Capacity Constrained by Design: The 25-Year-Old Building Niche Multi-Manager Hedge Fund Platforms | Zach Levitt
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Before we get started, I just want to do a quick disclaimer that nothing we say here is investment advice, as well nothing we say is marketing or advertising for Six Turn Capital or Opus One Asset Management. Everything is meant to be informative about the fund management industry. Hello, everyone. Welcome to another edition of Other People's Money. I am joined today by Zach Levitt, CIO and founder of Six Turn Capital and Opus One Asset Management. Zach, thank you so much for being here today. Thanks for having me.

Zach, you are definitely going to be the youngest person we've had on other people's money. Your path into managing other people's money is not normal. You really came into it directly from trading your own capital and from coming out of school. Can you talk to me a little bit about taking the path and really skipping that traditional role that people have as an analyst working underneath somebody before they go out and try and launch their own fund?

Yeah, absolutely. So I definitely took an unconventional path, but it was the path that was right for me. And I was always interested in investing initially from a fundamental more longer hold time standpoint, like most people start. That was when I was in high school. And then when I went to Queens University, as I was there, I founded a derivatives trading club. I saw that the way the market was going, derivatives were playing a bigger and bigger role in what was going on out there in the institutional space.

And then that gave me an understanding of a completely different type of trading. And I never even understood quant. I knew it existed, but didn't understand it until then. But I was lucky enough that a number of the top hedge fund managers in the world and portfolio managers in the world agreed to come and be guest speakers at our year-end conference. But then more importantly than that, even, they agreed to take me under their wing and mentor me. This greatly sped up my learning curve.

but also taught me that really a majority of the more successful people of the new era were heavily quant, if not completely quant. So I knew that I needed to learn that if I wanted to thrive in the way the market was transitioning. I taught myself to program in Python and then using my newfound Python programming capabilities, I found myself super bored when COVID hit, had a lot of time on my hands, as a lot of us did.

I was still an undergrad then. I learned that an undergrad program isn't a full-time job like it's made out to be when you take away all the social aspects of school and you're just staying at home. I wasn't in my university town. I was at home with my family. I had grandparents that I didn't want to bring COVID to, so I wasn't even really socializing with my friends like I usually would. And I used that time to read about the top performing hedge fund managers in the world.

I learned a lot from doing that. But then once I did a deep dive into a bunch of them, I came to the initially disappointing finding or interpretation that not all of them, not most of them, but a meaningful minority of them, once you did a deep dive, had returns that hinted at that they might have had some nefarious inside information.

in the way the return structure looked. And that disappointed me because one, that's illegal, two, that's morally wrong. But then after sort of stewing on that and being disappointed, but being bored, I thought, well, what if for a fun project, I used my newfound programming skills to come up with an alpha capture strategy based on publicly available filings of the top hedge fund managers that I thought had a pattern that they were likely cheating?

where just doing big data analysis to draw inferences on their publicly available filings, I would then try and see if I could come up with an algorithmic trading strategy that would benefit from leapfrogging and copying those types of trades that were likely to be an insider trade based on them getting crazy high performing returns in the same types of situations again and again and again. I did that across all sectors initially.

That worked really well. But then I thought deeper and asked myself, well, if this was going on in all sectors, what sector would have the highest informational value? And that led me to biotech. Because obviously, if someone knows the answer on Apple earnings, they're going to make some money, but they're going to make a couple percent by going long or short. Or if someone knows the answer on a phase two drug trial for one drug pipeline company, then by going long or short, if they get the direction right,

they're going to make 50, 100 plus percent on the move. So then I looked at the top biotech managers, isolated not just which ones were the best overall, but which ones had patterns where in the same types of situations before Catalyst, they were doing too well again and again and again and again. And then I wanted ones for their patterns that were quite doable to pick up on by doing big data analysis. And that led me to finding a basket of a few

biotech specialist funds that I found patterns that they get most of the return attribution from the same sorts of situations again and again. That created a basket of 20 stocks that would be my portfolio at any given time. And then I used that one compelling idea, but then also the data of that backtest to then raise a proof of concept amount of money, a few million dollars,

And then I traded that along with my own capital for the last four years and change. And when the biotech sector had a historically horrific stretch of returns, then my strategy held up very well. And that led to a lot of institutional dialogue. Initially, I was thinking that after that proof of concept, I would then launch a hedge fund that would just trade biotech. And I might hire one or two people.

assist me in that, but it would be the same strategy. Though throughout that journey, I got to be lucky enough to communicate with some of the top niche portfolio managers out there that I met through some of those mentors. I met through x.com, which used to be Twitter, on FinTwit, all sorts of places, through LinkedIn networking. And it showed me that there were other people like me out there doing compelling things in a differentiated

high alpha load way. And then I thought instead of just me doing my strategy in a fund, I wanted to create a multi-manager product that benefited from those truly uncorrelated return streams of niche portfolio managers that had high Sharpe ratios and high alpha loads because they were doing truly unique and differentiated things that just can't scale huge. And then it would essentially be taking the structure of a millennium

But then leaning into my difference, instead of saying it's a weakness that I'm not as capitalized as them, I'm going to say, no, I'm going to lean into that, make that perceived weakness a strength and target PMs like me, but in uncorrelated places to me so I could put together a higher quality return stream than the large platforms can purely because I'm leaning into going where they can't trade because they're too big. Now, what gave you the confidence to say, I think that this trading is nefarious versus, I mean...

everybody, every fund manager on the street, whether they have good returns or not, talks about how great their process is, how they have, you know, access to data that nobody else does. What gave you that confidence? So a few things. And one of those would just be the persistence of the alpha was a big one because I think we've all seen pretty high quality return streams that still have hot and cold periods. And

Boundary conditions are important, but then if you see something where a manager in a really volatile space has a type of edge that's way more persistent than the space, and even in horrible boundary conditions seems to hold up wildly persistently, then it doesn't prove that it's nefarious, but it shows that that's one likely explainer. But then from my perspective, let's say one of these managers just found a truly superior process to analyzing the science.

