Robert Morier: Welcome to the Dakota Live Podcast. I'm your host, Robert Morier. The goal of this podcast is to help you better know the people behind investment decisions. We introduce you to chief Investment officers, manager research professionals, investment consultants, and other important players in the industry, who will help you sell in between the lines and better understand the investment sales ecosystem. If you're not familiar with Dakota and our Dakota Live content, please check out our website at dakota.com. Before we get started, I need to read a brief disclosure. This content is provided for informational purposes and should not be relied upon as recommendations or advice about investing in securities. All investments involve risk and may lose money. Dakota does not guarantee the accuracy of any of the information provided by the speaker, who is not affiliated with Dakota. Not a solicitation, testimonial, or an endorsement by Dakota or its affiliates, nothing herein is intended to indicate approval, support, or recommendation of the investment advisor or its supervised persons by Dakota. The statements made by Chris Paolino represent his personal views and opinions and do not necessarily reflect those of Titan Advisors or its affiliates. Today's episode is brought to you by Dakota Marketplace. Are you tired of constantly jumping between multiple databases and channels to find the right investment opportunities? Introducing Dakota Marketplace, the comprehensive institutional and intermediary database built by fundraisers for fundraisers. With Dakota Marketplace, you'll have access to all channels and asset classes in one place, saving you time and streamlining your fundraising process. Say goodbye to the frustration of searching through multiple databases and say hello to a seamless and efficient fundraising experience. Sign up now and see the difference Dakota Marketplace can make for you. Visit dakotamarketplace.com today. Well, today we are joined by Chris Paolino, Co-Chief Investment Officer of Titan Advisors. Titan Advisors is a global alternative investment firm specializing in hedge fund solutions, custom portfolios, and insurance-dedicated funds. Founded in 2001 and headquartered in Stamford, Connecticut, the firm manages approximately $3.7 billion in assets for institutional investors, family offices, and high-net-worth individuals. Chris, welcome to the Dakota Live Podcast. Thank you for being here.
Chris Paolino: Well, Thanks for having me, Rob.
Robert Morier: Well, despite the weather, your room looks bright and sunny. So, I'm hoping it's a little nicer in Connecticut than it is here in Philadelphia with the weather. Well, before we get started, I'm going to read your biography for our audience. Chris Paolino is Principal and Co-Chief Investment Officer at Titan Advisors. As co-CIO, Chris is responsible for overseeing Titan's investment strategy, manager selection, and portfolio construction, guiding the firm's approach to hedge fund allocations and custom investment solutions. Chris brings deep expertise in alternative investments, having spent years analyzing, underwriting and managing hedge fund portfolios. Before joining Titan, Chris was an executive vice president at Hartford Investment Management and head of portfolio strategy. At Hartford investment Management, Chris was a member of the firm's investment committee and responsible for hedge fund investments across all portfolios and for the portfolio management of the company's internal defined benefit plan. Prior to that, Chris was part of the United Technologies Corporation's pension investment staff, focusing on absolute return investments. Throughout his career, Chris has been a thought leader in the hedge fund space, contributing to industry discussions on market trends, manager due diligence, and the evolution of alternative investment strategies. Chris earned a BS from the University of Connecticut and is a CFA charter holder. We're excited to have Chris on the show today. Chris, congratulations on all your success. And again, welcome to the Dakota Live Podcast.
Chris Paolino: Well, thanks, Rob.
Robert Morier: Well, we always like to start with the beginning. Chris. Would you mind sharing a little bit about your career path. As you know from our discussions, I'm a professor at Drexel University. So, my students are required to watch this show. So, they always like to hear how you ended up from a classroom in stores to… at least to this route on the investment management trail.
Chris Paolino: Yeah. So, it's interesting. I've been around the investment markets my whole life. Both my father and grandfather were retail financial advisors, always had CNBC and its predecessors on in the house as I grew up. And I went to high school and college in the '90s, which was a sort of a historical bull market. So, it was a very topical thing to try to be take an interest in, and I did. So, upon graduating from UConn, I went to work with my dad for a year and quickly realized that the sales aspect of it was not my strongest suit and talked to some people on the institutional side about how to become more of a buy-side professional investor. And from there I pursued my CFA designation, and my career unfolded in a very fortunate way for me.
Robert Morier: And it started in 1999. And you were early into hedge funds and absolute return strategies in your career. What experiences, really shaped your approach to hedge funds and alternative strategies, specifically as it relates to absolute return?
