Sean McGould, Lighthouse Investment Partners, LLC
Episode 8 of Perspectives, our dedicated series where AIMA, in partnership with KPMG, speak to alternative investment industry leaders from around the world, continues with a fascinating conversation with the Founder, CEO and CIO of Lighthouse Investment Partners, LLC (Lighthouse) Sean McGould.
Sean shares with listeners the lessons he's learned as both the CEO and CIO of Lighthouse, which currently manages over US$15 billion of assets. From the need to roll with the punches in the dynamic world of alternative investments, to the importance of succession planning as the industry embarks upon a “generational change”, he also cautions why starting a fund today is harder than ever, and what daring entrepreneurs can do to rise to the challenge of setting up their own business.
Any Lighthouse Investment Partners, LLC (Lighthouse) views presented in this podcast are for educational purposes only. Information is based on the thoughts and opinions of Lighthouse which is subject to change based on the markets or other conditions. Any information provided is not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service or fund. This podcast does not purport to address the financial objectives or specific investment needs of any investor or organization and should not be relied upon for investment decisions. All investments are subject to risks, including fluctuation in value and total loss of principal investment.
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Founder, CEO and CIO, Lighthouse Investment Partners, LLC
5 Lessons from Sean McGould
Sean suggests that the alternative investment industry is likely on the brink of a generational shift, with many founding hedge fund managers approaching a point where retirement or stepping back becomes a realistic prospect. He pins this down to being “a function of the age of principals and really how long the industry has been in existence.” For Sean, it is imperative for firms to have robust succession planning and for investors to be mindful of the continuity and stability of the firms in which they invest.
Sean advises that being nimble is vital when it comes to operating in the dynamic world of alternative investments. He highlights the swift emergence of opportunities, like in SPACs post-COVID, necessitating this agility. "Regulations can change how this industry operates and how strategies are impacted", thus, constant vigilance, flexibility and keeping abreast of regulatory shifts is a necessity. Sean details how Lighthouse’s preparation in mitigating regular risks like hurricanes, particularly apparent being based in Florida, have paved the way for the firm’s smooth transition to remote work during the COVID-19 pandemic, underscoring the universal significance of adaptability.
Setting up a hedge fund in today’s climate is considerably more complex and resource-intensive than it was back in the late 90s and early 2000s, according to Sean. "If you want to raise institutional capital, you're going to have to have a proper back-office operation...The bar has just been raised massively." This blended with an ever-growing list of compliance requirements, ensuring registration across jurisdictions, and a dedicated marketing function, are now prerequisites for attracting capital. The lesson for entrepreneurs and investors alike is to understand these elevated thresholds and be prepared for a much more rigorous set-up process.
Sean sheds light on the crucial role that hiring the right talent plays in an organisation’s potential for success. He emphasises that recruiting is consistently challenging due to the competitive nature of the space and the importance of ensuring a good fit between the individual and the firm. “Good portfolio managers have a choice of where they're going to work, whether it's with a multi-strategy firm like us, or setting up their own firm and moving forward in that way." The lesson here is to pursue not just expertise when hiring, but to also prioritize alignment with the organizational culture and long-term objectives. “You want people with you for the long run, sometimes expertise isn’t enough”, Sean advises.
Sean's career pivots crucially around his focus on generating returns, whilst simultaneously unearthing potential market inefficiencies. He underscores the significance of acknowledging both the potency and the deficits within markets, elements that have served as crucial instruments throughout his professional journey. “I do think the markets are fairly efficient. But learning where some of the inefficiencies are was really instrumental in my career."
Read the transcript
Tom Kehoe, AIMA 00:05
Welcome back to The Long-Short. Over the coming few months, we'll be bringing something a little different, the ‘Perspective’ series, in partnership with KPMG. This podcast series will feature conversations with leading CEOs and founders of alternative investment firms from around the world. And today, we're excited to share with you one of a series of conversations we've had with them. Our guests share their visions in a variety of areas, including how to attract and retain top talent in the context of the fierce war for talent, as well as how to navigate the increasingly complex operational scaling challenges and much, much more. The discussions are being led by myself, Tom Kehoe, co-host of AIMA’s The Long-Short podcast, and John Budzyna, Managing Director and US national leader for market development for alternative investments at KPMG. So, sit back, we hope you enjoy the show.
John Budzyna, KPMG 00:57
Good morning. We're here today with Sean McGould, the CEO and Chief Investment Officer of Lighthouse Partners. Welcome, Sean.
Sean McGould, Lighthouse 01:05
Thanks, John. I appreciate being here.
John Budzyna, KPMG 01:07
Excellent. Obviously, you currently run a worldwide investment firm based out of Palm Beach. But tell us a little bit about your background. How did you decide to work in finance to start?
Sean McGould, Lighthouse 01:17
Sure, John. I grew up about half my life on the East Coast in New Jersey and then went to middle school and then high school actually just outside of Chicago. One of the things that I was always interested in, which started around I would say the seventh grade, was just the stock market and various markets. I think part of that was growing up where I did as there were a number of CBOEs and the Chicago Mercantile Exchange, and I just became very interested in trading. There wasn't really a term for alternative investments at that point in time, but just the trading aspects in these different markets were really fascinating (to me). That had a big influence on what I wanted to do, study in college and then have a career in after that.