If we can hop on the same trades as them that they're benefiting from, and we benefit from that cutting edge research that they're doing to a higher degree than has been seen before, that's fine with us too. But you seem pretty confident that it was nefarious. It's certainly quite the hand grenade to throw out there. So why choose to say that that's why you think it is versus just, oh, these guys are so good? We think that there are people that are

average, worse than average, better than average, and then even really good or really bad at things. But then there's just a level of persistence and alpha load that truly would be a breakthrough process, which is possible. Or it could be someone having nefarious information, which is also possible. We think that nefarious information would explain it.

pretty easily and is the most likely. But yeah, there's a chance that they just had far superior processes in a few situations that were really repeatable again and again and again. And as long as we could benefit from leapfrogging on that

The cause of that doesn't matter to us. And given that we're just doing data, big data and inferences on publicly available information, obviously what we're doing was fully within what was public info. And then just saying, we think that these people know too much and whether they know too much for good reasons or bad reasons.

Who knows? Now, these niche managers that you have found that you think are interesting to put into a multi-manager book, you said some of that came from going out and trying to raise money for this strategy that you ran. How else did you meet these niche managers? And what is an attractive return stream from a niche manager to you? What does that look like? So I met them lots of places.

through mentors, personal contacts, through cap intro desks for some of them and a number of other ways. But then the meat of your question, what's interesting from a return stream standpoint for a niche manager? Number one,

they have to be uncorrelated because if they're doing something that is niche but is perfectly correlated, then it doesn't really add much of a genuine diversification effect to my platform. And obviously in the multi-manager game, the math is that you have a number of truly uncorrelated return streams that then gives you a platform level sharp that is pretty hard to recreate in most other approaches. So that's the big thing that they're uncorrelated. But then I also want to see someone that has...

quite a high sharp. Sometimes it's a wildly high sharp, not an HFT level sharp or anything, but I'm talking like two plus. So that's high for traditional trading or investing low if you're talking to Jeff Yass or Ken Griffin, but I'm not fortunate enough to have their problem.

So I'd be looking for like too sharp uncorrelated. Are there some PMs on my platform that are below a too sharp? Yes. But then in that case, they would have to be even more uncorrelated for them to get back in line to making sense from a platform level sharp additive standpoint. And that's the biggest thing. And then also I want what they're doing to also be a repeatable process, not just that they were in some niche market, made a directional trade.

or a concentrated trade and then it went their way. I want it to be either systematic or mostly systematic. Makes sense that it's repeatable, one, from the data that it was repeatable, but two, even when they explain how it works, that you're saying, okay, that is something that should happen in the future. And then I also want them to have low beta exposure. I want them to be most of the time completely market neutral. And then beyond that, they need good risk management. So I want them to have really contained drawdowns

I want them to have low drawdowns relative to their average annualized return or their kegger, whichever one you're looking at. And then the other thing that's important is that they can clearly understand and explain their process. And I get that you'll say, oh, they'll never tell your secret sauce. But even taking that aside, there's a lot of people with a great track record when they explain how they achieved it. You're left scratching your head saying like,

Did they flip five coins and all of them went heads? Or do they have something there? And you don't really think they have something there, but then there's other people...

Where the track record is very consistent, shows a high alpha load, shows all the traits I was saying. But then they explain what they're doing and you're like, wow, one, I've never thought of approaching the trading problem that way. So then they're doing something new that has a chance to work well. But then also, aside from being new and differentiated, you realize, wow, it truly makes sense that there's a reason why that would make money in a repeatable way. And if they tick all of those boxes, then I'm going to be interested in adding them to the platform, but

At that point, I need to get to know them as a person and get comfortable assessing who they are and saying, okay, do I trust this person? Yes, we have high oversight. We have a risk management team that has access to everyone's book. It's not that we don't have that, but still, I want to have confidence that someone's going to be honest and truthful in how they approach the markets and someone that really aligns from a moral standpoint to what we're trying to build.

What level of correlation to you is uncorrelated? And I presume you're doing this to S&P 500. So we're doing it to a few things. We're doing it to the S&P 500. We're doing it to the Eureka Hedge hedge fund index.

Because even if we're uncorrelated from the S&P, but we're perfectly correlated to a basket of other hedge funds, we serve no economic value and shouldn't really exist as a business. So we need to be uncorrelated to both of those two things. But then also to increase our robustness of returns.

Our portfolio managers need to be uncorrelated from each other, not just other things that other people could invest in. So it's a difficult thing that we're asking of these managers, but because we're fishing in smaller ponds, it's possible. I'm not going to say it's impossible at the biggest sizes in the industry, but I think everyone has seen and believes that at a certain point, once you get big enough, even if you can still be a good product...

you're very limited in terms of diversifying from that point. If you look at the biggest platforms out there, imagine if your job was you're in portfolio manager business development at one of these platforms that runs, call it 20 billion on the low end of the name brand largest platforms, all the way up to some that run above 70. How are you going to find someone that's truly uncorrelated and can run enough size to make a difference? I just honestly don't think it's possible. You could find someone that's

correlated to someone you already have and is better and there's a business case to be made for bringing that person on and keeping the other or kicking the worst person out and replacing them but truly finding someone that's uncorrelated I just don't think you can do or if you did it would be a miracle and you couldn't repeat that or at the small scale we can so I think that's the biggest answer to your question did you listen to the uh odd lots podcast with Ronan from Allborn I did it was a great podcast and it was interesting to hear his thoughts on the space

One of the problems that he brought up was obviously the pay problem and that one of the ways to solve that is actually not to care so much about the uncorrelated nature of the pods. That actually, if you have a bunch of pods and some are up or some are down, it can create a problem of compensation. But if everybody's kind of doing the same thing together, then you don't have those years where the fund is flat, but you owe a guy a lot of money. Yeah, I definitely agree.

