I moved to Hong Kong in 2007 after completing my MBA to join Merrill Lynch in their exotic derivatives team. It was a dream job and I was super excited. Life was good – things were going according to plan. So imagine my shock two years later when, in the wake of the financial crisis, I found myself redundant and out of a job.
It was perhaps at that moment that I began to understand what it means to get hit by the tail-end consequences of a black swan event.
Luckily, a few months later, I managed to find another job. I joined Blue Pool Capital, an Asian hedge fund, as a junior analyst. Blue Pool later converted into a family office for a few of Alibaba’s founders. I spent over six years at Blue Pool researching companies and investment opportunities in Asia. It was a small team and they gave me considerable freedom to experiment with all the crazy ideas I had. I met some incredible people and learnt a lot about markets and investing during my time there.
When I look back and try to connect the dots, it was perhaps the events of 2009 that shaped my desire to create an anti-fragile life. So it was partly towards that goal that I finally left Blue Pool, partnered with a friend and colleague, and started Asymmetrics Capital in 2016.
I am often asked why we chose this name for our investment firm. In truth, I had been fascinated with Nassim Taleb’s ideas of asymmetry and anti-fragility for many years and wanted these ideas to be the bedrock of our new firm.
Our guiding principle, ‘Asymmetrics’, refers to our portfolio of asymmetric bets. Each of our investments have asymmetric return potential versus the risk taken. There is reasonable diversification across our investments so our overall portfolio is not vulnerable to a single factor. On top of this, we use leverage cautiously and in small doses.
Over economic cycles, we hope our carefully chosen well-diversified collection of asymmetric bets generates satisfactory returns while never taking a ruinous level of risk. We manage the fund with an eye on the resilience of the entire portfolio, trying to avoid concentration risk in any one geography, industry, or strategy.
How did we design the firm differently? Appropriate incentives and skin-in-the-game
After being a part of the hedge fund industry for over six years (longer for my partner), we were disappointed with the way most funds were set-up.
The standard hedge fund charges 2% of assets every year plus another 20% of the profits, commonly known as the 2-and-20 fee structure. We felt that this fee structure was not conducive to long-term success, not for fund performance, and especially not for investors’ returns after fees.
We thought of multiple ways to address the shortcomings of the standard hedge fund set-up. First, we wanted a structure that allowed us to implement a long-term strategy: to invest flexibly and patiently, shielded from the pressures and biases that the standard playbook creates. Second, we wanted our risks and incentives to be fully aligned with that of investors. Third, we wanted the fund’s fee structure to be fairer to investors – fund managers should not be richly rewarded for just getting lucky.
To fix these issues, we designed our fund with the following structural features which align our incentives with our shareholders:
1. Significant personal investment: Both managers have the bulk of our families’ net worth invested in the fund. Our interests are substantially aligned with our investors: we don’t take undue risks because we bear the downside as much as, if not more than, them.
2. Low cost operations: We were very focused on keeping our firm’s operating costs low which ensured that we broke-even at an early stage. This allowed us the luxury to be selective about raising capital from like-minded long-term investors. We have seen several funds perform poorly because they felt excessive pressure to shoot for short-term gains so they could raise capital on the back of that track record.
3. Limits on fund size: Rapid increases in fund size can create a significant drag on performance. Often fund managers say that they will close their fund to new investors after hitting a certain size but forget these commitments when faced with the opportunity to take in more money. Our fund’s foundation documents have an unusual provision contractually slowing down fund inflows after the fund hits a certain size.
4. Fair fee structure: We only earn a performance fee if we exceed a hurdle rate that compounds each year. This structure offers a fairer deal to our investors: we only earn our performance fee if we earn a return over that hurdle. In conjunction with our low management fee, our fee structure results in substantially better economics for investors over time versus a typical 2-and-20 hedge fund. In most situations, we estimate investors in our fund pay less than half the fees as compared to a 2-and-20 hedge fund.
The result of our structure is a fund that allows us to adhere to our long-term investing style and therefore positions us to generate good long-term returns. We invest patiently and don’t generate activity for the sake of activity. Cash is our default option if we can’t find suitable investments, but our required return hurdle discourages sitting on too much cash – this structure strikes a good balance between conservative and opportunistic. At the same time, because of our high personal exposure, we manage the overall portfolio risk very carefully.
We don’t think of risk as volatility or some abstract academic construct. Most of our families’ net worth is invested in the fund along with our investors. For us, the real risk is permanently losing a significant portion of these savings. Whenever we wrestle with greed, we are always keenly aware of what we are risking on the line.
The asymmetric outcome
After four years of running the fund, we are more confident that our set-up is indeed conducive to good performance. We have outperformed relevant indices while taking significantly less risk.
To sum up, our investment goal was to construct a portfolio which generates satisfactory long-term returns with minimal risk of catastrophic loss of capital, no matter which version of the world unfolds…and it is important to remember that though only one version eventually takes place, we could have easily landed in many different parallel universes.
Our firm embodies this attempt to cut off the left-tail of the risk-reward distribution and to position for favourable outcomes, hence the name ‘Asymmetrics’.
P.S. Though he hates limelight and is intensely private, I still wanted to give a shoutout to my co-founder GC. Asymmetrics is our joint effort and we have built the firm and developed these foundational principles together.