Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A full pot-kettle-black emergency has been declared in the vicinity of this week’s Hong Kong investment conference. First responders in high viz jackets have been directing bystanders away from the irony spillage. As a hedge fund tycoon, Paul Marshall was not the obvious candidate to call out the payment of “incredible amounts” to hedge fund managers.
It would be equally easy to dismiss his comments as the sour grapes of a traditional hedgie at the astonishing rise of so-called “multi-managers”. Yet soaring pay suggests the multi-manager platform model is knocking up against growth constraints.
These highly leveraged hedge fund groups diversify investments across a wide range of asset classes. US-based Millennium, for example, has in excess of 300 teams (or “pods”) each with an individual strategy. Sophisticated risk systems prevent big drawdowns.
The multi-managers, whose other breakout star is Citadel, have over the past decade slightly outperformed traditional hedge funds in absolute terms. But on a risk-adjusted basis they have blown their rivals out of the water.
Since 2012 they have returned 8.2 per cent a year on average, says Goldman Sachs, compared with 7.5 per cent for traditional hedge funds. Multi-managers did so with lower year-to-year volatility and less correlation to the underlying market.
Their stronger performance net of fees is even more impressive given that their charges tend to be substantially higher. Multi-managers have accordingly generated much of the growth in hedge fund assets under management over the past five years.
After so much success, observers should question whether “peak pod” approaches. There are two other reasons to do so beyond pure mean reversion. The first is that size matters. If enough money is poured into this group, even the most recondite trading strategies will get crowded.
Next, multi-manager platforms are people-intensive businesses. Already, platforms account for about a quarter of all hedge fund staff globally, despite having 8 per cent of the industry’s assets. Growth comes from seeding new pods, with new teams and new strategies.
Talent is, by its nature, a scarce resource. Reports that platforms are wresting managers from each other in a “kind of battery-hen farming merry-go-round”, in Marshall’s words, suggest we might be bumping up against this constraint.
The Lex team is interested in hearing more from readers. Please tell us whether you think multi-managers are paid too much in the comments section below.
