Hedge Fund Huddle Podcast

Lessons from the demise of a hedge fund

Episode 1, Season 1

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  • Jamie: [00:00:05] Hello to everyone listening and a very warm welcome to this Episode, One of a Hedge Fund Huddle. My name is Jamie McDonald, and I was a hedge fund manager at SAC Capital, now Point72 for many years, both in London and New York. Now, here I am working with the fine people at Refinitiv, a London Stock Exchange Group business, helping to put together useful, relevant, dare I say it, fun content that can be enjoyed by experts and newcomers alike. So, each episode in this series is going to uncover some area of the hedge fund world that we hope you find interesting, because for far too long hedge funds have lived under this veil of mystery. And today we begin to demystify each part by peeling back the onion and seeing what's really going on behind the scenes. Now, today, I am delighted to have on the show two ex-co-workers, colleagues and friends, Romael and Alastair, who will introduce themselves shortly. And today, we are going to be turning hedge fund contents on its head. We're not here to necessarily brag about our victories. This episode is to find out what happened when Harmonic Capital, the hedge fund that Alastair and Romael were running together, had to close its doors and return money back to investors. A very difficult thing to do. So, what happened? What went wrong? And what lessons did you learn? Well, let's find out now as we welcome Romael and Alastair to the show. Romael and Alastair. Welcome.

    Romael: [00:01:29] Hi, Jamie.

    Alastair: [00:01:29] Hi, Jamie. Thanks for having us on.

    Jamie: [00:01:31] Great to have you on. So, Romael, let's start straightaway with you. Could you just give us some a bit of background about yourself, but up until the point where you decided to take over Harmonic.

    Romael: [00:01:41] Sure. So, Romael Karam, I spent a large part of the last 24 years of my career in the buyer side and predominantly in trading. My career started in 1998 at a small futures and options broker. I then had a three-year stint at Man Investment Products working for one of their incubator funds, before I joined Harmonic Capital in 2003, I was a junior trader there when I first joined. I think I was employee number four or five. I basically grew with the fund. I took on new challenges as years went on, I embraced the electrification of markets. I'm kind of that old. I developed a range of tools to make our trading and functions more efficient and away from trading, really, I saw Harmonic as my baby also. Even though I wasn't a partner. So, I got increasingly more involved in other areas of the business. And so basically over the 14 years I was there, I grew from a junior trader to senior trader to head of trading to partner. And then in 2015, I was working very closely with the CEO at the time and one thing led to another, and I led the five other partners through a management buyout and as a consequence for my sins, I was appointed CEO in 2016. In terms of highlights, really, for me it was the personal growth. Throughout my time at Harmonic, I was continuously learning, growing, developing, and I enjoyed every last minute of my time there, even through the really challenging times which led to its closure in 2018. But I'd say one of the kind of my fondest kind of memories of my time at Harmonic is basically working with the phenomenal individuals. The team we built there was really something else. Super driven, professional, unbelievably loyal, and really it was nothing but a pleasure to work with those with the team that we built there.

    Jamie: [00:03:18] Well, before we go to Alastair, what's incredible from what you just said is that you do have such fond memories of being there. So, you must have had a great amount of respect for the people that you work with.

    Romael: [00:03:27] Yeah, absolutely. Like I said, I went from junior trader learning from the people around me and we all added a certain something to the pot, really. And every single person was just super, super loyal, even through the toughest of times, even at the brink of knowing that it was, you know, we're not going to really make it much further. There were people giving up their weekends, sleeping on sleeping on the floor to make technology work, just to keep giving us a chance. And it wasn't it wasn't that dire. I'm probably painting a very dire picture, but I'm trying to show the loyalty that we'd kind of created from the individuals that we hired. And that was by far, I think the biggest positive I've had, and I'll take forward in my career is working with those phenomenal individuals.

    Jamie: [00:04:08] Well, we're going to dig into the journey of Harmonic in a second. But Alastair, if you wouldn't mind just introducing yourself, a bit of a background about how you got into this world. And yeah, as I say, up until the point where you were you were running the ship at Harmonic.