At the large scale, I agree with him that that's one way of thinking about it. But at the small scale where diversification is possible and meaningful, large diversification, not just tiny little splitting hair, little irrelevant amounts of diversification. And I think that though, yes, you have the netting risk that the LP is taking on and that you could be flat and someone or two people killed it and they wrote a lot of money. I think really diversification

That's a better problem to have if the expectation overall is that you could pursue an elite sharp ratio because you have genuinely uncorrelated people than saying we're going to just be trend following against a stop. And that's great because everyone's going to be up or everyone's going to be down. Is there like a numerical level of correlation that is sort of what you're looking for is like 0.5, 0.3? So we're even more aggressive than that, though it's possible for someone to be

More correlated than what I'm going to say. Really, we've not had an issue finding people that are very uncorrelated. So we're looking for like 0.20 or less. And then there's even a number of our managers when we put them against each other in our matrix that'll be negatively correlated to each other.

What if somebody has a high negative correlation? I mean, isn't that just as big of a problem? Yeah. So if someone was completely negatively correlated, then we would look at the return stream completely differently. And then it would almost be a tail product. And if we had someone that was a tail to our managers, that could produce value. But obviously, we would size that smaller, given that our managers, given their high sharp, are expected to make money a lot of the time.

So that's how we'd look at it. If someone was hugely negatively correlated, we wouldn't say, oh, forget about them, but we'd say, okay, that's interesting that they're persistently, seemingly heavily negatively correlated to our managers, given that our managers are uncorrelated to any traditional thing. So it wouldn't even be like a market tail hedge. It would weirdly be like a tail hedge to our proprietary mix of alpha PMs. But yeah, that would add value, but we'd have to size it small because like I said,

On a one-off basis, we expect our managers to make money, but all of them combined, we really expect to make money quite often. So someone that was against them probably wouldn't have a level of return that would be attractive for us to size up in any meaningful way. Yeah, that makes sense. Now, you mentioned multiple times you're looking at smaller ponds for these managers. How big a pond? So that depends, but how I'll answer it is it depends on the person's style of trading slash investing.

Sometimes it's not in a tiny pond. And then that would seem like I'm being hypothetical or I'm being contradictory, I should say, because I said we look in small ponds. But then how it would be an equivalency to looking in that small pond is if someone was also in the big pond that the guy at Millennium was in, my guy would be trading in a manner where he was turning over his portfolio a lot more and that would be his secret sauce. Well, the big Millennium manager in the same names,

Could move much slower and in many times would be kind of trapped in the positions that were big unless they wanted to push them around just to get in or out.

where we could be like little minnows in that big market and be trading it aggressively based on the same information that the Millennium PM has. And also we would be not needing to go down in the order book. We could be trading at top of books. So placing the same trade as the Millennium PM is much more efficient for us. So that would be the way that we would turn a large pond into acting like we're in a big fish in a small pond. But then other times it truly is

being a big fish in a small pond. And for size, regardless of which one of those it is, rather than the size of the pond, I more look at the size of the fish that we could be. And I view that by how much money their strategy could handle. And I want them to be able to handle at least 20 million. And usually, and this applies to most of my PMs, they could handle about 100 million

So with a number of PMs, my platform can scale to be a great business, but we want to intentionally never grow to the point where we're suddenly trying to compete against a millennium and saying we're smaller than them, but trying to be doing the exact same type of business. We always want to scale the point of being a good business, but then be a tiny minnow compared to a Citadel 0.72 belly-ass new millennium.

So in the case where a manager is a small fish, but in a larger pond where they're doing similar trades just at smaller size, aren't you there kind of like beholden to the ambition of that manager or the marketability? Depending, you know, some people might have the ambition to go be a millennium PM, but they don't have the.

pedigree or the ability to scale assets to where it would start to look more like that Millennium PM. That's not a big concern for us, just given the fact that the person trading the Millennium names would be turning over their book so many more times than the Millennium PM that they couldn't handle the same amount of dollars of GMV as the Millennium PM in those same names. So the PM is smart enough to be well aware that their process that allows them to have

an elite level sharp in those same names requires a level of turnover that can only be sustained up to, let's say, one eighth or quarter of the size of the book that's being run by the person trading those same names, but much slower at Millennium. What was the mentorship like that allowed you to come up with this strategy? I think it was a few things.

Luckily, there are podcasts like yours out there that are great ways where people from any background or any interest level can learn about very high-end institutional portfolio management. Prior to that, it would have been pretty much impossible to do what I was doing, given that it would be hard to find out who these people are, or even if you did, then...

