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Positioning Against 'Conventional Wisdom' | CIO Al Hemmingsen, Parkland Management Co. | Exclusive Q&A, Part 1

by trusted insight posted 11months ago 1720 views
Al Hemmingsen is the chief investment officer at Parkland Management Company, a single-family investment office based in Cleveland, Ohio. In part one of this interview, Hemmingsen emphasizes the importance of institutional investment advantages, why Parkland is less focused on direct investments and why investors should be skeptical of "conventional wisdom."

Hemmingsen was recently named as one of Trusted Insight’s 2017 Top 30 Family Office Chief Investment Officers. He graciously spoke with Trusted Insight on Oct. 31, 2017. The following interview has been edited and condensed for clarity.

Trusted Insight: This is a peculiar time in the markets, given the post-recession monetary and regulatory policies that led to current and persistent ultra-low interest rates and rich equity valuations. What areas of the market interest you right now?

Al Hemmingsen: In my view, it’s a fast shrinking universe of compelling strategies. If you think about it, we've been functionally at zero interest rates in the U.S. for about 10 years. A lot of smart hard-working people have been trying to solve that investment return problem for a long time.

Maybe in the early years, after 2008 to maybe 2012, there was lot to do in credit strategies. People saw that, and more investors acted on it. Then credit spreads became compressed and equity valuations continued to go up through the recovery. 

Then there were interesting things to do in insurance related strategies. That became more competitive. Then people started looking at how Dodd Frank and other issues. More investors started substituting for banks, providing all sorts of private credit for all sorts of purposes. You got paid very well early on and now you seem to get paid less and less for that. Now you have to take on more risk and put on more leverage to keep the returns the same in many spaces. These days I think you have to approach the world with the belief that anything you find that’s interesting today may become solidly uninteresting in a couple of years. 

 

"I think people’s default position should be skepticism of conventional wisdom. In the investment world, many practices exist purely due to tradition."


We’ve done a couple of things in the past few months. The 2017 hurricane season was bad. It was multi-event and not just hurricanes. We added a targeted exposure in the retrocession area of reinsurance. But that’s a very precise position. I think a specific subset of a specific market may be dislocated at a specific point in time. In a year, it could be different.

We’ve done some litigation related investments as well. We’re also likely to implement some specialized emerging market strategies next year. We might finally be seeing enough meaningful non-performing loan sales in Europe that would lead us to act. But it’s hard. Every year it feels like valuations go up, and that more competition appears for novel sources of returns. 

A big part of my philosophy is emphasizing the investment advantages that you have. If you’re a large investor like a public pension, size allows you to bargain fees and customize mandates. If you’re not, the biggest advantage you have is scale. Smaller strategies and markets are more lucrative, because they’re not scalable. They’re more diversified, because they’re not scalable. In my view, the risk is often misunderstood. A portfolio of the right sets of strategies can be surprisingly resilient and low risk. For that sort of activity: less correlated, less conventional strategies with more barriers to entry, a family office is one of the best suited investors.

Trusted Insight: At the same time, the number of sophisticated investment offices is rising, while chasing a finite number of opportunities. Something has to give at some point, right?

Every year it’s gotten harder. Equities are expensive. Bonds are obviously expensive, credit is expensive and returns for most alternative strategies have come down. Everybody talks about private credit now which is scary. It’s a challenge. Trying to time is dangerous. You could sit in cash for five or ten years waiting for something to happen. If an event happens it might not be big enough to pay for all the return you gave up while you were waiting.

Trusted Insight: The cliche “if you’ve seen one family office, then you’ve seen one family office” seems to hold true. What makes Parkland unique compared to your family office peers?

Al Hemmingsen: To your point there, they’re all unique but I think you can use some common attributes or ways to classify them. We're more of a financial entity and less operating company. We're less oriented around direct investments. We'll do an occasional co-investment, but we’re pretty targeted and strategic about what we're trying to do. There are other families that are different from us but there are probably some that are similar.

Trusted Insight: What’s the most important lesson you’ve learned in your career?

Al Hemmingsen: There are probably three big things.

One: I think people’s default position should be skepticism of conventional wisdom. In the investment world, many practices exist purely due to tradition. If you start to really probe why, there’s often no clear data driven reason why things have been done a certain way. Think of the incentive fee structure. Almost everyone charges 20 percent of profit. Why? Probably because Alfred Winslow Jones did in the 1940s. It’s totally irrelevant to how any single fund should be structured today. 

 

"The smartest of us at most will be right maybe 65 percent of the time. It’s easy to succumb to confirmation bias, in what you read, the people you talk to and the teams you build."


Two: Try not to make your own mistakes. Instead, try to learn from the mistakes of others if you can manage it. I’ve tried to make a conscious effort and create a real structure around that. A structured and intentional reading program helps. Any time in the industry there was a big hedge fund blowup, a risk management failure, an operational due diligence failure, try to figure it out. Go to the court documents, or anything you can get your hands on, and try to figure out. What exactly happened? If you were in that place what could you have done? Can you learn from mistakes without having to go through the pain yourself? The same idea applies looking at economic history. Even if you didn’t live through various events in history you can still read that history and try to understand it.

The last one is the one I’m spending the most time with. With my new role, I’ve had to change how I try to do this. Always try to seek out constructive dissent. It’s shocking how pervasive ego and overconfidence is in our industry. The smartest of us at most will be right maybe 65 percent of the time. It’s easy to succumb to confirmation bias, in what you read, the people you talk to and the teams you build. Find as many intelligent and thoughtful people who are also comfortable telling you that you’re wrong. And talk to them often. Part of that is trying to be very probabilistic in my worldview. We implemented something recently here that are inspired by that. Every new investment we underwrite going forward has a required section in the memo. As of a certain future date, we assign a full probability distribution for what we think the investment outcome might be. We can look back and examine those in the future. 

Read part two with Al Hemmingsen here. 

You can view our full library of Q&As here