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DAVID X MARTIN & ENRICO DALLAVECCHIA
Arctium Capital Management
Management guru W. Edwards Deming famously said: “It is not necessary to change. Survival is not mandatory.”
We all know what he meant. Given the ever-increasing velocity and intensity of change in the past few decades, it’s even truer now than in Deming’s day. Adapt or die.
Today’s environment of global tariff wars, nearshoring, technological decoupling, and the growing complexity of U.S. geopolitical priorities require a profound reassessment of how hedge fund investors conduct due diligence and how fund managers practice risk management. Investors and managers alike are operating in a regime defined by faster news cycles, greater tail risks, and a collapse of the assumptions that have governed global markets for decades. In short, the
frameworks we have traditionally used to monitor and mitigate risk must now be reinvented for today’s more fragmented, volatile, and dangerous world.
Traditional hedge fund due diligence frameworks were designed to test governance, consistency, operational stability, and alignment. They worked well in a world where volatility was episodic, institutions were predictable, and market regimes were long-lasting. But that world is gone.
But today’s world is totally different: The pace at which narratives shift, capital moves, and confidence erodes has accelerated. Evaluating a fund manager’s strategy, pedigree, and service providers is still important, but it is no longer enough. Investors now need to assess adaptability — that is, how well a manager navigates an environment where macro and geopolitical shocks are not outliers, but structural features of the market.
Historical track records during more stable times matter less than the ability to respond well to curve balls that come out of the blue. Investors should ask managers specific questions about past dislocations: “What did you do during the COVID shock? How did you respond to the inflationary regime shift? Tell me about how you managed through geopolitical disruptions, like Brexit or Russia’s invasion of Ukraine. Did you maintain discipline or shift risk aggressively – and why? How did you communicate with investors during these situations – and did investors respond well to your communication? What has been your biggest mistake as a fund manager … and how did you rebound from that mistake?” The best predictor of future behavior is
past behavior, so you want to use behavioral interviewing – asking specific, behavioral questions about their ability to think on their feet, prevent blind spots, and respond in a crisis. Examples of past behavior are far more revealing than a Sharpe ratio or volatility statistic. Beyond individual manager assessments, investors should also reconsider how they evaluate a fund’s contribution to the overall portfolio. It’s time to replace the traditional question, “Does this fund fit into our asset allocation framework,” with a more dynamic inquiry: “Will this fund continue to be additive under correlation breakdowns and volatility spikes?” It may seem counterintuitive, but a fund that complements the portfolio in calm markets may turn out to exacerbate losses in stressed conditions if it is exposed to hidden
betas or crowded trades. Evaluating resilience across regimes is therefore essential – and more relevant than evaluating fit within a static allocation model.
Another critical dimension is the detection and response to strategy drift. In calm markets, investment theses remain intact and risk frameworks evolve gradually. In today’s volatile markets, even well-defined strategies may drift — either due to market pressure, investor demands, or subconscious behavioral bias. Therefore, continuous monitoring is just as important as the initial investment decision. Investors need to establish feedback mechanisms to track whether managers are adhering to their mandate, changing their exposure profile, or deviating from their stated risk appetite. Timely detection of such changes can prevent significant losses. Service providers – often an afterthought — take on greater importance as the velocity of change increases. Prime brokers, fund administrators, legal advisors, and custodians must be resilient in their own right. Weaknesses in these relationships may not be visible in bull markets but they are vulnerable fault lines when stressed. Investors should evaluate whether these providers are robust, responsive, and appropriately scaled to the fund’s strategy and assets under management.
Equally vital is the evaluation of the fund’s operational and financial resilience. In a period where funding conditions tighten rapidly, and redemption cycles accelerate, managers with limited operational runway or excessive reliance on “hot money” are particularly vulnerable. A strong fund must not only perform but survive. This includes having lock-up provisions that are appropriate for the liquidity of the strategy, a diversified investor base, and a funding structure that does not rely on leverage to meet redemptions or cover margin calls. In addition, let’s not overlook the importance of managerial alignment. Investors have always asked whether fund managers have “skin in the game.” But in today’s climate, the quality of that alignment matters more than its mere presence. Investors want to know: “Are key principals significantly invested? Are incen-
tives designed for short-term performance fees or longterm capital preservation? Does the firm demonstrate a commitment to continuity and succession planning?” These factors become critical when markets turn and the path forward is unclear.
Risk management, for both allocators and hedge fund managers, must now morph from a retrospective function to a forward-looking discipline that supports active decision-making. The speed at which information flows and markets reprice demands a new level of responsiveness. In past regimes, drawdowns unfolded over weeks or months. Today, they can materialize in hours. Such acceleration demands tighter trigger frameworks, revised stop-loss protocols, and scenario analyses that reflect not only market volatility, but political instability, policy shifts, and regional conflicts.
One of the major weaknesses in today’s investment ecosystem is the underuse of scenario planning. Many investors and managers continue to build stress tests around historical market events – while tail risks today are less about the recurrence of past shocks and more about the emergence of entirely new disruptions. The task is no longer to predict specific events but to understand how a strategy or portfolio behaves when fundamental assumptions break. This includes scenarios like the failure of a major global counterparty, the fragmentation of capital markets, the imposition of capital controls, or systemic technology failures.
The one thing we know for sure is: The future looks nothing like the past. We must ask ourselves: “What is unthinkable today, that if it happened, would completely transform our business?” Futurist Joel Barker, author of The Business of Paradigms, says that “when a paradigm shift occurs, everyone goes back to zero. Your past success counts for nothing.” Overnight, your highly successful firm can find itself back at Square One, along with everyone else, scrambling to operate within a new, unfamiliar paradigm. In other words, we all need to get proficient at thinking about the unthinkable. Planning for the unthinkable means going beyond the numbers. It involves tabletop exercises, discussions around investment governance, and coordination across functions. The goal is not to eliminate uncertainty
– an impossible task – but to build a decision-making framework that performs under pressure. The best institutions create a pre-defined set of responses that can be executed quickly during a crisis. This includes capital reallocation plans, hedging overlays, and communication protocols. In a crisis, there is rarely time to design new solutions. The ability to act must be embedded in advance. In other words, you need a Plan A, Plan B, Plan C, Plan D, and perhaps a few additional contingency plans.
Reporting frameworks must also evolve. Too many investors rely on risk reports that are backward-looking, overly quantitative, and disconnected from decision-making. These reports often emphasize variance and benchmark-relative returns rather than actual investment insight. What we need is a more holistic view of risk — one that incorporates liquidity, behavioral exposure, operational fragility, and geopolitical sensitivity. Reports should highlight not just what happened, but what is likely to happen and where the vulnerabilities lie.
Lessons from other domains – particularly enterprise and cyber risk management – are instructive. In cybersecurity, the focus has shifted from how an attack happens to the consequences of the disruption. Similarly, investors should focus on the impact of market shocks, not just their causes. Whether the disruption stems from inflation, geopolitics, or regulation, the key question is: “How does it affect capital flows, portfolio construction, and operational continuity?”
Cyber risk management provides a valuable model for navigating today’s investment landscape. Because cyber threats can emerge and escalate in real time, the field has developed a culture of rapid response, constant monitoring, and contingency planning. This mindset — shaped by the need to act at “warp speed” — offers a useful analogy for investment professionals that are now facing, more than ever, a fast-moving geopolitical and macroeconomic environment.
One lesson we can learn from cyber risk professionals is the focus on identifying the “crown jewels” — assets or functions whose failure would be catastrophic. In hedge funds, this might include proprietary research
models, key staff, execution infrastructure, or critical service provider relationships. These elements must not only be identified, monitored, and stress-tested regularly but also explicitly incorporated into the design and execution of stress testing exercises and crisis simulations. Too often, tabletop exercises are conducted without the direct participation of the individuals or teams responsible for these vital functions — which limits their realism and effectiveness. Ensuring that these stakeholders are actively engaged in scenario planning, decision-tree analysis, and post-mortem reviews helps uncover operational dependencies and coordination failures before a real crisis hits. Their participation strengthens institutional memory, improves cross-functional communication, and ensures that contingency plans are not just theoretical documents but practical tools ready to be deployed under pressure.
Today’s leading funds are already adapting. They are embedding risk teams within the investment process – not as gatekeepers, but as partners. They are using open-source data to detect behavioral changes in markets, applying machine learning to flag anomalies in trading patterns, and building institutional memory around past crises to shorten reaction time. These managers understand that risk is not a static concept but a behavioral process that evolves – often very quickly –along with the market.
Communication with investors has also changed. Top-performing funds are increasing the frequency of updates, not only to report performance but to contextualize it. During volatile periods, weekly or even daily insights can preserve investor confidence and avoid redemption spirals. More transparency around positioning, risk exposures, and scenario thinking reassures sophisticated clients that the fund is in control, even if the market is not.
Smart allocators, too, are revisiting their approach. Family offices and endowments are re-evaluating how they define risk appetite. Rather than applying a uniform framework across asset classes, they are tailoring their approach to reflect the unique risk-return dynamics of alternatives. This includes defining not just how much volatility they can tolerate, but what kinds
of losses are unacceptable and what types of risks are dealbreakers – risks they’re unwilling to assume under any conditions.
Decision-making in uncertainty remains one of the most difficult challenges in investing. But with the right structure it can become more manageable. Investors who define their values, constraints, and priorities ahead of time can move more decisively when the facts change. Those who wait until uncertainty resolves will likely find that the best opportunities have already passed them by.
This is not a time to retreat into safe havens or to freeze decision-making – nor is it a time to chase alpha blindly. It is a time to elevate process over prediction. Building a resilient investment process means developing the tools, people, and culture to respond ef-
fectively to rapid – sometimes unimaginable – change. It means that due diligence is not a checklist, it’s an ongoing conversation. And it means that risk management is not a shield, it’s a steering wheel.
50+ years ago, futurist Alvin Toffler wrote that both the rate of change and intensity of change were accelerating exponentially over time. Toffler predicted that we’ll ultimately arrive at the point where the speed and intensity of change become overwhelming, even paralyzing, and we will find ourselves living in a state of shock – Future Shock. That day is fast approaching. What can we do to prepare and/or prevent it?
These are parlous times, in which capital preservation and opportunity capture depend on institutional agility. Success will go to those who can identify real-time threats, adapt to new realities, and act swiftly without compromising discipline. That is not just good risk management – it’s survival.
David X Martin CEO and CIO Arctium Capital Management
Enrico Dallavecchia President and CCO
Arctium Capital Management
Arctium Capital Management is an Outsourced CIO service provider specializing in hedge funds and alternative investments, with a core focus on uncorrelated alpha—a strategy designed to deliver returns independent of market swings. Our flagship Arctium Uncorrelated Alpha Fund seeks capital appreciation, particularly during market downturns, by generating returns with minimal correlation to equity and fixed income markets. Led by two former Chief Risk Officers of major financial institutions, our team brings deep expertise in markets and risk management. Arctium partners with endowments, family offices, pension funds, and insurance companies, offering customized OCIO solutions, hedge fund due diligence, and institutional-grade risk management.
