James Tyree is the CEO of Mesirow Financial, an employee-owned financial services firm headquartered in Chicago with more than 1,200 employees in offices across the United States and in London.
Tyree speaks to IBTimes about how his firm is navigating the challenges of the post-crisis financial world.
IBT: Can you first tell our readers a little bit about Mesirow Financial and what it does?
James Tyree: Mesirow is an investment management firm with about $50 billion in assets under management globally. It's a global markets firm with sales, trading, and origination in fixed income securities. It's [also] a corporate restructuring consulting firm, [and] it's an insurance brokerage firm.
IBT: In terms of the performance of financial assets, the financial sector itself, and the behavior of and needs of investors, have all these things changed after the global financial crisis? And if so, in what ways?
James Tyree: Clearly our world has changed dramatically because of the introduction and understanding of risk that before was irrationally not thought of. Risk in terms of volatility, risk in terms of correlation in many assets that were thought to be uncorrelated with each other turned out to be very highly correlated. The risk of assets that were thought to be liquid, [becoming] illiquid relatively quickly.
It's something that has changed forever. Liquidity, volatility, and correlation has changed. Volatility is here to stay, although not everyday, but people need to pay attention.
IBT: So not only are people's attention focused upon those things you mentioned, but this is a part of the new reality from now going forward?
James Tyree: Yes, I believe it is, across all financial assets.
IBT: As far as investors are concerned, right now, they're piling into fixed income, Treasuries, and they're kind of avoiding stocks. Do you think what investors want from investment managers has changed?
James Tyree: It sure has. You haven't gotten over the hangover in the huge declines [from] people's assets. Now they're feeling more comfortable because those who have stayed in equities have come back a great, great deal.
But the idea that people used to accept risk, now they're rethinking [it]. I think security is significantly more important [now]. Many people used to get 'security' from the age-old concept of diversification, and then based on what I said in the beginning -- correlation, volatility, and liquidity -- they're finding out [that] diversification isn't all it's cracked up to be in eliminating risk.
So I believe the new world is paying more attention to risk and seeking better risk-to-reward relationships, and accepting lower rewards.
IBT: The previously-held assumption of long-term institutional investors -- for example that U.S. stocks will return about 8 percent per year if you hold it long enough -- what assumption do you think are no longer valid now?
James Tyree: Longer-term equity assumptions, I think, are still valid. Long-term fixed income assumptions, I think you really have to question. Fixed income securities are all over the map right now. There is flight to quality, and I think this will [result in] lower returns on fixed-income securities, [compared to returns] historically*. That has been a big change.
[In the] $50 billion [of assets that we manage], we are dominated by alternative [investments]. So we believe strongly in innovation. We think that important concepts of the past like style boxes** and diversification around style boxes are key and critical and remain so.
But they must be looked at in light of overall risk parameters, especially as it relates to volatility, correlation and liquidity. And instead of looking at two- or three-dimensional investing, you have to look at four- or five-dimensional type of investing and understand where the difficult times can come from and how you can insulate yourself from them.
And you have to be more objective-driven, as to what your goal is. The simple concept of 'I want to get rich quickly' is not going to serve people too well.
IBT: Can you talk about what types of alternative investments Mesirow is into specifically?
James Tyree: We’re dominated by hedge funds, currencies, commodities, private equity, and real estate.
IBT: It sounds like your firm got into these asset classes before the financial crisis.
James Tyree: We've been in the private equity business for 30 years. The hedge fund business for 20 years, and the currency business for 8 years.
We also have traditional equity and fixed income, but we believe we have more tools available to you in alternatives.
IBT: Are you worried at all that trends of deleveraging and re-regulation in the financial industry will hurt the returns of alternative investments like hedge funds?
James Tyree: Of course we are. It's one of the biggest things we concern ourselves with, is how you can continue to innovate and use financial tools prudently -- and have them regulated appropriately -- but not kill them by over-regulation and imprudence in government.
IBT: So far -- after the worst of the financial crisis is over -- what segment of your business has done surprisingly well?
James Tyree: We've continue to grow. Probably the biggest growth has been in our global markets business. And sales and trading and origination. The second biggest is the global awakening to the importance of currency management.
It used to be that everybody took a passive stance towards currencies. You can no longer do that.
IBT: What is your outlook on the U.S. economy vs. the rest of the world, particularly emerging market countries?
James Tyree: In the U.S., we think 3 or 4 percent growth is all we're going to see for 2011. We see still some headwinds against economic growth in the U.S., primarily real estate. In Europe, [the main headwind is] predominately debt.
IBT: So you do anticipate that the U.S., after say five years, would return to its old rate of economic growth and asset appreciation?
James Tyree: Yes, but, you need need innovation.
IBT: By innovation, you're not talking about financial innovation, but technological, like the IT revolution?
James Tyree: Yes, but [even more than that, we also need] operational [innovations]. How to run a logistics company more efficiently. How to run a plant more efficiently. How to do everything with less people. Not just technology, but management innovation.
IBT: So do you think this crisis has cut the 'fat' from various industries and made us more efficient? And will those skills will help us in the future?
James Tyree: I think it has. It hasn't done it across the board; there is plenty of fat, unproductive kind of companies, I think they go by the wayside.
I think people who have really paid attention in the last two years, that have innovated and streamlined and developed their business, will be very successful operating in this environment. I think it's going to be a world of 'haves' and 'have-nots' in the business community.
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*Tyree is referencing the likely end of the 30-year U.S. Treasuries rally that started in 1981. Regarding his comment on flight to safety, it probably refers to the fact that risk-aversion has made Treasuries over-priced, so they will likely fall in the future.
**A tool, mostly used for stocks, that characterizes them by size and style (value, growth, mix of value/growth).