Scott Radke spends his days like many hedge fund managers, pouring over projections, spreadsheets, quantitative analysis and profit-loss statements in a perpetual hunt to generate ever-elusive alpha.
But unlike a traditional hedge fund manager, he’s not looking at stocks, bonds or commodities. Radke is evaluating the managers themselves and the strategies they run – he’s sorting the real from the fake, the wheat from the chaff, the highly skilled from the simply lucky.
“The difference between luck and skill can be hard to find a lot of the time,” he says. “You have to find people who have alpha – and that breaks up into a lot of different skills that aren’t necessarily common in a single person.”
Radke is chief executive at New York-based New Holland Capital, one of a growing number of “multi-strategy” hedge funds that are scouring the world for the best bets in some of the most niche markets.
The fund, which has its roots in a European pension fund, has joined a bevy of multi-strategy hedge funds – known as “pod shops” or “platform funds” – that have been on the rise since the start of the century.
The style was made famous by industry behemoths like Millennium Management, Citadel and Point72, which have spent much of the past decade hoovering up capital and investing talent into these big money, highly leveraged funds of funds.
Rather than operating one, or a handful of strategies themselves, these “multi-strats” are made up of pod managers that independently operate a single strategy, which the overlying fund can shift money in and out of as it sees fit.
Taking a similar model, New Holland’s Tactical Alpha Fund comprises a changing roster of about 30 portfolio managers from around the globe who are often engaged in trading activities that few are aware of.
With a value of $US5.5 billion ($8.4 billion), New Holland is a fraction the size of Citadel or Millennium which, according to Radke, means it can take a more nimble approach to the markets they engage with.
“Our smaller size allows us to invest in capacity-constrained strategies that would just be uninteresting to the largest multi-strats because it simply wouldn’t move the needle given their big balance sheet,” he says.
“We’ve made a deliberate effort to try to avoid the most competitive strategies and have a portfolio with low expected correlation – not just to equities and credit, but also other hedge fund strategies.”
As a result, traditional long-short equity plays and other well-known hedge fund strategies make up only a small portion of the overall fund.
We don’t invest in the prototypical hedge fund – the swashbuckling guy who’s the smartest person in the room.
— Scott Radke
“We favour more niche exposures like a US agriculture investor who grew up in a farming family has traded soy and corn and cattle his whole life and is doing that exclusively,” Radke says.
The fund also has allocations to managers trading everything from mispriced municipal bonds to US natural gas, or even Australian electricity futures.
“Our bread-and-butter tends to be more relative value, arbitrage strategies,” he says. “Those create the opportunity to exploit small mispricings in the market that arise by the behaviour of other actors that are less focused on evaluating price in the same way we are.”
Using the casino as an analogy, Radke says this is all part of an effort to seek out “good games” rather than simply evaluating the best players. New Holland would rather “be the house”.
“We don’t invest in the prototypical hedge fund – the swashbuckling guy who’s the smartest person in the room making big bets based on some intuition or feeling,” he says.
“There’s not a lot of evidence that we could predictably identify the smartest person in the room, or even if being that person is a persistent attribute.”
All of this isn’t aimed at pushing the fund into new territory, but rather to take hedge funds back to their root objective, which Radke thinks some in the industry may have lost sight of.
“For us, the philosophy has always been targeting low-beta, diversified sources of return, which is, in some sense, what hedge funds were supposed to be.
“But one of the reasons people often don’t like hedge funds is they’ve frequently lost a lot of money in correlated market environments.”
New Holland’s Tactical Alpha Fund, on the other hand, has sought to be truer to the “absolute return” moniker often spruiked by the industry, all while delivering about 9.1 per cent per annum since the strategy launched in 2021.
But finding those games and players is no simple task.
“There’s a strong temptation to look at realised returns as the answer to that question – but that just sends you back to luck versus skill.” he says.
“If I showed you somebody who was able to flip 90 heads out of 100, that would seem impressive. But if I told you that I had 100,000 people flipping coins and this was the best person, it would seem a lot different.”
Instead, the firm uses a mix of quantitative and qualitative analysis to weed out the consistent winners, often paying close attention to historical stress points – such as 2008 or March 2020 – as indicators of how uncorrelated these markets truly are.
“Machines can help us evaluate because humans are deeply flawed, and coming out of the box are not particularly suitable for managing risk – it’s a rare person who’s good at that,” he says.
“Machines have their own flaws and foibles, but the marriage of those two can be pretty powerful and can serve as a mirror to help you see with greater clarity what you may already know.”
On the flip side, it seems the firm applies as much effort into evaluating when to drop a losing strategy than when to pick up a new one. The firm’s roster frequently drops managers who have failed to meet expectations, but just like with his successes, Radke says it isn’t all about performance.
“It is rarely the dramatic underperformance that might be the subject of headlines,” he says. “As much as anything, you’re managing your own emotions when you’re investing, and it is hard to overcome the fact that you may have made a mistake.
“But when you realise that it’s become something different than you thought it was, you should get out. Sometimes that’s dangerous because you can talk yourself into the new thing – but you shouldn’t.”
But even taking into account the misses, Radke enjoys his work and is soon back to poring over spreadsheets and quantitative analysis looking for the next best game to play.
“Finance has a bad rap that it’s full of people who are egotistical – there’s plenty of that, maybe more than other industries … – but that’s not the norm,” he says.
“I spend most of my day meeting really interesting, smart, motivated people who have elected to specialise in this super narrow area. They know more about that area than I’ll ever know – but I’m there trying to engage with them and find a place for them in our portfolio.”
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