Chris Paolino: I graduated college in 1999, and I went to work in the fall of 1999, which was the absolute height of the dotcom bubble. And I was in hook, line, and sinker. It's funny, I have a little bit of a deja vu feeling in today's markets, a little bit around some of the AI enthusiasm. But at that time, it was the build out of the internet and technology stocks. And that all came to a screeching halt pretty early in my career. So, I realized the importance of diversification and hedging. And I saw a lot of those stocks go down 90%, 95%. And it kind set me on a path to be interested in more all-weather strategies, where you can generate returns regardless of what the market's doing. And that was at a time when the hedge fund industry was really in its very early stages. And it was a place to get a little bit on the ground floor, learning about those types of strategies.
Robert Morier: I'm curious. Given that it was the earlier days of hedge funds and absolute return, what was the peer group like for you at that time? Were there a lot of people covering absolute return hedge funds? Did you feel like an army of one, or was it growing kind of quickly as it related to just the overall peer group?
Chris Paolino: Yeah. It began to grow pretty quickly in the wake of the dotcom bust. I think for some of the reasons I espoused already around just people recognizing the need for more levers in their portfolio to generate returns regardless of what markets were doing. At that time, the early days of the hedge fund industry were mostly long-short equity. I think the industry has a connotation of being high risk. My experience has been the opposite of that. And part of that is, I think in the early 2000, the business started to institutionalize more towards having low correlation and low beta to public markets and less about making 80% or 100% a year. So, I've seen it evolve quite a bit towards much more macro and market-neutral strategies from the very early days, when it was much more about generating outsized returns and less concerned with lack of correlation and diversification benefits.
Robert Morier: Yeah, absolutely. Well, you're still sourcing hedge fund managers today, all these years later. You're doing it with Titan. And Titan's built a very strong reputation in hedge funds and a variety of multi-investor solutions. What differentiates the firm's approach to sourcing top talent?
Chris Paolino: Well, I think at its very core, it's always a people business. I think we have a very seasoned team that has been around the business for a long time. A lot of partners in the firm have been doing this as long or longer than I have. And when you're underwriting hedge fund investment strategies, a big part of it is a qualitative assessment of the people on the other side of the table. And do they seem to have a durable edge? Can they articulate it? Does it come through in the numbers… all those types of things. So, I think experience is a big part of our value add, as well as just being focused on the space. There's a lot of people that have several hats at different allocators. They might be responsible for private equity, private credit, and hedge funds and just have less time to focus on and see as many things as we do as specialists.
Robert Morier: That makes a lot of sense. Well, it seems like there's always a shifting macro environment. So, with the movement of the landscape in which you're investing, how has Titan's investment philosophy remained steady but still adapting to the landscape that you're investing in? How has it evolved?
Chris Paolino: Yeah, not to be cliche about using the term "try to skate where the puck is going," but we do try to be forward-looking and not really chase current performance or anything like that. I think we're trying to be somewhat contrarian. My personal bias is much more of a value investor, which has been a lonely existence for the last several years. But I think we try to be contrarian. We try to find areas that are out of favor, where there's less competition and more room to generate alpha. I think, obviously, the market's been defined as the leadership has been the mega-cap technology names. And it seems very difficult to have a whole lot of edge there, given the size of those companies and the coverage universe. So, we tend to try to find out-of-favor areas, where there's less competition and more room for active management to add value.
Robert Morier: That makes sense. As you're saying this, we graduated around the same time and entered the industry at the same time. But I've met a lot of people who have never seen an in-favor value cycle. So, do you think do you think it's going to happen in our lifetime? Or will we have to be contrarian for the remainder of our careers?
Chris Paolino: I think it is going to happen. I've been saying that for quite some time. But at the end of the day, I'm a believer that the trees don't grow to the sky, and the price you pay for something matters.
Robert Morier: I agree. Thank you for sharing your thoughts there, Chris. We appreciate it. Just moving on to credit strategies, it seems like the topic we seem to be talking about the most on this show, at least over the last six to 12 months. But they've been in flux, particularly over the past year. So where do you see the most compelling opportunities in credit strategies today?
