Episode #06. featuring. Chris Solarz, Adam Duncan, and Freeman Wood

Transcription

1 Episode #06 featuring Chris Solarz, Adam Duncan, and Freeman Wood

2 Introduction Welcome to CME Group's podcast series on managed futures. My name is Niels Kaastrup-Larsen, and I'm the host of the podcast Top Traders Unplugged. Today I'm delighted to welcome you to a series of short conversations with industry leaders in managed futures. On this episode my guests are Chris Solarz, Managing Director, Global Macro Hedge Fund Strategies at Cliffwater, Adam Duncan, Managing Director at Cambridge Associates as well as Freeman Wood, who is a Partner and Head of North America, at Mercer. 1

3 Niels: Just listening to your answers and, obviously, there's a lot of agreement between the three of you as to how you look at these things. Is there a risk that you end up with the same universe of managers and therefore we not only get a concentration of assets, like the HFR report suggests, but also that we might kill innovation? Meaning, that smaller managers simply don't have... that there's not enough demand for them to succeed and therefore the whole innovation starts disappearing Chris: I think the incentive fee structure is always going to be there. It can be a very lucrative industry, and I think any asset management group is very scalable. So, your management fee and performance fee on one hundred million is more than ten times profitable when you make it to a billion. So I think that that will always invite new entrants into the marketplace. But you're right, it's a very challenging place, and it's even more so today than it was in years past. And I think the low hanging fruit of alpha is largely gone. It's not so easy to be any of the strategies, right? You really have to be the best. So, I think that it's certainly a more challenging environment. I think the big picture to keep in mind, though, at three trillion dollars, we're still just a drop in the bucket of the entire global financial system. Freeman: There's a lot of assets out there, and it's getting bigger and bigger every day. People are looking for a return. In a low return world, people start looking for more interesting ideas. They look for new managers; they look for something different just to try and turn up time. So, I think that the demand will continue to be there. Niels: Just to put things into perspective for the audience, I read that your firm, Adam, according to some of your colleagues in London, talked about, that from a universe at about eleven thousand hedge funds, you narrow it down to around two hundred and fifty or so? That's on the recommended list, that's at least what's reported in an interview. I don't know if that sounds about, right? Let's just get a feeling for how many funds do your firms cover, recommend? What's the universe today. Freeman: That number is a little low. I think the total number... I think the number is a little high - there are about fourteen thousand hedge funds now, which is more hedge funds than Starbucks in the U.S. If I saw that 2

4 data correctly, (All laugh) which is a bit remarkable. But, I think about that we have a little over three thousand that we sort of touch and sort of monitor in the database. I think our recommended list across all strategy types is just under one thousand. That varies a little bit. We've trimmed it, we've trimmed some of those a little bit, so I don't know what the exact number is right now but it's more than two fifty, but not more than one thousand. I think that there are questions you can ask about how much of the universe should you research before you start picking things, and we're thinking carefully about... there are algorithms that can actually answer those questions. In some cases, I think we're a little over researched; and in some cases, I think that we're a little under researched; and we're thinking about ways to balance our research effort there. I feel like we do a reasonable job, I don't think that, if you looked at Chris's list or Freeman's, I think that there's less homogeneity than you would think. And I'm always surprised, when I come to these events, about the new funds. There's always names that I haven't heard of, or I'm surprised that there's just a lot going on out there. So I don't worry so much. We do have similar views on things, but I actually think that our Niels: Sure, sure.. Freeman: I would agree. I think that you see new managers all the time, but we have clients coming to us with ideas of leadership that we've never heard of before. Part of what we do, in our group, is we do the spoke work for clients to do reviews of their managers, so they may not be on any consultant's list. We get to see some of those very small, two to three person shops, and that's always interesting to see what's out there. So, there's always a flow of ideas, but I think that you need to balance not only the breadth of your coverage but the depth of your coverage. I think that, to Adams point, you need to make sure you spend enough time on quality managers, and you're touching them often. The depth of coverage is important - trying to find some emerging two-person manager that is going to drive alpha over time. You need to balance that, that's important Niels: Sure, sure. 3

