{"componentChunkName":"component---src-templates-template-home-index-js","path":"/","result":{"data":{"page":{"id":"72115ffa-c9c7-5ce6-b18a-1b10717e7a50","title":"Home","slug":{"current":"home"},"_rawPageTemplate":{"_type":"pageTemplate","option":"templateHome","templateHome":{"_type":"templateHome","flywheel":{"_type":"homeFlywheel","headline":"The Epsilon Flywheel","link":{"_type":"link","page":{"_id":"6c3141db-c342-4e7e-b114-4366efd155a7","_type":"page","_createdAt":"2020-03-04T15:55:52Z","_rev":"hfmSWbiN0AOX41hc27NPJx","_updatedAt":"2021-02-15T15:45:43Z","pageTemplate":{"About":{"_type":"templateAbout","flywheel":{"_type":"aboutFlywheel","blurbs":[{"_key":"66fc4b5bd8d7","_type":"flywheelBlurb","icon":"filing","text":"Using Regulatory filings as our source of security-selection allows us to circumvent the expensive and competitive input costs associated with fundamental underwriting of investment ideas."},{"_key":"b9f222e2fd8c","_type":"flywheelBlurb","icon":"graph-peak","text":"Instead, we rigorously test the predictive value of all managers' filings, and create rules-based portfolios that distill the best of their collective research."},{"_key":"6385fb55d01c","_type":"flywheelBlurb","icon":"random-graph","text":"The savings we generate through a more efficient process are passed on to clients. Our process enables daily liquidity and full transparency, driving alignment."},{"_key":"27a770dcce26","_type":"flywheelBlurb","icon":"reinvest","text":"This creates organizational scale which allows us to reinvest in our core competence and spin the flywheel."}],"heading":"The Epsilon Flywheel"},"middleSection":{"_type":"aboutMiddle","content":[{"_key":"c0b25f59e705","_type":"block","children":[{"_key":"c0b25f59e7050","_type":"span","marks":[],"text":"Our Principles"}],"markDefs":[],"style":"h2"},{"_key":"33a87f2824fd","_type":"block","children":[{"_key":"33a87f2824fd0","_type":"span","marks":[],"text":"Fundamental investment skill is alive and well, but investment managers have entered a new era of competition. Yesterday’s alphas are rapidly becoming today’s betas, and the need to construct calculated portfolios with a sober understanding of behavioral biases is more important than ever."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"209729e0bf9e","_type":"block","children":[{"_key":"209729e0bf9e0","_type":"span","marks":[],"text":"The application of core quantitative investment principles to fundamental security analysis provides an opportunity for both managers and capital allocators to “have their cake and eat it too”; escaping the stranglehold of margin compression and heightened competition. This is achieved by circumventing aspects of the investment process which have traditionally been the high cost of doing business."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"},{"_key":"ad0576a82a01","_type":"block","children":[{"_key":"ad0576a82a010","_type":"span","marks":[],"text":"The need for active managers to reduce the impact of randomness in outcomes is increasingly vital in a hyperactive world where the alternative is free, liquid, transparent passive exposure. Big data and statistical inference offer opportunities to produce portfolios with superior and repeatable outcomes."}],"level":1,"listItem":"number","markDefs":[],"style":"normal"}]},"quote":{"_type":"aboutQuote","content":"Not only do we want to control for our own behavioral biases, we want to provide powerful incentives to allow our investors to break away from their own behavioral biases."},"team":{"_type":"aboutTeam","members":[{"_key":"5e82cb3d19ac","_type":"teamMember","bio":[{"_key":"7ef4bf3df715","_type":"block","children":[{"_key":"7ef4bf3df7150","_type":"span","marks":[],"text":"Faryan Amir-Ghassemi is a founder of Epsilon Asset Management. Prior to Epsilon, Mr. Amir-Ghassemi was a Director of Analytics and Quantitative Investment Strategies at Novus Partners. In that capacity, he worked with clients ranging from endowments and multi-billion dollar family offices to fundamentally focused multi-manager hedge funds, creating solutions around portfolio optimization and investment strategies. Prior to joining Novus, he was a Hedge Fund Analyst at Cambridge Associates, focusing on hedge fund research for the firm's institutional investor clients. Mr. Amir-Ghassemi graduated from the University of Maryland with a B.A. in English Literature, earning an Honors Citation in his major and a Scholar's Citation in Business, Society and the Economy."}],"markDefs":[],"style":"normal"}],"name":"Faryan Amir-Ghassemi","title":"Co-founder"},{"_key":"80580644a1e3","_type":"teamMember","bio":[{"_key":"1f1cac22c5f5","_type":"block","children":[{"_key":"1f1cac22c5f50","_type":"span","marks":[],"text":"Michael Perlow is a founder of Epsilon Asset Management. Prior to Epsilon, Mr. Perlow was a Quantitative Developer at Novus Partners specializing in investment strategy creation, quantitative analysis, and software development. During this period, he created much of the infrastructure for testing quantitative investment strategies, including back testing engines. Additionally, Mr. Perlow was a technical consultant for Athanor Capital, a New York-based hedge fund manager. Before joining Novus, Mr. Perlow was at Ipreo where he predicted trends in active managers' holdings using brokerage flow data. Mr. Perlow graduated as a Scholar All-American with a Bachelor of Arts in Mathematics and Economics from Skidmore College."