Multi-manager hedge funds are currently all the rage. Are they worth the money?

A multi-manager hedge fund consists of multiple mini-funds.?Each specialised fund has its own P&L in which it is allowed to invest across different sectors and markets.?

The theory is founded on a premiss that not all investment managers are good in all markets and not all managers are successful at all times.? Spreading the investment across different Portfolio Managers allows the fund to achieve diversification and reduce risk; sound familiar?

Spreading risk across multiple strategies is surely just common sense which is why at TPP, we always look to design multi-strategy portfolios.

The rise of multi-manager hedge funds has led to a “merry-go-round” of portfolio managers being offered “silly” amounts of money, according to the co-founder of Europe’s largest hedge fund.

Sir Paul Marshall, co-founder of Marshall Wace, told an investment conference in Hong Kong on Wednesday the dominance of multi-manager platforms had reshaped the industry because they were “paying incredible amounts of money to target people”. “Everybody wants that Cristiano Ronaldo on their team, but there aren’t very many Cristiano Ronaldos,” said Marshall, who co-founded the London-based group in 1997 with Ian Wace.

“What’s happening is everybody’s getting paid the same as Cristiano Ronaldo.” Marshall, who is in the process of trying to buy the UK’s Telegraph Group through his digital media group UnHerd, did not name any individual firms. But his comments reflect how the dominance of multi-manager platforms such as Citadel, Millennium Management and Point72 Asset Management has driven a ferocious bidding war for talent.

With ￡52bn in assets, Marshall Wace is Europe’s largest hedge fund, on a par with Citadel and Millennium in terms of size. Multi-manager platforms, which typically allocate capital across tens or hundreds of teams of specialist traders, tend to employ a different fee model to traditional hedge funds.?

Rather than the hedge fund industry standard “two and 20” — a 2 per cent management fee and a 20 per cent performance fee — a defining characteristic of the multi-manager platforms is that instead of a management fee they use a “pass-through” expenses model.

Under this model, the manager passes on all costs — including office rents, technology and data, salaries, bonuses and even client entertainment — to their end investors. The idea is that managers invest heavily in areas such as talent and technology, with the cost more than offset by resulting performance. They then tend to charge a 20-30 per cent performance fee on top.

The pass-through model fuels practices such as sign-on bonuses running into millions or tens of millions of dollars, paid sabbaticals and payouts to individual portfolio managers that can be 20 to 30 per cent of profits, all of which are designed to lure and retain the top performers.

Some multi-manager contracts and payouts have even come close to matching Ronaldo’s $200mn-a-year contract with Saudi Arabian football team Al Nassr. The competition for talent has forced traditional hedge fund players such as Marshall’s firm to adapt.

Its flagship Eureka hedge fund this year added a “compensation surcharge” worth as much as 0.75 per cent of the fund’s value, to be used to reward high performers, a decision Marshall said at the time was taken because “multi-manager platforms are driving a bidding war for talent”.

Marshall said the platform hedge funds’ model had enabled some traders to take “very silly sign-on” bonuses, even if they got fired after two or three years and moved somewhere else, he told the Hong Kong conference. This practice is known in the industry as “surfing the guarantee”.

Marshall said some platform hedge funds operated a “kind of battery-hen farming merry-go-round”, and their high-pay model was “not the right way to build great businesses or even to build a great industry for our clients”.

Chris Gradel, who co-founded the Hong Kong-based investment group PAG, said during the same panel discussion that some staff in his firm’s hedge fund unit had been offered eight-figure sign-on bonuses to move to rivals, a practice he described as “absolute insanity”.

Laughing, he added: “We say: you’d better take it.” The trend was “a temporary phase, it’s a very bad phase”, Gradel added. “It’s good for certain people I suppose?.?.?.?but it’s not good for the client, it’s not good for the industry.” Albert Goh, one of four chief investment officers at the Hong Kong Monetary Authority, the territory’s de facto central bank and sovereign wealth fund, said during the same session that he was grateful for the comments because “we don’t like paying fees”. The HKMA is a major investor globally, with almost HK$4tn (￡400bn) in its Exchange Fund.

However, returns in multi-managed funds have been down a little over the past 12 months compared to the 3-year average, but maybe that can be forgiven in light of how choppy most markets have been.

It’s also worth bearing in mind that most diversified multi-manager hedge funds wouldn’t just YOLO (you only live once Meme) the “magnificent seven” stocks that have powered the equity market this year.

Over the last 12 months, the Multi-manager hedge funds have managed a median return of 4.8%. Which is still pretty good. It’s not TPP good, but it’s not bad.

Over the last 3 years, the median returns average out at 7.8%. Bear in mind that these funds will also take 20% of all the profit, on top of the 2% management fee, and keep it for themselves. The performance is worse among smaller multi-manager hedge funds, which is unsurprising. Not being able to bully the market in certain areas comes at a small cost.

So, with the best managing to average 4.8% over the last 12 months, what is the current average performance from the rest of the hedge fund world?

The Barclay Hedge Fund Index is a measure of the average return of all hedge funds (excepting Funds of Funds) in the Barclay database. The index is simply the arithmetic average of the net returns of all the funds that have reported that month.

In October, 1869 funds reported and the average return on the month was -1.60% bringing the yearly return to 2.43% so far in 2023.

This means, that according to Barclays Hedge Fund Index, the average return over the last 3 years has been 1.47%.

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Closing Comments:

Yesterday witnessed a downside surprise to US inflation, and the markets liked it.

Good news for our?trackers on our platform and some of the 'long or flats', but bad news for the active strategies who have been building a SELL bias into their portfolios.

WATCH this video from our co-founder Lane Clark in regards to this changing portfolio bias.

It will be interesting to see where markets move from here.

Regardless of which direction the economy (or markets) moves from here, TPP will aim to take advantage.

We hope that by building products like TPP that investors will see there are investment solutions out there that can perform regardless of the investment climate.

Why merely track a market, when?opportunities can be taken advantage of in the short and mid term?

Adding small short SELL positions?as the markets fall?is one of many ways our strategies make modifications to?consistently beat the markets.

If you're frustrated with what many?believe is a stale and outdated wealth management model- then consider arranging a call with our team.

We are also of the opinion that the industry needs revamped, and that wealth and asset managers have no excuses for failing to beat their benchmarks most years.

Investors want more than 4, 5, or?6% per annum, without taking on excessive risk.

Investors are frustrated with the poor performance and excessive fees.

lane??- this is the very reason why we built TPP.

TPP has been built for frustrated investors globally. It's time to empower yourself, and start to beat your benchmark. At TPP we offer a multitude of different strategies and trading techniques- they all have one thing in common. They are all designed to beat their market benchmark. Their track records suggest they will do exactly that.? It's time for change. No more exposure to underperforming?funds, and their inflated fees.

TPP has been built to disrupt the market place and offer investors the solution they've been craving. Welcome to the future of investing.???