Almost all the new money flowing into the hedge-fund industry is going to giant multi-strategy investments. But it takes deep pockets to fund the army of traders needed to run the platforms, or ‘pods’, that combine a range of different hedge-fund strategies under one roof, and manage risk centrally. That trend, and growing risk aversion, is helping to drive a fresh round of consolidation.
Hedge-fund consolidation to continue in 2023
The fall of the star system
The fate of the once highly respected investment house Gartmore provides a reminder of the dangers of relying on a star investment manager. Founded in 1969, Gartmore had £22 billion of assets under management (AUM) by 2009. But its reputation had become increasingly intertwined with the stellar performance of Roger Guy, who managed European equities and a hedge fund. When Guy quit Gartmore in 2010, following the suspension of a colleague, the investment firm suffered huge outflows – and its name disappeared for good after it was acquired by a rival, Henderson, in 2011.1
A similar fate has befallen other asset managers and hedge funds over the years, so it is little surprise that they – and investors – are now wary of becoming over-reliant on a star performer. Instead, according to Bloomberg, investors are ploughing money into funds ‘that don’t rely on the next macro genius or star stockpicker, but instead offer an army of traders who invest in an array of strategies’.
Indeed, almost all the new money that entered the sector in 2022 flowed into the coffers of giant hedge funds. That, says Bloomberg, cemented a tectonic shift that’s accelerated since the pandemic. Clients, the news agency says, are increasingly keen to pay high fees to gain access to a wide range of investments, from US stocks to Asian currencies, ‘executed by scores of traders who can be easily replaced if they stumble’.
Multi-strategy behemoths like Millennium Management and Citadel employ diverse trading strategies and are subject to tight risk controls. The appeal of multi-strategies lies in their ability to generate consistent returns. Bloomberg says Millennium has suffered one annual loss over three decades of trading, dropping 3% in 2008. Citadel has experienced two, falling by about 4% in 1994 and 55% in 2008. By contrast, an estimated 544 funds were liquidated in 2022 alone, according to Hedge Fund Research.2
Multi strategy gains on consistent returns
Increasing risk aversion drives investors to mega funds
The volatile market conditions seen in 2022, and continuing in 2023, have further contributed to the industry’s consolidation. Overall risk tolerance has declined, leading institutions to focus allocations on well-established funds that have successfully navigated much of the 2022 volatility, according to Hedge Fund Research. That has made it difficult to launch new funds: last year, launches fell to levels not seen since the global financial crisis.3
That trend is likely to continue. Significant asset outflows, driven by underperformance, are putting pressure even on well-established funds, according to Opalesque. The information provider quoted Ilana D Weinstein, Founder & Chief Executive Officer at executive search firm The IDW Group, as saying that the hedge-fund industry is in the ‘early innings of an industry correction and consolidation’. Weinstein argues that much of what is left at many large hedge funds is founder capital – and that if these funds are to recover, ‘performance will have to significantly improve which could take years’.
Weinstein added that many funds were over-optimised to market conditions before the pandemic and have had difficulty trading through volatility and rising inflation. Small and medium-sized funds, which are more sensitive to large outflows, could have particular difficulty in bouncing back, she concluded.4
1 https://www.whatinvestment.co.uk/gartmores-assets-under-management-plummet-26-6332/
2 https://www.familywealthreport.com/article.php?id=196656#.ZBnC03bP25c
3 https://www.irmagazine.com/shareholder-targeting-id/new-hedge-fund-launches-slip-2008-levels
4 https://www.opalesque.com/693339/Hedge_fund_industry_faces_consolidation_
as_performance_wanes333.html
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