}],"markDefs":[],"style":"normal"}],"name":"Michael Perlow","title":"Co-founder"},{"_key":"473494a5acca","_type":"teamMember","bio":[{"_key":"aef3fef7f274","_type":"block","children":[{"_key":"aef3fef7f2740","_type":"span","marks":[],"text":"William Cline is a Senior Advisor and seed investor in Epsilon. He is also a co-founder of Alcova Capital, a private debt manager based in New York. Prior to founding Alcova Capital in 2016, Bill founded Clovis Capital Management in 2002, a bottom-up, fundamental, concentrated long-short equity manager which at its peak had $2.8B under management. He served as Chief Executive Officer with responsibility for all non-investment activities at the firm. From 1995-2002 Bill was a Principal and Executive Vice President at Cramer Rosenthal McGlynn (CRM) where he served on both the Operating and Strategic Planning Committees. Bill earned a BA in Economics from Bucknell University, 1985. He is a Trustee and Board Member at The Evergreens Cemetery in Bushwick where he also serves on the Investment Committee."}],"markDefs":[],"style":"normal"}],"name":"William Cline","title":"Senior Advisor"}]},"topSection":{"_type":"aboutTop","content":[{"_key":"6e1c6ed59e07","_type":"block","children":[{"_key":"6e1c6ed59e070","_type":"span","marks":[],"text":"We use data science to establish rankings of domestic equity securities, akin to factor investing."}],"markDefs":[],"style":"normal"},{"_key":"0506615220dc","_type":"block","children":[{"_key":"0506615220dc0","_type":"span","marks":[],"text":"Unlike a value or momentum factor, our rankings are based upon the revealed skills of all active managers investing in domestic equities."}],"markDefs":[],"style":"normal"},{"_key":"1e4bc3dddb3a","_type":"block","children":[{"_key":"1e4bc3dddb3a0","_type":"span","marks":[],"text":"We access manager position-sets through public regulatory filings and test their portfolios for predictive signals."}],"markDefs":[],"style":"normal"},{"_key":"d052cf8a80be","_type":"block","children":[{"_key":"d052cf8a80be0","_type":"span","marks":[],"text":"We are quantitative in approach, but invest in low-turnover, fundamentally oriented securities."}],"markDefs":[],"style":"normal"},{"_key":"fc783fa5ad03","_type":"block","children":[{"_key":"fc783fa5ad030","_type":"span","marks":[],"text":"Our team came from "},{"_key":"fc783fa5ad031","_type":"span","marks":["9526fd567179"],"text":"Novus Partners"},{"_key":"fc783fa5ad032","_type":"span","marks":[],"text":", an industry leader in position-level data analytics for active managers."}],"markDefs":[{"_key":"9526fd567179","_type":"link","href":"http://www.novus.com/"}],"style":"normal"},{"_key":"71489f60bd2c","_type":"block","children":[{"_key":"71489f60bd2c0","_type":"span","marks":[],"text":"The Epsilon team has spent years working with large institutional investors to examine predictive signals in active managers. We have also spent nearly a decade focused on this data-set and the intricacies involved in optimally extracting its investment signal."}],"markDefs":[],"style":"normal"},{"_key":"395ee7e7323e","_type":"block","children":[{"_key":"395ee7e7323e0","_type":"span","marks":[],"text":"To read more on our philosophy, "},{"_key":"395ee7e7323e1","_type":"span","marks":["16d27e82cc12"],"text":"click here"},{"_key":"395ee7e7323e2","_type":"span","marks":[],"text":"."}],"markDefs":[{"_key":"16d27e82cc12","_type":"link","href":"/blog/why-position-level-analysis-matters"}],"style":"normal"}],"headline":"Epsilon is an asset management firm which pursues bottoms-up stock-selection alpha through a systematic investment process.","sideContent":[{"_key":"f0a5d7d8ef0a","_type":"block","children":[{"_key":"f0a5d7d8ef0a0","_type":"span","marks":[],"text":"QUOTES WE LIKE"}],"markDefs":[],"style":"h2"},{"_key":"5979f4dbd338","_type":"block","children":[{"_key":"5979f4dbd3380","_type":"span","marks":[],"text":"We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events. – Daniel Kahneman"}],"markDefs":[],"style":"normal"},{"_key":"56113327dc9c","_type":"block","children":[{"_key":"56113327dc9c0","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"}]}},"_type":"pageTemplate","option":"About"},"slug":{"_type":"slug","current":"about-us"},"title":"About Us","id":"2c94f4cd-2bfe-5270-9cf9-fb5e6f5f55ad","parent":null,"children":[],"internal":{"type":"SanityPage","contentDigest":"d676435e697c762ecadb7f5089343145","owner":"gatsby-source-sanity","counter":61},"__gatsby_resolved":{"slug":{"current":"about-us"}}},"text":"Learn More"},"summary":[{"_key":"5aa8e4c9bf87","_type":"block","children":[{"_key":"5aa8e4c9bf870","_type":"span","marks":[],"text":"So how do we deliver passive liquidity, transaprency, and fees with active alpha? By removing the expensive pursuit of fundamental security analysis. We make security selection decisions through big data analysis of regulatory filings. We tap into the collective wisdom of all active managers to distill their cumulative fundamental research. This provides tremendous cost advantages for our products, which we can pass on to our investors. 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Prior to Epsilon, Mr. Amir-Ghassemi was a Director of Analytics and Quantitative Investment Strategies at Novus Partners. In that capacity, he worked with clients ranging from endowments and multi-billion dollar family offices to fundamentally focused multi-manager hedge funds, creating solutions around portfolio optimization and investment strategies. Prior to joining Novus, he was a Hedge Fund Analyst at Cambridge Associates, focusing on hedge fund research for the firm's institutional investor clients. 