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The rise of multi-manager hedge funds — and the pay their portfolio managers are systematically harvesting in their seemingly never-ending pod-hopping — is now such a mainstream subject that it’s made it into the Sunday Times.
“Inside the super hedge funds that have Wall Street running scared,” is the headline. The article below is pretty good (it’s by Oliver Shah, so not unexpectedly) but, ironically, the top of the multi-manager/multi-strategy phenomenon may already be in.
Here’s an interesting chart from a recent report by Barclays’ prime brokerage that a kind colleague passed on to FT Alphaville:
Returns being down a little over the past 12 months can maybe be forgiven, in light of how choppy most markets have been and how broad, diversified multi-manager hedge funds wouldn’t just YOLO the “magnificent seven” stocks that have powered the equity market this year.
That the volatility is down — and remains in such a tight range — indicates that multi-managers are also keeping a tighter rein on risk. But Barclays estimates that both the market-beating alpha and Sharpe ratios (returns versus volatility) are down significantly over the past 12 months.
The top-of-the-range Sharpe of 0.8 is still good, but not really what investors are expecting for 20 per cent of any profits and the often obscene costs they are forced to eat in the multi-manager “pass-through” approach (it can often run at the equivalent of 4-8 per cent of assets a year). And a mid-range Sharpe of -0.1 is just plain bad.
The performance is particularly bad among smaller multi-manager hedge funds, which is unsurprising. The likes of Citadel and Millennium are closed to new investors, so investor money has sloshed over to smaller rivals. But those smaller rivals are unable to make the same investments in tech and people.
And now they are stinking out the place:
Perhaps this is just a fleeting period of mediocrity after almost a decade when multi-managers were one of the hottest strategies in town. Even Citadel’s Ken Griffin warned earlier this year in an FT interview that this couldn’t last.
The stories of markets are always stories of cycles and strategies that come and go in terms of popularity. Clearly right now the multi-strategy managers are very much in vogue. When you’re most popular is probably when you’re reaching the top of the cycle.
It’s too early to say for sure, but Ken could have called the top (even if there was probably a heavy element of wanting to diddle newer rivals).
Further reading:
— Across the multimanagerverse (FTAV)
— Multi-strategy hedge funds are the new, superior fund-of-funds (FTAV)