John Budzyna, KPMG 02:06
What was the catalyst that propelled you to pursue investment strategies at Lighthouse? How did you get to Lighthouse?
Sean McGould, Lighthouse 02:14
I was fortunate as I worked directly after college at PwC, and I was fortunate enough to have the opportunity to interview with an investment firm that was based in Chicago, but moving out to Bermuda at that time, which was Trout Trading. I secured a position at Trout and moved out to Bermuda. My specific role at Trout was to take some of the excess margin capital that existed within the fund and allocate it to external trading managers. So, all of the strategies that we're allocating to, I would describe as hedged or trading-oriented types of strategies. I was really fortunate to have that break in my career to have that opportunity to go work at Trout, and had a lot of freedom at Trout, to go talk to some of the world's best traders, hedge fund managers, you name it. I would speak to anyone about investments and really learn about all the different types of investing. Equities, futures, fixed-income mortgages and derivatives, really, everything. It was just a phenomenal opportunity to learn.
John Budzyna, KPMG 03:28
During that trajectory, would there be any really large defining moments for you that propelled you to the success Lighthouse Partners has today?
Sean McGould, Lighthouse 03:40
I think one of the biggest things John was was when I came in there, I wouldn't say I had, when I joined trout, I didn't have tremendous investment experience, I had a lot of experience, doing due diligence and running a process on, you know, thinking about something from start to finish. And one of the things that I always focused on was just, you know, what type of one of the things I learned was just what type of edge does a particular investment strategy have? So, during the day, I would find strategies that would take advantage of inefficiencies at the market. Then at night, I was told how efficient the market was. So, I think both of it was phenomenal training, John, because I do think the markets are fairly efficient. But learning where some of the inefficiencies and whether that's from a transaction cost perspective, whether it's an information type of advantage, a time advantage, those sorts of things were really instrumental in my career. But again, one of the biggest things was just being expected to make money month-in and month-out. So, it was great training in that respect, too, because the expectation was we're going to make money every month and I think at the time, you know, I really believe that can be done, and still believe it can be done today. That's something that we've always strived for at Lighthouse Partners, which is trying to produce really consistent profits. I think it goes back to some of the training I had over 25 years ago.
Tom Kehoe, AIMA 05:16
Sean, as you said, you launched Lighthouse Partners at the turn of the century, over 20 years ago. So, how has the strategy evolved, the firm's strategy that is? You've talked about going out and making allocations externally, for the benefit of our listeners can you explain a little bit about what goes on at Lighthouse Partners in terms of that strategy?
Sean McGould, Lighthouse 05:34
Yeah, I think I think one of the big things that changed for us really started in 2004, when we really created a platform, to house talent and whether that talent was internal to us or external to us. I think when you look at how the industry has evolved, it's evolved that way. We've come at it a little bit differently from others, but we didn't want to be restricted from investing with any investment talent simply because we didn't want to exceed some percentage of their fund. If someone was happy to work with us, and we were 100% of their capital, that was absolutely fine with us, when you fast forward 20 years from then, and look at where we are today, or 19 years, when you see how multi-manager platforms have kind of evolved, it really is very similar to the evolution that we went through. It's just we started by allocating capital, almost exclusively externally, and then over time have shifted to more of a blended approach.
But I think when you look at all of these platforms that have been built across the industry, it is about harnessing talent, it's about having a common platform to work off of. So, I wouldn't have necessarily predicted at the time we were building that, that the industry would have gone this way. But certainly, it suited how we think about the world of investing.
John Budzyna, KPMG 07:10
So, the Lighthouse platform really touches on many different investment strategies. How does Lighthouse determine on a monthly basis, or on a quarterly basis to allocate the capital across all those internal and external portfolio managers?
Sean McGould, Lighthouse 07:28
Well, John, let me talk a little bit just from a theoretical framework, and then we can dive deeper into any aspects.
So, one of the things again that we believe, and I believe across this industry is more diffuse risk taking. We want to have risk takers in equity market strategies, fixed income, commodities, derivatives. The second piece of that is we want that risk taking to happen across various markets around the globe. So, we want to diversify our investments geographically, we want to diversify them from a time perspective. We want to diversify them from a market perspective. We are searching and seeking out both strategies and the talent, the human talent to implement those strategies across the globe across different timeframes, and when I say different timeframes, I don't mean just different geographic timeframes, like we're sitting here on the East Coast, and we have someone in London, I mean, also the timeframes that the investment strategies are implemented over. So that can be anywhere from intraday to months holding position.
So, we start with that type of framework, and then we want to blend as many of those types of return streams with as much diversification as we can into a portfolio. I won't go into the specifics of our funds or what they're doing but each fund in this industry has something that it is after, specifically that it's trying to do. If that's trying to do that solely within equities, then you're going to blend those equities and you're going to use a combination of quantitative approaches. So, using optimisation, using correlation matrices, using value at risk, using modified value at risk, all sorts of different approaches to try and help you come up with a better allocation engine to do that.
