My guest today is Will England, the CEO and Co-CIO of Walleye Capital. Walleye is a multi-strategy hedge fund headquartered in Minnesota that manages around $5 billion. Our conversation is a primer on multi-strategy hedge funds, which have become a force in markets through the success of firms like Millenium, Citadel, Point72, and Balyasny. We discuss the operational complexity behind the model, which managers best fit this type of investment style, and what happens in stress events like the Gamestop short squeeze in early 2021. We also talk about performance culture, the All Blacks, and Will’s experience as a US National Team rower. Please enjoy my conversation with Will England.

Listen to Founders Podcast
Founders Episode 311: James Cameron

For the full show notes, transcript, and links to mentioned content, check out the episode page here.

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Show Notes
(00:03:22) - (First question) - His fascination with Robber Barons
(00:04:49) - He explains the style of investing he has built at Walleye Capital   
(00:08:51) - The importance of scale and what it means for firms like this 
(00:13:01) - A breakdown of the component parts of a 15% return structure
(00:16:56) - His advice to new portfolio managers trying to succeed with long/short investments
(00:21:23) - His reaction to an efficient market hypothesis   
(00:27:33) - He tells us what happens above the individual manager level
(00:29:42) - The universe of talented people behind the business
(00:35:26) - The backstory of Walleye Capital and why he chose Minnesota    
(00:42:37) - He discusses the felt experience of being at Walleye versus other firms 
(00:47:25) - Whether he identifies more as an entrepreneur systems builder or as an investor
(00:50:04) - What he says about the half life of successful quantitative strategies  
(00:54:03) - A breakdown of style allocations and the percentage of managers within each 
(00:56:30) - How he determines how much leverage to use and how to be great at applying it 
(00:59:59) - How the firm handles tough investment periods
(01:02:34) - How he knew Citadel wasn’t taking down gross during the GameStop short
(01:03:51) - What he looks for when hiring a portfolio manager
(01:06:37) - His philosophy on performance and how he blends that into his firms culture 
(01:09:21) - Inspiration he’s taken from the All Blacks team
(01:11:25) - Addition aspects of the firm he believes are important
(01:13:46) - Historical finance pioneers that inspire him 
(01:16:07) - The kindest thing anyone has ever done for him

This episode is brought to you by Tegas, the modern research platform for leading investors.

Stretch your research budget with flexible expert calls you can trust.

At a fraction of the cost of traditional expert networks, Tegas customers pay only what an expert charges with 0 markups and no confusing call credits, netting an average of 70% savings.

Tegas offers the ability to schedule 30 minute meetings, an offer you won't find anywhere else.

With White Glove custom sourcing for every project and robust compliance measures, including a dedicated 50 plus person analyst team that vets every call transcript, Tegas ensures your privacy and protection.

As the industry innovator for qualitative insights, Tegas helps you find the right experts you need a regular listener of my podcast, I have another recommendation for you.

The podcast is called Founders and it's hosted by David Senra who has devoted his life to learning from history's greatest entrepreneurs.

Each week, David distills the lessons of a different founder from Henry Ford to Coco Chanel to Edwin Land.

His recent episode on James Cameron is particularly excellent if you're looking for somewhere to start.

I guarantee if you listen to Founders, you'll feel inspired to level up whatever you're working on.

You can find a link to Founders in the show notes of this conversation.

And because Founders is part of the Colossus Network, you can search all the past transcripts on our website at joincolossus.com.

I'm Patrick O'Shaughnessy and this is Invest Like the Best.

This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.

Invest Like The Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management.

All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

My guest today is Will Engliff, the CEO and co-CIO of Walleye Capital.

Walleye is a multi-strategy hedge fund quartered in Minnesota that manages around $5 billion today.

Our conversation is a primer on multi-strategy hedge funds, which have become a force in markets through the success of firms like Millennium, Citadel, Point72, and Ballyasny.

We discussed the operational complexity behind the model, which managers best fit this type of investment style, and what happens in stressful events like the GameStop short squeeze in early 2021.

We also talk about performance culture, the all-blacks, and Will's experience as a U.S.

Please enjoy my great conversation with Will England.

So, Will, maybe we can begin by you telling me why you are so interested in robber barons.

Will England I love learning about that time of history and many things are different, but many things are the same.

And the scope of what some of these individuals accomplished was incredible.

So I lived in Minnesota in a town called Wysetta.

And in Wysetta, there's still a train station there built by James J.

It was 1 of the lesser known robber barons, but was still at the time 1 of the top 5 or 10, I'm running a railroad, I'm building this entire network.

And what they're able to accomplish in just the force of personality of saying, I'm literally going to change the landscape of the US.

I'm literally going to bring people, physically move them across.

And so much of that was because of who they were as individuals.