    Alastair: [00:04:21] Well, I'm Alastair Smith. I'm managing director at Advent Capital, the specialist fixed income manager based in New York and London. I'm responsible for business development in in the UK and Europe. I started my career many years ago in 1992 working for the Man Group, and since then I've worked for various different institutional money management firms. One being Man for many years in London and Switzerland, but also for Polar Capital, Aspect Capital and a few other really great firms. And I landed at Harmonic Capital in 2010, there to lead their distribution and to grow their institutional clients. That was our focus. I would mirror much of what all of what Romael said in relation to the team there and the individuals. And I'd also say that we had the support of some fantastic clients, a really varied group of international clients that really helped us in the in the good times and the harder times. And we really saw it as a partnership working with them. And even when we came to decide to close the business, up until that point, they were they were super supportive. And I feel that that is probably one of the most important things, seeing your clients as a partner in your success rather than perhaps as just a source of revenue. And that's what I've carried on through Harmonic and through onto to Advent Capital as well. And I should say, maybe people don't know Advent Capital as a firm, but it's a specialist fixed income manager and we are very well known for our convertible bond strategies long only and convertible arbitrage. So, I've moved from the world of quant to the world of convertibles, which is again been interesting. And one of the fantastic things about this business is that you can move from one thing to the other.

    Jamie: [00:06:16] Well, Alastair, if we can stick with you then you say move from quant to the fixed income world now. So, what was the business model of Harmonic prior to 2016, prior to the mid-2010s? And how was money raised? You talk about your clients, if you could talk a little bit more in depth about who exactly the clients were, what relationship Harmonic had with its clients. Was there an IR? Was there a full sales team?

    Alastair: [00:06:38] Certainly. So, up until I joined, there had been one salesperson at Harmonic. This is in 2010. I joined with the ambition of growing out a team and the support of growing our team. And through time we did do that. We had a small team of additional salespeople and investor relations. So, in the end it sort of team of three or four, and that is an important takeaway. It sometimes sales and marketing and business development is seen as an afterthought. Build it and they will come. And I really don't think that no other real businesses really run them themselves in that way. Clearly, if you have absolutely fantastic performance and you just make money year in, year out, then they will come. But there are very few managers that that achieve that and it certainly not a strategy to set out to believe that you will make money day in and day out. So, if that if you're going to be realistic, then you do really need to be realistic about the type, the different types of people and skills you need to develop a stable business with multiple clients.

    Jamie: [00:07:38] Now, from what I understand about, I mean, I was a portfolio manager, so I was just trying to run the portfolio myself. I wasn't so much involved in like the risk management and business building of the side of hedge funds. So, I mean, how do you how do you go to accumulating assets? Because I think from what I understand, it matters a lot about liquidity. It's like when do investors have the opportunity to exit? How do you keep investors? The larger drawdowns, obviously, it can be very painful in terms of people pulling their money out. So, what was the sort of business model to try and keep returns at a very constant, but sort of obviously growing pace?

    Alastair: [00:08:15] That's a big question. How do you raise money and how do you go and how do you succeed in that? I will give a quick answer to that, but happy to expand on it in time. It does very much depend on the stage you are in your business. So, if you're starting out say you have friends and family and now, you're now you're really trying to get going. And that's so much the case for many, many aspiring managers. There, there are different challenges. I think at that point, it's about leveraging existing relationships and making the most of what you have. Everyone has a lot more in the way of relationships than they believe they have. You just look at your LinkedIn and use that. That's a very powerful, powerful tool. I will also say one other thing that everyone should do, and that is invest in a decent CRM system right from the beginning. Do not put your stuff on an Excel sheet and think that's going to be a good idea. I was looking at how much a CRM system cost. Microsoft offer Microsoft dynamic for $100 a month. And I think we can you know, most people should afford that, and they should do it and they use it because and I don't need to tell you why a CRM system is important here, but it really is important and it shouldn't be overlooked from the very, very beginning. And then as you go through your phases of development, as you reach various milestones, so people talk about $100 million and grow, and then you sort of progress to sort of different types of marketing. You might hire people, you might go after an institutional client, but at the beginning you're really looking to leverage existing relationships, I think is the absolute key thing to do there and also look to the support of your broker. So, for example, your cap intro team, there'll be the bank or whoever you work with will have people that help you. They won't bring clients to you like and then say, ‘Here you go’. But they will really tell you where you're going, right, and where you're going wrong. And listen to what they say. They've seen successes and failures themselves, the brokers. You should be asking them what you should be doing, and they will have a pretty good idea. Is that a good summary? 

    Jamie: [00:10:23] I think it's not only a good summary about starting your own financial business, it was a good summary for anyone who wants to start any business. You know, so many people out there looking to start their own businesses and it's, you know, how do I raise money? How do I maintain good relationships with my first few customers or clients? And I think what you just said makes the total amount of sense.