E.J. KAVOUNAS
Copilot Entertainment
In recent years, the way films and television projects are financed has evolved considerably, with major studios like Netflix, Warner Bros., and Amazon often funding projects directly from their own balance sheets. These vertically integrated giants produce, distribute, and exhibit their content across global streaming platforms, allowing them to absorb the financial risk and retain the lion’s share of profits. However, a significant number of films and television series, including those that eventually appear on streaming platforms or in theaters worldwide, are not studio-backed but instead financed independently. These independently produced projects offer an underexplored investment opportunity, especially in the realm of secured private debt.
Independent film and television projects are typically financed through a mosaic of funding sources. These include equity investments from high-net-worth individuals, family offices, and private equity firms, combined with soft money such as government grants, tax credits, and rebates. In many cases, producers must also secure loans from private lenders to cover budget gaps. Equity investment is often seen as the riskiest component of the financing stack. These investors are last in line to recoup their investment and only see returns if the film performs well at the box office or garners significant licensing deals. To help mitigate this risk, some
investors rely on federal tax incentives such as IRS Section 181, which allows for an immediate deduction of qualified production expenses. Internationally, similar risk-reduction mechanisms exist, including production grants in Canada, the UK, Germany, and Australia, all of which aim to stimulate local film production by returning a percentage of the budget to qualifying projects.
Yet, beyond equity lies a more stable and potentially lucrative corner of the film financing landscape: secured debt. This form of investment is far less dependent on a project’s commercial success and more reliant on pre-arranged financial structures, making it attractive for investors seeking lower-risk exposure to the entertainment industry.
Secured debt in film financing involves lending money to a film or television project with the backing of tangible or contractual assets. These assets may include:
1. Tax Credits and Rebates: Many U.S. states and foreign governments offer refundable cash rebates or transferable tax credits for qualified production expenses. For example, Georgia, New Mexico, and Louisiana in the U.S., and countries like Canada and the UK, provide significant credits that can total 20% to 40% of a production’s local spend. These credits are typically assigned to a lender as collateral and repaid when the credit is monetized (either through a sale or refund from the state).
2. Pre-Sale Contracts: Independent producers often secure distribution deals in advance of production. These contracts guarantee payment from international or domestic distributors upon delivery of the completed film. A lender may advance funds against these contracts, with the sales revenue acting as repayment.
3. Gap Financing: In certain cases, lenders will finance the “gap” between what a producer has already raised and the total production budget. This is generally based on projections of future revenue from unsold distribution territories or rights. While riskier than tax-credit or pre-sale backed
loans, these still involve a degree of structure and collateral.
A typical secured lending process begins with the production company providing a comprehensive financial plan to the lender. This plan includes:
• A detailed production budget and schedule
• Copies of confirmed pre-sale agreements
• Letters of intent for tax credit eligibility following a pre-production audit, often from a local accounting firm, that provides an Opinion Letter based on spend and legislation.
• Completion bond (an insurance policy that ensures the film will be finished on time and on budget)
• Cash flow schedule detailing when expenses will be incurred and when revenues are expected
Once the lender verifies the collateral, it structures a loan that may cover 30% to 70% of the production budget, depending on the strength of the security. The loan is usually repaid within 12 to 24 months, with interest rates ranging from 8% to 15% annually, depending on risk profile and collateral quality.
Investing in secured debt for film and television projects offers several distinct advantages:
1. Reduced Risk: Unlike equity, which depends entirely on the project’s success, debt investments are backed by assets with known or contractual values.
2. Attractive Yields: Interest rates can be significantly higher than traditional corporate bonds or treasury notes.
3. Shorter Duration: Loans are often repaid quickly, sometimes within a year, allowing for higher liquidity and faster reinvestment opportunities.
4. Portfolio Diversification: Entertainment lending is uncorrelated to stock and bond markets, offering an alternative asset class that behaves differently during economic cycles.
5. Cultural Impact: Investors can contribute to the creation of artistic works and cultural products, sometimes receiving credits, invitations to premieres, or other non-financial perks.
Of course, no investment is without risk. For secured debt investors, the primary concerns include:
• Production Delays or Failures: If the project is not completed, the tax credits or pre-sale contracts may not be triggered.
• Regulatory Changes: Tax incentive programs are subject to political and budgetary shifts, which could impact availability or timing.
• Counterparty Risk: The solvency of distributors and tax credit buyers must be vetted, as delayed or defaulted payments could impact returns.
• Completion Risk: While completion bonds help mitigate this, some projects still run over budget or behind schedule.
These risks are typically addressed through rigorous due diligence, third-party oversight (such as completion bond companies and audit firms), and well-structured legal agreements.
The popularity of private debt in entertainment has increased in recent years. While boutique finance firms have helped expand access to this market, it is worth noting that some traditional commercial banks also provide film financing, particularly for the most secure collateral such as tax credits. However, these institutions often struggle to offer the level of leverage or production-specific flexibility that many independent producers require. As a result, more agile private lenders continue to play a vital role in bridging financing gaps. One example is Level Field Media whose principals have financed over 850 film and TV productions. This boutique lender assists producers using structuring, to increase collateral by mixing multiple jurisdiction’s tax incentives. Acting as a consultant, providing finance strategy, boutique lenders help producers reduce their reliance on equity while maximizing returns to investors and minimizing their risk.
While equity investment in film can yield outsized returns, it comes with considerable risk tied to box office performance and commercial viability. For investors looking for a more predictable and secured pathway into
the world of entertainment finance, private debt backed by tax credits and pre-sale agreements offers a compelling alternative. These investments combine the allure of Hollywood with structured asset-backed returns, creating opportunities not just for financiers but for storytellers and audiences alike. As demand for content grows globally, so too does the opportunity for savvy investors to participate in its creation—with less drama and more security.
E.J. Kavounas is an executive with over two decades of experience in media finance and investment banking. He produced the feature Hero Mode, starring Mira Sorvino and Sean Astin. Prior to this, he worked for 15 years in investment banking, including at Credit Suisse in Los Angeles, where he was a Managing Director. He has closed over $10 Billion worth of transactions, including financing the feature films Empire State (Dwayne Johnson) and Escape Plan (Sylvester Stallone and Arnold Schwarzenegger).
He holds an MBA from The Wharton School of the University of Pennsylvania and a BA from Middlebury College. In addition to his professional achievements, he is an advisor to Caltech Connection which supports community college undergrads through mentorship opportunities with Caltech grad students.
Uncorrelated spoke with Kevin Shea at Disciplined Alpha about the Harbor LongShort Equity ETF and his updated views on the overall U.S. equity market. The discussion is summarized below.
Uncorrelated: Can you provide a summary of the ETF and the compelling features it offers?
Kevin Shea: The ETF invests in Large Cap and Mid Cap U.S. stocks. It has four distinct features that include a Regime Model that determines gross and net exposure and Growth versus Value style tilts, distinct Industry Group based stock selection models, a separate Short Model, and an Alpha Opportunity Model that
determines which parts of the market have the most opportunity to generate alpha.
Uncorrelated: Can you describe how you developed these four features? Perhaps connect them to your broader career and the roles you had over time. For structure, please organize them chronologically. Which feature did you develop first?
KS: While we are probably best known for our Regime Model, the first feature I developed was the distinct Industry Group based stock selection models. My first career was in Biotech. In the early 1990s, I worked at a biotech company in Boston doing HIV research. It was intense work, as there were no drugs on the market for
EDITOR’S NOTE: THIS ARTICLE HAS BEEN UPDATED AS OF APRIL 2025 AND ORGINALLY APPEARED IN OUR JANUARY 2025 ISSUE.
HIV. If somebody got infected, their life expectancy was only 24 months. I worked with a team to develop an antibody. This research turned into a Master’s Thesis, an article, a patent, and ultimately a drug in clinical trials.
Due to the progress on the scientific front, we needed a business development person. I started working in this role part time while pursuing and earning an MBA, with a concentration in Finance and a minor in International Studies.
After graduating in 1995, I entered the Management Development Program at John Hancock that involved rotations in several parts of the firm. The first rotation was in the Health Insurance division. This made me reflect on the fact that Biotech and Health Insurance are both Industry Groups within the same Health Care Sector, but they are fundamentally different from each other. Biotech companies make significant investments in research and development (R&D), to develop distinct products protected by patents, over a decade plus product development cycle, and with heavy national regulatory hurdles to overcome prior to marketing. Health Insurance companies typically make relatively little investments in R&D over a much shorter product development time are more focused on operational product efficiency, and also look for the general account to seek to increase in value over time in order to pay out future claims.
Due to the inherent fundamental differences in the business models of the companies in these Industry Groups, it seemed natural from a stock selection perspective to build Industry Group dependent models.
I subsequently rotated to three different groups in the mutual fund division of John Hancock. I attended meetings with company managements and sellside fundamental analysts across all Industry Groups. The insights gained from these and subsequent meetings, which now number over 1,000, has allowed me to gain insight into the drivers of stock performance within a given Industry Group. I have taken these insights and rigorously backtested them to build Industry Group dependent stock selection models.
This is a very differentiated feature of the strategy. The investment management industry has evolved over the years, but we believe it is still tilted toward fundamental analysis for stock selection. While fun-
damental managers and analysts know a lot about the companies they cover, they generally have not backtested their conclusions about the specific drivers of performance. Quantitative managers and analysts, on the other hand, frequently run backtests, yet in our experience very few ever talk to company managements to understand the business models of the companies they are trying to model. Very few managers and analysts try to both understand the compelling fundamental drivers of performance within a given Industry Group, as well as backtest those ideas before incorporating them into an investment strategy. We think it is important to do both.
Uncorrelated: Interesting. Which were the next of the four features that you developed?
KS: I developed the separate Short Model followed by the Alpha Opportunity Model. I joined Invesco to build a Mid Cap product in 1999. Shortly after I arrived, the market started to decline significantly. While the overall U.S. equity and the Nasdaq declined, I noticed that the stocks that declined the most were not necessarily the worst ranked stocks in our existing Long Model. This led us to explore the idea of building a separate Short Model. We weren’t directly shorting stocks at the time, so we called this a Bomb Avoidance model. It was exciting to find predictors of underperformance, which we combined into an overall Model. It was somewhat frustrating; however, to not just avoid the stocks likely to underperform, but to potentially be able to actively take advantage of this insight by selling them short.
A couple of years later I had the opportunity to build a Market Neutral product at a predecessor firm to Disciplined Alpha, D.A. Capital Management. As there are fewer tools to work with in Market Neutral than a variable exposure product, it is important to focus on those parts of the market where you are rewarded for being correct. This work led to our Alpha Opportunity Model.
Uncorrelated: So that leaves the Regime Model. Can you expand on that? This sounds particularly interesting.
KS: I agree. In business school, it is common for finance professors to review the Fama French model in which the expected “total” return of a stock is driven by the
exposure to the market, size, and value. The market “relative” return of a stock is thus driven by a stock’s exposure to size and value. Finance professors tend to then typically review a lot of data and conclude that over the long run, if one buys small cap value stocks, they may potentially outperform the market. While this is conceptually correct, the long run for an academic might be ten years.