But the first thing you have to have for an allocation engine to work, I believe is you have to have an advantage in the strategies that you're trying to put in there. So, if you have great ingredients, just like a good recipe, if you have great ingredients, you're going to make something good. If you have bad ingredients, it's not going to taste as good. We need great ingredients first, and then we want to apply both quantitative techniques and qualitative aspects and things that we've learned over time to create an optimal portfolio in terms of doing that. But it all starts with the strategies and the human capital that we have.
John Budzyna, KPMG 10:15
I would assume that leverage is amenable to some strategies better than others. Is that how Lighthouse Partners approaches it as well?
Sean McGould, Lighthouse 10:24
Absolutely, John. I think that when you look at the history and go back several 100 years of where there have been financial blow-ups, it's generally a combination of leverage and illiquidity. When I think about liquidity in a broad framework, I don't think the markets are inherently as liquid as people think they are. And especially in periods of stress, they become less liquid. So, if you're combining something with really, really high leverage, that even has a remote tendency to become illiquid, that to me is a potential combination for losses. So, we want to try and avoid that. I think you say that exactly right, John, which is, there are some strategies like equity strategies that are on market neutral, I think you can leverage those safely. There are other strategies like distressed debt that you certainly wouldn't want to put as much turns of leverage on. Throughout my career, I've seen different episodes where funds or strategies have gotten in trouble because of a combination of those things. One of the earliest episodes of my career would have been Long Term Capital Management. Great positions, pretty highly diverse, just too much leverage and couldn't hold their balance sheet. So, that's definitely a risk when you look at something like David Askin and mortgages back in 1994, rapidly rising interest rates, lower liquidity in mortgage derivatives, again, lead to losses. I could add in others throughout the past 20 years, but they do have commonality to them. We want to avoid them. Also, we know we're not smart enough to predict everything that's out there. Think of every scenario that's out there. So, there has to be a cushion in terms of what people do in this industry, so they don't cross over that line.
John Budzyna, KPMG 12:25
That really leads to the real question of whether alpha is scalable? So, you have many firms that are raising a lot of assets, they're asset gatherers, others are focused purely on Alpha, but there's some blend there that works. And the question is, how scalable is alpha?
Sean McGould, Lighthouse 12:46
Yeah, I certainly don't think that it's infinitely scalable. But I think it's a little bit more scalable than people think. I think part of the reason for that is if you look at a strategy, let's just say that's equity market neutral, and you have a universe of securities that's liquid, and let's say just for the sake of argument you had to be 1000 long and 1000 short, the amount of combinations you could do with that is quite staggering. Each of those combinations or relative value combinations, may have a specific alpha profile to them. If you couple that with timeframes. So how long are you going to hold these pairs? So, is it an intraday strategy? Are you looking at quarterly earnings? Are you more fundamentally based on whether you're going to hold these for a year? Each of those timeframes leads to I would say some alpha opportunities as well. So, I think there's lots of combinations that you can put together. When you are simply long in equity, you're really subject to the market over any reasonable range of time and then that company's fortunes, how they're doing fundamentally. But when I think if you start doing relative value trading and long and short, over different horizons, different time horizons, different geographies, I do think that alpha is fairly scalable.
John Budzyna, KPMG 14:05
And speaking of timeframes, obviously, there's a lot of discussion now about whether folks think that we will be heading into a recession, both in the United States and around the globe. So, what is Lighthouses view on that topic?
Sean McGould, Lighthouse 14:21
Yeah, I think the view again from a macro perspective and some of this is informed by, again, looking at how people are positioning their portfolios and doing certain things. I think coming into this year, the vast majority of market participants in the hedge fund industry were expecting a slowdown and expecting a recession. Now, why hasn't that occurred? There continues to be more ink written on that. But I think that some of the latest thinking on maybe why a recession or a slowdown has been delayed is just the overall strength of the economy, the amount of stimulus that was put into the economy after COVID.
Looking at the different time effects of both fiscal versus monetary types of policy. So, if you look at fiscal policy, it's very quick, it's a shot in the room, you start sending people cheques during COVID, they put it in their bank account, they save it, they spend it, that has an immediate effect. When you look at some of the more monetary policies, if you are a company that has a locked in financing rate for the next 4 years, interest rates haven't really affected you. They're only going to start to affect you when you have to go refinance. You are seeing a slowdown, one of these impacts in housing turnover. So, if someone has a 3% mortgage, and they want to go buy a new house, and now they're going to have to pay a 6.5% mortgage, it becomes an economic decision. So, there are different lead and lag timeframes between fiscal and monetary.
We've gotten through some of the biggest fiscal monetary experiments we've ever seen. So, no one's really seen how this plays out, I think we would have been more in the camp and still are that there has to be some impact to raising rates this quickly. The last time I saw it in my career was in 1994, when rates went up really, really fast. Different dynamic there. It did have a big impact on credit spreads and on convertible bonds at a hard time, and then mortgage strategies had a hard time then. Equity markets were a little bit more sublime then because in 1995 earnings were so strong, and it was the start of a tech cycle that you had then.