5 Niels: I want to jump to another topic which is somewhat related to what we've discussed so far, and that is that in recent years, and Chris I think you mentioned it earlier, investors (including consultants) have complained about the performance of their hedge fund managers, including the CTAs as you mentioned. Now E-Investment just came out with a report titled, and I quote, "2016 Ends the Best Year for Hedge Funds Since 2013." It goes on to say that hedge fund return, on average, was around 5.35% for the year for This, of course, was following one of the few negative years on record for the three trillion-dollar hedge fund industry. But the flows in 2016 appear to highlight increased dissatisfaction with the industry, and substandard 2015 returns. The article goes on and concludes, and I quote, "However, despite some highprofile declines, the average hedge fund outperformed an equal weighted equity/fixed income benchmark for the second consecutive year and several segments showed that 2015 may have been an anomaly for the industry." Firstly, let me just ask you where you stand on this? Are you generally happy with the performance that you get from your universe of alternative managers? Freeman: Overall, we have, generally, been unhappy with hedge fund performance over these past few years. We have written a white paper that shows that over the cycle, good hedge funds can produce three to four percent of pure alpha when we struck out all the betas. And this is not very sexy of a return stream, but this is the reality of it. This is what hedge fund should be paid for - for the real alpha produced, and that's quite well. So the hedge fund performance is cash plus beta, plus alpha. In different environments when cash was higher, or when they took more beta, or they take more beta, you can get more impressive returns. But even the Alpha has been flat, hit negative, over these... from There was, first, in 2011 we saw a lull; 2015 we saw a lull. So, in general, people haven't been too happy with this. I think the bigger picture is that we've had a run of a bull market that's gone up three-fold since March 2009, and we haven't had a reasonable pull-back in S&P in nine years. So, everything gets benchmarked to equity indices, whether we admit it or not. 4

6 People keep an eye on... "What could I have done if I'd simply stayed long in the market?" This has led to an environment where just about every mutual fund, which is long biased, has out-performed every hedge fund over the past seven years. We have three-year trailing metrics; we have five-year trailing metrics, and we're well past these. So, everything you look at is simply a very, very difficult environment for anything, for any trading strategies. Partly because of the global coordinated central bank policy that suppressed volatility. Surprisingly, with all the unforeseen... all the big questions that are still out about with Trump; with China's inevitable credit bubble; and the big question still is, is Europe going to exist - is the European Union going to exist by the end of this year? With these things, you would not expect that people would be so complacent that volatility... that the VIX would have a 10 handle. I want to think that the expectations are that we're going to continue to have increase in equity markets. You don't need hedge funds if you have a forty-five-degree angle, no volatility for equity markets. Right now, where we see equity markets are at all-time highs at many places around the world (particularly in the U.S.), and fixed income markets, largely, are still at all-time highs. Yields are at nearly all-time lows. They're off the balance from November. In general, that's kind of where we stand. This is, I would argue, the time that you need the hedges. If we could go back in time, we probably would have advised all our clients in 2009 to simply be long only, and then wait. Fast-forward to 2017, now is when you want to be in hedge funds. Adam: I agree, I think people lose sight of the fact that hedge funds have done a very good job for our clients over the last fifteen years, and many of those strategies did fabulously well. Distressed investing, we were early into distressed investing and that paid us handsomely for thirteen years. And as more money has come into the industry - we've talked a little bit about the changes in risk preferences and the decline in volatility. I think it's a little early to say that hedge fund investing is done, or over, or whatever. There's just not enough evidence to say that. A lot of the strategies that we have invested in have rolled over in the last couple of years. They've had little bumps in the road here, but I think it's premature to suggest that, "Let's throw it all out and go passive." I think that would be a mistake. I wouldn't recommend it. 5