Chris Paolino: It's interesting. This is going to be… highlight, I guess, the contrarian thinking. But I think we're at all-time tights or very close to it in credit spreads in public markets. Part of that, I think is a function of the public markets have gotten a little more high quality over time because of the proliferation of private credit taking some of the maybe lesser quality deals. But I think the most interesting credit strategies I see tend to be short biased. And the reason I say that is because, being short, credit spreads is a very defined downside. It's a very cheap form of convexity. And it's something that I think can protect the portfolio but won't cost you a lot, like say, a long, long vol tail strategy might, just in terms of the bleed of volatility. The most interesting things I see in credit tend to be shorter bias now because I think it's about as cheap as it's ever been to be short the asset class, at least on a spread basis.
Robert Morier: Yeah, that makes a lot of sense. There's so much to talk about there, particularly as you see this democratization of alternative assets and private markets and increasingly private credit in retail portfolios at a time, potentially, where things are looking a little frothy. So, I appreciate you sharing that. We're going to talk a little bit more about that in a few minutes. But there's also this irony that investors are increasingly accepting illiquidity in private credit for these relative diminishing incremental returns. So how do you assess that trade-off? And where do you see that breaking point for institutional investors? We'll leave the retail folks alone for a little while.
Chris Paolino: Yeah, it's interesting. When I was at the Hartford, we did repurpose some of our dollars that were dedicated to hedge funds to private credit. And this is going back to 2016 type timeframe, where private credit was really more of a burgeoning asset class. And the logic at the time was that you could get an increase in spread for probably better-quality credit. I think now that's a little less true because it's a destination for funding for a lot of private-equity-sponsored companies. And I think now, investors seem to be most, I think, enamored with a little less mark to market volatility can go a long way for investors in portfolios. That's spoken like a true hedge fund guy, who has 12 statements a year instead of 4, which is a term I always use around one of the problems with the industry is observable volatility. But I think the private credit area has yet to really go through a default cycle. And I think we'll see. I think there's, obviously, a lot of very smart people out there lending money at those firms. And I'm sure they'll weather it just fine. But I think the size has grown to the point where it'll be interesting to see how it weathers an economic downturn.
Robert Morier: Yeah, absolutely. Thank you for sharing that. I can't tell you how excited I was that you wanted to talk about commodities. Again, it's something that a lot of our guests, not that they've been actively avoiding it, but it's just it hasn't been top of the conversation for a lot of allocators, for a variety of different reasons. But you did want to bring up commodities, and you had mentioned that you felt it was a compelling alternative to illiquid investments. Why is that for you all?
Chris Paolino: I think it's a super-interesting asset class. I guess this highlights my contrarian nature a little bit. But it's super interesting because it was out of favor for a dozen years. I can't tell you how many conversations we've had with prospective investors around, well, we've just written that out of our strategic asset allocation policy, et cetera, et cetera. And commodities work on investment cycles, where a lot of money is thrown into capital spending and exploration projects, a lot of capacity, supply comes online, price comes down, et cetera. We're at the opposite spectrum now. And we got super interested in it in the wake of the pandemic, to be honest, partly because of the amount of fiscal and monetary stimulus that happened. And if you look at ways to protect your portfolio versus inflation and debasement of currency, commodities are a super-interesting asset class. And the fact that I think a lot of people don't really want to talk about them, just kind of further emboldened me that there's probably a good amount of runway ahead.
Robert Morier: What are those misconceptions that investors have about commodities that are potentially preventing them from increasing the allocation into a broader portfolio?
Chris Paolino: As I mentioned, most asset allocation exercises are done using historical data. And from the period from 2010 through 2020, commodities were generally flat at the index level. So, it looks sort of like a returnless risk in a sort of portfolio optimization. And the second thing is a little bit of a bucketing exercise. People generally don't know where in their asset allocation to use them. I do think 2022 was an interesting kind of a case study that will get people to look at them more, because the asset class was up in a year where the equity market was down. Bonds were down, and the only positive sector performance in the S&P was energy. So, you see some of the correlation and diversification benefits of the asset class in environments like that. And I think people are coming around to trying to find a home in their asset allocation for it. A lot of people have real asset type allocations. But those tend to be infrastructure and real estate, which in my mind are much more interest-rate-sensitive than, say, commodities.
Robert Morier: I'm always curious, particularly as it relates to commodities. The argument of a specialist versus a generalist, how do you think about the approach to commodities from a manager research perspective?
