Diversifying Risk & Capturing Higher Returns with Alternative Investments
In this interview, Brock Freeman talks with Chris Carsley about alternative investments. We discuss his background and how an investor can get started in personally investing in alternatives.
“One of the things to think about alternatives, if you’re looking to add alternatives to your portfolio, are you looking to capture an enhanced return, or are you looking to diversify a risk? That’s the real two key aspects that you need to understand with alternatives. Take a long hard look at what you’ve built and why you think you need to change something, and can we identify the alternative that is going to fix that problem?”
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Chris Carsley, CFA, CAIA, Biography
Chris Carsley brings over 25 years of investment industry expertise specializing in corporate and venture finance, business valuation, business operations efficiency, regulatory compliance practices, securities research, portfolio management, arbitrage trading and hedging.
Previously, Chris was responsible for the creation of the business risk and operational due diligence program as a senior member of the investment research and analysis team at Benchmark Plus Management. He was also the head execution trader of futures, options and OTC based trades for the Benchmark Funds.
Chris was a trader for Paloma Securities where he negotiated and structured ISDAs, securities lending and financing agreements that targeted global arbitrage opportunities primarily for Canadian and European markets. Chris was also a senior member of the hedge fund security finance team that performed due diligence for the Paloma hedge funds to assist in enhanced finance/margin treatment and short coverage costs.
Chris is currently a member of the Charles Wright Academy Endowment Committee, serving on the board since March 2017. He co-founded the Northwest Hedge Fund Society (now the Seattle Alternative Investment Association) in 2004, and is Co-head of the executive board of the Seattle CAIA chapter that launched in 2017. He earned his Chartered Financial Analyst (CFA) designation in 1998, Chartered Alternative Investment Analyst in 2011, and holds a BBA from the University of Portland.
Transcript
Brock Freeman: Hello, this is Brock Freeman, your host for the Kirkland Capital Group podcast. In this interview, I talk with Chris Carsley about alternative investments. We will discuss about his background and how an investor can get started personally investing in alternatives.
Chris Carsley: Think about alternatives. If you're looking to add alternatives to your portfolio, are you looking to capture an enhanced return, or are you looking to diversify a risk? That's the real two key aspects that you need to understand with alternatives. Take a long hard look at what you've built and why you think you need to change something, and can we identify the alternative that is going to fix that problem?
Brock Freeman: Chris is uniquely qualified to speak on alternative investments. He has over 25 years of experience in investment fund management. The vast majority of that in alternative investments with billions of dollars under management. Chris was a trader for Poloma Securities, as well as performed due diligence for Poloma hedge funds. He worked as a senior member of the investment research and analysis team at Benchmark Plus Management. Chris co-founded the Seattle Alternative Investment Association and holds the Chartered Financial Analyst and Chartered Alternative Investment Analyst designations. Chris donates his time as a member of the Charles Wright Academy endowment committee. All of this is why it's great to have him as my partner, as well as the Chief Investment Officer at Kirkland Capital Group.
Chris, why don't you tell me a little bit about your background and tell us why you have this deep experience with alternative investments.
Chris Carsley: Sure, thank you Brock!
I guess we can go into a little bit of my background. I started a little over 25 years ago in traditional investments managing high net worth corporate accounts here in Seattle, which was just long stocks, long bonds, putting together select allocations that really met the guidelines and the requirements for each of those individual investors. I quickly had an opportunity to move, and I think out of luck, I got tapped on the shoulder to join a great group Poloma to come in and work on their securities finance and trading desk, where I got introduced to a variety of different operational structures, and eventually an arbitrage trading desk where we did a lot of event driven trades, hacks arbitrage trades and everything else. That was sort of my first introduction to the alternative universe from a job standpoint. Now obviously by that time I had done lots of reading and had already been working in a number of different aspects personally in the derivatives space and through college. By that time I joined Poloma I already had my CFA, which now the CFA is an amazing program but didn't really at that time focus much on alternatives.
