As investors race to size up the threat from the Omicron coronavirus variant, one corner of the hedge fund industry needs no reminding that the pandemic moves markets.
Helped by diversified portfolios and an ability to slash or raise their level of risk quickly, multi-manager funds including Millennium Management and Citadel have been among the industry’s winners in the wild markets of the past two years.
The rapid growth of such funds, which trade a wide range of assets and strategies, has unleashed a fierce battle for talent, driving compensation for top traders sky-high and helping to reshape Wall Street as firms try to entice recruits by expanding beyond New York.
“There’s huge competition and scarcity of talent,” said Tanya Lutyens, founding partner at recruiter and consultancy Lutyens Advisory. “When there wasn’t this mad war for talent, it was more of a buyer’s market and firms could dictate terms. Now they’re throwing more at them [staff they want to hire] to get them over the line.”
As the competition for staff has intensified, Millennium, a $57bn fund headquartered in New York, this year opened offices in the far more temperate Palm Beach and Miami as part of its sales pitch. At the same time, funds are sometimes having to guarantee millions of dollars in payments to persuade traders to sign on the dotted line.
“It’s super-competitive,” said one large European-based investor that backs such funds. “It’s now got past the point in aggregate [across the sector] where it’s economical” to make these hires, he added.
For now at least, such unease over the rising rewards remains rare. Assets in the sector, which includes firms such as New York-based ExodusPoint, Balyasny and Steve Cohen’s Point72, have ballooned by more than $100bn during the pandemic to $620bn, according to eVestment data.
Multi-manager funds operate in perhaps the most brutal pocket of the hedge fund world. Employing tens or even hundreds of small teams or “pods” that independently trade a range of strategies and assets, they use borrowing to improve gains from winning bets while trying to limit exposure to sudden market jolts.
The approach has proved a good fit for the market mayhem of the coronavirus crisis, making such funds the most popular within the hedge fund industry this year, according to eVestment.
Founded in 1989 by former stock broker Izzy Englander, Millennium made 25.6 per cent last year, its best performance in two decades according to investor documents, and is up 10.9 per cent through to the end of October this year.
Citadel, the $43bn group run by Ken Griffin, gained 24.5 per cent in 2020 and is up 19.5 per cent in the first 10 months of this year, according to a person familiar with the matter.
While their performance this year has so far trailed the S&P 500, these hedge funds continue to benefit from some investors valuing returns derived from specific bets more highly than those that come from tracking an overall index.
Since 2019 Millennium, for example, has returned billions to investors, who have also been willing to lock their money up for longer with the firm.
Adding to the allure is the consistency of their returns over long periods, even in turbulent markets. Despite having half of its $13.5bn in fixed-income assets ExodusPoint, founded in 2017 by Michael Gelband, Millennium’s former head of fixed income, lost less than 3 per cent in October’s bond market turmoil, better than macro funds such as Rokos Capital and Alphadyne.
Black and white
The “eat what you kill” model adopted by many of the firms means successful traders share in the spoils, while those losing even relatively small amounts of money can quickly be fired.
At Millennium, a trader can have their positions liquidated and could be fired if they lose around 7.5 per cent, although the firm will also take other factors such as market conditions into account, according to people familiar with the matter.
In extreme cases a trader within the multi-manager world can be out of the door just weeks after arriving, the people said.
“It’s black and white,” said a Millennium portfolio manager. “You know the rules of the game. Millennium tells you that they want to empower you; bring over your business and your team and we’ll take care of compliance, administration, trading systems etc. At a time when starting your own hedge fund is getting more expensive and more complex, this really resonates.”
For talented traders, that has worked out well. In addition to a base salary that can in some cases reach $250,000 to $400,000, those with strong performance are now regularly being offered 20 per cent of the trading profits they generate, with some offered as much as 25 per cent, say industry insiders.
Traders are also tied in by notice periods and lengthy non-compete clauses to stop them decamping to rivals, often six months but sometimes stretching to several years. To hire them, funds have to compensate them for accrued bonuses they are leaving behind plus lost earnings during their notice periods and early months at the new firm. Such payments can now reach $10m and occasionally as much as $20m.
Although they can accrue lavish rewards, industry executives say the trend also reflects how traders’ options have narrowed over the past decade.
Multi-manager funds have benefited as the cost of complying with post-financial crisis regulations has made starting a fund more onerous. Traders who might once have done so are increasingly tempted by multi-manager funds, where regulation and compliance is looked after and where they could be given up to $750m or more to manage on day one.
This dynamic has added fuel to the hiring spree. Since the start of last year the number of lead managers, each of whom heads a pod, at Millennium has climbed from 230 to more than 265, while the size of pods has also been growing. At ExodusPoint the number of lead managers has risen from 60 to 105.
The firms frequently go head to head in sometimes bitter fights for traders. Citadel recently hired trader Brad Schneider, who was previously at Millennium. ExodusPoint, whose name was inspired by the number of Millennium colleagues Gelband first took with him, has added tens of traders and other former Millennium employees to its ranks, although the flow has recently slowed.
New York-based ExodusPoint has hired 40 traders this year from a range of firms, including 10 in Europe and 10 in Asia.
In recent months it is Millennium that has been especially active, particularly in Europe. Of the 22 hedge fund trader hires that headhunter OCR Alpha listed for September across the industry, eight of them were made by Millennium — by far the largest by any single firm. One rival executive described Millennium as “trying to hire the market”.
Millennium and ExodusPoint declined to comment. Citadel said: “We invest heavily in building high-performing teams leveraging resources and technology that help our portfolio managers be more successful.”
Despite the robust performance from multi-manager funds, the sector has had setbacks. Some suffered initial losses as markets slumped in March 2020 with the spread of Covid-19, before intervention by the Federal Reserve sparked a recovery in riskier assets.
But with central banks signalling their determination to scale back stimulus next year, some industry executives are wary of how adept multi-manager funds will prove at navigating any market fallout, particularly given their huge asset growth during the pandemic.
“The issue for multi-strategy funds” that borrow to juice returns is that “when you have a big, unexpected move in markets triggering a liquidity squeeze, you’re going to have larger drawdowns [losses]”, said Jim Neumann, chief investment officer at Sussex Partners, which advises investors on hedge fund investments.
With additional reporting by Harriet Agnew in London