7 Freeman: Yeah, I would agree as well. I think that when you look at when a hedge fund excels, it isn't in the last four or five years. The environment isn't conducive to it. Low volatility, low returns, when you're looking at a strategy or a set of strategies that benefit from high volatility and have high fees, therefore need high returns to generate the amount of alpha. It's just not a good environment for it. When you look at it in the longer period, when you throw in some volatility, and you throw in uncertainty, you see why hedge funds matter, why alternatives matter. That environment certainly is more likely to occur in the future given the political change, given the economic change that we're facing. So, I would agree it's way too early to say hedge funds don't matter. Chris: I think that the biggest criticism I have for hedge funds, over the past eight years, is that these guys are getting paid the big bucks to see the future. What they collectively missed was that Bernanke put, the Yao Ming put, the Draghi put, the simple fact that risk assets (any risk assets) were what you want to hold. I think they, perhaps, were too hedged or too biased. At the end of the day, clients do want to make money, and I think they've been disappointed by absolute returns because hedge funds, perhaps having been too cute over the past few years. When hindsight is 20/20, it's certainly easy to say. But, I think we give these guys a lot of fees, and we can expect a lot in return. What they collectively missed was with this risk on up Niels: Well speaking of fees, that's usually the other thing that comes up in the press now, and that is when we talk about disappointing returns, then it's also mentioned that there should maybe be a need for lower fees. I think, in fairness, it's not just investors. I saw that one of your colleagues, Albourne Partners have talked about angry dollar fees, where they refer to the fixed management fees and how, in their opinion, they should be reduced. Where do you stand in this discussion and what are the right kind of fees, and what are the right levels of fees now-a-days. Adam: I always use this simple little coin flipping game to demonstrate one of the reasons that fees need to come down, which is that... Let's play a game. I'm going to flip a coin every month, and if it comes up heads you win a nickel, and if it comes up tails, you lose ten cents. That is basically a 6

8 very similar game to a two and twenty fee structure. Two and twenty plus expenses on an annualized basis is about half of the gross. So, it's not unlike this game where you win a nickel and lose ten cents every month. So, if you play that game ad infinitum, then the expected value of that game is about negative two and a half cents. And so, a natural question to ask is how often does the thing must come up heads for me just to break even? And the answer is about sixty-seven percent of the time. And so, for me to make money that thing has to come up heads more than sixty-seven percent of the time, let's call it seventy, seventy-five percent of the time. So, in any activity that you can think of where there's luck and skill involved and a high degree of randomness, where are you going to get seventy percent or better edge before you make a bet? In other words, our due diligence must get us all the way to a seventy percent conviction level before we can want to play this game under a two and twenty fee structure. So the reason that fees need to come down, in my view, is not some moral high ground on who makes money and who doesn't, it's because I can't get through my due diligence, I can't get the conviction level high enough in order to want to play the game. Fees must come down so that, through my due diligence, I can get to a level where yeah, I think I can play this game and still make money. So I think there is a misinterpretation that we're just taking the high ground on how much money people are making. No, it's just that I can't play this game with my research tools under those structures. Niels: Which fees do you want to see come down? The management fee or the performance? Adam: Well, all of it really. I think all of it needs to come down. I think you need to be a little bit careful about lowering the trade-off between fixed fees and incentive fees - lowering a fixed fee and bumping up the incentive fee. It appears that aligns with investor's interest, and it does in the single manager case. But in the case where the client's holding many managers with many performance fees spread around, those incentive fees end up being a strong disincentive to diversify. 7

