At a Morgan Stanley conference in January at the Breakers luxury resort in Palm Beach, Joshua White was treated like a mini celebrity as his startup hedge fund piqued the interest of attendees.
The founder of London-based Regents Gate Capital, who’s striking out on his own after spending 15 years as portfolio manager at Balyasny Asset Management and Ken Griffin’s Citadel, said he got more than twice the number of requests for meetings at the event than he had time to accommodate all.
The 43-year-old trader’s boutique is among several sprouting across the fiercely competitive $3.5 trillion industry just as some of the multistrategy hedge funds come under scrutiny from clients for their high fees and lackluster gains. Evidence is now emerging that some investors are open to looking at alternatives to these long-dominant jumbo pod shops.
A survey of investors by Barclays Plc released last month found that interest in emerging managers is rising in 2024 after a two-year decline. Another by BNP Paribas SA showed over two-thirds of investors planning to allocate to hedge funds are expected to pursue new relationships rather than adding to existing ones. Almost a third of investors polled by Goldman Sachs Group Inc. deployed their money in at least one new launch last year.
Some of the startups that have successfully raised billions of dollars belong to high-profile traders who previously worked at some of the biggest hedge fund firms. They have mopped up capital from external investors, their former employers, other pod shops or a combination. Some are even spinning out funds they already ran at big money managers.
Millennium Management trader Diego Megia is soon expected to kick off his own operation with a $5 billion pool, with Millennium chipping in with $3 billion. Another alum Priya Kodeeswaran started trading on March 1 at his Katamaran Capital with money from Brummer & Partners AB. Citadel money managers Jonas Diedrich and Dave Sutton also raised close to $2 billion last year for their Ilex Capital Partners.
That is inspiring others like White, who started trading for his fundamental market neutral strategy at Regents Gate with internal money last October. He expects to launch with clients’ money in the second half of 2024.
“Seeing others succeed in raising significant capital gave me the confidence to launch a new fund,” he said in an interview.
There are more examples. Kamil Szynkarczuk, a top portfolio manager at LMR Partners, is being backed by the firm with $200 million. Others like Nat Dean, a partner and senior portfolio manager at London-based Capula Investment Management, are spinning out with the fund they are already running.
Fierce War
Multistrategy, multimanager hedge funds such as Citadel, Izzy Englander’s Millennium, Steve Cohen’s Point72 Asset Management and Balyasny typically deploy numerous teams of traders across strategies, attracting investors looking for steady gains.
To stay on top, they engage in a fierce war for talent, paying top dollar to poach star traders from each other. They even go after those who plan to start or run their own successful strategies, often trying to convince them to join the firms instead.
The strategy has worked for some hedge funds but it has also meant high fees for clients. At a time returns are diminishing and 10-year US treasuries are yielding more than 4%, investors are starting to question the merit of staying with underperformers and locking their capital for years.
Clients received only 41 cents of every $1 made last year by multistrategy funds that passed on all their costs to investors via fees and other charges. There are also strict lock-ups — it could take as long as five years for investors to redeem fully from Millennium. When performance is good, few ask questions. But with the average multimanager only achieving a return marginally above the risk-free rate last year, scrutiny is building.
That’s making some investors take a closer look at their allocations.
Some respondents in the BNP Paribas survey questioned whether liquidity and fees justify the returns. Goldman’s report showed investor interest in the big pod shops peaked in 2023 and may now be waning. About 16% of those surveyed said they plan to allocate to multistrategy managers in 2024, down from 31% the year before. Meanwhile, more allocators said they plan to pull cash from the strategy this year than in 2023.
“Fees have gone higher and lock-ups have gone longer,” said James Medeiros, president at Investcorp-Tages, an alternative investment manager that oversees roughly $4 billion including seeding capital. “There is a higher level of scrutiny.”
Yet demand for a select few of the largest players remains strong, with many even closed to fresh cash. Startups like White’s still face a challenging capital raising environment. But the data shows green shoots are emerging even though new launches in 2023 lingered near record lows for the second straight year.
New launches rose last year in the Americas, the world’s biggest market, according to Goldman’s data. While volumes were lower, 2023 saw a record in average launch size. Startups worldwide raised an average of more than $300 million, 65% above the long-term trend and 14% more than the prior year. Goldman also pointed to higher survival rates among funds launched post-2018.
Some of the recent startups have also shown they can raise cash and generate the kind of returns investors desire.
Distressed and special situations fund Shiprock Capital Management, launched in January last year with $80 million, has seen its assets swell to over $300 million, spurred by 32% gains last year. Former Credit Suisse star trader Hamza Lemssouguer’s Arini Credit Master Fund made 32% last year, with firm-wide assets growing to $3.7 billion.
“We are at the tip of the spear in terms of a reverse migration,” Medeiros at Investcorp-Tages said, adding traders now have a choice.
One sign of that trend is Sean Gambino, who once produced an average annual return of 18.6% at his fund Heron Bay before moving to Eisler Capital in 2022 as fundraising got tough. In January, he reversed that decision and announced setting up Baypointe Partners, saying his approach doesn’t fit the tight risk limits of a multistrategy platform and he’s better off alone.
“Two years ago, our sole option was to migrate to a platform, but times have changed,” he said.
This article was provided by Bloomberg News.