Right now, it's a very different type of setup. We don't rely heavily in any of our processes on setting whether we're in a recession or not in a recession. But the portfolios are certainly set up a little bit more defensively to weather the storm. And again, I really think there will be an impact to raising rates this rapidly. But I think some of that impact is going to come when people have to refinance things. Or again, if you want to, you know move and you're in a house and the interest costs are almost twice as expensive as what you would have been paying. To me, those things have to have an impact. But when they show up, it's really hard to predict that. Again, that's why I like more diffuse risk-taking focusing on idiosyncratic risks. If you look at different markets, different markets have behaved differently this year. So, the emerging markets have done a little bit better, Japan has done very well, and for very, very different reasons.
Tom Kehoe, AIMA 17:53
Sean, you've talked about some of the central bank monetary policies, you mentioned what's happening in the US. But also, we have that impact globally as well. Where I am here in the UK, we've had the Bank of England also go through a series of interest rate hikes. There is a feeling though that both the central bank or the Bank of England here and the Federal Reserve are going in slightly different directions, with the Fed likely to slow down the interest rate hikes or may be halted entirely as opposed to what the Bank of England is likely to do. Where I'm going with this is you've talked about the impact, is that priced into the markets, is any of that impact priced into the market yet? What sort of impact are we talking about here? Are we likely to see a hard or soft landing? Either here in the UK, or in the US? What's your sense of that?
Sean McGould, Lighthouse 18:51
I think that the Federal Reserve in the US has to be really happy with the outcome so far that they've seen. I think it was absolutely necessary to normalise interest rate policy. Again, if you asked me my personal opinion, I don't think the interest rate should ever be at 0. I understand the theoretical framework they use of sitting there saying, well, we're in this deflationary spiral and real interest rates are negative and we've got to do certain things to combat that. Well, we were in the reverse situation, now we've got inflation rising, we want real interest rates to be positive to cool that down. When you look at the forward and the futures markets of what the prediction is, right now we do have, I would say, normal real interest rates in the US. So, about 150 basis points, when you look out somewhere between 3 and 5 years on the curve, that’s fairly typical. Then you see, in the US, the curve coming down, in December of 2014, the interest rates coming down and normalizing to 3 to 3.5%. That seems fairly reasonable. When you really dig into some of it, it's really interesting how things are being priced, there's still pretty fat tails within the distribution of fixed income. That's because if we do get a hard landing, rates are gonna go through that 3% and go through that floor.
Do I think we're going to get a really hard landing? I don't think so. I think there would have to be some major policy mistake that occurs. I think getting inflation under control is very important. I’m not suggesting that the US is exactly like other emerging economies around the world, but you want to have stable prices, and you want to have interest rates that reflect normal policy rates, and I think that, taking it to zero, I don't know, we'll never know whether that really helps spur a recovery in the US. After COVID, after the GFC (Global Financial Crisis), I think it certainly helped the banks. I think it's helped the financial system to have rates that low, but I don't know what it really did economically all that good. So, to answer your question directly, I do not think there will be a hard hard landing. But I do think there should be some slowdowns. And again, there'll be some structural friction because of where rates are now and where people borrowed at in the past.
Interlude - 21:45
KPMG is a global professional services firm, providing audit tax and advisory services to many of the world's leading alternative investment management firms to address the specific challenges and opportunities unique to alternative investments. KPMG has dedicated practitioners focusing on hedge fund, private equity, and real estate organizations. Our professionals devote their time to provide innovative and strategic solutions to alternative investment managers in areas ranging from strategy to operational and compliance functions. Through the knowledge of industry leading practices and customized technology systems. They provide advice and support that deliver value to these organizations and their investors. For more information, please visit kpmg.com.
John Budzyna, KPMG 22:35
Sean, I’d just like to go back to a point that you raised earlier about the multi-strat structure. Obviously, the alternative investment industry has been built on sometimes it's a single strategy, sometimes it's multiple strategies, but it seems like a continuation now of many multi-strats being formed. And the question is, do you see that as the path forward for the industry?
Sean McGould, Lighthouse 23:02
I don't think it's the only path forward, John, for the industry. I think there's always a need for specialised risk takers. I think that the multi-strategy platforms have done a great job of aggregating a number of very specialised risk-takers onto one platform and offering one fund. So, if an investor doesn't really want to take the time or doesn't have the time, maybe it's better for them to invest with two or three multi-PM firms that are really covering the landscape and recruiting the talent, doing the risk management, doing the allocation, which is really important, John, which we touched on before.
There are going to be other market participants who are just going to sit there at a point in time and say, you know what, I understand merger arbitrage, I really like that strategy, spreads are wide, I think there's going to be good returns going forward here, and that's really the only strategy I want to access and I'm going to go to an expert in that space and maybe choose 1 or 2 firms to go do that. Or I'm really excited about Japan and I want to make a geographic investment or I'm excited about the emerging markets. So, I think both approaches have room to grow and prosper there. I think a lot of it comes down to what the investors are after, what types of risk and returns are they after? And what's their own outlook on the strategies in the markets in general?
