As we reported last month, the biggest multistrategy hedge funds hired over 1,600 new investment staff last year, with some of them on immensely generous pay packages. But the deeper we get into 2024, the more it seems that some people are getting cold feet about joining the big diversified hedge fund behemoths.
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“Multistrats are good for some trading strategies but not for others,” says one senior trader in an investment bank who’s opted to take his skills somewhere more specialized instead. “If you’ve got a liquid strategy in equities or liquid credit products, they fine. But if you’re trading an illiquid strategy where investors want reassurance that you’re committed for the long term, working for a multistrategy firm is not ideal,” he adds, speaking off the record.
He’s not alone in that opinion. “The top tier people are not at the multistrats,” says a senior analyst who recently left a multistrat for a single manager fund in London. “Multistrats are all about seeing how much capital they can deploy in six to 12 months and collecting their management fees,” he claims. “They’re not really about performance, they’re just interested in taking an option on people, collecting the management fee, and letting them go if doesn’t work out.”
Multistrategy funds would undoubtedly object to this characterization of their activities, particularly given that the biggest funds like Citadel and Millennium generated returns of 15.3% and 10.6% respectively in 2023.
However, multistrategy funds have long had a reputation for “churning” staff who don’t perform. Millennium, for example, recently let go of former Deutsche Bank trader Omar Sayed after some of his event driven bets allegedly went awry. In an article last September, Marc Rubenstein, a former Credit Suisse managing director and retired partner at London asset management firm Landsdowne Partners claimed that in 2019 just 55% of one major fund’s portfolio managers made it to their three-year anniversary.
Multistrategy firms’ detractors say claim the big “pod shops” can afford to hire and fire portfolio managers (PMs) because of their “pass-through” fee structure, which allows them to transmute everything from employee compensation to headhunter fees and staff meals into costs to be born by investors. New hires can be put to work managing capital, which itself brings in a management fee of around 1.5%. If the new PMs make a profit, that’s great. If they make a loss, they’re quickly cut. Either way, their pay is charged to investors; the multistrat can’t lose.
Top traders are taking note. Recruiters say that in areas like illiquid credit trading, commodities trading and some areas of macro trading, there’s now a preference for joining funds or trading houses that specialize in that product area and that have a greater understanding and tolerance of risk. Barclays trader Frank Benhamou has, for example, just resurfaced at London-based credit-focused fund manager Cheyne Capital after leaving the bank last December.
Commodities traders are particularly wary of the multistrats. Although funds like Citadel have well-developed commodities businesses, headhunters say that funds which are newer to the space are having problems attracting and retaining good staff. “Some traders are lured to the big hedge funds with good bids and sign-ons, but then they realize that they’re working somewhere with no view of the physical trading flow and where they’re being given really tight stops like equities traders,” says one headhunter, speaking on condition of anonymity. “They’re saying that they need to be somewhere that really understands the commodities market and commodities risk instead.”
One hedge fund headhunter, who works a lot with the big multistrategy funds, says it’s a question of risk and reward. If you’re an aspiring portfolio manager who’s risk-averse, you’ll join a single manager fund as an analyst and learn the ropes, he says. But if you’re confident in your ability to generate pnl, you’ll take your chances in a pod. “Single manager funds have lower transition risk, but lower reward,” he observes.
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