We’re proud to feature our next guest in our “Meet the Buy Side Series,” where we feature Jason Gerlach from Sunrise Capital Partners. Sunrise, a long-standing multi-family office and asset management firm will celebrate its 40th anniversary in 2020 as a pioneer of quantitative investing. The firm owes its success to an ever-expanding suite of proprietary investment strategies that they’ve developed and continually enhanced since 1980. Sunrise’s multi-faceted investment approach has weathered many market storms including 1987’s Black Monday, the dot com bust of the early 2000s, and the 2008 global financial crisis.
Q&A Section with Alex Cho and Jason Gerlach from Sunrise Capital Partners
Alex Cho (CEO and Founder of Cho Research) – Hey Jason, thank you for taking some time out of your busy schedule to host this Q&A. Through the time we’ve gotten to know each other, you’re one of the few asset managers who have managed to stay in business for nearly four decades.
That being said, I wanted to ask, how you got into the asset management business, and what have been the differences between the asset management business as you’ve experienced it, and what you thought the asset management business would be like when you joined Sunrise in 2008?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – Thanks Alex. Good questions. I got into the asset management business in many ways through happenstance. In the mid-to-late 2000s, after a legal career that spanned nearly a decade that allowed me to hone a range of useful skills including problem-solving, risk management and communication, I was ready to be a bit more entrepreneurial but wasn’t sure what next step to take. Almost out of nowhere as I was contemplating my future, I got a call from one of my better personal and professional contacts about an opportunity at Sunrise, a firm that had a lengthy track record of success but was facing a transitional period and the tricky task of building and implementing a succession plan. After some thoughtful contemplation, I took the leap and joined Sunrise in May 2008, just a few months before the financial services world was rocked by the 2008 financial crisis, the Madoff scandal, and other events that would irrevocably change the asset management industry.
As far as how my nearly 12 years of experience in the asset management industry have matched my expectations, I can say that while I thought the business would be very challenging, I nonetheless extremely under-estimated just how challenging it would be, particularly in the wake of the events of 2008 and the consequences of those events. Global markets, now driven by a range of technological advancements and greatly affected by liquidity-constraining developments such as the Volcker Rule and volatility-constraining factors such as ongoing quantitative easing by global central banks, are relentless in the challenges they pose to the kinds of investment strategies we run. And just when firms like Sunrise think you’ve figured out some productive investment paths in this new paradigm, markets find a way to pivot in a new, more challenging direction that forces us back to the drawing board once again.
Beyond the challenges continually posed by global markets, the business-side of the asset management business has also become increasingly complex and challenging over my 12-year career in the industry. Regulations and the enforcement of those regulations have become more rigorous around the globe. Investor demand for better transparency, liquidity, and fee terms have increased substantially. And technology, while empowering and liberating in many ways, has simultaneously created an entire new suite of expenses and security challenges that simply did not exist when I entered the asset management industry.
So all in all, the business is hard and getting harder every day. However, I wouldn’t have it any other way. I love getting up in the morning and facing the challenges each day and working with the Sunrise Team to try and deliver the best possible outcomes for and service to our clients.
Alex Cho (CEO and Founder of Cho Research) – Great origin story and so, could you highlight your investment approach at Sunrise Capital Partners, and how it’s differentiated from the countless other strategies that asset managers employ to generate investment returns?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – I am not privy to the details of any other firm’s specific investment strategy so it’s hard for me fully compare and contrast what we do here at Sunrise vis-à-vis others. However, based on comparing our return profile to those of other firms, I am confident that we continue to forge our own, unique approach just as we have since 1980, sometimes for better and sometimes for worse. There are several key tenets to our investment approach that I believe make our outcomes unique.
First, we’re early pioneers of the school of thought that says that a quantitative, statistical and technological-driven investment approach offers opportunities and outcomes that are materially different from, and in many cases better than those that can be achieved from fundamental, intuitive, manually-driven investment approaches. We take great comfort in the patterns of market behavior and the many statistically significant advantages they can offer investors when captured with robust, risk-managed investment models.
Second, we’re not wedded to any one investment market, sector or geography as many investment strategies are. Instead, we have always believed in the power of harnessing multi-faceted diversity in everything we do. That means not only investing in a range of markets, sectors and geographies but also, utilizing a broad range of investment techniques over a broad range of investment time frames and ensuring that multiple assumptions about future market behavior are being incorporated into everything we do. Over time, we believe that multi-faceted diversification, by market, by sector, by geography, by time frame and by technique is critical to achieving compelling and durable risk-adjusted returns.
