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COMMENTARY A Report of TIFF EDUCATION FOUNDATION 2009 Edition 2 BOARD MEMBERS HIGHLIGHTS TAS Seth Alexander Third of Five. On July 22, 2008, the TIFF Education Foundation (TEF) President MIT Investment Mgmt Company hosted in Cambridge, MA the most recent edition of its highly idiosyncratic Cambridge, MA Endowment Management Seminar series. Modeled loosely after the broadcast TIP Suzanne Brenner series Inside the Actors Studio, this event mimicked its predecessors in that it Chief Investment Officer Metropolitan Museum of Art comprised interviews by TEF president David Salem — a suspect substitute New York, NY indeed for James Lipton of ITAS fame — of five highly respected institutional TAS Christopher Brightman investors. This Commentary comprises the transcript of David’s interview with CEO and CIO UVA Investment Mgmt Co. Seth Klarman, president of the Baupost Group, a Boston-based hedge fund that Charlottesville, VA manages over $16 billion on behalf of individuals and institutions. The final two TEF John Craig interviews from the July seminar will be published in coming weeks. Executive VP and COO The Commonwealth Fund New York, NY The Road Ahead. Seth Klarman, a talented and experienced hedge fund investor, TAS Richard Flannery offers herein insightful comments on what it’s like to run a multi billion-dollar CEO of TAS President and CEO of TIP investment firm and what it takes to find and retain the best and the brightest for West Conshohocken, PA his firm. Further, he discusses compensation structures, perpetuating his firm TEF Sheryl Johns after he’s done working, and the single best decision he’s ever made. TIP Executive Vice President Houston Endowment Inc. Seth’s capsule biography appears at www.tiff.org/TEF. Houston, TX TAS Mark Kritzman Better Later, Period (.)? Although staff’s competing professional priorities are President and CEO the chief reason underlying time lags between TEF seminars and publication of Windham Capital Management Cambridge, MA interviews comprising same, such lags are virtuous in at least one narrow sense: TIP William McCalpin they permit readers to gauge the enduring soundness of interviewees’ remarks Former Executive VP and COO against the background of events that have unfolded during such intervals. Our of Rockefeller Brothers Fund Wilton, CT view, admittedly biased, is that Seth’s comments documented here have enduring TEF William McLean value. Vice President and CIO Northwestern University ABOUT TIFF Evanston, IL TAS Jane Mendillo Mission. In 1991, a network of foundations founded a cooperative-style President and CEO Harvard Management Company investment organization whose structure and eligibility criteria have evolved Boston, MA over time but whose core mission has not. Known colloquially as TIFF, this TEF David Salem organization seeks to improve the investment returns of endowed charities by TAS President and CIO of TAS President of TEF making available to them a series of multi-manager investment vehicles plus CIO of TIP Cambridge, MA resources aimed at enhancing fiduciaries’ knowledge of investing. TAS Ellen Shuman Vice President and CIO Means. The organization comprises three regulated entities at present: a tax- Carnegie Corp of New York New York, NY exempt private operating foundation whose d/b/a (TIFF Education Foundation) is more descriptive of its focus on education than its formal legal name (The Legend Investment Fund for Foundations); TIFF Investment Program (TIP), an SEC- TEF TIFF Education Foundation a tax-exempt private regulated mutual fund family; and TIFF Advisory Services (TAS), a taxable non- operating foundation stock corporation and SEC-registered investment advisor that administers all TAS TIFF Advisory Services investment vehicles bearing the TIFF name. As noted at left, there is substantial a registered investment advisor for TIFF vehicles but not complete overlap among these three entities’ boards. TIP TIFF Investment Program a mutual fund family Inquiries. For more information, please call TIFF at 610-684-8000 or visit open primarily to charities www.tiff.org/TEF. Copyright © 2009 ■ All rights reserved ■ This report may not be reproduced or distributed without written permission from its publisher. ■ Commentary ■ 2009 Edition 2 ENDOWMENT MANAGEMENT SEMINAR 2008 — KLARMAN Genius Defined very important, especially these days — or at least until recently when people would leave after a year or David. I’m really delighted to welcome to the two of experience and start their own funds. We want stage someone I’ve known for a very long time, Seth people who want to be part of a team. We also place Klarman. I’m fond of teasing Seth that in the more huge emphasis on values and ethics and ask interview