From Engineer To Director Of Investments | Paul Chai, Kansas State University Foundation | Q&A, Part I
Paul Chai is the director of investments at the Kansas State University Foundation, where he is responsible for assisting portfolio management of investable assets, conducting due diligence on existing and prospective investment managers and analyzing pooled funds.
In this interview, he discusses his role at the first land-grant college established; how his engineering background helps him deal with investment problems from a systematic and analytical lens; and how a tight-knit relationship with the Board of Trustees allows KSU to have a more robust allocation decision and execution process than their peers.
Trusted Insight: Congrats on your role at KSU. You’ve spent a good chunk of your career at an asset management firm. What was the transition like into the asset allocator side of things?
Paul Chai: Thank you for the kind note. I am excited to join the KSU Foundation’s investment team. Investing for the betterment of present and future K-State Community is an honor and a responsibility I don’t look upon lightly. I am thankful for the opportunity and the trust and am eager to add value to this great institution.
"Chief Investment Officer Lois Cox and the prior investment team have laid great foundations and built a solid portfolio here before me."
In my prior role, I was managing a number of different portfolios including a fund of hedge funds portfolio, a fund of private equity funds, and several direct real estate and mezzanine financing deals for Grandway, a boutique multi-family office in Los Angeles. The portfolio sizes were smaller with more concentrated positions and idiosyncratic risk exposures. The investment horizons for most of the portfolios I managed were less than 5 years, and for the fund of hedge funds portfolio, the performance was measured and reviewed on a monthly basis. Return objectives for the portfolios were based on absolute return targets, with the HFRI FOF index loosely used as a relative performance benchmark for the fund of hedge funds portfolio.
At Kansas State University Foundation, we manage a larger long term investment pool and a smaller liquid expendable pool. Both pools are managed in accordance to clearly defined Investment Policy Statements and benchmarks. There is more of a focus on diversification and a longer-term investment horizon here compare to my prior position. Chief Investment Officer Lois Cox and the prior investment team have laid great foundations and built a solid portfolio here before me. The Team has been extremely welcoming and helpful in making my transition relatively smooth. After spending the first few weeks familiarizing myself with the portfolio, the organization and processes, I got involved in a number of projects, and it has been a blast since.
Trusted Insight: You studied mechanical engineering at MIT. How does your technical background influence your current role as an institutional investor?
Paul Chai: As you have astutely pointed out, I am an engineer by training, having gone to probably two of the more engineering-oriented schools at MIT and Carnegie Mellon, and worked in aerospace and semiconductor industries earlier in my career. This background has helped me understand the quantitative and analytical aspects of investment analysis more easily than a typical outsider to the investment management industry. More importantly, my engineering experience helps me approach investment problems from a systematic and analytical lens, as I tend to place a higher weight on logic and reasoning in my decision-making process, and less weight on emotion or gut feel. While this had caused me to miss out on a few incredible investment opportunities in the past, I have also avoided an even larger number of investment failures by biasing toward numbers and logic.
"Several of our board members actually started their distinguished careers as engineers just like me, so it warms my heart when they expressed how happy they are to have 'one of their own' on the investment team."
With that said, investing is a people business at the end of day, and more often than not, the personalities of the investment team, overall chemistry and the team’s motivations can impact performance in ways not measurable by numbers and logic. This additional human element is what makes evaluating and selecting fund managers in an endowment fund portfolio so fascinating to me.
Since joining the Foundation, I have been deeply impressed and humbled by the backgrounds and accomplishments of the various individuals serving on our Board of Trustees. Several of our board members actually started their distinguished careers as engineers just like me, so it warms my heart when they expressed how happy they are to have “one of their own” on the investment team. It makes me feel like a part of this big family, and I am glad that my engineering background served as a bridge to bring me closer to our Board.
Trusted Insight: Surely, today’s buzzwords like machine learning and AI must spark your interest. Do you think these technologies are applicable in an institutional setting?
Paul Chai: Artificial intelligence and machine learning have already disrupted various areas of the institutional investment management industry. Just to give some examples, in operational due diligence for institutional investors, there are now law firms offering operational due diligence robots that provide legal reviews of lengthy fund offering documents on a more timely basis for a fraction of the cost of human legal counsels.
"As an institutional investor, it is important to stay up-to-date on the latest technological advancements and industry developments, as technological disruptions can be a source of investment ideas and a way to improve efficiency in managing the portfolio."
The use of machine learning and artificial intelligence algorithms by hedge fund firms like Two Sigma, Renaissance, and D.E. Shaw have provided alpha return drivers for these firms beyond the traditional drivers like value, growth, or momentum. Robo-advisor solutions have also been offered by various investment banks to their private wealth clients.
As an institutional investor, it is important to stay up-to-date on the latest technological advancements and industry developments, as technological disruptions can be a source of investment ideas and a way to improve efficiency in managing the portfolio. With this said, AI and Machine Learning still have a long way to go, before they can completely replace the functions of the investment staff. As I had touched on earlier, investing in a typical endowment’s fund of funds model is very much a people business, and evaluating and selecting fund managers adds complexity to the task that cannot easily be replaced by a robot advisor with artificial intelligence or machine learning algorithms.
Additionally, the other side of endowment fund investing is a complex agency problem managing board and school expectations on intergenerational equity growth and cash distributions to the institution. While there have been various articles about investment advisors eventually being replaced by robot advisors, personally I feel that won’t be the case unless someday there is complete human trust and consensus on robot advisors over human advisors. Until then, human investment advisors will always have a place in this human-driven business.
Trusted Insight: How is the KSU Foundation different from its endowment peers?
Paul Chai: Kansas State University is the first land-grant college established under the Morrill Act in 1863, and has a long and rich history as a public institution of higher learning. However, we are a bit behind some of our peers in establishing the permanent endowment for the school, as it was until 1944 when the predecessor of the present-day Foundation was formed and the first gifts were received. As a result, preserving and growing the endowment to a size and scale befitting to the present and future needs of our school is a top priority for the Foundation.
We seek to grow the endowment fund through generous gifts from donors and through investment returns. The Foundation has arguably the best fundraising team pound-for-pound in the industry, and we have seen significant pledge and donation growth over the past few years thanks to our growing family of donors. On the investment side, we have a small team with just 3 full-time investment professionals, but also strive to be the best pound-for-pound team to achieve our institution’s specific investment objectives.
We try to stay up-to-date on best practices from our peers and the latest industry developments. Our objective is not to outperform our peers, but rather, to meet our school’s funding needs, and to preserve and grow the intergenerational equity for the present and future K-State students. We want to incorporate best practices in our process to put us in the best position to accomplish these goals. I wouldn’t say we do things drastically different from our endowment peers, however, each institution has its own unique circumstances and requirements, and we all prioritize and do things slightly differently to tailor to the specific organizational needs. In our case, because of our small team size, we prioritize on developing automated models to enhance work efficiency, and we focus on developing very tight-knit, personal relationship and trust with our Board of Trustees. Because of this trust from our Board, we probably have a more robust allocation decision and execution process than many of our peers.
Stayed tuned for part II of our discussion with Paul. View our full catalog of interviews here.
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