After surveying numerous allocators, I found that historically the most popular time-period that they use to evaluate performance is the most recent three years, followed by the most recent five years.
In the late 1990s, Growth stocks outperformed Value stocks. The internet Bubble finally blew up from 2000 to 2002, during which period Value stocks outperformed Growth stocks. This was followed by a sig-
nificant “Junk Rally” in the second and third quarter of 2003, when low-priced, low-quality stocks performed well.
At a high level, there was a shift from Risk On in the late 1990s, to Risk Off from 2000 to 2002, to an extreme level of Risk On in primarily two quarters in 2003. Put another way, first Growth stocks outperformed, then Value stocks outperformed, then Growth stocks outperformed again.
In my experience, many Growth and Value managers tend to be very passionate about their investing styles. Growth managers look for the latest new technology. Lately this has often had to do with AI. Growth managers also likely then pay a high multiple of future earnings or cashflow to buy these stocks. Value managers historically admit that they seek to provide a steady
allocation in a broader portfolio, likely not investing in companies that may cure cancer or reinvent the internet. They continue to state that they invest in “boring” companies, but these companies have had real earnings, and today, they buy these companies at attractive valuations. They often point out that Value strategies have the potential to hold up in times of market turmoil.
A Regime approach to investing historically does not categorically embrace Growth or Value as an inherently better method of investing. Instead, it relies on a model that indicates one of these styles is likely to outperform over the medium term. In our case we use a combination of Macro data and Relative Valuation to determine which of these styles is likely to outperform.
Very few managers take a Regime approach to investing. Based on manager databases and conversations with sellside strategists that publish on Regime models, we believe there might be about 20 managers in the industry that have a formal Regime approach to investing.
Uncorrelated: This does indeed seem like a very differentiated feature. Can you discuss why a Regime approach to investing may be particularly important at this point in time?
KS: It is the very same reason why I believe your Uncorrelated Conference is timely. I have brought with me a chart showing the relative valuation of the U.S. equity market for the last 130 years. Initially the valuation represented the PE ratio developed by Robert Shiller, known as the Cyclically Adjusted Price to Earnings Ratio, or CAPE. Over time, as additional information became available, other valuation metrics were included. These individual valuation metrics were combined on an equal-weighted basis to establish a composite valuation metric for the U.S. equity market.
The y-axis is on a scale from 0% to 100%. This represents the percentile ranking since inception of the chart for the composite valuation metric up until that point in time. When the line reaches 100%, this indicates that the U.S. equity market has never been as expensive as it had been, up until that point in time.
The U.S. equity market peaked in 1929, as referenced in the first red circle in the chart, just before the market crashed leading to the Depression in the 1930s.
The U.S. equity market finally recovered 25 years later in 1954.
The U.S. equity market then continued to rise until 1968. At that point, as referenced in the second red circle in the chart, the U.S. equity market reached a valuation similar to the level in 1929. The U.S. equity market endured multiple bear market declines during the 1970s, before finally recovering 14 years later in 1982.
The U.S. equity market, once again, then continued to rise until 2000. Just before the peak of the market, as referenced in the third red circle in the chart, the U.S. equity market, once again, reached a valuation similar to the level in 1929. The U.S. equity market, once again, endured two bear market declines consisting of the bursting of the Dot-com Bubble and the Global Financial Crisis, before finally recovering 13 years later in 2013.
Today, the U.S. equity market is, again, at a valuation similar to the level in 1929. When the multiple of the U.S. equity market expands, this corresponds with multi-year periods during which the U.S. equity market generates above-average returns. When the multiple of the U.S. equity market contracts, this corresponds with multi-year periods during which the U.S. equity market generates 0% annualized returns.
I believe the U.S. equity market is due for a multiyear period during which the multiple of the U.S. equity market contracts, and the U.S. equity market generates 0% annualized returns.
Many products that are marketed as solutions to diversify a Long portfolio have correlations with the S&P 500 Index of approximately .85 to .90, and, in my experience, are unlikely to deliver returns that keep up with inflation during a multi-year period when the S&P 500 Index may generate 0% annualized returns. Some Long Short equity strategies have much lower correlations with the S&P 500 Index, and may be better positioned for such a time period. In our case, this is due to the Regime Model. While the S&P 500 Index generated 0% annualized returns from 2000 to 2013, there were several year time periods when Growth stocks outperformed, then Value stocks outperformed, etc. Having the ability to shift between tilting to Growth stocks and Value stocks has the potential ability to generate absolute returns during such a time period.
Reproduced with permission from Simon White, Macro Strategist at Bloomberg Source: Robert Shiller at Yale University; Bloomberg Fundamental data; March 13, 2025; Factors are equally weighted and introduced as they became available, with CAPE being the first factor. An expanding window technique was used to calculate average percentiles; Estimates for S&P were used prior to 1957
Uncorrelated: I understand you have partnered with Harbor Capital, in the launch of an ETF version of your strategy. Can you tell us more about this?
KS: We are very excited about this partnership. Harbor Capital has $58.79 billion in assets under management as of March 31, 2025. In the last few years, the mutual fund industry has shown signs of maturing while the ETF industry has expanded dramatically. As of December 2024, and according to available information on the ETF market, in 2023, the overall ETF market grew 15%, while the Active ETF market grew approximately 46%. The figures for 2024 are ahead of the 2023 pace. The overall ETF market now exceeds $10 trillion in as-
sets. In the last three years, Harbor Capital has focused on bringing compelling ETF products to the marketplace. They now offer about 20 ETF products across a variety of asset classes. They also have a salesforce with coverage throughout the country.
The Disciplined Alpha Onshore Fund LP, which launched almost ten years ago, was reorganized into the Harbor Long-Short Equity ETF in December 2023. We agreed and after a lot of work by both parties, this was one of the first hedge fund to ETF conversions in the industry.
Uncorrelated: Sounds like an exciting partnership. Thank you for your time.
Performance data shown represents past performance and is no guarantee of future results. Past performance is net of management fees and expenses and reflects reinvested dividends and distributions. Past performance reflects the beneficial effect of any expense waivers or reimbursements, without which returns would have been lower. Investment returns and principal value will fluctuate and when redeemed may be worth more or less than their original cost. Returns for periods less than one year are not annualized. Current performance may be higher or lower and is available through the most recent month end at harborcapital.com or by calling 800- 422-1050.
ETF performance prior to 12/4/23 is attributable Disciplined Alpha Onshore Fund LP (the “Predecessor Fund”). The historical NAV of the predecessor are used for both NAV and Market Offer Price performance from inception to ETF listing date. Performance periods since LSEQ listing date may contain NAV and MOP data of both the newly formed ETF and the predecessor fund performance. Please refer to the Fund prospectus for further details.
Shares are bought and sold at market price not net asset value (NAV). Market price returns are based upon the closing composite market price and do not represent the returns you would receive if you traded shares at other times.
For Institutional Use Only. Not for Distribution to the Public.
The HFRX Equity Hedge Index measures the performance of the hedge fund market. Equity hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios.
All investments involve risk including the possible loss of principal.
Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETF is new and has limited operating history to judge.
The views expressed herein are those of Kevin Shea, Disciplined Alpha at the time the comments were made. These views are subject to change at any time based upon market or other conditions, and the author/s disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.
There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic
conditions. Short selling securities could potentially have unlimited loss due to the price of securities sold short increasing beyond the cost of replacement and the limitless increase on the value of a security. The Fund utilizes a quantitative model and there are limitations in every quantitative model. There can be no assurances that the strategies pursued or the techniques implemented in the quantitative model will be profitable, and various market conditions may be materially less favorable to certain strategies than others. The Harbor Long-Short Equity ETF (the “Fund”) acquired the assets and assumed the then existing known liabilities of the Disciplined Alpha Onshore Fund LP (the “Predecessor Fund”), a Delaware limited partnership, on 12/4/23, and the Fund is the performance successor of the reorganization. This means that the Predecessor Fund’s performance and financial history will be used by the Fund going forward from the date of reorganization. Performance information prior to 12/4/23 reflects all fees and expenses, including a performance fee, incurred by the Predecessor Fund. Disciplined Alpha LLC (“Disciplined Alpha”) served as the general partner and investment manager to the Predecessor Fund, which commenced operations on 1/1/15 and, since that time, implemented its investment strategy indirectly through its investment in a master fund, which had the same general partner, investment manager, investment policies, objectives, guidelines and restrictions as the Predecessor Fund. Regardless of whether the predecessor fund operate as a stand-alone fund or invested indirectly through a master fund, Disciplined Alpha managed the Predecessor Fund assets using investment policies, objectives, guidelines and restrictions that were in all material respects equivalent to those of the Fund. However, the Predecessor Fund was not a registered fund and so it was not subject to the same investment and tax restrictions as the Fund. If it had been, the Predecessor Fund’s performance may have been lower.
Diversification does not assure a profit or protect against loss in a declining market.
ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold.
Indices listed are unmanaged and do not reflect fees and expenses and are not available for direct investment.
The Standard & Poor’s 500 Index is an unmanaged index generally representative of the U.S stock market.
The Russell 1000 Growth Index is an unmanaged index generally representative of the U.S. market for larger capitalization growth stocks.
The Russell 1000 Value Index is an unmanaged index generally representative of the U.S. market for larger capi- talization value stocks.
Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.
Foreside Fund Services, LLC is the Distributor of the Harbor Long-Short Equity ETF. 4425052
Mr. Shea is CEO of Disciplined Alpha LLC. and has 25 years of investment experience. Previously he was the Director of Quantitative Research at Cadence Capital, responsible for implementing a regime-based approach across multiple products representing $5 bb. Mr. Shea has also held the positions of Portfolio Manager at Batterymarch where he managed $600 mm, and CIO and Founder of DA Capital where he grew the firm from $10 mm to $450 mm over four years. He has also been a Portfolio Manager at Invesco, responsible for $100 mm, and a Quantitative Analyst at John Hancock Funds. Mr. Shea holds a B.A. in Liberal Studies from the University of Notre Dame, an A.L.M. in Biology from Harvard University, and an M.B.A. in Finance and International Studies from Boston College. Mr. Shea co-teaches a Proseminar in Finance at MIT’s Sloan School of Management. He is a member of the CFA Institute, and the Institute for Quantitative Finance, also known as the Q Group. He is also a member of the Financial Accounting Standard Board’s (FASB’s) Investor Advisor Committee (IAC). Mr. Shea has been quoted in numerous publications including aiCIO, Emerging Manager Monthly, Hedge Fund Alert, HFM Week, Institutional Investor, and WatersTechnology. He has spoken at numerous conferences in the U.S. and internationally sponsored by Allianz, Argyle Executive Forum, Battle of the Quants, Capital IQ, FactSet, HFM Week, International Quality & Productivity Center, Northfield and Sentiment Analysis Symposium.
