Bloomberg Wealth: Dmitry Balyasny

Having a piece of the portfolio that's market neutral, that's going to do well regardless of the direction of the market, that's lower volatility, that creates like a ballast around which you can take higher risk bets, I think adds a lot of value for most institutions. Once you're in the right industry and a decent firm, you know, just work. Work your way up. Being a trader as you get older, I think, is certainly hard. Every decade it gets harder and but being a CEO, I think you have a longer lifespan. In his multi-decade career, Balayosny Asset Management founder Dmitry Balayosny never had a base salary. Everything he's earned, he's had to build himself. Balayosny left his native Kiev in what is now Ukraine at seven years old with his parents to start over in America. I don't think people fully appreciate what it's like to live in a communist or authoritarian regime. It was, you know, very little personal choice and freedom and so my parents really wanted to, you know, have a different life. They settled in Chicago. None of them spoke English. It was such a different world. You know, saying you're moving to America was like saying you're going to Mars. Like people had no idea what you're talking about. We had no idea what to expect. And he started working to earn money nearly right away. Like one of the unusual things, I guess, in my childhood was I started working at 12, 13, just doing door-to-door sales. And I did a variety of sales jobs through high school. And then in college, I transitioned to finance and got a job as a retail stockbroker at a small firm in Chicago. After college, he answered a newspaper ad for Schoenfeld Securities, where he learned the ins and outs of trading and worked his way up to running his own group at the firm before striking out on his own. Now he runs Balayosny Asset Management, or BAM, a roughly $20 billion multi-strategy hedge fund that competes with the likes of Millennium and Citadel. Today, BAM has 2,000 employees spread across 20 global offices and 170 different teams, each in charge of a different strategy. So we look at every strategy as a business. So you have the long-short equity business, macro business, commodity business, quantitative business. And you have business plans for that strategy. How do you become world-class in that strategy, which is, you know, multi-year, multi-decade, you know, undertaking. As for Balayosny himself, he did make one trip back to Ukraine since leaving as a child, this time as an adult with his wife and children. Actually, at the airport, I had, you know, Kyiv as my place of birth. And the guy in the airport in Kyiv said, welcome back when I showed up. And I was like, no, no, no, this is like a round-trip ticket. Talk about your firm. Right now, it's roughly a 20-some-billion-dollar asset management organization. And what is a multi-strat hedge fund? For those who aren't experts in this, what does that really mean? Sure. The basic idea is pretty straightforward. We try to put together lots of uncorrelated P&L streams run by different specialist teams that should make money in all sorts of different market environments. And we put all that together in order to create a consistent, uncorrelated P&L stream for our clients. And the reason that that's important is the vast majority of funds have a lot of correlation to the economy, to the broad market, to overall risk. And so having a ballast in the client's portfolios that should have an equal probability of doing well, regardless if S&P is, you know, up 17 percent like this year or, you know, down 17 percent like in 22. In either case, the probability of performance should be the same. But uncorrelated sometimes means if the markets are up 20 percent, you might not be up 20 percent. That might be lower. But the investors are happy because that means when the reverse happens, they're probably going to be up and the markets are down. Exactly. Yeah. You always have to remind folks that you can't have it both ways. So certainly years that it's a risk on year and the markets are up and to the right all year, we're not competing with that. We're still trying to clock, you know, percent a month type of returns. But it's the same thing whether the markets are up or down. It doesn't really have anything to do with the overall directionality. Let's suppose I were an investor with you and I said, well, I'm happy to go when the markets are up and down and just give me a nice, reasonable rate of return. What do you think a reasonable rate of return is for somebody invests in a multi-strat hedge fund? Is it nine or 10 or 11 percent? Yeah, I think in double digits and we try to do better than that. But I think low to mid-teens is very solid returns given the volatility of the return stream is low. So our annualized volatility tends to be around 4 to 5 percent. Let's talk about how a multi-strat hedge fund actually operates. You allocate money to various individual professionals or teams. You have how many do you have? 170 teams at the moment. 170 teams. So each one does a different thing. Is that right? They might be copper, they might be Fed futures, whatever it might be. And so after each day, do you look at how they're doing each day or do you look at them each week and how much time do you give them before you say, you know, you're not doing so well? I mean, we look all the time. So, you know, I have screens on my desk that, you know, I'm staring at all day long. But it's not exactly like that. I think one of the things people don't fully appreciate in this model is you're really building businesses. So we look at every strategy as a business. So you have the long, short equity business, macro business, commodities business, quantitative business, and you have business plans for that strategy. How do you become world-class in that strategy, which is, you know, multi-year, multi-decade, you know, undertaking. And you want to get better and better every year. And so then you go down to the team level. What team do you need to have this particular exposure? What is their edge? How are they going to get better year to year, month to month, right? And so then you