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The fightback is on.
The increasing industry dominance of the established US multi-manager platform model, in recent years the only driver of inflows into the hedge fund industry, has been challenged this year by flat flows, mixed returns and increasing scrutiny of hiring practices and pay.
Rivals see an opportunity. The high-profile example of this was Citadel veteran Todd Barker, starting Freestone Grove Partners in January with $3.5bn, and reported by Bloomberg as positioning his firm as the “anti-pod shop” when meeting with prospective investors.
Freestone will reportedly have fewer investing teams, no more than 20, and keep a cap on assets, but allow the individual “sleeves” to run more capital. Other new funds with a Citadel heritage including Holocene Advisors and Woodline Partners have also centred their approach on having fewer investing teams.
Freestone’s approach has some similarities with the Alpha Plus model Marshall Wace has developed into its answer to the established multi-manager model, fuelled by a hiring spree taking seasoned talent from the top US platforms.
AFI exclusively reports that the $4bn strategy is rooted in a systematic and collaborative approach, and has fewer investing teams than the platforms, some led by senior PMs joining from the likes of Citadel and D.E. Shaw.
Led by Marshall Wace veterans Anthony Clake and Alan Hofmeyr, the firm sees itself as trying to do something materially different to the US “pod-shop” platforms, based on long careers rather than trader churn and a collaborative and collegiate approach, all centred on systematic models rather than individual risk-taking.
But new entrants attracted by the established multi-manager model are still coming. Fortress Investment Group is entering the hotly-contested space by buying a platform from PineBridge Investments and hiring Balyasny’s former global equities chief to lead it.
The $44.7bn New York manager, which is part owned by Mubadala, said Jeff Runnfeldt would take on the CIO role at the newly renamed Fortress Multi-Manager Group (MMG) next October.
“We look forward to providing investors with the benefits of a liquid, diversified and market neutral approach to multi-manager investing,” said Fortress co-CEOs Drew McKnight and Josh Pack.
The fightback may come to nothing. Citadel posted a strong 14.8% gain in its flagship multi-strategy Wellington fund this year through November and has returned $7bn in profits to its investors, few of whom will be complaining.
Consistent performance in the higher rate environment of coming years will determine which firms succeed in the space as excess returns become core to LP decision-making. “A higher risk-free rate changes the dynamic and requirement for investor expectations,” said Jon Caplis of industry research firm PivotalPath.
He identifies multi-strategy as “the perfect example of a strategy which is being judged quite differently by investors compared to one year ago.”
During the pandemic era, “these multi-strats could do no wrong.” But the higher rate environment means “investors are going to feel very differently… If investors can get the same return or slightly better without the lock-ups, the worry over high fees or any unforeseen risks attached to the strategy…”
Their research indicates “investors are increasingly feeling fully allocated [to multi-strategy], not necessarily negative but less interested in adding to these positions. That risk-free rate is the main reason why.”
Caplis has identified an emerging trend of “specialist” multi-strats.
“Our clients are looking at specialist multi-strats where they cluster around a smaller number of strategies, like credit or in the futures space. [They are] looking at that new breed of multi-strats that can provide uncorrelated returns maybe even higher than some of the large names in the space.”
As long as the top firms continue to perform, it is hard to see their dominance fading. But 2023 has marked something of a turning point as new models emerge to challenge the major platforms, setting up an interesting 2024.
Next: read some of this year’s top AFI headlines on the multi-manager space:
Marshall Wace takes on multi-managers with Alpha Plus product (exclusive)
Multi-strategy hedge fund power list 2023 (exclusive)
BlueBay adapts key fund and joins multi-strategy club (exclusive)
Multi-strategy funds face ‘talent bubble’ test (analysis)
US multi-strats spearhead Dubai hedge fund moves (exclusive)
Schonfeld’s Millennium move shows cost pressure on multi-strats (analysis)
Man Group signals multi-strat focus under new CEO (exclusive)