“Tony Caruso is a leading light among the emerging investment leaders of tomorrow. Tony already has an outstanding reputation as a professional and uniquely gifted investor, which includes highly effective professional collaboration, superb risk management, and the curiosity and care that the best industry leaders always have. Already, Tony has had an influence on our entire fund as his emerging knowledge, unique wisdom, and disciplined objectivity are increasingly critical to UTIMCO’s key decisions. There is no doubt that Tony Caruso will soon emerge as an impactful investment leader here in Texas, and beyond … and the investment world, and the people and institutions that we all serve, will undoubtedly be much better for it.”
—Britt Harris, CIO, UTIMCO
Tony Caruso, CFA, as a senior director at UTIMCO, is always on a quest for alpha. Since he joined the University of Texas investment team in 2018, he has helped to more than double the endowment’s Stable Value Hedge Fund portfolio’s its assets under management (AUM) to $4.7 billion. Caruso has business in his blood: He recounts how his father, an Italian immigrant, who became a successful real estate developer, “learned from the school of hard knocks.”
Caruso started out in the investing world, after graduating from Duke University with a bachelor’s in economics, as a trader with Marquette Partners, a proprietary trading firm where he had interned in college.. “I fell in love with trading,” said Caruso, who traded Treasuries and eurodollar strips there.
After getting a master’s from the University of Chicago’s Booth School of Business, he joined Bridgewater Associates, the world’s largest hedge fund firm. Bridgewater, of course, is headed by Ray Dalio, whom Caruso found to be “an influential figure and great thinker.” From there, he went to Mesirow Financial, Advanced Strategies, a fund of hedge funds where he headed non-directional strategies. “I liked allocation,” he said.
Now at UTIMCO, he is responsible for the endowment’s Stable Value Hedge Fund portfolio, which consists of a broad mix of alternative strategies that have low correlation to traditional markets. For instance, he looks for links between finance and insurance, and for arbitrage opportunities in the now-turbulent arena of special purpose acquisition companies, or SPACs.
CIO: How would you deal with rising inflation and interest rates?
Caruso: Rather than reacting to rising inflation and interest rates while they are occurring, I would make sure that my portfolio is adequately protected beforehand. To do this, I would avoid owning Treasurys or any instruments with fixed cash flows extending out into the distant future, particularly if investors are not being well compensated to bear this risk. I would also increase my exposure to real assets, as well as instruments with shorter maturities. I would look to own assets that are expected to benefit from rising revenues in an inflationary environment without a commensurate rise in costs. I also view absolute return strategies as important tools to protect against rising inflation/yields, particularly ones that are designed to neutralize macro risk factors. While inflation may not necessarily serve as a tailwind for absolute return strategies, they will likely be unaffected and serve to protect capital.
If inflation and interest rates really begin to take off, I believe this will result in plenty of attractive opportunities for investors who have built portfolios with low rate/inflation sensitivity. Those who have constructed resilient portfolios prior to the storm occurring will have dry powder to put to work into the dislocations that result from the ensuing market turbulence.
CIO: What are your favorite alts, and why?
Caruso: My favorite alternative strategies are those that offer a dependably low correlation to traditional risk assets in all market environments. In my experience, there are just too many alts that show low correlation to broader markets 99% of the time, but then correlation spikes during the 1% of the time when it really matters. I put a lot of emphasis on sourcing strategies that have very low linkages to market risk and are not exposed to losses caused by broad liquidation events. If I suspect that a relative value basis trade is susceptible to widening during periods of market stress, I will make sure that financing is sufficiently termed out and catalysts for convergence are in place to avoid the possibility of being forced to crystalize losses at the worst possible time.
CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?
Caruso: Cryptocurrency is likely here to stay. The question is which cryptocurrency will prevail as the winner. In my view, it is extremely difficult to place odds on whether the accepted cryptocurrency will be Bitcoin, Ethereum, a central bank digital currency, or some crypto that has not even been created yet. While I have no idea which crypto(s) will prevail, I have a much higher degree of confidence predicting that most of the ~4,000 cryptocurrencies that currently exist will trade to zero at some point in the future.
CIO: How will the pandemic have changed the economic/financial world?
Caruso: The pandemic showed that investment team members do not necessarily all need to be in the same physical location to work effectively. I anticipate that there will be more flexibility in where portfolio managers [PMs] choose to work in the future. Multi-manager platforms such as Millennium have been allowing PMs to work remotely for quite some time, and I suspect that other hedge funds will follow suit after this forced experiment. We have seen an accelerated trend of investors leaving New York City for states such as Florida and Texas (due to lower taxes and/or improved quality of life), and I believe this trend will continue. In fact, I believe that if a hedge fund does not offer this as an option, it will serve as another reason for a PM to leave to join a multi-manager platform.
CIO: What asset class or investment troubles you most right now—and why?
Caruso: Long-dated bonds with negative real yields. Investors are essentially locking in losses and exposing themselves to further losses in a rising inflation environment. I think my children will ask me 20 years from now what investors were thinking buying debt at negative real yields, and I will not have a good answer for them.
CIO: What should be an investment trend, but isn’t (yet)?
Caruso: I believe that the “one or 30” fee structure is gaining in popularity, which is a good thing for the hedge fund industry. We at UTIMCO believe that one or 30 is an elegant way to ensure that allocators capture 70% of alpha over time. However, there are other ways to achieve this objective, too, by being creative with variables such as hurdles, AUM triggers, etc. I think that more allocators should focus on achieving a fair “alpha split” when negotiating fees and should collaborate more with managers to create innovative win-win solutions.
CIO: What investing decision have you made that you’re most proud of?
Caruso: I was hired by UTIMCO in 2018 to build out a portfolio with a zero beta mandate. This was a new initiative for UTIMCO, with the goal of adding exposure to investments that could hold up during periods of falling growth/inflation. Given that I had spent the prior seven years focusing on non-directional strategies for Mesirow Advanced Strategies, I knew the landscape well and so was able to grow the portfolio to around $4 billion in just a year and a half.
The investments that I made over this period were quickly put to the test during the COVID-19 crash, and these investments were collectively flat in Q1 when equity markets were down in excess of 20%. The portfolio subsequently generated about 16% over the following 12 months on a .06 beta. I am most proud of the portfolio management decisions that I made prior to the crisis, and I think it showed that I had a good grasp on the risks that each of these investments introduced into the portfolio. I chose to construct a portfolio with an eclectic mix of market neutral approaches diversified across asset classes, regions, sectors, time horizons, and strategy types. The breadth of the portfolio helped produce a stable return profile that was relatively unaffected by the market turmoil.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
Caruso: Jeff Talpins [of hedge fund Element Capital Management]. Macro is such a difficult strategy given the limited breadth potential and the highly liquid/efficient nature of the instruments. I have found very few macro managers who have been able to generate consistent alpha over long periods of time. I would like to pick Jeff’s brain to better understand how he has been able to achieve what so few other macro investors have been able to do.
