Damsel in Distressed with Dominique Mielle

apple

 

spotify

 

google-podcast

 

This episode of the FEG Insight Bridge features Dominique Mielle, well-known distressed debt investor, former partner and senior portfolio manager at Canyon Capital, and author of the book Damsel in Distressed: My Life in the Golden Age of Hedge Funds. After 20+ years in distressed debt investments, she published the first-ever hedge fund memoir by a woman. Dominique and Greg discuss what it was like to be the only woman in the room (and an immigrant, no less), what inspired her to write a book about her experiences, and why she decided to retire before 50. Dominique also explains why diversity is a key asset for hedge funds, how the recent changes in Fed activity are affecting the distressed landscape, and which American habit she simply cannot stand.

Chapters

0:00 - Intro

0:35 - Episode Overview

01:58 – Dominique’s story

04:04 – Defining distressed debt investing

06:46 – Breaking down the tools of the trade

10:15 – What types of debt can be distressed?

11:35 – Dominique’s shift from investor to author

15:29 – Being the only woman in the room

19:07 – The hidden asset of diverse perspectives

23:20 – Building resilience in the ups and downs of the market

28:23 – The impact of QE and QT on distressed investing

30:31 – Dominique’s take on diminishing returns in the hedge fund industry

34:56 – On retiring before 50 and life in retirement

38:20 – The one American habit Dominique can’t stand

 

SPEAKERS

Dominique Mielle

Investor and Author

Dominique Mielle is the author of Damsel in Distressed (Simon & Schuster 2021), the first hedge fund memoir by a woman. She was a partner and senior portfolio manager at Canyon Capital, a $25 billion hedge fund, where she invested for 20 years. In 2017, She was named one of the “50 Leading Women in Hedge Funds” by the Hedge Fund Journal and E&Y. Since retiring in 2018, she has been a full-time corporate board director and a contributor to Forbes. One of the only senior women in the hedge fund business, she played key roles in complicated bankruptcies, serving as a leading creditors’ committee member for Puerto Rico, and as a restructuring committee member for U.S. airlines in the wake of the September 11 attacks. She was a director and the audit committee chair for PG&E during its eighteen-month bankruptcy process.

Host

Greg Dowling, CFA, CAIA

Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.

Transcript

Greg Dowling (00:05):

Welcome to the FEG insight bridge. This is Greg Dowling, head of research and CIO at FEG, an institutional investment consultant an OCIO firm serving nonprofits across the U.S. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insights on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:35):

Today on the FEG Insight Bridge, we have Dominique Mielle, author of Damsel in Distressed. She is a 20-year-plus hedge fund veteran and somebody I have known for years. Dominique could always explain a complicated corporate restructuring, an aircraft securitization, or the waterfall of a CLO with ease, and often with biting wit. She takes the same approach to chronicling her career in the hedge fund industry with her very first book. Hear what it felt like to be the only woman around the table in this uber competitive, male-dominated industry; hear firsthand how this small cottage industry exploded into a multi-billion dollar mega business; and listen to stories about being in the trenches at a hedge fund during the tech bubble, 9/11, and the Global Financial Crisis. It was quite a ride, and we have her here today on the FEG Insight Bridge.

Greg Dowling (01:36):

Dominique, welcome to the FEG Insight Bridge.

Dominique Mielle (01:39):

Thank you very much for having me.

Greg Dowling (01:41):

It's been a long time, so I'm glad we can reconnect and tell your story. So you go from growing up in the suburbs outside of Paris to being a hedge fund manager in Beverly Hills with a bunch of old Drexel partners. How did that happen? Tell us your story.

Dominique Mielle (02:01):

That happened with many twists and turns, and I'm sure they would resent you calling them old by the way, if I might say. But essentially it happened because I wanted to see the world more than because I was interested in finance. I always start there because the stereotype of a hedge fund manager is usually a man who started trading when he was five years old and realized that there's an arbitrage between lemon and lemonade. That was certainly not my case. I wanted to be a beach bum in Tahiti. With a little bit of help from my parents, I realized that was probably not a good career path. I got a job for a bank, a French bank in New York, which then led me to become an investment analyst at Lehman Brothers for a couple years. Really finance was sort of not a path that I picked.