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That bewilderment only fortifies our belief that behavioral bias is a persistent but all too often silent killer of investment returns. It terrorizes not only managers, but investors in those managers. Let’s unpack both:"}],"markDefs":[],"style":"normal"},{"_key":"b4076286d26f","_type":"block","children":[{"_key":"b4076286d26f0","_type":"span","marks":[],"text":"Investor Behavioral Bias"}],"markDefs":[],"style":"h2"},{"_key":"ac432a72aaf2","_type":"block","children":[{"_key":"ac432a72aaf20","_type":"span","marks":[],"text":"As a thought experiment, imagine you have decided to invest with a very secretive manager. The investment decision was underwritten by your extensive meetings with the manager, her sterling pedigree and impressive three year track record. The manager refuses to provide transparency into her holdings or proprietary risk models (beyond vague generalities / anecdotes) because it is sensitive information. What happens when performance hits a rough patch?"}],"markDefs":[],"style":"normal"},{"_key":"e30e62714aec","_type":"pageImage","altText":"Image of epsilon plot graph","image":{"_type":"image","asset":{"_ref":"image-ad0aab8d3482294dad72a92bc325b5d95d31d683-800x582-png","_type":"reference"}}},{"_key":"e8a7e254fcd7","_type":"block","children":[{"_key":"e8a7e254fcd70","_type":"span","marks":[],"text":"Chances are you, as the investor, are more likely to redeem at signs of trouble with a non-transparent manager. The reason is the Principal/Agent Problem is exacerbated by the lack of transparency. When humans cannot understand what is happening, they will revert to a stress response. Academic studies prove this to be the case, and the results are startling: the impact of investor timing (namely buying highs and selling lows) in underlying managers is twice as deleterious as the impact of management fees on performance1. While we cannot rewire human emotion that likely evolved out of our need to survive prehistory, we can provide incentives to break away from irrational decision making. We do this by demonstrating clearly that our investments are entirely process driven, and giving our investors perfect transparency into what they own. If this is the case, our performance is tied to the process, not to whim or reaction."}],"markDefs":[],"style":"normal"},{"_key":"a53890b1973c","_type":"block","children":[{"_key":"a53890b1973c0","_type":"span","marks":[],"text":"Manager Behavioral Bias"}],"markDefs":[],"style":"h2"},{"_key":"5d389008bb3d","_type":"block","children":[{"_key":"5d389008bb3d0","_type":"span","marks":[],"text":"We were recently speaking to a hedge fund manager about a persistent frustration with his analysts. The conversation went something like this:"}],"markDefs":[],"style":"normal"},{"_key":"55ffac1117a4","_type":"block","children":[{"_key":"55ffac1117a40","_type":"span","marks":["em"],"text":"Us: What is the most common response when an analyst’s starter position goes 20% against him/her?"},{"_key":"55ffac1117a41","_type":"span","marks":[],"text":"\n\n"},{"_key":"55ffac1117a42","_type":"span","marks":["em"],"text":"HFM: They say “the idea is 20% better” about 90% of the time."},{"_key":"55ffac1117a43","_type":"span","marks":[],"text":"\n\n"},{"_key":"55ffac1117a44","_type":"span","marks":["em"],"text":"Us: How often is that the case?"},{"_key":"55ffac1117a45","_type":"span","marks":[],"text":"\n\n"},{"_key":"55ffac1117a46","_type":"span","marks":["em"],"text":"HFM: Maybe 10% of the time…"}],"markDefs":[],"style":"blockquote"},{"_key":"4c4ce53d3631","_type":"block","children":[{"_key":"4c4ce53d36310","_type":"span","marks":[],"text":"This is just one of many examples of an agency bias: analyst pitches idea to PM, PM puts it in the book, idea goes against them, then the analyst is in a pickle. Admit failure and risk your job, admit uncertainty and look unqualified, double down and hope to cost average your way into the green. Door #3 sounds like a panacea when your career is on the line. These are highly trained, highly competitive people who don’t like admitting failure of uncertainty, even though investing is fundamentally a "},{"_key":"4c4ce53d36311","_type":"span","marks":["154cc33985d1"],"text":"Bayesian exercise"},{"_key":"4c4ce53d36312","_type":"span","marks":[],"text":" of discounting potential unknown outcomes."}],"markDefs":[{"_key":"154cc33985d1","_type":"link","href":"https://articles.alphatheory.com/pdf/How%20Do%20Hedge%20Funds%20Become%20Better%20Forecasters.pdf"}],"style":"normal"},{"_key":"672f50199ef7","_type":"block","children":[{"_key":"672f50199ef70","_type":"span","marks":[],"text":"Other examples of manager biases include availability heuristics and sunk cost fallacies. These metastasize because of "},{"_key":"672f50199ef71","_type":"span","marks":["em"],"text":"hubris"},{"_key":"672f50199ef72","_type":"span","marks":[],"text":": overtrading, clinging on to losers, over-riding stop-losses, making exceptions. Hubris is a hard characteristic to overcome; outside of being a robot or stoic, we believe in obviating the need by having all investment decisions handled through a systematic process."