And yeah, obviously the robber baron term is because they're pushing the boundaries in certain areas.

Hill, relatively speaking, was 1 of the better robber barons, but really inspiring.

And so when we talk today about people building great companies, changing the world, it doesn't even fucking pale in comparison to what these people were able to accomplish.

And it's really inspiring and very applicable to today.

World was different then in all sorts of ways, both positive and negative, but the core concept of someone who decides I'm literally going to go and have an impact.

I think a lot of these people that we were talking about at lunch, whether it's Vanderbilt or James J.

Hill or any of these characters through history would be fun to weave how they've impacted your thinking throughout the rest of the conversation.

But before we go too deep into a history lesson, I'd love you to level set for the audience and explain the style of investing platform that you are building and have built.

Many call it the pod model or the platform model.

I don't want to take for granted that we explain this in lots of detail.

We'll spend probably a half hour here or something, because I think it's become such an important part of the investing landscape And many people know Citadel and Ballyasny who I've had on the show before.

But I think just explaining this method of investing first and foremost would be a great place to start.

And you can take that whatever direction you want and then I'll poke and prod on aspects of it.

The technical term is a pass-through multi-manager.

So hedge funds are a very special type of hedge fund.

That term pass-through, it sounds like it's an operational nuance, but it's extremely important.

What that is essentially saying is that investors are putting the trust in you as the investment manager to pass through essentially all the costs of the business in order to generate very high quality risks, just returns.

The way to think about the landscape today is there are essentially 4 big firms in the industry that have all been around for decades.

There's Citadel, there's Millennium, there's Point72, which used to be SAC, and now Bally, Asney, and Swelt.

Growing that's been around for a number of decades as well.

Realistically, there's only 4 or 5 that have sufficient scale, sufficient track records competency to be able to, again, take advantage of the full benefits of reciprocation.

Core concept of the multi-manager model is to say, this should be a pure alpha vehicle.

And the way to get that is by putting together multiple different types of essentially relative value strategies.

And that could be long, short stock picking, both from a fundamental standpoint and quantitative standpoint, various different forms of macro strategies, various different forms of volatility trading.

It would be inaccurate to say that everything has an arbitrage element to it, but relative value arbitrage-esque is certainly pretty common across most of the different styles.

And multi-managers, the biggest ones, the best ones really putting that together, putting those strategies together in a single format.

It's very easy to articulate why that makes sense.

And again, you take essentially just from a pure time series to employ multiple different uncorrelated time series, put them together while you've got a multi-strat.

What is very fascinating about the model and why there are realistically so few players that are doing this is to do that is incredibly difficult.

Not only do you have to have excellent individual managers, and we're talking in some cases hundreds of excellent individual managers or pods as they're referred to, But you also have to run a world-class operating company.

So that means world-class technology systems, even some of the less sexier functions, operations, legal, compliance, accounting, and be really able to invest in that and be world-class is very, very difficult.

And so if you think about the elements of a traditional hedge fund or investment model.

This was talked about in the previous podcast.

If you're running an investment firm, you have to essentially pick your investments.

So you've got your alpha for your signals of your quantity initially, you got number 2, portfolio construction, how do you put everything together in a balanced manner?

And then number 3 is building the business.

For most single manager hedge funds, that's things like raising capital, it's hiring.

Do we have a cool fancy office, stuff like that.

But for the multi-manager pieces, that third piece, that's just magnified dramatically because you're operating at such a scale across essentially everything that can be done in hedge fund land and putting it all together.

Complexity doesn't scale linearly, it scales exponentially.

So that's a really key differentiator of do you have the ability to run a world-class operating company?

And it is why in many cases Citadel is amazing.

And in the past couple of years just from a return standpoint have differentiated themselves And a lot of it goes back to the investments that they've made in building just this machine of an operating company.

I've been really interested lately in studying asset management firms for whom scale is an advantage or even a requirement.

Because typically the story in investing is that scale or AUM is the enemy of performance, that as you succeed, you get more assets, and as you get more assets, your universe shrinks and you can't perform like you did early on.

It's like a tale as old as time in the investing business.

But there seemed to be this small number of firms, not just in the multi-manager model, but someone like Blackstone, you could argue, has benefited from their scale and a lot of their strategies.

So talk to us about what scale means and all its meanings for a firm like this, where you said there's only 456, I'll say contenders to those top 4 firms who all have enormous scale in assets and all these other measures.

Why are the barriers to entry higher here than for a stock picking hedge fund?

So let's separate scale into strategy scale versus company scale.

With strategy scale, all things being equal as you get larger, positions get bigger, effectively become less nimble, transaction costs go up.

So it's not like we're changing the laws of gravity in our particular type of world for any individual strategy, and that can be a fundamentally driven strategy, it can be a quantitative driven strategy.

