Financial Engineers Killed the Art of Investing
Bienville Capital — with its unconventional approach to portfolio management — is trying to bring it back.
The first few explosions from the protests in front of the nearby Greek parliament building didn’t faze the patrons in the bar of Athens’s historic Hotel Grande Bretagne in Syntagma Square. Cullen Thompson, co-founder of Bienville Capital Management, a boutique investment firm, remained deep in conversation with his partner Ralph Reynolds, a reporter, and a Greek economic consultant about lawmakers voting on a package of economic reforms for Greece, which has been in and out of recession for almost eight years. The vote on the reforms came just weeks before a meeting of European finance ministers who planned to assess whether the country had made enough progress to jump-start its economy and get its third round of bailout loans.
Looking out at the Acropolis framed in lights against the nighttime sky, Thompson told the group, which included a local power broker and Dimitris Valatsas, a consultant at macroeconomic and geopolitical advisory firm Greenmantle, about the need to be on the ground, away from the groupthink in New York that was prompting hedge funds there to sell off Greek bank stocks. Bienville started investing in Greece nine months ago.
It took a series of increasingly louder blasts before heads bobbed up and the bartender and a few well-dressed customers finally went to a balcony and peered over the edge to see if there was anything to worry about on the street below. Despite the noise, all they saw was an exhausted group of demonstrators — made up primarily of striking workers who had shut down public transport all day to protest the vote — now milling around the square.
It was a sharp contrast with 2011. Pointing out the window, Valatsas, who focuses on European macro and energy economics, described how Athens was burning then, including the neighborhoods in the hills to the west of the Acropolis and in the square below, which housed one of the country’s biggest banks. Tens of thousands of people raged in the streets, furious that the European Union and the International Monetary Fund were demanding tax hikes and punishing salary cuts in return for money to keep the country running amid its crushing debts — and that the Greek government was acquiescing. Valatsas smiled at the relative calm below.
Five thousand miles from Athens, many investors fear Greece has made few reforms and that the country will go back to its old ways once the so-called troika — the European Commission, the European Central Bank, and the International Monetary Fund — are out of the picture, say sources familiar with foreign holders of securities in the country. Investors also don’t trust the banking system and its regulators’ plan to reduce exposures to troubled loans. They still see Greece as a leftist country unable to take steps like foreclosing on homes with unpaid mortgages. In reality, the country has implemented far-reaching changes to do just that. That logic is fueling rumors every few weeks that regulators will force Greek banks to recapitalize and jeopardize the country’s emergence from the bailout. As a result, investors continue to starve the country of capital and pour money into markets and securities that are at highs, according to many measures.
Bienville, which runs a series of opportunistic funds, including ones focused on Argentina and Brazil, sees a different story. Like Argentina and Brazil, Greece has become what Thompson calls postpopulist.
“They had a flirtation with a leftist populist government — [Alexis] Tsipras and his Syriza party — which proved disastrous,” says Thompson, 40, who is happily pulled into intellectual arguments ranging from reflexivity in the financial markets to the relationship between indexing and populism. “The Greeks now accept reality and realize there is no magical, easy way out.”
Greece, as a result, has made profound macro adjustments — the country is running a 3.5 percent budget surplus and has reduced its current account deficit from 15 percent to almost nothing — and structural reforms that could economically benefit the country for years in a startling turnaround for the beleaguered country.
But it’s a point lost on most active managers, who only pay lip service to being contrarian and identifying ideas that others have missed. Instead, they’ve shaped their strategies to fit into some version of the endowment model that most big pension funds and other institutions have been using to guide their investments since the early 2000s. That’s when David Swensen, chief investment officer of Yale University’s endowment, not only survived the bear market but posted outsize returns by using an asset allocation model that emphasized allocating big slugs to alternative fund managers, including hedge funds. Enamored of its success, other institutions quickly decided to copy what became known as the “endowment model,” setting off an almost two-decade race to invest in alternatives managers.
Now it’s become conventional wisdom to invest like Yale, even though the evidence of what effect this has had on hedge fund performance is clear: As capital flooded hedge funds, their returns steadily decreased, according to research from Schroders. The upshot: Pension funds and endowments — with active managers as their willing accomplices — have sought to transform investing into a process that can reliably squeeze out alpha, only to commoditize it and drive down returns.