    Romael: [00:10:40] I'd add one thing, one obvious thing, and it's kind of it might be obvious to some, but, you know, I guess the nature of this podcast, anybody can listen to it and it could be giving guidance to many. And I speak to an awful lot of managers who are trading crypto, for example, who are kind of, you know, not really in the traditional finance space more crypto native and is verifiable track record. So, Alastair mentioned the CRM in terms of your sales process but really the moment you start trading, you want that track record to start printing and recording so that when you are three years down the line, and you've got some good P&L to show that and you can prove that, and that's going to help tremendously when you're seed capital isn't so easy to raise, accelerate a capital isn't so easy to raise. These are real topics that I'm not going to pretend I know much about those. Alastair’s the expert there. But it's got increasingly harder to seed. It's increasingly harder to get accelerator capital. And it comes with a lot more caveats now. But having that track record, that's going to be your real shop window to kind of getting on that trajectory to raise assets.

    Jamie: [00:11:44] Yeah, I think that's right. For anyone out there who's got their own portfolio now is just to keep a record of exactly how your performance has gone. Why did you go through periods which were difficult? Why did some things work? And just make sure you keep and document it well, because, you know, even when I was at SAC, they had junior portfolio managers. They would give them dummy money or dummy portfolios, build up a track record, build a level of confidence before you start trading the bigger numbers. So, Romael, I did want to ask, moving forward to the day itself when I think, as you told me before, you went out for a coffee and thinking that maybe it would be crazy to buy the company out and get together. But then you came back and thought it was a great idea. So why don't you talk me through the thought process there?

    Romael: [00:12:25] Yeah. So, it's actually Alistair's fault! So, we sat around a table and we had just basically, this is the point I wanted to raise later maybe is succession planning, but we were going through a long process planning the succession of our CIO.

    Jamie: [00:12:39] Can you just remind me who was it? It was David and Richard that started the company in 2002.

    Romael: [00:12:44] Yeah. So, the three people that launched the business was Richard Noble. I think he left in 2006, Richard Conyers, ex Aspect Capital and David Pendlebury as well was also ex-Aspect Capital. Richard was the CIO sat over that responsibility right through to 2015. During the last years there he was less engaged in the day to day and had handed over the day to day running to the investment team. But we realized and through our COO leaving in 2014, I went around the business and had some meetings with the partners and said, hey, do you really want me to be COO? I mean, I’m the head of trading, I don't really want to do the COO role. It doesn't really excite me. But I would do anything for the business, right? And then every conversation turned to, yeah, no problem, we will support you on that Romael, but one of the biggest problems is, you know, is Richard isn't full time any longer. And that can only last for a certain period of time. And so that was the constant that was the repeated conversation over and over again. And so, then it was left to me, I don't know why I always get the short straw, to go and speak to Richard and say, hey, what's your intentions? And his response, I don't ask you what your intentions are from one day to another. You're employed here, you just get on with it. So why should I respond to you and tell you what my intentions are? And I'm like, well, slightly different because we're fully vested in this and it's our livelihood. You’ve done alright. And we'd like to alright too. To cut a long story short, we put a succession plan together for him. And then one day David came to us, and I was working very closely with him. He didn't speak to me personally. He called us all into a meeting room and I'm like, what’s going on? And he said, we’ve decided to close the business because, you know, I quite like that Richard's leaving and I fancy a bit of that too. And so, we're going to close the business. And at that stage we were actually managing money for some high-profile clients and turning over a decent profit, and it just didn't make any sense. And everyone left the meeting room, all the partners left the meeting room. And I sat down to Dave, and I said, Dave, are you serious? Is there something else like, you know, is it your health? What's going on? And he said, no, no, no, just don't have it in me to kind of step up to the energy that you guys have got with Richard leaving. He's been my right-hand man, started the business together. I kind of want to close it together. Well, you know, you've got to respect that. So, Alastair and I went for a coffee, and I thought, well, that's just absolutely you know, what am I'm going to say to my wife, right, I'm going to need look for a job. And everyone was like devastated. And Alastair said, we should buy the business – I’m like, don’t be nuts . He goes, yeah, we can do it. And you know, Alastair’s insanely optimistic, which is fantastic. And he was right. So, after just one coffee, I'm like, Yeah, actually, yes, good idea. So, we called everyone back to the boardroom. We had a partners’ meeting between the six of us. And we said, how about we buy the business? And everyone thought we were nuts and then slept on it and less people thought we were nuts. Some people bought into it, and it took about, I'd say, a week to convince everybody. And I think that was one of the first mistakes. Right. Is convincing everybody. There was, I don't want to name names, but there was individuals, one in particular, possibly two that had cold feet about the idea, weren't feeling very enthusiastic. And I don't think they really had the appetite for the risk that we're about to take on in terms of running their own business. So that was it. And then we had a long, protracted negotiation, which lasted about six months, and we had about ten weeks in the boardroom with the staff sitting outside thinking, What on earth is going on? And that's another lesson learned.  One of the biggest risks to the business at that time, and which we were taking, knowingly taking is basically unsettling clients, unsettling staff.

    Jamie: [00:16:36] Its disruptive.

