Financial Engineers Killed the Art of Investing

The first few explosions from the protests in front of the nearby Greek parliament building didn’t faze the patrons in the bar of Athens’s historic Hotel Grande Bretagne in Syntagma Square. Cullen Thompson, co-founder of Bienville Capital Management, a boutique investment firm, remained deep in conversation with his partner Ralph Reynolds, a reporter, and a Greek economic consultant about lawmakers voting on a package of economic reforms for Greece, which has been in and out of recession for almost eight years. The vote on the reforms came just weeks before a meeting of European finance ministers who planned to assess whether the country had made enough progress to jump-start its economy and get its third round of bailout loans.

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Looking out at the Acropolis framed in lights against the nighttime sky, Thompson told the group, which included a local power broker and Dimitris Valatsas, a consultant at macroeconomic and geopolitical advisory firm Greenmantle, about the need to be on the ground, away from the groupthink in New York that was prompting hedge funds there to sell off Greek bank stocks. Bienville started investing in Greece nine months ago.

It took a series of increasingly louder blasts before heads bobbed up and the bartender and a few well-dressed customers finally went to a balcony and peered over the edge to see if there was anything to worry about on the street below. Despite the noise, all they saw was an exhausted group of demonstrators — made up primarily of striking workers who had shut down public transport all day to protest the vote — now milling around the square.

It was a sharp contrast with 2011. Pointing out the window, Valatsas, who focuses on European macro and energy economics, described how Athens was burning then, including the neighborhoods in the hills to the west of the Acropolis and in the square below, which housed one of the country’s biggest banks. Tens of thousands of people raged in the streets, furious that the European Union and the International Monetary Fund were demanding tax hikes and punishing salary cuts in return for money to keep the country running amid its crushing debts — and that the Greek government was acquiescing. Valatsas smiled at the relative calm below.

Five thousand miles from Athens, many investors fear Greece has made few reforms and that the country will go back to its old ways once the so-called troika — the European Commission, the European Central Bank, and the International Monetary Fund — are out of the picture, say sources familiar with foreign holders of securities in the country. Investors also don’t trust the banking system and its regulators’ plan to reduce exposures to troubled loans. They still see Greece as a leftist country unable to take steps like foreclosing on homes with unpaid mortgages. In reality, the country has implemented far-reaching changes to do just that. That logic is fueling rumors every few weeks that regulators will force Greek banks to recapitalize and jeopardize the country’s emergence from the bailout. As a result, investors continue to starve the country of capital and pour money into markets and securities that are at highs, according to many measures.

Bienville, which runs a series of opportunistic funds, including ones focused on Argentina and Brazil, sees a different story. Like Argentina and Brazil, Greece has become what Thompson calls postpopulist.

“They had a flirtation with a leftist populist government — [Alexis] Tsipras and his Syriza party — which proved disastrous,” says Thompson, 40, who is happily pulled into intellectual arguments ranging from reflexivity in the financial markets to the relationship between indexing and populism. “The Greeks now accept reality and realize there is no magical, easy way out.”

Greece, as a result, has made profound macro adjustments — the country is running a 3.5 percent budget surplus and has reduced its current account deficit from 15 percent to almost nothing — and structural reforms that could economically benefit the country for years in a startling turnaround for the beleaguered country.

But it’s a point lost on most active managers, who only pay lip service to being contrarian and identifying ideas that others have missed. Instead, they’ve shaped their strategies to fit into some version of the endowment model that most big pension funds and other institutions have been using to guide their investments since the early 2000s. That’s when David Swensen, chief investment officer of Yale University’s endowment, not only survived the bear market but posted outsize returns by using an asset allocation model that emphasized allocating big slugs to alternative fund managers, including hedge funds. Enamored of its success, other institutions quickly decided to copy what became known as the “endowment model,” setting off an almost two-decade race to invest in alternatives managers.

