Is Millennium morphing into a fund of funds?
Multi-strategy –> Multi-manager –> Multi-boutique
One of the more intriguing storylines from hedge fund land last year was that BlackRock is in talks with Izzy Englander to buy a stake in his $72bn hedge fund, Millennium.
On the face of it, it seemed weird. Really weird. BlackRock is all about industrial scale, and while Millennium is a giant of the hedge fund industry, it is a midget by BlackRock standards. The fee levels are obviously very different, but BlackRock has a bond ETF that is bigger than all of Millennium.
Moreover, the touted minority stake is odd for BlackRock, which has only ever gobbled up targets whole and quickly remade them in its own image (RIP State Street Research, MLIM, Mercury, BGI, GIP, soon HPS etc). That it is currently in the process of digesting the latter two also make the timing terrible.
Most problematically, Millennium has mostly been closed to new investors for ages. Last year it completed a $10bn capital raise, but reportedly could have taken in twice that, and routinely returns profits to maintain its performance. In contrast, BlackRock is not in the business of turning down investment dollars.
Sure, Englander might be on the prowl for a succession plan, but what is the motivation for BlackRock when you can’t deploy your vast, global distribution network to sell sell sell?
Maybe this is a clue. FT Alphaville’s emphasis below:
Millennium has been the biggest individual hedge fund allocator of 2024, making multiple substantial external allocations — and the trend is set to continue given its remarkable $10bn fundraise earlier this year.
Israel “Izzy” Englander’s New York-based firm, which manages more than $72bn, has shown a new willingness to invest capital outside of its internal “pods,” notably handing billions to Diego Megia’s Taula Capital and signing off a $1bn commitment to Scopia Capital Management.
Millennium’s greater use of external allocations, almost always via separately managed accounts, has made it a key source of new capital for hedge fund launches. Of the 330 trading teams at Millennium, about a tenth are external.
Cap intro insiders say Millennium is not only the biggest multi-PM platform backer of other hedge funds, but the biggest allocator to hedge funds across the entire industry in 2024.
That’s from Alternative Fund Insight, a hedge fund site run by former Bloomberg News and EuroHedge journalist Will Wainewright, which has done a ranking of the most “influential” allocators to hedge funds.
Alphaville can’t vouch for the accuracy and methodology, which seems to be based on a mix of quantitative (estimates for numbers of mandates and $$$ invested) and qualitative (“AFI’s assessment of the levels of innovation, interest and intent”) measures. But it does tally well with our understanding of the shifting dynamics behind some big hedge funds and Millennium in particular. A spokesperson for the firm declined to comment.
It might seem weird to put Millennium, a hedge fund, on top of a list of hedge fund allocators including the Texas Teachers Retirement System, CPPIB and Adia, and consultants like Albourne. But as Wainewright points out, Millennium has become quite the powerbroker — with the following external investments just in 2024:
— Taula Capital. London-based Taula was started by former Millennium manager Diego Megia with $5bn, about 60% coming from Millennium. He now plans to raise a further $1bn from existing investors, taking AuM to $6bn, in excess of the day-one assets of $5.3bn achieved by peer Bobby Jain’s Jain Global in the summer.
— Scopia Capital Management. New York-based Scopia is reportedly getting about $1bn in a new external allocation from Millennium. It has run an equity long-short market-neutral strategy since 2001.
— Analog Century Management. Val Zlatev’s New York-based hedge fund manager runs a long/short equity strategy investing in hard technology sectors and received $1bn from Millennium.
— Centerline Investment Management. Hong Kong-based firm will get hundreds of millions from Millennium for its equity market-neutral strategy.
— Sone Capital Management. Ex-Echo Street Capital portfolio manager George Panos started his new systematic market-neutral hedge fund firm with about $500m, mostly from Millennium.
— Helix Partners Management. Jonathan Heller raised about $1bn for his new firm, with initial capital from Millennium.
Why is Millennium doing this? One reason is simply ravenous investor demand for its wares, but limited capacity to cater to it, given how scarce true alpha really is. By sending cheques to some external managers via separately managed accounts and treating them as quasi-pods — using leverage but with strict risk limits etc — Millennium can maximise its fee generation. All costs get passed on to investors anyway, in lieu of normal fixed management fees.