John Budzyna, KPMG 24:34
Structurally, the portfolio managers have to choose whether they want to run their own business, or whether they would rather sit on a platform as well, right. We will talk about that a little later on. But that also seems to be the velocity at which people are entering these multi-strat platforms now.
Sean McGould, Lighthouse 24:57
Yeah, I think that there is a distinct choice for a number of portfolio managers as to whether they want to run their own firm and what that entails, or working on a platform. Some can work autonomously and look at their universe of securities and implement their strategy. But it certainly is much different now starting a hedge fund firm than it was 20 years ago. Some of that has to do just with the talent, you need to put it together, some has to do with regulatory compliance, the requirements of institutional investors and what they expect of an operation, all of those things. So, it has definitely raised the bar and made it more difficult to enter this space, which I don't like. I like having it as more of an open playing field and letting good market participants come in. But that's not the way the industry has really evolved. I would say it really isn't how the securities industry has evolved in a number of places either.
Tom Kehoe, AIMA 26:11
So, let's touch on that first point. We talk about the ability to both attract and retain the best people. For your firm, how do you go about doing that?
Sean McGould, Lighthouse 26:24
I think that it's both ways as far as recruitment, meaning the firm has a philosophy that we need to execute on behalf of our clients. And if you have someone who's looking to join the firm and trying to recruit them, and they don't believe in that philosophy, or that operating model, that certainly is not going to work.
Beyond that, I think you need a lot of flexibility to attract and retain the talent. So, we want to make sure that it's going to be a good fit culturally and I do think that the culture of the organisation is very important. I would never distinguish between the cultures at different firms, I would never use the terms bad culture, or good culture, the cultures are different. That's a good thing because people are different. They're going to be more comfortable at one place or another. The risk management philosophy would be different from one firm to another. So, is there flexibility in some of the certain factor risks that people can take? Or are all those factor risk going to be mitigated? So, I think there are risk considerations. I think there are capital allocation decisions, how are those decisions going to be made? Is the capital stable? Am I under some sort of guideline where it is formulaic that if I lose more than X amount, I'm just going to be cut? Or is it the decision? Is there collaboration across the groups? Or am I more siloed? In my approach, all of these things are slightly different across all of the firms and play back into that culture, how the firm is operated, and what the individual portfolio managers are looking for. I think that each of the firms that are large within the space, I think some of those cultural aspects are well known. But I think they're really important in any type of recruiting or interviewing process, to make sure there's a good match between the expectations of the firm, and what the individual desires.
Tom Kehoe, AIMA 28:39
There's been plenty of column inches written about it, and we hear about it all the time is that how intensely fierce the war on talent is, particularly in your space. So, how do you assess the landscape right now?
Sean McGould, Lighthouse 28:56
Yeah, I would say it's very competitive. But I would say that when you look at most industries, the top talent within the space is competitive. You know, if you take it to an extreme example, like professional sports, it's hyper-competitive. It depends on the structure of the teams and leagues and things like that. But you're starting to see how competitive things can get even within US college sports now with name and image likeness, and a portal open and the transferability of talent. So, when you look across industries, I think it's always highly competitive for that talent. And again, the talent is going to go to where it is treated the best. As far as, again, from cultural aspects, the financial rewards are important, but the freedom, the challenge of doing what they're doing. But it's highly competitive, and good portfolio managers have a choice of where they're going to work, whether it's with a multi strategy firm like us, or set up their own firm and move forward that way.
John Budzyna, KPMG 30:12
The culture in a multi-strat firm, your global, your multi-strategy, you live in a hybrid work environment, and you're trying to have collaboration around a central way of doing business. How difficult is that?
Sean McGould, Lighthouse 30:29
I think because we have done this since the inception of the firm, John, it's just part of our DNA. There's two things that are interesting. One: one of the main impetus for setting up Lighthouse and having external clients from the multifamily family office that I started at, was really to grow international research presence. So, I wanted to have an office in New York, Chicago, London, Tokyo, and Hong Kong, to again be able to find the best local talent that was there. So, that's one thing that drove how we're set up today.
The second thing is a little less intuitive. But because we're based here in Florida, and I have been for 25 years, we also had to adapt very, very quickly to hurricanes and to having backup plans and being able to move quickly and set things up because people forget pre-COVID. If COVID had happened 15 years ago, I think it would have been a disaster for the financial industry. So, if we go back 15 years ago, we had to back up our systems on tape, and put them in a vault. We would then have to go get those tapes in a vault, fly them up to Chicago or a backup site, reestablish them and go forward from there. So, I think people forget how big an event like a hurricane or COVID could become. But because we had experienced it with hurricanes, we were very used to it, we were very used to adapting, we were used to working remotely. So, that's not as big of a shift for us as I think maybe for others because it's how I've worked, I work with people around the globe every day, and I love it. I love the variety of it. But it is just more conversations, like we're having here, we're filming this as well as voice recording it. But it has to be a lot more interaction like this. Then, there's also a lot of travel that's involved as well, because I do think face-to-face interactions are important and it's figuring out what the right blend is there, John, but people understand that when they work in these organisations, that the approach is going to be more hybrid.