}],"markDefs":[],"style":"normal"},{"_key":"744a4e2ad5e0","_type":"block","children":[{"_key":"744a4e2ad5e00","_type":"span","marks":[],"text":"Why It Matters"}],"markDefs":[],"style":"h2"},{"_key":"4ce5a3bb2508","_type":"block","children":[{"_key":"4ce5a3bb25080","_type":"span","marks":[],"text":"If we can start with the intention of controlling for investor biases as well as our own, we give ourselves a greater probability of driving success, not only for our firm but for our investors. We take the responsibility seriously, hence why it is foundational to our thinking."}],"markDefs":[],"style":"normal"},{"_key":"97cb119ca2f0","_type":"block","children":[{"_key":"97cb119ca2f00","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"},{"_key":"e4803adc01b9","_type":"block","children":[{"_key":"e4803adc01b90","_type":"span","marks":[],"text":"1 – See:"}],"markDefs":[],"style":"normal"},{"_key":"d852f01b72db","_type":"block","children":[{"_key":"d852f01b72db0","_type":"span","marks":[],"text":"Brian R. Wimmer, Daniel W. Wallick, and David C. Pakula, “Quantifying the Impact of Chasing Performance,” Vanguard Research Note, July 2014."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"72205c8ef600","_type":"block","children":[{"_key":"72205c8ef6000","_type":"span","marks":[],"text":"Geoffrey Friesen, Travis Sapp, “Mutual fund flows and investor returns: An empirical examination of fund investor timing ability”, "},{"_key":"72205c8ef6001","_type":"span","marks":["em"],"text":"Journal of Banking & Finance"},{"_key":"72205c8ef6002","_type":"span","marks":[],"text":", Sep 2007"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"31d1548ad297","_type":"block","children":[{"_key":"31d1548ad2970","_type":"span","marks":[],"text":"Ilia Dichev, “What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns”, "},{"_key":"31d1548ad2971","_type":"span","marks":["em"],"text":"American Economic Review"},{"_key":"31d1548ad2972","_type":"span","marks":[],"text":", Vol 97, No 1, Mar 2007"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"c3bc48b6fd1b","_type":"block","children":[{"_key":"c3bc48b6fd1b0","_type":"span","marks":[],"text":"Ilia Dichev, Gwen Yu “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, "},{"_key":"c3bc48b6fd1b1","_type":"span","marks":["em"],"text":"Journal of Financial Economics (JFE)"},{"_key":"c3bc48b6fd1b2","_type":"span","marks":[],"text":", Aug 2009"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"2326fbb6825b","_type":"block","children":[{"_key":"2326fbb6825b0","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"normal"},{"_key":"8e7cd89d6f9b","_type":"block","children":[{"_key":"8e7cd89d6f9b0","_type":"span","marks":["em"],"text":"The information contained on this site was obtained from various sources that Epsilon believes to be reliable, but Epsilon does not guarantee its accuracy or completeness. The information and opinions contained on this site are subject to change without notice."}],"markDefs":[],"style":"normal"},{"_key":"6a9e57fb29ff","_type":"block","children":[{"_key":"6a9e57fb29ff0","_type":"span","marks":["em"],"text":"Neither the information nor any opinion contained on this site constitutes an offer, or a solicitation of an offer, to buy or sell any securities or other financial instruments, including any securities mentioned in any report available on this site."}],"markDefs":[],"style":"normal"},{"_key":"1a3847d0a01f","_type":"block","children":[{"_key":"1a3847d0a01f0","_type":"span","marks":["em"],"text":"The information contained on this site has been prepared and circulated for general information only and is not intended to and does not provide a recommendation with respect to any security. The information on this site does not take into account the financial position or particular needs or investment objectives of any individual or entity. Investors must make their own determinations of the appropriateness of an investment strategy and an investment in any particular securities based upon the legal, tax and accounting considerations applicable to such investors and their own investment objectives. Investors are cautioned that statements regarding future prospects may not be realized and that past performance is not necessarily indicative of future performance."}],"markDefs":[],"style":"normal"}],"datePublished":"2017-08-01","featuredImage":{"_type":"image","asset":{"_id":"image-9ab01e44c6d7b463ebb68720deff129b8eecd083-4863x2736-png","_type":"sanity.imageAsset","_createdAt":"2020-03-26T18:35:30Z","_rev":"Jk1HkXoAIFyd382ZSepYOy","_updatedAt":"2020-03-26T18:35:30Z","assetId":"9ab01e44c6d7b463ebb68720deff129b8eecd083","extension":"png","metadata":{"_type":"sanity.imageMetadata","dimensions":{"_type":"sanity.imageDimensions","aspectRatio":1.7774122807017543,"height":2736,"width":4863},"hasAlpha":true,"isOpaque":true,"lqip":"data:image/png;base64,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","palette":{"_type":"sanity.imagePalette","darkMuted":{"_type":"sanity.imagePaletteSwatch","background":"#8c5354","foreground":"#fff","population":0.23,"title":"#fff"},"darkVibrant":{"_type":"sanity.imagePaletteSwatch","background":"#b23c33","foreground":"#fff","population":0.22,"title":"#fff"},"dominant":{"_type":"sanity.imagePaletteSwatch","background":"#d0a3a3","foreground":"#000","population":1.04,"title":"#fff"},"lightMuted":{"_type":"sanity.imagePaletteSwatch","background":"#d0a3a3","foreground":"#000","population":1.04,"title":"#fff"},"lightVibrant":{"_type":"sanity.imagePaletteSwatch","background":"#fc84ac","foreground":"#000","population":0.01,"title