You'd have to reach out directly without knowing a ton about them, basically saying just like, please give me a lot of your time to teach me. Or this way I could learn enough about them from some of them that post on x.com, what used to be Twitter. Some of them do a lot of podcasts. I could learn enough about them to get not a great understanding, but early out of the gates, I could get a good enough understanding to then when I reached out to them, ask them a pointed enough and interesting enough question that they would say, well, I want it.

talk to this kid and answer his question. And then from there, when I had their attention and I already got their attention by asking a good topical question about their expertise, then it was very natural for me to take the next step and say, I really appreciate you helping me this way. Is it okay if I stay in touch and ask you future things that pop up? Almost always people would say yes to that. And then they became what I refer to as my personal board of advisors, where whenever I had a question,

when I was optimizing the feedback loop that led to me creating the businesses that I have,

I could always go to them. I could always go to them and I could get a great answer to almost any question from any of them. But then what was really good was the odd time where I would ask all of them and none of them would know the best answer to it. They would always say, oh, I'll introduce you to this other person who's an expert at that one thing. And the next thing you know, my network grew. I have another person to add to my board of advisors and I'm getting world-class quality advice and feedback to my question that I'm asking everybody

throughout my learning curve. So that just really allowed me to bypass the timeline it usually takes people that are a traditional pathway, such as being an analyst at a bank, then being an analyst at maybe a multi-manager fund for many years, and then getting a carve out, and then running a small book there, then running a bigger book, then spinning out and launching. Though they get to learn all those great things, because they have all the other stresses on them of the day-to-day role of being the analyst,

Most of their time in that awesome learning environment, they aren't able to use to ask the PM to answer their questions where I was able to go to that quality of PM and

directly and foster a relationship where because I wasn't their analyst, I could just reach out to them whenever I needed help with something. Do you almost think that you probably got nicer treatment than an analyst might have gotten because the analyst would have got, "Hey, this isn't part of your job." 100%. I realized that halfway through was I was making comments to people in the industry that I was blown away with how nice hedge fund managers are and portfolio managers.

And a lot of them are like kind of shaking their head at me. And they're like, I'm not saying that they aren't good people, but they're like, like anywhere in life. Some of them are, some of them aren't. A lot of them are pretty stressed out and busy. So they're like, it's pretty uncommon. The treatment that you've gotten that none of them have been like short with you or said, I just don't have time. But then that's when it sort of clicked. And I'm like,

it's almost better that I wasn't their analyst or else, like you said, there'd be like, yeah, it's awesome that you're so hungry to learn, but go back and go through that daily PNL spreadsheet and make sure we have a good estimate on our numbers before they come in. Go update a model. Yeah. Quit asking me questions.

Now, what about as well? I have found that sometimes if you give somebody the opportunity to help out an institution that they like, like you started this club at your university and being able to say, hey, will you come help my university? Do you think that that helped at all? I think that helped a bit. But the biggest thing was these people, when I reached out to them, they really, I think, saw themselves in me.

And they wanted to make a difference. And that'll always be grateful for. And these people know who they are. I'm in constant contact with them and with a handful of them too. And the rest of them for sure, eventually will be the case. I'm already having business relationships with. So it was funny the other day I was talking to one of them and he

He was saying that it's way overdue for us to do something together from a business standpoint. And I agreed. But that shows the impact that their mentorship had, that with me being so young, they're already saying it's way long overdue for me to do business with a super established name brand hedge fund manager. Let's move into that. What are the business relationships as you started out really looked like? Where has the interest come from?

Is it from intros from these people? Are you having to go through cap intro desks? Some of the intros have been through these people. And then other business relationships could be looking at some of these people's funds and saying, would allocating to one of their strategies on an SMA basis be additive to my platform? And if it is, on top of

hypothetically it being helpful, then it shows that this is still, especially in the multi-manager space when you're building a capacity constrained one, it's very relationship driven still that we all know in this business, everyone has minimums, everyone has glossy, fancy decks that say, these are the hard and fast rules. But if you have a deep, genuine relationship separate from a business relationship with someone, you go to them and say, hey, we get along well, let's work together. And then there's a product that's

that looks like it could be a fit, but maybe you need something changed about it or you need something changed about the terms or something, that's more doable if you've had a long-term, genuine, meaningful relationship. So I've seen that's a lot of the human capital in this business that isn't talked about enough.

So, for example, would that be like you go to a manager who has a minimum that maybe you wouldn't be able to to fit into at your scale? And because of this relationship and the fact that they know what type of what type of client you're going to be, they say, OK, well, he's not going to be a pain in my ass, even if he is a small fish at this point. And who knows what it might grow into? I think that's absolutely the case on all of those points that you just mentioned that

That's the value of having deep relationships. And people know, too, if a relationship was transactional or if it was organic. And then over time of having a great relationship, a business case popped up that then was even better and easier to make work if there was a kink or two because of the initial genuine strong relationship versus me just reaching out to them purely for business for the first time saying, hey, you have a great fund.

Could you package it differently? Could you structure it as an SMA maybe? Could you lower a fee? Could you lower a minimum? Could you waive a lockup? That just doesn't come across so great.

One, if you're the small fish and you're asking that, you're probably going to get told no if you don't know them. But even if you're the big fish, that can just rub people the wrong way. When they're like, I don't even know this person. He's just asking me for things. Now, what about the different rappers, Opus One being the SMA platform and Six Turn being a traditional commingled vehicle? What are the differences between running the two and in terms of the people who are coming to you and interested in either one of them? The biggest difference is G2.

the structure and the clientele. So Sixtern is for high net worth, ultra high net worth, and then family offices, that sort of our sweet spot, along with some private banks have been interested around the world. And that's a really good product for them because everything's been built for them. It's plug and play.