    Romael: [00:16:36] Yeh, very disruptive. So, if I had my time again, I would make sure that doesn't happen. And then we finally reached an agreement and then it got a bit nasty as it does in these things. But, you know, six months later, we finally got it over the line in December, just in time for Christmas. We got it over the line, signed the deal. And we were about, I think, 3% from high water mark at that time had a massive bounce back into yearend closed the year, I think one or 2% up on the year. New high watermark did cartwheels had a phenomenal first two months like literally printing good performance. I turn around to the team and say, listen guys, just brace yourselves because this doesn't happen. This is a purple patch, if I've ever seen one. You know, you don't just buy a business and make great profits and pay yourself straight away and be able to share bonuses. So just brace yourself. There's going to be a long winter coming. Right.

    Jamie: [00:17:30] At that point, how did you allocate responsibilities? How did you decide who did what? Because you do need, from what I understand, the structure of a hedge fund. You do need a CEO. You need someone who's a CIO who's deciding exactly where the capital is going. You need someone doing the operations day to day. How did you divide up who did what and did you feel that you needed to hire new people in? And all the time you're still trying to run a business? It's not like you can pause the business for a few months while you sort this out. I'm assuming the whole time the funds were still grinding along.

    Romael: [00:18:01] Yeah. So, the investment side of business was taken care of in that three of the partners were on the investment team.

    Jamie: [00:18:07] OK

    Romael: [00:18:07] So the CIO and two other partners were on the investment team. So that was already partitioned to one side and the other partner was head of technology. So, all the tech stack, all the development of our models, we're fully quant systematic. We didn’t really explain that, but we're fully systematic shop so computer driven. And so all of that was taken care of in combination with the head of technology and the CIO’s team. Right. And then Alastair ran sales and relationship management. And then I looked over we had a very capable head of trading who replaced me, who was also with the business for a long time. In operations, we had a very capable head of operations who worked for the business, I think almost as long as I did joined about a year after, and then head of finance and head of compliance, again, very capable people. Prior to actually the buyout, we did actually hire a COO actually. So, we felt that we needed to fill the gap of hiring a COO. And we were doing that because we just felt you need to have a COO. And we weren't driven enough to make a decision on actually choosing somebody who should have been, you know, would have been more than capable of doing it. We hired the wrong person. It was actually a very able person. But he came in and realized that, he's leading ops, he's leading legal and compliance and leading finance. And between the three of those individuals that he was leading, they were all super capable. And there wasn't really much left for him to do. So, it wasn't much of a role for him. So, what was actually really detrimental was the fact that we hired someone, paid all the money for hiring fees, paid the salary for three months, and then he resigned after the three months were over. And that cost us it cost us money, but also cost us a bit of respect with our clients because we had to put our hands up and say we made the wrong decision. Now, most clients are actually very understanding. And when you come out with it and say, look, we felt we needed this person, but actually we don't because everyone's capable enough. Okay, fine. They knew our business pretty well, but the advice that we got from them was in future, make the right decision for the business. You know your business better than anybody else does. Don't just kind of do a box ticking exercise, which I think we were guilty of.

    Jamie: [00:20:23] So, Romael, you spoke about that start of your run post taking over the company. As you looked back, you call it a purple patch, but to what extent was it luck and to what extent was it a skill?

    Romael: [00:20:35] Well, it's it was a lucky period in time. And, you know, it was it wasn't down to any one of our abilities that we managed to make money during that period. So, it was it was fortunate. I wouldn't say it was lucky. It was just fortunate that that performance came in and around that time. And, one of the important things is that we'd actually decided that we had a two year runway before we saw that purple patch. So, we're in this for two years. So, if we don't make any performance fees for two years, we're good. So, we made performance fees. So, I thought, okay, cool. That two years should now be extended because we've made some money, right? That didn't happen. And I think people got carried away with the fact that they made a profit. And it's like any trade, right? You're in the money now. Do I close out this trade because I've made some money? Or do I carry on now I'm losing money? So yes, it was fortunate, and we should have seen that as a fortunate run. But we shouldn't be deluded into thinking that we were great money managers at that time and that the worst, you know, there's going to be tough periods ahead. And we weren't really prepared for that challenge, if I'm honest, none of us were. And it's all easy to run a business whilst you're doing high fives and you're printing performance fees. But when the proverbial hits the fan, that's when everything gets questioned. That's when Alastair's sales efforts gets questioned. That's when Romael’s CEO efforts get questioned. That's when the investment team, you know, do you really believe in what you're doing? The odd thing was we believed in the investment team's ability more than, dare I say it, they did themselves at that time. I'm sure they all very capable now, and they've all gone to on to great jobs. But at that time, given the mix of where we were, given the fact that we've just gone through a buyout, given the fact they had their livelihood on the line, I think they didn't believe in themselves. And that's a lesson learned in terms of, you weren't a great money manager in January. You're just fortunate. Going forward, you've got to knuckle down and you've got to keep developing. It's like a sales pipeline, Alastair can't survive on his selling, on just the people that he has in his funnel today. He’s got to develop more conversations for years ahead, months ahead. Similarly, with systematic investing, your models today may perform today, but they may have performed in back testing, but they may break down as the interest rate environment changes, as we're saying today. Right. Those models may not perform. And so, you've got to be coming out with new ideas, look at new asset classes, look at different asset classes that we've not traded before. We never traded equities, for instance. We didn't trade anything in options. So, look at other things that we can apply our knowledge and our expertise to because you're not always going to be lucky. You know the models aren't a silver bullet. They're not always going to make money.