":"#fff"},"muted":{"_type":"sanity.imagePaletteSwatch","background":"#ad5e5d","foreground":"#fff","population":0.68,"title":"#fff"},"vibrant":{"_type":"sanity.imagePaletteSwatch","background":"#e93f56","foreground":"#fff","population":0.17,"title":"#fff"}}},"mimeType":"image/png","originalFilename":"image.png","path":"images/fsepa19u/production/9ab01e44c6d7b463ebb68720deff129b8eecd083-4863x2736.png","sha1hash":"9ab01e44c6d7b463ebb68720deff129b8eecd083","size":2408788,"uploadId":"1Fr2e2QGQRZFKbOROTSG64VO9b6MrLw5","url":"https://cdn.sanity.io/images/fsepa19u/production/9ab01e44c6d7b463ebb68720deff129b8eecd083-4863x2736.png","id":"image-9ab01e44c6d7b463ebb68720deff129b8eecd083-4863x2736-png","parent":null,"children":[],"internal":{"type":"SanityImageAsset","contentDigest":"c8fc6f02ac8c85dd05a044d367456fbe","owner":"gatsby-source-sanity","counter":206}}},"overview":{"_type":"postOverview"},"seo":{"_type":"seo-tools","meta_description":"We’ve been told by colleagues that this is a curious primary objective for a new asset management firm, versus something more direct like performance and market analysis.  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Prior to Epsilon, Mr. Amir-Ghassemi was a Director of Analytics and Quantitative Investment Strategies at Novus Partners. In that capacity, he worked with clients ranging from endowments and multi-billion dollar family offices to fundamentally focused multi-manager hedge funds, creating solutions around portfolio optimization and investment strategies. Prior to joining Novus, he was a Hedge Fund Analyst at Cambridge Associates, focusing on hedge fund research for the firm's institutional investor clients. 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In investing, the dynamic between principal (LP) and agent (GP) has seen a change in sentiment in the last 10 years. There has been increased cynicism towards "},{"_key":"092246403a031","_type":"span","marks":["em"],"text":"heads I win, tails you lose"},{"_key":"092246403a032","_type":"span","marks":[],"text":" economic models. Like many hidden problems which become apparent when the tide recedes, PA has been a hot button issue in active management. Large institutions have "},{"_key":"092246403a033","_type":"span","marks":["bb640399960c"],"text":"come out"},{"_key":"092246403a034","_type":"span","marks":[],"text":" with "},{"_key":"092246403a035","_type":"span","marks":["71a71c9775ee"],"text":"proposals"},{"_key":"092246403a036","_type":"span","marks":[],"text":" and "},{"_key":"092246403a037","_type":"span","marks":["82420a349e27"],"text":"standards"},{"_key":"092246403a038","_type":"span","marks":[],"text":" to tackle these problems, but they chip away at the fringes of a broader problem, which are about control and trust. Let’s take a step back and discuss what are the most glaring issues as it pertains to PA problems in institutional investing."}],"markDefs":[{"_key":"bb640399960c","_type":"link","href":"http://www.pionline.com/article/20161226/PRINT/312269978/texas-pension-fund-taking-bold-step-on-fees"},{"_key":"71a71c9775ee","_type":"link","href":"https://hfm.global/hfmweek/uncategorized/albourne-to-launch-hedge-fund-price-discovery-initiative/"},{"_key":"82420a349e27","_type":"link","href":"http://www.theopenprotocol.org/"}],"style":"normal"},{"_key":"c6b54e6694b5","_type":"block","children":[{"_key":"c6b54e6694b50","_type":"span","marks":[],"text":"Fees"}],"markDefs":[],"style":"h2"},{"_key":"b7650422e133","_type":"block","children":[{"_key":"b7650422e1330","_type":"span","marks":[],"text":"Perhaps the elephant in the room is fees. This was not a huge topic when active management was the primary means of investing (before the proliferation of passive options), nor was there a clamor around alternative fees when they generated high median alpha to investors. As both dynamics have changed over time, fees have become centerfold in not only alternatives but traditional asset management. While there are myriad reasons why, fundamentally two things have occurred:"}],"markDefs":[],"style":"normal"},{"_key":"fca0fb6bf9d6","_type":"block","children":[{"_key":"fca0fb6bf9d60","_type":"span","marks":[],"text":"Beta has become effectively free"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"f7af4e7d7c82","_type":"block","children":[{"_key":"f7af4e7d7c820","_type":"span","marks":[],"text":"Alternative assets under management have grown, heightening competition and reducing consistency of firm-level outcomes"}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"4bcd974a9d4c","_type":"pageImage","altText":"Image of how alignment of interest unlocks performance potential","image":{"_type":"image","asset":{"_ref":"image-4a5ea6324a96d8d4f5dadaf3fba10ecfab3f33a7-1016x351-png","_type":"reference"}}},{"_key":"2b4adc0e8b02","_type":"block","children":[{"_key":"2b4adc0e8b020","_type":"span","marks":[],"text":"The traditional 2/20 model, which evolved almost out of habit rather than through transparent and competitive price discovery, is under significant threat, and so investors are increasingly skeptical to either high management or the very presence of incentive fees."