Class of 2021 NextGens

A college friend first introduced Panayiotis Lambropoulos to the world of hedge funds and alternative investments. In 1999, when the sector was nowhere near as active as it is today, the recent graduate from Boston College walked into a bookstore to read up on the growing investment strategies. It was enough to land Lambropoulos a job as a junior analyst at alternatives asset manager GCM Grosvenor, and the rest, as the investor puts it, is history. 

Today, Lambropoulos is making waves as a portfolio manager at the five-member hedge fund team at the Employees Retirement System of Texas (ERS). The allocator helps manage about 5% of the trust’s roughly $32 billion in assets, overseeing managers that represent about 67% of those funds.

Recently, the investor gained greater notice for conceptualizing, developing, and leading an emerging manager platform called PAAMCO Launchpad that seeds emerging hedge funds. In 2018, ERS announced a joint venture with fund-of-funds firm Pacific Alternative Asset Management Company (PAAMCO), and the co-investment program was lauded as a creative and unique approach to seeding emerging managers, especially in the US public sector. Now, ERS is currently in the process of discussing a potential third seed round.

Says Lambropoulos, “We’re always commended on standing out and being different, especially from GP’s and, for me, that’s the best compliment that we can get.”

CIO: What is the best way to bring more diversity to the financial industry?

Lambropoulos: I believe one avenue to explore in the pursuit of diversity is to start very early by investing ‘downstream’ and focusing on the pipeline; something akin to what professional teams have done. Scouting has migrated to as early as elementary school, and so should diversity preparation.

I believe education and, more specifically, financial literacy can be a key foundation to an improved and more diverse financial industry and that has to start early in anyone’s education. I believe financial institutes like the CFA and CAIA can serve as a great source of how to structure this education and can give their own diverse charterholders the opportunity to teach in an effort to show the different paths and ‘faces’ of the financial industry. Charterholders can become models or mentors and they can challenge any stereotypes of what industry professionals look and sound like. In addition, these and other financial firms can provide, when possible, financial support to many struggling schools. These investments are both qualitative and quantitative that can pay off in the long run. Moreover, the best course of action is to follow through on these investments with mentorships and sponsorships.

From a top-down perspective, there has to be board and management buy-in, support, and representation that reflects diversity and inclusion, otherwise the message will come across as hollow. There needs to be commitment, not simply compliance, and that is best executed by having dedicated professionals that purely focus on diversity and inclusion initiatives; dedicated and empowered professionals. The focus can’t simply be on diversity, as that simply represents a change and diversifying headcount. Inclusion has to be part of this change, otherwise all you accomplish is building a car without the engine.

CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?

Lambropoulos: In my view, cryptocurrency is here to stay or, more specifically, digital currencies are here to stay and will be the next big financial disruptor. The evidence is clear based on the fact that almost all central banks, globally, have already explored or are currently exploring some form of testing on digital assets and currencies. These efforts, of course, are led by China, the ECB [European Central Bank], and the Fed, which most recently announced it will be releasing a paper this summer on its own digital currency explorations. 

I think what we are currently witnessing and living through is the formation of a new financial frontier and the expansion of the current internet ecosystem. The question will be how will this new ecosystem coexist with the current one. These trends and changes will take place in the near term; however, in the long run, one area I would be paying close attention to is quantum computing. If cryptographic systems can be broken by these new ‘super computers,’ not only will the current value proposition of cryptocurrencies and blockchain technology be questioned, but also sensitive data held across this new financial ecosystem could be exposed or, worse, manipulated.

CIO: How will the pandemic have changed the economic/financial world?

Lambropoulos: Suffice it to say, we’re all living through what is hopefully a once-in-a-generation event. However, even when we arrive to a more stable state where the number of COVID-19 cases, hospitalizations, and, most importantly, deaths are extremely low around the world, the aftereffects from this pandemic will have a long-lasting effect on how we work, spend, and travel. 

Some areas to take a closer look at include the amplification of automation of many factory or service jobs as human or social distancing, which has been part of the pandemic defense play, becomes more prevalent. At the same time, white-collar employees may have the sustained option to stay home more often; for many industries the ‘hybrid model’ will become the main model. This won’t work for all business models and industries, but it may for most. The hybrid model will have an aftershock effect relating to commercial real estate, transit, business travel, and restaurants that are tied to traditional office work life. We have already seen the immediate impact the stay-at-home necessity has had on residential real estate across the country. In the same light, given the increased need for bandwidth, ‘big tech’ will most likely get bigger, and the current bandwidth inequality should be addressed as part of the nation’s infrastructure upgrade.

From a more macro perspective, the pandemic showed us that it was not the ‘great equalizer.’ In fact, it revealed a much greater inequality between and within countries; inequalities regarding wealth, income, and access to education, as well as health care services or even vaccines. Inequalities that played out differently across social classes, gender, and races. For example, women were disproportionally affected by the pandemic, as they tend to work in industries that were quick to shut down, but they also had to deal with increased child care once schools shut. As a result, their participation rate in the workforce decreased and has yet to recover. It may be a tall order and wishful thinking, but perhaps the pandemic serves as an additional catalyst to address inequalities and their effects as well as the financial impact on society.