Tom Kehoe, AIMA 32:55
Interesting. So, you follow the same approach then as Zoom. I read that Zoom, one of the big beneficiaries of COVID, and everyone having to work remotely, they're now looking at having their employees return to the office twice in the month, I think it was, or three times in the month. So, as you've said, this is something that you had been doing long before the COVID period, and it's worked well for you. So, you're very confident in being able to manage teams remotely, as well as having seen teams working with you locally.
Sean McGould, Lighthouse 33:31
Yeah, very comfortable and have had to make sure that the systems are in place to do that. It is still a technology challenge to keep everything working across a global enterprise. But I would say the technology is much better to do that today, and particularly if we have to vacate Florida for a hurricane or natural disaster, it's not all that different than being set up for COVID. I think organisationally, we really didn't miss a beat in COVID, and that's a credit to our technology team and all the team across the across the firm. But yes, I would say it's within our DNA to work that way.
When I started doing this 20 years ago, information was very different. I really had to physically go to countries and ask who are the best traders, who are doing interesting investment strategies. I would use a fax machine to set up my appointments because you're at different time (zones). If I'm trying to get in touch with someone in Asia, yes, I can stay up and do that. But we would fax that we’re gonna be there on this date and time. It's so different than today but you really had to get out there and go do it. I think that also solidified my thinking that you need people on the ground in these locations. So, it's not only for market research, it's also for, I'm not going to call it survival as it's not that dramatic, but if something happens in Florida, I want to know the organisation's functioning.
I think what's interesting is you've seen Wall Street firms, since the tragedy of 9/11, have actually diversified their human capital base to a variety of different locations. So, we have prime brokerage being built up down here in Florida. In Texas, you have back office processing, in Jacksonville, Tampa, in Salt Lake City, in other parts, and I think that's a smart thing for organisations to do. If they have a lot of human capital to have some different locations, where they can work from, diversify that talent, even diversify the thinking a little bit, has helped us because culturally, each of these countries is a little bit different and think differently. I think that helps everyone, hopefully, come up with the best solutions and ideas.
John Budzyna, KPMG 36:01
I mean, Lighthouse is always looking for great talent and great portfolio managers. Are there any other skill sets beyond portfolio that are specifically on your target list, and that are particularly difficult to attract at this point in time?
Sean McGould, Lighthouse 36:18
As far as different skill sets that we need, like technology, or in terms of different personnel attributes that we need? I would say everything is competitive within this space, and we want really good people, again, that want to be here. I don't think any organisation is for everyone. I think that younger people can sometimes make that mistake early in their career where they see a firm, and they're like, oh, I want to go work for that firm. I would always caution people, make sure you know what you're getting into. It may be the perfect fit, it may be a complete disaster. But you have to understand that.
But sure, I would say that every space is competitive. There's nothing easy that we're recruiting for. We’ll post positions in different parts of the firm and get lots of resumes. But again, not all of them are perfect and would be a perfect fit for us. So, I would say it is hard, really across the board to find talent. We want to make sure that when we do hire someone, they're going to have a good career here, and hopefully stay here for a long period of time. I'm really proud that we have a large number of people who have been at Lighthouse for a very, very long period of time. I think that helps organisationally, and you certainly need new people coming in and doing things like that, but now I'm really happy with the team we've assembled here at Lighthouse.
Tom Kehoe, AIMA 37:50
You talked about how different it is, your sense of how different it would be, if you were to set up the business today, as opposed to back in 1999. We are seeing some fund launches, albeit it is at a slower pace. I think we all agree on that. What's your sense as to how difficult it would be if you were to set up a business now?
Sean McGould, Lighthouse 38:16
I think when you go back to mid-1999, through to the first part of 2000, you saw a lot of smaller teams, and individuals setting up firms that were able to do that. You used to hear or you'd read in the press about two people with a Bloomberg (terminal) and that was the hedge fund model. It wasn't far off that. But also, when I started looking for talent within this business, there weren't people who had 10 years of experience in hedge funds at that point in time. Someone would have had to have started in 1985. You can go back to the history of hedge funds and the Jones model, you can go back even before that when people were doing arbitrage off convertible bonds, back in the 1920s and things like that, but the industry really started to develop, I would say, CTAs, around the inflationary era of the 70s. And then hedge funds and equity and security-specific fixed income, I would say in the late 80s, early 90s. It was just much easier to do so then.
Now when you're setting up a proper firm, and if you want to raise institutional capital, you're going to have to have a proper back office operation. You're going to have to have a Chief Compliance Officer, you're most likely going to have to register across the SEC (Securities Exchange Commission) and if you're doing business in different jurisdictions, you're going to have to have registration there. You're going to have someone to go attract the capital, so a marketing function. So, all of these things, I would say are much more than difficult than what they were when you had effectively people coming off prop desks. You did have two people with a Bloomberg (terminal), that were setting up these funds and going and doing it. Again, I don't think everything was perfect back then. I think that investors in this space have an obligation to do their own due diligence on these funds and the managers and the strategies and things like that. But, from day one, I think putting in a proper setup is important. But the scale that you need today, the much greater the scale of capital you need today, is much greater than what it was. And the resources that you need are much greater to be taken seriously, institutionally. The bar has just been raised massively.