}],"markDefs":[],"style":"normal"},{"_key":"b9dcb67aece3","_type":"block","children":[{"_key":"b9dcb67aece30","_type":"span","marks":[],"text":"Transparency"}],"markDefs":[],"style":"h2"},{"_key":"0e9a8340ba79","_type":"block","children":[{"_key":"0e9a8340ba790","_type":"span","marks":[],"text":"Several noted acts of "},{"_key":"0e9a8340ba791","_type":"span","marks":["dd47118cf805"],"text":"malfeasance"},{"_key":"0e9a8340ba792","_type":"span","marks":[],"text":" in the investment space put a heightened focus on transparency, but the fundamental PA issue is that the intellectual property that GPs use to generate alpha for LPs can be arbitraged once made public. For this very reason, there remains significant secrecy in practice, especially in many forms of quantitative asset management."}],"markDefs":[{"_key":"dd47118cf805","_type":"link","href":"https://en.wikipedia.org/wiki/Madoff_investment_scandal"}],"style":"normal"},{"_key":"7b74a44ab0db","_type":"block","children":[{"_key":"7b74a44ab0db0","_type":"span","marks":[],"text":"Liquidity"}],"markDefs":[],"style":"h2"},{"_key":"52af7ccb21f1","_type":"block","children":[{"_key":"52af7ccb21f10","_type":"span","marks":[],"text":"Winning liquidity concessions from LPs is another example of something that was acceptable for strategies that require a match between terms and underlying investments (think non-marketables), but transformed into a means of sheltering the profitability of the GP. While gates and rolling locks are on the decline, fund managers are still nervous about "},{"_key":"52af7ccb21f11","_type":"span","marks":["em"],"text":"grass is greener"},{"_key":"52af7ccb21f12","_type":"span","marks":[],"text":" LPs abandoning them at inopportune times and causing stampedes out of their funds. Liquidity as a PA problem is the most overlooked and can often be the greatest source of capturing structural alpha."}],"markDefs":[],"style":"normal"},{"_key":"5549f11fdb27","_type":"block","children":[{"_key":"5549f11fdb270","_type":"span","marks":[],"text":"Potential Solutions"}],"markDefs":[],"style":"h2"},{"_key":"3af423a7663b","_type":"block","children":[{"_key":"3af423a7663b0","_type":"span","marks":[],"text":"Ultimately, how adversarial these three are is a micro phenomenon; a function of the desirability of each GP in the eyes of the LP community. However, we believe this status quo leaves the door open for disruption from customer-centric GPs that can think long-term and those that can win long-term LPs."}],"markDefs":[],"style":"normal"},{"_key":"9e694678e662","_type":"block","children":[{"_key":"9e694678e6620","_type":"span","marks":[],"text":"By providing total concessions on liquidity, transparency, and fees, Epsilon hopes to generate significant scale, allowing us to further strengthen our offering (especially on fees), perpetuating our business model. We base this perspective on the almost antithetical approach Jeff Bezos and Amazon have taken in creating a modern powerhouse through this inverted, long-term approach."}],"markDefs":[],"style":"normal"},{"_key":"de7d5dae72d9","_type":"block","children":[{"_key":"de7d5dae72d90","_type":"span","marks":[],"text":"In short, we want to tackle some of the thorniest PA problems in the institutional investment space as a means of driving value to our clients and differentiating our value proposition. This requires deep and meaningful relationships with our LPs who we can trust to understand our process during the inevitable bouts of short-term turbulence. This gives us the fortitude to share full transparency and provide daily-liquidity, something we hope they would never need. As our scale increases, we can extend the olive branch by lowering fees to truly "},{"_key":"de7d5dae72d91","_type":"span","marks":["3db63929144d"],"text":"spin this flywheel"},{"_key":"de7d5dae72d92","_type":"span","marks":[],"text":". We didn’t invent this business approach, but we want to bring it to active management."}],"markDefs":[{"_key":"3db63929144d","_type":"link","href":"http://www.samseely.com/blog/2016/5/2/the-amazon-flywheel-part-1"}],"style":"normal"},{"_key":"9df1eb346551","_type":"block","children":[{"_key":"9df1eb3465510","_type":"span","marks":["em"],"text":"---"}],"markDefs":[],"style":"sm"},{"_key":"ce10e9c89ce9","_type":"block","children":[{"_key":"ce10e9c89ce90","_type":"span","marks":["em"],"text":"The information contained on this site was obtained from various sources that Epsilon believes to be reliable, but Epsilon does not guarantee its accuracy or completeness. The information and opinions contained on this site are subject to change without notice."}],"markDefs":[],"style":"sm"},{"_key":"4ff9c97a1621","_type":"block","children":[{"_key":"4ff9c97a16210","_type":"span","marks":["em"],"text":"Neither the information nor any opinion contained on this site constitutes an offer, or a solicitation of an offer, to buy or sell any securities or other financial instruments, including any securities mentioned in any report available on this site."}],"markDefs":[],"style":"sm"},{"_key":"175411eccdec","_type":"block","children":[{"_key":"175411eccdec0","_type":"span","marks":["em"],"text":"The information contained on this site has been prepared and circulated for general information only and is not intended to and does not provide a recommendation with respect to any security. The information on this site does not take into account the financial position or particular needs or investment objectives of any individual or entity. Investors must make their own determinations of the appropriateness of an investment strategy and an investment in any particular securities based upon the legal, tax and accounting considerations applicable to such investors and their own investment objectives. Investors are cautioned that statements regarding future prospects may not be realized and that past performance is not necessarily indicative of future performance."