Dominique Mielle (02:55):

It was the path that got me to New York, which was a very exciting city to discover. It's only when I went to Stanford, to study for my MBA--I had a few classes that really opened up the world of investing of the buy side for me. And that's when I really decided that it was a super interesting, super thrilling job, very intellectual. I signed up with Canyon Capital in '98. It was this little scrappy venture with half a dozen people in an office that was the size of a conference room and $500 million in assets. I ended up staying 20 years. So it was a great adventure, if you will.

Greg Dowling (03:38):

Yep. And we were right alongside you for many of those years.

Dominique Mielle (03:43):

You were.

Greg Dowling (03:44):

And that's how we got to meet. I've always been amazed at how all of the different elements of distress debt investing kind of weave through your career, depending on where we are in the cycle and the different asset class. So maybe back it up a little bit for those listeners. What is distressed debt investing?

Dominique Mielle (04:08):

Distressed debt investing is investing in companies that are in trouble. It's really distressed and stressed. The only difference being how close they are to the precipice of filing for bankruptcy. So buying bonds or loans in set company in trouble. And that's really the beginning. Most people think it's vulture investing--the bird who preys on the dead carcass. And it surely starts there. That's a good image to start, but you are not going to make any money unless you have a very proactive role in what becomes of that carcass. If it becomes a Phoenix, that's the bingo moment. That's how you make money. Meaning, really the job entails not only buying the right loan, the right bond, and the right company, but then being an activist and thinking up a new capital structure, a new business plan, an emergence plan, if you will, to which all the stakeholders will sign up and put the company out of bankruptcy into the path of profit and a thriving new road for the business to grow. In essence, through that process, rendering the securities you bought at pennies on the dollar, much more valuable, and making money in that way. That's what distressed investing is.

Greg Dowling (05:31):

So good companies, bad balance sheet.

Dominique Mielle (05:33):

You know, it would be great if it was often the case that we have good companies, bad balance sheet, and it happens, but it is more often the case that these are not-so-good companies with not-so-good balance sheets. It's a bit of a mix, right? It's never a clear-cut situation. It's like, when you hear Warren Buffet say, "I like to buy a great company with a wonderful mode, at a very reasonable valuation." Well so do I, right? So do I. The problem is, there are very few, if any, that really fit that description. Usually there's something wrong, but more often there are many wrong things. So things that are wrong with the business on the left-hand side of the balance sheet and things that are definitely wrong on the right-hand side with the liability structure.

Greg Dowling (06:26):

I think it's such an interesting part of the hedge fund business because of all of the tools and horse trading that sometimes goes on. If you would look at--any listener would just Google organizational structure for either Lehman Brothers or Enron. I mean, they're crazy, right? Like you have to exact--you have to know where you want to attach, what the value is. This isn't as easy as just finding something and going, "Okay, I'll buy it." There's a lot of work that needs to be done. So maybe talk through some of the research that you need to do, and then maybe what are the tools to getting that return that you require?

Dominique Mielle (07:00):

So I think the way you described it is very good because it evokes a game of strategy, a game of risk, and it really is what it is. You have different constituents: the loan holders, the bond holders, the vendors, the shareholders. Sometimes you have stakeholders who are not even on the balance sheet. For example, in PG and E, where I was involved as a director, there's the California regulator, there's the California governor who has a say. All these people want a piece of the corporate value pie. So that's, if you want, the board game, you have all those positions and your job as a hedge fund manager is to look at it and decide, "Which piece am I going to be? Do I want to own the loan, the senior bonds, the secured bonds, the first lien, the second lien--there are oodles of securities. And sometimes you have two or three different positions in the same company, sometimes you're long and short.

Dominique Mielle (07:58):

And the great game starts when the bankruptcy is used to transform the business. Your job is that of a chess player, meaning you have to anticipate what the next move of your opponent is going to be. What is he going to do? How is he going to grab his piece of the pie? How do you maximize yours within the feasibility of the balance sheet and the legal rights and remedies of your instrument? So it's very much a detective work, meaning, what securities can do what, and a chess game of, "How do I move my pieces to win--eventually--the biggest piece of the value.

Greg Dowling (08:41):

It's so interesting, some of these story lines, and oftentimes you might be fighting against other hedge fund managers. Right?