And the ticket size is right in that type of an investor's wheelhouse. But then the trade-off that comes with any product that's already been built for you is it's either a fit or it's not. Whereas we saw that a number of the biggest allocators in the world

We'll only do SMAs, which comes with additional cost and effort and detail and nuance, but that's obviously justified at a very large minimum ticket size. So then Opus One specifically for catering to that huge allocator that will only allocate an SMA, but then

will allocate in very meaningful heavy size and then also expects in exchange for allocating that heavy size one, they're going to get an SMA. But then they also want say in getting it run exactly their way. So obviously they're allocating the management of the portfolio or that sleeve of their portfolio to you. So they're not saying that they are the ones that know how to do it or want to do it at all. They want us to, but they'll have ideas in their head about what strategies they want.

We give them a menu of strategies to choose from. They could pick one, they could pick some, they could pick all of them. Once they do that, how do they want them weighted? We can give them ideas. We have a lot of ideas, but if they tell us, no, no, no, we want it weighted this way, we'll do it their way. And then also the volatility target. We will run any of our strategies at the vol target that we're given by the institutional allocator.

And then by us breaking it down to that granular level and also pretty much just giving them that menu, a la carte menu, where they can pick and choose and build what fits in their portfolio to satisfy their needs the best. That really is something that they like and has led to really interesting conversations with that.

I wish I could name the types of people that have been interested in that, but there's some of the most sophisticated financial minds in the world. So it's really an honor to get to talk to them and hear about their interests and

Really hearing them talk about what's working in their portfolio, what's not working in their portfolio, looking through the offerings saying, okay, I see the validity of all of your strategies, but these three are completely different than anything we have going on. So we're interested in those three. And based on our mandate, we want you to run it at a super low vol target. Or there's other people saying, well, we want you to run it at a higher than usual vol target. And then on our backend, we'll,

earmark an amount of T-bills that will match off to make up what they call part of the allocation. And that's how some of them want it to be a capital addition allocation. Others want it just to be super low vol. And every other little twist and turn that you could imagine that we're happy to accomplish.

I've found that people tend to fall into one of two camps. One is your sort of the customer is always right. And then the other is a more like old school Buffett partnership. Like we're going to write one letter a year. And if you call us too many times, you're out. And people do fall within a spectrum on each of those things. But it always amazes me the people who are...

very very rigid and in sort of like they do what they like like it's not about what the customer wants or where the investment landscape is headed it's much more like this is what i do and i have this philosophical belief that this way of managing money is the best way of managing money and some people have been very successful raising assets that way and others not so much um

Why have you chosen to go towards a more customer is always right? Why we went that way was just that we saw the types of customers in that segment of the market. And we really respected their nuance and understanding of portfolio management and saw that it would be a really good way to work together with these people and learn a lot from each other, be truly additive to their great portfolios. And then

You have to keep in mind that all of this customization is still within a box. So we're not saying we can do anything imaginable under the sun and you customize it however you want. We're saying we have these portfolio managers. These are the strategies we're offering. And if you want

any one of them or any combination of them, that's fine. And then once you pick them, you can pick a vol target. But we would never find ourselves in a position that some people try to say they are, which is saying we're the jack of all trades, where we'd never have an institution say, hey, could you guys put together this strategy for us that we don't have a PM that's an expert in? We would just say, sorry, we don't do that. We have no expertise there. We wouldn't say, oh, the customer is always right. So give us a huge SMA ticket and we'll

if we can figure out how to do this or not. We would just be upfront, say we don't have an expert for that. What about on the fund side with the more high net worth client? What are they looking for?

What they're looking for is interesting and it makes sense once you understand the different situation they're in. They're looking for the product that's already been built for them. Because if they're a successful business owner or if they're a very, very elite professional in one of the few fields that you can earn a ton in,

They're busy enough with their day job. They do their due diligence and make sure that the fund they're investing in is a high quality and ticks the boxes for what they're trying to solve in their portfolio. But beyond that, they say, that's your job. Go take care of it for me. So they like the fact that it's pre-built. They're never saying, oh, we like what you've built, but we want you to run it at a different vol target. And we want half of your strategies, but not the other. So it actually really fits well that by breaking the two businesses out

and targeting two very different types of clients, but that like similar underlying types of strategies that we found ourselves in a position where we're really offering the right product to

to the right people and making both happy with the amount of customization or lack thereof for either type of person. A lot has been said about the cost of starting up an investment business. For a lot of people, even choosing, you know, they'll maybe start with an onshore vehicle because that's easier and cheaper. And then launching an offshore vehicle is something that they do later down the line. And it's part of the reason that people say it's impossible to start

an investment business without a big seed investment. Obviously, you have decided to start multiple investment businesses that have different types of offerings. It's probably quite an investment, a personal investment. Did you have to take a seed? And how do you think about when you're going to reach a point of a break even? Our model is very different than most people's.

Most people either don't have a compelling offering most of the time because it's just them or them and a sidekick sitting in a garage, but their costs are low and they have an early break even. So one thing's terrible about what they're doing, but then the other thing's great. Then there's the opposite. There's people that on day one want to look like more like a Goldman Sachs from a headcount and setup. Obviously that's

not the identical amount, but that's just to show an extreme. And you look at them and you're like, well, what's going on? Like, yeah, they're going to raise a lot of money, but they need to raise like such a wild amount and then do well for a number of years just to reach break even. So then they kind of have the opposite situation where one thing is great that the other person had that was terrible. But then the other thing that the prior example had that was great, they have that's terrible. And I thought, well, is it possible to,

to get as close as you could to the best of both. That led to me constructing things very differently. So we're a fully remote work environment. Our portfolio managers don't need to come into one or two or three or a dozen ivory towers in the sky that we're passing through to investors that make break even even harder to get to, or in that case would be a drag on returns if the management company covered it.

then it would be the opposite example of it just then dragging on profitability of the business. So that was a big efficiency. And then another efficiency is all of our portfolio managers are paid purely on performance. No one's getting a base salary. And that's also true for everyone that is an executive at the firm. By having a good enough vision and a good enough story and a good enough structure that we were putting together, we were able to get world-class people that believed in themselves and in the vision enough to join that way.

