Why Hedge Fund Managers Must Adapt or Die | Kyle Mowery on The Future of Small Cap Value
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I want to do a quick disclaimer that nothing we say here is marketing or advertising for Grizzly Rock Capital or any of their funds or products. Everything is meant to be informative about the fund management industry.

Welcome to another edition of Other People's Money. I am joined today by Kyle Mowry, the CIO and founder of Grizzly Rock Capital. They are a long short fund based out of Chicago, and they focus on small cap, mid cap stocks, and specifically concentrated value. Kyle, thank you so much for joining me today.

Yep. Thanks for your time. This should be a lot of fun. So we had a pre-call and one of the most interesting things you said to me was that if you could do it again, you wouldn't set up your fund strategy quite the same way you have with Grizzly Rock. So Grizzly Rock is approximately 40% net exposure. So-

The longs still outweigh the shorts, but not quite full equity market beta and not quite market neutral. You said that's not really what allocators are looking for anymore. The industry, I think, is bifurcated among things that are very low net and have a high focus on alpha and a unique and uncorrelated return stream. That's one area.

Another area is higher net. It's going to have higher volatility and that might be an equity alternative.

An alternative to equities that is designed to exceed a certain index over a certain period of time. I think that when we think about the investment management business, there's a lot of options. And I think for those who are building investment management businesses, it's important to be very specific about not only where your skill set are,

But how those skill sets can best be married with what the allocator community is actually looking for. What qualifies as low net? I mean, do you have to be truly market neutral? Can you lean one way or the other? Or do you have to have that almost like pod shop, like strict...

market neutral, factor neutral to be attractive to allocators now on that side? Yeah, I think it's a very good question. So within equity and equity long short, I think that the reduction of exogenous risk, factor risk is something that's been very popular. I think that works better in mid and large cap than small and the smaller portion of mid

The reason is the factor, the factors tend to be very volatile within small. So we actually looked at the, we did a deep dive on, as style factors became more prevalent in 2017 and 2018, we did a deep dive on that and, you know, decided, you know, do we want to be factor neutral? Do we want to be style factor aware? Do we want to disregard this altogether?

we ultimately decided that being style factor neutral and small is probably too hard in terms of what you end up doing is just cutting down your returns. And that's the same with the pods requiring leverage. But I think the nature of those markets in mid and large cap, predominantly large cap to be clear, is the factors tend to have a lot more stickiness than they do in small. So

I actually don't think small cap factor neutral really works. I've seen it done. I haven't seen it done extremely well. Yeah. So I guess if it can't really be done, does it change the type of allocator who's interested in small and mid cap? Are they the same people or they're just bucketing you in a different group, even if you are market neutral? I think if you asked, say, 100 allocators, you'd probably get variations of 100.

more than one handful of answers of how they look at the world. I think some look at the world in terms of a volatility targeting approach where, look, if your vol is mid-single digits, okay, you're a low net. If your vol is, you know, in the teens, that's equity market-like, and they're going to be looking for requisite

returns to match that. I think the reality is there's, I think of investment management in terms of how you run money and it's a triangle. So you can always pull two of the three legs and the three legs are return stream, tax efficiency, and volatility. So you can pull any of the two at one time and you have to give on the third.

And that's just inherent on what the model is. And I think that for people who are considering running money professionally, they need to be very clear about what they're good at and how those strategies align with those desires that they have.

And in our pre-conversation, you said about a 60% net long you think is enough equity exposure to put you more in the equity bucket. Um,

Is that because small caps are generally more volatile? And so for somebody who is doing volatility targeting, you're going to reach into their equity like bucket with a 60 net. The reason I picked 60 and that was somewhat of a random number was if you're a true long short and you're trying to make money on your shorts.

that is something where inherently you have to have exposure. So even if you're fully long, say a hundred percent long, you're still going to, if you have shorts, you're going to be, you're going to net down into that 60 range without using leverage, right? Clearly you can amplify with leverage any of these strategies. And I have a lot of friends that run a small mid cap, long, short with leverage and their return streams are volatile and the good years are very good. And the, the,

the tough years are more tough than they otherwise would be. Leverage is simply a magnifier. And I think when you think about that from a business perspective or an industry perspective, the question is, is leverage

Is that what the allocator community, is that what your investors are looking for? And if yes, then it's a wonderful thing. Then that alignment and agreement matters. But I've seen it when it doesn't go well and you go through Q1, Q2 of 2020, I've seen it go the wrong way. The more alignment managers and allocators and investors have on the front end and they're being intellectually honest with themselves, right?