Kevin W. Shea, CFA Chief Executive Officer Portfolio Manager Disciplined Alpha LLC
Over the past two years, commercial real estate (CRE) has been at the center of turbulence in the alternative investment world. The combination of soaring interest rates, remote work disruption, and credit contraction hit the sector hard. Office assets lost their luster, cap rates ballooned, and transaction volume stalled. For many investors, CRE became synonymous with risk.
But markets are cyclical, and distress often sets the stage for opportunity. As of 2025, a growing cohort of sophisticated investors is rethinking CRE not as the problem child of alternatives, but as the most actionable opportunity in the space.
Why? Because while much of the alternative asset universe is only now starting to face real cracks, CRE has already repriced—and that makes it uniquely positioned for smart capital to step in.
The distress in commercial real estate wasn’t slow or subtle. It was fast, broad, and very public. Follow-
ing the pandemic-induced demand shifts and a historic surge in interest rates, CRE went through a structural repricing.
Lenders reined in leverage. Refinancing dried up. Office towers emptied out. Even multifamily and industrial—darlings of the pre-2022 cycle—faced valuation cuts as cap rates widened. Suddenly, asset owners were underwater on 2021-vintage deals and equity was wiped out in recap after recap.
But here’s the silver lining: this pain has already worked its way through a large portion of the system. CRE has already experienced a real market-clearing moment. Prices have corrected. Risk has been repriced. Opportunistic capital is returning to the table.
Compare that to other corners of the alternative landscape—where many assets are still marked to outdated valuations, and distress remains unrealized.
The private credit boom of the past few years may
be heading toward its first major test. Loans originated in 2021 and early 2022 were priced during a low-rate, high-growth environment. Today, many of those borrowers are struggling with debt service, and restructuring activity is picking up.
Venture capital faces a similar reckoning. As of 2025, many portfolios are sitting on markdowns, with flat or no exits. Yet fund-level NAVs often lag the reality on the ground. The illusion of stability masks what will likely be a challenging capital raising cycle for many emerging managers.
Even private equity is feeling the squeeze. Dry powder remains high, but deal activity has slowed, and exits are harder to come by. Multiple compression is real, and GPs are grappling with how to return capital on overvalued legacy assets.
Meanwhile, core infrastructure and real assets— long considered safe havens—are seeing pressure due to rising capital costs, permitting delays, and increased political risk. Once stable yield plays are now experiencing volatility.
In short, distress is a lagging condition in many
alt strategies, but in CRE, it’s already been priced in.
Unlike many alternatives, real estate has the benefit of being both a cash-flowing asset and a hard asset. That means it has multiple levers to drive value:
• Rental income
• Operational improvements
• Leverage and recapitalization
• Tax efficiency and depreciation
As valuations have reset and interest rates begin to stabilize, real estate investors are seeing cleaner entry points, more conservative underwriting, and genuine upside.
In particular, value-add and opportunistic strategies are gaining traction. Managers are targeting distressed assets, bridge lending opportunities, preferred equity positions, and even direct ownership in mismanaged or over-levered deals. The market is becoming more two-sided again, with willing sellers and data-driven buyers.
Not all CRE sectors are created equal. Office remains challenged in many urban cores, but even within that asset class, there are bright spots: life sciences conversions, boutique urban repositioning, and Class A+ assets in high-barrier markets.
Multifamily is seeing renewed interest as rents stabilize and new supply slows. Industrial continues to benefit from supply chain reconfiguration and nearshoring. And hospitality, once thought to be the riskiest play, has roared back with travel and experiential spending returning in force.
Investors are also gravitating toward special situations: distressed debt, note purchases, loan-to-own strategies, and real estate-backed private credit. These strategies provide equity-like upside with credit-like protections.
Geographically, capital is flowing toward the Sun Belt, secondary metros, and regions with demographic tailwinds. Puerto Rico and the U.S. Virgin Islands have even drawn attention from real asset investors looking for tax advantages and yield.
Another reason CRE is gaining momentum is that the capital stack has become more favorable for new entrants. Debt is more expensive, yes, but it’s also more rational. Banks and private lenders alike have pulled back, opening space for new credit players to step in with well-structured terms.
Preferred equity, mezzanine debt, and bridge loans are all seeing increased demand. For investors who know how to underwrite risk and structure protection, these instruments offer asymmetric return profiles.
Meanwhile, institutional capital—which once crowded into core real estate in gateway markets—is rethinking its approach. Many are shifting to private REITs, club deals, or manager-led co-investments that offer more control and flexibility.
Perhaps most important, LPs are looking for
places to put capital to work. With other alternative strategies entering periods of uncertainty, real estate— particularly at the value-add and distressed end of the spectrum—is starting to look like a contrarian but logical allocation.
Several large pensions, endowments, and sovereign wealth funds have announced renewed interest in CRE, especially in segments that are demonstrably dislocated. Family offices are also re-engaging, attracted by the combination of income, appreciation potential, and tangible asset backing.
There is also a growing movement to pair CRE with impact or ESG mandates, particularly in affordable housing, adaptive reuse, and energy-efficient retrofits.
Of course, commercial real estate still carries risk. Some office markets may never fully recover. Construction costs remain high. And liquidity is still constrained compared to other asset classes.
But in CRE, these risks are known, priced, and often visible in a way that private equity mark-to-model or early-stage venture capital risk is not. That’s what makes CRE so attractive in this phase of the cycle: you can see the cracks, but you can also underwrite through them.
The best opportunities in alternatives often come from sectors others have written off. In 2020, that was credit. In 2021, it was growth equity. In 2025, it may be commercial real estate.
While other strategies brace for valuation resets and LP skepticism, CRE has already gone through the fire. What’s emerging now is a more disciplined, more transparent, and more actionable investment environment—one where smart capital can find attractive risk-adjusted returns.
For allocators and fund managers willing to lean into dislocation, CRE might not just be a comeback story.
It might be the most compelling alternative bet of
the next cycle.
• Refinancing Wall: Billions in maturing debt will either force recapitalizations, create buying opportunities for both properties and distressed paper
• Sun Belt vs. Gateway Repricing: Diverging performance will shape capital flows.
• Return of the Local Developer: Smaller operators with strong local knowledge are regaining an edge.
• Private Credit Synergy: CRE-focused credit strategies are offering hybrid returns with downside protection.
• New Structures: Look out for interval funds, NAV-based lines, and more co-investment structures appealing to institutional LPs.
CRE is a complex asset class, but for investors willing to do the work, the reward may be found in this moment of recalibration. Distress creates entry points—and right now, CRE is the rare alternative asset where the worst might already be behind us.
Nathan Whigham Founder and President EN Capital
EN Capital is a leading capital advisory firm specializing in debt and equity placement and capital stack structuring across multiple industries. The firm actively works on deals across the US, Caribbean and LATAM. EN Capital is led by Nathan Whigham who has been structuring and placing capital since 2006.
TOM BLAIR
iClerk
In the 19th century, William Jevons discovered something peculiar. He noticed that as steam engines became more efficient, coal consumption didn’t drop; people began to use more coal. This counterintuitive insight became known as Jevons’Paradox, and for economists and historians, it has become an academic trope. Put in the context of intelligent AI Agents, Jevon’s Paradox means that as tasks become drastically more efficient, organizations find more use cases to automate, unlocking new productivity and demand levels. When a task becomes cheaper, faster, and easier, we don’t stop doing it; we find a hundred new ways to do more. Agents make the work accessible to more people, who find new ways to use it.
The most profound aspect of these agent technologies is their ease of adoption; the ease of implementation is fast, often within 100 development hours for a custom agent. Agents can process transactional data and language data from virtually any system, in any format, and with minimal integration cost. Training staff is as each as a having a conversation with a colleague as these agentic systems leverage natural language interfaces, interactive charts, and automated reporting, and all in real-time. The overall effect is that on a global basis, agentic systems are transitioning from the 30 million programmers that are required today to unlock information value, beyond the 750 million spreadsheet users, to allowing billions of new people, and their ideas, to be unlocked.
In today’s technology environments, the task of moving data between SaaS-based business intelligence
(BI), customer relationship management (CRM), and spreadsheets requires predefined steps and a lot of smart labor. These systems are brittle and unable to adapt to the nuances and the one-off requests that occur in business. By contrast, AI Agents maintain context over time and across different data sources. Armed with persistent memory, Agents can recall context from prior interactions to inform future actions, using advanced reasoning to solve problems and handle exceptions rather than just following rigid rules. Crucially, they semantically integrate with existing software and data sources, indexing any databases, documents, voice, or video, but without the maintenance nightmare of human-maintained web scrapers, programmed spreadsheets, macros, CRM, or BI tools; the difference between a program that automates a calculation and an AI agent that can dynamically and accurately generate
an entire financial report.
Agents operate just as human employees operate, according to pre-determined roles and in alignment with contractual obligations, corporate policies, or compliance rules. AI agents can process private information, anonymizing information without sharing it with the LLM providers, while simultaneously providing unfettered data access through interactive, language- based interfaces. Agents can reason through tasks like humans and provide accurate, secure, and repeatable information with traceable provenance.
AI Agents don’t just follow instructions, they learn, adapt, and connect across systems, and through this lens, we have observed three general classes of AI
Agents, each with a distinct role in how work gets done:
Knowledge Agents. Agents that aggregate a specific corpus of knowledge and serve as on- demand experts, curating and delivering information through interactive, graphs, charts, reports, or prompts. These agents can be deployed to access corporate information, databases of large documents, or dense financial contracts, and extract the required information and insights for customers or employees. A Knowledge Agent can make private, confidential information accessible, secure, and interactive.
Workflow Agents automate entire financial processes from start to finish with human checkpoints for quality and control. Agents can log into systems, perform multi-step workflows, and coordinate activities with one-click provenance, allowing professional staff to focus on what is strategic rather than having to manage the minutiae. Agents automate manual data and financial statement gathering, perform interactive scenario modeling and statutory reporting, and generate accurate, traceable KPIs.
Integration Agents serve as the connective tissue of a firm, linking disparate SaaS and manual systems and data into cohesive workflows. Many firms suffer from having numerous specialized tools that don’t communicate, and Integration Agents solve that by orchestrating any tasks on any data that require the integration of isolated systems. To monitor a finance database for reconciliation or to cross-check each against compliance rules, Integration Agents ensure quality, repeatable data collection, transformation, and transmission of critical business processes.
Many firms outsource their back-office systems to offshore processing or rely on professional services-driven tools like SaaS, spreadsheets, email, and manual processes as the backbone of operations. These tools and the manual processes that drive them are error-prone, complex, and repetitive; no one likes this type of work. Today’s professionals spend dozens of hours monthly on routine administrative work instead of being able to focus on strategic initiatives.
Firms have long relied on stopgap measures like programmed macros or robotic process automation (RPA) tools to mitigate these issues. These handcranked tools cannot adapt to the change of daily business or the ambiguity and nuance of natural language requests. Last generation systems are adept at copying numbers from one system to another, but these systems do not understand context or meaning. A static, deterministic process will fail if a data format changes or an email template differ, a different paradigm from the cognitive reasoning abilities of AI Agents that can adapt, provide maintenance-free resilience, and the analytic flexibility necessary to support modern business processes.