Chris Paolino: Yeah. We are big advocates of specialization in the asset class. It's referred to as an asset class, but really the markets are very, very different. So, if you think of the S&P 500, most of those companies in their earnings potential is somewhat levered to what the economy and GDP is doing. Within commodities, there's very different drivers for, say, soybean or corn… corn prices than there are for gold and silver prices, let alone the energy complex. And so, specialization matters, in my mind, quite a bit. So just be close enough to those markets and understand the supply and demand characteristics. It really gives an edge versus a generalist that, I think, has a much fuller plate to try to figure out the drivers of each of those markets.
Robert Morier: Yeah, that makes sense. A quick question for you, kind of going back up to the top floor, just thinking about specialists versus generalists. In your seat, where does it pay to be a generalist?
Chris Paolino: Credit is actually an area where being a generalist can be advantageous, specifically in the public markets. Because a lot of times, there are a lot more relative value opportunities in things like structured credit than there are maybe corporate credit. And I think that having a broader lens in fixed income investing in credit can tend to be very valuable. The higher the risk the asset class, the more specialization I think matters. If you think about venture at the top end of that, clearly venture, there's edges to being specialized in a specific area.
Robert Morier: So, getting back to commodities, where are you seeing the compelling opportunities within commodities today?
Chris Paolino: I would say there's sort of two primary legs to our thesis there, one being, obviously, the precious metals market and gold has had an extreme bid from central banks around the world. And we just had, for the first real inflation impact in most investors’ adult lives, so there's a keener focus on precious metals. And the bigger driver, the big macro driver is the energy transition and energy needs of things like AI, data centers, et cetera. So, there's a lot of materials needed for the energy transition process. There's a lot of energy requirements to run data centers. And there'll be a lot of, I think, change in the infrastructure of the electrical grid. All of that lends itself to opportunities in commodity prices.
Robert Morier: Well, I'm also excited to ask you about your thoughts on hedge funds, just given your history. So, what are those hedge fund strategies now that you think are standing out in today's market? Are there any specific themes or sectors that are getting you and the folks at Titan excited?
Chris Paolino: Because they are built in a low beta sort of form, the prevailing level of cash interest rates is a component of return. And for years that was zero. And hedge funds as a group kind of got painted with the brush of being a mid-single-digit type return proposition. I think all of that has changed as rates have come up. You can see it in the index-level data of hedge fund returns, where returns are much more compelling. Markets generally, on an equity level, are pretty expensive. So, people looking for ways to find generators of value against the backdrop of fully priced asset prices are making hedge funds interesting again. You couple that with just the geopolitical landscape that we have today, makes things like global macro super interesting. Where there's now currency volatility again, commodities is in that opportunity set. It's, I think, a much more fruitful environment than we've seen in the last 8 or 10 years of my career.
Robert Morier: Interesting. Just thinking about global macro, how about the opportunity set for managers? Because we've seen… I don't want to call it an ice age for hedge funds, but as you noted, it's been more challenging. There's been consolidation, attrition, folks leaving the industry. So now that a spot like global macro is favorable from your perspective, what does the opportunity set look like for managers?
Chris Paolino: Yeah, I think it's a very fruitful opportunity set. I think we have the rest of the world equity markets, emerging markets, are generally really under owned. The US equity market has dominated the market cap globally. And macro is sort of a go-anywhere strategy. So, the ability to trade, say, equity indices or emerging market currencies, those types of things are interesting again. And I think investors have very little exposure to it because it's been such a US-dominant equity market type environment.
Robert Morier: Absolutely. Thanks for the follow up. Well, not all hedge fund strategies behave the same way. Can you talk about how you split hedge fund strategies between those equity-like or bond-like characteristics?
Chris Paolino: Yeah, it's a great question. I think, as I mentioned, I think in the early days, everything was a lot more equity-like as the industry has evolved. A diversified portfolio of hedge funds is much more of a fixed-income surrogate than it is an equity surrogate. I'm a believer that the returns are linked to where risk-free rates are. And you're trying to earn an alpha spread over that. So today that gets you to a high-single-digits type return. And that's interesting for people, considering especially that it's had roughly half to a third of the volatility of the equity market indices.
Robert Morier: Hedge funds are interesting. I had a guest comment on hedge funds, that more than any other asset class, the manager is judged from day one. So, performance starts the minute that allocation hits the account, unlike, particularly, what's happening in private markets and obviously the J-curve. And you've got time to realize those returns, those gains over many years. So, it always begs the question around how you ascertain the competitive advantage or the competitive edge of a hedge fund manager that you're really having to think out of the gate whether or not they're going to be sustainable over the mid to long-term in your portfolio, particularly in strategies that tend to be a little busier as well.
