Dmitry Balyasny, Managing Partner and Chief Investment Officer, provided an outline of his firm, Balyasny Asset Management (BAM), as well as thoughts on how a well-functioning hedge fund should be structured at a luncheon presentation hosted by CFA Society Chicago on September 10th, 2015.
Balyasny provided a summary of how he got his start in the business; beginning with trading short-term equity and futures, and later in a fund of funds analyst role. After a number of years of trading and fundamental analysis under his belt, Balyasny set up BAM in 2001. He happily advised BAM Atlas Global fund has never had a negative return since its inception (2002) and also noted that Atlas Global has a correlation with the S&P 500 since inception of .04.
Balyasny provided several tips on what it takes to build a good hedge fund complex, from returns to the overall culture, and include the following:
- Ensure that you have a low correlation index – Balyasny consistently looks for uncorrelated managers; people that are doing different things (that add Sharpe).
- Promote a collaborative, partnership culture, and attract and retain talent through a culture of excellence.
According to Balyasny a good hedge fund is small to medium in size and has robust risk management separate from portfolio management, emphasizing sector specialization, and dynamic capital allocation.
How does BAM produce for their clients? Their source of alpha is primarily drawn from ideas – bottom up bets (big bets do not work). BAM generates alpha primarily from ideas, 87%, while sizing of the bet only accounts for 13% of alpha. Thus it is critical to have numerous good ideas.
Balyasny also noted that since the market is mostly efficient, alpha is typically acquired over a short period of time. Approximately 70% of BAM’s alpha is generated within four months of purchase; 44% in less than one month, and 26% in one to three months. Thus BAM turns over their portfolios frequently in an effort to generate alpha. The BAM model focuses on the short-term as they believe it is difficult to look out years into the future and have expectations hold.
Balyasny finished the discussion by answering several questions including an interesting question regarding fee compression in the hedge fund market. Balyasny thought it strange that nearly all hedge fund products are priced the same, the 2 and 20 model. “Either they are too expensive, they are not providing alpha, or they are too cheap.” Balyasny noted that BAM’s pricing structure pushes past the 2 and 20 to a higher level because of their delivery of alpha and in an effort to remain small.