Tom Kehoe, AIMA 40:55
We're starting to see some of the older generation, retire or think about succession. Over the last 12 months, we've seen some of the leading industry figures announce they're stepping down, or are planning to do so. Do you see a generational change across the industry? Are we approaching a generational change?
Sean McGould, Lighthouse 41:24
I think we are. I think if you are running, let's just take an example, a Long-short fund that has your name on the door, you've been running it for 20 years, I think it's proven hard to transition. Those types of firms, for multi-strategy, multi-PM firms, hopefully, you've got, again, diffuse risk-taking across the board there, you've got well built out risk management teams and systems there. Again, you still need a transition. Because at the end of the day, generally there has to be someone to make final decisions, if there's a tie, or you're talking about things. So, you have to be cognizant of that. But I think the industry will (see a generational change). I think it's just a function of when the industry really started to grow. The age of the people that were running the firms at that point in time, and the age where they are in their life now. I think to do this for any length of time because it is a 24-hour-a-day activity with markets open. Depending upon what the firm does, you really need to enjoy it to do it for a long period of time. You need a certain energy level to go do that. So, if your interests are elsewhere, and you're not as excited about it, doing it, then I think it's the right thing to step aside. I certainly would if I didn't have the energy level and certainly get asked how long do I want to do this? I've been doing it for 25 years. Look, I hope I can do it for another 20 years. But if for some health reason, I couldn't do it. If I couldn't do a good job for the team here and our clients, then I would absolutely step aside. Or if I woke up one day and just said, I have no interest in the markets, then yeah, I think it's the right time to step aside. So, I do think the industry will be facing more of those over the next five years than they have previously. But I think it's just a function of the age of the principals and really how long the industry has been in existence.
John Budzyna, KPMG 43:31
I think maybe if we just reflect on some of the other developments that we see that are forms of succession planning. That would be acquisitions by large asset management firms of particular hedge funds, you know, where we had the TPG acquiring Angelo Gordon recently as an example of that. Then you have some of the large co-investment managers going off to set up their own funds. So, in some ways, doesn't succession take care of itself?
Sean McGould, Lighthouse 44:04
I think that it does, and I think whenever you have a group of creative, dynamic people, there's going to be different offshoots of the business, different structures of the business. What's the right thing to do for a firm at a point in time, if people have a new idea and something they want to branch into? There are constantly, potentially new strategies or areas of opportunity to explore. So, these firms are very dynamic. John, I think you are right, that the succession does take care of itself a little bit in terms of the market opportunity, and who's doing what within that and the importance of it, and certain things ebb and flow within this space, as we know. So, if you look at the opportunity that was in SPACs, right after COVID, that opportunity is huge, and you needed people to take advantage of it very quickly and assemble a team and get after it. Things like that are constantly changing. So, I think organisationally, you need to have the flexibility to go tackle these things.
Also, regulations can change how this industry operates and how strategies are impacted. I always use the example of utilities Paris trading, which was great in the late 90s, it changed because of deregulation within the utility space. So, there are constant examples. Banking regulation looks like it's going to change here, again, there are constant examples of how regulatory influences change in the industry. I think that's going to continue to unfold, there are obviously new security rules that come into play across all the different geographies that reflect the shape of this industry. So, people really need to pay attention to those things that are going on regulatory-wise, that affect investment decisions within the industries they're looking at. And then the overall regulations of the industries that we're operating in. So, classic example would be the short selling role. After the GFC, if you take out short selling within the hedge fund industry, it's tough to implement these strategies with that, so we really have to stay on top of those sorts of changes as well.
So, it's not only succession, but it's the rules of the game that come along with that, that all of us need to pay attention to and be mindful. Look, we all are within this ecosystem, and you want good operators within this ecosystem, you want reasonable leverage levels, all of those things. But it's really important that we have taken this very seriously here at Lighthouse, over many, many years. We know we operate within a framework, and we want to be good participants within that framework of doing so. So, I really like this industry, I love alternative investments, I love the people I've met within this industry and in this space and I want to see this continue to succeed for a long period of time. I don't think it'll ever be the biggest industry within asset management. But I think it has a place, I think it serves a useful role in a lot of different ways. I'm super proud to be part of this industry for a long period of time.
John Budzyna, KPMG 47:25
Possibly one of the greatest changes that might impact us all, including the alternative investment management industry is OpenAI and the impact that may have on what we all do in the future. What's the Lighthouse view on this?
Sean McGould, Lighthouse 47:45
Yeah, look, I think I'm an optimist by nature. I think that AI can have a huge impact on healthcare, on discovering new drugs and on the speed of discovery of new drugs. I think that AI will be helpful to society, I don't have the doom and gloom that maybe others have on it. I think it will help things become more efficient. I think that people would generally argue that having a mobile phone and more information at our fingertips has helped us in general. I know there are some downsides to it, where people talk about the effects of social media and mental health and things like that. That should be taken very seriously. But I think that the world is getting better and it's getting more resourceful and abundant over time. I think AI is another tool that can help do that.