Consider fund administration and accounting, a domain governed by statutory deadlines, islands of data, compliance policy, and lots of professional services. For example, calculating a fund’s Net Asset Value (NAV) at period-end requires gathering information from custodians, pricing various assets, reconciling transactions, and double-checking everything for compliance with valuation policies. Today, this is a painstaking process involving multiple analysts and layers of manual review and compliance steps. AI agents are streamlining these steps with Fund Administration Agents that can automatically extract data from statements and feeds, validate it against expected patterns, and perform reconciliation, all designed with quality control checkpoints that meet corporate policy requirements. AI-powered tools can ingest and cross- verify financial information from multiple sources, significantly reducing manual errors and speeding up NAV calculations and investor reporting. The finance team can generate accurate NAV reports in minutes and with traceable audit exception handling and provable results. While Agents handle the toil of reconciliation, humans can focus on the strategic aspects of the business.
Precision calculations with traceable citations, and explainable reasoning logic across chains of actions, are the key to Agents that process legal and finance documents, perform compliance actions, and ensuring regulatory compliance actions. Agents can deconstruct
complex contracts, generate searchable tags, and semantically understand the “meaning” of different passages, providing analysis in context to corporate policy objectives and allowing for easy comprehension through interactive, natural language interfaces. AI agents are tackling the mundane, repetitive, critical workflows, allowing firms to retain, not replace professionals, and perform more strategic and less tactical work.
The American Institute of CPAs reported that 75% of today’s public accounting CPAs will retire within the next 15 years. A limited supply of qualified professionals is compounded by increased compliance, reporting complexity, and costs to create an environment that mandates vast automation. AI agents can perform many of the tasks CPA’s, analysts, and other professional staff perform today, from collecting and cleaning data for analysis, to automating logic and inference and complex scenario modeling, allowing expensive staff to concentrate on higher-level strategy and client engagement.
As AI agents replace the tactical work that takes place in the back offices of finance, compliance, and advisory firms, the economics of professional services are being rewritten. What once relied on deep benches of junior staff and expensive, error-prone processes is now shifting to intelligent automation that is faster, cheaper, and auditable by design. The firms that adapt will not only survive the looming talent shortage and increasing industry complexity, but be able to leverage the increased capacity and more efficiency staff while gaining competitive edge. The transformation is not about replacing professionals, but arming them with intelligent collaborators.
The strategic advantages of deploying AI Agents in professional services revolve around the operational efficiency gains, the speed of business execution, improved accuracy, labor and inference cost control, and the ease of adoption resulting from using these technologies.
When an autonomous agent can handle a task end-to-end, a firm can reallocate human effort to more strategic work. With AI Agents, a task that might cost thousands of dollars in staff time per quarter can be rep-
licated for a fraction of that cost of the SaaS subscriptions and professional services labor expenses currently employed. This isn’t about replacing professionals, but about a process optimization of current business practices, to benefit the staff and helping them amplify their productivity.
With efficiency gains comes improvement in speed of business execution. Agents can operate in real time or on pre-set schedules and are able to provide alerts and reminders for your custom business processes. Whether for regulatory filings, LP reporting, K1 generation, or Agents that help you perform financial and technical due diligence, AI Agents can dramatically accelerate cycle times, providing real-time, interactive interfaces that allow you easy, logical access to all your data, all the time.
Humans make errors and so do language models. The difference is that AI Agents can be designed so they don’t make errors and provide improved accuracy. By automating the tedious data transfers, calculations, and document cross-checks, AI agents help mitigate mistakes by using both deterministic and non-deterministic models, meaning the AI Agents can process both numerical and language data with auditable accuracy and source data traceability. A well- designed agent will perform a task the same way every time, or flag an exception if something doesn’t match expected parameters. This consistency is invaluable in compliance and accounting workflows, where an oversight can result in regulatory fines or financial losses.
There are two important factors in determining the cost to deploy an Agent, labor expenses and the cost of inference. In the United States, a professional makes an average of ~$100k annually, nearly $200k with full expense load. An Agent designed to perform 40% of the same tasks as an experienced analyst performs, can be performed with an AI Agent for under $1k per month, a fraction of the current cost to perform the task.
AI Agents not only perform work for less, but they also help businesses control the cost variability and exposure of changing technology. Deep reasoning models offered by LLM vendors allow AI Agents to think through problems the way a human, reasons through a problem. For enterprise firms, the fact these models can generate an unpredictable number of tokens, the unit
of cost accounting in language models, results in an exposure to runaway inference costs. It is akin to roaming Europe with your phone and receiving a large phone bill upon your return. This is particularly important in fund administration, where profit margins can be thin, and shaving off a substantial portion of manual effort to minimize labor cost and while controlling inference costs, translates directly into savings.
AI Agents reason across your private data the same way a professional would, looking for patterns in data, early warnings of issues, or opportunities, allowing professionals to make smarter decisions, faster. Agents don’t just cut costs, they are tools of re-engineering, allowing firms to rethink how they surface patterns and insights from the deluge of information. Agents automate 90% of the work for about 10% of the current cost, providing speed, greater accuracy, and accessibility beyond what is currently available. However, the most compelling AI Agent feature is fast deployment, the ability to rapidly develop custom workflows and deploy to staff, usually within one calendar quarter.
The advent of AI Agents in financial services brings transformative implications not just for efficiency and profit, but also for people and society. Foremost is the elevation of human roles.
As machines assume the mundane and repetitive work, professionals can shift toward more analytical, strategic, and interpersonal responsibilities. This won’t happen comprehensively, but gradually, one agent at a time. This is one of the factors driving AI Agent adoption; each Agent automates a single workflow, which is one logical unit of work, and the entire firm doesn’t need to “adopt AI”, just to automate one workflow at a time. Over time, through use, and acclimation to the technology, firms often find more and more workflows to automate. This is the way Jevons’ Paradox will play out: tasks will become more efficient, organizations will find more use cases, which will unlock new productivity demand levels. Rinse and repeat.
These changes will herald a new age of advisory work where instead of junior analysts burning the midnight oil updating spreadsheets, poring through large documents, or grinding through bank statement rec-
onciliations, they can focus on interpreting results and learning to think like investors or strategists earlier in their careers. GPs, investors, partners, and accountants will have more bandwidth to be proactive advisors, spoong issues before they become problems rather than spending all their time reacting to problems. In essence, work becomes more about thinking and communicating and less about processing, and with a positive social impact. Jobs become more satisfying and creative, human talent is better utilized, and firm retention increases. We have seen these Agents change people’s lives for the better. As Agent adoption permeates the financial industry, firms must apply the same standards, roles, and constraints as any new team member, requiring upfront guidance, monitoring, and clear ethical direction.
As AI Agents make financial processes cheaper, faster, and more accurate, demand for automated workflows will continue to surge, unlocking entirely new use cases across professional services and reshaping how firms manage labor, compliance, and data, at scale. In a world of rising complexity and shrinking margins, AI agents aren’t replacing professionals, they’re elevating them. Firms that leverage these amazing technologies will succeed beyond competitors that do not, resulting in a reimagining of how work gets done.
To learn more about iClerk AI Agents, contact Tom Blair - tom@iclerk.ai
Tom Blair CEO iClerk
AI
iClerk AI is an enterprise platform that deploys accurate, repeatable, and traceable AI Agents to automate complex, labor-intensive, yet critical financial and accounting
MATHEW KRYDER Petschauer Insurance
Managers who treat insurance as a commodity may be jeopardizing their company’s future. Purchasing decisions driven by price with little regard to the insurance contract lend themselves to significant coverage gaps, unnecessarily exposing the firm and its investors to an irrevocable financial loss. Alternative asset managers are especially vulnerable to such gaps due to the unique financial exposures they face. “Off the shelf” insurance policies often fail to adequately cover their operations and the managers who purchase them may be taking on more risk than they realize.
Insurance policies are highly differentiated contracts and insurance carriers specializing in financial services risks have created programs tailored to meet the unique needs of the asset management industry. Managers interested in proper risk transfer should partner with an experienced insurance broker with access to these programs to secure the coverage they need to protect themselves and their stakeholders.
This article takes a closer look at some of the unique financial exposures and rising trends faced by the asset management industry. We also detail the essential insurance coverages needed for an effective risk transfer program while highlighting the coverage gaps to be avoided.
In today’s volatile marketplace and rising government regulation, alternative asset managers face a variety of adverse exposures. Interactions with regulators, shareholders, investors, vendors, creditors and employees can lead to costly litigation. These risks threaten the bottom line and the reputation of your fund and its managing partners. For example, a fund assumes vicarious liability for the actions of its outside service providers. If an error is made in misstating performance or in the financials, the fund will bear the responsibility. Even well-managed operations can be sued for misman-
agement, misrepresentations, employment practices violations, breach of duty, and failure to provide adequate disclosure of the investment risks involved.
The primary purpose of the Management Liability policy is to pay for defense costs. If a lawsuit is brought against the management entity, the fund’s assets are used to indemnify the fund manager. Management Liability insurance would prevent a fund from needing to liquidate positions or use cash to pay for defense costs. The insurance limit should correlate to the assets under management (AUM), however, this limit typically covers a minimal portion of AUM. It is important to remember that Management Liability is designed to pay defense costs for a mistake, not indemnify the loss of tens of millions of dollars of trading losses. The policy would be prohibitively expensive if it covered the fund’s assets. Management Liability provides an extra degree of security and comfort to your current investors and serves as an excellent selling point to your potential investors.
Many fund managers attempt to cover these risks with a traditional Directors and Officers Liability (D&O) policy. D&O alone, however, does not provide adequate protection for a fund. Because a fund manager also serves as an investment advisor to its investors, it may be impossible to determine whether a claim results from professional advice, which is not covered by a traditional D&O Policy. D&O and Professional (a.k.a. ‘Errors and Omissions’) Liability are written together in a Management Liability policy to protect against these risks.
Another common gap is that specific operations may be overlooked when writing the Management Liability policy. For example, if the funds themselves are not listed as the Named Insured on the policy, then the funds are exposed if a lawsuit is brought against the manager and the funds.
Another example of an overlooked operation is the management of ERISA plans. If the firm manages funds for employer sponsored plans such as pensions and 401(k) plans, then they have a fiduciary exposure and Fiduciary Liability coverage should be included.
Fiduciary Liability provides protection for breaches of fiduciary duty by administrators of Employee Benefit Plans. These policies usually include coverage for Errors & Omissions. Unlike the ERISA or fidelity bond, Fiduciary Liability coverage provides liability protection for the fiduciary.
Fund managers serving on outside boards can also expose the fund to decisions made or advice given by these managers. An “Outside Directorship Liability” Endorsement should be added to provide additional protection in connection with outside boards on which they serve. This coverage is especially critical for private capital managers who sit on the boards of their portfolio firms.
