Tyra: I am here today with Jason Josephiac from Raytheon Technologies, it is a pleasure to have you here today and thank you for taking the time.

Jason: Likewise, thank you Tyra.

Tyra: Before delving too heavily into these questions, let’s first start off by having you tell our audience a little bit about yourself.

Jason: I work for Raytheon Technologies on the legacy United Technologies side. United Technologies merged with Raytheon on April 3rd of this year. I work in our pension’s investment group covering hedge funds and we use hedge funds in our portable alpha construct. I also work on our multi-asset class portfolios. When I say multi-asset class think about strategic partnerships that we have with a couple of larger firms, where they bring us their best ideas to achieve some sort of risk/return goal and we also lump in risk parity into this multi-asset class portfolio as well.

I have been at Raytheon Technologies for seven years and before that I was in sales and client services at a firm called The Boston Company Asset Management for four years. The Boston Company was a subsidiary, a boutique manager of BNY Mellon, but they’ve gone through some changes over the past seven or eight years since I’ve left.

Tyra: Tell us a little bit about the types of funds that you target, the ticket sizes and your process when you are meeting with a prospective manager.

Jason: I pretty much spend most of my time looking at hedge fund managers and as I mentioned these hedge funds are for the portable alpha construct. So, a lot of what I do is more relative value and more market neutral oriented, where we’re ultimately trying to get 250-350 basis points of alpha over cash after financing costs and after fees and whatnot. That tends to not be the typical way that a lot of allocators use hedge funds.

I think a lot of allocators use hedge funds as some sort of replacement for the S&P 500 or in some sort of absolute return hedge fund bucket. But what I’ve seen from other allocators and hedge fund programs over time is that a lot of them have not been able to stand the test of time. This is because they tend to be benchmarked against the S&P 500 or they tend to be in the bucket that is orphaned and doesn’t really make sense when it comes to a total asset allocation standpoint. This is because as you can go through long periods of time where beta rallies in a material manner like it has really since 2008/2009 and then hedge funds are viewed as doing not what they are really supposed to do.

But, it really all depends on your goal and objective. Our goal and objective is to get that 250-350 basis points over cash and port that over to either equity futures or treasury futures, so we view hedge funds as a substitute and a complement really to active long-only equity and active long-only fixed income.

Tyra: When you’re reviewing managers and going through the due diligence process and once you get to the point of allocation, what is the range in ticket sizes that your team and yourself are typically allocating into any given manager?

Jason: It really varies, prior to the merger, we were a $30B pension plan on the UTC [United Technologies Corporation] side and the Raytheon Plan has roughly $18B-$20B. So overall when it comes to the pension plan on a combined basis that makes us now north of $50B. On the hedge fund side, we have about 10%-11% in hedge funds, which comes out to roughly $5B-$6B, it all depends where we are with the integration of the two pools of assets between Raytheon and UTC today.

The ticket sizes can vary and it really all depends on what we are investing in. Whether it is a more directional type of strategy, which tends to be a smaller portion of what we do since we are really looking for more market neutral relative value types of strategies, but there are times when we will put in some strategies that may be a bit more long volatility-oriented so in that case it can range anywhere from $25M, $75M to $100M, something that is more core market neutral relative value it can range from $200M – $300M and something that may be a bit more directional, but still have an embedded beta component to it such as structured credit or long/short credit that would be more often than not between $100M to $150M. Those are very loose guidelines. We evaluate strategies on a strategy-by-strategy level and we don’t really have some sort of general guidelines that we go on base off a higher-level set of rules. It is really idiosyncratic on a position-by-position level basis.

Tyra: Pre-Covid, when you were going through the due diligence process, how long did it typically take you for any given opportunity and now that we are in COVID what does that look like? Has it changed in some way?

Jason: Keep in mind, I am answering this from the position that I sit in. Constraints vary across institutions where historically we have had a fantastic leadership with our CIO, Robin Diamonte, and she really empowers her team to move forward and find ideas that they think will move the dial and create optimal portfolios, so my answers may vary from the other investors and what types of structural constraints or cultural differences they might have in terms of their work environment.

It can vary, there is no general rule of thumb as to how long it takes a manager to get into the portfolio. I have done things that have taken a month or two and others that have taken two to three years. The reason for the two to three years is not because the whole formal process takes that long, it is more I turn over a lot of stones and I form relationships and then it really depends on the timing of when something might make sense. When I say timing, it is not the timing of trying to time a manager’s alpha stream, it is more about do we have a current manager with that type of exposure? and if we do, then are we looking for a backup?

So, there may be a handful of managers I might want to monitor as a potential replacement or complement to an existing position. Normally, more often than not those type of prospective investments lend themselves to take a bit more time because again I am not looking to replace a strategy immediately Day 1, on the flipside of that, if it is exposure that we don’t have today, then that might afford itself a bit of an accelerated timeline given principles of diversification and what we’re trying to accomplish across the whole hedge fund program in terms of adding managers that bring low correlation or uncorrelated alpha return streams to our whole mix.

Tyra: On the topic of the Coronavirus, now that we understand the due diligence side and how has that made you re-think portfolio construction and your allocation efforts and do you find your approach to be similar among your peers, if not, then, how does it differ?