go to the hiring of the team, the analysts, the infrastructure, the risk management, and you're constantly trying to improve the process and the people in each of those facets all the time. And so you're always looking at them on an absolute basis. How are they doing? And on a relative basis to other people in that strategy. And you're evaluating it, you know, every quarter, every year. But to answer your question, we usually look for a couple years of performance to make people decisions, unless something is really off. On 170 teams every day, at the end of every day, wherever you are in the world, you have to watch how 170 different teams perform. Doesn't that take a lot of time and energy? Yeah, that's why we have 2,000 people. Okay, you have 2,000 total people, but you are the chief investment person. That's right. And do you actually make investment decisions yourself or you monitor those that are making the investment decisions? I do a bit of both. But I would say my bigger value add at this point, because we are so diversified, is making the strategy decisions, the people decisions and capital allocation decisions as opposed to individual trades. But I do some trading as well. So today, how many leading multi-strat hedge funds are there in the world? I think you can count them on one hand. Very few. It's hard because it's so hard to have that many different strategies and oversee them appropriately and get the rate of return you want. It's a very difficult business to build and to maintain your hedging. I sort of liken it, and you would have a better view on this than me, to the private equity industry where, you know, 30 or 40 years ago there were thousands of private equity firms, but today the vast majority of the alpha is half a dozen firms. I think it's very similar to that. It's very hard to go start up a firm today and go compete with Blackstone and Carlyle and Apollo. I think it's the same thing in multi-strats. The DNA of that type of firm, where in addition to just being a good investor or trader, you have to be good at people management, at recruiting, at infrastructure, at risk, at technology, like that's very hard to compete at today from a standing start. So when you don't, you know, just go out looking for money, typically you have closed funds and so forth, but when you do open up for money, do people just rush in because it's hard to get into the multi-strat funds that are well known? It depends on the time, and usually it's counter-cyclical. So after a more difficult period, as always, it's harder to raise capital, but as you know, usually those are the best times to get in when the recent numbers actually aren't that good, because whatever was causing that, whatever the headwinds were, chances are they're in the process of changing, and you've probably made improvements to the business during a difficult period. Conversely, when you're raising money after a really good period, it's very easy, but then usually the returns aren't quite as good. Now, we've had high inflation, high interest rates. Has that made it harder or easier for multi-strat funds in recent years? It hasn't been significant for us because we're really relative value in almost everything that we do, so we're paying the financing spread, and the spread that we're paying is consistent regardless if rates are one percent or five percent or three percent. This doesn't really affect us very much. So one of the most famous investors of all time is Warren Buffett, and I think he made a famous bet years ago to the effect that somebody could say that he would invest in the S&P 500, and then somebody else would invest in some hedge funds, and you'd see after 10 years who did better, and I think the people that invested in the S&P 500 did better than the hedge funds. What do you think of that view that you can't really beat the market, and people like you are trying to beat the market, but it's really difficult to do that? Well, I think it's a wrong way to sort of frame what we're trying to do. So first of all, there are certainly firms that have had fantastic track records over time, Renaissance being the obvious example, but others as well that have significantly beaten the market. But I don't think that's the right way to look at it. I think they're both good investments for different purposes. So if you had an unlimited time horizon and no need for liquidity, and you could just lock up your money for 50 years, sure, you should just put all your money in S&P, and you'll probably come out ahead, right? But that's not reality for most institutions and most families. You have different purposes for different types of investments, and so having a piece of the portfolio that's market neutral, that's going to do well regardless of the direction of the market, that's lower volatility, that creates like a ballast around which you can take higher risk bets, I think adds a lot of value for most institutions. It was such a different world. You know, saying you're moving to America was like saying you're going to Mars. Like people had no idea what you were talking about. We had no idea what to expect. Hey, let's talk about your background. So you were born in? I was born in Kiev. Yeah, and I used to say Kiev, but now recently people say I have to say Kiev. So what is correct? I think either one. I think the local pronunciation is Kiev. Okay, so you immigrated to this country with your family when you were how old? Seven. Seven years old. So do you still speak Russian or? Yeah, I speak Russian with my folks. And do you remember your parents saying we're going to leave this country? I remember the change at the time, and I didn't really fully understand it. Did you speak any English then? No, zero. I mean, none of us spoke any English. You had to understand at the time the information that folks have today. It was such a different world. You know, saying you're moving to America was like saying you're going to Mars. Like people had no idea what you were talking about. We had no idea what to expect. What did your father do? So my dad was a professor at a university in Kiev. My mom was an engineer. And at the time when you had to get