Looked at in this context, Bienville is something of a throwback. The firm is taking an unconventional approach to investing, regardless of the trillions in institutional money using the endowment model and similar asset allocation theories. In short, Bienville is trying to resuscitate investing’s creative spirit.
Thompson, Reynolds, and partner Billy Stimpson founded Bienville in late 2008 as a family office, including Stimpson’s family, which ran a 145-year old timber business. Instead of just allocating money to a Morgan Stanley or other investment firm, Bienville wanted more control over decision-making and the ability to curate ideas for its clients. That’s where the founders got the idea to build a network of hedge fund managers, Silicon Valley entrepreneurs, and others. In 2010 they raised their first fund; after that was successful, they started getting the attention of a quiet but powerful group of investors and launched a series of opportunistic funds. They rolled out subsequent funds to invest in Argentina, Brazil, and Greece, all of which were experiencing macro distress and undergoing political and policy changes. Bienville uses both macro research and bottom-up fundamental analysis and thinks that the two disciplines can’t be used separately. Brown University, the University of Oregon, and Texas Children’s Hospital are anchor investors in the new Bienville Global Opportunities Fund, which is Bienville’s first fund that will invest in multiple ideas and which is based on Bienville Direct, a strategy offered to Bienville’s family office clients. That strategy has returned an annualized 13.6 percent net of fees.
To Thompson and his partners, one of the only sure bets to generate outsize risk-adjusted returns is to be a contrarian and look in more complex and ignored markets for opportunities. Knowing that investors wouldn’t stop believing in constructs like the endowment model anytime soon, Bienville used some of the herd behavior to its advantage.
If investors were gravitating to easy-to-understand markets, the firm would go into complex situations; if investors wanted managers to do the same thing over and over again, it would be willing to go into investments that didn’t lend themselves to repeatability, such as Greece. If investors wanted short-term access to their money, it would employ two-year or longer lockups so it could take advantage of managers being forced to sell assets at tough times.
It’s an elegant solution for many investors that have flexibility. But it’s also been a tough sell for Bienville. For one thing, the model doesn’t scale. And it doesn’t meet the seemingly desperate need of institutional investors to shoehorn every investment in their portfolios into a tidy category.
“Over the years, our style — the combining of macro and micro analysis among other things — left us in this gray area within the industry,” Thompson says. “Most funds do one or the other. So, from a business development standpoint, it’s purgatory. We knew we didn’t fit in anyone’s style box. But in a way, we loved it.”
Jay Namyet, chief investment officer of the University of Oregon Foundation, says institutional investors need to figure out a way to take advantage of firms like Bienville, which are willing to give up something — namely, size — to go after interesting and lucrative investments.
“With stocks pretty expensive and bond yields pretty meager, merely asset allocating is not going to achieve what we need,” Namyet says. “We’ve said for years that we’re looking for special niches and special people. Bienville is one of them.”
Back at the Hotel Grande Bretagne, the Bienville group headed down to the lobby. Though the protests had thinned even more, the hotel didn’t take any chances letting people out the front door. That’s not surprising given that some burned-out buildings still remain just around the corner. A smiling bellman led a group of bar patrons and hotel guests down some stairs, through the basement, past workers in the laundry and a few employees sitting on chairs in shabby corridors, and out the rear exit of the hotel. Emerging from an alley, the group found itself on an empty downtown street. Almost on cue, police in riot gear appeared from another street, in no rush to get to the protest.
“Most investors don’t like thinking about smaller economies in the middle of big political regime changes and what these countries will be like when they stabilize,” says Thompson. “It requires a lot of resources and time on the ground to witness a force like populism being discredited.”
Bienville’s first opportunistic investment was decidedly more local. In 2012 the firm launched its Gulf Coast Opportunities Fund — a natural fit since Thompson, Reynolds, and Stimpson all grew up in Mobile, Alabama. As a result of the financial crisis and the explosion on the Deepwater Horizon oil rig, which sent more than three million barrels of oil into the Gulf of Mexico in 2010, beachfront real estate that the founders knew intimately was selling at deep discounts. Bienville, which partnered with a local real estate expert for the deal, was able to raise institutional capital.
“It was the first time we took investors to see the properties that they would own,” says Stimpson. “People don’t know Alabama. But once they walked out onto a beach and realized what we were paying for it, they immediately saw the value.”
For those investors who took the plunge, the move paid off: The Gulf Coast fund returned an estimated cumulative net return through December 2017 of 80.2 percent.