Brock Freeman: So, let me stop you there. Can you define CFA for our folks that don't know what that is?
Chris Carsley: You have the Chartered Financial analyst program. It's one of the more difficult tests I think out there, but it is a great swath of information, very large body of information for anyone who wants to go into investment management that's going to have an analytical background. Back when I took it, you didn't see a lot of CFAs, but you're seeing now more and more CFAs throughout the investment management world. It is becoming one of the core credentials for people to have in the investment management arena. From Poloma, after spending years and learning a ton about alternative investments not only from a trading standpoint but having the opportunity to dive into a number of the Poloma funds and see how things were built and help enhance the operational structures of lots of different hedge fund platforms that were embedded inside Poloma, I then came back out West and worked for Benchmark Plus, which is at that time was a little over $2 billion dollar fund. They invested in a number of different esoteric strategies that all would be considered alternative as well. One of the key things that was important for Benchmark was you really had to have a wide knowledge around the investment platform, but also the operational nature of how those funds were built. Because one thing you saw on alternatives, it wasn't always the trader that was driving the particular value, it was a network or an operational structure or some level of efficiency by a network that allowed that fund to have the ability to capture outsize returns. You saw that a lot as you were looking across hundreds and hundreds of funds at Benchmark.
From there, my career dove in into another alternative sector, which was more startups, seed angel and venture, where I worked in building some variety of different startup companies, direct investing into a number of startups, some more technology-based, some not. That led me to actually build a small seed angel fund and help a number of other people think about building out various aspects of their venture fund that they wanted to run, and then I went on to help and work with a separate platform in managed futures trading. I've really had this fortunate career that has allowed me to touch and really dive in deep on a number of different platforms across the alternative investment space.
Brock Freeman: The one question this leads to, and I think was going to be a common question out there is, what exactly are alternative investments? For most of our listeners, unless they've been in this kind of investment thing for a long time and doing their own research, if we talk about alternatives, maybe the first thing they think of is alternative medicine or something like that, but in the investment world, how would you define for individuals who might be diving into this first time? What exactly are alternatives or what are they not?
Chris Carsley: Yeah! Well, it's funny you end in that statement. It's sometimes easier to explain what an alternatives are not than what it is. When you're looking at alternatives you're looking at a situation where it's everything that's not just long stocks and long bonds. It's broken down into two core tranches of the traditional investment world, which is what most of us hopefully had exposure to and had the ability to educate ourselves and our current investors, where I'm going to go buy a mutual fund or an ETF or an individual stock, or I'm going to buy a mutual fund or ETF that's going to give me a bond exposure. If you're a little bit more advanced, maybe you have a platform where you're doing direct bond purchase through a brokerage house. That's all your traditional side, and that's actually where a majority of the money in today's investment world still lands.
You need to understand alternatives sounded really fancy and they sound really cool, which they are. They're pretty exciting. You can really be exposed to a number of interesting trade theories, not all good, but at least interesting. That's actually a very small portion of the entire investment dollars in the world. Most of it is still in the traditional space.
Now with that said, I'll give a quick overview of alternatives. I told you what it's not, now think of hedge funds, venture, real estate, infrastructure, timber land, buying art. Anything that is not traditional long stocks and bonds. Now a large portion, and a lot of people say this well, how alternative are some hedge funds that are in the long-short space? There again, there's some argument around as to how alternative it is in today's world.
Brock Freeman: I'm going to stop you right there for a moment. What does long-short mean? As an individual investor who didn't really grow up in that hedge fund world, what does long-short mean?
Chris Carsley: Long-short is probably one of the most prolific strategies in hedge fund world where I am going long on a basket of stocks.
Brock Freeman: That means you're waiting for it to go up. You're waiting for that rise. That's the long play basically.
Chris Carsley: Yup! I'm basically buying shares of Apple, Netflix, Amazon, whatever stock is your favorite. I'm buying a basket of those, because I think they're going to outperform on the upside.