What is different, going back to our earlier comments about building an operating company, is that there definitely are economies of scale and even network effects as you get bigger.

So just to talk from a size standpoint, you've got sitting on millennium or approximately 60 billion of actual AUM.

There's a lot of leverage that's involved in these models.

So the balance sheet is multiple turns higher than that.

These are very, very big investment businesses.

And we're considered 1 of the smaller players in industry and we're still above 5 billion.

So small is relatively more 300 people versus 3, 4, 000 for some of the other places.

But that second element, just to return to it for a second, the notion of company scale, operating scale, as you get bigger, you can get better.

Think about what I was just saying before is the model is not just about having good individual investment strategies and why is it that you might have hundreds of them.

It's really to say for any particular type, you don't want that to get too big, to have too much market impact, but then you got to start putting these things together.

So it goes into, okay, I'm only going to build world-class technology if I can build it for dozens and dozens of people, because otherwise the fixed cost investments are going to be too high.

I'm only going to build an accounting department with dozens of accountants that are going to implement, again, world-class systems, be able to track all the individual arrangements we'd have if you're doing that, again, at scale.

So there's a true notion of the barrier to entry is that you need to be great at all of these non-investment functions in order to, frankly, justify what they're doing to them.

And I'd really just go back to underscore like technology is a huge, huge piece of what we're doing, just like in other businesses.

And that's not a cliche like, oh yeah, tech's important everywhere.

The exercise that we're running, it's like a nuclear reaction.

And if you've got great systems, be able to contain it because you're using 567 turns of leverage in this case.

If something goes off the rails, you just blow up.

And there are firms that have blown up historically.

So the sophistication of the risk systems is very much tied to sophistication of the technology systems.

So if you don't have that as part of your DNA and abilities, no, you absolutely can operate at scale.

But as you get bigger, once you're able to develop those systems, again, to really say these are our core central functions that allow us to plug great investors onto the platform, you can get bigger.

And then that's where the momentum can build in.

As you get bigger, you can offer the best people, which again, we can define what best means, but high quality practitioners, larger book sizes, economics in our industry become very important.

If you're not operating a certain scale for too small, you can't offer that to someone, it's not going to be attractive.

And again, that relates to this pass-through concept that we've been talking about earlier.

It's different than in most hedge funds where it might be a 2 and 20 model where the firm gets paid 2 and 20 no matter what.

You could have 5 individual teams that are doing great, but the other day they got to split that 2 and

No, when we go and when all these other places that we've been talking about go and strike a deal with a PM, that's formulaic, it's contractional.

There is an element of which you kill there.

And so as you get larger, yes, you can definitely incentivize people more with larger book sizes.

On the other hand, the pace is really, really important.

It's inaccurate to just assume, just raise as much money as possible.

And because you're a multi-manager, it's going to be great.

No, you need to do the things that are precursors to success, just like in any business, you need to be able to build the platform properly.

So when you absorb that capital, you can deploy in a ways which ultimately are respecting the trust that your investors are giving you, whether they're entrusting you that capital in the first place.

I'd love to take this return stream that some listening might be familiar with, which Canon often does for multi-managers, look very different than like a tiger cub or something that's effectively stock pickers.

Some of them really, really good stock pickers, but more of a market like exposure, and I'm just going to make up a number, let's say the return in a given year is 15% average return is 15% over time or something.

And in the case of the multi-managers, the best ones, often the volatility is quite low.

Relative to what you'd have to endure for a 15% return elsewhere.

And hopefully uncorrelated to your point earlier with just the broad, let's say S&P 500 or something like that.

So I'm an LP, I give you money and I get back a 15% return, I'd love to walk through the component parts of that 15% at every layer, the costs, the leverage, the return streams themselves, what those things are, the portfolio construction tools and the risk really break down what's underneath that return stream and maybe going 1 by 1.

You pick the order, you probably can build it up from the ground up, but it is confusing probably for a lot of people that haven't thought through this strategy that I'm getting this simple return, but underneath that is all this fairly complicated stuff going on.

So I'd love you to explain that in a lot of detail.

So I'm just going to speak in the context of assuming everything was trading equities.

There's analogs for fixed income products, but just to make the numbers a little bit easier to follow.

And again, effectively relative value investors.

So let's assume when we're talking long, short, this true market neutral, long, short.

So if you have $100 in a fund, if you had 1 turn of leverage, that would just be 100 long, 100 short to 100 is 200 long, 200 short.

So the way the numbers work out, and when you're just talking return on GMV on gross market value, is collectively the individual strategies are really looking to make 2 to 3% return on GMV.

Yeah, the individual strategies and then collectively.