Jason: In terms of the virus, we have to take into account that we are merging these two pools of assets, $30Bn UTC pension plan and this $20Bn Raytheon pension plan so there has been a lot of work going on behind the scenes with that. Therefore, we haven’t been really active on finding new opportunities or replacing managers given that we already had about 25 line items in our hedge fund program on the UTC side and then on the Raytheon side roughly around 20 there as well. So, it is between 45-50 line items that we have to go through and optimize the portfolio so really new allocations haven’t really been top of mind. It is more about what do we have today? Do we want it tomorrow? How can we build the best risk-adjusted return portfolio until you get 250-350 basis points net of fee alpha over cash?

What I will say in regards to existing relationship and getting up to speed on with the legacy Raytheon managers this has perhaps actually made things a bit easier because Zoom calls, conference calls and video chats you can hop on them much faster you don’t really have to coordinate in-person meetings or have to worry about travel. Where before the virus, this type of technology just wasn’t really utilized to the extent it could have been so I think the virus has actually helped with getting up to speed with strategies that we have had to have introductory meetings with and dive a bit deeper into the legacy Raytheon portfolio. As well as getting realtime updates with our managers on a more frequent basis instead of waiting for a manager to come through on their travel schedule or waiting for us to go to the manager’s office wherever they might reside.

Tyra: How does the new virtual conferencing regime fare with your newer relationships with newly introduced managers? Do you put those conversations on hold/move forward, where do you find your team sitting on that type of a spectrum?

Jason: We have been so busy with the merger that new allocations haven’t been top of mind, however, if I were to do a new allocation then I would perhaps look to our existing line up first to see if there is a strategy or capability that a firm has that is existing. I wouldn’t go to them exclusively just because we have an existing relationship, just more as a good place to start. Of course, you don’t want to hire someone just because you have an existing relationship somewhere else. More in terms of an education standpoint, but I think that is a pretty good starting point. But, I think the hurdle would be very high to hire a brand-new manager without at least meeting them in person.

I think going forward, some people get a bit too complacent with video chats and conference calls. They might be missing some of the more qualitative and tangible aspects of building relationships. Where ultimately you really want to be sitting across the table from that person to really be able to see their body language, look them straight in the eye or go to dinner and see what their mannerisms are and see how they treat others outside of an office setting. You want to just try to get people outside of their comfort zones and see if they are the same person in a different setting outside of work as they are across the table.

So, I think that will always be a portion and a part of what we do. I think the people on my side of the table will do that more frequently and better will actually find their relationships will be a bit smoother and you will have an understanding that you are standing shoulder-to-shoulder with people that are aligned with you in terms of interest. Instead of just someone who is on the other side of a conference call line or Zoom chat and they are looking at your allocation as purely a dollar amount. Rather they actually want to be partners with people that they like that they trust and that are just good people overall. Life is too short to invest with a bunch of people that might have poor morals or ethics and I think that can easily be hidden sometimes during conference calls or Zoom calls.

Tyra: Do you allocate outside of the US?

Jason: In terms of our strategy exposure, we will have exposures outside of the US. In terms of where managers are domiciled, it is mostly in Europe and North America. We actually don’t have anyone domiciled in Asia and that is not really a conscious decision, that we made. It is more of where we sit and we have a limited size investment team. Where prior to the merger, we were a team of 9 people (6 people on the investment side) and now since after the merger we are closer to 10 people on the investment side.

On the hedge fund side, it is just me and I recently hired an analyst at the beginning of August. It is a bit tougher to look outside of the US when it comes to the more regional or localize types of managers because it just takes much more time and effort to do that. But we will use Fund of Funds for those type of exposures to help complement or supplement our efforts that we can afford in terms of resources internally.

Tyra: Do you come upon managers who restrict disclosing their full outlined portfolio positions that they hold such as when you find that in marketing material, they may restrict to showing only their top 10 positions?

Jason: I do, it is one thing to have it in marketing collateral and have it sent out, it is another when we hop onto a phone call and we talk about it. It depends on the manager. If you’re a quant fund then your top 10 positions aren’t really going to matter that much, whereas, if you’re a distressed investor or a macro manager that is concentrated on a handful of themes.

Tyra: What is a fee structure that you’ve been seeing recently, in terms of a commonality across asset managers?

Jason: It really varies, I hate paying for beta so these long/short equity managers that tend to have a net directional bias maybe they have an embedded 0.3, 0.4, 0.5 or 0.6 type of beta to the market. Number one, we don’t invest in those type of funds not because I don’t think there’s alpha there, but we run a portable alpha program and we are looking for more market neutrality. We don’t have a team internally to take a long/short equity manager and hedge out their embedded beta exposure. However, we do have Fund of Funds that will do that for us within their own strategies. But even if we were able to invest directly with those type of long short equity managers, if we were to set up a fee structure with them, I would want their returns beta-adjusted for their embedded beta. It doesn’t make sense to pay a 15%, 20%, 25% or 30% incentive fee on a manager, if they are bringing you any sort of systematic embedded long-term beta in their portfolio.

At the end of it, the evidence shows that the beta timing hall of fame, people may be in and out of it every single year, but there is really no one in there that is going to stay in the beta timing hall of fame. And if there are ones out there, they’re probably managing small sums of money or the ones that are managing large sums of money they are probably already closed and not taking on any new capital.

Overwhelming, I do not believe in paying for embedded beta exposure so with that I am much more likely to opt for a higher incentive fee with a beta-adjusted type of return hurdle relative to an appropriate benchmark and keeping down that management fee for the cost of running the business not as a profit as assets under management grows.

Tyra: Thank you Jason for your time today, be sure to look out for Part II next week.