Class of 2017 Forty Under Forty

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Michael Nichols Senior Investment Officer, Texas Tech University System
(Lubbock, TX) 39
Michael Nichols
(Art by Marcellus Hall)

The private debt portfolio is outperforming the Barclays Global Aggregate by 700–1000 basis points over any period the last five years.

How have you been a change agent at your organization? What have you done that you’re particularly proud of?

Over the last three years, the portfolio had a complete overhaul. The ACIO left to take a CIO position, so I ended up being the right hand of our CIO. My risk and economic analysis had always been a factor in allocation, but now I was also driving the derivatives portfolio. During this time, I structured more upside into the equity portfolio while adding various hedges, added swaps which have added significant Alpha, and diversified our counterparties. I took an active role in negotiating MCA agreements, which led to better fees and co-investment opportunities. Derivatives are a cost-effective way to gain Beta exposure and manage risk. MCA agreements allow us to focus on idiosyncratic risk. These two pillars embody our investment philosophy, which I have helped to build.

What is the asset class or investment that keeps you up at night, and why?

We have structured our exposure to market risk well. Our co-investments which often take an extended amount of time to play out and are event-driven can be a bumpy ride. With that said, this is why we are highly selective with who becomes an MCA partner.

What methodologies have you adopted within your institution?

When I started, there really weren’t any internal risk measurements. I used both parametric and distribution-free methods in various ways to measure market risk, factor risk, and tail risk, among others. This approach allowed us to expedite the rebuild. Now, we are mostly passive in public equities, which Bloomberg tracks nicely, and we have increased our rate of co-investments. Risk management has changed substantially, yet again, to underwriting individual deals.

Where do you fall in the passive vs. active debate?

Both are important. I try not to overpay for false Alpha or Beta in disguise.

What are the changes you’d like to see the institutional investing community make in 10 years?

The alternative investment industry has grown tremendously. They have been great at capturing fees and delivering low, uncorrelated returns. They serviced a demand for their product, and then received the backlash as clients realized that true Alpha is fleeting, difficult, costly, and in limited supply. I would like to see the investors seek more bespoke solutions and order off the menu. Many Alpha-focused funds are over-diversified, which can be suboptimal.

Who is a manager you don’t currently work with whose brain you’d like to pick?

Renaissance Technology, but my mind may be too fragile to handle it.

Ideally, where would that meeting take place?

Mars… Seriously, it’s time to accelerate the space race.

What is the software investment tool that helps you most?

Initially, SAS. I then used it to vet Risk Plus (a PerTrac module created by Finanalytica), which is easier to use. Now, I mostly use Bloomberg and manually track any co-investments.

What would improve the relationship between you and managers?

We have a high level of transparency with our MCA managers. This is in stark contrast to some of the legacy private asset managers. There is already enough information asymmetry without paying 2 and 20 for more of it.

Why did you choose your current path?

I had a difficult time settling on a career path. This one is multi-faceted, dynamic, and challenging. It allows me to use my entire toolbox. Using it to benefit the endowment is extremely gratifying.