While the partners were new to this type of investing, they were not new to working together. Thompson, Reynolds, and Stimpson all attended the same private school from kindergarten through 12th grade. Thompson and Stimpson, 40, a year apart in school, became roommates for five years in New York City after graduating from college. Reynolds, 55, hired Stimpson to work for him at Deutsche Bank, where he was head of equities and proprietary trading. Thompson studied accounting at the University of Alabama, where he was recruited to play golf. He started his career at consulting firm Arthur Andersen, moving first to Lehman Brothers Trust Co. and to a small wealth management firm, and then joining Citi’s private bank.
Thompson and Stimpson started talking about money management, the conflicts in asset management business models, and the lack of investment sophistication in places like Alabama. Stimpson, still in his 20s, started telling his dad that he should explore alternatives for the family’s money. Stimpson’s father had a family office for 40 years that managed the wealth of the Stimpsons’ business. Stimpson, who left Deutsche Bank to join J.P. Morgan, introduced Thompson to his former boss, Reynolds.
When the three opened Bienville, they named it for the founder of both Mobile and New Orleans. Reynolds, who had co-founded and was chief investment officer of Carlyle-Blue Wave Partners Management and was previously president and chief executive of NatWest Securities, was a passive owner until 2012. “[Bienville] also means ‘good city.’ A good city has great people, ideas, infrastructure, and a network — it’s an ecosystem. That’s what we’re building here,” says Stimpson, whose father is now the mayor of Mobile. “The idea for Bienville really was born out of Cullen wanting to build a better advisory business, with better ideas, and my family was part of that.”
About the same time that Bienville got going, the financial crisis threw the problems with active management into sharp relief. Investors lost trust in traditional active asset managers, whose funds were found to be invested in riskier securities than they had promised — or failed to provide any protection from the market rout. Investors started switching to index funds, because they were cheaper and investors knew exactly how they would behave.
Hedge funds put up gates — blocking investors from taking their money out — in a mostly failed attempt to protect themselves and other shareholders from the losses that would come from selling illiquid securities into a bear market. Bernie Madoff’s Ponzi scheme set off alarm bells about the infrastructure and back-office and banking systems that hedge funds were using. Given all that, it became even harder for funds that used a creative approach or didn’t fit into a preexisting bucket. Copying became endemic, hedge fund returns declined, and complaining about fees became the topic of conversation.
After that, people gravitated to brands. In other words, no one gets fired for investing in the IBM of hedge funds. “Guys like us who don’t smell and act like big brand-name asset managers get rejected a lot. It’s hard being different. It’s much easier to fit in a box or to do what everybody else is doing. But assets are the enemy of performance, without question,” says Steve Drobny, CEO of Clocktower Group, a global macro hedge fund advisory business.
The Bienville partners understood this. But they also knew that if they were to succeed, they would have to look very different — or compete with the thousands of other money managers operating from the same active management blueprint. They started by building a network of experts around the world that includes consultants and other connections and sharing staff with other notable investors, family offices, and Silicon Valley venture capital firms. Bienville shares all these resources with investors in its funds, including meeting notes and new investment ideas.
Joe Dowling, chief investment officer of Brown University’s endowment, says, “Bienville has developed an evolved partnership model: working closely with their investors with a high level of transparency, sharing internal research, and investment memos as well as opening up their deep relationships and networks.”
With the Gulf Coast fund, Bienville had put in place a number of pieces of that approach: It partnered with local experts, a tactic it has since used in Argentina, Brazil, and Greece. It also started taking clients on trips so they could see properties and companies for themselves or walk the streets of cities and countries where their money would be invested. Although a hard sell with investors who don’t always have a place to put a fund designed around a specific investment opportunity, Bienville liked the focus and the fact that it could wind it down when it was time to go home.
In the case of Bienville’s Argentina fund, which primarily focuses on equities, given capital controls and a government hostile to foreign capital, few investors were looking to put money into the country and assets were dirt cheap. After spending time in the country, Bienville’s founders thought voters wanted a change and would elect a more business-friendly government that would change the economic picture. Stimpson says the Argentina fund allowed Bienville to broaden its institutional network. It committed to structuring the fund with a long lockup so investors would know from the beginning that they would need patience to benefit.
“We needed to give ourselves enough time for the trade to work,” says Stimpson. “Many funds and firms arguably offer too much liquidity, and as soon as there is volatility, they get forced out of a trade.” The downside was a lot of rejection. “We had 300 people tell us they were interested but passing because of the structure or it didn’t fit into one of their boxes,” adds Reynolds.
