Shipyard Capital

And now there’s a third constraint: crowding is incredibly hard to measure. Everyone knows this. It’s just really fucking hard. Much harder than any other factor. Qualitatively everyone (esp on the sell side) knows crowding when they see it, but getting that in a normalized cross sector fashion across time out of 1 million conversations with the sell side and into the model as a X parameter……hard….. But wait there’s more! The pods are levered. This is also why they’re so rich! If you’re levered 6x you can make a lot of money on 6 different teams betting separately on which shoe retailer was slightly less affected by leap year dynamics.  Wait! One last one! Payouts are one way. They can pay you a lot of money, they can fire you, but they CANT claw back what they’ve paid! (Payouts also have a bit of a hurdle dynamic: we all went to Harvard and only need to be explained a multivariate regression structure once….clearly we can all make the implicit 200+200 fairly easily…..less clear that we can walk away and make 200+3800 somewhere else) Now as a backdrop, the pods have been winning share and they’ve been winning share for many of the above reasons alluded to: they are capital light business models that deliver an insane product to LPs (insanely reliable income streams) via diversified alpha driven leverage.  With success comes some of the curses of success. In this case some of said curses are 1) wage inflation (a cost), 2) rising competition. The said combination of which has resulted in a talent battle for people who share some common “factors” (pun!): they tend to be liquidly employable, they tend to behave and think in similar ways, they tend to be young, and (if they’re good) they tend to be rich.  Pods are ultimately a human resource business (some legitimate advantages of scale notwithstanding) but this poses some real adverse selection problems. Firstly, when you have a bunch of people who are liquidly employable they move a lot! And if the firms are raised on the same business model they likely have the same investment ambitions and risk limits. So if the same people are working in the same structure they might be building similar systems??? Now you should be reading this and the answer is obvious: correlation risk! And indeed that is the case, everyone knows it. Correlation risk has been rising at the stock level, the team level, and even in the realized fund performance level (especially once you strip out some legitimate idio elements in master fund capital contribution & investment mandates) (allocators will get that comment)  So correlation risk has been rising for a decade+ now. And it didn’t really matter when the untapped pool for multistrat edge was large. But now there’s a fuck load of multistrat capital. This is really what people complaining about the market being broken mean. The market isn’t “broken”. There’s just an unobserved variable (a custom factor so to speak) of a particular stock being useful in pod factor land. This results in apparent one way price action and massive over/undershooting especially around thematics (SAASpocolypse!) (for the sharps among you note that these themes can be quite narrative driven transient which is mathematically speaking from a risk perspective equal to saying they’re really fucking hard to identify and measure) Honestly this is fine. In the end water finds its level, edges get competed away, stocks eventually earn what they earn, etc. But there is a cohort here who is not so well positioned. It’s the least desireable multistrats.  (Continued)