9 The more you diversify, the more likely it is that you're going to end up paying fees to some portion of the universe and end up with zero return. And so, there's a strong disincentive to diversification, and that is sort of opposite to the entire message that we tell clients, that it's a good idea to diversify. So yeah, I think you need to be a little bit careful. I think that the overall thing is that people should go for fixed fee structures that are low and reasonable. Chris: I think that the reason that fees are such a big issue, it's really a symptom of the disease that is hedge fund underperformance. If everyone were making big, big money people wouldn't worry about paying higher fees. So, I think that it's a plug in order for the LP to take more share of the games by paying lower fees. I think this has come up a lot, and a lot, over these past few years, and we've seen a lot of different innovative structures. And just to name a few of them, which I think are interesting, clearly, the two and twenty structure is dead. Two and twenty no longer exists, even for the blue-chip managers, I think that has come down. So, is the new two and twenty the one and a half and fifteen? Perhaps, something like that, that's the starting point I think. But we're seeing discounts for longer lockups, we always see three-year class, or five-year class, we've always kind of seen that, that s nothing new, but we're starting to see more of that. We're seeing discounts for larger institutional share classes. One thing I'm starting to see a little bit is declining management fee as AUM grows. So maybe it's one and a half until five hundred million, and then everyone at five hundred million now pays one percent. I like that. I think that aligns it. One thing I've seen is discount for loyalty. So, you get an extra twenty-five basis points off your management fee every time you've been invested for four years. Performance fee hurdles, I think this has been used quite well in private equity space. It was interesting, this week, to see three different start-up managers with five and ten percent hard hurdles. So, if you make ten percent gross, the manager doesn't take any performance fee on that. He must make twenty percent gross to be able to take performance fees on that ten percent difference between the twenty and the ten. 8

10 And finally, we're seeing clawbacks on incentive fees. I think part of the evolution, as well, is we're seeing lower, cheaper versions of your main fund. So, you can get a different flavor for a cheaper fee but still with the same investment process of the name brand fund. Freeman: I think we're seeing more creative fee structures. I would totally agree with you as there's more pressure. I think you're right; I think Adam, particularly. If you return a payday of hedge funds and have those huge returns, people would care less about those fee structures. You know they're going to be excited about the return, but I'm not sure if we're ever going to get there again, certainly not in the near term. One of the things that we think is important though is that there's more and more pressure on fees. You really start doing your due diligence on what's included in those fees versus what is being charged to the fund, and we're seeing that particularly smaller managers, are starting to embed cost into what the fund pays for, and therefore the fees look like they're coming down. But, all the costs are really eroding your alpha in other places by burying it. So, it puts a lot of emphasis on your due diligence process to understand, not just the fee structure, but where the costs are going, who's paying for what. Niels: I don't want to ask any controversial questions, and of course I do it with the greatest respect for all of you, but in that discussion, do clients actually also maybe ask you to consider your own fees because you're a part of the process of selecting the managers, and so on and so forth, or is it mainly now that the focus more on the manager fees? Chris: Both, we've seen decompression across the industry, for sure. 9

11 Freeman: I think people will spend their money where it makes sense. So, when you think about what we all do: the due diligence we do, the research that we do, I think clients understand the value in that, not just for the intellectual capital we're bringing, but also the time we spend and that they really can't do that. So, I think that's where you see clients willing to spend. Whereas, if it's just broad fees, they're going to look at what value they're getting. Going back to the earlier discussion, we talked about the spectrum of services that we provide, from everything from just pure tools for the "do it yourselfers," all the way through delegated, and we're doing all the work. Clients all along that spectrum are looking for, "What value am I getting for the fees I'm paying?" If you can demonstrate that they're very willing to pay that, if you can't then obviously their going to put a lot of pressure on. Niels: It kind of brings me on to just the next topic which was, we already touched upon this a little bit, and that is the cheap alternatives. Especially, obviously, I see it a little bit from the trend following or managed futures part, but we've seen funds in that area, where they've gone from... I think last year one of them grew by almost six hundred percent to close to three billion. It seems like everybody just loves this. However, I don't really see a lot of evidence yet that long-term that these funds outperform the best trend followers, for example, in the world. So I wonder just, is the headline fee more important to you and your clients than then net returns after fee? Adam: I think that attractive fees are necessary, but not a sufficient condition for investment. I think we're not going to invest in something that doesn't have attractive fees. We are also not going to invest in something that just isn't of high-quality. And this is what makes for negotiation, right? You know you have something for high-quality; you don't want to sell it cheaply. We would like to buy high quality things cheaply, and so we have... the table is set for negotiations. 10