Dominique Mielle (08:48):

Very, very often. Very often. The classic conflict is between bond holders and shareholders. Because shareholders essentially have a call on the company and bond holders have sold a put. One is long volatility, one is short. And volatility suddenly shifts when an event happens. It might be bankruptcy, but it could be a merger and acquisition, it could be a change in the market or a legal change in the business. And that pits two stakeholders, one against each other.

Dominique Mielle (09:21):

And by the way, that happens in very complicated capital structure. Like you mentioned, the Enron, the Lehman Brothers. Certainly in Puerto Rico, which was the biggest municipal bankruptcy ever. There were 19 issuers of $80 billion debt, each with their different idiosyncrasies. But it can happen in a very simple capital structure. PG and E had two layers--one bonds, one equity--and that's it. And this was one of the most fascinating bankruptcies that I've ever seen. So those conflicts are really what makes the job absolutely thrilling. I really want to say, this is a job that is incredibly fun, intellectually challenging, but really great fun.

Greg Dowling (10:04):

All that is all corporate credit. And really anything can be distressed. I know over the years we've talked about aircraft securitizations and other distressed instruments. So talk us through what can be distressed. I know it's a lot more. So is it anything?

Dominique Mielle (10:19):

The classic case is a company, but obviously a lot of times it extends to an entire industry. So if you think of waves of distressed in the past, it's been telecom in the 2001 area, post the dot com bubble bursting it was the telecom. In '08, literally the entire market was distressed. Then there was a period of municipal bonds distressed the entire market around 2014 in Puerto Rico. So neither a bond nor a state, really, but a territory became distressed--a very large one. As you mentioned, securitizations can be distressed, and they can include CLOs, they can include mortgages--obviously during '08--they can include aircraft securitizations. And it's, by the way, being very relevant today with all those aircraft bonds that include aircraft that were leased to Russian airlines, those planes have virtually disappeared into the vortex of Russia, and that's weighing very heavily on those bonds. And there's certainly a very interesting field of distressed either today or coming up very shortly.

Greg Dowling (11:35):

I saw that you wrote a book. So what made you go from investor to author?

Dominique Mielle (11:40):

Well, I retired in 2018 and then I realized pretty late in life that my industry, which I had a tremendous experience in and a lucrative and fun career in, was really unidimensional. Not that I never realized that I was the only woman there. I'm not totally stupid either, but it's something that I didn't pay much attention to because I was very focused on trying to make money, and that's a pretty full-time job already. But after I retired, having a lot more time, I just thought, "Wouldn't it be great if there was a female voice in the hedge fund industry? If there was a book about the woman's experience in that world?" And more than anything, if I could show some women out there, some foreigners, some minorities that it is a worthy job that it is possible to do very well, that they should consider it, and also to show people in the inside that they should seek more diversity. So it was both for young people wanting to try their luck at investing, but also hedge fund practitioners looking around their team, hopefully thinking, "Well, geez, maybe it'd be good to have more women," or whatever minorities you can think of. That was really the goal.

Greg Dowling (13:02):

And that's right. If I think about sort of Wall Street books, there's some great ones--Barbarians at the Gate, or Liars Poker, or When Genius Failed--and they are all written by men about men.

Dominique Mielle (13:14):

Exactly. They're all written by men and about men. And those, the ones you mentioned, are great. They're captivating. They're funny. But the books about hedge funds are a little bit different. They tend to be very preachy. They tend to be unidimensional in the way they stereotype and characterize a hedge fund manager. It's always some God of the market who never makes a bad trade. And it's just, there's a narrative around there that's neither very funny nor very relatable. And it's a shame, because I think it deters people who would be great at it, to start, and it also doesn't push actual hedge fund managers to think, "Hey, there's still a whole population out there that I should recruit from." You know, the hedge fund industry, their resources are people. Right? And think of that about an industry that restricts sourcing it's raw material to 10%, 15%, 20% of all available resources in the world. That doesn't make sense. So that's just what I'm trying to preach these days.

Greg Dowling (14:21):

There's certainly been a lot more books about this topic--about diversity in general. Maybe not as many... I don't know of any that are a female perspective on hedge funds, so yours is very unique. But sometimes they can be very serious books and you certainly cover a lot of serious topics, but it's a fun book, I will say. It's fun. It made me laugh on several occasions. So I don't want anybody to think, "This is interesting, but I don't know if it's--" It is totally readable and it's a lot of fun to read. So.

