Khe Hy – Quant Hedge Funds and the Fear of Death

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:20)
My guest this week is Khe Hy. Khe has a very interesting two-part story. We start with Khe's career at Blackrock, where he rose to be one of the youngest MDs at the firm, specializing in quantitative hedge funds. Khe shares his perspective on how the hedge fund landscape has changed and what investors should look for in hedge fund managers in the future.
The second part of the story is about Khe's attempt to understand himself.
We get into fear, joy, and all that he has learned across several years of introspection and exploration. His lessons coalesce around four key pillars – compassion, stillness, what he calls uncomfortable introspection, and finding truth. We explore what he means by each of these ideas in some detail. I'm not sure if Khe is capable of lying. He is one of the most honest people I've met, for better or worse, and was kind to share both his struggles and moments of clarity on investing and life. With deep questions about purpose and deep questions about how to evaluate a quant hedge fund, this was my kind of conversation. For show notes, visit investorfieldguide.com forward slash K, K, H, E, and now please enjoy my conversation with Khe.
This is going to be a conversation that I think about a third or half of the way through will really start to surprise people. But we're going to start in a comfortable world, which is that of finance and investing. If you could give a 30 second to a minute summary of your career from start to finish in finance, we'll use that as the jump off point, kind of where you are and what you did at a high level.

**Khe Hy** (2:52)
Well, first, thank you. It's a privilege to be here with you and I'm really excited.
So a minute on Wall Street. Let's see. I started as an investment banker at a firm called Broadview and actually quit 18 months into it. Not that I couldn't cut it, but it was not the kind of way that I wanted to be living my 22-year-old life.
I stumbled upon a career in fund of hedge funds and started as a research analyst and effectively did continue down that path for 12 years. So a total of 14 years in finance and I was evaluating hedge funds, predominantly hedge funds that were quantitative in nature and across all different asset classes. The last eight years, I was at Blackrock. I was the head of research for the New York office and was really focused on two parts of investing, evaluating quantitative equity funds and quantitative trading funds and doing seeding.

**Patrick O'Shaughnessy** (3:56)
So let's talk a little bit about the hedge fund to fund business at a high level because it's something we've only really explored once, maybe twice before. So just give a sketch of how the flow of capital works where you're a bottleneck in the process or a stage in the value process.
From capital to end deployment, how does it work?

**Khe Hy** (4:16)
We're one cog in the process and we used to take, and I say we, fund to funds, used to take quite a heavy toll fee along the way. And so if you step back hedge funds, I think there's 7,000 of them, highly unregulated, no real central database, very much a relationship in access driven business. So you're a large institution, a family office, an endowment, a government, and you read about hedge funds and you hear that they're uncorrelated to other asset classes, you want to go invest in them.