Big hedge funds are the biggest winners from the downturn
For a while now, being a large hedge fund has been seen as a blessing and a curse.
Sure, managing more client money means a bigger payday when you collect your fees at the end of the year but it has become increasingly difficult to invest huge amounts of capital and generate decent returns.
Plus, the more assets you have, the more clients you have to answer to and hedge funds — which aren’t exactly known for their transparency despite how ardently some may preach it — don’t tend to like that.
In the years after the financial crisis, many fund managers branched out and launched their own shops creating a small universe of so-called emerging managers (unrelated to emerging markets) who could pitch their small size as an (ahem) asset.
Yet money has largely been concentrated in hallmark names. Some two-thirds of the industry’s assets are now run by about 5 per cent of the managers, according to data group HFR.
And after chalking up gains from the market volatility introduced by the coronavirus pandemic, big US hedge fund platforms are likely to get even bigger, report the FT’s Laurence Fletcher and Robin Wigglesworth and DD’s Ortenca Aliaj.
Even the huge fees some of these firms demand, which are above the industry average of two and 20 — taking a 2 per cent management fee and 20 per cent of profits — don’t seem to be much of a sticking point any more. That’s bound to give them a further advantage: having their pick of the talent in an industry that is reeling from the stock market’s fastest descent into bear market territory.
Many of these firms are also able to breathe a sigh of relief. It wasn’t too long ago that investors were left wondering what the point of investing in hedge funds was if they couldn’t outperform the broader market or protect capital when volatility shot up.
But funds such as Ken Griffin’s Citadel, Izzy Englander’s Millennium Management and Steve Cohen’s Point72 Asset Management have not only protected their investors from losses, they’ve actually made money during a financial crisis.
These results have prompted a wave of fundraising from several big firms, including Citadel, DE Shaw and Baupost Group, some of which have been closed to outside money for years.
That’s not to say that the cohort of big funds didn’t have their own casualties. Two of the largest hedge funds in the world — Bridgewater Associates and Renaissance Technologies, which manage almost $250bn combined — have suffered losses in the market rout.
Perhaps a warning sign to their rivals that getting too big might end up being a problem. As Con Michalakis, the chief investment officer of Australian pension fund Statewide, put it:
“If you have a few lumbering giants and one of them mis-steps, you will have turmoil.”