Where a hedge fund can come in, there's restrictions for a lot of other managers, they can't go short, and we can have an entire section of talking about what shorting is. I won't go into too much detail of how it actually works, but basically it is, I'm selling the stock hoping that it will go down. So, I'm selling something I don't really own, hoping that it will go down and I'll buy it back at a cheaper price. When I go short, I want the stock to perform poorly. A hedge fund manager in the long-short space will buy stocks that they think are going to go up more than average, whatever their benchmark has to be, and I'm going to short stocks that I think are going to go down more. It's very difficult to add, but they're trying to add value on both sides. I want to add return on the short side, I want to add return on the long side. That's what a long-short manager is and there are a lot of different forms of that. That is an alternative you see.
Like I said, there are venture funds, seed funds. Those are the individuals that will go out and they will collect investor dollars to go in and raise and then invest in a portfolio of startup companies at various stages. They may be early stage to where the fund of the company is just getting started too. They may invest later stage where the company's really attaining growth in dollars. Then you've got companies that go out and own timber land and they contract the rights and collect fees based on the logging of that timber. There's a farmland, people owning actual farm land, and then taking a profit from the sale of that crop.
Any of those types of structures would fall into that alternative pocket. Now, one of those I've had some exposure to, and we've also obviously built one at Kirkland Capital Group is the real estate investment space. Just like anything in infrastructure, real estate is considered an alternative investment. You can go into where you're doing equity purchase in real estate, or you can go in and do debt. There's a variety of structures in different sub sectors that people invest in within real estate just in itself.
Brock Freeman: You've gone over quite a few different areas here. Do you mind talking a little bit about maybe your own portfolio, whether currently or over the past few years? How you have allocated across perhaps your traditional versus alternatives, and then in the alternative space? What are you allocating? I'm not necessarily asking for individual funds, etc., but give us an idea about areas of alternatives that you have invested in yourself.
Chris Carsley: I run what they call a hub and spoke model. I have a core portfolio that would look fairly passive and basic, where it's mostly traditional, where I have a number of different investments in individual stocks, and a variety of different indexes and usual funds that build as a sort of a core. Then the alternatives are either instruments that I've viewed that will enhance the return on my portfolio or they will be a diversification nature to my portfolio. There'll be what they call countercyclical, when the market's going up they may not perform as well, but when the market falls they tend to perform very well. It's a nice offsetting piece of your portfolio or you are lucky and you find some investments that are a little bit of both. They de-risk your portfolio, and they capture an outsized excess return on comparison to other peer investments. The alternative space, just because of my background I may have a larger allocation to alternatives than most, seeing as that's where a lot of my career has been, and I've got boots on the ground to where I'm involved in a lot of direct projects that are in the startup world. So, I have some different individual investments, seed based companies.
I actually do some international investing in some startups. I also utilize other people's expertise. I find someone who runs a fund that really has the time and expertise that I don't have because I'm doing something else, and I want to go to them and say, great! I think you are in the right space. I think you're doing something interesting.
So, there's a few funds that I invest in that are in the venture space, but they invest in secondaries. And really quickly what that is, is they may not be directly involved with a startup that's coming out with their first private issue or something. They are going into a company that's been issued for a while that they already owned, and they're buying that and providing liquidity to an investor that wants to sell a piece of their existing position, knowing that there is some event or some opportunity that's going to see a growth in those shares or relatively shorter duration that company might actually have an M & A transaction, or go public.
Well, that's some of the work that I do. Obviously, I have some exposure in managed futures. In the real estate space, I both have some equity exposure directly in real estate, and then through our fund, I have a fair amount of debt exposure. I'm a big proponent of what we're building, and so I've put a fair amount of skin in the game. I think it's a great investment for what we're doing.
