Multimanager hedge funds suffer exits as investor frenzy fades

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The hedge fund industry’s hottest sector suffered exits for the first time in seven years, a sign that investors who once scrambled to get access to so-called multi-manager funds may finally be losing interest.

Pioneered by firms such as Ken Griffin’s Citadel and Izzy Englander’s Millennium, multi-manager hedge funds house dozens, if not hundreds, of trading teams known as “pods” that run a variety of trading strategies in stocks, commodities, exchange foreign exchange, credit and other markets.

These funds have attracted tens of billions of dollars from large investors in recent years thanks to strict risk controls and consistent returns, even in bear markets like 2022.

But a report by Goldman Sachs seen by the Financial Times shows that these firms saw net client withdrawals of more than $30bn in the 12 months to the end of June, the first time they have suffered outflows since 2016.

This is a “significant turning of the tide,” Goldman said in the report. “There has been a shift in allocator sentiment and the flow picture reflects this lower appetite.”

The data was compiled by Goldman Sachs’ prime brokerage division, which lends money to big investors such as hedge funds to make market bets, and was based on a sample of 53 firms with 366 billion in assets. dollars. About a third of the $30 billion figure was due to hedge funds that chose to return capital to investors.

The biggest driver of the drop in investor demand is that after years of increasing their investments in the space, some allocators, such as pension funds, have decided they’ve invested enough, Goldman said.

But last year’s weaker returns also hurt investor enthusiasm, with a gap emerging last year between larger, more established players such as Citadel and Millennium and smaller firms, some of which fared little better than the cash. Dmitry Balyasny’s Balyasny Asset Management and Schonfeld Strategic Advisors gained 2.7 and 3 percent, respectively, at the end of last year.

“The average return for several managers in 2023 was almost identical to the risk-free rate for the year,” Goldman said in the report.

The bank’s data showed that over the past year there was a 13% performance gap between some of the best and worst managers.

Some of the top managers in the space, such as Millennium and Citadel, have been largely closed to new investors in recent years, although Millennium this year has been in talks to potentially raise billions of dollars for a cash pot additional that can be used when the firm wants, according to a person with knowledge of the matter.

The bank also attributed the drop in interest rates to rising rates in the sector.

The growth of multi-manager hedge funds has been fueled by the so-called pass-through fee model, where all costs such as client entertainment, office rents and bonuses are charged directly to investors, in addition to a performance fee. This can result in annual fees that can range from 3% to 10% of assets. Instead, hedge funds charge an average management fee of 1.35%, according to data group HFR, to cover their costs, plus a performance fee.

The high fees have allowed these firms to offer some of the most lucrative pay deals in the industry, fueling a growing war for talent, but it has also put pressure on these hedge funds to continue delivering profits to keep up with costs their.

In a sign of the sector’s rapid growth, Goldman found that over the past 12 months, multi-manager hedge funds added about 2,400 new hires, with non-investment staff up 19% and 13% respectively. of investments.

Despite a mixed year for performance last year, the picture was much brighter this year, with firms such as Balyasny and Schonfeld delivering better returns.

The bank added that while sentiment appeared to be turning for the worse, the sector “shows no signs of losing its importance and relevance” in the hedge fund industry.