and each other. I think that is, that puts people in the best chance to succeed long-term. So if you are somebody who is at the crossroads trying to decide whether you want to be more equity-like or more idiosyncratic and market neutral, how should you be assessing your skills to determine what is right for you? If your skills are

In the bucket that the pod shops are looking for, it makes very little sense to start your own firm. And it makes a lot of sense to go to a pod shop. Because even if your career is a couple of years there, the potential to make significant profit personally is there. And the reason that it's there is they have massive teams of entrepreneurs.

not only fundamental personnel, but also quants running over the top and risk management. And the risk management at the pods is exceptional. I think that's one of the reasons that they're so large now, right? Single managers, and to be clear, my fund or my business is a single manager fund. But single managers can and do run off the rails from a risk perspective more often than the pods can.

who employ legions of PhDs and quants and run over the top. Now, that doesn't mean they're not exposed to some exogenous event, but for the current market structure, the way that they are addressing that problem makes a lot of sense, frankly. And I would say that

For a young analyst or an investor in their earlier mid-career, it makes a lot of sense. Now, I never was at a pawn shop. That's not my time frame. I look out one to three, two to four type years. That's not a pawn shop time frame. And therefore, I never pursued it because it doesn't align with my skills and interests. But what we've built, it does. And it also aligns with...

our investors' desire on risk. If you're not in the low vol, low net game, I think you are trying to beat indexes. And as we sit here in early 25, beating the S&P or the NASDAQ has been wildly challenging. And the last two have been in big cap tech. For those of us who have raised money from investors saying that we would invest in small and mid-cap securities,

We functionally wouldn't be in a position to buy NVIDIA. And therefore, comparing us to that index is probably not intellectually honest. There are other industries that are probably more aligned with how we represent ourselves to our LPs. And so it's not cherry picking to focus on returns relative to those indices and especially over time.

After a year like 2024, you always see the Bloomberg screenshots of like, oh, look at what the megafunds did. Who is buying these products? You're having conversations with your investors about your returns relative to the indices. How much of it is them knowing what they're buying, that they are buying a small and mid-cap fund and that's what they're going to have exposure to. And if that factor doesn't do well,

there's no way you're going to keep up. I think a lot of it looking at it from an industry perspective is about one, being very clear about what you're going to do upfront and then two, not experiencing style drift. Right? So we don't do a lot of large cap tech. If we started buying large cap tech, which I guess legally per the fund arcs could potentially

work, that would be a style drift. And that would be, in my opinion, a reason for investors to significantly question our value proposition because that's not what we said we were going to do. But look, our business has been operating 13 years. I want to avoid getting into numbers, returns, because this is a public forum, but it's filed with the SEC that we've been

around for 13 years. And we've done that by being consistent with our approach to our sandbox and applying our methodologies consistently and judiciously to that. So you mentioned that in the fund docs, technically you could, but your LPs might have some problems with it. I guess, do potential LPs, are they more interested in seeing a hard mandate where you are resigning

Or is it the type of thing where it's like, if you can't trust a guy to stay within his stated mandate, then you probably shouldn't be investing with him anyway? It's definitely the latter. I mean, the fund docs are wonderful. They're written by highly educated lawyers, but those are not.

the basis of the relationship with the allocator. The basis of the relationship is personal relationships, especially in the family office community, which is a good portion of our investor base, especially in the high net worth community. And even on the institutional side,

There's usually one or two institutional type relationships with the people. But, you know, as you run money for these folks longer, they have a better sense of who you are within the organization and whatnot. So it tends to be fairly personal in that way, too.

Okay. So you mentioned family offices, high net worth. I think it came out that like 37% of Harvard's budget this year was going to be paid for by their endowment. They are funding the operations of the university from the return stream that they're generating from the endowment. They have very different needs than a high net worth individual or family office. What

is the problem that you are solving for them versus maybe an institutional client? Yeah, that's a great question. I'll answer the question broadly. Our

reason to exist is to compound over time. And to compound over time, the biggest error that I've seen people come up with is a large drawdown. Okay. So a large drawdown can be due to, you know, market factors. It can be excess leverage. It could be, you know, getting over one's skis with a single name or a theme or whatnot.

