture. When we have products of our own, we don’t charge our clients any fees for that, because they already pay us for the overall relationship and so we can be objective in terms of what we recommend. It’s not like there’s all these products that we are being pressured to sell, like they get at a lot of banks. Our motto is to always do right by the client, so it comes down to what’s best for them and what fits best in their portfolio.
At the summit, I’m looking forward to meeting people and getting their perspective on how they see things, but also the consensus from folks and things they’re looking at. It’s funny, there are a lot of times where I’ll do this to find out what I shouldn’t do, or to maybe take the opposite approach as I think there’s often a herd mentality.
Trades and strategies or ideas and themes tend to get crowded, so I think that’s the time to watch out for them. Private credit is a great example as it’s kind of become a buzzword. Even as we’re putting our own strategy together, we’re being very careful to take a look at what’s going on in the marketplace and see if there’s certain areas that we should avoid because they’ve gotten too crowded.
Theodore Katramados, Director & Associate Portfolio Manager, TAG Associates –Ted has been a Director & Associate Portfolio Manager of the TAG Relative Value Fund since 2006, focusing on manager research, portfolio construction & risk management. He is a member of TAG’s investment committee and has 27 years of hedge fund experience. Ted began his hedge fund career at Lehman Brothers and has worked at Chase Manhattan Bank, Deutsche Bank and Citigroup. Prior to that, he worked at the Federal Reserve Bank of New York and the Australia and New Zealand Banking Group. Ted received a BS from the Wharton School at the University of Pennsylvania and an MBA from the Stern School at New York University.
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