The downfall is you need a very compelling story to get people to forego a base salary. But if you're able to be convincing enough to pull that off, then you can get elite talent that is the type of elite talent you want. Because one, they don't bloat the early days because they're not getting anything that isn't

directly leading to performance. But then also, these are the most motivated types of people that truly believe in elite levels of hard work because they're going for the big payout that's delayed and is on upside. That's the personality that's going to work seven days a week crazy hard. The person that you're only able to get because you're giving them $250,000 a year

They could be super smart, have all the capability in the world, but that's the type of person that goes, well, I already got that part. Yeah, I want a bonus too, but I'm going wake surfing on the weekends all day long. And there's nothing wrong with having fun on the weekend and stuff too. But I just noticed that personality type that doesn't care about any upfront guarantee, but wants the bonus.

big payout based on performance, they're going to be like a dog after a bone. What is the story that you are selling to these people in terms of how you're going to grow and how you're all going to benefit together? The story is different depending if it's to a PM or an executive. It's still the same overall story of where the funds go in, but obviously it impacts people in different ways. To the PM, the story is just that we're a capital source. We're a capital source that understands them.

These niche portfolio managers have had a lot of less than enjoyable interactions with allocators that given their capacity constrained nature,

had to be pretty much high net worth, ultra high net worth. And a lot of them weren't hardcore quant traders like these portfolio managers are. So you can already imagine the mismatch in product understanding and communication between those two. So it's like a dream come true for a portfolio manager like that, to have someone that speaks their language, but then also themselves and their team speaks the fundraising language and saying, hey, we're going to bridge the gap for you. We're

product savvy allocator that you've had so far. We're going to be able to scale you up over time. Here's the business case for why we're going to scale as we scale, you scale. And then they don't have to ever interact with people that might be sources of capital, but don't understand what they do to the nuanced level that they would prefer. So that's sort of the hole we fill for the portfolio manager. They really like that.

And then what the story would be that comes across well to the executive is saying, hey, be part of really something unique, a truly capacity-constrained, performance-driven, multi-strategy platform. And they see the economics that if we do what we set out to do successfully, there'll be no shortage of money to go around to compensate every team member.

very, very handsomely. And they all see that they're getting a piece of the upside. And it's a very attractive proposition for people that, one, don't need the short-term money because they've had immense success in their careers, but then two, also really are willing to underrate themselves and say, I'm going to be part of this team. And from my efforts combined with these people's efforts, I think we're going to go from point A to point B. And when we get

even half the way to point B, everybody's handsomely compensated. Also, the types of strategies you run matter too. Like I interviewed...

a manager who was like, well, it wasn't too bad starting out because I felt very confident in my, you know, the predictability of my return stream on an annual basis. There are strategies out there where people say, well, we look at our, we think about things on rolling five years or rolling three years, and you can have periods of underperformance if that's what you're focused on that make it very hard to pay off of performance alone and require, you know, the

base salaries to be paid to keep talent around. Does the predictability or perceived predictability of returns impact that for you? Absolutely, that does. And then the other thing that our portfolio managers like is that we have a pass-through model. So they're getting paid on their performance no matter what. And people that have a high SHARP are happy to bet on themselves. People that have a low SHARP

want to get a huge base salary, hope their firm as a whole kills it. And then that at your end, their boss is in a good mood and throws them an extra couple hundred grand where a high sharp PM saying, okay, you're a source of additional capital. You're going to pay me based on my returns. Let's go. But then even though that's how the portfolio manager thinks of it, you can see that by that being the case,

For my executives, we see, well, because of that, we can go and build an all-star team of PMs like that that are uncorrelated to each other. So even though the executives are betting on the firm level profitability and aren't getting paid off on any one PM's returns like the PMs are, they can see the rating on the wall that, well, if you have a bunch of uncorrelated high sharp PMs and you give them X amount of rope before you let an underperformer go without putting a hole in the overall platform,

you're going to be making money quite consistently on a year-to-year period. Obviously, is it impossible to lose money any one year? No, of course you could. But it's just like when you look at the big platforms' annual returns, they make money almost every year. Not every year, but pretty close. And where are you cutting people out?

We have a few thresholds. I can't say the specific level, but there's an amount of money that if they lose it over any one trading day, we would let them go. There's then an amount that if they lose over rolling 30 trading days, we'd let them go. And then there's a peak to trough absolute drawdown that if they lost it over any time frame, we would let them go. And they understand that because we tell them, look,

you're betting on yourself. You have a track record of performing. If you perform like you say you will and you have the drawdown limits on a problem, if they're hit, then we're protecting the platform, which means that if someone else is the underperformer and you're doing great,

the platform's not put in peril. So then the source of capital still is there for the performers. And I make it clear to them that if I need to off-board someone for performance, it's never a personal issue I'm going to have with them. I'm going to shake their hand, say, you're a very exceptionally talented person. I'm happy to give you a great recommendation wherever you go next. I know the quality of intellect you are, the quality of trader you even are. And if you give someone a hard stop, like,

No matter how good they are, you could come up with scenarios where they'd be rare, but you could come up with the almost...