Dominique Mielle (14:53):

Thank you, Greg. First of all, it's got an enormous quality--it's short. So there you go.

Greg Dowling (14:58):

I like short books, yeah. Check it off the list. I read it.

Dominique Mielle (15:01):

Check it off the list. Number two, it is meant to be funny and light. I'm not preachy and it's certainly not a diatribe about the industry. I mean, far from me to say anything negative about the business that gave me the freedom to quit before 50 [laughs].

Greg Dowling (15:19):

It's a pretty good business.

Dominique Mielle (15:21):

A pretty good life.

Greg Dowling (15:22):

Yeah. It's not bad. Going back to an earlier version of you, where you're at that hedge fund table. Being oftentimes the only woman in the room, did you feel pressure to act differently?

Dominique Mielle (15:33):

It's hard to say because I am me, I am a woman. Would I have been pressured or not pressured had I been a man? That question is, you know--

Greg Dowling (15:42):

Yeah.

Dominique Mielle (15:43):

Impossible to answer. I did feel like I needed to be more prepared, more convincing, more forceful, more noticeable in my arguments, in my pitches, in my marketing pushes. That's how I felt. Was I wrong to feel that way is very subjective. But it certainly, at times, feels isolating to be the only one of your kind. Not only because it's hard to share experiences, but also because--and that happens to minorities a lot--it's sort of all eyes are on you to represent your category. So the greatest fear of a lot of women is if they have a losing trade, or in general if they're experiencing failure in their job, or a setback, the fear is, "Oh, well, what do you expect from a woman?" That it will reflect on the people who look and think like you. That is pressure, I think. That is pressure.

Greg Dowling (16:45):

You wrote the book to hopefully build more awareness of the industry. Is it just awareness? What are the other barriers you see for either women or other minorities to get into the financial services area, specifically investing/hedge funds?

Dominique Mielle (17:00):

Well, I think we need two things. One is for institutional investors like you guys to pressure for diversity. And I feel that it is happening. There is a very strong push, very strong forces to have changes occur. So I'm very optimistic about that. But you also have to have hedge funds themselves on the inside be persuaded that it is a good thing. And not that it's a good thing because of fairness or equality or some grand ideas. I'm not even talking about that. They need to be convinced that they'll make more money with a diverse investment team. There's been quite a bit of research around board of directors and companies being more profitable, making better returns, making better decisions with a diverse group, but there's been less of specific research about investing. It's coming. But a lot of it is dated. To just demonstrate that they'll make better investment decisions with a diverse group.

Dominique Mielle (18:06):

Intuitively, it makes a lot of sense. We are in the business of ideas, that's what we do. So it means we're in the business of looking at different perspectives, at different viewpoints. It would seem very logical that you'll achieve that with different people. But until and unless hedge fund investors are convinced of that, it's going to be very hard that to make a push. I'm hopeful. I think this year we'll have 12 new hedge funds launched by women, some of which have considerable scale. Twelve is both a lot and not enough, right? It's a lot because it's never been 12 before. It's not a lot because, again, if a few of those don't do well, there is going to be a lot of eyeballs on these women. So we need 100 or 50.

Greg Dowling (18:55):

And the attrition rate of most launches, it's about 50%, so.

Dominique Mielle (18:59):

Exactly.

Greg Dowling (18:59):

At the end of a couple years, you'll have six. That's still not a lot.

Dominique Mielle (19:03):

That's a good point, yeah. Statistically, it's not a lot.

Greg Dowling (19:06):

To make things even harder for yourself, not only are you a woman, but you are a French woman, so you're a foreigner. And I love in your book--a couple things in your book. One, I love some of the comments you made about mixing up French and American metaphors, that was pretty funny. But also from an investment perspective, you were talking about, "Hey, during the European debt crisis, being French, being European, I had a totally different perspective than my American colleagues and that actually helped with the investment process."

