Name: Nathan Peters
Current Role: Director, Fulcrum Alternative Solutions
Analyst at Robeco-Sage Capital Management and Jeffrey Slocum & Associates
Academics: BA, Philosophy and International Studies, Macalester College
Accolades: Every day I can earn a salary for doing what I love is accolade enough in this tough ol’ world.
Activities Outside of Work: Lockdown specials: running, cooking, tennis, reading nonfiction. I don’t have as much “hobby” time as I used to with two young kids!
What are your high-level observations on how the investment management landscape has evolved over the years?
The biggest shift I’ve witnessed over the 20 years I’ve been in the industry is the relentless march of technology twinned with the transparency that it brings. As a result, passive gets bigger as a % of the total pie, and non-benchmarked active gets bigger in absolute terms, funded from benchmarked active managers. For my sins, I have thrown my lot in with the active managers, focusing on the broadest toolset application in hedge funds. I just find it endlessly fascinating how people keep trying their darndest to add value (against the odds). My money is on human ingenuity.
Have you noticed a shift in focus on factors versus traditional asset-class diversification?
Traditional asset classes still dominate the investment universe, and if standalone factor performance is anything to go by, I don’t see this changing very much. Also, some of the justifications for expecting a return in the factor space are so regime-dependent that they become less useful as a core building block of portfolios, in my opinion. That said, as a risk attribution tool, I’ve found well-constructed factor lenses like Venn to be invaluable in helping to price what are sold as skill-based strategies.
What are the challenges investors face today that perhaps they didn’t face in the past?
The logical end of a near 40-year bull market in bonds leaves most asset classes and some factors vulnerable to a generational headwind the likes of which everyone currently in a portfolio management position has yet to grapple with. The key will be to align yourself with managers whose expected returns don’t depend on low/falling time value of money.
How did you start your career in investment management?
I answered a physical bulletin board ad in my college’s career center for “English majors” who wanted to learn finance. I wasn’t an English major, having studied Philosophy, but figured that would be ok. I still haven’t “learned” finance in the sense that I’m not sure the lessons ever end, but it’s been a fun education.
What were your major influences to get to this stage in your career?
For me it was spending time working towards a common goal with quality people rather than anything I read or studied. The real world is the best teacher. As my father likes to say, we are just “inferential processors in a quantum soup” and we’re better in teams. I would like to shout out to Texas Hemmaplardh, who showed me the ropes and demonstrated considerable patience with me early in my career, and Ron Tauber, who kindly took me under his wing and showed me how business is done in the big city of New York.
How do you and your team approach idea generation? What quantitative elements are important to you?
We focus on sourcing fund investments, and the only way we’ve found to achieve the fee level we need in order to avoid paying over the odds is to invest early in new funds launched by established teams/businesses in return for fee discounts. As such, we do a lot of handicapping of pro forma or adjacent track records to the proposed fund, formulating our risk/return assumptions on the basis of first principles which we call the 5 Key Ingredients for Competitive Advantage: 1) Alignment of Interests, 2) Experienced Risk Takers, 3) Targeted Inefficiencies, 4) Effective Controls and 5) Sustainability Policy & Approach. Once these are postulated, portfolio fit is the primary quantitative application, and for that Venn does an admirable job. The ability to quickly and easily create LASSO regressions on daily data with a robust, cleaned and appropriately residualized factor library is a leap forward in quantitative rigor for us.
How does your organization use factors to evaluate managers, and create and manage portfolios?
Factors are the investment map against which we plot our course. Perhaps in past decades we would have used only the eight Core and Secondary Macro factors which are also in Venn, but the inclusion of Macro Styles and Equity Styles help us to better explain and handicap the wider dispersion we see in the fully active hedge fund universe. In terms of managing portfolios, we have our core asset class expected returns generated by our world-class macroeconomics department here at Fulcrum, and we input those expectations into Venn to forecast portfolio returns and risk, although these of course are taken with a big pinch of salt and probabilistic range of expectations depending on the actual path of the economy. Generally, we find we do better to manage risk, for which we have greater certainty, and let the returns take care of themselves based on the merits of the thesis we set out in our 5 key ingredients I mentioned earlier.
How does your organization go about measuring sensitivity to factors? How does your organization measure and monitor the risks in your portfolios?
We like to run both single-factor and multi-factor regressions for a given asset to try to understand what the correlation structure of the market means for our risk at any given time. Scenario analysis is useful to stress-test the covariance matrix as well.
Does Fulcrum make use of returns and/or holdings based analysis when monitoring portfolios? What do you see as the pros/cons of each?
We conduct both holdings and returns-based analysis across the firm and compare and contrast the findings against each other. Just the diversity of method is helpful in framing risks, although I find returns-based analysis freeing in that the breadth of data available far exceeds holdings-based analysis, allowing us to better sort and sift the entire universe of potential investments. But the depth and detail in holdings-based analysis gives you a better understanding in a specific instance.
Can you discuss your thoughts on leveraging software/quantitative tools in your process?
Unlike financial leverage, there is no increase in the fragility of the enterprise when you leverage technology. Well-designed software just frees up time to pursue higher order (read: greater value added) activities. The biggest potential pitfall with quantitative tools is a false sense of security that exquisite measurements will be exquisitely accurate as well. We try to guard against this by always reverting to first principles and acknowledging the sheer scale of what we know that we don’t know.
Disclaimer: Nathan Peters, who is employed by Fulcrum Asset Management, a current Venn Pro subscriber, is not compensated for this statement. As a Venn Pro subscriber, Fulcrum uses portfolio analytics and certain other Venn features that are only available on Venn Pro, and its experience could differ from your organization’s due to its particular use of Venn, the version of Venn used, or other factors. Not all subscribers will be equally satisfied. The person providing this testimonial was selected based on a variety of factors, some of which are subjective.
The information contained in this article is provided for general informational and educational purposes only, and should not be construed as investment advice. The contributor to this material is associated with a client of Two Sigma Investor Solutions, LP (“TSIS”). Neither TSIS nor its affiliates have compensated the contributor for his statements. The statements from the interview have been edited and reformatted by TSIS with the contributor’s approval. Unless otherwise noted, the contributor’s statements do not represent the actual views or opinions of TSIS or its affiliates, or any officers, directors, or employees thereof.
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