By Ethan Coy
I’d first like to discuss your experience at Cornell. I understand you were one of the first recipients of a scholarship which allowed you to attend Cornell in exchange for working twenty hours a week. What about your Cornell experience motivated you to remain involved with Cornell and take on your new role as a member of the Board of Trustees?
Reddy: Receiving a scholarship to attend Cornell gave me the ability to pursue a track that was very uncommon back when I was a student. By completing a joint degree between the business school and the engineering school I was able to discover my professional passion. I was also lucky to be at the right place at the right time. Wall Street was rapidly becoming more quantitative in the 1970s and my engineering background put me in a strong position to use my skill set to carve out a niche and find a company to sponsor me for a work visa in the United States. That proved to be my key to professional and personal development.
Andrew Rudd, a PhD in Operations Research who taught derivatives in the Johnson School, got me into quantitative finance on the investment management side. The genesis of my entry into finance was a little bit by accident and a little bit as beneficiary of the industry trend at that time. In essence, the scholarship gave me the opportunity to discover my passion for quantitative finance and benefit from a world-class education at Cornell.
From curbing inflation, to creating a national sales tax, to amending the bankruptcy code, India, for all its faults, seems to be managing its economy quite well. Where do you see opportunities for improvement in India and are there areas of the Indian economy where foreign investors should be looking to allocate capital?
Reddy: I have not invested much in India so I am not as familiar with it as someone who actively tracks and invests in the Indian markets. I do think, however, that the general trend is encouraging. In the past, investors have been hesitant to dip into Indian markets because of a lack of transparency in regulatory processes, archaic laws, and disputes over taxation. The current government in India seems to be very inclined to devise a transparent framework in order to encourage international investment. In terms of growth potential, I think India offers immense opportunities due to its youthful demographic: around 40% of all Indians are under 25. That in itself creates an unprecedented demand for goods and services within the country, thus making Indian companies less reliant on exports to fuel growth. This is particularly good for mid-cap companies looking to cater to the domestic market. These companies have benefited hugely from an improvement in living standards which has fueled demand for automobiles, scooters, TVs, washing machines, and much more. There’s definitely been a lot of progress over the years, but many challenges remain. I think political interference, which is a problem in every country, is more of an issue in India. So is corruption. Fortunately, the government is taking concrete steps to address these concerns. The recent demonetization is a big step toward wiping out corruption in India. It’s likely to create public angst and possibly a slowdown in economic growth because of the prevalence of corrupt money, but I think it's a step in the right direction.
Since growth in India is still fueled by banks and bank loans, access to capital is not as easily available as it should be for an economy of that size. There are no established bond markets and bankruptcy laws are vague, I think the next stage should be the issuance of corporate bonds. We cannot rely exclusively on bank loans because they have their limitations.
It’s also worth pointing out that the savings rate in India is very high. For most investors with fixed income, the only choice today is your bank or your company’s life insurance policies. Indians are looking, however, for avenues in which to invest other than just bank deposits.
President-Elect Trump has indicated the desire to stimulate the economy via his infrastructure plan, which largely will be funded by private investors. What role will large institutional investors such as KKR have in such a plan and will President Trump be able to raise the amount of money he plans to?
Reddy: We are still in the very early stages and it is not clear to me the direction the President-Elect wants to take. He clearly has identified infrastructure development as his top priority because it’s a business he knows, and he is hoping to have a public-private partnership. But the details are unknown. There is a huge appetite among pension plans and sovereign wealth funds for long-dated assets that have some income, and for infrastructure projects which tend to have the longest duration. A simple example is a toll road or gas pipeline. KKR is involved in the infrastructure and energy space. These projects have a fair amount of demand, and we could get involved in a public-private partnership, but it’s too early to say. It’s certainly a very important priority for the President-Elect, but the question remains whether Congress will approve it given its resistance in the past to public spending on infrastructure projects.
Bank stocks have surged since Trump’s election as the market anticipates regulation to be rolled back under the new administration. What does this mean for firms such as KKR which have filled the void in lending that banks left after the adoption of Dodd-Frank?
Reddy: I think the need for capital is still very deep and access to capital doesn’t have to come exclusively from banks. Whether some of these regulations will go away or not is unclear, but I think the need for capital remains. Different pockets of capital are important and I believe banks should not be the only source. Pension funds and endowments give us capital to invest, and these institutions have long horizons. Moreover, they don’t typically use leverage, and certainly providing capital for long-term opportunities in an unleveraged manner is one way to make the system much more stable.
