Tight risk controls helped them deliver those gains. If portfolio managers lose even a few percent, they’re generally forced to reduce or even liquidate positions. And because the pod shops traffic in so many markets — and not in big directional bets — no single investment will make all of the money, or sink a firm.
As of midyear, there were 55 pod shops — multistrats and single strategy — overseeing $368 billion, with about half that amount controlled by the five biggest firms, according to a September Goldman Sachs Group Inc. report. That’s up from 29 firms running a combined $149 billion in 2018.
Investor interest, though, may have peaked. Clients are now fixated on leverage and the risk of “platform de-grossing” — or stampede selling — Goldman Sachs said in an earlier report. And 8% of those interviewed in June said they planned to pull money from multistrat funds in the second half of the year, up from 4% six months earlier.
Some smaller firms are struggling amid the increased competition. Schonfeld Strategic Advisors has barely made money this year and investors have pulled $2.3 billion from its funds. It almost partnered with Izzy Englander’s Millennium, a much larger rival, but instead found new and current clients who said they’d be willing to invest up to $3 billion.
Even with more assets and stiffer competition, Citadel continues to be among the most aggressive risk-takers.
While Griffin’s firm gets high marks from S&P Global Ratings for sound risk management, healthy cash levels and sticking to liquid investments, the credit-grading company called Citadel’s appetite for opportunistic, concentrated bets a negative, highlighting its big wagers on natural gas and power — sectors prone to large price swings — in 2021 and 2022.
Citadel gained 38% last year, with about $8 billion — half the profits of its main hedge fund — coming from commodities, according to people familiar with the matter.
With $62 billion of assets under management, Citadel is so big that its trades “could at times represent a high multiple of average daily trading volumes,” potentially limiting its ability to sell quickly without sending prices tumbling, S&P analyst Thierry Grunspan wrote in an April report.
“We are in the risk-taking business,” Citadel spokesman Matt Scully said in a statement. “Our investors expect us to deploy their capital against the most attractive opportunities we see in the market.”
The fund gained 13.7% this year through October, while many other multistrats posted returns in the single digits.