(Bloomberg) — Smaller multimanager hedge funds that struggled last year are at risk of losing clients or being swallowed by larger firms.
Consolidation is among the top themes investors are watching for in 2024 as the industry’s biggest players look for fast ways to acquire talent, after adding tens of billions of dollars of assets in recent years.
“It’s not that the model doesn’t work, but it is over-saturated, and that could lead to consolidation,” said Jon Caplis, head of PivotalPath, a hedge fund research firm.
As of midyear, there were 55 so-called pod shops — multistrategy and single strategy — overseeing $368 billion, with about half that amount controlled by the five biggest firms, according to a September Goldman Sachs Group Inc. report. That’s up from 29 firms running a combined $149 billion in 2018.
It was a difficult 2023 for these firms, which have teams that wager on a variety of markets. The PivotalPath Multi-Strategy Index rose just 5.6% last year, among the worst-performing strategies. Balyasny Asset Management and Schonfeld Strategic Advisors struggled, each returning less than 5%, while Millennium Management and Citadel bucked the trend, returning 10% and 15.3%, respectively.
Dmitry Balyasny, whose firm oversees $21 billion, said in October that hedge funds will need to acquire external teams of traders in order to have enough experienced employees to push into new areas. While developing talent internally is critical, it’s not enough, he said at an investor conference in Toronto. Last month, Man Group Plc said it’s open to buying businesses as the firm expands into various credit strategies.
Schonfeld, with about $10 billion of assets, was in deal talks last year with Izzy Englander’s Millennium, but ultimately abandoned them after finding a few investors willing to give it money after two years of lackluster returns.
It was at least the second time the two firms had discussions that ended without a deal. A previous round of talks came in 2020. A few years ago, Millennium also approached Nick Maounis’s Verition Fund Management, which hasn’t had a down year, according to people familiar with the matter.
Here are some other hedge fund returns:
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