In Houston a couple weeks back I did a fireside chat for a large group of money managers with my friend Ben Hunt (Epsilon Theory). We were invited by Jeremy Radcliffe of Valedor Partners.

We had a wide ranging conversation on everything from inflation to early seed stage investing.

Ben and I discussed the alpha that I continue to believe can be found at the seed stage. One thought I shared that seemed to get everyone’s attention was if you really want a lot of alpha, be prepared to be laughed at.

This week I read this excellent piece from Ahmad Butt titled ‘Unpacking Alpha in Venture Capital. Ahmad is a systematic hedge fund manager whose base hypothesis was that as a pool of capital, an allocation to VC can deliver uncorrelated, strong returns and that there is an informational benefit to having a lens into the future technologies that will continue to displace operations, impair assets, and disrupt incumbents.

Some core findings include:

Dollars should be focused into capacity constrained strategies that are attacking the early stages. VC does not scale.

I see no obvious warning signs that this is a poor time to enter the asset class. Technology-led innovation is pervasive and cumulative.

Whilst Silicon Valley has undoubtedly been the epicentre of technology innovation, other hubs of ideation, innovation and global problem solving are developing fast.

VC is a human capital business, driven by prescient GPs and outlier founders. There is limited evidence to support long-term consistent firm-level performance, in fact persistence of performance is declining.

Investing with more metrics = less alpha. The best investors are comfortable investing at the edges but do so on the basis of a scientific and rigorous process that appreciate the risk. A quick summary of a rigorous methodology is inspired by a recent book from P. Tetlock (Superforecasting).

The best early stage investors are foxes — they are curious polymaths, with broad peripheral vision. LPs should test for and allocate to investors with the optimal attributes versus making their own editorial about where the tech next wave will come from.

Technology KPIs have evolved but I believe most public market investors still don’t understand the pervasiveness of technology. Every listed asset is potentially impaired.

My friend Fred Destin had a good thread summarizing the research as well.

I am looking forward to reading the rest of Ahmad’s research.

Have a great weekend.