12 And to Chris' point, I'd like to reiterate that, is that it is a negotiation. It is not running around beating people over the heads just to get lower fees. I am very much in favor, and we do this in our negotiations, of structures that put the ownness on us to earn our way into more attractive fees. I think the relationship between manager and consultant can really deteriorate when they make concessions, and then we don't deliver any assets, or we don't deliver the kind of client interests that they were expecting. So, a fee structure that steps down as our level of interest grows, and so on I think it's fair and helps put some of the pressure back on us to really help raise assets for them. Freeman: I think that's important, and when you think about it broadly, sort of fee for value, beating down custodian for example; or beating down a manager, or any service provider to a level that isn't sustainable doesn't add value in the long run. So you have to really look at the value that you're getting in the partnership you have with any provider, whether it's s a consultant, a manager, or a service provider like a custodian. We spend a lot of time on that because that's where you can get a lot of value. You can save some costs, but really getting value is what you're trying to achieve. Niels: I mean we're recording now in the early part of 2017, and clearly 2016 was a very eventful year, certainly on the political scene. Maybe I can come to you first Chris on this one? What's your biggest take away from 2016, and have you learned something new from a year like that. Chris: I think we learned a lot. I think the rise of populism is alive and well. I think that is one of the biggest risks in Europe right now for... is developing with the European Union. So I think there are a lot of risks, and with risks, provide opportunities. So it feels good to be on the hedge fund side, that there will be tremendous opportunity this year, and with tremendous opportunity last year. We saw the rise of voters right? We saw Brexit, we saw the U.S. elections, and we saw the Italian referendum - three very big voter turn outs for all three that changed the course of human events. I think we'll see a lot of them coming up this year: we've got the Dutch elections, French, German, perhaps Italian as well. 11

13 So, I think it provides a lot of opportunity and, for the first time in awhile, I feel like this will really set up a great opportunity for some of these hedge funds. Because volatility should be greater, and the opportunity... A lot of these big events haven't been priced into markets. For example, the two-year note in Spain is trading under that of the U.S. you know, it's trading closer to zero. That doesn't make sense considering the potential for unrest in Europe, so there's a lot of asymmetric opportunities that managers can capitalize on. So, from that perspective, it's a very exciting time. Niels: Do you all agree with that? Freeman: I think volatility creates opportunity, particularly in traded asset classes. The big learn, personally, was that I didn't realize volatility could go so low in a world where it looked very low. That s the big surprise to me, and the community, is that volatility came down to where it did. One would expect that volatility should come up. Niels: Sure. Obviously, one of the big turning points was really the interest rate and bond market turn which suggests that maybe the thirty-five-year interest rate cycle has turned. Adam, when you think about that, does that change the way you want to allocate within the alternative space? And if you could influence the overall portfolio in term of how much is allocated to alternatives overall, would that also be influenced? since it's such a big talking point within the institutional world. Adam: I don't think that my views on allocations to alternatives will be overly influenced by the level of interest rates. I think that very few people will be successful in making money, being short interest rates, or making big bets about higher rates. I think that would be a very difficult and disappointing trade for people who try it. I do think that people underestimated how well fixed income, generally, would perform despite the levels of rates over the last couple of years. I think people underestimated how well just being long fixed income was going to do, and I think that was somewhat of a mistake. 12

