In certain circles Ken Griffin is considered an amazing hedge fund manager not just due to returns performance, but the fact that he has built a significant and complex business and enjoys managing employees. At a the Milken Institute Global Conference, Griffin discussed how he built a significant asset management business alongside other hedge fund industry participants.

Ken Griffin: Does a hedge fund manager want to build a complex organization?

Being a great hedge fund investor or trader and nurturing employees and building a complex business organization are sometimes considered different talents.  “Many hedge fund managers are not interested in running a complex organization,” Ken Griffin said on a panel moderated by IDW Group CEO IIana Weinstein. “They are focused on the joy and passion of investing directly in companies. They simply are not interested in having a complex organization with dozens or hundreds of people.”

Hedge funds are known to be populated by great investment managers, but they are not generally known for their genius in building complex management structures to run a large organization. This leads Ken Griffin to what he says is a more interesting question.  “Why are some managers more interested in building larger platforms, such as Citadel?”  Griffin might be considered unusual for the satisfaction he receives comes from building a business, finding and developing human talent, he said.

Building a significant organization means the firm’s leadership spends time working with employees to help them become better people. Ken Griffin said, given a limited amount of executive leadership time, he likes to allocate coaching time to the best people in an organization because he says this moves the needle most effectively.

Success in building a business is not only in effectively managing people, but selecting the right candidates.

Jason Karp, Chief Investment Officer and CEO at Tourbillon Capital Partners, L.P. says his best hires come from people who have overcome adversity, learn from that failure and are open to change.  “Dangerous hires are typically the most brilliant people… that they think everything they believe is correct. They think there is no way they are wrong. When presented with conflicting information they don’t change their mind. They are impervious with pain, often reckless in their personal life.”

Karp discusses an interesting point in talent identification and management, pointing to two different skills.

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Ken Griffin: The science and art of hedge fund investing

Ken Griffin noted that in his business their win percentage on correct investment decisions are near 52 percent, which in part highlights the quant science of making the right decision as opposed to the art.

“We’re in a lot of different businesses, and in everyone one of our businesses there is a science and an art,” he said. “The science usually encapsulates the hard work and process that goes into driving an investment decision. We’ll do thousands of management meetings a year,” he said, noting the lack of glamor. “At the end of the day the art comes down to not how you can do all that work, but how well you can differentiate your idea from what other people perceive the reality to be.

Ken Griffin believes hedge funds are successful when they “have a differentiated point of view and the market agrees with you when the information you have becomes known by all. That is really the art in this business. It’s in understanding how the market is going to incorporate the information you have that others don’t have.”

The key question, Ken Griffin observes, is how will other investors respond to information when it becomes known to all?  “That’s the art in the business and it is a tough art.”

Alexander Klabin, Managing Partner and Co-Chief Investment Officer, Senator Investment Group LP, defines how to achieve success based on making the complex simple. “Great investors are able to distill complex ideas down to the one or two things that really matter and then make an analogy for what the investment is,” he said.

Significant hedge fund allocator says judge investment success based on initial investment thesis, not just outcomes

Gideon Berger, Senior Managing Director at Blackstone in charge of alternative allocations and one of the leading allocators to hedge funds takes a different perspective on hedge fund success as someone who evaluates rather than manages a hedge fund.

“I don’t have a crystal ball,” he said, outlining his process for evaluating hedge funds. After basic evaluation, he answers a few questions. “What is investment thesis going in? Where is the edge or opportunity?” He writes these down and returns to the initial investment thesis later.

After an investment is made, it is important to follow up and keep in mind the initial objectives. “Fast forward a year and you are hopefully reflecting less on past performance than you are on the initial investment thesis,” Berger said.

If the initial investment thesis is playing out, but return outcomes are nonetheless below expectations, “that’s actually an opportunity to add to the investment,” he said. “But if the thesis isn’t playing out but the investment is making money, that’s called good luck… and that is not a repeatable investment strategy. Separating why you are making an investment from results is important in order to have a discipline around where you are putting your money. Otherwise it turns into a returns chasing activity, which clearly doesn’t work.”