Ted Seides – A Deep Dive into Hedge Funds - [Invest Like the Best, EP.07]

Episode Summary

Executive Summary: Patrick O'Shaughnessy interviews Ted Seides about the hedge fund ecosystem, drawing on Seides’s Yale and Protégé experience to explain manager selection, seeding, fees, fundraising, and why hedge funds still matter despite tougher competition and rising indexing.

Main Topics: Joseph Campbell and the Hero’s Journey (Priority: 4/5): The conversation opens with Campbell’s ideas as a framework for change, courage, and personal transformation. Yale Endowment and David Swenson (Priority: 5/5): Seides explains how Yale’s disciplined asset allocation, rebalancing, and manager selection shaped his investing philosophy. Protégé’s Seeding Model (Priority: 5/5): He describes how Protégé seeded emerging hedge funds, took revenue shares, and diversified across many managers. Fundraising, Pedigree, and Charisma (Priority: 5/5): Launching a fund now is harder; pedigree helps, but charisma and relationship-building increasingly determine success. Fees and Alignment (Priority: 5/5): Seides argues fees are a market-clearing price and should be judged against value added, cost of capital, and long-only alternatives. Short Selling and Strategy Niches (Priority: 4/5): Dedicated short funds face structural headwinds, though targeted shorts can work when tied to specific dislocations. Career Advice and Future of Asset Management (Priority: 4/5): He advises would-be managers to start small, recognize opportunity cost, and think hard about where their skill fits now.

Key Arguments: Yale’s edge came from discipline: structure, rebalancing, and strict investment rules. Seeding works because early capital earns revenue shares and optionality without needing outsize returns. The hedge fund launch market is mature; supply of managers far exceeds demand for new capital. Charisma matters because allocators back people they trust, not just track records. Fees should reflect cost of capital and true value added, not just headlines like "2 and 20". Dedicated short-only funds struggle structurally because markets rise most years and short positions shrink in rallies. Hedge funds still matter for risk management and spotting market dislocations like subprime. A young manager should think first about building a durable small business, not immediately scaling to billions.

Data Points: Yale analysts hired from class: 18 global analysts - O'Shaughnessy recalls Goldman Sachs's Yale recruiting environment in the early 1990s Protégé seed investments made: about 40 - Seides estimates the number of hedge funds seeded over 14 years at Protégé Protégé total investments: about 200 - He notes the 40 seeds were part of a broader set of investments Protégé seed capital size in early 2000s: $25 million - Typical seed ticket size in the early 2000s Typical seed capital size today: $75,000, $100,000, $150,000 - Seides says seed tickets are much smaller today than in the early 2000s Typical seeder revenue share: 15% to 25% - Broad range of top-line economics a seeder may receive Short-term rates in the early 1990s: mid-single digits - Used to illustrate why hedge fund fee levels then had to account for cost of capital Hedge fund fee shorthand: 1 and 20 - Seides references the old industry structure before "2 and 20" became the common critique Current hedge fund fee shorthand: 1.5 and 20 - He uses this as a rough baseline for contemporary fee debates Number of hedge funds: 7,500 - O'Shaughnessy cites the crowded state of the hedge fund industry Time at Protégé: 14 years - Seides describes the length of his career there Yale benchmark for absolute return: 5% or 6% real - Historical required return for Yale’s absolute return bucket Later benchmark example: 7% - Seides cites Swensen describing a 7% required return benchmark Management fee of long-only active fund: 80 or 85 basis points - Used as comparison against hedge fund fees and active share

Pivotal Quotes: "be the hero of your own life" — Michael Mervash / Ted Seides: Seides describes the Hero’s Journey retreat and its purpose "The problem is if that were the case and that were the only way to get into business and have a successful business, you'd probably only have 20 or 30 investment funds in the world" — Ted Seides: On why Yale-style capital and governance cannot be the only model "If they are, are they going to be a talented portfolio manager? If they are, are they going to be able to build a business out of it" — Ted Seides: His checklist for evaluating emerging managers

Implications: The hedge fund industry will likely keep consolidating around talent, trust, and differentiated value, so investors should evaluate economics and incentives more carefully.