Some of the industry’s most prominent investors, who asked not to be identified discussing individual managers, said they entrust their money only to the largest hedge funds, worried that smaller multimanagers won’t be able to withstand an unwinding that comes from overcrowding. Those firms may be less diversified, have less robust risk systems and less money to compete for top talent.
Other firms are trying to profit from the increased market volatility. Magnetar Capital, co-founded by ex-Citadel trader Alec Litowitz, implemented a short-term strategy to its quant funds several years ago that tends to make money after multistrats cut their crowded equity positions en-masse.
There’s also a new generation of multistrats, including ClearAlpha Technologies and New Holland Capital, that are shunning the most common trades to minimize risk and boost returns.
Freestone Grove Partners, a new multimanager specializing in stocks, is limiting the number of pods it will use to as many as 20, telling investors any more reduces returns.
“Everyone says ‘We are going to be the one that is able to run out of the crowded theater,”’ said New Holland Chief Executive Officer Scott Radke, whose firm manages about $6 billion. “But it works less well as the theater gets more crowded, and maybe you are less nimble than you thought.”
This article was provided by Bloomberg News.