The Achieve Podcast - Trent May (Lab Quantitative Strategies)

Welcome to another episode of the Achieve Podcast, the show where we highlight leaders, creators, and entrepreneurs who are building meaningful businesses, shaping their industries, and having impact. I'm Taylor Baker Baker, your host, and excited today to be joined by Trent May, the CIO at Lab Quantitative Strategies, and you can find them at lab-qs.com. Now, Trent, give us the backstory on how you got into this space and who you're currently serving.

Sure. Well, thanks for the invitation and happy to chat, and hopefully it's productive for you and your listeners. Um, look, we— I've been in the investment business for, hard to believe at this point, 35 years. Wow. Uh, started my career as a technology analyst at a mutual fund company and worked my way up to a global partner and portfolio manager role for a number of years. And that, that experience, you know, taught me how markets function from the inside, so to speak, how research translates into risk and how portfolios are built and how they act under pressure. I eventually left to launch a long-short hedge fund. I did that for about 6 years and then had an opportunity and made, I think, what some would consider an unusual move given I was in the portfolio management role, had an opportunity to join the state of Wyoming as its first chief investment officer. And that got me into an allocator role in a multi-strategy portfolio. And it was interesting. That transition was pivotal in my career. And managing capital inside a pension fund certainly forces you to think differently. It forces you to think longer term, and you're optimizing for durability across decades, not, month— monthly returns, for example, as you do in mutual funds, or even daily returns. Um, and then later, not too long after that, about 2 and a half years, I had an opportunity to join a family office, multi-billion dollar family office, uh, where I was president and CIO for about 12 years. We continued to refine the philosophy that we began to build inside of the Wyoming Retirement System. And that philosophy is an integration of alpha and beta. I was there inside the family office for about 12 years. And then we jointly, myself and this family office, my family office and this family office, came together to form an entity called Lab Quantitative Strategies. And I stepped down from the role, president CIO role at the family office, in February of '23 and, and moved over to run LAB full-time, uh, in April of, of 2023. So here we are today. Um, we, as I suggested, uh, we run strategies that blend alpha and beta together. In fact, the name LAB stands for Liquid Alpha Plus Beta. We serve institutional investors, high net worth clients, family offices, endowments, foundations, and so forth.

Wow, there's a wealth of knowledge and a myriad of stories to unpack right there, but we'll try to stay on task. What was that?

I said we could talk for hours, I'm sure.

I'm sure. And, and yeah, diversity there, I love that. Now, what would you say at this stage is driving growth for the organization?

Look, I think The macro environment's changed a bit in the last 5 years. So the traditional— so we focus on liquid markets, so I'm going to concentrate there. Certainly there's been a rise of private equity and private credit, but I'm going to focus on liquid markets. In liquid markets, their traditional framework has been a what's known as a 60/40 portfolio, so 60% stocks, 40% bonds. And that general approach has worked quite well for the last 40 years. But it's a very regime-specific environment. It operates best in a disinflationary growth environment, which again, for the most part, we've been in for, for 40-plus years. But recently, that, that, that approach has struggled a bit, particularly in 2022. It doesn't perform well in inflationary environments or when growth is a little bit more choppy, so correlations become unstable. And that opens up allocators to potentially different approaches to their liquid market portfolios. And Lab uses an approach called portable alpha. We can get into the weeds if you would like, but I think there's a more open-minded approach to different portfolio construction techniques today.

That makes sense. And yeah, I'm sure the plane has changed quite a bit in the last 5 years.

It has.

Now, looking back for you personally, what turning points, positive or negative, have molded the way you think about running the organization?

Yeah, so I started in the business as an intern during graduate school, and one of the first decisions I made, candidly, and it was fortuitous in hindsight, but you kind of had to— back then, you kind of had to pick, do you want to be a fixed income person or an equity person? It sounds silly, but—

What do you specialize in?