Thirdly, we are completely humble in the face of the power of global markets full knowing that what worked well five years ago may be completely obsolete now. Accordingly, since our 1980 inception we’ve never been complacent, and we remain obsessed with a rigorous process of ongoing research and development. Through this process, we are constantly observing market behaviors, continually questioning our best ideas and assumptions, and pushing ourselves to ensure that the approaches we take adapt to changing market conditions and contemplate outcomes that may presently seem unimaginable. Anything less in our view would have spelled the end of Sunrise many years ago and not allowed us to be able to celebrate our 40th anniversary in 2020.
Alex Cho (CEO and Founder of Cho Research) – So, I recall a conversation we had a while back about Sunrise’s use of computer execution and thoroughly back-tested strategies but I wonder if there’s some element of human judgement in your investment process. Can you kind of elaborate a bit on the role Sunrise’s experience and judgment plays in your investment decisions?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – This is a very good question Alex. While as noted, we do believe very strongly in the power of model-based, highly-disciplined, quantitative and mechanized approaches to investment, we certainly tap into our decades of experience and market-honed judgement in many ways throughout our investment process.
For example, many of our best models start with a fundamental observation of one of our team members or an idea that came from our experiences in watching markets move and interact in real-time. While we believe in the concept of “artificial intelligence” very much and use such tools throughout our process, we still believe that there’s a level of market and investment intelligence that remains in the exclusive domain of the human mind that computers simply cannot replicate no matter how sophisticated they become. Accordingly, all concepts are welcome in our model development process whether they are found by computers or whether they come from the wisdom and experience of one of our team members.
In addition, once investment ideas have been modeled and mechanized, we still think it is critically important to wrap those mechanized models in a layer of human judgement and oversight. What if an un-modeled risk scenario emerges in markets that has no precedent in prior market behavior? What if in the midst of the trading day a geo-political crisis emerges that might drastically affect market liquidity and market behavior? In cases such as these, we think its paramount to effective risk-management to be able to adjust or even override automated models and leverage the Sunrise Team’s decades of experience.
Alex Cho (CEO and Founder of Cho Research) – Fantastic. We’ve discussed diversification previously and you’ve touched on it a bit with your comments, can you elaborate a bit more on the concept of diversification?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – Sure. When it comes to diversification, most people in our industry think about pairing stocks from different sectors together or blending U.S. and global stocks together in a portfolio, or often, mixing up a portfolio with stocks and bonds. These are all important concepts and we don’t disagree with them.
However, we think that these concepts do not go far enough in terms of truly diversifying one’s portfolio, especially in an era where technology and other factors have eliminated much of the diversification benefit that comes from blending different types of stocks or stocks and bonds together. In our view, one needs to focus on concepts like time and technique as well when pursuing diversification.
For example, a given market may behave in a certain way in 24- or 48-hour windows but quite differently in 30- or 180-day windows. What looks like a trend or pattern in one window may simply be noise in another. Accordingly, our view is that it’s better to build investment approaches that blend outcomes from different time frames so that more positive possibilities are captured over time.
The same goes for one’s investment assumptions and the techniques one uses to attempt to capture positive return based on that assumption. For example, some people believe that certain markets over time will behave in a traditional Gaussian way and exhibit a relatively normalized distribution of outcomes. Others believe that over certain time periods, certain markets may behave in decidedly non-Gaussian, abnormal ways. In our view, both beliefs could be right, depending on the market and the time frame one considers. Accordingly, many of the models we weave into our investment approach will blend philosophies and take advantage of different techniques to capture return in different price distribution environments.
By looking at diversification more broadly, we think investors are likely to generate better risk-adjusted returns over time and increase their chances of long-term survival and success in what is a perilous business.
Alex Cho (CEO and Founder of Cho Research) – In conversations we’ve had, you’ve suggested that Sunrise is often “agnostic” to sectors and assets in its investment approach. Can you elaborate more on this?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – Absolutely Alex. When I use the term “agnostic,” I’m referring to the fact that we are not wedded to trading a certain stock or even to trading stocks exclusively. Likewise, we are not wedded to investing in specific types of bonds or even the asset class of bonds at all. Instead, we like to go where the statistical opportunities for profits are at a given time. Accordingly, we may develop a model that is highly effective trading U.S. equities but not particularly effective trading non-U.S. equities. If that’s the case, we are perfectly content to simply implement that model in the U.S. equity realm and avoid others. Alternatively, we may develop an investment approach that does not work in equities at all but rather, in a single, more esoteric investment instrument such as volatility futures. In that case, we’ll leave the investment model to its domain and have it focus solely on generating compelling risk-adjusted returns by buying and selling volatility futures. And notably, it’s critical to recognize that over time, a given investment approach may stop working with respect to certain markets, sectors or geographies but emerge as an effective investment tool in markets that it previously avoided. For this reason, it is in our view to be open-minded and indeed, agnostic toward what areas you’re willing to invest in over time.