I know everyone's always asking me questions, I get a lot of questions on crypto. I do a lot of research on crypto. I haven't personally dove in on that, but there's some interesting white papers and some interesting research as more data is becoming available, so that's a space I'm looking at, but I haven't dove in yet.
Brock Freeman: What about crowdfunding? If we think about what's happened over the last few years, it's almost like alternatives have become far more accessible in the last 10 or 15 years with Reg A, which is the new SEC regulation that allow a much broader public participation in startups and other fundraising ventures that led to this crowdfunding. Do you see that as a legitimate place for people to place in their portfolio as an alternative?
Chris Carsley: Yeah! I mean, let's give it a definition. Crowdfunding is exactly what it is, it's a platform of where investors go to access an investment. Now that investment usually has found itself to be of an alternative nature, because why would you go to a crowdfunding platform when you can just go to your discount broker and buy any stock or mutual fund or ETF?
It has been a platform to where alternatives have gathered and you're seeing a number of different high quality portals. I think that is here to stay. I think it is good for the investors, but I think it's also very good for a lot of different individual projects, companies, syndications, and funds as a way to access a wider swath of capital.
In raising money. I always say this, it's not rifle work, it's shotgun work. Having the aggregation of investors, let's say like for us, we need accredited investors. Having someone who can actually put those together, and then I can quickly go out and reach hundreds, if not thousands of potential investors and have them review my materials, that's very beneficial. Hopefully the portal that you're using has quality deal flow, and for the investors in the funds, they get access to a number of investments they would never have run into normally. I'm a huge proponent of that platform, and I think that's here to stay.
Changing regulations has really opened up that platform, but you're also seeing that there's a number of people that run all these regulatory bodies and are passing laws. You've just recently saw a widening of what is the definition of an accredited investor. For people who don't know what that is, the old rules, where you as an individual, you made $200,000 or more for the past two years, that's gross income, or you have a million dollars in assets, investment assets, that's outside your primary home. They added another qualification to that, to where for some people who may not meet those monetary guidelines, they may have a level of knowledge that has been achieved through their industry and can be proven through a variety of different accreditations. There's a few securities related accreditations that had licenses that now will allow you to be deemed as an accredited investor as well, but that's still the biggest barrier for investors to access alternatives. I mean, there are a few ways to get around that through different filings that allow non-accredited, but for the most part, there's still a barrier there for a majority, but it's getting better. It's good to see regulators are making these changes.
Brock Freeman: Yeah, absolutely!
Let's take a step back and let's imagine that if you were an investor who now has reached accreditation either through the amount of money you have set aside, you've been saving for a while, or you simply just have a high income, like many of our techie friends who are earning those high salaries. Maybe even you had your 401k for a while, you have some investments aside from that, but mostly they're in the public market or the 60-40, the split between normal investments in the stock market and then some in bonds, etc., and now you're thinking, you know what, I need to really investigate this alternatives market.
Well, how would you approach that? I mean, it seems like when you talk about alternatives, it's so broad. That it's difficult to know. Where do you even start as a person who is busy already with their career and family, etc., but hey, I definitely need to make sure that I'm making the right decisions around my investment portfolio. Maybe they don't entirely trust a wealth manager. Maybe it's time for them to look for a new one or look for one to begin with. But how do I think about that as an accredited investor, who now wants to dive into this world of alternatives? How do I look at that? How do I approach that?
Chris Carsley: Very complicated question! There's a lot of steps. One, I always like to say alternatives are not for everybody, and there could be a variety of reasons that they're not a fit for you. Some of it, as you mentioned, could be, I just don't have the time, or I don't have the resources or the network to obtain the education I need. But if you were like, hey, this is something I want to add to my portfolio, in the key aspect think about your portfolio. Where are you currently at, and why do you think you need an alternative? What is missing from your current portfolio that you think an alternative might fix? One of the things to think about alternatives, if you're looking to add alternatives to your portfolio, are you looking to capture an enhanced return, or are you looking to diversify a risk? That's the real two key aspects that you need to understand with alternatives. Take a long hard look at what you've built and why you think you need to change something, and can we identify the alternative that is going to fix that problem?
