How I Invest with David Weisburd
E154: How a First-Generation Immigrant Became a Top CIO: Paul Chai's Story
Fri, 11 Apr 2025
Paul Chai’s journey from first-generation immigrant to Chief Investment Officer of a $1 billion endowment is anything but conventional. In this episode, we unpack how he transitioned from aerospace engineering to managing capital, his approach to investing in “outsiders,” and the delicate balance of taking risk in hedge funds, GP stakes, and tactical trades like TALF 2.0. Paul shares how Kansas State University's endowment supports the school’s mission, why they invest in lower middle market buyouts and small hedge funds, and how they find and evaluate emerging managers.
Chapter 1: Who is Paul Chai and what is his background?
Chapter 2: How has being a first-generation immigrant influenced Paul's career?
I've always felt that I've been an outsider for the most of my life. Being new to this country, being somebody who had transitioned from career to career positions throughout my life. I've been an engineer, I've been a consultant, and then coming into the family office and as somebody who came into the Endowment Foundation space without a whole lot of pedigree.
You're going after a manager where you're meaningful to them, where it's really a two-sided street. Why does that matter?
For us, like you said, it's a two-way street. So what we can contribute, our GPs are successful. We are in turn also benefiting from their strong performance and become successful. For six months of placing on the trade, Telv 2.0 investment generated an 8% return. That's roughly four times of the 2% return, I guess, the U.S. aggregate index for bonds during the same period.
So you have a very unique background for chief investment officer. Tell me about your background.
Thank you so much again for having me on today, David. It's a real honor to be here. I'm a first generation immigrant from Taiwan. My mom brought me and my brother to the U.S. when I was 14 with very little English ability. I eventually graduated from MIT with a degree in mechanical engineering.
After college, I worked in the aerospace industry as an engineer and the semiconductor industry as a consultant. I spent 12 years in the family office, gaining invaluable investment experience. In 2018, I saw an incredible opportunity to join the Kansas State University Foundation's investment team.
And when our longtime CIO, Lois Cox, retired in 2023, I had the privilege of stepping into her role.
So you are a first generation immigrant like myself. In what ways was being first generation an advantage and which way was it a disadvantage?
I've always felt that I've been an outsider for the most of my life. Being new to this country, being somebody who had transitioned from career to career positions throughout my life. My life, I've been an engineer, I've been a consultant, and then coming into the family office and somebody who came into the endowment foundation space without a whole lot of pedigree.
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Chapter 3: Why does Paul focus on investing in 'outsider' managers?
Chapter 4: What is the significance of building meaningful two-way relationships with fund managers?
You're going after a manager where you're meaningful to them, where it's really a two-sided street. Why does that matter?
For us, like you said, it's a two-way street. So what we can contribute, our GPs are successful. We are in turn also benefiting from their strong performance and become successful. For six months of placing on the trade, Telv 2.0 investment generated an 8% return. That's roughly four times of the 2% return, I guess, the U.S. aggregate index for bonds during the same period.
So you have a very unique background for chief investment officer. Tell me about your background.
Thank you so much again for having me on today, David. It's a real honor to be here. I'm a first generation immigrant from Taiwan. My mom brought me and my brother to the U.S. when I was 14 with very little English ability. I eventually graduated from MIT with a degree in mechanical engineering.
After college, I worked in the aerospace industry as an engineer and the semiconductor industry as a consultant. I spent 12 years in the family office, gaining invaluable investment experience. In 2018, I saw an incredible opportunity to join the Kansas State University Foundation's investment team.
And when our longtime CIO, Lois Cox, retired in 2023, I had the privilege of stepping into her role.
So you are a first generation immigrant like myself. In what ways was being first generation an advantage and which way was it a disadvantage?
I've always felt that I've been an outsider for the most of my life. Being new to this country, being somebody who had transitioned from career to career positions throughout my life. My life, I've been an engineer, I've been a consultant, and then coming into the family office and somebody who came into the endowment foundation space without a whole lot of pedigree.