Dominique Mielle (19:37):

Yeah. I'm trying to prove the point that different people bring different opinions that can enrich the conversation and hopefully lead to better decisions. It's hard to pinpoint, right? How do you prove that somebody's opinion made an investment better? It's very hard, but this example you brought up is, again, very topical, because with the Ukrainian War, the topic of Europe has come up again: Does it strengthen or weaken the European community? And some American investors were of the opinion that it's going to weaken Europe considerably--the EU, as a political and economic construct. And I had the opposite opinion, because I come from the history of the EU, and the history is that it was conceived right at after the Second World War to make sure there would never be another war between Germany and France. So it really started with combining their steel industry. It became an economic venture, but it really was a politically motivated construct at the beginning. And I do think this deplorable conflict is going to make the EU stronger, not weaker. So do you want to have that opinion in your investment team? I think so. You may not put much weight to it, you may put a lot of weight to it, but it is a good thing to have it. Yes. Not to mention that I bring a whole lot of completely incomprehensible phrases and colloquial French expressions that really raises a lot of eyebrows.

Greg Dowling (21:24):

[laughs] There are some really great examples. But yeah, I think in your book you were talking about... Because there was a view, sort of call it 2010 era, where from an economic perspective, there were a lot of hedge funds poking around who thought the EU might collapse because of economic reasons. Having that view like, "Hey, that's only one side of the coin, it's more of a political experiment than anything else." That leads to better investment decisions. So that's just really good input. And I think what you've said, other people would be like, "Yeah, I've heard that." Well, I bet people hadn't heard that back then. That was still pretty--kind of a new idea for a lot of managers when they were wrestling with, "What about Greek banks? And what about Spain or Portugal?"

Dominique Mielle (22:04):

Exactly. You strictly viewed the EU as an economic group of countries in the same region. And when you observed that Greece was borderline coming out of it, so was Italy and Spain--they were having a lot of trouble keeping up with the economic mandate of the EU--then there was certainly a view that the whole thing would collapse. But if you started with the point of view that this was a very strong alignment of a political will to bring peace between people, that is a totally different point of view. And in fact, internally at Canyon, there were at least some people who said, "Well, Europeans, they've always hated each other. They fought two wars and they continue to fight. It's not like there was no European war after the Second World War--in Bosnia for example. They've always hated each other, so the EU will collapse at the first opportunity, and this is such an opportunity with the Great Recession." And I thought, "No, this is specifically because there were wars that we set up the EU." So a healthy debate is good for hedge fund.

Greg Dowling (23:18):

Absolutely. While you were in your 20 years at Canyon, you saw big ups and downs, which is actually what you want, right? Being a distressed debt investor, you want the 100-year flood to come every 4 years. And you were there for the tech bubble, for 9/11, for the Great Financial Crisis. You were there for quite a bit. How was it different earlier in your career versus later in your career? Take, maybe the tech bubble and 9/11.

Dominique Mielle (23:45):

In so many ways, they were different for me personally first, how I took them. You know, it makes a difference when you're a young analyst and when you're a partner, the telecom crisis was a great training ground. It was great fun. I didn't know any better, so it was an interesting time to be learning how to invest in distressed, because there was just so much of it. You would turn around and there was another telecom bust. 9/11 really gave me a career. That's what launched my first--really the first coverage that I owned at Canyon, which was aircraft and airlines, because no one else covered it and I covered it extensively. And it gave me employment for many years because virtually all American airlines filed for bankruptcy in the following five years. And these were large capital structures. There was a lot of money to be made, and a lot of money and a lot of investments that were really uncorrelated to the market. It was obviously at the 9/11 event, but then it continued to provide excellent opportunities. '08 was a very different animal. '08 was... Just use that word, it was a traumatizing experience. I don't know if it was for you.

Greg Dowling (25:01):

Oh, absolutely.

Dominique Mielle (25:02):

To me, '08 was personal. It felt absolutely debilitating to have such losses. And of course I could tell that everybody was losing money, so it wasn't just me, but it doesn't feel like that. It still feels like you are the idiot.

Greg Dowling (25:20):

Yeah.

Dominique Mielle (25:20):

You are the one who lost the money. And it really is a turning point, I think, in my career, where you had to sort of gain perspective. You had to think about your job and your process versus the results and realize that maybe the process was good, but you got caught in macro.

Greg Dowling (25:44):

Yeah.