Chris Paolino: Our firm definitely is receptive to looking at managers at the very early stages. Part of that underwriting process is, without question, other places they've worked to the extent you can get any color on a track record, their background, et cetera. And then qualitatively, it comes down to an assessment of the way that they're approaching capital markets, their temperament around risk taking, all of those types of things that make for a durable hedge fund. And then last but certainly not least, do they have a business infrastructure around them that's sustainable? Certainly, in this day and age, having a compliance culture, having the proper service providers, all of those types of things are super important. So, one of the things we do as a firm, our operational due diligence people, if people are in the early days of setting up a hedge fund, we'll be very consultative about best practices and hopefully be a resource for them to help them build a more durable business.
Robert Morier: When you're thinking about the people, the qualitative, how do you approach those early conversations with a manager that you've started to do the work on, you're having conversations. There may or may not be a prior relationship. There may or may not have been a reference call for that particular fund who's now on your desk. How do you think about those early conversations from a character perspective? What are you looking to glean? Because you mentioned the word durable. I just find it funny… durability can be transported to so many different parts of the due diligence process. And one of them is the durability of the person. Are they… are they going to be able to last the test of time? So, I would welcome your thoughts there.
Chris Paolino: One thing that's really important in our process is off-list references, so talking to people who have worked with or know personally the key decision-maker or portfolio manager that we're underwriting. You do a lot of character references with those people, and I think you learn a lot. I don't know how many meetings I've been and over the course of my career, but you get, I think, a certain amount of ability to discern who's a genuine human being and really an earnest person and who has sort of come to the industry because of the compensation structure alone or something. So, it's a little bit gut, a little bit character references. All of that goes into the sauce.
Robert Morier: Chris, after 25 years and hundreds, if not thousands, of meetings, I'm curious. How do you stay fresh going into those meetings, so it doesn't feel like you've heard it all before? There's a great song called "I've seen it All Before." I would assume you've heard quite a bit of the obligatory process discussions. How do you stay fresh?
Chris Paolino: Well, a lot of it is bringing in younger people to the organization and seeing it through their eyes some. As I mentioned, we have a pretty senior team. We have some junior folks as well. And it's important to have that to get the fresh perspective. A lot of times, I'll do a meeting with somebody younger on our team. And before I say anything, I'll ask what they thought. And it’s a very interesting industry in that I think oftentimes, portfolio managers are wealthy or successful people. And younger people are predisposed to think that they walk on water, so to speak. And the people like me, who've been in the industry for a while, are predisposed to be negative going in and proving the opposite. So, it's an interesting tension because I've seen a lot of young people just be bright-eyed and really take everything that they're told at face value. And then you debrief with them and say, well, let's pull on this thread or that thread.
Robert Morier: Absolutely. Thank you for sharing that. We tend to spend a lot of time on this show talking about the underwriting process, sourcing a manager, why do you choose a manager, allocations, portfolio construction. But we rarely talk about the end, or kind of the end of the shelf life, particularly in hedge funds, where… I don't have the statistics in front of me, but the longevity of certain funds, particularly on the alternative side, tends to be a bit shorter than traditional long-only. What are those signs that you look for that a hedge fund solution is starting to near the end of its life cycle?
Chris Paolino: We always talk internally that AUM sometimes is the enemy of performance. That's not necessarily true in certain asset classes or strategies, where scale matters some. So, it's somewhat subjective around the asset growth. Some of the things that I think have signaled end-state for me is when managers start to… they've been public market investors their whole life, and they start to get very active in private markets. They could potentially fall in love with one activist situation, things like that. Those are things that I think are warning signs. So, we're always vigilant around making sure that the role that we put the manager in within our portfolios is adhered to. And if the returns and style drift some from what the role was that we expected them to play, then we'll revisit that. Importantly, managers have been more and more disciplined about asset growth, which is encouraging to see because I do think certain strategies, once you get past a certain level, you have to change your stripes to continue to put that amount of money to work.
Robert Morier: I was talking to an investor yesterday about lockups. I'm just curious what your general view is on longer lockups versus shorter lockups, particularly in the hedge fund space.