permission to leave, right? And at the time when you got permission or requested to go, you were immediately fired from your job. When they asked to leave, and you had to say you were going to Israel, and then you had to switch trains and planes. It was all to do. But you immediately lost your job. And so for the next year, you had to survive by selling off possessions because you were unemployable while you were in this. But you couldn't leave right away. And you couldn't leave. So were you ostracized from your school group because you're leaving in a year or so as a young boy, or you don't remember that? I remember a little bit. There was quite a lot of anti-Semitism and discrimination there at the time. It was very widespread. Like even personally as a six-year-old at the time, I remember not being allowed to play in a soccer game because I was Jewish. And I went upstairs. I was like, what does it mean to be Jewish? Why can't I play soccer? Because we weren't particularly religious. But I think that was like another nail in the coffin for my parents wanting to leave. But in addition to that, the bigger issues there at the time, I don't think people fully appreciate what it's like to live in a communist or authoritarian regime. You couldn't switch jobs without permission. You had everything prescribed in terms of how much you could make, what you could do, what you couldn't do, where you could live. It was very little personal choice and freedom. And so my parents really wanted to have a different life. What did your father do in Chicago? So they had a very tough time initially because they didn't speak the language. And so rather than their professional fields, the initial jobs were cleaning sleazy motel rooms. So they couldn't get a professional job. Yeah. They went to school at night to learn English. And then they eventually got jobs in their field and kind of worked their way up. And in your case, you didn't speak any English either. Correct. So how long did it take you before you were comfortable in English? It's easier for kids, for sure, to pick it up. But I still had a hard time for the first couple years. But, you know, you pick it up. All right. So you went to public schools. I did. And then you went to Loyola of Chicago. I did. Which famously won the National Basketball Championship, I think, in the- 1954. So you graduated. And then what did you do for a job? So I actually started working pretty young. Like one of the unusual things, I guess, in my childhood was I started working at 12, 13, just doing door-to-door sales. And I did a variety of through high school. And then in college, I transitioned to finance and got a job as a retail stockbroker at a small firm in Chicago. So that was kind of my entry that I could get into finance. And I was successful selling stocks and recommending investments, but I wasn't successful trading for myself. But I really wanted to trade. And I got lucky answering a newspaper ad when Schoenfeld Securities opened up an office in Chicago. They ran a newspaper ad one time. And I was desperately looking for a trading job at the time. And I was hired into their proprietary trading training program. And were you good at proprietary trading? Not initially. So initially, I was hired with no base compensation. I've actually never had a salary randomly. But I was hired with no base comp, and you got a percentage of your P&L. But I didn't generate any P&L for the first year. So what did you live on? It was tough. It was tough. And did you live- were you still living with your parents? No, I was living on my own. I'd actually just gotten married at the time, and it was a tough period. But after that, I started getting the hang of it and making money. So at what point did you say you're good enough to start your own firm? It was a process. I went from an individual trader to running a group within the firm, to running a separate division, and then to a separate firm where we were raising capital. That was in 2001. So when 2001 arises and you say you want to start your own firm up, does the Schoenfeld people, do they say, stay here, we'll pay you a little bit more, don't go? No, they were very supportive. Steve Schoenfeld was very supportive. And him and I initially backed the firm, so it was our capital to start. And then I started raising outside institutional capital a couple of years later. As we talk today, there are concerns about the age of the president of the United States. But is there a concern for hedge fund investors of what age? They can't quite do this forever. Warren Buffett, not a hedge fund, but he's 93. George Soros was in his, I'd say, late 80s and still doing it. How old are you? 52. 52. That's like a teenager. Yeah, I hope so. That's how I tell my kids. 30 years, you'd be old enough to run for office or something. Yeah, exactly. So is there an age by which you think people should retire from trading? Or basically, do you have a skill set you can do it till you're no longer around? Well, I think it depends on the model. So this is much more of a business as opposed to the profitability of the fund just being based on my trading decisions. Being a trader as you get older, I think, is certainly hard. Every decade, it gets harder and harder. But being a CEO, I think you have a longer lifespan. But we're a partnership, and we have over 20 partners now. And so by the time I'm in my 60s or 70s, I imagine we'll have many more partners, and there'll be much larger partners in the overall firm. And they're running very significant areas of the firm. And it becomes a much more distributed type of management structure. So you haven't reached a stage where the younger partners or the mid-level partners come to you and say, well, maybe thank you for starting the company. And it's great, but maybe I should have a bigger share. And maybe you have a smaller share. You don't come in on Fridays or something. You're not at that stage yet? Not yet. Once you're in the right industry and a decent firm, just work. Work your way up. It's been observed by many people, not just me, but many people that immigrants to this country are pretty successful very often. And we have about 