State of the single-manager HF industry w/ Ricky Sandler
Recently, Ricky Sandler, the founder of Eminence Capital, joined Ted Seides on the Capital Allocators podcast. During their conversation, Sandler shared valuable insights into how he has navigated the ever-changing landscape of public investing through market regime shifts—and how the market regime is evolving today.
Here are my key takeaways:
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Pre-Eminence Days
Ricky’s father, Harvey, was a Goldman Sachs sell-side cable and media equity research analyst who later ran his own fund, exposing Sandler to the finance industry early on. Sandler attended the University of Wisconsin-Madison after his admission to the University of Michigan was deferred. Though he initially considered law school, conversations with unhappy lawyers convinced him otherwise.
Sandler interned under David Herro at Harris Associates, a famed deep value investor who ran the international strategies. Through his father’s introductions, Sandler secured interviews at various firms and landed a job at Marks Asset Management. At Marks, he crossed paths with Wayne Cooperman, the son of legendary value investor Leon Cooperman, who was the CIO of Goldman Sachs Asset Management.
Envisioning a slightly more value-oriented approach than Marks’ quality focus, the two joined forces to co-found Fusion Capital. While the fund initially performed well, the 1998 Russian financial crisis took a toll on their returns, straining their partnership. Disagreements arose over investment decisions and the strategic direction of the firm. This experience shaped Sandler’s belief in the importance of having only one ultimate decision maker at an investment firm.
Sandler explained that co-equal partnerships in investment firms come in two forms: 1) two stock pickers; 2) one stock picker and one business partner (handling operations, fundraising, etc.). Partnerships between two stock pickers often lead to conflicts over portfolio construction, while partnerships between an investor and a business partner frequently result in disputes about contributions to the firm’s success.
At age 29, Sandler founded Eminence Capital. From the start, collaboration was a cornerstone of the firm’s philosophy. He ensured that at least two analysts worked on every stock—even when the team started with just two analysts. Early on, the firm generated alpha through accounting shorts, but over time, the effectiveness of this strategy diminished due to the rise of specialized forensic accounting services.
Single-manager L/S HF is in a bad position
Directional (not market-neutral) single-manager hedge funds are in a tough position due to allocator behaviors. It’s becoming increasingly difficult to sell the concept of fractional market upside exposure with downside protection. Allocators are gravitating toward a barbell approach, favoring either pure long-only strategies, which are straightforward to benchmark against indices, or uncorrelated market-neutral products, which promise absolute returns.
Today, Eminence Capital reflects this shift: 70% of client assets are in the long-only or long-biased products, while only 30% is in the long/short hedge fund. Sandler believes that single-manager funds looking to stay competitive need to add products like “portable alpha” 150/50 strategies. These products provide 100% market exposure while incorporating alpha-generation initiatives. Eminence has successfully implemented this approach, with over $1 billion in assets under management in its version of the product.
Adapting to market regime change
When asked how Sandler has been able to stay in the game while some of his peers have left the fund management industry, he credited to his willingness to adapt. He shared that a successful investor today needs not only solid business analysis skills but also the ability to understand stock movements. This includes understanding market sentiment, buy-side consensus, and shifts in market flows. The old mindset of "I don’t need a catalyst" no longer works in today’s market.
The composition of market participants has also changed significantly. Passive strategies now account for 60% of the market, while the remaining 40% of active investors are increasingly non-fundamentally driven (macro, thematic, quant, etc.). As a result, short-term price movements have become increasingly detached from fundamentals.
A hedge fund’s value creation depends on stock movement; without it, being right about a business’s fundamentals doesn’t translate into results. Sandler recognizes that while Eminence doesn’t need to emulate short-term traders, they need to understand their influence.
When engaging with the sell-side, the focus has shifted from business and financial analysis to understanding market flows: Who’s calling you? What questions are they asking? What are the tension points?
With this deeper understanding of market flows, their portfolio turnover has increased, allowing them to act tactically when a stock moves up or down 30% for non-fundamental reasons.
Quant, data science and alpha shorts
Since its founding, Eminence has built a quant team, a data science team, and a dedicated short team. Sandler shared how he executed the buildout of these teams.
Quant
The quant team was carefully assembled by hiring ex-sell-side equity research analysts who had transitioned into strategy or data science roles. Therefore, these individuals fully understand the fundamental analysts’ workflows, making it easier to integrate their contributions. Sandler emphasized the importance of not making quant data the sole basis for investment decisions. Instead, the quant team’s work has informed portfolio decisions and enhanced the understanding of single-stock price movements.
For instance, they analyze price targets and ratings from Eminence’s own sector team meetings, linking those ratings to stock performance.
In another example, Sandler shared how the team helped understand how quant strategies drive flows. A quant team member flagged seven unprofitable growth stocks that were down 7% on a day when the market was only down 2%. One of those stocks was Zillow. Sandler corrected the analyst, noting that Zillow had sold its unprofitable home-flipping business and its core operations were profitable. However, the analyst pointed out that on a last-twelve-month (LTM) basis, Zillow was still unprofitable. This highlighted the limits of quant models, which rely on historical data and cannot anticipate forward-looking changes. This insight led Sandler to opportunities in mischaracterized stocks like Zillow and Uber, where Eminence can exploit inefficiencies created by quant misinterpretation.
Data Science
The data science team focuses on alternative data to track thesis progression in real time, offering insights beyond quarterly updates. This includes tools like web scraping, credit card data, and parking lot imagery to gain immediate perspectives on business performance. By replicating what pod shops and short-term investors observe, Eminence can better understand near-term stock movements while capitalizing tactically, given its longer investment horizon.
For example, Eminence is long on Dave & Buster’s, with a thesis centered on new management implementing menu changes and store remodels to revitalize growth. With only 10 of 200 stores currently remodeled, the data team compares metrics from these remodeled locations against the rest, providing precise insights. This approach can validate a thesis before the next quarterly earnings release.
Short Team
In 2014, during a bull market, most Eminence analysts were focusing on longs, as rising markets incentivized juniors to prioritize ideas with larger dollar amounts. Sandler noticed this imbalance and grew uneasy about the market’s trajectory. He made several changes to address this:
Created a Dedicated Short Team: He appointed one of his most skeptical and contrarian analysts as a short specialist.
Adjusted Compensation: Short alpha was given twice the weight of longs in bonuses.
Emphasized Balance: Sandler reinforced the importance of equal effort on longs and shorts.
These changes brought more balance to the quality and volume of ideas, ensuring shorts received the attention they deserved.
Risk Management for Shorts
Shorting single names has become more dangerous due to historically high stock-level volatility relative to index volatility. To mitigate risk, Eminence has made the following changes regarding shorting:
Short position sizes are capped at 2% of capital, with even smaller sizes for small-cap stocks with high short interest or frequent Reddit mentions.
Shorts are diversified across different themes to avoid correlated bets, moving away from concentrations in accounting or fraud-related shorts.
With smaller initial positions, shorts are not closed even if a stock rises 100%, allowing the firm to stomach a large position during a squeeze.
The diversification comment is echoed by one of the panelists at the Sohn Conference, who highlighted using factor charts to manage correlated risks in short portfolios.
Through these efforts, Eminence has built a more balanced, adaptable approach to investing, leveraging data and careful team structuring to stay competitive in a rapidly evolving market.
To learn more about Eminence, please read my Eminence deep dive.
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