For years, it was common knowledge that smaller hedge funds outperformed larger peers.
Investors focused on finding up-and-coming managers before they made it big and raised billions. Big-name institutions like Blackstone and the Teacher Retirement System of Texas seeded new funds and sought out emerging managers. While there was safety and, typically, capacity in the biggest funds, there was alpha in unknown names.
This has all changed with the yearslong industry takeover by the biggest multistrategy firms. The big four — Millennium, Citadel, Point72, and Balyasny — have in recent years outperformed peers despite their ballooning sizes, dominated the fundraising environment even though they’re mostly closed to new money, and turned the talent market on its head with eye-popping offers for investors.
For the first time, scale benefits both the manager and the LP, and the result is four managers with overwhelming clout. Business Insider talked to more than a dozen fund founders, allocators, and industry experts, such as top prime brokers and recruiters, to understand how smaller platforms plan to survive the unprecedented concentration of capital and talent and where allocators are turning in this new reality.
Goldman Sachs’ prime brokerage desk, using regulatory filings, estimated in July that 53 multistrategy firms employed a total of 18,600 people. More than 71% of them worked for one of the big four, leaving the 49 other funds with a combined head count smaller than Millennium’s.
Fundraising — which came easy for big and small platforms alike when interest rates were lower three years ago — is now a slog for many smaller multistrategy funds, several executives told Business Insider. The shift has cramped some firms’ expansion plans that commenced during the boom times following the pandemic and put pressure on a business model that thrives with scale.
Meanwhile, Point72 and Citadel have returned capital to investors, and Millennium can command a five-year lockup period for new money, a term length previously unheard of in the hedge fund world. One allocator told BI that Point72, the $39 billion firm run by the billionaire New York Mets owner Steve Cohen, had a $9 billion waitlist — which is more capital than firms like Eisler and Walleye manage.
A different allocator compared the concentration of capital in the four largest firms to passive investing, in which all the assets flow to Vanguard, BlackRock, or State Street.
“For people who can’t get into the top guys, they’re saying they’ll just invest in some other structure or asset class instead,” this person said, pointing to private credit as a landing spot for some of this capital.
David vs. 4 Goliaths
The big four platforms have grown to a point where smaller rivals aren’t battling another hedge fund — they’re fighting with institutions.
“They’re becoming more and more like investment banks to an extent,” said one platform founder with less than $10 billion in total assets. Others in the industry likened Citadel in particular to pre-IPO Goldman Sachs — a comparison Ken Griffin would most likely welcome, given his laudatory comments about the firm.
A hypothetical $5 billion multistrategy manager has a much different existence than even the $21 billion firm Balyasny. One smaller platform executive hoping to grow said that, even as Citadel and Point72 returned capital to LPs, “it was a bitch last year raising money.”
A February report from JPMorgan’s capital advisory team said hedge funds with assets between $500 million and $5 billion had net outflows of $21.5 billion in the past two years, while firms with assets greater than $5 billion hauled in $12.2 billion in net new money.
Goldman Sachs’ July report noted that allocators were starting to balk at the high costs required to run multistrategy firms. The trickle-down effect is that firms such as ExodusPoint have accepted a cash hurdle — where performance fees accrue only when returns surpass that of a Treasury bond — to appease antsy LPs. Despite the buzz around the launch of Jain Global, the firm raised billions less than it was expected to pull in.
Several smaller-platform executives said LPs were also worried about a platform unwind and what a significant market event could do to these firms, given that they operate with so much leverage.
With more capital in multistrategy funds than ever before, some market watchers have been sounding the alarm about the knock-on effects of this investing style. These funds use borrowed money to juice their bets, meaning any significant movement against their position can cause losses to accumulate quickly.
The risk-management systems of these platforms will often force their investors to shed positions quickly in the face of mounting losses, which can exacerbate a stock’s decline. It’s a market risk that Viking Global’s chief investment officer, Justin Walsh, said he monitors closely and that the governor of the Bank of England, Andrew Bailey, raised concerns about last month.
But now that scale has become necessary for those competing directly with the four biggest firms, any slowdown in growth can be fatal, and suddenly tepid allocators could cause a domino effect, a former hedge fund allocator said.
“Without capital, you can’t get a diversity of return streams,” they said. “Without a diversity of return streams, the model doesn’t really make sense.”
‘Do you have a right to exist?’
Those that can’t beat the biggest players at their own game need to offer something different.
“If you’re going to compete with Citadel and Millennium in their own backyard, you’re already dead,” one person who’s building out their multistrategy offering told BI.
They added, “Do you have a right to exist — or are you on borrowed time because you raised money when all multistrats could raise money?”
Matthew Barrett, the head of manager research at Kepler Partners, who works with allocators searching for funds, said smaller platforms must offer a “derivative” of the main models the big four have perfected.
For Dymon Asia, a $3 billion multistrategy fund with offices in Asia and the Middle East, the differentiator is geography.
SummitTX
At SummitTX, Crestline Investors’ recently rebranded multistrategy fund, “what resonates is the alignment of the whole package,” the firm’s chief investment officer, Caroline Cooley, said. This includes fees, liquidity, transparency of positioning, and risk so that institutional investors have a more personalized setup.
Other midsize shops focus on investment opportunities that are more niche and wouldn’t move the needle at the biggest platforms.
“They need PMs to run $2 billion to $4 billion and manage seven to nine people,” said Rich Schimel, who cofounded the $3 billion firm Cinctive Capital and once ran a stock-picking unit at Citadel. “There are not a lot of people out there who can do that. Not efficiently, at least.”
“It’s a whole different model than ours,” he said.
At his firm, he said, the focus is partially on “low-hanging fruit” in mid-cap stocks that are too small for the biggest funds, for example.
The Holy Grail, though, might be finding a way to offer multistrategy returns at a fraction of the price. The pass-through fee structures nearly everyone has adopted to keep up in the war for talent have LPs on the hook for billions in employee compensation.
Citadel
Several allocators said a firm able to recreate multistrategy returns without relying on dozens of human portfolio managers would have plenty of backers. While Doug Haynes’ Norias Research never ended up launching, reportedly because of an inability to raise sufficient capital, hedge fund LPs said his proposed firm’s algorithm-driven and less-people-intensive structure made sense.
And gross returns from a manager like this could be muted compared with high-head-count peers and still come out on top.
“If a full pass-through fee is 10%,” Barrett said, “you’re already running at a significant head start.”
The squeeze has already begun
Consolidation in top-heavy industries snowballs, and the multistrategy space is not immune.
While the Millennium-Schonfeld tie-up was called off in 2023, the big four platforms have warped the industry by bringing independent external funds in-house and spinning off new firms backed by the mother ship.
While there’s optimism around hedge funds generally, a different Goldman report from last summer said that assets in the multistrategy industry had tapered off and that outflows outpaced performance gains through the first half of 2024. The talent pool can barely handle the big four, much less additional platforms hoping to replicate their models.
“There is definitely a difference between A talent and B talent, and you see it across different platforms,” said Justin Young, the director of investments at Multilateral Endowment Management Company, an allocator that manages assets for Oklahoma State University’s endowment and other institutions.
Even those on the smaller end of the spectrum acknowledge there will probably be fewer platforms going forward.
“Are there too many? There could be,” one founder with under $10 billion in assets said. “There could be some consolidation.”