}],"markDefs":[],"style":"sm"}],"datePublished":"2017-08-01","featImageAlt":"Illustration of diamonds","featuredImage":{"_type":"image","asset":{"_id":"image-cbaf47951aaf512b20be66d816ca1c09239d787a-5315x2990-png","_type":"sanity.imageAsset","_createdAt":"2020-03-26T20:41:33Z","_rev":"OXqFd4jvDFgRJvhpr7nLrE","_updatedAt":"2020-03-26T20:41:33Z","assetId":"cbaf47951aaf512b20be66d816ca1c09239d787a","extension":"png","metadata":{"_type":"sanity.imageMetadata","dimensions":{"_type":"sanity.imageDimensions","aspectRatio":1.7775919732441472,"height":2990,"width":5315},"hasAlpha":true,"isOpaque":true,"lqip":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAABQAAAALCAYAAAB/Ca1DAAAACXBIWXMAAAsSAAALEgHS3X78AAABBElEQVQoz3VTURbDIAjz/pfd3jorgtYZhRbbtw9rAxIIaHjH3LCy1FaPo+1Z2qtj7LUejaQMvCVupWMptX36/3vXmG6LGpO4tIAP9QUnSOBMA5cFgxj7iRn+eYYUI1kgDfaEPsHucGJHoAkGlomldsIvScNCgJFsNINYSeCHHRiBSAobyZXIOIJlA4g3yfHRgqfk6CoeFS49VAlGkBy+JM7d1q7xZw9RatRyWSV/TXLxkmcLzsr/SlbjkEw6lFsLyA+NbEjXLTA/rlWw0tlNcZVcTsnEq1xbZn9IzjfJWVbJ2U35r2RUBmZUhBcAB5dJjteBK4QzsMEHG84CgxQxY8JlvpofADNex0qXTvwAAAAASUVORK5CYII=","palette":{"_type":"sanity.imagePalette","darkMuted":{"_type":"sanity.imagePaletteSwatch","background":"#227276","foreground":"#fff","population":0,"title":"#fff"},"darkVibrant":{"_type":"sanity.imagePaletteSwatch","background":"#1d6366","foreground":"#fff","population":0,"title":"#fff"},"dominant":{"_type":"sanity.imagePaletteSwatch","background":"#b2c4d0","foreground":"#000","population":1.68,"title":"#fff"},"lightMuted":{"_type":"sanity.imagePaletteSwatch","background":"#b2c4d0","foreground":"#000","population":1.68,"title":"#fff"},"lightVibrant":{"_type":"sanity.imagePaletteSwatch","background":"#c4ecee","foreground":"#000","population":0.01,"title":"#000"},"muted":{"_type":"sanity.imagePaletteSwatch","background":"#728993","foreground":"#fff","population":0.22,"title":"#fff"},"vibrant":{"_type":"sanity.imagePaletteSwatch","background":"#39bfc5","foreground":"#000","population":0,"title":"#fff"}}},"mimeType":"image/png","originalFilename":"image.png","path":"images/fsepa19u/production/cbaf47951aaf512b20be66d816ca1c09239d787a-5315x2990.png","sha1hash":"cbaf47951aaf512b20be66d816ca1c09239d787a","size":3391586,"uploadId":"u4Yg0bKhkPaj9wNImyLDDcuXLXX0WMDG","url":"https://cdn.sanity.io/images/fsepa19u/production/cbaf47951aaf512b20be66d816ca1c09239d787a-5315x2990.png","id":"image-cbaf47951aaf512b20be66d816ca1c09239d787a-5315x2990-png","parent":null,"children":[],"internal":{"type":"SanityImageAsset","contentDigest":"a346265da4aaf1d9d6e7df359c7a8538","owner":"gatsby-source-sanity","counter":208}}},"overview":{"_type":"postOverview"},"slug":{"_type":"slug","current":"how-alignment-of-interest-unlocks-performance-potential"},"summary":"Principal-Agent (PA) problems have persisted for quite some time.  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Prior to Epsilon, Mr. Amir-Ghassemi was a Director of Analytics and Quantitative Investment Strategies at Novus Partners. In that capacity, he worked with clients ranging from endowments and multi-billion dollar family offices to fundamentally focused multi-manager hedge funds, creating solutions around portfolio optimization and investment strategies. Prior to joining Novus, he was a Hedge Fund Analyst at Cambridge Associates, focusing on hedge fund research for the firm's institutional investor clients. 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Consistency puts fears to rest and provides flexibility. But consistency is hard to come by, especially when outperformance is the intent, and even more-so when market beta is a core component of return. So how can investors enjoy outperformance with consistency? It depends what type of consistency you are looking for and the investment strategy at work."}],"markDefs":[],"style":"normal"},{"_key":"2ffaa368d3d8","_type":"block","children":[{"_key":"2ffaa368d3d80","_type":"span","marks":[],"text":"Consistency of Alpha for Fundamental Portfolios"}],"markDefs":[],"style":"h2"},{"_key":"43ac9734b8ae","_type":"block","children":[{"_key":"43ac9734b8ae0","_type":"span","marks":[],"text":"We’re of the mindset that consistency with fundamental portfolios comes down to the quality of process, decision making, and the ability of the practitioners to evolve with the world. This is an extremely challenging hurdle given the behavioral biases that impact managers who witness success (fame, fortune, hubris) and their ability to keep the organization moving forward through time (talent, style, transient edge)."}],"markDefs":[],"style":"normal"},{"_key":"f7b2761c6321","_type":"block","children":[{"_key":"f7b2761c63210","_type":"span","marks":[],"text":"It’s equally hard for allocators to determine the true consistency of a manager. First, there is an inherent sampling bias of managers that are brought to the attention of the allocator (e.g., failures aren’t pitching large checks). The lucky evolutionary winners are lauded as examples, and their process is then rationalized as superior. What’s loss is often a true understanding of causal significance. To make matters worse, the “window of action” on hot ticket items is often at a period where statistically significant data can’t be collected. Act or miss out. Finally, some investment styles may not be conducive to demonstrating repeatability (e.g., concentrated/low number of positions). We think these are key reasons why time-weighted returns of successful GPs are invariably superior to the dollar-weighted returns of their LPs."