So this is something that I find to be both a disadvantage and an advantage. The advantage being that I can be more adaptable. I can... Getting comfort in my environment, I've learned to really try to open myself up by sharing my own personal life to people who may be less familiar with my background.
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Chapter 5: How did Kansas State University Foundation execute their TELF 2.0 tactical investment?
It's a good example of being strategic and agile, and how that can turn a short-term dislocation into long-term.
I was just speaking to Cliff Asness of AQR, and he believes that investors systematically are either underleveraged or overleveraged. And one of the places that they're underleveraged is their fixed income portfolio. He believes they should be much smaller, but with higher leverage. What do you think about that? And how do you think about leverage in your portfolio in general?
We don't take a lot of leverage. Within parts of our portfolio, there's inherent leverage. Within our portfolio, we have currently about 65% of the portfolio participating in what we call the growth. So that's a growth bucket that participates in public and private equity. And most of these are 100% loan positions on the public equity side.
And in the private equity side, we also monitor the level of leverage carried by our general partners. Amount of leverage that's taking that's a little bit higher within our portfolio comes from the diversifier
diversify part of our our portfolio and uh specifically coming from the hedge fund portfolio which makes up about 12 of our of our portfolio today and that's where we are tactical we do monitor the leverage for our fund managers but it's a smaller portion of our portfolio so typically higher leverage impact can be limited having coming from a family office in the past where we manage a
highly leveraged fund of hedge fund portfolio back in 2008 and living through the times of the great financial crisis when the portfolio has to be locked up due to. Essentially, all of our funds in the portfolio, having restricted liquidity access to their positions, we certainly have learned the lesson, or for me personally, I've learned the lesson that leverage is a double-edged sword.
You can enhance returns in good times, but in bad times, that's when you can have your head handed to you, when your loss can be amplified and you're losing multiples of your equity.
percent of your portfolio is in diversifiers, which is hedge fund like strategies. I think it's probably the closest to a black box in the endowment world where it's very secretive, many different strategies. Unpack that box for me and tell me about what some of these diversifier strategies are.
Because the biggest portion of our portfolio or 65 percent of that is in global growth in public and private equity diversifiers. are really seeing and positioned to help dampen the volatility of the equity market, because it can be very volatile at times. This is really designed to smooth out the ride.
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Chapter 6: What returns did the TELF 2.0 trade generate and why was it important?
So when we are thinking about our target return, it's designed to ensure long-term sustainability of the endowment. And it needs to cover three key components. First, annual distribution. of 4.3% currently over the average market value of our endowment over the last three years. And this is a portion where we distribute each year to support scholarships, faculty, and key campus initiatives.
And then secondly, we have to cover our fees and expenses, including investment management costs, operational expenses, and support fees to help support our fundraising efforts to grow the endowment. And that currently adds up to be roughly 1.5% a year of the endowments market value.
And lastly, to maintain our endowments purchasing power over time, we need to keep up with the rising cost of education and campus needs. So we have to keep up with long-term inflation numbers. there's always a little bit of a tricky exercise to determine what's the appropriate inflation number to use in this case.
For our institution, we choose to have a 2% long-term inflation target in line with what the Fed is targeting. But it's something that we continuously monitor. So every year we have an exercise of reviewing investment policy statement to think about, is this target return still the right way to go about based on
whether we are going to maintain that 4.3% distribution, whether we are going to charge the same amount of management fee across the foundation and what that inflation assumption is. So this is the annual exercise that we do based on the changing market environment. But once you kind of add them up, today's long-term target return is about 7.8%. And hitting those numbers isn't just enough.
So this is where we try to exceed it while managing risk effectively. Our job is to construct a portfolio that not only meets the target, but goes in a way that provides stability and resilience through different market cycles.
So let's say you sit with your investment committee in 2026 and you decide you want to increase your return. What are some of the levers you could pull in order to increase Kansas State's return?
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Chapter 7: How does Paul approach leverage and risk management in the endowment portfolio?