I think specifically within the hedge fund space, one of the biggest uses of AI would be if people have very unique data sets that they can apply this technology and these techniques to. I think that can be a big advantage. But no, overall, I mean, I'm very optimistic, I hope I'm not sitting here 10 years from now, and the machines have taken over and we're in a Terminator movie, but I'm a little bit more optimistic than that. Especially, outside of the hedge fund industry, the potential good that AI can bring really to the global population and tackle some of the most pressing issues that we have, I think any type of technology that we can throw at that is helpful.
Tom Kehoe, AIMA 49:29
Just sticking on your theme of optimism. We asked this to all of our guests that have joined us in this series of interviews. Could you on a scale of 1 to 5 tell us how optimistic you are about the hedge fund industry over the coming 5 years? 5 being the most optimistic.
Sean McGould, Lighthouse 49:48
Yeah, I would say I'm probably at about a 4. The reason for that is I think we've seen interest rates normalize. Right now, we're not going back to a 0 interest rate policy or financial repression. I think financial repression made it hard for some of these strategies to work to suppress volatility, all those sorts of things. So, I don't think we're heading back that way. I think that's a positive.
I think that there are a lot of really creative, energetic people in this industry, that are going to find new techniques and new things to do to produce profits consistently. So, I'm never going to bet against ingenuity. Again, the only reason why I wouldn't give it a 5 is that it is more competitive than it was 25 years ago. That's a good thing, probably for the markets in general, providing market liquidity efficiency, people taking out making more efficient markets, I think, is a good thing. Hopefully, the world stays an open place from a regulatory perspective where we can operate in all these markets around the world. But certainly, you have concerns in certain markets you would operate in. If you have big investments in Russia, and what happened between Russia and Ukraine, those investments are now gone. Are there other places in the world where you need to be mindful of that? We need to be cognizant of those things. So, the playing field just isn't necessarily as open from a global cooperation and regulatory standpoint. So, I need to be mindful of that. And then just competition as well as why I wouldn't give it a 5. But again, I think that there are natural incentives within this business to go out there and find ways to produce consistent profits. I think individuals and firms are going to do that.
John Budzyna, KPMG 52:00
Sean, you're at the top of your field, but you're still working very, very hard. What's still on your to-do-list for you professionally and personally? What would you like to accomplish?
Sean McGould, Lighthouse 52:14
Yeah, professionally, I really want to deliver results for our clients as consistently as I can. And it's a big challenge to do that every day, the markets are always changing, that's what I like about this job, there's always change that's going on in the markets and you have to adapt to that change. There are opportunities that come up and there are risks that you have to take care of, and you have to think of things in more of a probability sense than just a pure kind of neither right or wrong sense. If you talk to many traders, there are many good traders out there that actually make money, 50% of the time, or less than 50% of the time, and a lot of it comes back to risk management. So, for me, it's continuing to kind of push the envelope of where we're operating. Again, continuing to find, attract and retain the best talent that we can globally, continuing to push forward into new markets and new strategies. These are all challenges that we really want to deliver on. Everyone here wants to deliver for the clients, and again, want to have a good career opportunity set and feel like they're in control of something and contributing to something. I think the research across our organisations really points that out. I don't think any hedge fund firms are all that different from those things. So, I still see lots of challenges out there, John, professionally, from talent to risk management to running the firm better. All of those things. So, it'll never stop. I'll never be perfect and it's a good thing. I enjoy it. I really enjoy the challenge.
John Budzyna, KPMG 54:06
And how about personally?
Sean McGould, Lighthouse 54:09
Personally, on the philanthropic side, there's really 3 things that I focus on. I focus on kids, and the opportunities that they have afforded to them. Focus on schools, as well. So, I've sat on the board of 3 schools and education is very important. And then healthcare and I think that healthcare is critical for everyone. If you're healthy, you can be productive, you can do lots of things. Some people don't have a choice about health as well. But I think we continue to get closer. Talking about AI, talking about individualised medicine, learning more about the human body, things like that. I think people are taking care of themselves better. I think food is becoming a little bit more abundant for people. That's not the case everywhere in the world. But really for me, kids and opportunity, again education, and healthcare are where I like to really spend time philanthropically. These are things that are, unfortunately, not going to go away. These challenges are most likely to stay in my lifetime. So, I think I'll be working on them for the rest of my life.
Personally, I love playing sports. I don't watch sports that much, but I love playing soccer still, and I still run quite a bit. So, that's what I do to stay healthy and do some things outside of work. That's what I like to do. My family, John, is also by far the most important thing I don't talk about on these industry types of podcasts, but if they're listening to this, and I don't say that then I'm crazy for not saying that, but that's really, really important to me. But, you know, just professionally and personally, those are some things I work on.
Tom Kehoe, AIMA 55:56
Sean, thank you very much for taking the time to speak to us today. Good luck and good wishes for the future.
Sean McGould, Lighthouse 56:02
Thank you. I really appreciate it. Thanks for having me on. And good luck with everything you're working on as well and truly appreciate the opportunity.