Another (related) motivation is how expensive it has become to hire the semi-autonomous pods of portfolio managers, traders and analysts that populate the likes of Millennium and Citadel. In 2023, Paul Marshall of Marshall Wace likened multi-managers to a “kind of battery-hen farming merry-go-round” with “silly” compensation structures. Since then it has gotten even sillier. A good recent example of this is a Millennium portfolio manager who left less than a year after being promised a reported $50mn sign-on bonus.
The best portfolio managers also often want to run their own firms anyway. A good example is Igor Tulchinsky’s WorldQuant, which started out as a pod inside Millennium but is now an independent entity that manages some money on Millennium’s behalf alongside conventional hedge funds open to outside investors. Another one is Symmetry Investments, which was started by former Millennium portfolio managers over a decade ago, who are said to still manage some money on behalf of their former employer.
This is becoming a bigger and broader trend. Last summer, Goldman Sachs’ prime brokerage group estimated that 69 per cent of multi-manager hedge funds like Millennium now have at least some of their money managed by outsiders, up from 54 per cent two years ago. A decade ago the number was probably close to zero.
Goldman Sachs sees this as a manifestation of “a new front in the war for talent”, as multi-managers are forced to become more flexible on how they accumulate the best portfolio managers. Here are some of the details from its prime brokerage report:
The largest category of external allocations is equity L/S, which accounts for over half of the total — this is perhaps unsurprising given the ongoing dominance of equity L/S as a strategy within multi-managers more broadly. Within equity L/S, most allocations are to sector-specialist managers with low net exposures, consistent with the profile of PMs the platforms tend to hire. The next largest category for external allocations is quant, which accounts for over a quarter of the allocations we are aware of. This is possibly a reflection of the challenges of building quant businesses internally: external allocations may allow managers to circumvent these difficulties and still gain exposure to quant strategies. The remaining 20% or so is made up of a mixture of other strategies across event driven, macro, credit and RV.
Overwhelmingly, these allocations are in the form of separately managed accounts (SMAs), which allow multi-managers the ability to retain full transparency and control, impose risk limits and preserve capital efficiency by cross-margining external managers against internal PMs. With that said, we are aware of a handful of external allocations in the form of funds of one or commingled fund investments, though these are extremely rare.
Overall, we believe that the growth of the external allocation phenomenon has been directly related to the increased costs and challenges in talent acquisition — it opens up a new pool of potential talent to multi-managers in the form of PMs who want to continue to run their own firms. It may also give multimanagers the ability to access strategies more quickly, without incurring the frictional costs associated with building up the supporting infrastructure for those strategies — quant is a good example of this. Beyond this, the willingness of managers to accept SMAs has risen significantly in recent years as a function of the challenges of the asset-raising environment . . . which has helped increase the supply of potential managers to approach for these allocations.
Alphaville has previously argued that multi-manager hedge funds are almost like a modern, improved version of the old fund-of-funds that have been falling out of favour ever since 2008. In other words, an easy one-stop shop for exposure to a broad array of hedge fund investment styles, but with strict risk controls and overseen by the likes of Englander and Ken Griffin rather than some hedge fund industry dropout.
However, Millennium has been far more aggressive with its external investments than any of its peers. Of its ca 330 different trading pods, roughly a tenth are now said to be made up of external managers, and the proportion seems to be rising quickly.
OK, we’re now entering the realm of wild speculation, but Millennium almost seems to be inadvertently morphing as a bigger, much broader hedge fund business. One that acts as an investment intermediary as well as an investment manager. And that is a more scalable business that we can understand that BlackRock might be interested in.
All that said, we still suspect the BlackRock/Millennium talks will go nowhere (if they haven’t already) for all the reasons that we laid out at the top. And it’s hard to see Izzy Englander — whose patience with portfolio managers rivals Alphaville’s with crypto — wanting to turn his baby into something as gauche as a hedge fund platform.
But it’s still fun to speculate.