Governments played a big role in limiting not only human movement (by necessity) but also the magnitude of last year’s recession, which lasted a month. Governments will continue to play a big role as to how countries and citizens own and spend their money simply due to the fact that we saw an increase in massive deficits that shielded many economies from doom; spending in the trillions that, eventually, taxpayers will have to pay for. For a matter of perspective, according to the Institute of International Finance, global debt was at around $260 trillion at the start of 2020 and has only increased since that time. By some estimations global debt to GDP [gross domestic product] is almost 40% higher today than it was at the onset of the 2008 great financial crisis. This debt concern includes corporate debt as well. Corporate debt was already elevated before the pandemic and only increased because of the pandemic. For example, by some estimates ‘zombie companies’ alone have close to $2 trillion in obligations currently outstanding. Concerns regarding debt and growth are more severe when looking at emerging or poorer countries. For the time being, low rates and controlled inflation are not a concern but, eventually, this may not be the case.

Despite the fear, anger, and pain we have experienced during the pandemic, we have also seen innovation, whether it’s been in altering business models, changing and accepting different forms of payment, or adjusting the methodology for delivery of goods and food. Innovation will continue and improve as we all adjust in this new world going forward. One obvious area is health care. We saw technology that had been in the works for four decades (mRNA) put to effective use through the usage of vaccines. I am sure the technology will now be looked at for other ways of usage to tackle other life-threatening diseases or viruses such as HIV or cancer.

CIO: Where do you see the most exciting areas to specialize further over the coming years?

Lambropoulos: I think one area that is still in its infancy but may have the potential for further growth is systematic strategies that focus on fixed income. Strategies such as these, today, remain relatively few and far between and the market itself is rather small; of the approximately $1.3 trillion in high-yield assets, less than 0.5% resides in quantitative strategies.

Successful quantitative investors need certain key ingredients in order to succeed with breadth and liquidity on top of any list, along with the ability to model them. If we take a look at equity markets, we have seen their evolution on both of these fronts, which began in the 1990s. This evolution unfolded with the advent and expansion of algorithmic trading, along with the expansion of new execution venues that increased liquidity and reduced friction or trading costs. On the contrary, the evolution in the fixed-income markets has lagged and we’re perhaps still in the early stages of such an evolution.

As this evolution expands, investors will have to focus on key questions such as whether or not alpha generation in high yield can be generated by simply transferring intelligence and tools garnered from equity models over to fixed income. Access to quality data and transparency within the corporate bond market will have to be assessed. Controlling for more practical risks specifically relevant to the credit markets, such as jump to default, along with other credit-focused nuances, will have to be accounted for portfolio construction purposes. There are a myriad of other considerations, but as these considerations are addressed, this may lead to the expansion of systematic fixed-income strategies.

CIO: What asset class or investment troubles you most right now—and why?

Lambropoulos: Mark Twain famously stated that ‘history doesn’t repeat itself, but it does rhyme.’ That’s what I think about as I have seen increased activity in hybrid investments and offerings where there is a blurring of lines between private and public investments. I am dating myself but, this activity reminds me of similar activities we saw prior to the great financial crisis of 2008. During that time, managers began offering less liquid investment opportunities in exchange for potential higher returns. That’s not too dissimilar from today, especially within a relatively low yield environment. These investments were working until they didn’t and investors soon found out their capital was gated, side-pocketed, or both. The side effect was for investors to redeem from their other, more liquid structures. Hedge funds in many cases stated they became ‘an ATM’ for investors seeking capital and liquidity. In many situations, investors weren’t able to exit some of these less liquid investments for almost a decade after the initial investment. My concern is that we are seeing similar activities unfolding today.

I am not arguing against the validity of private investments, but there are a number of issues investors should keep in mind. There has been close to $3 trillion raised for private investments in the last couple of years, so there is a lot of capital chasing and, perhaps, a smaller number of attractive opportunities. This while public equity valuations remain rather elevated. So the question is whether or not there is indeed enough of an illiquidity premium return embedded within these private investments. In addition, these investments need to be part of the proper structure (drawdown, co-investments, side-pockets) to better manage assets and liabilities. There is also the manager capabilities. It requires a different skill set to invest within the public equity domain than the private counterpart. Investors need to feel comfortable they are investing with a team that has the capability to invest in both types of assets classes. 

Personally, I believe it’s better for managers to offer investors the option of investing in public and private investments separately. Investors can then assess the opportunities, options, and liquidity profiles on their own and they can better assess the risk they want to take.

CIO: What should be an investment trend, but isn’t (yet)?

Lambropoulos: Staying within the technology and crypto theme, a couple ‘white board’ ideas I have recently discussed with managers are:

1. Given the scarcity of digital assets, what if those that possess these digital assets were able to lend them out for additional yield enhancement within a portfolio? and 
2. Given the increased attention NFTs [nonfungible tokens] generated this year, how far are we from companies issuing NFTs in lieu of equity or debt? Is this possible and, if so, what would that mean for valuation techniques and portfolio construction going forward? What would it mean for economic theories that address socializing losses and gains?