Dominique Mielle (25:44):

Once you've had a year of 20%, 30% loss, you've certainly gained a lot of resilience. And that's what it did for me. I think it made me a better investor because I had a stronger stomach after that. I thought, "Anything can happen. I can stumble and I'll just get up and make it back." It's not a bad skill to have in life in general, to have a job where failure happens a lot and happens in a very harmful, debilitating manner and to have to show up the next day and get the job done and try to make it back. I think it's a pretty good life lesson. So '08 definitely was a very, very marking moment in both my professional and personal life.

Dominique Mielle (26:37):

After that, it's very interesting because the distressed market changed. '08 was really the first time that the Fed used QE, quantitative easing. People now feel or think that QE is one of the very traditional weapons or tools, let's say, that the Fed uses, but it really didn't start using it systematically until 2008. That's when it became sort of this go-to moment where any time there is a crisis, then the Fed will act very swiftly and very massively to help out the market. But this was new and it totally changed the bouts of distressed periods. Now when you look at the distressed market in 2020, when the pandemic hit, it was shallow, it was short, it was brutal and short. You had a trillion of distressed bonds in March, it was gone by June. So that really changes the game a lot, that nature of distressed waves, if you will.

Greg Dowling (27:46):

During COVID, I forget what the spread on high yield was, but it was nowhere near--it was probably 900 to 1100 was sort of the range that it got. Which, in previous crises, it would skyrocket and it would just stay there, so you had a longer opportunity to buy into that. And then we saw the tools that the Fed use in 2008, use them again but even add to it and buying corporate. And perhaps we've pivoted a little bit, we're talking about QT as we are doing this podcast. My guess is that if there's another crisis, we would pivot again and pivot back to QE. Do you think distressed investing will be the same now that we've discovered all these tools?

Dominique Mielle (28:29):

I don't think so. That's a tool that simply was not employed in 2001, not to mention that the distressed investor community was much smaller. So there was a lot of supply, not a lot of demand or not a lot of investors that were specialized in buying distressed, and the Fed was absent. Now the setup is the Fed is very active. The demand is huge. If you think of the last distressed fund raised by Oaktree, it's $15 billion. And there are few opportunities and they are fleeting. As you said, within 3 months, the plethora of distress bonds disappeared. If you think of the largest bankruptcy case in 2020, 2021, it was Hertz. Hertz is $26 billion, $25-26 billion in assets. It is tiny if you relate that to Lehman Brothers, which was $600 billion. You see the difference in scale. So we are at a moment where funds and hedge funds are very large, distressed waves are short, and the cases that make this distressed market are small. Hertz is small. And the next biggest bankruptcy was LATAM, the Latin American airlines, which was, I think, less than $20 billion. So these are small versus the capital that's going after those opportunities. I do think distressed investing has changed for the long term.

Greg Dowling (30:01):

Yeah. It seems like it's morphing into more capital solution products and the occasional PG & E. We're still going to have companies have issues with litigation or product liability, you name it. But it's not going to be this target-rich opportunity set like we saw in the past. At least it doesn't seem like it. Now things could change, but it's not a great setup for the distressed halcyon days of old.

Dominique Mielle (30:25):

I would agree with that.

Greg Dowling (30:26):

And maybe that's also a good segue into just the hedge fund industry in general. You write in your book as well, "Hey, if there's a lot of money chasing distressed, there's a lot of money chasing everything else out there." You were there during the good old days where returns were pretty incredible, and more recently they haven't been. What do you think is the malaise that's been impacting the industry as a whole?

Dominique Mielle (30:50):

Well, I think the main reason is that the golden age of hedge funds, which is the subtitle of my book, happened when hedge funds were relatively small and nimble. As the industry as a whole became essentially "the market," it's become virtually impossible to beat the market. If by definition you are the market, you're not going to beat it. Now that doesn't mean that some hedge funds cannot beat the market sometimes. Of course, there are always hedge funds that one year or the other outperform the market. But what it does mean is that the hedge fund industry as a whole, it's going to be very, very difficult to consistently, or rather if you want to use a statistical term "persistently" beat the market. And indeed we haven't seen the industry beat the market in the last 10 years on a consistent basis.

Greg Dowling (31:44):

Do you think if a firm shrunk their assets, does that help? Or is it just, there's just way too many other firms out there? Even if a firm is a little bit more focused, if they change their fee construct--is there anything that an individual firm can do? Or does it really need to be more opportunities and less money?