Alex Cho (CEO and Founder of Cho Research) – That sounds fascinating. So turning to another topic, your firm has launched a separate asset management firm referred to as, “RYZZ (pronounced “Rise”) Capital Management.” This specific firm is dedicated to the creation of actively-traded ETFs and strategies that can be implemented for RIAs and other investors in separately-managed accounts. Can you explain some of the differences between what you’ve done historically at Sunrise and what you’re doing in RYZZ Capital Management?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – Yes Alex. Happy to provide some differentiation. One of the challenges and opportunities that has emerged over the past decade is what I would call the “democratization” of investing and a trend toward making more and more types of investment opportunities available to a broader swath of investors. Investment approaches that used to be exclusively available to large global institutions are not being implemented and packaged in ways that allow RIAs (registered investment advisors) and individual investors access. Consistent with this trend, we recently launched RYZZ Capital Management which is fully sub-advised by Sunrise Capital Partners. With this venture, we are bringing to investors of all stripes a range of sophisticated, dynamic, and diversified investment solutions that will allow people to leverage our nearly four decades of investment experience and hopefully, achieve more compelling risk-adjusted returns in their portfolios in the future. RYZZ’s offerings differ from Sunrise’s historical offerings in that they are structured in a way that many of the past barriers to entry – high investment minimums, relative illiquidity, relatively low transparency, and relatively higher fees – are eliminated and the offerings are calibrated to fully comply with the regulatory framework that governs investments by RIAs and individual investors. For more details, readers of this interview can visit www.ryzzcap.com.
Alex Cho (CEO and Founder of Cho Research) – Okay, regarding RYZZ Capital Management’s separately managed account (SMA) offerings, could you provide a brief overview of your SMA offerings and who they are intended for?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – Certainly Alex. The RYZZ SMA offerings are meant for those RIAs and others who want to invest at a higher initial amount than the typical ETF investor ($250,000 or more to start) and have the transparency, liquidity and other conveniences of an investment account that they open and control, at an institution of their choice, for as long as they want to have it open. RYZZ Capital Management will manage such accounts on a client’s behalf using any of a number of strategies we’ve developed or even a customized combination of those strategies, depending on the investor’s goals and needs. SMAs are an increasingly popular tool for many investors given the control and security they offer and we’re happy to run them for investors for whom SMAs are a good fit.
Alex Cho (CEO and Founder of Cho Research) – Very interesting, and so turning back to the discussion of Sunrise Capital Partners, do you currently accept investors, and under what conditions would you consider engagements from outside capital?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – In addition to managing our own capital, Sunrise does indeed manage capital for a select group of qualified institutional and individual investors in both fund structures and in the SMA format. Investors interested in learning more about Sunrise Capital Partners can visit www.sunrisecapital.com and contact us directly at [email protected]
Alex Cho (CEO and Founder of Cho Research) – Great, on a more personal note, who has been an investment hero, or someone who has shaped your career, or inspired you over the years?
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – There are many people from within the industry and outside of it that inspire me. Most notably, I remain quite inspired by the founders of Sunrise Capital Partners and the early senior leaders of the firm who had a tremendous level of vision and courage during a time when few were willing to walk down such an experimental path in the investment world. Included in this group is Sunrise’s current Chief Research Officer, and one of my partners in the business, Richard Slaughter. Beyond him, I am constantly looking to other corporate leaders for wisdom and guidance and I am constantly inspired by the words and actions of Howard Marks from Oaktree Capital Management, Satya Nadella from Microsoft, Warren Buffet from Berkshire Hathaway, Sallie Krawcheck of Ellevest, and many others.
Alex Cho (CEO and Founder of Cho Research) – That was a great Q&A session, and I learned a lot. I’m sure the readers will appreciate your thoughts, and the ideas you’ve shared. Thank you for taking time out of your day to host this Q&A, and I’m sure we’ll have more conversations in the future, and you’re welcome to join us for another Q&A whenever you want.
Jason Gerlach (CEO and Managing Partner of Sunrise Capital Partners) – Thank you very much for having me Alex. I enjoyed the Q&A very much. I wish all your readers the best possible success in their investment outcomes and I hope they can take away a lesson or two from Sunrise’s approach to investing. We welcome any follow-up inquiries from anyone who may have questions from this discussion.
***This concludes the Q&A section with Alex Cho and Jason Gerlach from Sunrise Capital Partners***
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