than 25 years since we attended classes together at the questions designed to get at those two issues to see if business school across the river, he’s been able to hold the interviewees have a way of thinking that would just one job, which was a job of his own creation. Who suggest whether they are morally blind or not. There’s said genius is the ability to invent one’s own occupation? something called ideational fluency that basically By that standard, Seth is a genius. That leads to my first measures innate curiosity and how your mind presents question for him because I think many folks in the room, options in response to a question or problem. If your yours truly included, spend an awful lot of time trying to mind doesn’t come up with a lot of different options, identify human beings who are capable of performing the how are you going to figure out what’s wrong with an art of investment management well and distinguishing idea or what you should be worrying about in terms of luck from skill in doing so. Seth’s background is quite a hedge or something like that? So we try to identify unusual in that he was hired at a very early age, right people with broad ideational fluency. Just plain common out of business school, to manage a portfolio. So what sense is also important. At times we find people who I’d like him to start off with is an explanation of why are brilliant but lack common sense. So there’s a whole he thinks the folks who hired him right out of business variety of characteristics. I think to take the next step school to manage their personal wealth did so and, of and be a portfolio manager you need both a sense of course more importantly and to the point, what he looks history and a vivid sense of risk. When Warren Buffett for in identifying investment management talent. Seth, put out a job description for his replacement, he said, welcome. “This person will need to be able to imagine things that have never happened before.” I think that’s very, very Seth. Thank you, David. It’s great to be here. important. So I would say that there are some people First of all, slight correction. I wasn’t technically hired who just have a special something, a flair for getting to to manage an investment portfolio. I was hired to be part the heart of the matter better than just about anybody of a team that would attempt to figure out exactly what else. We’ve had a number of them go through our firm we were going to do over time. over the years. A broad curiosity blended with some contrarianism and a sense of what makes you money David. Even worse! is the right combination of traits. Also, understanding the value of optionality is important. Some of the best Seth. Yes! But I think the notion that investments that we’ve ever done — I think most people somebody would trust a 25-year-old to manage a have ever done — aren’t necessarily attractive in their portfolio is probably a stretch, so I just want to be fair own right. They’re attractive because the upside versus about that. the downside is compelling, rather than being right that the earnings would come in a certain way. Hunting for David. Yep. an extremely mispriced risk-and-return scenario takes skill and determination. Seth. I think in many ways it’s hard to put your finger on exactly what would cause you to trust Full Price somebody and envision them as the person you’d want to bet on for the future. We’re hiring analysts, not portfolio David. How often do you find mispriced managers, so I need to make that distinction clear. We talent? look for people with a whole variety of characteristics. In a sense, we’ve realized that the process is one of Seth. I would say we’re not really looking winnowing out rather than winnowing in. At the end of for mispriced talent. I’m happy to pay full price, and the day, we may still decide that even though we haven’t I’ve sometimes intentionally chosen over the years to rejected someone on any particular characteristic, we pay people more than absolutely necessary. I think in the still don’t want to hire him or her. But mostly we find talent search for investment professionals, for example, reasons not to like them, especially because we start there’s a big gray area between the least you can get with a very large pool. So we’re looking for, obviously, away with and the most you could possibly justify; raw intelligence. Willingness to be a team player is and that might be many hundreds of percent different. 2 Commentary ■ 2009 Edition 2 ■ Copyright © 2009 ■ All rights reserved ■ This report may not be reproduced or distributed without written permission from its publisher. ENDOWMENT MANAGEMENT SEMINAR 2008 — KLARMAN continued And frankly, it’s true for operational talent, too.

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