Dominique Mielle (32:02):

I think what a firm can do is adapt its fees to its performance. [laughs].

Greg Dowling (32:06):

[laughs]

Dominique Mielle (32:09):

I'm sure I'm preaching to the choir.

Greg Dowling (32:10):

That's easier to say once you've retired, right. To be fair.

Dominique Mielle (32:15):

Exactly. Of course. It's... To be fair, it's very easy for me to say, as you pointed out. Look, I think the industry has to change and will change in terms of the value that it's offering to investors. It used to be that the great deal between investors and hedge funds was, "+I shall pay you 1.5 and 20, so very hefty fees, and you shall outperform the market consistently." And I think that deal is pretty much broken. So then you start thinking, "Well, why do people invest for hedge funds?" Well, there are good reasons. Diversification is one, right? So how much should one pay for diversification? Is it 1.5 And 20? I'm not sure. But that is certainly a good reason to do that. The other is, there are a lot of structural reasons why one would make an allocation to a hedge fund.

Dominique Mielle (33:16):

It's mostly because somewhere, sometime, a hedge fund will beat the market. Maybe even a couple, three, four, or five years in a row. But then the investor must be nimble. It can't be a static allocation based on what a consultant says, and they basically say the same thing to all of their clients. It really has to be an exercise in hedge fund picking. As some hedge funds do stock picking, you've got to move your allocations very actively. Maybe on a yearly basis. That's a lot of work, but that, to me, would make sense. To move very swiftly between styles, between sizes. And then the last thing is there's been pretty consistent research that shows that emerging hedge fund managers--so the smaller size--do outperform bigger ones. So that would be also an avenue of thinking. But of course it comes with a lot of risk. As you said, those smaller hedge funds are also prone to flat out disappearing. So there's definitely more risk in them, but there is more return.

Greg Dowling (34:25):

Yeah, there's certainly evidence to that, that supports that. And the business is just getting bigger. I just looked at the recent hedge fund report or annual report that came out and it showed that the concentration in the top 20 managers, it's like 80% or 90% representing the entire hedge fund industry. Like many industries, it's definitely consolidated.

Dominique Mielle (34:45):

That's pretty astounding to me, those numbers.

Greg Dowling (34:48):

Yeah. The big are very big.

Dominique Mielle (34:50):

Right.

Greg Dowling (34:51):

And so all the small ones don't add up to much when you look at the entire pie. So, too many assets? Make too much money? Why did you retire? You retired so early. What was the driving factor?

Dominique Mielle (35:03):

I mean, 20 years is not so early. I think a change every 20 years is a good thing. I retired because I think the business changed considerably. And to be honest, it was less fun to me. And as you said, the incredible option that I had was that I was financially secure. And it's another thing that women don't really talk about, they don't really like to talk about money, but a hedge fund career can be incredibly lucrative. And that was certainly my case thanks to my former employer. So I found myself having less fun in an industry that was changing, where I was having difficulty reconciling what had been the value proposition in the past and what it is today. So I simply decided that I was probably not in the best position to invest the money of our investors.

Dominique Mielle (35:59):

I mean, it is a job that one should take very seriously. You are investing the money of pensions and insurance, and a lot of people who rely on that for their retirement, for their kids' education. So there's this image of hedge fund managers who make a lot of money for themselves and it quite true. I mean, I think you could safely say that hedge fund managers have made more money for themselves than for their clients, but yet, you have a lot of responsibility. You shouldn't take it lightly, and you should give it 150%. And I came to the point where I wasn't "feeling it," as my kids would say. [laughs]

Greg Dowling (36:38):

No, I think that's well said. You have to give it your 110%, you are a fiduciary. And maybe you milk it for a couple of years, but that's not the right thing for anybody, investors or yourself, so I think that...

Dominique Mielle (36:52):

It's not the right attitude. You've got to be hungry. You've got to be quick. You've got to be fresh. You've got to be competitive. And you've got to want it every day. If you find yourself sort of flip-flopping around any of those notions, I think it's time to go ride your horses. [laughs]

Greg Dowling (37:12):

So what else are you planning on doing on your retirement? You wrote a book. Is there a second book? Is there volunteer activities? Are you investing your own money? What else are you doing in your retirement?