The next thing is you will have to have a large time commitment. You need to either get out there, and through the web or a variety of different resources by the internet to educate yourself. The other way you can do that is to join various organizations. There are alternative investment organizations out there that their primary focus is networking and education. I mean, one that I actually represent here in Seattle is the CAIA, the Chartered Alternative Investment Association. It's a great organization that their primary focus is education and networking. Perhaps join something like that or go through the tests or take the fundamental program that they have just to get a basic introduction to alternatives; and expand your network so that you now have people who do this every single day that you can maybe ask questions. That would be one aspect that I would think of.
One thing that you'll naturally gravitate to in your research of going out and saying, hey, what's available in the alternative spaces? You'll find something that you enjoy, that you like. It's something that maybe fits an interest of yours or maybe meshes with a background you already have. That will only help motivate you to understand. You'll come up the learning curve quicker and to understand the risks and the benefits of that alternative investment that might fit into your portfolio, but it is a lot of deep search in your existing investments. It's also going to take time and that is one of the problems with alternative investments. It is a very large and sometimes confusing universe, with a lot of individual players of all sizes and you will have to take that time to do the research.
It is important to find once you've identified, hey, this is what I want to add to my portfolio and this is something I have interested in, I feel like I'm educated enough to make that decision. You then need to go onto the search of where you can really find a group or groups that you feel you can trust, because you got to remember, it's not just the investment, it's the team that's going to be managing that investment for you, that's just as important. You need to make sure you can get the transparency. You can understand and go through their docs, and that you have a team that wants to take the time to make sure that you have all your questions answered.
There again, I mean, that's another time commitment. You're basically doing some pretty heavy due diligence, not only on the investment that you've taught yourself about. Now, you're doing your research on the team and that you feel comfortable with that, because you're going to be on a journey. You're going to be on an adventure with that team. They're going to have your money and hopefully they're going to be doing exactly what's going to fit and fill that need that you needed in your portfolio.
That's really where alternatives come in, but don't be afraid when you go out and you do your research and you realize that this is just really daunting and I think my portfolio is meeting my objectives. Don't follow the bandwagon like a lot of people did in ‘08 and feel like you just need to jump into the alternative world and you're not really sure why your portfolio is doing that. A lot of people make some very big mistakes in ‘08. They felt like everyone else is doing it, they got into a lot of investments and they didn't understand the liquidity nature, what a gate was.
If you don't know what a gate is, it's usually in the investment docs that says, in times of stress if too many people ask for their money back, the fund can close itself and not actually honor anyone's redemptions. That hit a lot of people who didn't read their documents and didn't really understand what they were getting into. So, don't ever feel bad that if your portfolio is all long stocks and bonds and it's meeting all your objectives and you sleep well at night and you've done your due diligence, and you've dove into alternatives and you just found it's not for you, then that's okay.
Brock Freeman: But on the other hand, Chris, there's still a tremendous amount of danger in the public markets as well, as we saw in ‘08 when things crashed. You're still running a large risk, even though it sometimes feels, because there's so much talk about it, there's so much information out there. It's so easy to sort of just give your money over to an ETF or whatever, or in your 401k pick a few things at the beginning and forget about it, that you don't even realize the danger of volatility that you've got, or the danger of things falling off a cliff with a certain company or fund that might explode in that area as well, right?
Chris Carsley: Oh yeah! There is definitely! If you're investing, you are taking a cadre of different risks, and understanding what those risks are, inherent into what you've invested in is important. That applies to traditional investments as well. The only reason alternatives are a little bit trickier is, you don't have 50 websites trying to tell you what to do. You don't have a hundred different brokers offering you information. That's really what I mean, but you are totally correct. Just even investing in the S & P 500, which most people feel is a core benchmark of your equity investing, and like myself and most everyone else listening to this probably has some level of exposure to it, it's pretty volatile, it moves around.