}],"markDefs":[],"style":"normal"},{"_key":"4f6681dca1f2","_type":"block","children":[{"_key":"4f6681dca1f20","_type":"span","marks":[],"text":"Consistency of Alpha for Quantitative Portfolios"}],"markDefs":[],"style":"h2"},{"_key":"2caba41157ee","_type":"block","children":[{"_key":"2caba41157ee0","_type":"span","marks":[],"text":"Quantitative portfolios traditionally seek to arbitrage an anomaly in the market, or to ride a trend that has been deemed predictive of superior risk-adjusted future performance. If these signals are truly unknown to the broader market, they can be harvested by clever managers, providing a conduit for repeatable alpha. Truly smart quantitative firms layer "},{"_key":"2caba41157ee1","_type":"span","marks":["em"],"text":"orthogonal"},{"_key":"2caba41157ee2","_type":"span","marks":[],"text":" strategies upon each other, increasing the probability of consistent outcomes."}],"markDefs":[],"style":"normal"},{"_key":"b632d99f5f53","_type":"block","children":[{"_key":"b632d99f5f530","_type":"span","marks":[],"text":"Think about it this way: if you can run a casino and setup enough 51% winning games on top of each other, your ability to generate a consistent day-over-day profit increases as the number of uncorrelated games at play increases. This perhaps is the one silver bullet that investors can enjoy: the ability to increase investment consistency through the layering of truly orthogonal alpha."}],"markDefs":[],"style":"normal"},{"_key":"52ab0f9edce7","_type":"block","children":[{"_key":"52ab0f9edce70","_type":"span","marks":[],"text":"There are two problems with this from the investor’s standpoint. First, with a lack of transparency into how these anomalies are exploited, there will be heightened agency issues. Second, true orthogonality is like an uncertainty principle; extremely difficult to know it when you see it. With a lack of transparency into the anomaly, the LP is left trusting the GP, which causes a Principal-Agent problem. With an inability to be certain about true orthogonality, they may introduce significant tail-risk in aberrant market conditions."}],"markDefs":[],"style":"normal"},{"_key":"f6ee5cfc627a","_type":"pageImage","altText":"Image of Grinold and Kahn’s Fundamental Law of Active Management","image":{"_type":"image","asset":{"_ref":"image-91baaed0a5b9e2254416154ec6265967fa62073b-768x318-png","_type":"reference"}}},{"_key":"d70f6b239e07","_type":"block","children":[{"_key":"d70f6b239e070","_type":"span","marks":["em","strong"],"text":"Grinold and Kahn’s Fundamental Law of Active Management"}],"markDefs":[],"style":"normal"},{"_key":"4e6756a0709c","_type":"block","children":[{"_key":"4e6756a0709c0","_type":"span","marks":[],"text":"Epsilon’s Approach to Consistency"}],"markDefs":[],"style":"h2"},{"_key":"fad3082d6d4a","_type":"block","children":[{"_key":"fad3082d6d4a0","_type":"span","marks":[],"text":"Understanding consistency from both sides (fundamental / quantitative) allows us to marry the best of both worlds in our pursuit of consistency. We want to be entirely process driven and scientific in our approach so our portfolios can adapt to market evolution as well as competition. By applying the scientific method to fundamentally derived theses, we attempt to nullify our own behavioral biases and drive investment consistency. By looking at thousands of data points across dozens of time steps, we attempt to create statistically significant data signals applied across the entire universe of securities to create repeatable, consistent results. Ultimately, it is an approach aimed to drive superior dollar-weighted returns to our clients."}],"markDefs":[],"style":"normal"},{"_key":"019fdbf28050","_type":"block","children":[{"_key":"019fdbf280500","_type":"span","marks":["strong"],"text":"The information contained on this site was obtained from various sources that Epsilon believes to be reliable, but Epsilon does not guarantee its accuracy or completeness. The information and opinions contained on this site are subject to change without notice."}],"markDefs":[],"style":"normal"},{"_key":"f7a3dca770dd","_type":"block","children":[{"_key":"f7a3dca770dd0","_type":"span","marks":["strong"],"text":"Neither the information nor any opinion contained on this site constitutes an offer, or a solicitation of an offer, to buy or sell any securities or other financial instruments, including any securities mentioned in any report available on this site."}],"markDefs":[],"style":"normal"},{"_key":"1bf830cfccbc","_type":"block","children":[{"_key":"1bf830cfccbc0","_type":"span","marks":["strong"],"text":"The information contained on this site has been prepared and circulated for general information only and is not intended to and does not provide a recommendation with respect to any security. The information on this site does not take into account the financial position or particular needs or investment objectives of any individual or entity. Investors must make their own determinations of the appropriateness of an investment strategy and an investment in any particular securities based upon the legal, tax and accounting considerations applicable to such investors and their own investment objectives. 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