49 million immigrants in this country. Many of them have built great businesses or great business people like yourself. What is it about being an immigrant to this country that gives you a certain drive, or is it just fortuitous? No, I think there's a lot of self-selection in it because the people, by definition, who are leaving for a better life are driven to improve their circumstances of life. So I think, number one, it self-selects the people that have that drive. And then when they get to this country and there's a tremendous opportunity, they don't have a lot of options. There's no BS. It's not I'm going to go save the planet. It's like I need to create a sustainable life for my family. So what about Ukraine now? That war has been going on for about two years now. Do you get pulled into it because you're Ukrainian by birth, or do you stay out of it just because it's not something you're focused on? It's a very sad and I think important situation. When it broke out and subsequently after, we contributed to a lot of philanthropic organizations and humanitarian organizations in the Ukraine, both personally and as a firm, and a lot of our employees and partners contributed. I think it's really important that the West in general is supportive, not just for the fate of the people in Ukraine, but as an example of freedom and free societies versus autocratic societies. You don't have democratic societies initiating wars. Wars are bad for business. Nobody votes for wars. And so the more that we can do to band together and show support as the Western world in those situations, I think the less of them we'll likely get in the future. So since you came over at the age of seven, have you been back to Ukraine ever? Once. Yeah. I went back with my wife and my daughters, my older kids. But it doesn't have a pull so that you're not going back regularly. It's just you wanted to see what it's like. Could you remember anything from the time you left? Actually, at the airport, I had Kyiv as my place of birth. And the guy in the airport in Kyiv said, welcome back when I showed up. And I was like, no, no, no. This is like a round-trip ticket. I'm out in a couple of days. But it was meaningful to go and especially with my parents and my wife and kids. So when you do reasonably well, as you obviously have done in the financial service world, you tend to make money. And when you make money, people come to you for philanthropic gifts and so are there philanthropies that you're particularly involved with or interested in? Yeah, for sure. So I'm a big fan of the Ayn Rand Institute. At the Shrugged was very influential book for me that I read in college. And the portrayal of business people heroically in the novel was really resonated with me. I don't know if you can imagine today a novel or a movie where the businessman is the hero. And the way that she illustrated morality and individual rights being supportive of capitalism and productivity as opposed to the tension there, how it's portrayed in the broad world really resonated with me and I think has been really helpful for me. So I'm a supporter of the Ayn Rand Institute where we give out a lot of books to kids around the country. And then we started a philanthropic organization ourselves called Atlas Fellows. You'll notice the same theme. Our fund is also called Atlas where we give college scholarships and finance industry internships to a number of kids. We now have 100 kids in the program. I just met with them today actually in New York. Super sharp kids, merit-based scholarships, and they're working their way up through finance industry internships. So in all the years you've been in the investment world, would you say that you've observed the most common, what would you say you've observed as the most common mistake that investors make? I'd say chasing returns. There's alpha in somebody's performance, but there's also usually a combination of various tailwinds. And so when we look at somebody's track record, we really try to think of it in the context of what was going on in the world during that period. And if somebody has a strong track record in long bias technology investing, for example, during a period that the NASDAQ is up and to the right, you have to discount that a bit and think about how did they do the months that the market was down and the quarters that the market was down. Because when you get to the period where it's down for a year or two or three, you want to make sure that they could still do okay. But I think people don't value that context sufficiently and chase returns a little bit too much. What is the best investment advice you've ever received? I would say the risk management side, being really focused on diversification and cognizant of the leverage that you're running. I suppose a young professional, somebody in college or in business school is watching this interview and he or she says, you know, I really want to be like Dimitri. I want to build my own multi-strat hedge fund. What's the best way to do that? Is it to immigrate from Ukraine? Is it to come here as a young person, as an immigrant from anywhere? What's the best way to get trained to do what you do? Well, I think the best training is always doing something similar. So when we talk to our interns, we have like 150 interns this year and this question comes up a lot. Number one, you want to make sure you actually want to be in this industry. It's a hard industry. There's a lot of ups and downs. And if the only reason you're going into it is because you think you're going to make a lot of money, that's not a great reason. You've got to really have a passion for investing, for trading, and you want to do it in your spare time, even if you weren't getting paid for it. So that's kind of number one. And then once you have a, you decide that that's what you want to do and you have a foot in the door. There's a great podcast recently from Jerry Seinfeld, randomly, where his best advice was just work. And I think that's right on. So like, once you're at a, in the right industry and a decent firm, you know, just work, work your way up, learn from others and you'll get the necessary experience.