14 I think the trend followers and the crisis alpha folks need to be a little bit careful here. If you would get a protracted sell-off or even a shorter sell off, and CTAs were not long fixed income, at the time, that the crisis alpha could be impaired. So, I worry a little bit about the potential for an equity correction when trend followers are neutral fixed income which is what sort of what happened after the election. But I think that if it's going to be a protracting correction that the systems will be quick to get back into fixed income and that that shouldn't be too much of a problem. But, there is the potential here that if you get some volatility in interest rates, and systems get neutral fixed income, and then you have an equity correction, that crisis alpha would be impaired. Chris: I think that's the big worry, that we're going to have the simultaneous sell-off of bonds and equities, like we saw during the Taper Tantrum in 2013, and these periods are particularly troublesome for strategies that are predicated on the correlation holding up - the negative correlation between bonds and equities; that when equities sell off there's a flight to quality in fixed income. So this could be particularly troublesome. One thing that I've seen with this trend, and it's come back full circle now, is that five or six years ago one of the biggest questions at all the conferences was, "How is your portfolio positioned for the inevitable rise in interest rates?" Then it didn't really begin to work because interest rates kept coming down, and then when we had negative interest rates, we realized that the whole lower boundaries, now, were unlimited to the downside. We had Draghi do it, and then in Japan; last year I think we realized, collectively, that negative interest rate didn't work, and now the pendulum is swinging again. Now people, especially after we saw the huge sell-off in global fixed income after the Trump election, we're starting to ask that question again over the past two months, "What about the inevitable rise of interest rates?" So that's going to be at the forefront of everyone's minds as they're considering their portfolios. Niels: Sure, sure. 13

15 Freeman: I think what's interesting is that a few years ago, when people looked at interest rates and said, "Okay, well, we're getting close to the bottom; we've got an asymmetrical probability, so let's start betting on that rise." Then the prospect of negative interest rates changed people's perspective. What can happen even when you have a much higher probability of going up based on history? It changes people's perspective. So, I think that has been an interesting phenomenon, but I would agree that people realize the downside isn't unlimited. For many reasons, it is somewhat limited and therefore prospects still exist to move forward with rising rates and how you're going to protect yourself - or not really protect yourself, it's just how you want to position yourself, and what makes sense relative to your needs. Often you ignore the need. What do you need the money for? For retirement assets? Is it a pension? Is it an endowment foundation? And when is that need going to occur? Then you start thinking about, well, do I really care about short term movements or is it more important to think about what the long-term view is and how to position myself to match those needs - whether they're liabilities, or investment needs, with the investment thesis. Niels: Sure, sure. I know we could talk about this for much, much longer, but I want to start bringing our conversation to a close, and I want to invite... Since I've been asking most of the questions, I want to invite you to maybe bring up something that you think that I should have covered, or a question to one of your colleagues that you want to ask them before we sort of end our conversation. So, I'm going to start with you Chris, either a thought or a question you think would be relevant at this stage Chris: It's a good question. I'd like to maybe just pass the questions. I don't have a pressing question, we've covered a lot of ground, and a lot of good ground. 14

16 Freeman: What's been interesting, in this dialogue, for me, is the similarities of views in several areas, so that's been very interesting to me. We come at our jobs a little bit differently, and our responsibilities are a bit different, but our views seem to be very consistent with the areas we talked about, so I would agree that this talk has been very good. Adam: I think that, for me, over these last months and leading up to this conference and preparing for this the biggest concern is the wall of money that's come in and the risk preferences attached to it; and the response from the managers which has led to sort of a systematic decline in the amount of risk that's being taken; and the forward looking sharp ratios of and prospects for alternative investments, and I think that people... I think the real risk here is that the investments are just under risked and will possibly deliver similar sharp ratios in the future but at potentially lower levels just because the amount of risk taking is lower. Freeman: Do you mind if I ask you a question? I think that's a great point. Do you think... what is the contributor to that? And do you think it's (we spoke before), do you think it's that people are having much more shorter time horizon in view of risk management? And is that driving a more riskaverse culture, or what do you think? Adam: I think that there are two things, I think one is that a lot of the money that has come in does have lower risk preferences; and they've brought a lot of money with them, and a desire not to lose 5%, not to lose 10%. The amount of risk that a manager will run, under those sort of conditions, is very low. If you don't want to ever lose more than 5%, you run a very, very low level of risk. You look at the amount of risk that people are running and it's kind of consistent with those objectives. So that's one, just general lower risk preferences. 15