But, you know, any return stream that you make 50 one year and you lose 50 the next year, you're digging out of a 25% hole. And you just took out two years of time. And so our strategy is designed to advance growth.

by not going backwards. And that sounds simple and it sounds trite. And maybe after a couple of years, like 23 and 24 in the broader stock market, that sounds like, oh, why do you exist? Well, there are reasons that we exist and there are reasons that

Our investors sleep well at night knowing what we've done for our first 13 years. That's wildly different than I have friends that run funds that are trying to put up big, big numbers every year. And many years they do. And some years they have an off year. And it's kind of funny. A lot of those folks end up with in and around the same numbers.

geometric return stream as us over time, we just get there differently. And I think that by and large, the LP base is going to be different as well. And I think that that's why I keep going back to that communication and alignment on the front end about process, about expected return stream, about what would suggest deviation from the initial focus.

And how does capital raising differ between somebody like yourself more focused on low and slow versus those much more high torque, you know, counterparts that you're mentioning? You know, maybe they're a five of six C and they're allowed to put their returns out there in public. And obviously, when you put up a big flashy number, it gets around.

People see it. And even if you're not allowed to put it out in public, you know, people, people share decks. It's no secret in, in the industry. So it does get around. Look, the water finds its level. If you're, if you're a launch at a reputable prime brokerage, you're going to get, you're going to get looks from the allocators. I think pedigree matters, right? The three P's of the industry, it's people, process and pedigree.

People, performance and pedigree, people use those P's interchangeably. But the point is that if you have a great resume, if you have a great track record, you're going to have an understanding of the allocator community already. And you're going to be able to have a more high profile launch. That's not what I did. I launched right after business school, literally like the next week.

And I launched small. And that's not probably something I would do again. And we can get into that if helpful. But that was aggressive. I was 29 and no kids, no mortgage, but no trust fund to fall back on. So we worked pretty hard in the early years. We work hard now, but I think the first four or five years was 12 hours a day, six days a week. That's a sacrifice that some are willing to make and some are not.

And it also doesn't come with a certain guarantee of success. So for folks thinking about that, I'd think long and hard before doing it. But if it works and you can be around for a while, yeah, it's a great business. And you get to work with and interact with great people and hopefully do well for your investors for a long time. So it's a very rewarding business, not only financially, but also interpersonally as well.

So how much did you launch with? I mean, one of the big problems that people have is the chicken and egg of, I can't write you a big check until you already have some money because I don't want to be too big as a percentage of your assets. It feels like you're constantly trying to find small fish, then medium-sized fish, then big fish and sequencing them and changing your approach marketing-wise over time is very difficult. Well, I made a lot of mistakes on the business side.

I think we've been very consistent on the research and value proposition side. Obviously, I can't disclose private returns in a public forum here, but we've been consistent on that side. But from the business side, we made so many mistakes. I launched with less than a million dollars, and the goal was to put together a three-year track record. That model existed when I started my career, which was prior to the

great financial crisis. And I think I was kind of wedded to that model, even from undergrad, from college. I went to UCLA. That's where we get the bear from in Grizzly Rock. And I came up with the name in my dorm room and it was always a goal to start Grizzly Rock. Now today, 2025, I absolutely would not do that. Not because I wouldn't be willing to go through the grind again, but because it doesn't set one up for success. I think

To launch a viable business, it requires the service providers and the heft truly institutional at launch. So if I didn't have an anchor investor, whether that's a formal seed with economics or a high profile or high ticket LP day one, I wouldn't launch because the probability of success is far lower that way.

What is required now in terms of service provider quality, team quality, etc., is high. You are competing with extremely smart, extremely hardworking, extremely well-backed teams. And that's a very competitive industry. And it always will be because of the potential for tremendous success.

And so I would either have a seed or a significant anchor at launch or I wouldn't launch. There's a lot of good seeds out there without creating your own. Because I created my own, I guess maybe that's why we're having this conversation today, but I don't necessarily think it's a silver bullet at all. But at the same time,

I've had a lot of friends who have done it and have raised small amounts of money and are still very happy. Medium amounts of money and only a few folks who I know personally have really scaled to, let's say, 500 million or more.

I think that's pretty rare, but it does happen. Well, it sounds easy to say, well, just go get a seed, go get an anchor investor. But that is in many ways as difficult or more difficult than hanging up your own shingle. So what's the best way to do that? Is it just go get a job, perform, do well, make connections?