Dominique Mielle (37:23):

So I am on the board of several companies and I really, really enjoy that work. As I mentioned, I was the chair of audit and the director of PG and E during their bankruptcy. Fascinating case. And that takes quite a bit of my time. Not all it. I do play a lot of polo and ride my horses. I travel and I generally, what can I say, I generally enjoy myself. And I am writing something else--to be continued--but I'm in the middle of writing something. Yes.

Greg Dowling (37:55):

Oh, I can't wait. I'm sure it'll be good. So if someone wanted to read your first book, where would one be able to find your book?

Dominique Mielle (38:02):

One would find my book on Amazon. Kindle, hardcover, and the audio book is coming in a few days.

Greg Dowling (38:09):

Oh, excellent.

Dominique Mielle (38:09):

That's the easiest way

Greg Dowling (38:10):

On your commute you can listen audible and...

Dominique Mielle (38:13):

What could be more fun? And I promise it's not my voice, so you don't have to deal with my accent.

Greg Dowling (38:20):

[laughs] So speaking of Frenchy things, you are pretty American in many, many ways, but being French is in your blood. So what's the thing that drives you nuts about your American colleagues or your past American colleagues? There's got to be some like American thing that just--oh, it offends your Frenchness.

Dominique Mielle (38:41):

There are many [laughs].

Greg Dowling (38:41):

[laughs]

Dominique Mielle (38:44):

I am a stickler for table manners.

Greg Dowling (38:48):

I read that in the book. You're appalled at Americans' table etiquette, using their forks and knives and putting things in their--grabbing things with their hands and putting them in their mouth, and...

Dominique Mielle (38:58):

I do think of the dinner table as a social, human, eating activity rather than a hunting ground.

Greg Dowling (39:07):

[laughs]

Dominique Mielle (39:09):

I'll leave it at that.

Greg Dowling (39:11):

I probably should never eat with you then. I probably would offend you immensely.

Dominique Mielle (39:15):

I think we've had a meal together. You're fine. You passed.

Greg Dowling (39:18):

That's-- I'm sure we have. I'm sure we have.

Dominique Mielle (39:21):

You passed. And by the way, it's like everything. There is no hard rule. So when you like somebody, you just look elsewhere.

Dominique Mielle (39:31):

Well, I know you're also a foodie, so give me your favorite restaurant in--let's do LA and then let's do around Paris.

Dominique Mielle (39:40):

Paris is easy. I just took my father who turned 89 years old for his birthday to a restaurant called Apicius, which I highly recommend. Absolutely excellent, impeccable service, beautiful surrounding. And in LA, believe it or not, I really cannot tell you a single restaurant because I just don't go out. I just cook and stay home. You know, I'm an old fart. I just never go out in LA.

Greg Dowling (40:08):

So what's your favorite meal to make at home?

Dominique Mielle (40:11):

I like, I cook a lot of French stuff at home. Very simple, easy. You know, I'm not a foodie, I'm a traditional.

Greg Dowling (40:19):

I think you're a foodie. I wouldn't say you're kind of a--I can't imagine you going to In-N-Out Burger.

Dominique Mielle (40:25):

No, no. That would not--that hasn't happened since I was a student and on a severe budget.

Greg Dowling (40:34):

This has been fascinating. I really think the first time anybody walked me through an aircraft securitization was probably you, walking through like the differences and the types of engines and planes and just really fascinating stuff. And you always have done it with a lot of great humor insights. So it's always been a pleasure, and therefore really enjoyed your book. So great book. For everybody out there, if you want something quick and easy to read Damsel in Distressed.

Dominique Mielle (41:03):

Thank you, Greg. That's so nice of you.

Greg Dowling (41:06):

Oh, thank you, Dominique. It's been a real pleasure. If you are interested in more information on FEG, check out our website at www.feg.com and don't forget to subscribe to our communications so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these to be FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views and opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of their firm or of FEG.

 

DISCLOSURES
This was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Past performance is not an indicator or guarantee of future results. Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. The views or opinions expressed by guest speakers are solely their own and do not represent the views or opinions of Fund Evaluation Group, LLC.

WANT TO RECEIVE MARKET UPDATES & PODCAST NOTIFICATIONS?

Join other institutional investors receiving FEG’s updates, including market perspectives, white papers,
podcast episodes, and event invitations.

 

Subscribe Now