Hiring the right talent is critical to the success of any firm. However, managers need to be aware of the additional risks associated with managing employees, including employee theft and lawsuits stemming from the administration of employee benefits. Managers are especially vulnerable to employee discrimination and harassment suits which can quickly spiral into significant losses for employers. According to the Equal Employment Opportunity Commission (EEOC), the average cost of settling out of court for employment related cases was $75,000 and jury awards averaged $217,000 in 2020. More than half of EEOC claims filed in 2020 involved claims of retaliation.
If you have employees, your firm should secure Employment Practices Liability coverage which provides for the legal costs to defend claims involving sexual harassment, wrongful termination, and discrimination including legal liability for such acts. It also covers discrimination suits brought by candidates you chose not to hire. This coverage is also known by various titles: Employment Related Practices Liability, Management Risk Protection, Employers E&O, and Americans with Disabilities Act Insurance which are all basically the same coverage.
A Crime policy and a Financial Institution Bond cover losses stemming from theft of money and securi-
ties, including theft of your firm’s assets by an employee. Managers will want to make sure investors’ assets are covered under this policy as well.
Employee Benefits Liability insurance
Are you providing employee benefits to attract and retain talent? Then you’ll need an Employee Benefits Liability policy which provides protection against claims made by employees caused by a negligent act, error, or omission in the administration of an Employee Benefit Plan. Incidents such as providing incorrect advice concerning an employee’s health insurance plan or failure to enroll employees under a benefit program are covered.
ERISA Bond
An ERISA (Employee Retirement Income Secu-
rity Act) Bond is a fidelity bond that protects against dishonest and/or fraudulent acts of employees or trustees that could arise in the course of maintaining an Employee Retirement Plan. The ERISA Act requires employers to maintain a bond in the amount of at least 10% of the retirement plan assets.
Asset managers are improving operational efficiencies and profitability by leveraging technology. Such efforts, however, have greatly increased their exposure to cybercrime. Ransomware, wire fraud, and data breach have been the primary drivers of cyber insurance claims for the financial services industry. Asset managers are especially vulnerable to these methods of attack due to the potential for financial loss, legal liability, and rep-
utational damage. Financial firms are a prime target for criminals given the staggering potential monetary reward. In 2024, the average cost of recovery from a ransomware attack for financial service organizations was $2.58M1 and data breach was $6.08.M2. According to the FBI, cybercrime losses of $12.5B were reported in 2023, with a substantial portion attributed to wire fraud.3
Dependence on outside service providers has become another rising exposure for US businesses. The ransomware attacks on Change Healthcare and CDK Global, for example, caused widespread business interruption for their consumers. This exposure isn’t just limited to cyberattacks: an estimated 8.5 million computer systems were impacted by Crowdstrike’s defective software update that was pushed to their customers.
Unfortunately, cybercrime is here to stay. The National Association of Insurance Commissioners reports a significant rise in cyber claims frequency and severity of attacks on US businesses4. Cyber criminals are becoming more specialized and organized. The rise of Ransomware as a Service (RaaS), for example, has lowered the barrier to entry for cyber actors. Artificial Intelligence (AI) has enabled cyber criminals to be more sophisticated and effective. Phishing emails are better written and tailored to their audience. Deep fake audio and AI video generation have also brought impersonation to a whole new level of believability.
The best defense against these risks is to implement effective cyber security measures including multi-factor authentication (MFA), employee training, and managed detection and response tools, to name a few. However, even the best controls can be breached. When an attack occurs, cyber insurance serves as a pre-paid crises management team by providing time-critical resources such as forensics, legal compliance and ransomware negotiators. A cyber policy also indemnifies businesses for wire fraud loss, ransom payments, and costs associated with data breach including notification expenses, legal fees and data recovery. While it’s essential to cover the direct costs associated with an attack, a properly written policy should also cover indirect losses such as business interruption and reputational damage.
A major shift in the cyber insurance market is the
use of technology to reduce claims and mitigate severity of losses for their clients. Many cyber carriers are leveraging public data, for example, to evaluate an applicant’s digital footprint and underwrite the risk more effectively. Some carriers can now mitigate risk by alerting clients of potential threats and recommending measures to remediate.
Although cyber insurance has emerged as an effective financial safeguard, many insurance contracts do not adequately protect investment firms from the unique set of exposures they face. Cyber insurance contracts vary widely among carriers and insuring agreements are provided on an a la carte basis, where needed coverages may be overlooked without careful review. Business Interruption and Cyber Crime agreements, for example, aren’t always included. Many policies do not provide Dependent Business Interruption, which covers your firm from losses due to a technology outage of a service provider. This coverage should be added if your firm outsources critical operations.
Insurance carriers have responded to rising claims by instituting exclusions and limits to coverage. Wire fraud losses, for example, have been so rampant that most carriers have implemented sub-limits on this coverage up to a maximum of $250,000. Other carriers use highly restrictive conditions such as requiring the insured to follow specific procedures for coverage to apply. Wire fraud coverage (a.k.a. ‘Social Engineering’ or ‘Funds Transfer Fraud’) would not pay, for example, if an employee fails to authenticate a funds transfer request by phone.
Also, many Social Engineering agreements only cover losses to the insured’s money, not money owned by others. In this case, a wire fraud loss would not be covered if a fund manager is tricked into transferring money from a pooled account.
The good news is insurance is available to cover these gaps, however it is imperative your policy be tailored to address the multitude of cyber exposures you face.
In the asset management industry, where investment strategies and client relationships rely heavily on
the expertise of a few key individuals, the loss of a top fund manager, portfolio strategist, or executive can have significant financial and reputational consequences. This reliance on specific individuals creates what is known as key person risk—the risk that a business will suffer if a crucial team member dies, becomes disabled, or departs unexpectedly. Key person risk is particularly acute in asset management due to the importance of reputation, investor confidence and investment performance, as well as the potential for operational and strategic disruption.
The risk of a key person’s death or disability can be mitigated with an insurance policy on the individual. If the insured person dies or becomes disabled, the company receives a payout, which is used to cover financial losses, hire a replacement, and stabilize operations. Key Person Life Insurance can be structured as term life insurance (for a set period) or permanent life insurance (which can include a cash value component). Key Person Disability Insurance benefits are paid either monthly or as a lump sum. It is important these insurance policies align with the key person provisions of a firm’s
operating agreement or fund documents.
Insurance policies are often viewed as commodities and purchased piecemeal in response to stakeholder demands, rather than as part of a cohesive risk management strategy. The day your organization suffers a lawsuit, cyber-attack, or sudden death or disability of a key person is not the time you want to discover gaps in your insurance plan! The unique set of exposures and rising threats that asset managers face coupled with the complexities of insurance contracts highlight the importance of partnering with an experienced insurance broker who can tailor an insurance plan to effectively transfer these risks for your firm. Such measures will enable your company to thrive in the face of unexpected curve balls.
1. Sophos, “The State of Ransomware 2024”
2. IBM, “Cost of Data Breach Report 2024”
3. Federal Bureau of Investigation, Internet Crime Report 2023
4. National Association of Insurance Commissioners, “Report on the Cyber Insurance Market,” Oct. 15, 2024
Petschauer Insurance has over 60 years experience as an independent insurance brokerage, representing the country’s leading insurance companies. We have the expertise to provide the financial services industry with the coverages needed to protect their firms and investors. Dedicated to a higher standard of excellence, we look to establish a firm relationship of mutual trust and service with the goal of reducing potential risks or gaps in your coverage while attempting to lower your overall insurance costs.
Erwin Petschauer, ARM Vice President Patriot Partner Agency
Mathew
Kryder, MBA, CLTC
SAM TALMAN
Puerto Rico Energy Forum
Energy is the number one input to economic activity. It is the critical infrastructure that enables schools to operate, police officers to respond to emergencies, and industry to hire talent and create a tax base. It is so fundamental that many other jurisdictions, especially in the US, have done what they can to prioritize a paradigm of lowcost/high-reliability, so much so that individuals and businesses can operate with relative ignorance to this system.
That’s not true in Puerto Rico. In Puerto Rico, the energy system hangs over the island. Worst of all, this crisis isn’t new. It is the accumulation of decades of challenges that result in mass outmigration, a hostile business environment, a bankrupt utility, politicized private operators, uncompetitive tenders for utility scale projects, sclerotic permitting regimes, stranded assets, high costs, frequent outages, aging infrastructure, and tons of federal funds.
The Puerto Rico Energy Forum was created to unpack these different features, as well as to highlight the innovative success stories where people have made progress. Tom and I have played with two different mottos for the Forum. The first is more straightforward, “inform, educate, and achieve.” In order to move the needle, Puerto Rico needs an engaged populace, willing and eager to understand the complexity of the various perspectives on the energy situation; and ultimately to participate in creating solutions, be they regulatory, technological, political, or financial. We need innovators, mentors, thought leaders, and public opinions.
The second motto is “the most comprehensive conversations about energy in Puerto Rico you’re not
getting anywhere else and really want to have.” A bit more ‘tongue and cheek’, this version highlights that we are not the only ones talking energy, but we are the only ones doing so as openly and as broadly as we are. Puerto Rico needs technology and perspective diversification. We can put solar on every rooftop, but it won’t help address fundamental systematic challenges. Industrial users are forced to develop their own on-site solutions, but what does that say about the island’s competitiveness? Hydro assets have sat for decades without operational upgrades or maintenance and policy leaders have mandated the decommissioning of a key generation plant. What will happen with demand? Who’s thinking about utility economics?
The Forum is designed to merge and understand these different viewpoints, hear from the private sector, technologists, energy users, policy makers and government officials, and other thought leaders to engage in robust discussion. What are the challenges, how do we overcome them, what are responsible expectations, and how do we move the needle?
As of right now, we have three segments each month: Power Hour, PR Energy in 60 Minutes, and our General Forum. This year we are launching a website, a blog, easier channels to access the conversations, workshops on microgrid regulations and the circular economy, a second event for National Clean Energy Week, and more.
Follow us on LinkedIn, join the Forum as a member to support this work, participate and contribute your ideas; if you have a challenge, let’s hear it; if you have found a solution, even better. We need your help. Let’s lead a thought revolution for energy in Puerto Rico.
Sam Talman Co-Principal Puerto Rico Energy Forum
The Puerto Rico Energy Forum is an effort to organize thought leaders in Puerto Rico’s energy sector to understand the challenges the island is facing, highlight success stories, and map a pathway forward.
CHUCK STORMON
StartFast Ventures
On January 20, 2025, the release of DeepSeek R1 (a new AI model developed by a Chinese company) sent markets reeling.
Markets reacted with a sharp decline in the stock prices of major US tech companies, particularly NVIDIA, due to concerns that DeepSeek’s cost-effective open-source design could disrupt the established AI market dynamics, potentially rendering large investments in expensive AI infrastructure less necessary and bringing into question the dominance of US tech giants in AI.
As AI reshapes industries, the AI investment landscape is also evolving. Given the shifting dynamics, a nuanced, segmented, and flexible strategy is needed for allocators in 2025. How should allocators balance investments across chips and hardware, data centers and infrastructure, energy, and AI applications? To answer that, it’s important to understand the three dimensions driving AI advancement.
