Theodore Kokas

Managing Director, Global Head of Alternative Investments, SEI Investments, USA, American/Greek, 47

Could you tell us about your background?

I started my career as an engineer designing ships for the US Navy, but got bored of it and left. On the basis of my quantitative abilities–I had no finance background–I convinced the treasurer of one of the Federal Home Loan Banks to hire me and I started working as a money market trader. In my second year in the job, I transferred to the Mortgage Backed Securities desk.

After another year, I decided to go back to school and get a financial education. I did an MSc at Boston College and then started a PhD but left to join a spin-off of Goldman Sachs, Southfield Corp, which was specialising in trading relative value relationships in commodities. Using the futures market, the company replicated the economics of a feedlot operation, trading feeder cattle and corn futures against live cattle futures. I was hired to replicate this arbitrage strategy in other similarly economically bounded relationships such as the soy crush, energy cracks, and bond basis arbitrage. For years, Southfield was the only firm doing this type of trade in the cattle market, until Cargill entered the market.

I moved to a larger hedge fund in 1996 and then to another fund in 1999. After ten years in research, I moved to portfolio management in 2001, when I joined the Abu Dhabi Investment Authority and took on the role of head of proprietary trading within their alternative investment division. After two years, I moved to New York and went on as a portfolio manager, first with Millenium Partners, and then with Rubicon in London, where I stayed until they closed shop in 2007 (the company later staged a dramatic comeback in the wake of the financial crisis).

I moved to the fund of hedge fund business doing manager selection and allocation, joining SEI as Head of Strategy in the Philadelphia region. A year ago I was promoted to Head of Alternative Investments. As such, I oversee hedge fund, private equity, and real estate assets worth a combined USD2.5bn.

What do you do in the Fund-of-Funds framework?

We have three main responsibilities: first to make top-down asset allocation decisions across various hedge fund strategies, our flagship product is a multi-strategy fund of hedge funds with USD1.9bn AUM, second is fundamental bottom-up manager selection–we invest with between forty and fifty managers–this is done by my team of analysts and my role is to oversee their work, third to build the portfolio allocating the risk budgets to the various strategies and managing the risk.

How do you manage the risk?

For measurement, we perform both return-based and position-based risk analysis, employing such metrics as VaR (with caution as we recognise the limitations of this approach) and expected loss with a focus on tail risk. We also do scenario analysis. Our primary risk management system is a proprietary multi-factor risk model that monitors our exposure to the various sources of risks and return. Risk control is primarily done by adjusting asset allocation and manager selection, but we have the option of utilising overlays from time to time.

You have been very successful to date and been entrusted with responsibilities encompassing research and management, why distract some of your time to do a PhD at this stage of your career?

The main reason is that I want to strengthen my skills: while I conceptualise the research work of my unit, I contract out the research to people with specialised expertise. I need to have a greater understanding of research methods and a greater exposure to the academic state of the art to better monitor this research.

This was not an easy decision to make at my age and at this stage of my career. However, not investing in developing these skills and acquiring this knowledge would slow down the rate of progress in the organisation. Research is paramount in the alternative investment space; for me to guide my organisation in the appropriate direction, I need to do a PhD.

Why choose EDHEC-Risk Institute?

Credibility. I need my qualification to be credible and the PhD in Finance programme at EDHEC-Risk Institute offered serious guarantees. It has a solid curriculum, is delivered by world-class faculty, and benefits from the support of a well-regarded research centre. I am looking forward to drawing on the collective resources of EDHEC-Risk Institute and on individual faculty members to do rigorous research, and have already started interacting with practitioners at the leading edge, which should prove fertile ground for new ideas.

Has the programme met your expectations to date?

The first two professors I have met are exceptional. They are impressive scholars by their own right and also excellent pedagogues; access to high-quality academics was one critical factor in my choice of EDHEC-Risk Institute, so I am thoroughly satisfied.

I also expected the programme to be intense and challenging; it certainly is but I do not feel overwhelmed. I have charted a course to digest the volume of information we have been exposed to and feel confident.

Indeed, the programme is challenging by its nature and format, how are you going to manage the required time commitment?

My wife also wants to know. I intend to orient my dissertation work towards things I am already working on and that will have very practical implications with tangible benefits for the organisation.

SEI appreciates the value my research will have for improving the investment process and also see this as professional development. The company is thus endorsing my participation in the programme.

Human resources had had negative experience with the financing of EMBAs, but they recognised that while the benefits of general management programmes are largely intangible and highly individual, a programme like the PhD has immediate collective value for the company as the team as a whole benefits from better supervision and better guidance.

Could you tell us more about this research then?

I want to focus on systemic return drivers in the hedge fund space and examine hedge fund replicating strategies.

I also have an interest in risk management across asset classes. Last May, our risk factor model was reporting low betas across our entire suite of risk factors however nearly all of our individual managers were down on the month, clearly something was missing… The missing factor was an estimate of liquidity risk, a flight to quality in stress periods. Correlations across risk premia increase in periods of stress and we were not monitoring this level of cross-sectional correlations directly in our factor model.

I am interested in looking at correlations between strategies and their evolution over time to examine to whether correlation behaviour could serve as early warning for stress situations. Risk management should work not only in good times but also during periods of stress. In my opinion, the industry has to work harder to learn the lessons from the last crisis.

Who do you think this programme is for?

In my opinion, this is a programme for senior executives and investment professionals who want to drive their organisations in different areas. This is for people who want to broaden their understanding of finance theory, not only to grow personally, but also use their new skills and knowledge to upgrade their organisations.