UCLA is a great undergrad, but it's non-target for a lot of bold sprocket IB and PE. And by the way, I was playing baseball all spring and summer. I played baseball at UCLA. So I didn't have the traditional path, internship to banking, to PE, to long only to, you know what I mean? I had to create my own way. Now that's a unique endeavor and something that worked for me, but it

It's not the highest base rate for success. And so, yeah, folks are focused on that. They can either get a seat out of undergrad or if you're early career, you can still get an MBA. I did my MBA at the University of Chicago, which is always a bit humorous when I tell people I'm a fundamental engineer.

Perfect. I'm focused on marketing efficiency, although my MBA is from Chicago. It's a great program. It's not all a Kwan, Fama's class. It's a wonderful class, but there's not the only one there. There's a number of great classes. So I chose the MBA route, but it can be done in a number of different ways. I think the key in the investment business is the same as any business. And what is the value proposition? What is the challenge that you're trying to solve?

and being extremely specific about, is it high returns? Is it after-tax efficiency? Is it no drawdowns or low drawdowns? Is it a replacement to X, Y, and Z in an investor's portfolio? I think that's what I would focus on for enterprising on people considering something in the investment management industry.

So the cynic in me says that the best path is to grow up in an upper class, upper middle class area where this path is understood. And you're making this decision at the age of 16, essentially, that I'm going to have to do the extracurriculars that are going to get me into the target school. And that the majority of people who are successful in this business come from, you know, a couple of financial hubs, large cities where this path is understood and taught, you know, almost at the high school age. Yeah.

Yes, correct. I would say that that is accurate largely for specifically the hedge fund business. Private equity is similar. I will say, though, I have a lot of friends, even business school classmates and other friends from church or from

the industry who are not in technical hedge fund seats, who are having a tremendous amount of success in lower middle market private equity. That market is extremely inefficient. And a lot of young people I talked to today who

We're kind of asking about breaking in the industry. They say, hey, what would you consider if you were my age now? And I do bring that up often because I think it's wildly inefficient. And it's an area where younger folks can get a seat, create a seat.

and do really well over time. And that's for fundamentally driven investors. So I want to talk a little bit about what you said regarding starting with A-level service providers, starting with top primes. I've interviewed a number of people who started their own fund here, and you get mixed messages. Some people say,

I would never take a seed. I would never do that. Start small, start, you know, be thrifty. And then other people who are like, it's just so much easier this way. Why do you think it's so important to start with those higher level service providers? Well, again, you have to you have to solve for what?

who your customers, your clients are going to be. Who are the allocators you're going to be going to? And if you're going to institutions or sophisticated family offices, which are basically institutions, it's incumbent that everyone has name brand service providers. You have to do that. They'll just flip to that slide or presentation and throw it straight into the trash.

If you don't have, you know, reputable auditors, administrator, you know, a robust operations team. You know, when I started in the business pre-GFC, there was a statistic and I don't think it's true now, but people said, oh, half of hedge fund failures are operational. That should never happen because...

It's simple blocking and tackling. There's nothing earth-shattering about that. You just have to be diligent in setting up the process and the people and double-check everything, have good service providers. That's table stakes. It's kind of like, well, you're smart, you work hard. Those are table stakes. Having good service providers is table stakes. For the institutional community, if you were looking at other companies

types of high net worth, you can probably save some money on those service providers. But you're still going to need a certain level because the regulation, and it's well documented. I don't know how much we need to talk about it. It is costly to comply with SEC regulations.

I think the SEC, a lot of people say a lot of negative things about them because they require a very high bar. But that high bar, I think, is there for investor protection. And so we're very happy that we have attempted to comply with those standards, even when we're smaller than being required to register. So when we actually registered, there was no change.

And I think that was incumbent by having good service providers, high quality people that you work with. And that just removes the operational risk and lets the team focus on the return stream. Obviously, it's great if you can do it on day one, but it's not possible for everybody. Is there some way to start maybe with a bit more of a hedge fund in a box model, you know, and then over time get to it?

You as a young investment manager are probably not going to get dinged for an administrator that's a smaller, less named brand. But if you go with your buddy who's a CPA as your audit, that's going to be a problem, right? So if folks are thinking about where to spend money, I spent the most money early on on audit because with a reputable audit firm,

In the end, the audit is the only thing that really matters because the admin, they are very unlikely to make mistakes, but it can happen. But the auditors with the

built-in suspenders approach that they take. By the time it gets through them, if it's a reputable audit, I think most investors will accept that, especially in strategies that are fairly liquid and easily underlying prices easily identified. And then from there, it's building with the prime brokerage team, with your administrator, your CFO, your COO. It can be done in-house. It can be done externally. There's a number of

part-time. A business like ours, Longshore Republic Stocks, this is not an operationally intensive business. We do need arm's length people involved, but we were able to partner with a wonderful firm. And technically it's an outsourced service provider, but we interact on a daily basis that we interact as if they're on our team. And that's been a wonderful, wonderful relationship.