best trader you could imagine and you could war game a situation where they'd hit any level of max stop that you could put for them so you just say yeah that's needed that's the lesser of two evils versus blowing up the platform so we have to enforce that but then you look at them and say you're still a great trader you're gonna probably go and kill it at the next place you go and some people point fingers at us saying oh they let go this great trader that's short-sighted it's

We're just doing what we need to do to protect the platform and the PM is going to go and thrive somewhere else. Would you ever take a PM back? In the future, yeah. We would take them back. We probably wouldn't be like immediately. We wouldn't like fire them and then a week later be like, here's the capital again. But if they went somewhere else, did well for a handful of a meaningful amount of time, and then they came back to us and wanted to try again, that's something that we wouldn't necessarily be against doing, especially if the nature of their drawdown was bad.

that we believe that the strategy didn't erode. They just got on. They just got like six Sigma or something. Then we would just say, okay, you got unlucky and you've done well since let's try again. What if there was a hole in the strategy that both they and you didn't perceive and they went and they saw it and adjusted the strategy, were able to communicate what went wrong, why it's going to be different this time is, is that something that is good enough to come back?

That's not good enough, but that's part of what's good enough. So that's important, but that on its own, and then, hey, give me a book to trade, wouldn't cut it. But that combined with, hey, here are the returns I've gotten since I've plugged this hole in my portfolio. And this shows that it's worked, but then rather than just me doing something different and then that same thing or some other thing that could blow up a portfolio hasn't happened yet, it would more be,

I fixed an actual weakness in the strategy. When they explain the weakness and how they fixed it, that already makes sense. And then the cherry on top is that they show you, and I've been trading for a meaningful amount of time since then, and I've been having results that show that it might be worthy of reinserting them on the platform. Maybe in a best case scenario, they've gone through multiple of those events again, and they can show this is how the return is different from-

Yeah. Unfortunately, those types of Six Sigma events, I mean, they happen more frequently than the math would indicate, but perhaps not fast enough to get that back. Now, I want to talk a little bit about track record and hypothetical track records in the quant space. Backtest hypothetical track records are bound. People have different methods of

analyzing them. The SEC actually has different rules about marketing hypothetical track records, so they can be dicey. Can you talk to me a little bit about hypothetical track record and the different types of quantitative hypothetical track records that are out there? Absolutely. Yeah. So this is a great topic because I'm on

One side that me and my investors view as being the most legit type of pro forma return series versus others that equally based on the rules have to be called pro forma. But we would view as being completely on the other side of not really being worth underrating as an LP yet. And the differentiator is a lot of people will say pro forma returns and then that's just a back test.

That's the type that a lot of allocators don't really put much weight behind and they want to see real returns. My type of pro forma returns that we're using that investors are happy to underwrite is it's a multi-manager platform. We're just combining these portfolio managers, real verifiable, actually achieved track records, and then showing how it would look when we put them together on our platform.

and we add on our platform's leverage target, then we deduct our fees, et cetera. It's just showing the client exactly the experience of what our product would have been if it was around for those years. And it's not a computer-backed test. It's purely taking real portfolio managers, real returns, putting them all together and not cherry-picking, oh, we sized up the ones that did great and we sized down the ones that did horrible. No, we equal-weighted them except for a few that

actually have business cases to not be equal weighted, such as like a tail hedge manager was undersized, but everyone can see that that's how you would always do it. And then that gives people a very clear picture of what investing in the fund is likely to perform like. And that's the type of hypothetical or pro forma performance that very sophisticated, limited partners are happy to underrate at an early stage in your business. So even though

For new, people see that and say, okay, we like the story, but then we also think that this is a valid way to show pro forma performance in a way that matters. So they're willing to get involved quite soon. So as an example, there's a private bank that usually would wait three years before investing in a fund.

They said it wouldn't be day one given that we're new just because they want to see that operationally things were going smoothly. But because of the returns not being an issue and it not being a backtest, they said that they'd be happy to get involved a few months in. So that's the type of benefit to having really good pro forma returns that are real, but then just not under your funds vehicle versus a computer backtest. Because I guarantee you if it was just a computer driven backtest, that same private bank

But as I said, your story sounds good. We believe it'll work well, but we'll see you three years from now. This goes to the marketability of multi-manager strategies as compared to single manager strategies when there isn't a predecessor fund that they have a predecessor vehicle. I mean, do you think that this is an advantage for startup managers overall to be multi-manager compared to a single manager? Yes, but with a big asterisk.

Yes, if you can pull it off. There's some personalities that are great portfolio managers and even are the rare person that's a great portfolio manager and has the personality to be a great fund manager that still wouldn't have the interest or the capability for the other set of unique needs personality-wise to run a multi-manager because then you're also managing personalities, recruiting personalities, selling the dream to personalities, etc.

So if that's you, that's truly who you are, that you say, I'm the guy to go and put together a startup multi-manager platform, then yeah, it will make raising money easier because you're going to have a more persistent return stream. You're going to be able to be the type of allocation that people really want to make. And then the downside though, is you have to manage way more moving parts just to get things off the ground.

