If you're thinking of leaving a bank for a fund now, watch where you leap. In every year since 2015, hedge fund closures have exceeded launches, and things seem to be getting worse rather than better. In 2019 investors pulled $87.9bn from hedge funds, which was double the amount they extracted in 2018. When you're joining a fund now, you therefore need to be assured that it's not leaking assets.
One way of doing this is to join an industry leader. One of the hedge fund industry's veteran headhunters says this is exactly what's happening. While failing funds like Moore Capital Management are closing due to what founder Louis Bacon described as, "intense competition for trading talent," he says top analysts and portfolio managers are gravitating to multi-strategy market leaders which are benefiting from a virtuous circle of increasingly talented staff and increasingly impressive returns.
"The top talent is going to firms like Citadel and Millennium," says headhunter Claude Schwab, former talent strategist for Bridgewater Associates and founder of the site Hedge Fund Observer. "They are literally picking up whoever they want. It's hard for other firms to compete."
Citadel has outperformed this year. In the year to November it generated returns of 16.7%, Point72 generated returns of 13.3%, Balyasny generated 9.1% (but has only just hit its high water mark after a difficult 2018), and Millennium generated 7.6%.
Millennium's recruitment in London has been particularly evident. Between January and October 2019, Englander's operation added 32 analysts and portfolio managers, an increase of 20%. Subsequent hires include Karim Cellier, a former managing director in delta one trading at Morgan Stanley and Pierre Vernet, a former economist at Goldman Sachs.
Citadel has been recruiting too, including Pablo Salame and Michael Graham from Goldman Sachs. Six people joined in London from banks and rival funds in August alone.
Citadel declined to comment on its hires and Millennium didn't respond to an email. Schwab says the two funds benefit from a so-called 'pass through expense model' rather than the traditional two and 20 hedge fund fee structure. Under the pass through model, investors are automatically charged costs associated with running the fund, including staff salaries and bonuses.
The upshot is that they are able to pay more, says Schwab. "Firms without the pass through model keep cutting fees and their assets under management keep falling, and they can't afford to pay," he says. While funds like Citadel and Millennium are benefitting from a virtuous circle on the upside, rival funds are suffering the opposite effect.
Citadel and Millennium aren't the only funds with a pass through expense model. Industry insiders say that other strong performers like Point72 and Balyasny operate something similar. By making investors pay their expenses, funds say they're not only able to pay staff well, but can allocate more capital to portfolio managers and afford better technology and infrastructure.
Schwab says this is a big advantage in a world where hedge fund talent is both scarce and choosy. "It's becoming harder and harder for funds to find someone who's done well. There are almost no prop desks on the sell-side to pull people from and a lot of people on the buy-side have not performed."
At the same time, Schwab says top talent is increasingly interested in funds' relationship with investors. No one wants to work somewhere where assets under management might suddenly be yanked. Funds with poor performance are unable to switch to a pass through model though. "It's a luxury," says Schwab. "You can only implement it if you've been doing well."
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