That business is Corbridge. I have no affiliation with them other than being technically a customer. But Ryan Vorg at Corbridge has been a home run for our business. And I've actually sent a number of friends of mine over there and he's doing a great job for them too. Yeah, I mean, you hear the griping from a lot of fund managers and I think it's helpful to clarify that it's tedious and costly, but not difficult. Yeah.

Right. Yeah. No, it's not. It's not difficult. It's not difficult. It just requires effort. Especially if you've started out and you have tried to keep costs low. It's difficult because the margins on your business seem like they're getting worse as you're getting bigger. But I mean, that's kind of like our most businesses. There's like a stair step function where, you know, as you grow, there's a point in that growth phase, the margins drop down. But if you reach a certain point, it gets better. I get it.

I don't see why it would be any different for investment management that you're able to keep your day one margins...

I don't disagree. Yeah. You do want to invest in your, in your people. I mean, your people are your biggest asset and because they're your biggest asset, they're going to be your biggest cost. That's part and parcel of what the business is. So yeah, invest in good people and work with the best people that you can possibly work with and that align with your thinking. Um,

the most, because when you get into periods of stress, people tend to focus on what they're good at, right? I mean, like there's three ways that people come up in this business, right? You're either a risk manager, an analyst, or a trader, right? So when people hit periods of stress, they're going to revert to how they came up. They're going to revert to what they know best, right? The traders are going to try and trade their way out of it.

The fundamental guys like me are going to try and look at their free cash flow numbers and make sure they're not missing anything. The risk managers, it's more of a mathematical approach there. You said you're a fundamental guy. It's been a tough going for the value factor over the last year. When you went back to your models and went back to look at everything, what was your take on 2024? We were viewing that the market structure has deviated significantly from the pre-COVID period.

And the market has changed a lot and nothing is constant, but change itself. And so we actually wrote a paper that was sort of a dovetail off of Cliff Asness of AQR wrote a paper called The Last

less efficient market. It was published in September of 24. Clearly, he's coming at it from a factor and a quant perspective, but we found a lot of his commentary made sense for us. But as an active stock picker, that was something we needed to go and look at market structure. So we ended up writing a white paper about

It was an internal, it's not published. It's an internal white paper that really talked about, okay, what has changed in the market structure and how must fundamental investors change with it, right? Because if we were having this conversation 20 years ago, I would have told you that value is the best factor historically. It was high pre-cash flow to price and value was a mean reverting strategy. There was a certain...

intrinsic value. But when you look out there today and you see like today we're taping quantum computing stocks are down like, I don't know, 40%. I'm not involved in the sector, but they had tripled in the last two weeks. Now they're down 40%. I mean, that is more emblematic of what's going on in the market than mean reversion.

the value guys were talking about 20 years ago. And so the dichotomy, and those are clearly, you know, extreme examples, but, but the dichotomy of what a lot of us turned ourselves in

We call it the old ways, the old methodologies, pre-GFC type fundamental analysis. That absolutely still works, but it requires a higher focus on catalyst. So a little bit more, say, Joel Greenblatt rather than others. So focus on catalysts, focus on hard catalysts, and don't assume value is going to revert. And that is incumbent on pretty much all catalysts.

of my cohort managers that I talked to on an informal professional basis, there is a significant focus on catalysts and or guys going to where, you know, industry changes, whether you're, you know, I think if you look at 24 return streams, folks that focused on AI and data centers and whatnot tended to do very well. And if you weren't in those scenarios, you still could have had a good year, but it was probably a heavier lift for you. And

And how do you think about adjusting your strategy and your style with these types of evolutions versus style drift? You know, it's very easy to say like, well, if you said you're a value manager, you should be using this factor, but it's not working. Like, how do you deal with that evolving with the market, but yet not, you know, succumbing to style drift? It's a really, really nuanced and important question.

Because we've been operating 13 years. Markets have changed significantly. You know, style factors was one. And then the post-COVID market structure shift was another. Everyone in this business has to know what they're good at to their core. What do they have to offer?