There was another stereotype to contend with. Thompson says that after the fundraising, he found out that one investor had said, “What do those rednecks from Alabama know about Argentina?” A lot, apparently: The Argentina fund returned 39 percent in 2017.
Bienville raised $240 million for the fund, even though it thinks it could have gathered two to three times that amount if it had altered the structure. But the partners have no regrets. “We wouldn’t have generated the performance we did, and given the volatility in Argentina, we could have suffered some significant losses,” says Stimpson.
Robert Durden, CIO of Texas Children’s Hospital, which has $3 billion in investable assets, knows how hard it can be to get approval for funds that don’t fit the standard mold. In 2012, Durden, who headed private investments for Morgan Creek Capital Management at the time, brought the Gulf Coast real estate idea to the firm’s investment committee. CIO Mark Yusko immediately said no.
“Mark never rejected my ideas,” Durden says, laughing. But Yusko questioned the logic of investing in a part of the world hit by a major oil spill with people who had no experience doing anything similar. Yusko, though, ultimately dug deeper and approved the investment — but only after five members of the committee asked for permission to put their personal money into the fund.
Durden, who has continued to invest in Bienville through Texas Children’s foundation, has also watched Thompson and his partners experiment with ideas and build an asset management firm that offers other benefits, such as access to a rich network of experts. Durden believes that Bienville’s new hedge fund model may ultimately be even more influential than the firm’s approach to investing.
The way Bienville has set up its new Global Opportunities Fund, which it launched in January, showcases some of the benefits. For one, ten strategic investors, including Texas Children’s, will get discounted fees as well as access to the firm’s research from external consultants, notes and ideas from staffers it shares with other family offices and Silicon Valley, ideas from external managers it uses in its advisory business, and other information through a third-party system. The fund itself — in contrast to Bienville’s narrowly defined funds like the Argentina or Brazil fund — will invest in a mix of its highest-conviction ideas that will have a likely time frame of about four to five years.
Until now the returns of endowments and other investors have been mostly driven by manager selection, says Durden. With the explosion of managers and the assets they oversee, the difference between the best and the worst managers has narrowed. As a result, investors will have to find an edge in other ways. For instance, investors will need to devote more time to tactical asset allocation and finding good opportunities.
That’s where the model that Bienville is developing can come in. The best managers will share unique ideas with their clients, who can invest directly in them, co-invest, or use the information to shift their portfolios one way or another. “When investors select managers they’ll increasingly be looking for some that will share macro and other ideas,” says Durden. “There will be a big move away from just giving money to a hedge fund and asking them to tell you how they did at the end of the year,” he adds.
Drobny concurs, saying Bienville looks a lot like the type of firm he preaches is the future. “What Cullen is doing is the way fund managers have to operate going forward. People talk about the end of hedge funds, that hedge funds are dying,” he says. “They’re not. But the old model of the hedge fund business — people give you money, pay you fees, and you give them returns — that is dead.”
Drobny says hedge funds have to transform into service businesses, offering transparency and value beyond returns. “The smart pools of capital — the Canadian [pensions], some sovereigns, some foundations and endowments — are looking for the right partners to help them find opportunities,” he adds.
Thompson is often flying around the world looking for those opportunities. During the long drive out of Athens to the headquarters of political party New Democracy in the working-class neighborhood of Moschato, Thompson shares the car with the manager of one of the only Greek hedge funds. The two discuss the economic reform policy of New Democracy president Kyriakos Mitsotakis, whom many expect to defeat Greek Prime Minister Tsipras when elections are held either in the fall of this year after Greece exits the bailout program or May of next year. When Thompson is asked why experts at competing hedge funds or well-known family offices would share information with Bienville, he responds quickly: because Bienville offers great ideas as well.
Thompson is meeting Mitsotakis for the second time. The candidate, whom Thompson thinks is the reformist-in-waiting, arrived to their first meeting with two pages of notes on Bienville, including its investments in Argentina. Though the firm’s fund is relatively small, billions in capital from other hedge funds flowed into the country after Bienville’s investments showed signs of success. Mitsotakis wants Bienville to do the same for Greece. For his part, Thompson wants Greece to do what Argentina did for Bienville.
Photo Credit: Image 1: (left) Billy Stimpson and (right) Cullen Thompson; Image 2: Ralph Reynolds.