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Thomas Zucosky B. G., Opalesque Geneva:

Thomas Zucosky, one of the true veterans of hedge fund investing, joins Opalesque founder Matthias Knab for a candid and wide-ranging conversation on four decades of financial innovation, hedge fund evolution, and investment philosophy.

Thomas Zucosky started on Wall Street in 1981, "a time of very interesting financial engineering." He ended up leading the financial futures section at Shearson American Express in New York City. Feeling disillusioned with the sell side, he moved to the buy side as a registered investment advisor and then created the hedge fund house Aegis Capital in 1985 with two partners. "We were doing program trading, equity market neutral, dividend capture, and futures trading. And it was an exciting time." The money was easy in those days, he adds.

As he started a family, he moved to Princeton, New Jersey. He started working out of Olympia Capital's New York offices and running the Stars Fund, a fund of hedge funds that allocated capital to the who's who of the hedge fund community in those days, such as George Soros, Julian Robertson, Michael Steinhardt, Bruce Kovner, Steve Cohen, Ken Griffin, Paul Tudor Jones, Monroe Trout, Lewis Bacon and Leon Cooperman.

Who bought hedge funds and FoHFs in the 1980s and 1990s

In those days, the majority of investors were individuals, some of whom were introduced to the funds by Swiss private banks. In the U.S., they invested in limited partnerships, which did their own fund administration. After Bernie Madoff, they started using third-party administrators.

Most investments were small. And it was very much an introduction game, where introducers would get a kickback and keep their contacts close to the vest. When the internet became widespread, it was no longer about who you knew, but rather about what you knew. Investors had to start understanding strategies they had not previously understood.

Two kinds of hedge funds

In the 80s and 90s, there were two kinds of hedge funds, he says: the aggressive ones with high volatility and low Sharpe ratio, and the steady ones with low volatility and 10-12% yearly returns. Those funds trying to produce consistent rates of return in order not to scare investors eventually led to the phenomenon of Bernie Madoff.

Style drift and global macro

All the big funds of today started small, with $50m or less: Paul Tudor Jones was a cotton trader and Ken Griffin was a bond trader, for example. When their assets grew to large sizes, many "style-drifted". Many also got into global macro. "Global macro is the last resting place for managers as they grow their assets."

In the 90s, managers such as George Soros would have feet on the ground in Brazil to see what was going on in Brazil, for example. But the internet levelled the playing field by providing information about everything to everybody. So the "feet-on-the-ground" edge went away. "There were no more global macro managers because they couldn't figure out how to create returns that weren't that information arbitrage," he explains. "Now, it's come back for other reasons because you've got technology, AI and other ways to take advantage of these opportunities."

The second Lamborghini

Professional allocators worry when managers move from an incentive-fee-based business to a management-fee business. The latter model means they are just collecting assets - and trying not to blow up by becoming less aggressive. "Typically, I want to rotate out of a manager once they're in that management fee side of the business."

There is a joke in the industry that says if you see a manager buying a private plane or a second Lamborghini, for example, that's a telltale sign.

Many hedge funds start out by claiming a limit to their capacity, say, $250m. If they gather assets beyond that limit, it means they have hired people to do the same thing, investing in their core competency. But there is also the possibility of style drift, that is, moving away from their competency.

Investors from 30 countries interested

Investors from 30 countries participated in a recent interactive Opalesque Investor Workshop "Multi-Manager Investing 2.0: How Lucidity Capital reinvented the model" with Thomas Zucosky.

Here are some of the questions Tom addressed:

1. As an investor, I like your TLC (transparency, liquidity, control) concept. It sounds like the holy grail of investing. So tell me, why isn't everyone doing it?
2. What do you believe are the best measures of risk-adjusted returns?
3. How will AI impact not only trading, but also the analysis of trading? Will AI negatively impact human trading talent? Or, will AI put you and other allocators out of business?
4. Do you invest with emerging managers?
5. How do you compete with the big platforms in retaining talent?
6. Do you offer any customized mandates for Strategic partners or allocators?
7. Which brokers are you using for the SMAs? Which PMS/RMS technology are you using to manage the portfolio in real time?