There's way more intricacy, nuance, and work that goes into it. So for most people, it's not going to make sense for them to start a multi-manager, but then it's going to be harder for them to sell the story early on to limited partners to enter it. But if you are the type of personality that it's a fit to start a multi-manager, then yeah, a huge benefit of that is that you're going to have an easier time selling the product.

at an earlier time in its creation than all other types of funds out there pretty much. Both businesses, you've been live trading now, different periods of time for each of them, but still relatively close in terms of their life cycle. What's next? I think we're just looking to scale up the capital base at Sixtern. Like I said, we have a threshold where we're going to hard cap things. So the window of opportunity won't be open forever for people to get in, but

People prefer that, that do get in, because then the alpha load is protected and we're not just scaling for the sake of scaling like far too many managers do these days. And then at the Opus One side, we're having some very interesting conversations right now with some of the most sophisticated large-scale allocators that are looking for that hard-to-find diversification that we're a good fit for. And as an example, there's some of the large multi-manager platforms that are saying, well,

it doesn't make sense for them to hire a PM that is as capacity constrained as any one of ours. But when I put together a number of capacity constrained portfolio managers, then suddenly that adds up to being more capacity than one of their usual PMs or the same capacity. And then suddenly it's not a waste of their time to hire that when they're hiring that collective of PMs that have already been put together and diligence, but as one line item to underrate as one desk, that'll be an SMA. So,

That's really what we're looking to do. And that's how we're scaling either business, one of them through organic LPs to the fund. That's for Zyxtern and then for Opus, looking for one or two strategic separately managed accounts with very large allocators that need hard to find small scale diversification. But like I said, a few PMs that then together add up to not being small scale when combined.

When you reach that sort of like initial cap, what is the assessment process look like for can we go a little bit further? Obviously, there's a level that you know you're never going to reach, but you don't really know what it's going to be until you start to butt up against the ceiling. So what is how do you assess? Can you take on more capital? We have pretty good understanding of what the capacity of each strategy is and then

what we believe is a best practice, even though we're using good prep or using what some would say are best practices to come to those understandings of where capacity is. We then haircut it pretty aggressively saying no assumptions, perfect. So make the best assumption you can make, but then give yourself a huge margin of safety. So that's how we get the number in our mind that our capacity is. But then as we were getting close to that, we would then,

still grow up to that number, but we would start inching there. We wouldn't just say, okay, let's say we were 50 million shy and we had 50 million ready to come in the door. We wouldn't say, okay, let's take that 50 and hope we were right. We would say, no, we're going to take maybe like 10, then 10, then 10, et cetera, and keep going as that worked. And then once we got up to that number, we would then say, okay, even if there's been no sign of alpha decay, we're going to freeze the

growth for a little bit. And then we're going to grow the headcount, but we're going to really take the time to be intentional that we're not growing headcount to grow capacity. We're growing headcount to make the quality of returns better that also at the same time could happen to grow capacity. And then once we've lived up to that,

Then we would reopen for a small amount more capital, slowly work our way up and then close again and probably do the same thing as we could. And the timelines for that are impossible to predict because we're not willing to just take on PM stack capacity. So therefore, we could find that one PM that adds a chunk of capacity and makes the platform stronger in two months, or it could take us two years. Do you envision any sort of

peak on the number of PMs you could have? We don't really want to put hard numbers there, but at the same time, we know it couldn't be infinite or some crazy number given how strict we are about the rules for PM to be good enough to be added to the platform and not just to be a way to increase capacity. So it would never be a crazy high number, but without knowing every PM I'm going to talk to in the next 10 years and

What the results of those conversations are going to be. It's impossible to say, oh, it would never be more than 10 or 15 or 20. I just don't know. But it would never be a crazy large number just because we believe there aren't that many that fit our very high bar to step over for them. What about PA traders? Are there...

people who maybe are not managing money in a traditional vehicle that you would take a look at their returns and say, hey, this is worthy and you might point them in the right direction on how to set up a vehicle or even you would be their only client? I'm happy to have those conversations.

And really, it's just if they're willing to be open enough, which when it comes to personal accounts, I've noticed people are like super closed off for the most part. But then everyone that's trading institutionally has the understanding that, yeah, it's a business. So if anyone's going to invest, they're going to ask you pointed questions. But yeah, I'm happy to look at someone trading a PA in a very high alpha load manner and putting up a good sharp with a systematic approach. But they would have to sort of open up the kimono

enough that I could look in and truly do the due diligence the same way I would on a PM that has a small scale hedge fund or has run money in any other professional capacity. Like I wouldn't be interested in someone that's like absolutely cleaned up on like 20 grand.

I would want the person to be like, oh, I've built up my PA. I've put up these awesome returns and I have like, it doesn't have to be huge, but maybe they're trading a couple million dollars. And then though there's some people at, let's say their capacity is a hundred million trading five, I could see the case as to why, even if the Sharpe's great, they'd want my money temporarily. But where you just have to be realistic is if someone has a crazy high Sharpe,

their capacity is 20 million, they're putting up 50% a year and they have millions of their own money in there. They're going to get there pretty quick with or without me. So that's the other thing you have to be aware of. Yeah, that makes sense. Well, Zach, thank you so much for joining us today. This has been a lot of fun. And where can people find you?

Yeah, so unlike some people, I'm pretty easy to find. You can find me on LinkedIn. I'm decently active on what used to be Twitter, now x.com. My handle is at DerivativeBro. And beyond that, I think the biggest thing is tweet at me, send me a LinkedIn invite message, follow along on LinkedIn and on Twitter. I post monthly letters for Six Turn. That's something people like following along with. And then on our website,

website for Six Turn. There's an info email if someone wants to reach out there. That's a good way to get in touch. And we're happy to have conversations with anyone that wants to just talk trading or talk about what we're doing. Wonderful. Yeah. And everybody who's listening, please like, share, subscribe this interview.

And follow us on whatever your favorite podcast platform is. And if you like the show, if you don't like the show, leave us a review. It really helps to get that activity going. So, Zach, thank you so much. If you like the show, tell me. If you didn't like the show, talk to Max.