By: BAM Team
Last month, BAM Co-founder and Chief Investment Officer Dmitry Balyasny joined Citigroup Chief Executive Officer Michael Corbat for a virtual fireside Q&A at Citi’s 12th Annual Australia and New Zealand Investment Conference.
Dmitry spoke to more than one thousand global investors, fund managers and corporate clients about managing risk and volatility, navigating remote work, the firm’s growth in Asia, and more.
Here are excerpts from that discussion:
Michael: This has been an extraordinarily challenging year. Can you talk us through how you manage risk and volatility in a rapidly changing macro environment?
Dmitry: We run a multi-strategy, multi-PM model. That model is very helpful in a rapidly changing environment because you don't have to just make consensus changes from the top – you have a lot of specialists that are figuring things out in their own niche universes every day.
In addition to that, a big part of our investment philosophy is adapting to what's going on in the markets – with a large dose of humility, as far as our ability to forecast what's going to happen in the far off future. That was important this year because it was very difficult to forecast. We spent a lot of time trying to figure out what's likely to happen in the next few days and weeks, which was the right mindset for a rapidly changing environment.
Lastly, you really need strong PMs. If you have fantastic risk systems and great thinkers, but your decision makers on the ground who are managing portfolios are not top notch, this type of market will expose that weakness.
We had a pretty good blueprint of the Covid situation because it hit Asia first, and we could see how serious and contagious the virus was by how China was responding to it. We had a lot of conversations with our teams about the potential impact in the US, across different markets, different types of companies, and we focused on positioning our portfolios accordingly.
M: In some of my conversations with other CIOs, they expressed frustration that their diversified positions this year actually prevented them from making significant gains. In periods of higher volatility, did you find yourself trying to get more alignment or consensus around certain views?
D: We try not to do that, actually. We want everyone to have a knowledge of what's going on in the markets and make their own decisions based on that knowledge. If you have 80 people running portfolios and they all have the same tilt, you lose the value of the multi-PM model.
M: The increase in retail participation in markets has been well-publicized. Can you tell us what effects that activity has had on your investment approach – and how you think it's affecting the markets more broadly?
D: I think it's a real positive for the markets. The more generalist participation there is – whether it's retail, institutional, mutual funds – the better.
In terms of alpha generation and uncorrelated returns, it just creates a bigger pie for those specialists who are arbitraging those minute differences between correlated stocks in their sector, between correlated bonds in their areas, etc. And if you have really good specialists in particular areas, they should always be able to outperform, on an alpha basis, any generalists that come through their space.
M: Your firm has really grown and evolved since you started as a long/short equity manager. What's the next thing you're working on?
D: In terms of newer strategies we're working on, the most interesting is the intersection between fundamental and quantitative equities.
Around six or seven years ago, we started taking our fundamental equity positions and quantitatively constructing equity portfolios around us. The next iteration of that was adding external signals into the mix – seeing if we can take different external data sets and amplify our internal research with external signals. The current version we're now looking at is using machine learning and other advanced techniques, so that our programs can learn and get better, faster.
M: How has your firm’s culture evolved as you’ve grown, and how are you navigating the remote work environment that we find ourselves in?
D: As we've gotten larger, we've been able to find a good balance between having an entrepreneurial, creative, collaborative culture while also having process discipline.
That collegial, team-oriented culture took on a new importance in Covid. If you have a culture where people aren’t comfortable reaching out to each other, asking questions, jumping on a call, navigating remote work becomes very challenging.
But because we've built up that grain together over the years, and our people really feel that the firm is behind them and their co-workers are rooting for them, it was a seamless transition for us.
M: Over the last 12 months, Asia has played a significant role in terms of increasing their overall performance. How important has Asia Pacific been for your fund’s performance over the past year?
D: Asia has been a big strategic region for us for a number of years, and we're continuing to invest there. We just hired a new Head of Analyst Development in Asia for equities, and we're hiring a number of portfolio managers.
One of the things that's different about hiring in Asia is that there’s a bit less experienced asset management talent, particularly in a market neutral model, than in the US, or even in Europe. Our Anthem portfolio manager development program has been very successful in Asia, and that's one way to really try to grow there.
