Most of us use the internet for entertainment, it can also be used for learning. The Milken Institute has a number of you tube videos and one can learn as nuggets of information are given. In one of the videos, the theme of the event was talk about managing people in the hedge fund industry. The people tend to be under 35 and if the fund is successful have accumulated wealth greater than the average person, why are they still doing their job? how do you motivate them to continue? what does it take to bring someone into your firm and be successful?

The four participants were from a variety of size of firms – Kenneth Griffin at Citadel, Gideon Berger from Blackstone Alternative Asset, Alexander Klabin from Senator Investor Group and Jason Karp of Tourbillion Capital Partners.

They discussed many topics including what does it take to be successful? Mr. Griffin said there are two parts: one is the science which is the process and hard work – gathering the information, studying companies and management and coming to a conclusion. The art of the work is what does your conclusion mean to the rest of the street ( who have similar intelligent people doing the same thing as you)? The method you beat the index is to have ideas which are different that the prevailing view on the street and when the knowledge is known to other investors they agree with your assessment which moves the stock or investment vehicle.

Mr. Klabin believes one of the methods to success is not only to generate ideas and see patterns, but you communicate to tell others. Use analogies. The example is an acre of land is 43,560 sq. ft. or the analogy is a football field with the ends cut off. Which one will you remember? Can you distill your idea down to make an analogy which allows others to understand?

Mr. Berger allocates Blackstone money to different fund managers based on a wide variety of metrics but at the end when the metrics seem to be very close to each other, the method he uses are: Blackstone tries to understand the hedge funds strategy or has an investment thesis why are these people better? what is there edge? and as important why are the people in the industry? what are they trying to build? or looking at the character of the firm. The reality is hedge funds have a success ratio of 52% or 48% are wrong – how do people act and how do the act when faced with adversity?

In discussing who they hire, Mr. Karp says he uses tests to determine how open are people to change when they are confronted with new information. The reality is no one will ever have complete information – they can and will have ideas that should work. What happens when something comes up that changes? are they open to it? do they continue to dig in? can they learn from failure and will try not to repeat it?

Mr. Griffin had a slightly different take – you coach your stars because if you can get 15% more from them you will have a great year. The bottom 50% you allow them to swim or sink and bring in new people. At Citadel they do have turnover for a variety of reasons, but those that stay will be extraordinary in the narrow range of work they do.

He also believed the reasons people stay at Citadel are 3 fold: (1) there are a wide variety of platforms to manage so there is plenty of opportunity to do great things; (2) the most important aspect is the Teamwork or working with great people and there is a Culture of Learning which means everyday you come to work you are learning something new; and (3) they hustle – they do what they need to do to stay ahead of others.

One of the reasons why the emphasis on teamwork is Mr. Citadel willing to delegate. Early in his career he started on the American and Japanese bond desk. They added Europe to his duties which meant a 24 hour clock and at some point he needed to sleep. He had to learn to delegate which meant to trust others and work together to get the tasks done.

Mr. Klabin also discussed culture within his firm. There are the values which every firm has and the daily rituals which enforce the culture. In this fashion the process means more than the outcomes. An example he used was Dean Smith of North Carolina Tar Heels basketball coach had a process of rating players in practice. They were given points for high probability shots; they were given points for passing so a person can take the easy shot; if they shot the basketball and it went in when a defender was in their face they lost points. Why? it has a long shot or in baseball terms hitting for the fences when a single or double brings in the run. The point of the exercise was to emphasis teamwork.

One of the other hallmarks of his firm is start with the why? If you define your purpose why you are doing something rather than how? and what? people can relate to the why and will stand by you longer. If you start with the how? or the what? people will find other alternatives. The example he gave was Dell and Apple computers. Dell gives you the what they do – build computers to your specifications. When they tried to go into other devices besides laptops people did not buy. Apple start with the why? challenge the status quo which allowed them to be a disrupter and introduce ipad, iTunes, iPhone, etc.

Linking to dividend paying companies, in service companies the most important asset goes home each day from their office. People are important and how you treat them and how they feel they are being treated. The opposite of this discussion is a movie called Office Space. Part of your job as an investor is determine do people come for the best of reasons and stay for those same reasons.

There are more questions than answers, till the next time – to raising questions.