It used to be that the pinnacle of jobs in the hedge fund industry was working for a major multistrategy hedge fund and that the pinnacle of jobs in major multistrategy hedge funds was being a portfolio manager (PM) or maybe a senior portfolio manager like at Millennium. Times have changed, though. These days, the very best portfolio managers are still working for the big funds, but at arms’ length.
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Bloomberg reported yesterday that Aaron Weiner, who’s leaving Coatue Investment Management, is getting “multiple billions of dollars” from Millennium to start his own hedge fund. Last week, Diego Megia, a former Millennium senior portfolio manager, launched Taula Capital in London with $3bn of Millennium’s money. Other funds are at it too: the WSJ says 61% of multistrategy firms now allocate capital externally, up from 52% in December 2022.
The incentive for funds is that they can bring talented portfolio managers under their umbrella who might not work for them in other circumstances. Multistrategy funds are often criticized for their strict risk limits. They insist that as much capital is deployed as possible, even if the conditions for its deployment are not clement. As a result, only PMs with strategies that have a high sharpe ratio, allow $25m+ to be invested, and that deliver returns over a short time horizon are suitable. “The amount you’re allowed to lose is very, very small and so your time horizon at a multistrat has to be very, very short,” one portfolio manager tells us.
Seeded funds are cut more slack. One hedge fund manager who’s been considering taking seed money says multistrategy funds will typically give “more room” in terms of risk to a PM they’ve seeded with money than one they employ directly. They will also often provide “some infrastructure” and an operating budget. In many cases, the seeded fund will be added to the parent fund’s pass-through model, whereby costs are charged directly to investors.
However, and even though Weiner and Megia presumably think seed money is a good thing, it’s not for everyone. Multiple portfolio managers are turning it down, and are doing so from funds other than Millennium. “These deals are only really one step removed from being an internal portfolio manager,” says one, who’s walked away. Others are more forceful in their repudiation of the seeding structure. “They own you,” says another PM, referring to the multistrats. “They pee all over your capacity, and then they lock you down.”
He’s referring to the fact that multistrategy funds often demand exclusivity for their seed investment for the first three to five years. They also usually demand almost complete visibility over the PM’s strategy. They want 20% of profits, in perpetuity. And even when the three to five years are up and other investors can submit money too, the multistrategy seed investor gets visibility on the portfolio. This makes it difficult for a portfolio manager to find other investors. The PM does the work to scale up the fund, the multistrat seed continues to collect a cool 20% of your money. “You are giving your secret sauce away,” one portfolio manager tells us.
Another London hedge fund manager who runs his own fund says multistrats have effectively replaced the funds of funds that were popular a decade ago. One PM says you’re better off raising money yourself. “I’d rather launch with a fraction of the money and have a diverse investor base,” he says. “That way, you also own everything – including your risk framework.”
It may be that the very, very best hedge funds are turning the multistrats down.
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