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B. G., Opalesque Geneva for New Managers:

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.

Part 1 and Part 2.

The multi-manager model 2.0: virtual prop trading

Zucosky joined forces with First New York Securities (now First New York) in 2008, a watershed year in finance. That's when he decided that he would never again invest in commingled vehicles. These vehicles had to put up gates when redemptions came in droves, as they contained a lot of illiquid investments which they could not sell.

At First New York Securities, he was tasked with outsourcing balance sheets to traders who would normally be hired to sit on the trading desk, but who already had their own identity as a hedge fund. The outsourcing was done through a separately managed account.

"So we replicated the trading desk experience with these traders in even a better way because we didn't have to pay them any salary. We didn't have to give them real estate. We didn't have to provide them with technology. We didn't have to give them health care. We didn't have to pay a management fee like a fund of funds would. And we could see the positions in real time and communicate with the managers about the risk, the returns, the opportunities, and the challenges."

The Lucidity model: TLC

That's when he pivoted and created the Lucidity model at Lucidity Capital Partners, which he founded in 2022. Today, he heads a virtual prop trading shop, with an equity market-neutral manager, an event-driven manager, a short-term futures trader, a crypto manager and many more alpha-driven strategies.

Lucidity does not provide money, but the right to trade only what is listed in the investment management agreement. This means that a technology manager will not be allowed to invest in an oil company stock, for example. "That's one of the ways that we control risk."

Lucidity's motto is TLC, that is, transparency, liquidity, control - a different motto from that of traditional hedge funds, which are notorious for their lack of transparency.

His firm is completely transparent, he says. "One of the things that we do that other people can or won't do is for $10m, a family or wealthy investor could open an account at Goldman Sachs in their name, and we would build a bespoke portfolio for them. There are no other co-investors. They can see every position, and they know that no one can run away with the money because it's in their name. The only person who can move anything is the investor."

Lucidity also provides liquidity, where investments are exchange-traded, with a low net exposure and little leverage. "There are no private equity positions, no real estate positions, no pipes, no emerging markets ... We want to be able to push a button and get out."

As for the control part, it means not sending money to a commingled vehicle, and the assets are controlled by Lucidity or the investor. "We know that nobody can run away with the money."

The people that are associated with the firm are senior statesmen of the industry and are sitting in the driver's seat as they have traded, have been a hedge fund manager, have interviewed thousands of managers, including some of the brightest minds in finance such as Warren Buffett.

Time to be the mice again

Zucosky thinks a lot of allocators have adversarial relationships with managers, but not he. He uses behavioural science. He wants to work in synergy with the managers, understand their relationship with fear and greed, their experiences, their previous mistakes and so on. He finds trading talent most often through word of mouth and occasionally invests in new managers.

He will only invest through separately managed accounts in strategies that he understands, that can provide sustainable alpha, that are uncorrelated, and that are liquid.

He also believes that "big is bad in the production of alpha." In the old days, the hedge fund was the mouse that was running around the feet of the elephants. Now, the big hedge funds are the elephants. It is time to be the mice again.

You can watch the whole interview here: www.opalesque.tv/hedge-fund-videos/thomas-zucosky-lucidity-capital-partners/1

Investors from 30 countries are interested

Investors from 30 countries participated in a recent interactive Opalesque Investor Workshop:

Multi-Manager Investing 2.0: How Lucidity Capital reinvented the model

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?

You can access the user-friendly video replay here: www.opalesque.com/webinar/index.php?id=82#pw82

Related articles:
Perspectives from four decades of hedge fund investing - Part 1
Perspectives from four decades of hedge fund investing - Part 2

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