Chris Paolino: Yeah. So, I think it's a function of what the underlying is. I will say, as a firm we are very focused on liquidity. It been kind of an existence, being focused on liquidity lately, because I think people have been more and more receptive to taking less liquidity. If the underlying is liquid, then the terms of the fund should be liquid. I understand, from an investor standpoint, every investor that's really passionate about it would love Warren Buffett's structure… permanent capital, the ultimate patience. In our case, we offer our investors liquidity. We expect to be offered liquidity if the underlying allows for it. And subject to the type of strategy, if it's something that… the opposite can be true too, where the liquidity terms are very good and the things that they're trading don't seem like they should be that liquid. So, you can get both ends of the spectrum. But we're big, big advocates of making sure assets and liabilities are matched.
Robert Morier: Any preferences between fundamental, quantitative, or even hybrid approaches to style?
Chris Paolino: We have a big fundamental bias. And we talked earlier about commodities. And I think that that's a really interesting space to contrast those two approaches. We try to focus on commodity strategies that have fundamental PMs doing real supply-demand work. There is a whole subset of the asset class that's very quantitatively driven, maybe trend following. And those strategies can work. They're just not as comfortable for us as fundamental strategies. And I can tell you that, when I look at the screen every day, and I'm looking at what different market sectors are doing, I want to have a good sense of what our manager allocations are doing. And sometimes with quant strategies, that's difficult to do.
Robert Morier: It makes sense. Thank you for sharing that, Chris. Earlier in the conversation, you mentioned that you'll look at managers relatively earlier in their life cycle. How early will you be focused on managers? I guess this is really in the context of emerging manager programs that are increasingly accessible across a variety of different platforms. Is that part of your sourcing and selection process? And how would you think about defining emerging?
Chris Paolino: Yeah, it's a big part of our process. We've been day one on numerous occasions with many funds. And partly it's a big part of our value proposition because, certainly, most established hedge funds would rather have large state or corporate pension plan as an allocator than a group like ours. Because we're resourced for it, we have to be aware of all of the launches and getting to know all of the new managers. And frankly, that's a way that investors use us. They may have a direct program of established managers, but they know that they're not going to be either resourced or willing to spend the time to underwrite emerging managers. So oftentimes in our custom business, we'll do things focused on emerging managers for people who have larger programs that they run directly. And then that allows us to be a little bit of an extension of their staff on things that they do directly. And it's kind of worked out nice for us.
Robert Morier: You mentioned references when you're sourcing managers and trying to get to a manager. Can you touch on the importance of connections with other allocators, particularly in alternatives? As a lot of our listeners know, if you're looking at endowments and foundations, there does tend to be a lot of… I hate to use the word "herd investing," but there's consensus. And sometimes a manager can see more assets as a result of two or three following. So how do you think about this? And I'm asking as a contrarian as much as an investor, but the importance of connections with other allocators.
Chris Paolino: Yeah. So, I think, and I live up in the greater Hartford area of Connecticut, and as I mentioned, I worked at the Hartford and worked at United Technologies, two locals. We have a very active group of allocators that get together here. And I think that's super helpful. And every region should have that, not least of which, because I think we can share notes on who we've seen, who's in town, those types of things, but it also can be cautionary, if people are too convinced that a certain strategy or a certain manager is the Holy Grail, for lack of a better way to put it, sometimes that can be cautionary tale. But I think, generally speaking, I think there should be more and more active ways for groups to get together regionally, because I think we all know when the larger managers are in a certain geography doing a little bit of a road show, we all tend to see the same people. And it's kind of fun to debrief.
Robert Morier: When you're sitting at that lunch in Hartford with your peers, and you're discussing the evolution of alternative assets in your portfolio, how have you seen the evolution playing out as it relates to Titan's business? And I ask that from a few different perspectives. Alternatives have become increasingly more accessible. So, you have this dynamic around liquidity and illiquidity. But you also have more managers coming online. Some asset classes have gotten crowded. So, when you think about the evolution… you're kind of taking this from a peer group discussion… what do those thoughts look like from your seat?
