Investors are putting money into funds that don’t rely on The Next Macro Genius or Star Stockpicker, but instead offer an army of traders who invest in an array of strategies. These behemoths raked in a lot of new money in the hedge fund industry last year, cementing a tectonic turnaround that has accelerated since the pandemic.
Clients are increasingly willing to pay high fees – even bigger than hedge fund standards – to gain access to the entire universe of investments, from US stocks and precious metals to Asian currencies, performed by scores of traders who can easily Can be changed if they stumble.
It’s the exact opposite of the old business model: Launch a fund, put it in your name, call the shots, profit. A generation of managers are finding this new style more appealing – and in some cases with little choice because lucrative business stars are no longer in vogue with investors. With a nearly $4 trillion industry in a shambles, multi-straits are the only way to grow.
great trip
Behind their epic growth is consistent performance during periods of market chaos. Take two of the oldest and largest multilevel homes in the world: Millennium Management and the Citadel. They pool investors’ money into larger funds, before parceling it out into different trading strategies under one roof, with layers of risk management to avoid trading mishaps.
The $1 million investment in Millennium’s multi-strategy pool at the time of its launch in 1989 is now worth about $67 million. The Citadel has turned a million dollars into approximately $236 million since its launch in November 1990. In contrast, a $1 million investment in the HFRI Fund Weighted Composite Index in the early 1990s, when the benchmark debuted, would have been worth $18 million.
Millennium has suffered an annual loss over three decades of trading, dropping 3% in 2008, according to investor updates seen by Bloomberg. Meanwhile, according to Hedge Fund Research Inc., more than 3,350 hedge funds have closed over the past five years, some knocked down by market swings during the pandemic, which highlights how uncertain a single strategy can be. Is.
“Multi-manager platforms have indeed become the most efficient allocators of capital,” said Karen Bastianpillai, who has invested in several such funds at Switzerland-based NS Partners.
This dominance may exclude new entrants. Abhijit Gaikwad returned to Millennium, which runs $52 billion this month, after unsuccessful attempts to raise capital for his own fund. Industry veterans Colin Lancaster and Mitesh Parikh, who were on track to start their own fund with $1 billion, took their business to multi-strategy firm Schoenfeld Strategic Advisors instead last year. He has just been allotted $5 billion to run a macro trading unit.
Schönfeld’s chief investment officer Ryan Tolkien said that for Lancaster, “in the eyes of both itself as well as investors, it is better to attract and recruit better talent by partnering with Schönfeld rather than trying to do so on its own.” will be able to.”
It is also leading to acquisitions, a true rarity in the hedge fund world. Glen Point Capital, which earned $3.8 billion and backed legendary investor George Soros in its early days, gave up its liberties last month after clients pulled their money. Isler Capital, a multi-strategy hedge fund, purchased the business.
Andrew Beer, founder of New York-based Dynamic Beta, said, “Joining a multi-strat on Monday and puntting about $500 million on Tuesday compares to scrambling for $50 million of seed capital to start your own firm.” I’m a lot more attractive.” investment, said.
To be sure, other forms of funds still control most of the assets under management in hedge funds, at least for now. And talented individual traders can still do well when their particular trading strategy is in vogue. But choosing top managers is a gamble in itself. His fund suffered its worst loss of 26% last year after billionaire Chris Rokos’ record profit in 2020. New York-based hedge fund Alphadine, which has never lost money since its launch in 2006, ended last year down 21% after its bond market bets were trapped.
Single-minded funds can also struggle with success, as the growth spurt potentially makes it more cumbersome to trade in the strategy that made its name. Any attempt to force a change on a Star Trader can scare off investors.
Meanwhile, multi-strats have a low tolerance for underperformance. With individual managers less visible to clients, those who begin to lose in the high single digits or increase their risk may have their assets cut short at best, and fired on the least chance. .
Read More: Balyasny, BlueCrest, ExodusPoint Ground Traders Over Loss
This emphasis on rigor is appealing to pension funds, foundations and endowments that have turned to hedge funds, often without the resources to closely track each manager’s actions. Why go on a rollercoaster with Rockstar when the rest of the investment community opts for diversified multi-strats?
The obvious downside is the price tag: Expensive, but well worth it, for investors who keep flocking to these funds.
