Hedge Fund Master Class – Craig Bergstrom, Adam Blitz, and Dan Fagan (Capital Allocators, EP.318)

Episode Summary

Executive Summary: A hedge fund masterclass with Craig Bergstrom, Adam Blitz, and Dan Fagan focused on how institutional allocators think about hedge funds today: manager selection over asset allocation, the impact of higher rates, liquidity and leverage risks, platform hedge funds, long/short equity, macro, credit, fees, and emerging opportunities. The panel was broadly constructive but selective, favoring liquidity discipline, concentrated talent, and structures that align incentives.

Main Topics: Allocator frameworks and manager selection (Priority: 5/5): All three panelists emphasize bottom-up manager selection over broad strategic asset allocation. They favor finding truly exceptional managers, often early in their development, and maintaining a diversified portfolio of styles only at the margin. Higher rates and portfolio returns (Priority: 5/5): The group argues that structurally higher short rates improve expected hedge fund returns because many strategies earn cash yields or short rebates. Higher rates also make hedge funds more viable for foundation and endowment portfolios that need a 5% to 6% payout. Liquidity, leverage, and contagion risk (Priority: 5/5): A major theme is that illiquidity and leverage are the primary sources of permanent capital loss. The panel discusses hidden systemic risk from crowded positions, rapid deleveraging, and the footprint of large multi-strategy platforms. Platform hedge funds and multi-PM structures (Priority: 4/5): The panel debates the appeal and risks of multi-manager platforms. They acknowledge strong historical performance and low beta, but worry about opaque risk, survivorship bias, high leverage, and the difficulty of verifying true edge at scale. Strategy views: long/short equity, credit, and macro (Priority: 4/5): They see renewed opportunity in long/short equity due to dispersion and passive flows, remain constructive on tactical credit dislocations and distress, and view macro as attractive mainly for diversification and probabilistic trade structuring rather than big directional bets. Fees and incentive alignment (Priority: 4/5): Higher cash rates have reignited debate about hurdles and fee fairness. The panel wants managers to be paid for skill, not for earning risk-free cash yields, and expects growing pressure toward better alignment, especially in credit. Opportunities and avoidances (Priority: 3/5): Current opportunities include catastrophe reinsurance, secondary private credit, and emerging managers. The main avoidances are high leverage, illiquidity, and strategies where the allocator cannot truly understand the source of returns.

Key Arguments: Hedge fund portfolios should be built primarily through bottom-up manager selection, not top-down calls on strategy allocation, because truly exceptional opportunities are scarce. Higher short rates structurally lift expected hedge fund returns because many strategies naturally earn on cash, short rebates, or floating-rate exposures. Liquidity matters more than optics: many markets look liquid in normal times, but large positions can become hard to exit quickly, especially during stress. The biggest hedge fund risks are leverage and illiquidity, which can turn mark-to-market losses into permanent capital losses through forced selling or margin calls. Large platform hedge funds can generate excellent historical returns, but their scale, leverage, and opacity make them difficult to underwrite and potentially systemically important. Long/short equity looks more attractive going forward because passive flows and platform trading have created room for medium-term stock pickers, especially in inefficient sectors. Macro is best understood as a diversification tool and a trade-structuring business, with repeatable edge coming from probabilistic expression rather than bold single-view calls. Fee structures should evolve with higher cash rates; allocators should not pay full incentive fees on risk-free carry and increasingly want hurdles or preferred returns. Emerging managers can be especially attractive because they are hungry, less crowded, and often have not yet built the leverage/liquidity problems that plague larger firms. Open-ended credit hedge funds may decline structurally in favor of closed-end vehicles because closed-end structures better align fees, liquidity, and asset-liability matching.

Data Points: Corbin Capital total assets under management: about $8.5 billion - Craig Bergstrom described Corbin’s overall firm AUM Corbin hedge fund-related program: about $5 billion - Craig said this portion is what he referred to as fund of hedge funds 2.0 or 3.0 Corbin private/opportunistic credit programs: about $3.5 billion - Craig noted this as part of the firm’s overall AUM Evanston Capital assets under management: about $4.3 billion - Adam Blitz described the firm’s current AUM GIC hedge fund program longevity: a couple of decades - Dan said GIC has had its hedge fund program for about 20 years WCM compensation structure: flat fee - Disclosure stated Capital Allocators was compensated a flat fee by WCM for the testimonial AlphaSense source library: over 500 million premium sources - Promo described AlphaSense’s research platform coverage AlphaSense expert calls: over 200,000 expert calls - Promo described AlphaSense’s market intelligence resources Alpha Summit 2025 dates: October 6th through 8th - AlphaSense event promotion Hedge fund industry equity capital estimate: around $4 trillion - Dan used this as a rough estimate of hedge fund equity capital Illustrative hedge fund gross leverage: 2.5x gross leverage - Dan used this assumption for an industry-wide footprint estimate Estimated hedge fund footprint: $10 trillion - Dan estimated industry position footprint using equity capital and leverage US public equities market size: about $40 trillion - Dan compared hedge fund footprint to the US equity market US Treasury market size: a little over $20 trillion - Dan used this to compare hedge fund footprint to fixed income markets Target payout requirement for foundations: 5% annually - Craig noted this as a key reason higher hedge fund total returns matter Endowment payout range: 5% to 6% annually - Craig referenced typical endowment spending needs Example short rates/cash yield: 4% to 5% - Adam and Dan cited current cash rates as a major driver of gross hedge fund returns Expected start of some manager returns from cash: 4% to 5% off the bat - Dan said managers can appear up 3% to 4% yet still be down net of cash opportunity cost Illustrative long/short equity exposure sweet spot: 100 long by 60 short - Adam gave this as an example of balanced gross/net exposure in long/short equity Hedge fund sponsor fee convention discussed: 2 and 20 - Adam referenced typical macro fees when discussing whether managers are paid for risk-free carry Episode-specific private equity deal example: Mavis Tire Express Services with over 1,100 locations - Ted promoted the separate Private Equity Deals episode about the Bay Pine auction win

Pivotal Quotes: "If you're comfortable with leverage, you are doing something wrong." — Dan Fagan: Dan explained why allocators should never become complacent about leverage in platform or multi-manager hedge funds "We just don't think there's that many good hedge funds out there. Our whole job is to identify and gain access to them." — Adam Blitz: Adam summarized the allocator mindset behind manager selection and the scarcity of truly exceptional hedge funds "We believe that there are way too many hedge funds." — Craig Bergstrom: Craig tied the abundance of mediocre firms to the difficulty of finding high-quality single-risk-taker managers

Implications: Allocators should expect better return potential from hedge funds in a higher-rate world, but success will depend on discipline around liquidity, leverage, and fees. The best opportunities likely sit with skilled managers, smaller firms, and mispriced dislocations rather than crowded platforms.