An Open Lane

“Follow the leader” is a psychological dynamic as old as time.

While asset classes, funds, and strategies are often viewed in a static, extrapolative lens, I believe the pace at which they live and die has accelerated measurably in the last decade. Hot money makers attract more participants chasing the same deals, with the information added by each additional participant diminishing over time.

Along these lines, I’d recommend Inside the House of Money by Steve Drobny as a fascinating study on the rise and fall of macro trading. While the mention of macro often evokes images of polymaths playing exotic markets like a chess master, associates of Soros and Tudor put their work in remarkably more straightforward terms.

Two factors drove the once large opportunities in global macro. The first was the remarkable market inefficiency driven not only by the large number of individual currencies that existed, but also the striking lack of sophistication of its central bank managers. Jim Leitner explains,

“I used to have so much fun playing around in the markets… The central banks were so much more active back then, especially in Europe. It was a no-brainer because they were keeping everything in ranges and leaving orders at fixings. The central banks would all set the value of their currencies every day and each one wanted to have their own daily fixing. There was one in the Netherlands, one in Paris, one in Germany, and so on. Logically, the French franc versus the Dutch guilder should be the same whether it’s being fixed in Paris or in the Netherlands because it’s the same thing. But it wouldn’t be the same because it would be traded differently due to the different orders.”

In essence, central banks were profit donors, and they’d even telegraph their decisions ahead of time.

Such an opportunity to arbitrage similar currencies naturally attracts competition over time, and as central banks became more sophisticated over time, so too did the competition.

“Gone are the days when a few strong personalities dominate a small, concentrated number of funds and markets. The increase in information flow, competition, influx of assets, and development of new markets has added tremendous complexity and scope to the global macro landscape today. The strategy that started with Keynes and made famous by Soros has become a broadly diversified collection of many different managers and styles… As 1999 rolled into 2000, many other global macro funds closed down, prompting the popular press and Wall Street pundits to declare global macro ‘dead.’”

I think it is fitting that Soros started his fund around the end of the Bretton Woods system and shifted away from macro when those opportunities had run their course.

In today’s context, the combination of an ever more social investing community, a bloated central bank balance sheet, and an eager “shoot first, questions later” mindset in the markets all bring the phenomenon described above to a new extreme. With more money looking for a home, the Brookline thesis is that creativity and adaptability will not only be increasingly rarer but also more valued in this paradigm.

Just 3 years ago, I had an idea, at 205 pounds and no talent in running, to make an all-out effort to qualify for the Boston Marathon, and for what could only be called an obsession, life became a series of optimizations, where I shrunk to the size of a highschooler, bought a hypoxic altitude simulator, and ate nothing but arugula salads.

Brookline is the penultimate stop in the race, just three miles after Heartbreak Hill, and it sits in the center of what runners call “the wall” in marathoning. On Sauvie Island, I qualified by 7 seconds, a margin of .06%, towed over the line by a final flailing sprint in the last quarter mile. One skipped run, one cheat day, one lapse in effort may have made the difference in success and failure.

That journey has little to do with investing in of itself. After all, investing is more about looking for one-foot hurdles than doing the pole vault. Rather, Brookline to me is about the pursuit of great personal projects and new challenges.

In a world where the expedient path is increasingly rewarded, many of today’s professionals simply seek the greatest scale, incentivized far more by management fees over long-term performance. When capital is abundant but ideas rare, the common path for investment professionals is to raise capital first and figure out the investments later.

The greatest gift of my early career has been to work for people I deeply admired. Ruane was in every sense a temple of value investing where we aspired to an uncommon standard in all aspects of our work. In a throwback to an older time, I hope for Brookline to be my own take on a classic in the industry. As Bill Ruane put it, funds should be bought not sold.

Brookline is adopting Buffett-style, performance fees. There are two main principles here: (1) I am far more interested in performance rather than sales and (2) our exciting ideas should always outnumber our funds, not the other way around. The goal of Brookline is always to provide long-term, outstanding investment results for the firm’s clients.

In addition to drafting our fund documents, there are some exciting investments I’m making into building the firm’s longer-term strategy and edge. I believe a fund’s best performance comes when it is pushing a frontier or driving an open lane.

With running aside and one objective ahead, I am nothing but ready for the next endeavor.