Ted Seides and Brent Beshore – The Future of Asset Management - [Invest Like the Best, EP.30]

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At a Glance

In this episode of Invest Like the Best, Ted Seides, a hedge fund FoF veteran, and Brent Beshore, a lower-middle-market private equity investor, discuss the future of the asset management industry. Ted Seides argues that the hedge fund industry is facing structural fee compression, and future advantages will concentrate among boutique firms with deep fundamental research capabilities in inefficient markets (e.g., Asia, specific sectors). He believes "long-term capital" is the scarcest and most powerful competitive advantage in the current environment.

The Fee Dilemma and Future of the Asset Management Industry

Ted Seides believes the hedge fund industry is undergoing structural fee compression, with the core conflict being the imbalance between fixed management fees and returns.

• Historical Context: Nine years ago, with short-term interest rates at 4%-5%, hedge funds could generate 3%-4% returns from cash management alone, making a 1.5% management fee seem reasonable. With rates now near zero, the management fee becomes a net cost.
• Current Data: The prevailing fee structure for mainstream hedge funds remains "1.5% management fee + 20% performance fee," but new funds have begun significantly cutting fees to attract capital. The market consensus is that fees are trending downward, though the path is unclear.
• Mechanism Breakdown: The high management fee model was masked during periods of high returns. However, as market efficiency improves and returns decline, the problem of high fixed costs becomes apparent. This makes it difficult for new entrants to raise startup capital, while large funds face pressure to reduce fees.
• Brent Beshore Adds: The industry should shift toward a "winner-take-most, losers-lose-too" incentive structure. Citing Andreessen Horowitz's model of reinvesting all management fees into serving portfolio companies, Beshore argues that hedge fund management fees should genuinely be used to enhance investment capabilities, not for partner compensation.

Finding Alpha: From Information Advantage to Analytical Advantage, and the Value of "Long-Term Capital"

Ted Seides points out that the half-life of information advantages has shortened dramatically, and future excess returns will increasingly come from the analytical advantage provided by "long-term capital."

• Historical Context: Using the Feshbach brothers in the 1980s as an example, they hired interns to retrieve publicly available 10-Q reports from the Library of Congress a week before large institutions like Fidelity, achieving a 70%-90% win rate on short positions. This "information access" advantage no longer exists.
• Current Dilemma: Short selling has become extremely difficult for two reasons: first, the low-interest-rate environment increases the cost of shorting; second, short-selling strategies have become crowded, causing stock prices to surge before reverting to fair value, forcing shorts to cover.
• Deduction and Signals: Seides believes that a few investors with "long-term capital" (e.g., those accepting 3-5 year lock-ups) have a significant advantage. They can invest in "event-driven" opportunities that take time to realize value, which are undervalued by the market due to short-term uncertainty. Falsification Signal: If market volatility remains persistently low and short-term trading strategies continue to outperform, the advantage of "long-term capital" may be diminished.

Industry Selection: Avoiding the "Sexy" Trap, Finding "Non-Obvious" Value

Brent Beshore proposes that the most profitable industries are often the most "boring," and true value is hidden in the non-core parts of the value chain.

• Mechanism Breakdown: Beshore argues that an industry's average return is inversely proportional to its "sexiness." Glamorous industries like wine, movies, and restaurants, due to low barriers to entry and intense competition, have terrible average returns. Conversely, "boring" industries like roof repair, lacking appeal and thus facing less competition, offer higher returns.
• Specific Examples: In the wine industry, the real money is not made by wineries but by companies supplying them with oak barrels, steel rings, or transportation services. In real estate, the profit is not with real estate agents but with companies selling tools and services to those agents.
• Deduction: Beshore advises investors to look for B2B businesses that "help support the economy but are not flashy themselves," especially those providing specialized software for specific "boring" industries (e.g., pest control). These companies have natural moats because their customer base is niche and non-mainstream.

Mentioned Positions

This section contains no substantive discussion of specific investable positions.

Judgments Worth Remembering

1. Ted Seides: "Long-term capital" is the scarcest resource in today's market. Having locked-up capital allows investment in opportunities that take two years to materialize but have highly certain outcomes, which are mispriced by the market due to short-term uncertainty.

2. Brent Beshore: An industry's average return is inversely proportional to its "sexiness." The most profitable industries are often the most boring and unattractive (e.g., roof repair), while glamorous ones like wine and movies are typically poor investments.

3. Brent Beshore: Within an industry, the most obvious participant (e.g., winery, real estate agent) has the lowest returns, while the "non-obvious" suppliers around them (e.g., oak barrel maker, real estate software provider) usually enjoy higher profits and stronger moats.

4. Ted Seides: The half-life of an information advantage is extremely short. In the 1980s, getting public documents early provided a massive edge. Today, that "information access" advantage is gone, shifting the edge to "information processing" and "analytical depth."

5. Brent Beshore: The "moat" of most small businesses is inseparable from the owner personally, including their relationships, industry intuition, and decision-making ability. Trying to replicate this value by hiring a cheap "replacement" is nearly impossible.

6. Ted Seides: Short selling for hedge funds has become extremely difficult, not only because low rates increase costs but also because the strategy is crowded, causing prices to surge before reverting to value and forcing shorts to cover.

7. Brent Beshore: Business "hygiene alpha" is crucial. Many small businesses cannot be sold or scaled because they lack basic financial discipline (e.g., not knowing where cash comes from or goes). Doing the "brushing your teeth" foundational work is a prerequisite for growth.

8. Ted Seides: The asset management industry faces a "performance chasing" dilemma. Everyone is currently chasing the S&P 500, which is itself an act of performance chasing. When the boat tilts too far to one side, it will always right itself in some way.