The more volatile an investment is, and you have shorter time horizons. you really need to be careful about how much you're allocating to that investment. Because if you run into where you have a liquidity need in an emergency or something of that nature, and the stock market takes a really big hit and you have to sell, you will realize a loss. The one thing with equity investing like into an ETF that does the S & P 500. Well, it might go down 18%, but you haven't recognized that loss until you sell it. If you have an emergency need and you need to recognize that, then you've actually materialized that risk for yourself, and it's now hit you directly in a monetary way.
So, you're right. I mean there's risks in everything and that's one of those things that for some people out there, they're trying to look at their portfolio and say, well, instead of just going to cash, is there other alternatives out there that might mitigate risk and not be correlated with what I already own. Correlation is, there again, moves in a countercyclical way. It basically if the stock market's going down heavily you have something in your portfolio that is hopefully stable or showing the positive return. Sometimes those are difficult to identify, but they are out there.
One of the things that we can deal with here is that's going on in today's world. Why are people starting to look at more alternatives? I think everyone's happy with the record equity market, back-to-back double digit returns on the S & P 500. Most people have done fairly well on the equity side, but interest rates are low. They hit 150-year lows at the beginning of this year and now people are really looking at the fixed income portion or that portion of the portfolio that's supposed to create lower volatility. They're realizing it still creates lower volatility, but it doesn't provide any material return. That's where a lot of people are looking to alternatives to see if it's something that will work for their portfolio. As they're trying to find an alternative that may have a similar risk profile but is capturing a larger return that's going to meet their objectives.
Brock Freeman: I want to go back a little bit, because you talked about really educating yourself about these different alternatives and picking something that you feel interested in, which I think is a great driver of wanting to even find out more. I don't think you were saying you become an expert at it, but at least educating yourself to some degree helps you then pick a team or the actual investment manager. For example, for Kirkland Capital Group, you and I are the primary investment managers for our Kirkland Income Fund. When you're buying into our fund, you're saying, hey, Chris and Brock, I like what you've laid out. I believe in you guys, we like your background, etc.
Really that's what you're doing is you're educating yourself about, yep, this is the kind of investment I want, and hey, here's the team that I want on this and I believe in them. That usually comes from maybe looking at their background, listening to them, having a chat with them. I think that's what you're wanting to do, no matter what alternative investment you're looking at, right?
Chris Carsley: Correct. I mean right now we have tons of conversations with a number of different investors. Everyone is on the hunt for yield as I was saying currently, but I think there will always be, given where they are in the life cycle of their investment career. You need to understand that team. You've identified the product, now is this the team, and is the fund in a structure that meets what I need? Do I have the liquidity needs? Do I understand how the fund is built? Are the liquidity needs matching the underlying investment? There's always a new questions that you want to ask that you would never ask in the traditional world.
One of the common failures in alternatives is your fund managers that mismatch assets and liabilities within the investments they are running. What that basically means is, I'm giving you daily liquidity on an investment that I lock up for a year. Okay, well, that's a problem, because when you come in a time of stress and expect me to give you liquidity, I've actually put you into an investment that I can't possibly meet your liquidity needs, and that would be that mismatch. You think that sounds common sense like no one would ever do that. Just make sure you really understand the managers and what they've built and how they run their business, because that is one of the aspects of alternative investing.
Brock Freeman: Maybe where some of these alternatives sound like they're actually quite good is for a retirement portfolio, because hopefully on a retirement portfolio you've got a pretty specific end date in mind. You might think, well, I'm going to retire in 10 years or 5 years or 15 years. That can be matched with some of these less liquid alternatives.
Chris Carsley: Correct! I mean, there's a lot of proponents of where I've seen a lot of people using longer-term money, which is qualified retirement-based funds. To invest in startup companies, which naturally 10-to-12-year time horizons of when that company might have a liquidity event, that's a better match. The investors that are savvy enough to understand the nature of the underlying investment with the duration may be using those funds is very useful.