Hedge funds have drawn criticism since the financial crisis for their inability to manage risk and earn superior returns. What would you attribute this to, and are central banks one of the main reasons hedge funds can’t generate alpha?
Reddy: The ensemble of central bank policy changes over the past few years has had a very detrimental effect on the investment world. Highly unpredictable and sudden shifts in ideologies and approaches have generated a lot of uncertainty. In particular, fundamental macroeconomic changes have made it much more difficult for hedge funds, which tend to be more micro and fundamentals focused. That’s been the biggest challenge, particularly over the last 18 months with all the talk in the U.S. about raising interest rates. On the other hand, the Bank of Japan decided to go with negative rates and because nobody was expecting such a move, it had a huge impact on financial institutions, insurance companies, and banks, which are the engines of economic growth. The uncertainty that prevailed following these decisions made it very difficult for hedge funds to add alpha in an environment where technical factors overshadow fundamental factors. Over the last six to nine months, however, as monetary and fiscal policies around the world have evolved, the markets seem to have absorbed these changes much better than they did earlier. Consequently, hedge funds have started to do well in the current environment.
Another challenge in the current market is the mix of phenomena like indexation, growth in ETFs, and decline in market liquidity. One trend is thus more cyclical in nature -- that the market now has a better idea how to operate. The second is probably more of a structural trend that hedge funds still need to adapt to. It’s the fact bank regulation, low rates, and capital needs have created some very exciting idiosyncratic and uncorrelated opportunities around the world. We have shifted our portfolios from more traditional alpha sources into these new opportunities.
After co-heading equity derivatives at Goldman Sachs, what made you decide to move into the hedge fund world and what advice would you give our readers interested in working for a hedge fund?
Reddy: When I was at Goldman Sachs I interacted a lot with the hedge funds in developing their strategies, particularly when they wanted to use derivatives to influence their views of the market. Europe was much more open to using derivatives than the U.S. market. So when I left trading, I really wanted to go back to the investment world where I started. One of the attractive features of the hedge fund industry to me was that this industry was at the cutting edge of research and was attracting the best talent. I felt I would continue to learn by being involved in an industry that cuts across asset classes and geographies. I came very much from an equity derivative background, so the opportunity to learn about macro and credit or fixed income strategies was very exciting. The hedge fund solutions industry gave me an opening to deal with all these strategies and I genuinely felt that if we structured the product correctly, we could fill a very important need. I think people should focus more on the characteristics that hedge funds provide, and whether they’re really appealing.
In terms of what people should do to get into hedge funds, remember that they represent an array of strategies and should not be looked at as a single bucket. You’ve got equity, macro, distressed credit, and relative value, so your ability to learn the nuances of the field should be your driver. But also focus on what your value-added is. Going back to my own experience, having a quantitative background when derivatives were starting to evolve allowed me to immerse myself in that space. It’s not just about passion; you’ve got to have the skill set to truly make it work.
As AI transforms the economy and drives many jobs into extinction, how can Cornell adapt, and what are your aspirations for Cornell Tech?
Reddy: I think we are in the very early stages of AI. Our new president is the ultimate expert; Martha’s knowledge and background is very exciting for Cornell. AI’s scope is so vast that we are just scratching the surface. It cuts across robotics, manufacturing, data analysis, medicine, and finance. I think our industry has done a very poor job in leveraging that technology relative to other industries. Indeed, we’ve barely progressed over the past fifty years. We’ve just followed the same path with the same attitude and same approach, oblivious to the fact that disruption in any industry doesn’t come from inside, it comes from outside.
In terms of Cornell Tech, I think our ability to provide business and technology in a single place is a huge advantage, and that we need to leverage that asset aggressively. So far, I think the programs of Cornell MBA and Cornell Tech have been geared toward entrepreneurs, which is good inasmuch as entrepreneurs need to understand marketing, finance, and business. But I think a lot more can be accomplished by incorporating AI, including cloud computing, into other fields of management like finance, marketing, and strategy. I am very excited that Cornell Tech sits at the center of all these fields.
I just set up a chair at Cornell at the Tech Business School for a professor of practice, about which I am quite excited. Mukti Khaire, the professor of practice, is focused on entrepreneurship and trying to bring together and effectively leverage both technology and finance.
Lastly, what does Girish Reddy do for fun?
Reddy: I have a variety of personal buckets. Obviously, my professional life is a big part of what I do. Philanthropy, particularly with an educational focus, has always given me enjoyment and satisfaction. Above all, though, I cherish my family, friends, travel, and golf. Balancing these is always a challenge – but one I’m only too happy to face.