Every player in AI needs to differentiate its offerings from competitors. There are three broad means to achieve better AI performance: compute power (chips, servers, and data centers), data upon which to train the AI models, and algorithms which define how the AI learns and what it can do with what it has learned. Here are some trends to watch in each of these areas:
Many assumed that scaling compute was both necessary and sufficient for improving AI models. DeepSeek shook this assumption, showing that advanced algorithms can significantly reduce the cost of training and deploying a new model, without sacrificing performance. However reduced costs will likely only increase demand (Jevons paradox), as demand for AI seems insatiable. GPUs still dominate (and NVIDIA dominates in the category), but special-purpose AI chips are on the rise. These specialized chips will further improve speed, power efficiency, and cost-effectiveness. Furthermore, AI inference is expected to increasingly shift from centralized data centers to edge devices (smartphones, IoT, robotics) over the next few years. Lower latency, improved privacy, and reduced bandwidth requirements make on-device AI compelling.
AI-generated synthetic data will help overcome the limitations of real-world datasets (cost, privacy, scarcity). This approach can accelerate model development, especially in highly regulated domains (healthcare, finance). Self-supervised learning (such as used in Google DeepMind’s Alpha Fold) allows models to learn from unlabeled data, reducing dependency on human annotation. Companies with proprietary data sets will still enjoy a competitive advantage for a time.
While large foundation models (e.g., chatGPT, Llama, Claude) remain influential, the trend is also moving toward smaller, domain-specific models that are cheaper to train and deploy. As in the case of DeepSeek, a Mixture-of-Experts algorithm can give better results with a smaller-sized model. Further, model compression via pruning, quantization and knowledge distillation helps maintain performance while reducing compute costs.
AI agents (e.g., OpenAI’s “Operator”) are designed to plan and execute tasks autonomously. Though early reviews have been mixed, improvements in reinforcement learning and planning algorithms will likely make agent-based AI more reliable and commercially viable. Ultimately, advances in compute, data, and algorithms reinforce one another, leading to a more ubiquitous and powerful AI ecosystem. This convergence paves the way for AI’s expansion into new industries—healthcare, finance, logistics, energy, government, and more.
1. Evolving Data Center Economics: If lower hardware costs drive up compute demand significantly, there could be continued or even accelerated data center expansion, albeit with thinner margins per unit of compute. Infrastructure investors will need to focus not just on capacity but on efficiency and flexibility—platforms that can scale dynamically in response to AI-driven demand spikes.
2. Democratization and Fragmentation of Innovation: As compute becomes more accessible, the
downstream ecosystem is likely to see a proliferation of smaller players and specialized applications. While this fragmentation could mean higher failure rates, it also opens the door for disruptive innovations that might not emerge from the largecap playbook.
3. Sector-Specific Opportunities: Sectors like cybersecurity, which now face novel challenges from AI-driven threats, may see significant opportunities for companies that can quickly adapt their products and policies. The intersection where government and commercial needs meet could become a rich area for active management.
4. Evaluating the Operator Hype: Early underwhelming experiences with AI agents might signal that the technology isn’t yet mature enough for mass adoption in certain applications. Temper expectations on short-term “wow” factors in favor of long-term, iterative innovation.
• Rebalancing Exposure: While large players remain crucial for the backbone of AI infrastructure, there’s growing potential in the downstream arena where nimble, innovative companies can capture market share. A hybrid approach might be optimal: maintain exposure to established names in infrastructure while allocating a portion of capital to nimble, specialized players on the AI applications side.
• Dynamic Allocation & Agility: Given the evolving nature of both hardware and software in AI, maintaining flexibility in allocation is key. Adopt a more dynamic rebalancing strategy that can capture shifts in demand—whether that’s a resurgence in high-end chip premiums for niche applications or an explosive growth in democratized, cloudbased AI solutions.
• Valuation Discipline: In a landscape where cost efficiencies can quickly erode traditional profit margins, ensure that investment theses are built on
robust, defensible economic fundamentals.
The AI investing landscape is dynamic, with increased investment activity, and evolving strategies among both established players and emerging startups. Allocators need to adopt a flexible, segmented strategy, balancing exposure to chip and infrastructure giants with investments in nimble, innovative application-focused companies. A close eye on valuation and a focus on defensible economic fundamentals are crucial. As the AI landscape continues to evolve, continuous monitoring and agile rebalancing will be key.
Chuck Stormon has been a thought-leader in AI for 40 years and has seen many hype-cycles and winters. He has built eight companies, including developing one of the first AI accelerator chips and many AI applications. For the past dozen years, Chuck and his partners at StartFast Ventures have invested in high-growth AI application companies. chuck@startfastventures.com
StartFast Ventures Fund III is a $100 million venture capital fund focused on investing in early-stage companies leveraging artificial intelligence (AI) to transform industries. The fund boasts experienced managers with a strong track record, access to a vast pipeline of AI opportunities, and a network of successful entrepreneurs. StartFast Fund III seeks to generate alpha through a unique process of sourcing deals, and is particularly interested in investing in AI-powered companies in the commerce, healthcare, cybersecurity, and fintech sectors.
DAVID GOLDSTEIN STP Investment Services
Co-investing has long been considered a niche strategy in private markets, but that perception is rapidly changing.
Historically, co-investments were reserved for an elite group of institutional investors with close ties to the largest private equity firms. Mega-funds granted these select LPs access to exclusive deal flow, often at more fa-
vorable terms than traditional fund commitments. These arrangements were highly relationship-driven, available primarily to investors with the capital, sophistication, and influence to negotiate direct stakes in deals. However, as the private equity landscape has evolved, access to co-investments has broadened. Today, even mid-sized institutional investors and family offices are gaining entry to these opportunities, democratizing what was once
a privilege of the industry’s upper echelon.
Today, shifting market dynamics, rising valuations, and increasing investor demand are positioning co-investments as a core strategy for fund managers and LPs looking to deploy capital more effectively.
Take investor behavior, for example. As fundraising conditions tighten, LPs are becoming more selective, conducting deeper due diligence, and seeking greater control over where their capital is deployed. Many now expect co-investment rights as part of their fund commitments, preferring direct exposure to select deals rather than investing solely in blind pools. Some LPs won’t commit to a fund unless they receive co-investment opportunities, especially in volatile markets where they prioritize targeted investments over broader fund commitments.
At the same time, GPs increasingly rely on co-investments to secure funding for deals when traditional fundraising slows. These vehicles provide flexible capital solutions, allowing fund managers to navigate shifting market conditions while giving investors direct stakes in high-value opportunities. By offering a more precise and transparent investment structure, co-investments continue to gain traction as a preferred strategy for both LPs and GPs.
At the same time, private equity firms are deploying record levels of dry powder while balancing investor expectations for capital efficiency. Rather than raising larger blind-pool funds, GPs are increasingly turning to co-investments to secure additional capital on a dealby-deal basis. This allows firms to maximize their purchasing power while avoiding excessive dilution across a fund.
As valuations continue to rise, deal sizes are growing, forcing firms to find ways to bridge capital gaps, particularly in high-growth sectors like AI and healthcare, where even well-capitalized firms struggle to execute new opportunities without additional funding. Many PE funds have investment limits preventing them from allocating more than a set percentage of total fund size to a single deal. For example, a firm targeting a $100 million investment may only be able to commit $70 million due to fund constraints. Co-investments provide a mechanism to close this gap, allowing GPs to
secure the additional capital needed to pursue high-value deals while maintaining fund discipline.
Cost is another major driver. Co-investments generally offer lower fees than traditional private equity funds, making them an attractive alternative. Many GPs have adjusted their fee structures to remain competitive, reducing management fees and carried interest on co-investment vehicles. These favorable terms appeal to LPs while increasing pressure on GPs to manage these vehicles efficiently.
For middle-market private equity firms, offering co-investment opportunities has become a key differentiator in an increasingly competitive fundraising environment. Unlike large firms like KKR or Carlyle, which can raise commingled funds with relative ease, smaller fund managers must find creative ways to attract LPs. One approach is bundling co-investment opportunities with traditional fund commitments, giving investors immediate deployment options rather than waiting for capital calls. This not only strengthens LP relationships and increases capital commitments but also provides investors with faster exposure to deals without long-term lockups, making co-investments a compelling incentive for fund participation.
As more fund managers offer co-investments, LPs also find themselves competing for access to the best opportunities. Investors with the ability to move quickly and commit capital on shorter timelines often gain priority in these deals, reinforcing the need for a well-structured co-investment approach. While co-investments provide the flexibility for these managers to compete, they also introduce complex operational requirements that must be considered as part of the overall strategy. GPs must navigate separate accounting, compliance, and investor reporting needs for each co-investment vehicle.
Unlike commingled funds, which spread capital calls across multiple deals, co-investment vehicles operate on a deal-by-deal basis. This structure necessitates independent tracking, customized investor reporting, and precise liquidity management. Without a streamlined system, GPs risk delays in investor communications and inaccurate reporting.
Additionally, each co-investment vehicle must maintain separate bank accounts and meet distinct tax
and compliance requirements. For firms managing multiple co-investments, investor overlap can complicate tracking commitments and distributions across vehicles. Managing this process efficiently is critical to maintaining strong investor relationships and avoiding reporting errors.
Fund administration has become a key factor in ensuring smooth execution. Unlike traditional funds, co-investments require rapid capital deployment and real-time reporting, often involving multiple investors with different structures. Firms that lack the infrastructure to efficiently track capital flows and investor commitments may face delays that erode LP confidence.
Another challenge is liquidity management. Since co-investments operate on a deal-by-deal basis, capital calls and distributions are often more irregular than traditional funds. For example, a GP may need to call $29 million from investors immediately while reserving $1 million for expenses, requiring precise liquidity planning. Without proper forecasting, firms may encounter cash flow mismatches that disrupt deal execution.
As the volume of co-investments grows, so does the need for scalable, accurate, and efficient solutions that allow fund managers to focus on what they do best: sourcing and executing high-quality deals.
Without the right infrastructure in place, GPs risk operational bottlenecks that could slow deal execution, frustrate LPs, and limit their ability to scale investment strategies. In an increasingly competitive fundraising environment, investors gravitate toward managers who demonstrate not only strong deal-sourcing capabilities but also the ability to execute co-investments efficiently.
As competition intensifies, fund managers who can scale co-investments efficiently will have a strategic advantage. Those who invest in the right infrastructure and operational expertise will not only attract more capital but also build stronger, long-term relationships with LPs. The firms that execute co-investments well will be the ones driving private market growth in the years ahead.
STP Investment Services is an award-winning technology-enabled services company that provides middle, back-office, and compliance solutions to investment managers, hedge and private equity funds, family offices, wealth managers, and asset owners. STP’s end-to-end investment operations, Blueprint technology, and expertise provide a partnership to clients that enables them to grow revenue while optimizing processes and protect their business. STP provides a range of services with capabilities to process all asset classes and meet ever-evolving regulatory requirements.