Yeah, it's what you specialized in. And equities, to me, had a certain amount of appeal that were driven Look, I wanted to maximize my future value creation, so to speak. In my opinion, and it remains this today, is if you want to grow your capital, you want to own as much equities as possible, right? Because just the way cash flows work, whether it be inside of a company, an industry, or a global economy for that matter, The equities are the residual cash flows. And so you have to be rewarded to take that risk more so than a fixed income person, for example. But it wasn't a super easy decision because, frankly, back then, when I didn't know a whole lot about the industry, the perception was, oh, the fixed income people were the sophisticated, mathematically driven people, and I have an engineering undergrad, so in some respects, that was a natural fit for me. And the perception of equity folks back then was, "Oh, it's just a bunch of cowboys." Right? So it's a little funny, but now with the benefit of 35 years of hindsight, it certainly was a good decision on my part. What I didn't appreciate about equities, frankly, was the volatility, the risk that comes with them. And the impact that that has on long-term investor outcomes, and it's substantial. And again, it makes all the sense in the world because, as I mentioned, the equities are at the residual cash flow piece of the capital stack. And so by default, they're the most volatile. And that has a real impact on people, right? And so it's easy to say, well, I can withstand a 20% drawdown, but when you actually get into drawdowns, you see the impact that they have on investor behavior. And investors tend to make bad decisions at inopportune times. And there's plenty of academic research around this. And so while the equity markets might give you 10% over time, realized investor outcomes might be closer to 6% because of the volatility impact. So those were two significant decisions. One was just the decision to focus on equities. And the second was to really understand the impact of risk. And in some respects, it's unfortunate. In other respects, it's very fortunate that within the first 15 years of my career, I was fortunate to experience two 50% bear markets. And so— [LAUGHTER] —so that certainly drove home the risk side of the equation. Now, coming out of the '08 and '09 crisis, which was substantial— again, I had the opportunity to join the state of Wyoming. And so that move to the allocator side, that move into the institutional multi-strategy world opened up an entire new perspective for me. So I think those are the 3 major decisions or major inflection points in my career.

That makes a lot of sense, and I can see how those mold things. Now, as you guys try to grow and expand, what have been the biggest bottlenecks or obstacles that keep showing up? Well, what we do—

so we have a non-traditional approach, what I, what I would call. So the set— this concept of separation of alpha from beta, it's been around for a long time, but frankly, it was pioneered by PIMCO back in the '80s. And, and that fund that they had way back then is still around today, which I think speaks to the efficacy of the approach. Having said that, most investors, particularly the big allocators, think in terms of buckets. They build them around— they build their portfolios around asset classes. We want a certain amount of private equity and private credit and long-only equities and domestic, you know, so they, they fill all these little buckets. Our approach here at LAB is much different. This concept of portable alpha, of separating alpha from beta, Frankly, requires a fair amount of education. Now, again, we have the benefit that it's been around for a long time. It has witnessed periods of time historically where it's been in favor. And then the '08 and '09 period was fairly challenging for some practitioners of the approach. Yeah. So there's— I think there's ways to do it correctly and in ways that are substantially more risky. Yeah, and that period really caused a lot of angst about the approach, and it kind of fell out of favor for a while. It happens to be back in favor today, but it certainly requires a fair amount of education. So it's a combination of we need to build the infrastructure to be able to run the, the investment approach correctly, have the right infrastructure, be able to scale. At the same time, we have to build educational material to make, you know, to help investors understand what it is we do.

Gotcha. Okay, I can see that, that education is always evolving and changing. And how do you upload that much data to an investor without overwhelming them? It is.

I will tell you, I've been a Chief Investment Officer now for, gosh, 18 years. And I think one of the— I think a lot of people probably think of the Chief Investment Officer's primary role is making market calls and in, you know, moving the portfolio around. I will say that— I will say that's not necessarily true. The primary— I think one of the primary value drivers of the— of this role is education, is to make sure that your investors understand what it is they're invested in. Because if they don't understand it, when you get into a difficult period, inevitably they're going to come to you with questions. And if you can't answer them and they're not educated, you could impact their long-term outcomes. That makes a lot of sense. Yes. Yeah.

Now, when it comes to you guys' messaging and outreach, your marketing systems, what's been working well and where do you feel the gaps and frustrations?

Well, it's a good question. I think, I think the concept of separating Alpha plus Beta tends to resonate with investors. We try to be transparent about how the portfolio works, where the return drivers are, what can go right, what can go wrong. I think there's, there's, there's a, there's a peer of ours that does somewhat of the similar things. He, he's fond of saying that risks can't be they, they don't go away, they just can be transformed. And I think that's right. So I think that our approach is, is different. It, it takes what I would call traditional investor risks and it, it changes them, right? It doesn't make them go away, it changes them. So, you know, we, we try to educate our clients, um, around that, like, what are the risks that we're taking that are different maybe than what you're used to? Um, it's very difficult to simplify the story, candidly. Um, trying to distill years of research and, and all the— every industry has its own, what I would call, language, right? And trying to take the language of investments and distill it down into digestible, understandable bites is challenging. It's one of our, one of our biggest challenges as an organization.

