The most successful idea in hedge funds is now simply strength in numbers.
Investors are plowing 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 secured pretty much all of the new money in the hedge fund industry last year, cementing a tectonic shift that’s accelerated since the pandemic.
Clients are increasingly willing to pay high fees—outsized even by hedge fund standards—to gain access to a whole universe of investments, from U.S. stocks and precious metals to Asian currencies, executed by scores of traders who can be easily replaced if they stumble.
It’s a stark contrast to the old business model: Launch a fund, name it after yourself, call the shots, profit. A generation of managers are finding this new style more appealing—and in some cases have little choice since flashy trading stars aren't in vogue with investors any more. With a shakeout underway in an industry that runs about $4 trillion, multi-strats are the only way to grow.
The Great Migration
Behind their epic rise is consistent performance during periods of market chaos. Take two of the oldest and largest multi-strat houses in the world: Millennium Management and Citadel. They pool investor money into huge funds, before parceling it out in various trading strategies—all under one roof, with layers of risk management to avoid trading accidents.
A $1 million investment in Millennium’s multi-strategy pool at its launch in 1989 is worth about $67 million now. Citadel has turned a million dollars into about $236 million since its start in Nov. 1990. By contrast, $1m invested in the HFRI Fund Weighted Composite Index at the start of 1990, when the benchmark started, would be worth $18m.
Millennium has suffered one annual loss over three decades of trading, dropping 3% in 2008. Citadel has had two, falling by about 4% in 1994 and a whopping 55% in 2008, according to investor updates seen by Bloomberg. Meanwhile, more than 3,350 hedge funds have shut down in the past five years according to Hedge Fund Research Inc., some knocked out by market swings during the pandemic, highlighting how precarious single strategies can be.
Multi-manager platforms “have in effect become the most efficient allocators of capital,” said Caron Bastianpillai, who invests in a number of such funds at Switzerland-based NS Partners.
This dominance can crowd out new entrants. Abhijeet Gaikwad returned to Millennium, which runs $52 billion, this month after failed attempts to raise capital for his own fund. Industry veterans Colin Lancaster and Mitesh Parikh, who were on track to start their fund with $1 billion, last year took their business instead to multi-strategy firm Schonfeld Strategic Advisors. They’ve just been allocated $5 billion to run a macro trading unit.
Ryan Tolkin, chief investment officer of Schonfeld, said that for Lancaster, “in the eyes of both himself, as well as investors, he would be able to attract and recruit better talent by partnering with Schonfeld than trying to do it on his own.”