And what they have to offer is central to their identity of their firms. But how does that interact with the market set and the market opportunity? And so for us, we still use our fundamental free cash flow based approach now. But we focus more on catalysts. Like if there's a lot of cheap stocks,

They're going to stay cheap. And there's a lot of expensive stocks that are going to stay expensive. Those are not interesting as either longs or shorts. What are interesting are businesses that have catalysts or value realization events or where the narrative is going to change and the multiple and therefore the price is going to change. And so it forces us to use our

our tool our toolkit and apply it to more specific areas and so that way we're using the same toolkit and therefore it's not style drift but we're applying it to areas in which that matters right like i don't do any quantum computing i don't know anything about quantum computing they're not longs they're not shorts but if we were if we were to study that industry and we would study it with our same lens and then is there something to do there i don't know um because i haven't

have been done the legwork there. But there are many, many industries where we have done the legwork and we know it extremely well and we can find catalytic-driven longs and shorts. I find with fundamental-driven investors that...

They often forget about these other things that are happening in the market. And just because there are strong fundamentals underlying your stock doesn't mean that these market structure forces are not what's driving the price. And so they see the price move and they they attribute it to the analysis that they've done and the strong fundamentals. And not that that isn't part of the reason it has gained momentum, but that it can't possibly be part of the momentum factor.

And that when momentum turns, it's going to turn too. And just because the strong fundamentals are there and that underlying trend is there, doesn't mean that these other factors aren't going to come into play. And I see it happen a lot with fundamental investors. The person that I read the most on factor methodology is Cliff Asness. I'm not a quant. I have no

relationship with him. But I think he thinks about it pragmatically from a factor perspective. And value factor works, as he would say, and so does momentum factor. It absolutely works. It's odd. 24 was a massive divergence between the momentum factor and the value factor

in periods of rising economic activity, they do tend to rise together more. Like 22. Yeah, exactly. Down together in 22, 24 was bifurcated. And so, yeah, I do think intellectual honesty requires that you bifurcate, like, were you right? Did you get lucky? And because it goes the other way, too. You can get a thesis...

Dead to rights. Like we had like going into COVID pre-COVID, we had a whole bunch of say there was a transportation businesses that were inflecting. I'm thinking of one specific company. I don't want to get into it, but the numbers were inflecting. And then COVID came in and and we lost money on that name in 2020. Well, was that was the.

Analysis incorrect? No, it just didn't include a pandemic that more or less shut the world down. And so that was unlucky. But the reality is, if you do this long enough, the luck of the draw tends to even out.

That's why track record matters, because it's in the numbers ultimately. That gets to self-assessment and self-improvement and looking back intellectually, honestly, at your results and saying, was this luck? Was this skill? What are the things that we're doing well? What are the things that are working that we should be doing more of next year? How do you think about that in terms of assessing the performance of a trade and the portfolio as a whole?

That's a great question. I think you have to hold up performance over the appropriate time period for your strategy. And then it's the market or that factor or the consortium of factors. And then you rate yourself honestly against that. I think that most people in this industry don't want to grow their businesses for obvious reasons. And therefore, they end up writing letters that are more marketing than introspective.

And I think we're all human. I've probably written some letters that justify performance that I wished was different as well. But that's not what I try to do. We try to be intellectually honest. And I think that our investor base, like who's with us now, are folks that have seen us struggle because every single manager is.

has had a difficult period. Buffett and Munger and these folks have all had major, major drawdowns, but that was part of their style. That was part of their strategy. Those shouldn't have been expected and were expected, but the LPs were paying attention with a partnership or paying attention. So, um,

Does that answer the question? It all comes down to intellectual honesty. It does, but it sounds like you're doing it on a quarterly basis. I'm thinking more about as a firm process, how are you doing it? Is this on a quarterly basis? You're taking a look at every name in the book and saying, was it the fundamentals? Did the fundamentals actually improve or...

Was there something that the market grabbed onto factor-wise and the entire industry did well and we happened to be in the right place at this moment in time, but our business really hasn't performed the way we predicted? That's more the question I was getting at. That assessment is far more daily than... Because when prices fluctuate daily, when you have liquidity, you can buy or sell every position every day. So I had a PM when I was an analyst said,

You know, if you're long something, you have a view that you would buy it at that price basically every day.