David Goldstein Director, Product - Fund Services STP Investment Services
Stratus Financial LLC
U.S. consumer credit is a foundational pillar of economic activity. From credit cards and auto loans to mortgages and student loans, consumer borrowing fuels growth, drives spending, and supports financial flexibility for millions of Americans. For investors, this market presents a timely opportunity—particularly through private credit channels that offer enhanced returns and greater control over risk. As banks tighten underwriting standards and pull back from higher-risk segments, private credit is stepping into the gap, providing capital to underserved markets and creating high-yield investment opportunities.
Stratus Financial Fund I operates at the intersection of this transformation, applying disciplined underwriting, robust borrower screening, and a specialized focus on Purpose Loans—particularly those designed to finance professional training in aviation. This tailored approach captures the strength of the U.S. consumer credit market while addressing niche segments with outsized potential.
Consumer credit in the U.S. has undergone significant transformations over the past several decades. In the post-war era, credit access expanded dramatically as consumer lending became a mainstream financial tool. The introduction of FICO scores in 1989 revolutionized creditworthiness assessment, allowing lenders to scale credit decisions with greater precision.
During the 2008 financial crisis, consumer credit markets experienced a sharp contraction, with banks tightening lending standards and reducing exposure to higher-risk borrowers. This created an opportunity for alternative lenders to enter the space, pioneering new underwriting models and leveraging technology to assess borrower risk more effectively.
Fast-forward to today, and private credit plays a crucial role in filling gaps left by traditional banks. Stratus Financial’s Purpose Loans reflect this broader trend
by providing structured financing solutions tailored to high-demand career paths, ensuring sustainable credit expansion while mitigating risk.
As traditional lenders respond to regulatory pressure and capital constraints, private credit is expanding rapidly. Now a $1.5 trillion market, private credit enables flexible capital deployment across sectors—including consumer finance. Investors are increasingly drawn to this asset class due to its potential for strong returns, diversification benefits, and lower correlation with public markets.
Private credit has grown exponentially since the 2008 financial crisis, largely due to regulatory changes that forced banks to curtail riskier lending. According to Preqin, private credit assets under management have grown at an annualized rate of over 10% since 2010. The ability of non-bank lenders to provide tailored credit solutions continues to drive market expansion.
In this context, private credit funds offer several key advantages:
• Custom loan structuring
• Direct borrower relationships
• Negotiated protections and covenants
• Floating-rate exposure in a rising-rate environment
The result is a segment of the fixed-income market that delivers higher yields, better underwriting transparency, and superior investor control.
Large institutional investors—such as pension funds, sovereign wealth funds, and hedge funds—have increasingly embraced private credit as a core component of their portfolio strategy. This surge in institutional demand stems from a need for income-generating assets with lower correlation to traditional markets.
Private credit offers institutional players exposure to customized lending structures, enhanced due diligence, and attractive yields not typically available
in public bond markets. According to McKinsey & Company, institutional allocations to private credit have grown significantly in recent years, driven by consistent double-digit returns and portfolio diversification benefits.
Stratus Financial Fund I’s emphasis on Purpose Loans positions it as a compelling option for institutions seeking stable, socially impactful investment opportunities. As the fund scales, institutional capital can support further growth and innovation in niche lending verticals.
Consumer credit is not just a financial product—it is a macroeconomic lever. When credit is readily available, consumer spending increases, stimulating economic activity and business growth. Conversely, when credit tightens, households reduce spending, contributing to slower economic expansion.
In the U.S., consumer spending accounts for nearly 70% of GDP. Access to credit allows households to smooth consumption, invest in education or transportation, and recover from unexpected expenses. Therefore, changes in consumer credit conditions can serve as early indicators of broader economic health.
Private credit, including Purpose Loans, plays a key role in ensuring continued access to credit—particularly in times of economic uncertainty when traditional banks may retreat. By supporting borrowers in high-opportunity sectors like aviation, private lenders help sustain economic momentum and workforce development.
Becoming a commercial airline pilot is a significant financial undertaking. From private pilot certification to commercial multi-engine and ATP licensing, the total cost of training can exceed $100,000. These costs—often incurred in a short timeframe—are prohibitive for many aspiring aviators.
At the same time, the financial return on investment can be substantial. Regional airline pilots typically begin their careers earning $60,000 to $90,000 annually,
with major airline pilots earning well into six figures as they gain seniority. According to industry projections, some captains at major airlines can earn over $300,000 annually. The high demand for pilots, compounded by a wave of retirements and global growth in passenger travel, makes commercial aviation one of the most promising and stable career paths.
Purpose Loans from Stratus Financial provide a critical bridge, offering super prime borrowers access to the training they need to enter a career with strong income potential and long-term financial stability. These loans are uniquely structured to align with the borrower’s career progression, reducing financial stress and accelerating upward mobility.
While private credit presents attractive returns, it is essential to understand the associated risks and mitigation strategies. Key risk factors include:
• Credit Risk: Borrower defaults can impact portfolio performance. Stratus Financial employs rigorous underwriting, ensuring high borrower FICO scores and stable income streams.
• Liquidity Risk: Unlike publicly traded bonds, private credit investments are less liquid. Investors should align their capital commitments with expected time horizons.
• Regulatory Risk: Shifts in lending regulations and consumer protection laws can impact returns. Funds must remain adaptive to evolving policy landscapes.
By incorporating robust risk assessment models, active loan monitoring, and conservative lending criteria, private credit funds can deliver consistent, risk-adjusted returns.
For savvy investors across industries, artificial intelligence (AI) is top of mind—both for the innovation it promises and the disruption it brings. In recent years, the acceleration of AI adoption has created redundancy in certain roles across healthcare, finance, logistics, and manufacturing, sparking broader discussions about
which professions are most future-proof. As AI reshapes job markets and automates tasks once considered irreplaceable, questions about long-term career security have become increasingly relevant in investment decisions. Many sectors are already experiencing workforce shifts due to automation, prompting investors to evaluate the durability of careers supported by their capital.
In aviation, AI is transforming various aspects of pilot training and recruitment, offering enhanced flight simulations, personalized learning experiences, and data-driven performance assessments. However, the automation provided by AI cannot replace the indispensable expertise and real-time decision-making abilities of human pilots. While AI-driven systems contribute to safer and more efficient flight operations, they are best utilized as complementary tools rather than replacements for human oversight.
The aviation industry remains deeply reliant on skilled pilots, and the cultural and regulatory landscape does not favor removing human decision-makers from the cockpit. The two-pilot system currently in place ensures a critical layer of redundancy, judgment, and adaptability—qualities that AI, no matter how advanced, cannot replicate. Passenger trust and comfort in air travel heavily depend on human expertise, reinforcing that while AI may enhance pilot capabilities, it will not replace them. The technology is still far from advanced enough to safely and reliably replicate the complex, split-second decision-making required in the cockpit. Even when such advancements become technically feasible, it is highly unlikely that the average traveler would feel comfortable stepping onto an aircraft knowing no human pilot is at the yoke. (source: Brookfield Aviation).
• Quantifying Performance: Purpose Loan Metrics
• Stratus Financial Fund I maintains rigorous underwriting standards that reflect both high borrower quality and long-term repayment behavior. The following shows the most recent portfolio data:
• Average borrower FICO score exceeds 750 (Super Prime as defined by the CFPB)
• Cumulative returns of 57% over the last 4 years
• 95% performance rate (cumulative defaults re-
According to the May 2023 Occupational Outlook Handbook from the Bureau of Labor Statistics, the average annual salary for commercial pilots is $113,080. For airline pilots, copilots, and flight engineers, the median annual wage is significantly higher at $239,200. Beyond their base earnings, pilots often receive comprehensive benefits packages, including health, life, and disability insurance, as well as retirement plans. In many instances, these benefits surpass those typically offered in other professions.
These figures highlight the financial strength of borrowers and the fund’s ability to maintain a low-risk, high-performance portfolio, reinforcing its resilience in the private credit market. (source: ATP, Stratus Financial)
“Our investment approach is grounded not only in offering attractive returns but also in supporting the next generation of commercial pilots by lowering the barriers to entry for a lucrative career in aviation. By financing professional training for super prime borrowers—individuals with stable incomes or sufficient assets and a clear path to upward mobility—we’re helping build careers while creating a resilient, high-performing credit portfolio.”
— Brandon Martini, Co-Founder & COO of Stratus Financial
The U.S. consumer credit market continues to stand as one of the most dynamic and resilient asset classes, underpinned by its scale, accessibility, and direct link to macroeconomic activity. Amid evolving regulatory landscapes and shifting institutional priorities, private credit has emerged as a structurally significant force in bridging capital gaps—especially in sectors underserved by traditional banking. Within this paradigm, Stratus Financial’s focus on Purpose Loans not only delivers attractive, risk-adjusted returns but also generates measurable economic and social impact.
By financing high-potential, super prime borrowers in aviation—a sector characterized by long-term
career stability and strong income trajectories—Stratus aligns capital with upward mobility. This dual mandate of performance and purpose exemplifies a modern investment thesis: one that blends disciplined credit underwriting with strategic human capital development. As private credit matures and investor appetite deepens, purpose-driven lending models such as Stratus’s will be instrumental in defining the next chapter of financial innovation. In doing so, they enable investors to participate in both the structural transformation of consumer finance and the empowerment of a new generation of skilled professionals.
Explore how Purpose Loans are reshaping private credit, funding the future of commercial aviation, and driving the next era of financial growth at https://stratusfinancialfund.com.
Alan Rios Chief Investment Officer, Stratus Financial Co-host, Alternative Income Blueprint Podcast
For the last 8 years, Alan has accumulated a deep and recognized reputation in the banking industry. His career spans global banking, where during his last role at
Citigroup, he served as Vice President for Citi’s North America Global Family Office Group while based in New York. In this role, he catered to the firm’s top private banking clients by providing them institutional banking access and facilitating capital raises.
Presently at Stratus, Alan heads investor relations and Capital Markets efforts. In this role he manages equity and debt investors, contributing to the fund’s operations and growth. At the same time, Alan actively explores opportunities to integrate the fund’s private credit offering into larger institutions and expand its investor base with a strategic approach to transformational growth.
Alan is also the co-host of the Alternative Income Blueprint podcast, which explores unique investment opportunities that go beyond traditional stock, bond, and real estate markets. The show focuses on strategies that not only offer attractive returns but also contribute to meaningful causes.
Alan holds a bachelor’s degree in Finance from the McCombs School of Business at University of Texas at Austin with a focus on banking and capital markets. Outside of the financial industry, Alan curates private communities of investors, industry leaders and collectors with a passion for cultural pursuits, particularly in the contemporary art world.
Stratus Financial Fund I is a private credit fund offering investors access to compelling returns by financing flight training for careers in commercial aviation. Backed by Stratus Financial’s deep industry expertise and a network of over 300 flight school partners nationwide, the fund targets an underserved, $2 billion market. Investors gain exposure to a high-performing alternative asset class—while helping the next generation of pilots take flight.
Alan Rios Chief Investment Officer
Financial LLC
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