That makes a lot of sense. Now, with all the buzz and talk around AI and automation, where have you guys found ways to use it internally, and where do you still see opportunity?

That's a, that's a, a very timely question, Taylor. So we, we, uh, we do get that question a lot, and, and understandably so, and we think about it a lot. Look, technology at Lab is, is the foundation of what we do. So again, our name is Lab Quantitative Strategies. Quantitative implies, of course, a systematic approach, which implies a heavy reliance on, on technology. Yeah, I have been in the so-called quantitative space for my entire career as an analyst way back in the day. I was, in hindsight, what I would call a first-generation quantitative analyst. We were building Excel workbooks, and then, you know, ultimately that migrated into Python and, and so forth. But look, we do a lot of machine learning, a lot of AI type of stuff. AI, I think, is kind of a catch-all, a little bit like the term hedge fund. It's, you know, it can mean a lot of different things. Yeah. We use a systematic approach because it allows us to measure our outcomes and then understand what went right and what went wrong and, and make tweaks to those approaches. So we continue to do this exact same thing in our investment approach today as we were doing 5, 6, 7, 8 years ago. The tools change, to your point, right? Now you, you, you may like we are building an internal AI capability, so to speak, that has a collection of brains and, and then agents on top of those, right? And we can process more information more quickly, uh, things of that sort. But at the end of the day, um, we have a particular approach and, and we're not going to just turn that over to AI, for lack of a better term. Now, where I do think that there's substantial impact on our business from AI and we're pretty excited about is, is it does enhance the productivity. You can clearly see this, right? So the good thing about the investment business, or the software business for that matter, is it's a pretty scalable business, right? It's not like the consulting business where if you want to, let's just say, add $10 million of revenue, you've got to add a consultant. Here, you know, the technology business and the software business are are pretty scalable. I think AI is even gonna further that. So, you know, there's a lot of, for example, operational due diligence, there's a lot of regulatory filings, compliance filings, things of that sort. You can build agents that can certainly provide your legal team with a lot of leverage. Oh, nice.

That makes a lot of sense. Now, what— when you guys think about the next stages of the business, What are you most excited about?

We have spent at this point— so Lab— so the family office and myself came together in 2019 to form this entity. So Lab is in its 7th year. I've been here now for 3 years running it full-time. It has been a heavy lift to build out the infrastructure that underpins Lab. The first, let's just call it 7 years, have been focused on making sure our research processes are correct, our governance is correct, the risk systems are in place. We have the operational discipline because we trade some strategies internally, but we also use external strategies where needed. And so it's a complex business model. We've also— we also have had to make sure that our product suite is correct. So we have effectively an onshore and offshore absolute return fund. And then we have a product called Dynamo, which is a— I'll call it a relative return fund. And that's the only products we need. With those 3 products, we can, we can dial in for our shareholders pretty much any risk profile they want and pretty much any market exposure that they desire. But that's been a big lift. So I think what we're excited about and what the next stages bring for us is now it's about putting capital over the top of this infrastructure. What we set out to do, and one of the challenges that I faced at Wyoming as well as the family office, is there's a lot of money to put to work and there's money that comes in every year. To both of those entities. And so it doesn't make any sense to build little niche strategies that can't take capacity, right? That's not what's going to work long term. What you have to build are scalable strategies, okay? Because you're thinking in decades. So LAVIT now has that infrastructure. Now it's just a matter of finding the right partners. I love that.

Now, how big is the organization, the team, right now?

We have 23 people on staff today. Uh, we are largely headquartered in Denver, although we have, uh, researchers in Chicago, we have researchers in Boston, uh, and some people in Florida as well, but largely in Denver.

That's awesome. Now, Trent, when you look back at your own journey, the wins, the mistakes, what lessons stand out to you, and what do you wish you understood sooner?