Clients of multi-strat funds typically sign up for high and opaque fees called “pass throughs”. Such fees can reach 10% or more on top of incentive fees, in contrast to the standard hedge fund model of paying a 2% management fee. And 20% of the profit, with the recent drop in these prices. Pass-through fees include everything from raising employee salaries (and firing struggling businessmen) to office rent and even entertainment.
Some clients have even been signing their money for years. Millennium told investors in November that it had raised a record $10 billion for a fund that takes five years to fully exit. At least four other large multi-manager funds have changed their terms or recently introduced new share classes, increasing the time it takes investors to exit.
Read more: Millennium, Winning the Battle to Keep Citadel Customer Cash Longer
Dynamic Beta’s Beer said, “The idea that institutions voluntarily lock their money up over the years and pay annual performance fees is the Frankenstein monster of incentive structures, which replicate hedge fund returns through cheaper strategies.” Tries to. Imagine if VCs took profits when WeWork hit a valuation of $47 billion.”
too big to fail
Nevertheless, multi-manager funds are the only part of the hedge fund industry that is still attracting new money. Hedge funds collectively haven’t pulled out any new money since 2008, all of their growth driven exclusively by performance, according to a Bloomberg analysis of Hedge Fund Research Inc data.
In contrast, a sample of twenty multi-manager funds collectively grew assets by 510% to $222 billion over the past decade, shows data compiled by Julius Baer. Thirteen of them are now closed for new money.
Of course, these funds come with their own set of risks. While multi-strats tend to be more cushioned than rivals against moves in a particular market, critics worry about asset concentration, made worse by eager banks offering them huge leverage to juice up their bets. Are being given.
“Can you imagine the Fed allowing a $50 billion multi-strategy hedge fund to fail? I can’t. Think of the pain that ArcGos went through and that was small in comparison,” Will Potts, who is trying to start a multi-strategy fund by crowdsourcing investment ideas. “Loss to major brokers will lead to financial distortions, it will be LTCM on the move.”
With echoes of the Long Term Capital Management rescue in 1998, the Federal Reserve pledged an unprecedented $5 trillion to keep the markets running smoothly in March 2020, when a highly leveraged bet called the Treasury Base Trade froze — an intervention called the Treasury Base Trade. Described by veteran macro trader Paul Tudor Jones. As in “Atomic Bomb”.
Read more: Before the Fed Enacted, Leverage Burned Hedge Funds in the Treasury Market
Sean McGold, who runs Lighthouse Investment Partners, isn’t worried about a single event that brings down a multi-strategy fund, given their diffuse risk-taking. He is more concerned about the liquidity risk that could prevent leveraged hedge funds from placing bets. “If for some reason the liquidity dries up for a long period of time, and maybe it could be due to a hike in interest rates or some other situation, it certainly makes it difficult,” he said.
At the Citadel, the biggest concern is ensuring that the $43 billion firm remains in a position to respond to changes and attract talent. “The key is to maintain Citadel’s culture of competence, focusing on talent and not being complacent so that whatever the risk – be it markets, debt, liquidity or pandemic – our culture positions us to adapt. Zia Ahmed, a spokeswoman for Citadel, said.
A spokesperson for Millennium declined to comment.
Temptation
For now, multi-strategy funds continue to lure talent and money at a rapid pace.
Danilo Onorino is feeling the pain of their success. He founded Dogma Capital in 2014 after a brief stint with Millennium, where he found the risk limits too rigid and needed to change his trading style. “My strategy is not wild. I left because it wasn’t the place for me,” he said. Onorino runs $10 million from Lugano, Switzerland, and says raising capital is “almost mission impossible.”
This is an opportunity for Richard Schimmel, who launched Synactive Capital Management in 2019 and reviewed over 4,000 resumes, interviewed over 900 candidates, and hired 53 traders. The equity-focused firm recently added risk arbitrage trading and plans to expand into macro and credit strategies, becoming home to many managers who didn’t want to strike on their own.
“You see a lot of people who try and I give them credit for trying to get the hang of their shingles,” Schimmel said. “In some cases, they’re being paid even more than they started in a place like this. Their own businesses.”
This story has been published without modification in text from a wire agency feed. Only the title has been changed.
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