Is the multi-manager hedge-fund boom coming to an end?

Multi-manager hedge funds, which operate multiple trading teams or ‘pods’ that execute diverse strategies across various markets, have pulled in tens of billions of dollars in recent years, thanks to strict risk controls and consistent returns, even in equity bear markets such as that seen in 2022. However, in the 12 months to the end of June 2024, more than $30 billion in client withdrawals were made, marking a sudden shift in sentiment for one of the industry’s most sought-after strategies, according to a report by Goldman Sachs cited by the Financial Times.¹

The outflows seen in 2024 were the first in seven years, reflecting weak returns in 2023. While larger firms such as Citadel and Millennium outperformed, smaller players struggled. Balyasny Asset Management and Schonfeld Strategic Advisors posted gains of just 2.7% and 3% respectively, barely exceeding the risk-free rate, according to a report by Hedgeweek.²

Increasing charges in the sector may also be deterring interest. Multi-manager hedge funds charge expense fees about triple the size of traditional peers, according to a Barclays note to clients reported by Reuters.³ While a traditional hedge fund has a fixed 2% cost fee and the owners of the fund take 20% of profits after costs, the multi-manager platform must pay bonuses to the traders working at the fund and therefore charge higher expense fees, according to Reuters. Consequently, rather than the so-called 2-and-20 charge, the multi-manager fund is more like 7-and-20.⁴

Goldman Sachs data from a survey of more than 300 investors, such as family offices, sovereign wealth funds and pension schemes, showed that just 15% expressed an interest in increasing their exposure to multi-manager strategies with so-called pass-through fees, where the hedge fund passes on its costs. The figure had declined from just over a fifth of investors willing to take on the extra fees the same time a year earlier, said Goldman Sachs.⁵

However, the appeal of multi-manager hedge funds may rebound if performance improves and their long-term record is good. For the 10 years ending 31 March 2024, a Multi-Manager Peer Group Composite, comprising 34 members, had an average annual return of 7.38%, versus 4.93% for traditional hedge funds, with about half the volatility, according to a study by Morgan Stanley.⁶

Multi-manager hedge funds have various advantages over single hedge funds, which “tend to carry net exposures and trading betas associated with their particular strategy” and “more often they are amplified forms of the manager’s investment views, leading to highly correlated ideas and holdings”, according to Morgan Stanley.

By contrast, a multi-manager platform offers “a range of diversified alpha sources and centralizes the risk management function” and the independent managers “are thus free to put their talents to their highest and best use”, Morgan Stanley adds.

Multi-Manager Platforms Have Delivered Stronger Risk-Adjusted Returns Than Hedge Funds