    Jamie: [00:23:17] Yeah, I mean, beware of complacency for sure. But on the flip side, when you are having a rough time, just know that there will be an element of bad luck in there as well. And that as my old partner Andy Billy used to say, the one thing you always know about luck, it's going to change. 

    Alastair: [00:23:32] So I just make a point that I think Romael said that’s interesting about giving clients bad news. You feel you shouldn't do that because it's bad. But my experience is that most investors, most clients will take bad news so long as it's communicated clearly and there's a reason for it. And in fact, they'll typically say to you, well, what did you learn from that? You know, what are you doing to put that wrong, right. And you sort of agonize over the bad news, but actually it's much better sharing it. And clients are much more forgiving than you think they would be. And for good reason. They want you to succeed as well.

    Jamie: [00:24:09] Well, why don't we talk a bit more about that? So, during that period of transition, I assume you were headlining the conversations with most of the clients, both institution and private, whatever. So, what were those conversations like? How much convincing did they need to keep their money in? What was that narrative like?

    Alastair: [00:24:25] It's fairly straightforward. It's a bit like bad news. Just constantly give good, clear communication to investors as to what you're planning to do. And if you change a plan, explain what you've changed it and what you're going to do in the future. People agonize a little bit more than they should do over that. As long as you're clear and as long as you have the trust of your clients, you'll be absolutely fine by that. They trust you to do the best for them. It's not as complicated or as difficult as people think it is.

    Jamie: [00:24:55] Yeah, it just strikes me. I mean, I obviously worked at a firm under Steve Kerr where the head man was very much the brand. And I remember when we were there, I don't know, it sounds like it was slightly different situation. Like if he left, what are investors going to do? He was so much a part of the fabric. That's why he wasn't CEO. We had somebody else who just ran everything about that. He was just focused on the trading. I mean, some of these other companies like the Elon Musk's of this world at Tesla, there's so much risk if these people at the top become too much of the brand. The biggest risk, which is what happened, is the guys at the top suddenly decide they don't want to do it anymore. And then what do you do? So how do you speak to investors and say, well, how is this not going to happen again? Or do you need to try and convince clients and say, okay, well, we're going to at least instil a management team that's going to continue to run operations.

    Alastair: [00:25:43] To answer that, it is about processes and how strong is your business and have you demonstrated good processes before the person announced that they want to leave? And can you demonstrate it at the point of leave and demonstrate them going forward? It is just I wake up in the morning and I chew my pen and look at my screen and then I decide what to buy or sell. Then no, people are going to be worried about that. So, with Harmonic Capital, it was a systematic, process driven firm, as Romael has mentioned. But other firms, even fundamental firms fundamentally or discretionary built firms, driven firms, can still show a strong, strong process. And I would say that the similarity there might be when Steve Jobs died and left Apple, it was clearly a company that was very well run, had strong, strong people in it and processes. And of course, there was some well, let's wait and see. But generally speaking, people continue to support the firm.

    Jamie: [00:26:37] So Alastair, during that period, what was life like for you and what are the lessons you've learned more on the sell side of things?

    Alastair: [00:26:45] I mean, you're there as a team so you'll do piece and you want your colleagues to do their piece, if you see what I mean. 

    Jamie: [00:26:52] I think the question was more, was everyone doing their bit?