The other aspect is a lot of alternative investments are not, I would say tax advantaged, they're not structured in the way that they trade to minimize tax. So, let's take a short term, a long-short fund that we had described earlier. They might have trading every single month on both the long and short side, capturing those returns, creating short-term gains, and those all flow down to be an income tax rate. A lot of investors that are extremely tax sensitive avoid funds like that. Whereas, like a lot of your pensions, endowments, and everything else usually love that type of exposure because they're not a taxable entity.
The same with the Kirkland Income Fund. We originate bridge loans on commercial real estate. We are generating income. So, one of the things that we really want to make sure all of our investors know as well.
You need to talk to your tax counsel. You need to understand how this will impact you, because if you're going to use after tax money, non-qualified money, there will be a tax impact from these gains. I mean, there again it's important if you have a roll-over IRA or something else like a self-directed 401k or a self-directed IRA, you need to realize that those are funds that are perfect for many of the different alternatives out there that you might want to add to your portfolio.
Brock Freeman: One thing I want to touch on before the end here, maybe just talk a little bit about why you established KCG?
I'll give a little background here. I was the one who sort of brought this idea of commercial mortgages to you and said, hey, let's look at a fund, knowing you had this deep background of alternatives. But you were approached all the time, you talked about this over the years, about how many people approach you, Hey, I want to do a fund for this, or I want to do a fund for that.
So, this was definitely not you jumping at whatever opportunity that came along. You were being very careful with your depth of experience about what you wanted to actually put your work into. Tell me, why this sort of qualified for you as an opportunity that you wanted to pursue?
Chris Carsley: Yeah, I still remember the day when you brought this idea of like, hey, we should do this. I immediately went into my due diligence mode. I already had a number of notions from doing my constant research on the world.
The nature of what was being created through the Kirkland Income Fund was that ability to provide a consistent yield, which had been a problem long before COVID even hit; in fact COVID just amplified the problem. You basically had a number of investors that were experiencing what they call reinvestment risk. A lot of things maturing or being called that were at higher interest rates, and they're having to reinvest in constantly lower interest rates. There was always a growing demand in that space that I was well aware of. And then when you talk about the life cycle, where people are at, you have an aging population that's coming in, and saying, well, I do need that income. I need that monthly income being kicked off. It's a product that was in demand. I knew it was in demand and it's something that where, we could create a profile that would capture a consistent yield, but do it in a way to where we could be very risk focused.
What I mean by that is being able to control that risk, and when we walked through the nature of what was going to be behind every single loan, we're going to be first lien, full recourse, backed by an actual income producing asset, I just really viewed that as an amazing platform to build in a timely aspect. I was hearing a number of investors actually ask for that product long before you even mentioned it to me.
Now there's income being regenerated in multiple different ways, and there's lots of alternatives that do that. This was one that was very appealing to me because of the risk metrics, even your younger millennials and younger people, I have a few students that I mentor to, they would often bring up and talk about, well, I want to capture return and I've got my actual equity exposure, what else do I think about? How do I control risks but capture return?
One of the things that your younger crowd is really interested in is the idea of real estate, and the growth of their wealth through real estate, not just my company stock or my exposure to the S & P 500. They felt comfortable around the tangibility, and I find both spectrums, the older and the younger are in that space.
The older spectrum also likes that tangibility of where, okay, I'm dealing with an alternative investment. I'm working with a manager, who's doing bridge financing, but underneath all of it is a physical asset, and it's something that they could get a feel for. One of the things is for me, having built funds before, you know, really having the ability to come in and build a fund in a nature, with the way real estate is, structured to be very investor focused.