17 The other I think, and this was... I had a great conversation with one of the large multimanagers out there. I think that some of this comes from this high performance, in some ways, "survival of the fittest" culture, where if you don't make money you're out, and people have stop losses that are set at 10%. So, "Do your thing, and if you're not down 10%, you know you're good." But the perceived stop loss is much tighter. The manager who's sitting there trying to generate money knows that if he's down 2%, they're going to start watching me, and if I'm down 3% then I'm going to go have conversations, and there'll be a weekly update thing going, and if I'm down 5% I'm probably out of here. So, if you're setting risk limits on your traders and the folks who are trying to make the money, but the perceived stop is much tighter, then it's very hard to get that person to take risk. I think that some of the high-performance cultures are contributing to a lack of or an unwillingness, on the trader's part, to take risk. Freeman: Yeah, I think when you look at a lower return world outside of pure equities the penalty for being wrong or having more volatility is higher. So, people will look at risk adjusted returns, and if you have more volatility, they're going to be concerned because you don't have the returns to back it up. But, to make returns you must take risk, everyone would agree with that. Chris: This plays very well into our discussion on fees because as people are taking less risk, they're making less return. But, they've kept their fees constant, therefore it's a sneaky way of making investors pay higher fees per unit of risk, and therefore per unit of return because their taking less risk. In that sense, everybody loses. Freeman: That's right. 16

18 Adam: And this is another thing about the fees, the reason that the fees must come down is because risk taking has come down. In effect, the price of the fund is more than doubled just because of what's happened to the risk taking. So, these funds, even though the fee headline number has stayed the same, the true cost has more than doubled because the risk taking is so low. Freeman: Agreed. Adam: So my fear, for the alternative industry, is that we've pushed the managers to take less risk and as a result, the returns will be very consistent with their historical sharp ratio, possibly lower because of the increase in the number of players. But, we've got to get the risk up if we want to make any money in this, and I think that's a real problem Niels: And therefore do you, since you've had the biggest conversation with the institutions, do you have to go back to them and now educate them and saying you... I mean we all know the pension funds, for the most part, are underfunded anyways so do they need to understand that they need to allow to take more risk? Adam: I talked to one of the large managers, that we would all know, and he said, "Look, we have three share classes, ten, fifteen, and twenty, and everybody chooses ten." Everybody picks ten. So, it's not to lay this all at the feet of the managers, they're acting quite rationally I think. I think as an industry, though, with the amount and the types of money that's come in, we've pushed things to cater to a very low-risk preference, and that to me is quite troublesome. 17

19 Freeman: I think when you start to see more volatility, and more opportunity for higher returns, I think people's risk appetite expands. So, they say, "Okay, I'm willing to take on more to see the opportunity. Maybe why this risk appetite has declined is because people just don't have an expectation, outside of hopefully equities, but the expectations of returns are going to be there to support the level of volatility that... which is, sort of, a self-fulfilling prophecy in that they're worried about returns, and take less risk, but you re going to get less returns. Adam: I think there's also a little misperception too about volatility and the nature of volatility. Volatility is generally destructive for asset owners. To the extent that people... you know volatility is generally good for market makers, and traders, right? You have many opportunities to kind of be on the bid, be on the offer, and can do things with volatility. But, for asset owners, volatility is generally destructive. To the extent that people have decreased their trading and just have taken on longer term thematic views that are more sort of an asset owner position. I think more uncertainty and volatility is likely to lead to destructive outcomes in our alternatives than to provide great opportunities. I think you got to be careful, like wishing for more volatility, and so on and so forth, could be quite destructive. Niels: Well on that cautionary note, Chris, Adam, and Freeman, thank you ever so much for sharing your thoughts and opinions on managed futures and alternative investments in general. I really appreciate your openness during our conversation today. To our listeners around the world, let me finish by saying that I hope you're able to take something from today's conversation with you as you continue your own investment journey. If you did, please share these episodes with your friends and colleagues and send us a comment to let us know what topics you want us to bring up in the upcoming conversations with industry leaders in manage futures. From me, Niels Kaastrup-Larsen, thank you for listening, and I look forward to being back with you on the next episode of Top Traders Round Table. 18

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