    Alastair: [00:26:55] No, you see, people get distracted I think is what happened. You know, everyone thinks they can do sales and marketing. How hard is it? You just pick up a pitch book and you just talk to it? You tell the person what's going on. And of course, it's not like that at all. And there's a process to it. And you're not just telling people you're trying to bring them into partnership with you. So, I think that many people in the team got distracted, not just in my area, but in in other areas. And so, I think one of the failures of f Harmonic was not focusing on the primary purpose, and that is to make money. And I think that would be my big words to anyone starting this firm. You're an absolute return manager. You're there to make money and that should be your beginning, middle and end and not to be distracted and get other people to do things if that's going to distract you from your main task. And I think we saw a little bit too much of that. I also think that you need to adapt as well. You know what you're good at, you've spent maybe ten or 20 years developing that and then you think you're going to exercise that as your own firm and that you must do, but you must also learn to adapt. So, if other opportunities come along so fast trading opportunities or new markets come along, you must have the courage of your own convictions to pursue those opportunities, those profit opportunities. And I looked at Advent Capital, where we specialize in convertible bonds and our founder and CEO, Tracy Maitland, he has an absolute dedication to doing the best to making money for our for our clients. And I really learned from him and our firm and see perhaps where we went wrong with Harmonic Capital. 

    Jamie: [00:28:39] One thing you said Alastair there, which Romael I’d love to ask you, is, when it comes to outsourcing, how do you know what to outsource and what not to outsource? How do you balance that decision?

    Romael: [00:28:49] I think the first thing I'd say is that the opportunity for outsourcing has moved on a great deal over the years. Right. So, we're talking, if we look back ten years ago, an investor would want to come in and say, see a ten year lease to make sure that you're not going anywhere. Whereas now, working in a serviced office is totally fine. And then if you're just starting out, do you need to hire a very expensive compliance person or a very expensive COO? Is that the best place to spend your money or do you need a part time resource? And there's lots of businesses out there that are providing this. And then in tech stack especially, that's moved on a great deal. You know, gone are the days when Cantab would parade their clients through the office to see all the flashing lights. Everyone inspired, I want a room full of flashing lights.

    Jamie: [00:29:40] The ticker tape going across the ceiling. 

    Romael: [00:29:43] Yeh. You know, gone are those days, and now, you can put so much into the cloud and it's more efficient. It's actually a better use of your capital in terms of your own personal money, not to buy all these servers and have them set in their redundant use what you need. And so you've got all that and it just makes sense. It allows you to be nimble and then a lot of the solutions that you might use, so Harmonic, at one stage we kind of started describing ourselves more of a technology firm than a hedge fund, which is a clear example of the distraction, right? We started out to manage money and make money for clients, not to become a technology firm. And so being proud of all of tech that we built was one thing. It was great and it was impressive to clients, but that's not going to raise more money. That's not going to get the investment in and it's not going to double the allocation to us. What's going to do that is running the money well, focusing our efforts on the right things and turning over a profit making, you know, alpha.

    Jamie: [00:30:40] So Romael, I mean, a bit of a private question, but during that time period, with more responsibility comes greater expectation comes greater stress, I imagine. How did you how did you cope with that, whether it's like balancing private life and work life. Were there moments where you thought the stress is getting too much and how do you sort of cope with it?

    Alastair: [00:30:59] I'll tell you what he shouted. He shouted at everyone all the time.

    Romael: [00:31:01] True. I did actually shout at Alastair once.

    Alastair: [00:31:02] But I'll tell you what, you never did that. That’s as a joke, by the way, he was very calm, really superbly calm, I would say.

    Romael: [00:31:17] I have to say, right. It's kind of a bit of a personal story and kind of, you know, we can edit it later if it doesn't suit, but I actually didn't feel stressed at all. I actually really, genuinely enjoyed every last bit of it. I remember on a Sunday evening receiving a text from one of the partners the week before, so that week we're about to decide what we're going to do if we're going to close the business or not. And it wasn't closing the business. It was, are we going to call investors and say, hey, we're returning your money, which is just a very embarrassing thing to do. Right. Unless you're just running your own PA account, which is a good reason to do that. But we weren't doing that. We were failing. And we're going to tell clients that we're not going to stick it out through the drawdown that we've given you and try to recover your losses. We're going to hand the money back. And that's giving up. Right. And on the Sunday night, I received a text from one of one of the partners saying that I'm resigning now. I don't want to be part of the decision-making process. How does that make any sense? You're still on the hook financially. What are you doing? And even through that, that's just emotions, don't take it personally. But even through that, I was really looking forward to going into the office on Monday morning just to kind of say what's the next challenge that we're going to overcome? And I just I just think personally myself, I ended up having this insane bounce back ability. I remember again, another different individual resigning several times once I was in Peppa Pig World with my daughter and he’s resigning as I'm riding some dinosaur, another time I'm leaving the office, he's resigning by the time I go to M&S to pick up my dinner and I’ve come back to the station, I've bounced back and thinking there's a way through this. So, I really genuinely enjoyed that. I don't know why.