So if you have 50 equity long short managers and you say, okay, pick your number $10 billion balance sheet, you're looking to make a couple hundred million dollars of P&L off of that as a whole.

And so those are the individual return of streams, but the average, the expectation is the same no matter where you are.

And so the way to back into the leverage is depending on the type of firm, you can have up to 10 turns of leverage.

So let's just say it was 10 to make the math really easy, 10 and 3% to get to your 15.

So I make 3% on GMV, but using 10 turns of leverage, that'd be a 30% gross return on the actual AUM.

The way that the fees shake out And the fees per unit of exposure, again, are very fair, but you've got a lot of them and that leverage comes in.

Effectively, the investor gets half of the return.

And because you're paying the individual PMs, there's a fixed cost element of it.

You're paying this analyst salary, there's the technology cost, there's the central team costs.

And then individual PMs, depending on their tenure and their strategy, paying between 15 and 20% of the actual P&L.

So when you add that up, the investor gets about half of the return.

And that's how you go from that 30% gross return to the

So people talk about, yeah, there's a lot of fees in a multi-manager model, which absolutely there are on an A1 basis.

And it's extremely important in our industry to remember that you are the steward of your investor's capital.

We would actually look in the fees per unit of exposure.

It is analogous to your standalone tiger style investor that's charging 2 and 20.

It's just because of the leverage that gets magnified a bit.

And that's justified because of the benefits of putting all these different strategies together is really when it comes down to having this giant risk management exercise.

And I can't underscore that enough of running a proper multi-manager, it's risk and people.

Plug great people into a great system, risk manage the hell out of them.

That's what allows you to use those numbers and create a profile that ultimately is very attractive.

Let's zoom into a specific strategy and manager and we'll call them Jane Smith or something.

They come to a platform like yours and as you just articulated, their job is effectively earn a 3% long short spread.

Let's say they're in equities and keep this really simple and their market neutral.

They're not allowed any basic market exposure.

And that's 1 market risk factor to which they are neutral.

So her job in this case is have the longs that she picks outperform the shorts by 3 percent.

You don't let the basket out and that's what you're looking for.

If you're recruiting a new Jane, let's say, what else are you telling her she needs to do to be successful beyond just earn 3% better returns on the long versus the short side.

For a long short investor like that is not just about market neutrality.

We give someone a risk sheet when other firms would give someone a risk sheet and saying, okay, effectively you're driving a car down the highway.

The guardrails are there just like in a car, so you don't drive off.

Obvious things going 1 step down for that.

Don't be too concentrated in a single position.

So if something surprising happens you're not punched in the face.

So that's another element of saying, what's your universe to be in?

Let's just assume if you're focused on picking tech stocks, don't all of a sudden go dealing with industrial companies.

Or if you're a biotech manager, you should be hyper-focused on this particular set of what you're doing.

Liquidity, a big part of the risk elements is the worst place to be in investing is something that you don't like and you can't get out of.

In private market investing, that's very clearly going on.

Same applies to public market investing as well.

So being cognizant of liquidity profile of your positions so you can stay nimble to a reasonable degree.

Those are some of the obvious core elements.

And that final piece of that, which gets talked a lot more recently, we act this way, all the firms are going to act this way, is to say, okay, effectively as a stock picker, and the same concept applies to a quantitative investment strategy, a cancrease debt or strategy, really, is your job, to my earlier comments, is to produce alpha.

So let's think of all the things that are known.

And you can bifurcate that in 2 ways in terms of the style factors, momentum, value, growth, et cetera, which are effectively more statistical than anything.

And then there's the other side is the industry factors.

And let's actually take that out to a reasonable degree.

And the reason for that, and there's tons and tons of statistical analysis that we've done that other firms have done, is humans' ability to consistently not only time the market, but to time when is the value factor going to switch, When is the growth factor going to switch?

The law of large numbers is not in your favor.

And so as a stock picker, let's just isolate out.

Focus on stocks, focus on like for like relative value.

And I can even make an argument for the market as a whole.

This is a huge part, especially nowadays when so much talent has left long onlys of what actually keeps market efficiencies.

This software company versus that software company, which 1 is better or worse?

And that's what we want people to be doing because that's where we believe they have edge.

That is where the law of large numbers is in your favor.

Again, whether you're a quantum investor or you're a fundamental investor in saying, yeah, take out all the noise, all that other crap, because it's so fucking confusing what actually is driving movements at any given day.

And that's when you get this notion of idiosyncratic returns.

What is your idio number that needs to be above a certain degree?

And that's where firms can differentiate themselves effectively how locked down, how tight are you going to be?

And that is not to say that the machine is doing all the portfolio construction for fundamental stock pickers.

Obviously for quantitative strategy there is.

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Will England - A Primer on Multi-Strategy Hedge Funds