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(Bloomberg) — Joshua White was something of a celebrity at the Morgan Stanley conference held in January at the exclusive Breakers resort in Palm Beach, as his startup hedge fund piqued the interest of attendees. was treated.
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The founder of London-based Regent’s Gate Capital, who is striking out on his own after 15 years as a portfolio manager at Baryasny Asset Management and Ken Griffin’s Citadel, has not responded to requests to meet at events. He said it was more than double the number he received. Time for everything.
The 43-year-old trader’s boutique operates in a fiercely competitive $3.5 trillion industry, where some multi-strategy hedge funds have come under scrutiny from clients for their high fees and lackluster returns. It is one of several boutiques that have been created. Evidence is now emerging that some investors are willing to consider alternatives to these long-dominant jumbo pod shops.
Interest in emerging executives is rising in 2024 after two years of decline, according to a Barclays investor survey released last month. A separate report by BNP Paribas SA found that more than two-thirds of investors planning to invest in hedge funds are expected to pursue new relationships rather than strengthening existing ones. It was shown that Nearly one-third of investors surveyed by Goldman Sachs Group invested in at least one new business startup last year.
Some of the startups that have successfully raised billions of dollars belong to prominent traders who previously worked at some of the largest hedge fund firms. They raked in capital from outside investors, former employers, other pod shops, or a combination thereof. Some are already spinning out funds that were managed by major asset management companies.
Millennium Management trader Diego Megia will soon start his own operation with a $5 billion pool, and Millennium will invest $3 billion. Another graduate, Priya Kodiswaran, started trading at Catamaran Capital on March 1 with funding from Brummer & Partners AB. Citadel money managers Jonas Diedrich and Dave Sutton also raised nearly $2 billion for Ilex Capital Partners last year.
This has inspired others, like Mr. White, who started trading for a basic market-neutral strategy at Regent’s Gate last October using internal funds. He said the company plans to launch in late 2024 with customer funding.
“Seeing others succeed in raising large sums of money gave me the confidence to launch a new fund,” he said in an interview.
There are many more examples. Kamil Shinkarchuk, a top portfolio manager at LMR Partners, has received $200 million in backing from the firm. Others, like Nat Dean, partner and senior portfolio manager at London-based Capra Investment Management, are looking to spin out funds they already run.
fierce war
Multi-strategy, multi-manager hedge funds, such as Citadel, Izzy Englander’s Millennium, Steve Cohen’s Point72 Asset Management, and Baryasny, typically deploy large teams of traders across a variety of strategies to generate steady returns. It attracts the investors it wants.
To stay on top, they wage fierce wars for talent, paying top dollar to mutually poach star traders. They may even track down people who are planning to launch or implement their own successful strategies and try to convince them to join the company instead.
Read more: Hedge funds in race for top trader are up for a $120 million payout
While this strategy has worked for some hedge funds, it has also meant higher fees for clients. With returns declining and the yield on the 10-year Treasury above 4%, investors are beginning to question the merits of locking up capital for years in poorly performing stocks.
For every dollar the multi-strategy fund earned last year, clients received just 41 cents, and all of that cost was passed on to investors in fees and other fees. There are also strict lock-ups, and it could take investors up to five years to fully redeem Millennium. When performance is good, few people ask questions. But the average multimanager has come under increased scrutiny because it returned just slightly above the risk-free rate last year.
This is causing some investors to take a closer look at their allocations.
Some respondents in the BNP Paribas survey questioned whether liquidity and fees justified the returns. Investor interest in big pod shops may have peaked in 2023 and is now waning, according to a Goldman report. About 16% of those surveyed said they plan to assign to a multi-strategy manager in 2024, down from 31% a year ago. Meanwhile, more allocators said they plan to withdraw money from the strategy this year than in 2023.
“Fees are going up and lockups are getting longer,” said James Medeiros, president of Investcorp Targis, an alternative investment manager that oversees about $4 billion in seed funding. “There is a higher level of oversight.”
However, demand for a select few large companies remains strong, and many are even unable to access fresh cash. Startups like White continue to face a difficult funding environment. However, the data shows that new product launches in 2023 are emerging, even as they remain near record lows for the second year in a row.
New product launches increased in the Americas, the world’s largest market, last year, according to Goldman data. Although volumes were down in 2023, the average launch size set a new record. Startups around the world raised an average of more than $300 million. This is 65% above the long-term trend and 14% higher than the previous year. Goldman also noted that funds established after 2018 have higher survival rates.
Some recent startups have shown they can raise money and generate the kind of returns investors want.
Shiprock Capital Management, a distressed and special situations fund launched last January with $80 million, has seen its assets swell to more than $300 million, spurred by a 32% rise last year. . Former Credit Suisse star trader Hamza Remsugere’s Arini Credit Master Fund returned 32% last year, and total assets rose to $3.7 billion.
“We are on the cusp of reverse migration,” said Investcorp Turges’ Medeiros, adding that traders now have a choice.
One sign of that trend is Sean Gambino. He used to earn an average annual return of 18.6% with his own fund, Heron Bay, but moved to Eisler Capital in 2022 as his funding became tighter. In January, he reversed that decision, saying his approach did not meet the strict risk limits of a multi-strategy platform and that he was better off acting alone, announcing the formation of BayPoint Partners.
“Two years ago, our only option was to move to a platform, but times have changed,” he said.
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