CIO Greatest Hits: Hedge Funds – Dan Fagan (GIC), Craig Bergstrom (Corbin Capital Partners), and Adam Blitz (Evanston Capital)

Episode Summary

Executive Summary: A hedge fund panel from GIC, Corbin, and Evanston Capital argued that the best opportunities still come from bottom-up manager selection, not macro bets or broad asset allocation. They discussed higher rates, liquidity management, leverage, platform funds, long/short equity, macro, fees, and emerging managers, emphasizing that leverage and illiquidity are the main left-tail risks while differentiated skill, alignment, and access matter most.

Main Topics: Bottom-up manager selection over top-down allocation (Priority: 5/5): All three allocators said hedge fund returns are best sourced by finding exceptional managers rather than making large strategy bets based on macro views. Asset allocation matters episodically, but manager selection is the core edge. Impact of higher rates on hedge fund economics and fees (Priority: 5/5): Rising short rates improve expected hedge fund returns mechanically, but also intensify fee debates because managers now earn meaningful risk-free returns before skill. Hurdles and more aligned fee structures were presented as increasingly important. Liquidity, leverage, and footprint as core risks (Priority: 5/5): The panel repeatedly stressed that leverage and illiquidity—not volatility—create permanent loss-of-capital risk. They also highlighted how the growing hedge fund footprint and crowded positioning can cause contagion across markets and managers. Platform hedge funds: compelling but risky (Priority: 5/5): Platforms were described as levered collections of talented PMs that can deliver strong historical returns, but they require exceptional talent, strong risk systems, and careful diligence. The group warned about opacity, survivorship bias, and systemic spillovers. Strategy views: long/short equity, macro, and credit (Priority: 4/5): Long/short equity was framed as potentially attractive again due to dispersion and the rise of short-term capital, macro as valuable for diversification but hard to source, and credit as the one area where tactical tilts are most justified. Emerging managers and niche opportunities (Priority: 4/5): Each allocator pointed to specialized opportunities: emerging managers, catastrophe reinsurance, and secondary private credit. These were viewed as places where pricing, alignment, or dislocation may be especially attractive. Transparency, alignment, and diligence process (Priority: 4/5): The speakers emphasized open communication, granular due diligence, and understanding business models, terms, and risk controls. They rejected 'black box' shorthand and favored managers who are direct and data-rich.

Key Arguments: Hedge funds should be judged on whether they provide differentiated return streams and diversification, not on whether they beat equities in absolute terms. Higher short rates lift expected returns across many hedge fund strategies because cash and short rebate become meaningful contributors. Leverage and illiquidity are the dominant sources of permanent capital loss; volatility alone is not the main concern. Platform funds can work, but only if the firm actually has exceptional traders and risk management; otherwise the model can amplify hidden fragilities. Liquidity terms must match underlying assets; offering too much liquidity in illiquid strategies can force bad selling and harm long-term investors. Multi-strategy platforms may transmit stress across books and strategies, creating contagion even in apparently unrelated markets. Long/short equity may have better prospects after a decade of passive and platform competition, especially in sectors with high dispersion and manager specialization. Macro is most attractive when volatility and uncertainty are elevated, but skill often lies in trade structuring rather than directional calls. Fee structures should include hurdles where possible because cash yields now create substantial risk-free returns that should not be fee-generating alpha. Emerging managers can be attractive because they are hungry, focused, and often less burdened by liquidity and scale constraints. Secondary investments in private credit can offer attractive entry points when capital is exiting smaller funds and discounts are widening.

Data Points: GIC hedge fund program longevity: A couple of decades - Dan described GIC's hedge fund program as having been in place for several decades. Corbin assets under management: About $8.5 billion - Craig described Corbin's total assets. Corbin hedge fund-related assets: About $5 billion - Craig said this is the fund of hedge funds-style portion of the firm. Corbin credit/opportunistic assets: About $3.5 billion - Craig noted the firm's other opportunistic and private credit programs. Evanston Capital assets under management: About $4.3 billion - Adam described Evanston's current assets. Podcast library size: Over 500 podcasts - Ted referenced the show's long-running archive. Summer series duration: Seven weeks - Ted explained the annual summer replay series format. 2025 Capital Allocators University dates: December 3rd and 4th - Announcement for IR/BD professionals in New York City. AlphaSense event dates: October 6th through 8th, 2025 - Announcement for Alpha Summit 2025 in Brooklyn. GIC-style leverage assumption: 2.5x gross leverage - Dan used this conservative assumption to estimate hedge fund industry footprint. Estimated hedge fund industry footprint: $10 trillion - Dan estimated industry positions when leverage is applied to ~$4 trillion of equity capital. Estimated hedge fund equity capital: $4 trillion - Dan cited the commonly cited amount of hedge fund equity capital. U.S. public equities market size: $40 trillion - Dan compared hedge fund footprint to the equity market. U.S. Treasury market size: A little over $20 trillion - Dan used Treasuries to illustrate scale of the hedge fund footprint. Short rates / cash yields discussed: 4% to 5% - Speakers cited current short rates as a major tailwind and fee issue. Typical management/incentive fee context: 20% incentive fee - Used in discussing why managers may be collecting fees on risk-free returns. Annual payout requirement: 5% to 6% - Dan referenced foundation and endowment spending needs. Illustrative long/short equity exposure sweet spot: 100 long / 60 short - Adam suggested this as a rough portfolio construction balance.

Pivotal Quotes: "If you're comfortable with leverage, you are doing something wrong." — Dan Fagan: Dan explained why leverage in platform and multi-strategy funds should never feel safe to an allocator. "The real black box is the human investor who's subject to all the emotions and behavioral biases that come with not being a machine." — Dan Fagan: Dan pushed back on the idea that quantitative strategies are inherently opaque. "Somewhere along the way, the last five years or so, the illiquidity premium somehow turned into an illiquidity discount." — Adam Blitz: Adam criticized the market's willingness to accept lower returns for illiquid investments.

Implications: For allocators, the message is to prioritize skill, alignment, and liquidity discipline over fashionable labels or headline returns. The rise in rates improves hedge fund economics, but also raises the bar for fees, transparency, and risk control.