    Jamie: [00:32:56] But my question is, how do you do it? Because I mean, me personally, I am not taking a personal financial hit and let's say you've got your savings, whatever it is, and half of them are wiped out. It sounds like you're someone who can wake up the next day and go, right, how do I make them back? But I don't think everyone can do that.

    Romael: [00:33:13] No, not everyone can. And that's one of the things

    Jamie: [00:33:15] That you need to be able to do if you’re going to go into this world?

    Romael: [00:33:17] You’ve got to find the right partners. Right. That's really important. And it's not, I wouldn't say it's right to have everybody like me, because that would just be insane and you can't have a whole bunch of super optimistic people. Some people are going to look at it in a different way. And we did have a good balance, but ultimately the balance didn't work because risk appetite diverged massively. And that was what broke the back of the business, is that we couldn't really see eye to eye. And it may be my failings is kind of the CEO. I wasn't experienced enough to lead the team in that way, or it could have been lots of different things. I take some responsibility for that and if I had my time now, having kind of experienced other things, maybe a I’d be a bit harder, I was trying to please a lot of people.

    Jamie: [00:34:02] Well, if I may interrupt, this is my question to you both. Now, as you look back, what would you have done differently?

    Romael: [00:34:07] First thing I would do is when we were discussing the management buyout, there was, like I said, one or two individuals that I would let them make a decision. And if they wanted to not be part of it, that'd be fine. I would sacrifice some of our own personal money to pay them a salary and stay, but not be part of the partnership. That's the first thing. Second thing is and we should have learned this from the first point. When Richard and Dave left are your gut feel is that this business can't survive without people who created it? You know, Apple can't survive without Steve Jobs. Well it can. And we proved that it could. Harmonic could survive. And we even raised money from existing clients after they left through a draw down. Right. So, we could prove that we could raise money. And we were very successful. We launched a UCITS fund, and we were doing really well with some of the investment consultants as well, trying to raise assets that way, too. So again, what I would do is when a certain individual resigned the first time, I would have just let him resign. I wouldn't have convinced him to stay because that created more pain and more negative feeling that basically manifested itself across the rest of the team and made it hard to continue. And it just created a bad vibe. We should have rebuilt the investment team at that point, is what I thought.

    Jamie: [00:35:24] As I look back, you had six equal partners, am I correct?

    Romael: [00:35:27] Near enough equal. One person had 2% more, which didn't really mean anything. It was more of an ego thing.

    Jamie: [00:35:36] Right. I'm just looking back in retrospect, was six too many for a 25 people firm?

    Romael: [00:35:41] I wouldn't say so. It wouldn't be wrong to have six partners, but it's wrong to have six equal partners and it's also wrong to have six equal partners that try to make every decision with a committee vote. Right. You know, there's got to be responsibilities passed on to certain individuals who make the final decision on certain things. Alastair famously once said to me, just because you can go into a shop and buy a washing machine doesn't make you qualified to tell me how to do sales. Well, he's right. It doesn't make me qualified. I have an opinion and you can take that opinion. But ultimately, I've got to trust my business partner to make the final decision on sales. And the same thing goes for investments and same thing goes for technology. But we didn't we kind of got into the weeds. We were all very detail orientated people that wanted to know every little piece of detail, every decision anybody was making, which was just crippling. Five-hour partner meetings are not good for anybody.

    Jamie: [00:36:39] Alastair, how about you? What would you have done differently?

    Alastair: [00:36:42] So, I’d develop a few things that Romael said there. So, in relation to people getting distracted and talking and then deflecting perhaps their own challenges onto you and then questioning your ability to do your job when then you're already a proven professional. I'd already been in the business development world for close to 20 years by that stage. And so, I'd already proven my ability, I could always improve, I could always do things differently, but I didn't need to justify myself. And I would say if I was going to do something different, I think it is important to back yourself. You know, you're probably doing the right thing. And then when you're backing yourself, turn around and say, look, I'll do my job, you do yours. And then there’s no shortage of things you've got on your desk. So, get on with, what you're doing. And, for example, better technology or making money for your investors. I mean, I really would say that's a big lesson learned. So back to yourself. Another one is not to pander to people. You know, if someone says they want to resign, let them resign, and they really do, just don't go no, no, please don't do that. Just say you look, okay. Let's work this out. Let's work this through. Or if someone is behaving badly, then just say, look, you've got to stop that. Otherwise, you're going to have to ask you to leave. So, the pandering, you think that's helping the situation? It's calming the room. It's better for the relationship. It's not it's better just to call it what it is and work through the problem. And if the problem is someone has to leave the partnership, then that's the solution to it. So those would be my two main lessons. I mean, another one is, you know, it's life rich experience. You know, as Romael says, you know, enjoy the moment. It's not going well but it is it's what you're learning.

