Bill Kerr, global head of Sidley’s Investment Funds practice, sat down with Alec Litowitz, founder and CEO of Magnetar Capital, to discuss Alec’s career and the evolution of the firm, which has approximately US$13 billion of assets under management. Kerr led the discussion, which touched on everything from decision-making and the private funds industry to the importance of financial literacy and the value of a law degree. In addition to running a successful company for the last 15 years, Litowitz is a real estate investor, venture capitalist, and philanthropist, as well as an elite endurance athlete.
THE SUCCESS OF PATTERN RECOGNITION
- When it comes to innovation, Litowitz’s greatest strength, he believes, is his ability to recognize patterns.
- There is inherit bias in the way we perceive things. No one sees data points as they really are. Everyone brings preconceived notions to data analysis, so perspective becomes important. A good dose of self-awareness and introspection enables contextualization.
- Bringing a beginner’s mind to a problem is important, as it allows you to look at a problem with a fresh perspective, unencumbered by past experiences. In a beginner’s mind there are many possibilities; in an expert’s, there are few.
- Disrupters such as Airbnb, Amazon, and Netflix succeed with a beginner’s-mind approach.
FAIL OFTEN, FAIL QUICKLY
- Failure must be an option. Litowitz believes there is no right or wrong answer; only in hindsight do the answers become clear.
- Think about possibilities and probabilities like a Bayesian decision tree and navigate it appropriately. There is no perfect node, but don’t stay too long or jump too fast. You have to wander around to eventually get to the right place.
- Look for better risk rewards. Use your intuition. It is your conscious talking to your unconscious.
- Take a maniacal and relentless approach to reassessment of where you are. Constantly reassess and poke at assumptions to make sure you are on the right path.
- A graduate of MIT, Litowitz was drawn to the characteristics of the private funds industry, a complex field with patterns everywhere.
- There is an immediate feedback loop that tells you whether you are right or wrong.
- It’s both quantitative and qualitative, and is like a constant game of chess where you maneuver around for new data points.
- Litowitz learned early on that success is not about putting on a series of trades, but about the business of the business, about building processes and resiliency into your business.
- The vision for Magnetar — which gets its name from astronomy — was simple: find investments that were less crowded and identify where there were gaps between traditional strategies.
- Taking the firm’s energy franchise as an example, Litowitz described the constant evolution of the firm. There were broad waves of change in the energy industry. In the 90s, it was structural.
- There was an opportunity for energy independence in the United States. Magnetar became a large investor in midstream infrastructure. It was about a disruption occurring and feeding into that disruption.
- Now we are in the second wave of energy independence. It is about renewables and decentralization. Magnetar is focused on climate change, renewables, and the future of energy.
- Success requires not staying on one node too long and changing and adapting to opportunities.
THE INTERSECTION OF INNOVATION AND LEGAL COMPLIANCE
- You want someone who has the confidence to make decisions with imperfect information.
- Legal compliance is an incredibly critical role at any firm. You need to earn and keep the trust of all stakeholders.
- Litowitz said he believes strongly in the combination of law, ethics, and morality because the law is constantly changing, and how you interpret the law comes down to character. Character is what earns respect.
- The most valuable teams within legal and compliance are capable of thinking in probabilities and possibilities and not certainties.
- Legal and compliance can empower business creativity when there is adaptation. Stasis is death.
- Take the existing set of tools that a lawyer or compliance officer has and think about how to use them to solve new problems.
THE VALUE OF A LAW DEGREE
- A law degree is an incredibly disciplined skill set that empowers you throughout your career, said Litowitz.
- The son of two psychoanalysts, Litowitz originally wanted to be a doctor and contemplated a pre-med education but, on the advice of his father, ended up going to MIT, where he studied mathematics and anthropology.
- After college, he went on to get a JD, MBA, even though he knew he didn’t want to be a practicing lawyer.
- His law background, he said, gives him the ability to interpret things better and see issues others might not. It has been invaluable in all stages of his career.
APPLYING THE BEGINNER’S MINDSET TO PHILANTHROPY
- Litowitz’s approach to philanthropy is to try to even the playing field of opportunity. See a problem nobody is quite solving and solve it.
- Financial education for youth became a focal point of his about 10 years ago when he founded Magnetar Academy, a financial education program that served Chicago-area high schools.
- Litowitz believes there should be a federal standard for financial literacy. Every graduating high school student should have a financial education, he said, because they’re going to need it for the rest of their lives.
- In 2016, the Magnetar Capital Foundation partnered with the University of Chicago STEM Education to develop a best-in-class 65-hour financial education curriculum called finEDge, which they’re working to scale nationally.
The evolution of traditional asset management
- We’ve seen the migration from active to passive management.
- We don’t have benchmarks anymore. Instead of great stock-pickers, we have models and products that reflect the change in our understanding.
- Performance attribution is key. What is driving someone’s returns? What are our benchmarks; moreover, can we create investable benchmarks?
- If we get investable benchmarks, we democratize access. It shouldn’t be just wealthy people who have access to alternatives like venture capital and private equity.
- With investable benchmarks, you get a better understanding of who is generating excess returns and can provide access to it to a broader range of people.
- There are a lot of pros and cons to SPACs, but Litowitz has invested in them since 2008.
- SPACs democratized access. For the most part, he said, these are venture-backed companies that are going public, and they’re probably going public earlier than they might have before. They add stocks to the universe, democratizing access in the venture space, particularly in areas that are disruptive, like climate change, technology-related companies or space, for example. It increases the funding of disruptive change.
- Democratization of access and funding is good, but there needs to be safeguards. Is proper due diligence being done? What are the risks?
- Recent news involving Reddit and Robinhood highlights the dangers of access to financial markets and products without knowledge.
- You need an education from people with the right incentives.
- Magnetar is investing in financial education to help people appropriately make use of expanded access to financial markets in order to better financial health, opportunity, and long-term well-being.
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