E221: From Citadel to Family Office CIO: Sid Malhotra’s Investment Lessons
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, Siddharth "Sid" Jhawar, Chief Investment Officer at Cactus Capital, shares his approach to managing capital for a single family office and the unique advantages of their long-term investment philosophy. (00:43) The conversation explores how Cactus creates alignment between the investment team and the principal family through co-investment and performance-based compensation, ensuring everyone thinks with a multi-generational mindset rather than chasing short-term gains. Sid discusses his framework for navigating market corrections, the strategic advantages family offices have over institutional investors, and lessons learned from his time at prestigious firms like Citadel and Pritzker Group.
- Main Theme: Building and executing an absolute return investment strategy at a single family office while maintaining perfect alignment between investment professionals and the principal family through innovative compensation structures and co-investment.
Speakers
Siddharth "Sid" Jhawar
Siddharth serves as Chief Investment Officer at Cactus Capital, a single family office where he manages capital exclusively for one family without external clients. He previously worked at Pritzker Group for over six years, gaining valuable experience in family office operations and strategic investing. Earlier in his career, he worked at Citadel in their capital structure analysis group, where he developed expertise in analyzing complex securities across entire capital structures and thinking holistically about investment opportunities.
Key Takeaways
Perfect Alignment Creates Long-Term Thinking
At Cactus Capital, the investment team has their own capital invested alongside the family in the entire portfolio, and a portion of their compensation is tied to both recent and longer-term performance. (01:16) This dual alignment mechanism ensures that when investments perform well, the team benefits through both compensation and returns on their personal investment, but when things go poorly, they suffer on both fronts. This creates genuine skin in the game that naturally drives long-term decision making and eliminates the principal-agency problems common in traditional investment management.
Keep Dry Powder for Market Dislocations
Sid maintains a three-pronged approach during market sell-offs: defend the portfolio by evaluating what to sell, hedge exposures that can't be sold, and play offense by buying dislocated assets. (14:54) The key is maintaining dry powder in conservative instruments like T-bills that can be liquidated at par value to take advantage of opportunities. He emphasizes the importance of dollar-cost averaging during sell-offs, typically deploying capital in three tranches depending on the severity of the market decline.
Focus on Absolute Returns Over Relative Performance
Rather than trying to outperform benchmarks, Cactus focuses on generating positive returns regardless of market conditions. (09:42) This absolute return mindset means prioritizing capital preservation and consistent compounding over high-risk, high-reward strategies. Sid follows Warren Buffett's rules: don't lose money, don't forget rule number one, and take prudent risks. This approach favors a high batting average of singles and doubles rather than swinging for the fences with a high failure rate.
Network Building Accelerates Career Growth
Sid's biggest career regret is not focusing more on building his professional network earlier in his career. (37:00) While working long hours and focusing on individual performance is important, especially right out of business school, building relationships with people across the investment world provides invaluable perspectives, deal flow, and opportunities. The network becomes increasingly valuable over time, but the compounding effect is much stronger when started earlier in one's career.
Think Holistically Across Asset Classes
From his experience at Citadel, Sid learned to break down silos when expressing investment views. (29:00) Instead of limiting himself to one asset class or approach, he considers the full matrix of options across public and private markets, equity and credit, to find the optimal risk-reward way to express a thematic view. For example, when bullish on energy, rather than just buying energy stocks, he evaluates all possible ways to gain energy exposure across different instruments and structures.
Statistics & Facts
- T-bills currently yield approximately 4.3%, which provides a real return above core CPI inflation while maintaining capital preservation for dry powder strategies. (17:28)
- Private markets typically experience 35-50% declines during major corrections, compared to 15-25% declines in public equity markets, creating relative value opportunities for those with dry powder. (23:08)
- Private assets are typically marked only four times per year compared to public markets that trade 250 days per year, creating what Cliff Asness calls "volatility laundering" that makes private investments appear less risky than they actually are. (24:53)