    Jamie: [00:38:35] I had a wonderful take recently. I was listening to another financial podcast and this guy who was running his fund, he says, when someone sends me their resume, the first thing I do is look for something where something's gone wrong and I'll ask them about that, like what went wrong and what did you learn from it? Because it's true. I mean, that's one thing that life does is you've got to use these road bumps as hurdles to propel you higher. And learning from mistakes is just such a big part of business. So that's obviously a great takeaway from what happened here.

    Alastair: [00:39:08] My teacher says to my son, let setbacks be jetpacks. 

    Jamie: [00:39:13] Really?

    Alastair: [00:39:14] That's good, isn't it? 

    Jamie: [00:39:15] That's better than the humps turning into … yeah. I should have used that. Okay. I've got, I've got my next tagline. So, let's just talk about life today if we can, the world of hedge funds and how it's sort of changing. What do you think is happening in the space? Is it a growing asset class as people look for greater diversification? Are the business models of hedge funds changing materially from how they started, and they still haven't been around a huge amount of time, I mean, three or four decades. But how would you. How would you answer Romael?

    Romael: [00:39:46] I think I'll kind of defer to Alastair in a moment, but from a kind of business model perspective, it goes back to that outsourced resources that you have now. I would say we went through this period where, you know, every year there'd be a new publication saying it's now going to cost you X hundred million to launch a fund and now it's going to cost you 150 million to break even to run a business. And then I think the cost started coming down because people started leveraging the outsourced services, you know, be it technology or be it individuals. Right. So, I think the business model there is changed for the better. It allows people to launch themselves, be more nimble and really focus, outsource everything that is necessary to be outsourced, that investors need to a credible team to then you focus on alpha. So that's a good thing in terms of, you know, asset raising, I think I've mentioned before that got increasingly harder as we dipped down and we wanted to try and raise some capital for one of our funds. We realized that, you know, seed capital was no longer a seed capital. It was really kind of accelerator capital and accelerator capital was no longer really accelerator capital. It was, you know, late-stage investment of some sort. So that's harder. But I think the rest of it, in terms of the current environment, you know, I had aspirations to get to the buyer side again. That's disappeared. But Alastair is still very much in the space. So, Al?

    Alastair: [00:41:04] It's still an exciting business to be in active management. And I think that some extent the pendulum will swing back to it. These markets are active manager markets that we've got at the moment. I think we tipped into more money being passively managed than actively managed not very long ago. And again, I think that's more opportunity for active management and the opportunities you said to find partners to help you get off the ground and going has as increased, you don't need to do it again or yourself. And investors are not expecting you to do that. They're really looking for your ability to do something different from them that they can't just buy off the shelf. And there's always demand for that. And then one lesson learned. One other point, which I think is still important now, is finding a partner. It's fine to try and find a supportive partner to help you grow your business. I think so many people think it's better to have I'll do it myself; I'll show them I can do it myself. I think having a stable institutional style or a family office or anyone really that you've perhaps sold a quarter of your business to or maybe even more who then helps guide you as a sort of bedrock? It is massively valuable. And I would always from my own experience would always encourage people to find a good partner. However much you think that might cost you? It is always better to have a smaller piece of a bigger pie.

    Jamie: [00:42:37] Smaller piece of a bigger pie. I'm writing that down. That's me from a dietary point of view as well. Alastair, Romael, it has been so great chatting with you. I wanted to say a big thank you for opening up your hearts and minds and talking us through what must have been a very challenging point in your career. There's a lot of key takeaways I thought I might remind listeners. Outsourcing is a very important part of a start-up business. It sounds like now is actually a great time to do it with so many tech platforms offering good budgets for outsourcing, which means you don't get distracted. Adapt where you can. Not only trust your partners, which is what Alastair was saying, but find the right stable partner to support you. Let them do their job and get them to let them to let you do yours. And ultimately, which I think is one of the main conclusions is. I forgot the jetpacks one now. Let setbacks be jetpacks. There we go. I wanted to make sure I got that in. Anyway, guys, it's been so great. Thank you both for coming on the show.

    Romael: [00:43:40] Thanks a lot.

    Alastair: [00:43:41] Thank you, Jamie.

    Jamie: [00:43:42] And I'll just say to anyone listening, this is the first in a series of podcasts around the hedge fund world. So, if you enjoyed this episode, please do subscribe and follow us wherever you get your podcasts. And until next time. Cheerio from me and cheerio from Alastair and from Romael.

In January 2018, Harmonic Capital voluntarily closed while managing close to $2 billion. Why did this happen? In this episode we hear from former partners Romael Karam and Alistair Smith who take us inside its demise and explains what went wrong and what others need to look out for.

Host: Jamie McDonald

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