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Joe Rumph, Manager, Absolute Return and Fixed Income, John D. and Catherine T. MacArthur Foundation

Institutional Investor • 21 September 2023

Alpha Edge Recognition - Next Gen in Alpha Generation

This year, Allocator Intel is recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in the key areas of portfolio construction in the Alpha Edge Recognition Awards.
Joe Rumph, nominated as the Next Gen in Alpha Generation, is a Manager of Absolute Return and Fixed Income at the John D. and Catherine T. MacArthur Foundation, where he shares responsibility for the foundation’s absolute return, fixed income, credit, and special situations investments. Previously, he was an Associate Director of Investments at the Kresge Foundation in Troy, Michigan where he was a generalist with responsibilities across all asset classes and geographies and helped manage an internal derivatives portfolio.
Joe received an MBA in Analytic Finance, Accounting, and Economics from the University of Chicago Booth School of Business and a BA in Economics and Philosophy from the University of Michigan. He is a CFA charterholder.
The following is edited for length and clarity.

Let’s start with you sharing an overview of your role

I help manage two hedge fund portfolios, one benchmarked to duration and one to credit spreads. The portfolios are run through a portable alpha structure, so the underlying investments are evaluated through an alpha lens, and we end up with a wide range of strategies that may or may not have a systematic beta to their asset class benchmarks. We use a derivatives overlay to manage our public market exposures to match our asset allocation targets.
I also help to manage our private credit portfolio, which consists of a variety of strategies that we feel appropriately compensate us for sacrificing liquidity.

What are some of the most significant changes in the last few years?

For several years prior to 2020, we were very active in private credit. The asset class offered significant structural alpha – the ability to earn an outsized return relative to the risk taken due to specific inefficiencies in the market, namely banks being unwilling or unable to lend freely.
As this trade became more popular, a large amount of capital was raised for such strategies, and spreads compressed significantly. Although some strategies continue to adequately compensate us with an appropriate illiquidity premium, it has become much harder to find them. As a result, our focus has primarily been on finding opportunities in our more liquid portfolios.

When looking to form a strategic partnership with an asset manager, what are the key areas on which you focus?

Alignment of interests is everything. We always want to invest with high-integrity partners who will make the right decisions, particularly when it is hardest to do so. 
A core advantage of our strategy is that, by separating alpha and beta, we have much more breadth across the opportunity set. We look for strategies that are able to take advantage of some tangible, persistent market inefficiency in a risk-controlled manner. We are always looking to be overcompensated for a given level of risk taken.

What investment opportunities are you focusing on over the next 12 to 18 months?

I like relative value fixed income strategies right now. Not only do we have divergent central bank policies for the first time in a decade, but we also have a significant inversion in the U.S. Treasury curve. This creates opportunities for skilled relative value rates traders to generate attractive risk-adjusted returns.
I also continue to like multi-manager platforms and am spending time specifically on more macro-focused platforms. I think the opportunity set in macro is attractive and a platform approach diversifies you from concentrated macro strategies that tend to have more binary return streams.
Finally, I have been spending much more time looking at stressed and distressed U.S. high yield strategies. The U.S. has been an intentional underweight in our credit portfolio in recent years, but I do think there will be opportunities in this space depending upon how hard of a landing our economy experiences.

What challenges do you anticipate for your team over the next few years?

Finding consistent sources of alpha is always a challenge. Declining interest rates have acted as a tailwind for markets for the last 40 years, and the post-Financial Crisis, zero interest rate policy led to tremendous growth in market valuations over the past decade. Now that we appear to be in a more normalized interest rate environment, it will be imperative to differentiate true market skill from managers and strategies that have simply benefited from accommodative monetary policy.

What would you say is your office’s greatest accomplishment since you joined?

I think we have done a good job navigating the opportunity set across the liquidity spectrum in credit. When I joined the foundation in 2013 we had a sizable long-duration (10+ year fund life) distressed credit portfolio. Over time, we acknowledged the difficulty in earning a sufficient premium for locking capital up that long, specifically in credit strategies.
As a result, we moved our focus to shorter duration (five- to seven-year fund life) private credit funds that did offer a sufficient premium for sacrificing liquidity. We created our hybrid-liquidity credit portfolio in 2016 and were able to take advantage of a particularly attractive opportunity set. As the illiquidity premium has continued to erode, however, we have now shifted our focus to more liquid strategies. 

What do you do in your spare time?

My wife and I have a 2-year-old son, whom we both adore. Aside from spending as much time as possible with him, I try to go for runs along Lake Michigan a few times a week. I also love to read. 
Finally, I am a loyal fan of the University of Michigan and Detroit sports teams and try to get to at least a few football and baseball games each year.

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