Crossing the line: Face to Face with Mark Yusko

Mark Yusko's move from the rarified world of endowment management to what he laughingly calls the ‘dark side' has been a success. In his words, ‘we've been lucky.'

Since Mark Yusko formed Morgan Creek Capital Management in July 2004, the firm has attracted $2.2 billion to its funds-of-funds strategies and another $1.3 billion in advisory accounts for 11 endowments, foundations and ultra-high-net-worth investors.

Mr. Yusko formed the firm after six years as chief investment officer of UNC Management Co., the investment firm formed to manage the endowment of the University of North Carolina, Chapel Hill, currently at $1.5 billion. Prior to his tenure at UNC, he was senior investment director of the now $5.1 billion endowment of his alma mater, University of Notre Dame, South Bend, Ind.

Morgan Creek has a range of services, from manager-of-managers funds that offer an outsourced endowment investment portfolio to high-net-worth and smaller institutions to consulting advice and manager selection for direct hedge fund investors with a minimum of $200 million to invest. Morgan Creek manages funds of funds for three joint ventures: a total portfolio fund for high-net-worth investors, offered with Salient Partners LP and distributed by Merrill Lynch & Co. Inc.; three alternative investment funds of funds offered through Tiger Select Fund Management, with seed funding from the Robertson Foundation, the charitable side of Julian Robertson's famed Tiger Management LLC; and a multistrategy alternatives fund managed for Hatteras Investment Partners LLC.

Tell us about Morgan Creek. When I came out of UNC, I had a nice little business plan: Morgan Creek would be in the advice business for a handful of endowments, foundations and wealthy families. But we got into the fund-of-funds business and that has grown, especially our distribution partnership with Merrill Lynch. That portfolio replicates the returns of a top endowment portfolio — we compare ourselves to Yale — using 10 asset classes and now manages money for 4,000 high-net-worth investors. This year has been just amazing, exceeding all expectations. We're up to 30 employees now, including five from my investment team at UNC.

To what do you attribute the success? We've been lucky. Julian Robertson tells a funny story. When his famous Tiger cubs were heading off to manage their own funds, the piece of advice he gave them was simple: "Make sure in your first two years you're lucky." We followed his advice. It could have been different.

What's your investment philosophy? We have one investment philosophy, one investment model that utilizes the same group of 200 managers managing across 10 asset classes from traditional to alternatives. We use one asset allocation process for all the vehicles we offer. I compare the investment model to a pile of LEGO bricks. You can snap all 10 "bricks" — the asset classes — together to provide a one-stop solution that is like the UNC model. If you snap off the bottom six bricks, that gives you full coverage of alternative asset classes. You can slice it up in many ways, put it back together in a more customized form, depending on the size of the client.

What is Morgan Creek's goal? Four processes are used to manage money: asset allocation, manager selection, portfolio construction and securities selection. Institutional investors should be spending the bulk of their time on asset allocation, because this is where returns come from. But many spend a lot of time on the other three. Our process takes care of those three so investors spend the most time where they need to — on asset allocation. Our fund-of-funds clients have been outperforming many of the top-quartile U.S. endowments and that has begat new business without us having to work that hard. Our advisory clients have been getting performance over the past two years that ranks them among the best performing U.S. endowments.

Speaking of performance, can you be more specific? My lawyers say I can't talk about specific funds and specific numbers. What I can say is that our target performance for hedge funds of funds is inflation plus 10% and for the absolute return strategies, inflation plus 7%. Over the past year, our funds of funds have outperformed their targets.

Where will Morgan Creek's growth come from? The funds-of-funds business is definitely where we'll see the most growth; it's easily the most scalable of our businesses. In terms of capacity, since we model ourselves on Yale, our upper limit on assets under management is somewhere between $17 billion and $18 billion.

When it comes to advisory clients, that's a much less scalable business. Endowments and foundations are beginning to outsource their CIO function to us. For the price of a single CIO, you get a whole team of specialists. We've instituted a $200 million minimum for these advisory clients and have set a maximum limit of 20 advisory clients. But one way we're seeking to increase our capacity for these non-discretionary clients is by increasing the number of CIOs we have. I'm the only CIO now, but if each CIO can handle 20 clients, you can see how we'll be able to scale this business. A lot of CIOs are leaving endowments and foundations to join money managers; I'm having breakfast with one of them next week.

What are the biggest differences between endowment life and asset management life? I absolutely loved my job at Notre Dame; I loved working at my alma mater every day. When I moved to Chapel Hill, it was absolutely great. … I loved my job at UNC. But when I was thinking about leaving, my friend John Griffin, who runs (hedge fund manager) Blue Ridge Capital, told me that starting my own business would be the most liberating thing I did. I thought to myself, "But I don't need liberating! …" but it turned out that John was right. Having the freedom to make quick decisions … or worrying about small bureaucratic issues has been fantastic. I love it over here on the "other" side. It is so much better.

What has been especially satisfying? I get a great deal of psychic income from knowing that the investment model we imported from the endowment arena is working to diversify the portfolios and improve the returns of investors. ... The returns we're generating are permitting institutions to do incredible things. We also put 10% of our profits into the Morgan Creek Foundation and each employee gets to designate where their portion of profits goes. It's only small now, but we're really excited about the possibilities this foundation creates for issues like education and cancer research.

What about marketing? I used to have a chip on my shoulder about "selling." I hated it. But a friend told me that "selling is just transferring your enthusiasms to others." And I knew I could do that. …

You've been a hedge fund investor for 15 years. What's different today? Back in the early days, only the best managers were willing to leave their corporate jobs to go out on their own. Today, everyone thinks they can run a hedge fund. But there just aren't 8,000 good hedge fund managers. In terms of recognizing real talent, in hedge funds, like baseball or anything else, you have to say no more than you say yes. And you have to have pattern recognition: You need to be able to recognize who are the good managers. You can't teach this: you have to experience it. You can't make a decision to pull out of a bad situation — like Amaranth, for example — unless you've seen that movie before.