And that's fair, excluding tax as a factor. And so I think when you think about that, you are making decisions every day on every position. Most of the time for strategies such as ours, the decisions are to do nothing, but they're still decisions and you need to be intellectually honest with that. I think it's a much more daily and iterative process than I was taking that question prior to being

our communication or at what time period is it fair to assess performance? Because for a strategy like ours, any one month can be a good month. If we get a buyout, it's going to be a good month. Uh,

If something else happens, it cannot be a good month. But over a period of 12 or more months, that's when you really see that the luck or unlucky tends to balance out. And that's why for a strategy such as ours, that might be true. Now, other businesses or other strategies might have different time periods. But for us,

It's 12 months at a minimum. You talked about buyouts. Maybe it opens up the door to talk about the difference between upside and downside vol. I mean, there's a lot of different perspectives on whether upside vol should be dinged in the same way it is on the downside, Sortino versus Sharp. Yeah.

What do you think about the difference between the two? And how do your investors, because that's really at the end of the day what matters, is do the investors and the potential investors care about upside fall? The dirty little secret is people tend to show the number on the tariff sheet that's better for them. It's usually incumbent on the allocator to put the numbers through their system and then assess the potential new manager against a matrix of their existing managers or return streams.

I think it gets back to doing what you say you're going to do. If you say you're low net and then the market's flat for two years and you're up 30 each year, well, you better be able to explain that very, very specifically or it's going to look as if you got lucky.

Or the inverse, like it could be a time period where you launched your fund and the strategy didn't work for a couple of years. If you can explain that effect, then I think allocators will understand it's intellectually honest. But these people are smart, right? I read so many letters that are largely marketing or fluff or, you know,

You know, it's trite, but every time someone has a bad year, there's a Buffett quote about long-term, right? In our letters, we try and be very honest. And if we succeeded, be honest about that. And if we did not succeed, what we're going to do to fix it. And I think that over time, everyone in this business gets the investors they ultimately deserve. And that can be a massive compliment, or that can be a situation where,

Folks never reached the scale that they were hoping to reach. And I think either way, it's a confluence of their skills and somewhat luck of timing. So you talked about letters. You mentioned you read Cliff Astis a lot. Did you read his most recent one? I did. The 2035, the 10-year look back.

Yeah. And what did you think? Because there were there were two takes. I mean, there were people who loved it and thought it was funny. And and there's some truth to to to the criticisms as well. Well, first of all, Cliff is an amazing writer. I do read most of what he has to say because I think it's.

I think it's wise and I think it's honest, right? You can say a lot of things about cliff, but he doesn't have much of a filter. And so what you see is what is, uh, is really what he's thinking. And I think that has a lot of value in this environment. And some of his gripes with private equity, I think are unfair. He says, private equity is volatility laundering. That's not a bug. That's a feature. Okay. Like that's like, that's a feature,

And I know he has some issues with crypto. I'm not involved in crypto, long or short, but certainly that's caused me to come away from more sexy, exciting type things.

But yeah, no, in terms of other, is there any other parts of that paper? Cliff's opinions are known. His opinions are known and the things he likes are known. And so if you were having a strong critique, you would say the summary is that things Cliff likes did well and things I don't like did bad.

Yeah, and that's fair. And that's fair. But the reality is the better certain asset classes do, such as crypto, the worse people like me who are not involved in those asset classes appear. Whether or not our decision to avoid them were grounded in some sort of a principle or just fear or whatnot, whatever the reason is,

It doesn't matter if Bitcoin goes from 100,000 to 200,000 or 250, like I think you mentioned in the piece, I'm going to look relatively dumber than I am. So Bitcoin goes from 100,000 to 10,000. I'm going to look relatively smarter for avoiding it. And neither of those actually have any impact on what I'm doing every day. But the perception of that, I think it's hard.

When you're a competitive business, I think perceptions...

It's hard not to compare yourself to folks. Do you read a lot of letters? I do from people I respect. I mean, there's a lot of really talented fund managers out there. People talk about the death of small caps and small cap managers. And yes, there are far fewer of us than there were a number of years ago. But there's a lot of really, really high quality work being done in these less efficient areas of the market. And

There's no passive market inflows where there are a large cap. There's very little of that. There's little allocator interest, even among funds with a very good track records. I'll say that.

without naming names, but there's quality work being done that produces very attractive risk-adjusted returns. And I have friends in the long-only bucket and long-short bucket, both, that I would characterize that. And yes, I do read their letters. When you see names that are your own names starting to pop up a lot, what is your response to that? Yeah, so that's infrequent, to be candid, because we skew...