There are several levers that we have historically pulled to enhance our returns compared to our benchmark. while managing the risk effectively. We do have the flexibility within approved rebalancing ranges to place an overweight or an underweight to certain asset classes based on our market conditions. So this does allow us to be more opportunistic while staying disciplined.
So for example, if we do need to increase expected returns, we can tactically increase the allocation to growth to equity positions when situation calls for it. Secondly, we also are somewhat different in that we do invest beyond traditional categories.
So even though we have a top-down strategic asset allocation framework, there are some high return strategies that don't fit neatly into a conventional asset class bucket.
For example, if you think about convertible arbitrage strategies, niche equity strategies like a sector specialist or a country specialist, reinsurance strategies or GP stake strategies, they don't necessarily fit neatly into an equity or a credit or a hedge fund bucket. So that's where we try to be flexible and we find creative ways to incorporate them. And then lastly,
We try to take tactical opportunities when these locations arise. So like the TELF 2.0 trade we talked about earlier, we can act quickly to capture excess returns that wouldn't typically be available in a static asset allocation model. So these are all different things that we do, but ultimately our goal is to balance risk and return while being nimble enough to take advantage of
to unique opportunities that fit within our governance framework.
So you could either rebalance, so you have your growth, your diversifies, your liquidity. You could rebalance a little bit more on growth, which essentially makes it slightly less diversified or slightly less liquid, but a higher return. You could do investments into things like GP stakes, reinsurance, or you could prepare kind of for these idiosyncratic trades like the TELF 2.0.
On the TELF 2.0, without giving away the secret sauce, how are you preparing yourself for the next TELF 2.0 trade? So how do you go about scouring the market and the managers for the next great trade?
We don't. We wait for them to emerge themselves. And sometimes when situations arise, you do see these dislocations. We are certainly not macroeconomists from our team, and we don't profess to know the market better than the fund managers that we have investments with. So this is where we do partner with our fund managers.
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Chapter 8: What strategies does Kansas State use to ensure portfolio diversification?
We have partnered with the biggest GP stake managers in the market, essentially focusing on the trophy assets of fund managers. Because for us, we are really thinking about it as a way for us to deliver high cash on cash yields coming from the stability of the largest fund managers and GPs out there that have continuously been able to grow their asset size and
deliver a relatively safe return for their LPs. So these are the larger GPs that have seen the largest growth in their asset size. And we do feel there's some stability to how they are managed and taking GP stakes within those fund managers allow us to be able to diversify our portfolio in some ways. Because when we think about our private equity portfolio, at our size, we tend to partner with
smaller, lower middle market, buyout type of strategies and managers at a smaller size by doing GP stake in our portfolio in the trophy largest asset managers in some way that diversifies away from our exposure to smaller managers. And we get to participate in the growth of the larger asset management firms as well.
In many ways, that's a trifecta. You have your growth because the moiks are pretty attractive in GP stakes, even for these mature trophy assets. You have your liquidity. It starts to go liquid with the first quarter because you're getting a percentage of the management fees. And then I would argue it's also diversifier because management fees are contractual.
So even if a fund's not doing great, there's still 10 years of management fees.
Right. So there is a durability of the return factor. And that's another part that plays in our interest. We don't see it as an equity investment, we don't see it as a credit investment, but it's really components of both, where if the GPs continue to grow their assets, they will continue to see a higher share of growth in their performance fees.
And that performance fee, along with GP's own investment in their funds, would deliver a performance on top of kind of what you mentioned about the regular cash flows coming from the management fees.
Part of the way that Kansas State has been able to sustain the returns that you guys have sustained is by going lower middle market, going into the smaller managers and
where there's more alpha firstly there's also obviously blow up risk for smaller fund managers how do you manage that and why are you not more concerned about your small managers blowing up growing concern is certainly an additional risk that's higher with smaller less established fund managers so we don't we're somewhat constrained from investing and seeding they when they want funds um
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