Investors to Ken Griffin: Multi-strategy hedge funds are still booming
Demand remains strong and performance has improved this year
CITADEL founder Ken Griffin was only half right last month when he said the multi-strategy hedge fund boom had “come and gone”.
Yes, the amount of money these multi-manager funds oversee has dipped from last year – partly because some, including Citadel, have returned billions of US dollars of profits to clients.
But the firms, also known as pod shops, are still in their heyday – and several rank among the world’s largest hedge funds. Demand for the biggest among them is strong, performance improved this year and the war for talent to trade their billions continues to rage.
Griffin said he expects some consolidation among the smaller multi-managers, most of which have sprung up over the past 15 years.
There are now 53 such firms, which oversaw a combined US$366 billion at the end of June, down from US$369 billion a year earlier, Goldman Sachs said in a September report. Net outflows totalled about US$31 billion over that span, according to Goldman’s calculations, the first time since at least 2017 that more money went out than in.
Even so, it was not all because clients were looking to exit. About one-third of the outflows was attributed to the hedge funds sending cash back unilaterally, worried that managing too much money would weigh on performance. Some of the bigger players expect to do so again in 2025.
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Citadel regularly returns profits – a total of US$25 billion since 2017. It managed US$66 billion as at Dec 1.
In September, for the first time in its history, Steve Cohen’s Point72 Asset Management said that it would also hand back profits after assets ballooned to more than US$35 billion.
Investors flocked to multi-manager funds in recent years because of their steady returns, even in volatile markets. Citadel’s assets have doubled over the past five years, roughly the same rate of growth as Izzy Englander’s Millennium Management, which oversaw US$72 billion at the start of December. A few new managers have made strong debuts, including Bobby Jain and Diego Megia, who both raised more than US$5 billion for their funds this year.
New pod shops
While multi-managers only account for about 8 per cent of the US$4.5 trillion invested in hedge funds, most of the money in the strategy is concentrated in a few large firms. Millennium, Citadel, Point72, Balyasny Asset Management and Hudson Bay Capital Management all oversee more than US$20 billion each, ranking them among the world’s biggest hedge funds.
Unlike Citadel and Point72, Millennium continues to actively market its fund. This year, when it set out to raise US$10 billion, investors clamoured to get in, pledging more than double that amount.
As banks’ private wealth clients and others look to increase their allocation to these managers, “multi-strategy funds are finding new and creative ways to deploy that capital”, said Gordon Corbett, global head of consulting in prime financing at Bank of America. Those include hiring more internal teams, allocating capital externally to other hedge funds and, in a few cases, even exploring private investment opportunities for the first time, he said.
Performance picked up in 2024 at some smaller funds, putting them on better footing to compete for clients. Schonfeld Strategic Advisors, which was close to being subsumed by Millennium before talks abruptly ended in late 2023, posted returns of more than 17 per cent for each of its two funds through the first 11 months of this year.
Cinctive Capital Management’s main fund returned 11.75 per cent to Sep 30, after dropping almost 6 per cent in 2023, according to the Employees Retirement System of Texas, one of its anchor investors.
The 53 firms tracked by Goldman posted an average gain of 5 per cent in the first half, beating their performance for all of 2023. That means they are on pace to meet their annualised returns of the past five years.
Talent war
The current economic environment is helping, said Jon Caplis, head of hedge fund research firm PivotalPath.
“Higher interest rates not only generate positive rebates on short positions, they help separate corporate winners from losers, creating the security dispersion that multistrats require to perform,” Caplis said.
With some big managers getting even bigger, the competition for talent continues apace.
Balyasny spent US$200 million to recruit senior money managers as its peers all vie for the same group of traders who can manage portfolios of at least US$1 billion – as well as attract, mentor and retain younger analysts who might run their own books one day.
Across the multi-manager universe, investment staff increased by 13 per cent, according to the Goldman report. The firms continued to come up with ways to keep employees from defecting to rivals, including instituting or expanding clawbacks on bonuses. BLOOMBERG
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