Other trends that will most likely gain or continue to gain traction might include: 

• Fourth industrial revolution and resource scarcity—Global demand for scarce resources has only increased as global populations have increased and demographics have continued to change. This demand will continue to increase going forward. In many cases, accessible resources have been depleted and other key commodities such as oil, coal, and minerals are becoming less accessible as they’re located in harder to reach places and deeper underground. This means that as demand continues to increase, the cost of accessing these resources will also increase. This is also vital as we think about the fourth industrial revolution—the digital revolution, which is tied to key minerals such as, lithium, cobalt, graphite and nickel. 
• Demographic trends—Birthrates had begun falling prior to the pandemic and have decreased because of it. In addition, given the vast improvements in health care and living standards, people are living longer. Because of this, many developed countries have aging populations. If this continues to be the case and income as well as wealth inequalities continue to widen, this will have a profound impact on government policies. From an employment perspective, it may mean, due to a smaller pool of employees, automation will become more prevalent. If automation becomes more prevalent, then the conversation around universal basic income will perhaps increase. Speaking of demographics, China’s middle class will only continue to grow; by some estimates up to 3 billion by the year 2030. This will have a profound impact on global economies, as well as increased geopolitical uncertainty. What may also result is more innovation from companies in emerging markets and the days of simply copycatting companies in developed countries will subside and emerging markets will offer additional investment opportunities compared to today.  
• Technology—We all realized how vital technology was for many of us during this pandemic. Technology also played a key role for a vaccine to become available in a very short period of time. These are just two examples of how fast technology itself is changing and how it’s also changing the world. Investors and business leaders need to plan for the impossible, which is to plan for technologies that change quickly, may not exist today, or may emerge very quickly. This will have implications for investing when it comes to valuations and investor expectations. I would include the eventual emergence of quantum computing in this technological revolution. Other areas to think about may be linked in the current semiconductor chip shortage. I would expect as life changes and continues to evolve, chips will become more prevalent in products that perhaps we haven’t even thought of today and will be utilized in ways that only a few years back might have only been seen on the SciFi channel. Wearable and implantable technologies may eventually become an extension of ourselves. 
• Got cash?—Emerging markets have been ahead of the developed world when it comes to the use of mobile payments. The pandemic only accelerated the usage and acceptance of digital payments globally and it’s a change that will most likely stay here for good. Technology will have to vastly improve and consumers will have to get more comfortable with the idea of ‘invisible’ and intangible cash, but once they do, smaller companies may be the beneficiaries of this big change. 
• Urbanization redefined—Much talk during the pandemic has been around the end of major urban cities like New York City. I don’t believe big cities like New York City, which have seen an exodus of individuals, will stop attracting individuals. They will simply attract a different demographic, with different needs and wants. Big urban cities will simply reinvent themselves and adjust accordingly. This will have implications on real estate, taxes, housing, consumption, etc. On the opposite end, during this demographic rotation, the question will be which city is the ‘next Austin’? Any future growth will need to be accompanied by infrastructure, real estate, service needs, and demands. 

CIO: What investing decision have you made that you’re most proud of?

Lambropoulos: Launchpad, ERS’ revamped and reimagined emerging manager program, is my proudest accomplishment. I believe Launchpad is a unique investment structure within the current investment landscape as it:

• provides better alignment of interests through its co-investment requirement alongside our strategic partner PAAMCO Prisma;  
• looks for a different source of returns by investing in ‘smaller’ managers; 
• includes what I call ‘structural alpha,’ which in this case is in the form of shared economics through a revenue share; and  
• improves transparency as ERS benefits from our strategic partner’s use of a separate managed account. 

The idea of Launchpad was born out of the belief our industry was coming to an interesting inflection point with so many managers either retiring or converting to family offices. The investment thesis was to invest early with, hopefully, the next generation of successful investment managers that would have to fill the void. In addition, there was ample evidence smaller managers were having a hard time raising capital. This would put investors like ERS in an advantageous position that could lead to better terms and increased capacity. This capital raising challenge has only increased because of the pandemic. Lastly, there is the proof that emerging managers can add significant value in any portfolio—according to some studies as much as 300 to 400 basis points [bps] of outperformance when compared to more established peers. The structure itself is, by design, ‘flat’ as both ERS and our strategic partner work closely on all investment opportunities while ERS retains its ability to veto and review all due diligence work product. 

I am proud of the fact that Launchpad moved from an idea to execution in a relatively short period of time with a lot of internal management support and, so far, it is performing as I had hoped.

CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?

Lambropoulos: The manager I would like to have a conversation with is Jim Pallotta [of Raptor Group]. I enjoy talking investments and global events, including geopolitics. My real passion, though, from a very young age and through today, is soccer and I am a big follower of all Boston sports teams. Pallotta, a Massachusetts native, at one point managed billions of dollars in his own hedge fund, remains an active investor today, and has been part of the ownership group for a professional soccer team in Italy (A.S. Roma) and an NBA team (Boston Celtics). Ultimately, I would be curious what he has found more challenging: investing capital or managing a sports team? Also, I may have a suggestion for a soccer team that may need both capital and good management in my home country of Greece.