Chris Paolino: Well, I think the alternatives industry generally is… I think it follows the arc, the individual investor, retail investor, tends to follow the same arc that institutions do. And now you're seeing much more of a democratization and accessibility of those types of products for high-net-worth investors. Inevitably, their asset allocations will converge more on what institutions look like as time goes on. I think all of the institutional asset allocations are the way they are for very good reason. They have robust statistical processes to try to put model portfolios together. And so, I think we've seen a democratization of alternatives. I think that will continue. It's probably in its early stages in the Ra community, things like that. And on the institutional front, I think it's starting to diverge some because there's a lot of corporate pensions that have gotten very asset-liability aware, as well they should. And that changes… that changes the job from much more of an asset liability management exercise to just an asset-only maximize-return type of proposition. So, the corporates have a different set of circumstances than I think the state plans do. And the endowments are slightly different as well. And I think probably 20 years ago, all those portfolios looked pretty similar.
Robert Morier: I was just thinking about 20 to 30 years ago, when we both started in our careers. Most of the asset managers, the portfolio managers that I knew were running balanced portfolios. And then they all became long-only managers. And then they became hedge fund managers and then private equity and then venture capital. And now private credit. What do you think is next in that continuum, for those professionals who are evolving as well? Do we see a lot of commodity managers running around?
Chris Paolino: Yeah. I was going that direction, Rob. And part of that, I do think, is it makes sense. I mean, if you look at periods like the '70s, commodities were much more of a representative asset class. I joke with my colleagues who most of them are too young to remember the movie Trading Places. But it was about commodities. Their firm was a commodity trading business, and you would never make a movie like that today. So it would be, private equity guys or private credit guys. So, if it goes from 0% allocation to a 5% allocation in people's portfolios, it's going to be very fruitful time for people that know the space well.
Robert Morier: Thank you for sharing that. It's a good conversation. It is an interesting time to be talking about this space. So, when you think about the balance of needing innovation with this discipline of risk management, which we haven't talked about too much. But a lot of the asset classes that you're talking about are part of this kind of super cycle that's going on, whether it's AI or what technology is allowing in the commodity space. So how do you balance that with risk management?
Chris Paolino: We are big believers that portfolio construction should address a lot of those concerns. It's relatively straightforward to look at a correlation matrix of your different holdings and say, are they differentiated. We really try to make sure that qualitatively, the way that we understand what they do, it is differentiated. And sometimes you have to make room for things in a portfolio that have been difficult. So, as I mentioned earlier in our conversation, short-biased credit managers haven't necessarily had the wind at their backs, so to speak. But having things like that in a portfolio that you know should protect you in general, risk-off events are really important because I can tell you that the move from an investment grade credit spread from 200 basis points to 60 basis points has not been easy if you were short. But I know they can only go to zero. Or I think they can only go to zero. I mean, we've had negative sovereign rates before. So yeah, it's important, I think qualitatively, to have things in your portfolio that will protect you from general risk-off environments.
Robert Morier: Chris, thank you so much for all of these thoughts and insights. I greatly appreciate it. As I mentioned at the top of the show, we have a number of student listeners and educators who tune in to this show. And I always like to close the conversation asking for a little bit of advice for them, whether it's advice that you received from a mentor or just what you've learned over the years that you think might still hold true for someone graduating into this landscape.
Chris Paolino: You have to do what you love. I'm in this business because I'm passionate, a student of capital markets. You know, my wife teases me that every time I'm reading a book, it tends to be a business biography or an investment-related book. So, you have to love it. Because I think if you get into the business just because it's typically been a well-compensated industry or what have you, it won't be an enjoyable life. If you're passionate about capital markets, that goes a long way. And the second thing I think is talk to everybody. Talk to people who've been in the business for a long time, whether in this business or other related businesses. There's no better way to learn than to seek out people and talk to them. And sometimes I think people think it's off-putting to ask people questions. But, at least from my perspective, I think talking to younger people is super enjoyable for me. And I think most people probably feel the same. So, you should feel emboldened to ask people about their story.
Robert Morier: I would agree. Great advice, Chris. Thank you so much, Chris, Congratulations on all your success. We wish you nothing but future success in your personal and professional life, as well as with Titan. So, thank you for being here today.
Chris Paolino: Oh, thanks so much, Rob. I enjoyed it.
Robert Morier: If you want to learn more about Chris and Titan Advisors, please visit their website at titanadvisors.com. You can find this episode and past episodes on Spotify, Apple, or your favorite podcast platform. We're also available on YouTube, if you prefer to watch while you listen. If you'd like to catch up on past episodes, check out our website at dakota.com. And finally, if you like what you're seeing and hearing, please be sure to follow, share these episodes. We welcome your feedback as well. Chris, thank you again for joining us. And to our audience, thank you for investing your time with Dakota.