What I really mean by that is really have a fund that allows kind of transparency that I like to see as an investor and be able to transfer that to our investors. That was another real aspect. There are certain things that all alternate investments can't disclose to you, because that's kind of a little bit of their secret sauce, but in what this fund could offer, I always tell people the only thing I can't really talk to you too much about is the loan I'm looking at now. I can't dive in and tell you exactly the property and the opportunity of the loan I'm looking at right now to add to the portfolio, but once I've done it, I believe in full transparency. I want you to understand exactly what we've done. I want you to have access to that property information. You can go look at that property and understand how that's built, because that's what I would want as an investor.
Your final point to this, that really sort of just was the last nail for me was, hey, we can build this platform and we can also be very borrower centric because the nature of our trade comes from these borrowers. And if we can actually do the right thing in the name of the investor, but also come around and build a platform that can be borrower focused and really be there for those borrowers in a variety of different ways that was end to end, that was, okay, we now have a product. This will be in demand. Not only for the people bringing us the loans, but hopefully for the people that wanted to invest in this, and they gain access to the investment.
Brock Freeman: I think what you're saying is, the nature of this is that you're able to bring some great returns in a very risk managed way, but you're not doing it by some type of opportunity that might disappear tomorrow. Particularly with the long relationships and how things are being built on the borrower side, where we're providing a real service that is going to have those borrowers or borrowers similar to those come back again and again because they like it as well.
Chris Carsley: Exactly, and that brings another point that just popped into my head. This can all be done without the use of leverage. The one thing that as an investor that I forgot to mention when you're looking at alternatives is understand how much of that return is generated by the deployment of leverage.
Lots of arbitrage strategies, they make very low risk returns, but sometimes they're not very big, and so people deploy a great deal of leverage to make that return worthwhile. That was the other aspect is being able to come in, and really offer an amazing risk adjusted return for investors that didn't require leverage. It's so important to think about leverage because it's a two-edged sword. It swings and it can make your returns greater per dollar deployed, but it also can swing and plant right in your forehead. That's what again in ‘08, a lot of people suffered with a lot of the black Swan left tail events. Leverage really was that blade that cut pretty hard on a number of investors, because it's an operational risk. It can create forced sales. It can cause a lot of problems that really aren't inherent in the risk of the investment, but the manager added a lot of risks to that investment that really are operational in nature. To a large extent, you'll hear a lot of people say this, that those who are taking operational risks many times in the alternative investment space, that you're not always rewarded for the full extent of those operational risks. Sometimes leverage is one of those.
Brock Freeman: Great! We have time for one more question. So, I'm going to go for something that's totally unrelated to investments, and ask you a more personal question before we end.
Life has become a little different here in this pandemic period, and of course, whenever you're starting up a new fund and KCG is still relatively new, you probably don't have so much time. So, what are the things that you really want to do more of, but you don't have time for?
Chris Carsley: Time and restrictions, I think, as the issues of being, hey, don't go anywhere, plus also super busy. One of the biggest things, I've been traveling almost all my life, I look forward to getting back traveling, and one of my big hobbies is scuba diving.
I am looking forward to building this fund, getting it to the point where we've got some real solidarity, and we're allowed to fly and go somewhere without spreading some virus in one way or another, hopefully. I guess we're always spreading something, but nothing that's going to kill anybody hopefully, and get back into the water so I can add a photo collection. I do a lot of underwater photography. It would be nice to have warm sand on my feet and spend some time under the water, that's probably one of the biggest things I'm looking forward to.
Brock Freeman: Nice! Well Chris, it's been great chatting about alternative investments. We hope our listeners and watchers are getting something about this that can really help you begin your journey on alternative investing, both the opportunities there for your portfolio, as well as helping you avoid some of the pitfalls, by getting yourself educated and really looking deeply into that team that you want to invest with.
If you've got questions for us, feel free to set up an appointment with Chris and I, we'd love to talk to you more about KCG or even in general about other alternatives, and what we do.
Thanks, and have a great day!
Chris Carsley: Thank you!