towards industrials and materials, and that's not been a sector area. So there are a few funds that do stuff like that, but not too many. But yeah, there are certainly, we kind of know the people who are trafficking those names and talk to them and respect many of them a great deal. But yeah, no, certainly,

You can and do end up in what people pejoratively call hedge fund hotels, where you will do them. I think the question on those is what's your exit strategy, either if things go well or if things go bad, because if you all came in on the same thesis, everyone's probably going to be exiting on more or less the same outcome, and that can really dampen return. So you need to be cognizant of that. But that's...

few and far between for us. So you have your couple of industrial guys that maybe you'll see it. But if you start to see it popping up in more generalists, is that an indicator for you? Depends on the price, too. You always want to think about, and we talked about this in our market structure white paper last month, like

who are you going to sell this to? Because in the end, we have to give the money back to our investors or use the money for ourselves personally. So you always have to sell the business or the business has to pay you. So either the business is paying a giant dividend or you're going to be selling a business to someone else. That could be private equity. That could be strategic. That could be back on the public stock market, right? To another participant. But you're going to be selling that business to someone.

So who are you going to be selling it to and what are they going to be looking at to buy it from you at hopefully a higher price? So I think a lot about who's going to buy it from me in two to three years when I go into an investment. And a lot of times that could be long only folks who can look to a cleaner story with less complexity at a higher multiple. I could be a growth oriented folks or it could be, you know, index inclusions is a big one too. So if I'm getting

If I own a company, that company gets picked up in an index, there is passive buying, and that is a huge, huge wall of money, and that would tend to float stocks higher. So every stock is a different case, but you always want to be thinking about who is going to buy the stock at the period at which you're going to want to sell the stock.

A lot of people who are in the small cap world say, like, we're looking for the small caps that are going to become large caps. And obviously, historically, that's very true. Every large cap company was once a small cap company. But the size at which companies are coming to market now, the length of time that they spend private before the IPO has grown tremendously. I mean, do you find that true? You know, that sort of ism that, you know, all large caps were a small cap one day. Is that still true?

A lot of times it's different markets. There are very interesting businesses that just have a smaller end market. Our public 13F shows that our largest investment is in a business called Ferroglobe. Ferroglobe is the largest Western producer of silicon metal and ferro silicon. That's US and the European Union.

Those markets are relatively small. Now, they're growing because of the growth in solar, but Faragl being the biggest Western producer of these products, that's still a small cap because the end market is just small for that product, right? So that's never going to be a large cap.

So that's different than, hey, I didn't get to buy Airbnb because it never came public before it was this giant company, right? And because the end markets, the TAM is wildly different. So I think that you want to think about the TAM. With small caps, we end up with a lot of esoteric industries that are absolutely needed, but they're not going to be...

in vacation rentals or payments or these multi, multi, multi-trillion dollar industries. And that's where you see more large caps. But if you are trying to play that game, you do want to study things that can graduate into being these giant companies. I think one of the examples, and I'll use not one of mine, but a wild success example of many popular and vocal small cap managers has been PAR.

The payments technology company, right? That is a scale business. It is approaching scale. I've never invested in it. I have friends that do, but I'm bringing it up as that is an industry that can grow tremendously and that actually could graduate to being a real mid-cap.

or more over time, right? That's different than Ferroglobe where Ferroglobe, yes, could grow with the solar market, but without solar market growth, it's probably a GDP growth.

ish type grower over time because of how the industry structure is. And then I want to bring it back to like mandate as well. So if you do have something that graduates from small mid cap into large cap, I mean, do you have to sell it? Can't can you hold it? Do your how would your investors feel about something that you really believe in? And it just happens that the TAM has grown and continued to grow as the economy evolves.

I don't think the investors would mind as long as our go-forward investment case is intellectually honest and you are just kind of holding on to it because it's this wonderful name, right? Like you'd hate for something like pick up.

pick a multi-bagger like Microsoft or something that was, that's something as well known that started out very small, like constellation software, right? Yeah. If you were in constellation software, went up three X and you sold it because it went up three X and that was five years ago, that was really dumb. Right. But if you sold it because you,

It had reached your target of intrinsic value or you had other ideas that you liked better. That is intellectually honest, regardless of the subsequent performance. So I think it's all about intellectual honesty and maximizing the go forward, the X and T risk return of your portfolio at every given moment. That's the job. All right. Well, I think that's a good point to leave it on, Kyle. Thank you so much. Appreciate your time.