Oh gosh, um, it's a very good question. Probably spend hours on this. I would say, I would say one of my strengths and one of the things that has benefited me the most is the ability to think long term. The benefit of compounding cannot be underestimated. I know it can be frustrating when you don't have a lot of capital when you're starting out and, you know, it grows slowly at first, but you do eventually hit this inflection point, right? And that power of compounding is substantial, right? So it works slowly and then all of a sudden it works suddenly. I wish investors would embrace that more. We get too wrapped up in, oh, I didn't outperform the market this year, or my neighbor's doing this, or, you know, my peers are doing that. And it, it really detracts from the long-term outcomes of investors. And it's, it's, it's really unfortunate. You have to be patient. Investing is not gambling. It's not. It's, you know, it's funny because, you know, we sometimes you go to Vegas or whatever, people, you know, people ask me, what do you like to— I hate gambling, just to be clear, right? Like, investing to me is a probability game, okay? You— all you're— all we're doing is assessing probabilities. What are the markets discounting? Do we believe they're under or overvalued? and we make bets on a probability-adjusted basis around that. Over time, especially as a young person, if you believe in capitalism, if you believe in the economics that revenue comes in, you pay your suppliers, you pay your employees, you pay your fixed income, and the residual flows to your equity holders, all else being equal, Take a long-term view. Own as much equity as you can. Be objective about the risk profile. Everybody's risk profile is different. If your risk profile— you know, your risk pro— you're more conservative, take a little bit less equity risk so that you don't make a bad decision when the markets turn down, because they will. The flip side is be optimistic on the long term. Because if capitalism works, you will be rewarded and compounding will pay off. I love that.

There's so many good nuggets you just dropped. Compounding works slowly and then suddenly, and investing is not gambling.

Exactly. Those are two key pieces. Wow.

Now, if you had to focus on one constraint for the next 90 days to solve, what would it be?

Well, how specific do you want me to get?

You get to decide.

If I had to focus on one constraint over the net— well, we have a very lab-specific issue. I'm not sure that's necessarily what you're asking, but we, we have an internal challenge where a hedge fund is typically structured with a master fund where all your relationships are up here, and then you have what's called feeder funds that different investor groups can, can access the master fund through. The way our client base is right now, we have to have two separate funds, and we can't— we, we can't, for tax and regulatory reasons, have this master fund. We are very focused on raising enough capital because we have to dilute our existing client, our largest client, in order for us to get a master fund in place. But that's a very lab-specific— outside of the lab-specific, I think the, I think the biggest constraint, or I would call it an opportunity frankly, is around AI. You asked me about that before. I'm an old school guy. I like, you know, like, it's funny, I, you know, like this concept of Wintel. Like, you probably don't even know what that is. Most of your listeners probably don't know what that is. I ask our internal staff, they've never heard of Wintel. But that used to be Windows plus Intel. That was the ecosystem for, for the PC business back in the '90s, of course. And so I like to think in terms of operating systems and then the programs like Excel and stuff that are tacked on on top of that. I think AI is very similar. So I think for Lab, solving this, what I'll call operating system of, of AI brains or engines, you know, so I don't think you want to rely on one. I think you want to rely on a subset, and then building vertical-specific, um, agentic AI engines over the top of that, or agentic AI applications, is a great opportunity for us and can solve a lot of the constraints that we face from a scaling perspective. Love that.

Now, Trent, I know we're short on time. Uh, any final thoughts for our listeners and other entrepreneurs and leaders?

Well, uh, not necessarily. I appreciate the time again, that giving me the opportunity to talk about myself and about Lab. I appreciate that. Look, Running the— running a business, as your listeners well know, is challenging, but it's incredibly rewarding. Again, if I— you know, I, I do get asked a lot because I've obviously been in, in the workforce for, for 35 years. So I have— some people call me old. I like to think I have a lot of experience. Um, like, I, I would I would say perseverance, long-term focus, understand that the highs are never as high as you think they are, the lows are never as low as you think they are. Keep grinding through it and you'll look back and you'll be like, holy cow, what an amazing ride.

I love that. Highs are never as high as you think they are, lows are never as low as you think they are. That's awesome. And for those who want to reach out, LinkedIn or labs-qs.com. So lab-qs.com. Anywhere else you want to send them?

I know those are the two primary areas. I'm obviously on LinkedIn. Feel free to reach out to me if you're interested. Be happy to connect. Awesome.

And again, thank you for joining us, and thank you to our sponsors of today's episode, Achieve Fractional, which provides fractional executive leadership for growing businesses. And if you enjoyed today's episode, share it with a friend, with a colleague. If you have questions about investments and, and what to do with your portfolio, reach out to Trent and the team and they will get you taken care of. They'll do analysis, and we'll see you on the next episode of the Achieve podcast.