Now it’s become conventional wisdom to invest like Yale, even though the evidence of what effect this has had on hedge fund performance is clear: As capital flooded hedge funds, their returns steadily decreased, according to research from Schroders. The upshot: Pension funds and endowments — with active managers as their willing accomplices — have sought to transform investing into a process that can reliably squeeze out alpha, only to commoditize it and drive down returns.

Looked at in this context, Bienville is something of a throwback. The firm is taking an unconventional approach to investing, regardless of the trillions in institutional money using the endowment model and similar asset allocation theories. In short, Bienville is trying to resuscitate investing’s creative spirit.

Thompson, Reynolds, and partner Billy Stimpson founded Bienville in late 2008 as a family office, including Stimpson’s family, which ran a 145-year old timber business. Instead of just allocating money to a Morgan Stanley or other investment firm, Bienville wanted more control over decision-making and the ability to curate ideas for its clients. That’s where the founders got the idea to build a network of hedge fund managers, Silicon Valley entrepreneurs, and others. In 2010 they raised their first fund; after that was successful, they started getting the attention of a quiet but powerful group of investors and launched a series of opportunistic funds. They rolled out subsequent funds to invest in Argentina, Brazil, and Greece, all of which were experiencing macro distress and undergoing political and policy changes. Bienville uses both macro research and bottom-up fundamental analysis and thinks that the two disciplines can’t be used separately. Brown University, the University of Oregon, and Texas Children’s Hospital are anchor investors in the new Bienville Global Opportunities Fund, which is Bienville’s first fund that will invest in multiple ideas and which is based on Bienville Direct, a strategy offered to Bienville’s family office clients. That strategy has returned an annualized 13.6 percent net of fees.

To Thompson and his partners, one of the only sure bets to generate outsize risk-adjusted returns is to be a contrarian and look in more complex and ignored markets for opportunities. Knowing that investors wouldn’t stop believing in constructs like the endowment model anytime soon, Bienville used some of the herd behavior to its advantage.

If investors were gravitating to easy-to-understand markets, the firm would go into complex situations; if investors wanted managers to do the same thing over and over again, it would be willing to go into investments that didn’t lend themselves to repeatability, such as Greece. If investors wanted short-term access to their money, it would employ two-year or longer lockups so it could take advantage of managers being forced to sell assets at tough times.

It’s an elegant solution for many investors that have flexibility. But it’s also been a tough sell for Bienville. For one thing, the model doesn’t scale. And it doesn’t meet the seemingly desperate need of institutional investors to shoehorn every investment in their portfolios into a tidy category.

“Over the years, our style — the combining of macro and micro analysis among other things — left us in this gray area within the industry,” Thompson says. “Most funds do one or the other. So, from a business development standpoint, it’s purgatory. We knew we didn’t fit in anyone’s style box. But in a way, we loved it.”

Jay Namyet, chief investment officer of the University of Oregon Foundation, says institutional investors need to figure out a way to take advantage of firms like Bienville, which are willing to give up something — namely, size — to go after interesting and lucrative investments.

“With stocks pretty expensive and bond yields pretty meager, merely asset allocating is not going to achieve what we need,” Namyet says. “We’ve said for years that we’re looking for special niches and special people. Bienville is one of them.”

Back at the Hotel Grande Bretagne, the Bienville group headed down to the lobby. Though the protests had thinned even more, the hotel didn’t take any chances letting people out the front door. That’s not surprising given that some burned-out buildings still remain just around the corner. A smiling bellman led a group of bar patrons and hotel guests down some stairs, through the basement, past workers in the laundry and a few employees sitting on chairs in shabby corridors, and out the rear exit of the hotel. Emerging from an alley, the group found itself on an empty downtown street. Almost on cue, police in riot gear appeared from another street, in no rush to get to the protest.

“Most investors don’t like thinking about smaller economies in the middle of big political regime changes and what these countries will be like when they stabilize,” says Thompson. “It requires a lot of resources and time on the ground to witness a force like populism being discredited.”

  • Institutional Investor