#7 – A Scotsman & an Englishman
Dylan Grice is a former economist, prop desk trader, strategist and family office investor. Rob Crenian is the former UK CEO of Renaissance Technologies, the world’s most successful hedge fund. They teamed up to form Calderwood Capital whose reason d’etre is preservation of capital in what is likely to prove a much more difficult long term environment in the next decade or two than in the last.
In this interview, Dylan Grice and Rob Crenian discuss how markets work, how “stupid” investors have been winning of late but will not do so for much longer, how quants think, how real alpha will be more difficult to come by, and how this will likely be found not by being smarter but by doing something different; and they explain how they are seeking to preserve wealth with an unconventional investment strategy at Calderwood Capital.
I met Dylan when he was working on Albert Edwards’ team at SG and I used to enjoy his weekly missive, Popular Delusions, a title he has resuscitated for his new newsletter. I hadn’t met Rob before this episode which we recorded in person in the podcast studio at my office. We really had a fun conversation in which I probably participated too much, and we carried on in the pub afterwards. Spoiler: this episode is longer than usual.
They got together to set up Calderwood Capital which is an unusual hegde fund, deploying unconventional strategies to preserev and grow wealth, as they explain in the podcast. Their principles are that diversification is the most potent tool in capital preservation yet is the least effectively used; but radical diversification requires radically orthogonal (it seems to be their favourite word – statistically independent) return streams. They talk about the evaluation of risk-return as needing to take place after the research, not before.
You get the picture…………..
GETTING INTO INVESTING
Both started at Dresdner Kleinwort with Dylan going on to work with Albert Edwards at SG and Rob moving to quant manager Aspect Capital. They therefore have had very different career experience, which brings diversity to their new venture.
THE ROLE OF THE FAMILY OFFICE
Family offices are attracting some really high quality investors who enjoy the relative lack of constraints. But the job, capital preservation, is much more difficult than it was say 20 years ago, because of the lack of yield.
“You don’t have to be the smartest guy in the room, but you do have to be different.”
Value investing hasn’t been working; what has worked recently is “craziness, recklessness”. Dylan mentioned when talking about SPACs and similar features of recent markets:
“it’s crazy how dreams were being priced”
I was quite surprised by some of the things I learned about quants. Good quants just connect data, and there is the analogy of continuous improvement with F1 teams, where success often depends on the data. Quant managers too have to accept that they live in an ever-changing world and Renaissance used to talk about the “half-life” of a quant model – the ability to generate alpha decays over time.
Their strategy is to build a portfolio that doesn’t depend on getting markets. macro or forecasts right. When you get into more esoteric areas of markets, you find a genuine risk premium – for example, the reinsurance industry depends on collecting more premiums than it pays out in the long term – there has to be a profit incentive. By assembling a basket of such strategies and some quants exposure, they hope to be able to survive interest rates at 20% and still make money.
I thought this was a fascinating discussion, full of gems, and it made me reconsider whether gold was a sufficient insurance policy in my portfolio and what else I should be thinking about. You should too – strategies which have been successful over the last 40 years are unlikely to work in the next 20. That’s why I am continuing this macro series with a very special guest next month.
ABOUT DYLAN GRICE
Dylan was formerly Head of Liquid Investments at Calibrium AG, Zurich, where he helped build and establish one of the largest family offices in Europe. He started his career at Dresdner Kleinwort Benson in 1997 in the Quant, Strategy and Economics group, where he spent time as a prop trader before moving to Société Générale’s highly regarded global strategy team, working alongside Albert Edwards. He is a graduate of Strathclyde University (as is last month’s guest, Hugh Hendry) and the London School of Economics.
ABOUT ROBERT CRENIAN
Rob is the former CEO of Renaissance Technologies (UK) where he ran and managed the London office responsible for the EMEA regions. He started his career in 1997 as a derivatives risk manager at Dresdner Kleinwort Benson – where he first met Dylan Grice – before switching to quantitative strategy/research. He subsequently moved to Citigroup as a quant researcher in the number one ranked team (Institutional Investor survey 2003/4) before joining Aspect Capital as Head of Product Management. He is a graduate of UCL and the Universities of Cambridge and Bristol.
Sebastian Mallaby, More Money than God. Dylan commented that he liked his view that what works now won’t work in future. Dylan also recommends Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger.
Charles Schwager’s Market Wizards and Liar's Poker by Michael Lewis. Both books were among those on his desk when he joined Aspect Capital, along with a DVD of the movie Trading Places.
HOW STEVE KNOWS THE GUESTS
Steve has known Dylan from when he worked on Albert Edwards’ team. Steve had always liked the team, including Dylan’s predecessor James Montier, now at GMO, but became a massive fan in 2008, ahead of the credit crisis, when Albert was one of the few voices to warn of the trouble ahead. Dylan’s team heard this podcast and got in touch to say he would like to come on and I hesitated for a nano-second – it’s really a privilege to produce something like this and to be allowed to chat to brilliant people. Thanks to the listeners who enable this!