“Derek is fearless, he works hard, he is creative and curious but above all he has an unrivaled talent for building a wealth of key relationships and maintaining them over decades. His team has an edge because they eventually arrive at the truth by triangulating with Derek’s network.”
—David Villa, Executive Director and CIO, State of Wisconsin Investment Board
Derek Drummond’s 19-year career has landed him in one of the most consequential positions for the State of Wisconsin Investment Board – portfolio manager for alpha generation in the public markets, with direct responsibility for more than $20 billion in assets. Drummond led the charge for the board’s inaugural allocation to hedge fund drawdown structures by demonstrating the high return potential when deploying capital in tumultuous market environments and being a liquidity provider for investors who have no choice but to sell.
His team works diligently to understand the true drivers of risk and return in its portfolio, and has the systems and resources to be knowledgeable and collaborative partners. They have developed a very wide network and invest time in continually cultivating it to stay informed on whatever is going on in the business.
Drummond joined the board after serving for about a year as head of alternatives investments at a San Francisco-based sovereign wealth management company, a portfolio manager for Golden Sun Capital, and vice president of investments at Tactical Allocation Services.
He holds an MBA from the University of Wisconsin, and is a Chartered Alternative Investment Analyst license holder. His colleagues coin him a “fearless, creative and curious” hard worker who has an eye for building long-lasting relationships. Drummond talks with CIO about his experiences thus far, and his plans for the future of Wisconsin’s board.
CIO: What makes 2019 an interesting investing climate? How are you handling it?
Drummond: This year started out very different than we thought it would, honestly. The return of the “Fed put” has changed our appetite for risk in the intermediate term, with the understanding that the quick bouts of volatility like we have seen over the last year or so are here to stay. It’s a really interesting environment because there are no fat pitches, yet at the same time, there is lots of change going on in the world, so trying to identify the regions, asset classes, and strategies that will outperform is an interesting puzzle to solve. SWIB is tackling it by staying the course but developing a “playbook” for when things get dislocated and we can act quickly to shift the portfolio. In alpha space, we are increasing breadth in our regional exposure, we’re working more than ever on unique uncorrelated strategies, and we are partnering with a few key firms to develop strategic partnerships to bring alpha ideas to our internal teams.
CIO: After this year, what are the largest opportunities and the largest threats you see on the horizon?
Drummond: The largest opportunity I see is further integrating our internal and external efforts, either through more coinvest, knowledge share, or what we call “structural alpha.” We have a few tricks up our sleeves that we think are on the cutting edge of how our firm interacts with external managers and the street that we believe make us better and help our clients in ways we just haven’t had the technology for previously.
There are lots of threats out there. My personal biggest concern for the investing community is simply the forward outlook for a policy portfolio over say, the next five to 10 years. Beta is just not going to get you where you need to be alone, one needs solid alpha to hit our long-term targets.
CIO: How did you arrive at your current position? And why did you choose this part of the financial services industry?
Drummond: I most certainly didn’t come up in this business the normal way. I have wanted to be in the investment industry for as long as I could remember. My grandmother gave me “Predators Ball” and “When Genius Failed” when I was 16 and I was hooked (apparently by blowups.) The idea that markets were not perfectly efficient and that through hard work, creativity, and flexibility one could capture those inefficiencies was amazing to me. I finished my undergrad degree a little early, so I went to work for a wealth management firm as an intern and my project was to “figure out these things called hedge funds.” As we built our first funds and grew our business, I was fortunate enough to meet some of my lifelong friends in this industry that have gone on to do amazing things in and out of finance. Together we learned, usually the hard way, how to think about risk and return, portfolio construction, patience and character.
Ultimately when I moved on from that business, I developed the view that the people who could benefit from the flexibility and diversification of alternatives the most were the people that have historically not been able to access these investments, and so a pension was the ideal next move for me. I was incredibly fortunate to yet again to find a great seat at SWIB, an organization truly like no other. The liability structure, the governance structure, the talent, and the leadership make it one of the most forward-thinking and fun places to work. The adage of “surround yourself with people smarter than you” has worked very well for me over my entire career and I’m very fortunate for the opportunity to work with some of the best in the business. We’re a competitive bunch at SWIB, we like to win, and we like to learn, and so every day is fun.
CIO: What was the most important strategic allocation of your career?
Drummond: I have two. The first investment I ever made when I was 21 was with one of the world’s greatest multistrategy firms, and we still have a material relationship today. They have helped me appreciate what partnering with hungry, humble, and smart people really means, and that there really is repeatable edge in the market if you work hard enough (and that sometimes you get what you pay for… sometimes…)
The second was a decision myself and many of my colleagues made when we decided to move on from our first job out of college because of an investment we didn’t believe in. Learning that no one investment is so essential, that there is always another way to make money, and that you can’t be emotionally tied to an investment has been a lifelong lesson I have learned (again, sometimes the hard way.)
CIO: Tips for money managers who want to work with you, especially what not to do.
Drummond: If we say no, going to our boss and asking them to make us take a look again almost ensures I won’t.
Other than that, just be intellectually honest about what’s going on and what you are trying to deliver. My team is going to figure it out anyways, so let’s save everyone time and just call it what it is. You’ll have a much better probability of success if you know how we think, understand our needs, and try and provide a thoughtful, high-quality solution at a fair price.
CIO: Biggest goof a money manager has made with you?
Drummond: A manager threw a chair at me once a very (very) long time ago.
CIO: Who in the financial world would you like to have lunch with and why?
Drummond: David Shaw. He has built an enduring cutting-edge finance business and gone on to work in various scientific fields, stretching research boundaries. I just think it would be a really engaging discussion that could help me better understand how to think about solving problems creatively.
CIO: What are changes you’d like to see the institutional investing community make in 10 years?
Drummond: Two things. I think pensions and sovereign wealth funds are going to be the new warehouses of risk where banks used to serve that purpose. That’s both a very intriguing and scary prospect. A lot of the business that banks used to participate in are very profitable and ideal for a permanent balance sheet. I think there is going to be a renaissance for large, sophisticated asset allocators over the next 10 years in terms of the depth and breadth of what they can do, and it will be to the benefit of their clients. However, my concern would be that pensions take on these risks without the appropriate systems or staff to understand and manage the risks.
Because of my DNA, I’d like hedge fund managers to go back to being hedge funds. Investing in the cracks, delivering on the promise of uncorrelated, idiosyncratic returns, etc. This isn’t entirely their fault; institutional investors have forced many managers to be so tightly constrained that the value proposition doesn’t work anymore. I think if managers knew that investors had the appetite, tolerance, and time horizon for opportunities and risk to play out, things may look different than they do now, to everyone’s benefit.
CIO: What are your hobbies not correlated to work?
Drummond: I am an avid endurance athlete. I have been running long distance since grade school, but any event that looks terrifying or painful seems to call out to me. I try and do one or more Ironman events every year with my wife, and I did the Leadville bike ride with one of my closest friends and best allocators I know, Ben Bronson (he handily beat me). I’m not fast, but I can go in a straight line for a long time while I try and estimate monthly performance in my head.
