Hedge fund giants are backing more external fund managers. Here's why smaller rivals are doing the opposite.
In an industry run by savvy billionaires, rank-and-file traders have had the upper hand in recent years thanks to what Millennium founder Izzy Englander deemed a " talent bubble" in 2023.
Multistrategy firms, which blend a variety of investment strategies within a single fund, are catering to top PMs' whims, opening offices in places like Dubai and Puerto Rico so employees can avoid the taxman, or letting top traders run capital externally in their own funds. A report from data provider With Intelligence found that multistrategy platforms have put $55 billion to work in external managers, with firms like Millennium, Qube, and Schonfeld leading the way.
But as the industry's largest players partner with new launches and external money managers, smaller platforms are drawing in portfolio managers who want a semblance of autonomy in addition to the benefits of working within a broader organization.
Smaller managers can offer a more boutique feel for traders who feel constrained by the biggest multistrategy funds, which one allocator previous described as " skill factories" that don't rely on a single star.
Adrian Brummer, a partner at $12 billion Brummer & Partners, a Swedish alternative investment manager, told Business Insider that the firm has four internal portfolio managers and expects that to grow to "six or more during this year."
Brummer has more investment strategies run via external partnerships than internal PMs, but traders working in-house can be more efficient and easier to aboard, Brummer said.
"A pod structure also allows us to access more capacity-constrained strategies," Brummer wrote in an email.
A focus on talent
Brummer isn't the only platform known for investing in external firms and managers that is flipping its model.
A person close to the $6 billion alternative manager New Holland said the firm is in the early stages of adding internal portfolio managers to its multi-strategy offering. The firm began as an investment advisor for Dutch pension plans and has since become independent. It just hired former Brevan Howard executive Stephan Brohme as chief risk officer to boost its "operational infrastructure," a press release said.
"His extensive experience and expertise working alongside investment teams to effectively mitigate and strategically manage risk will be a tremendous asset across our firm," New Holland CEO Scott Radke said in the release.
London-based Bainbridge Partners, which started its multistrategy offering as a fund-of-funds in 2002, has added 10 internal investing pods over the last decade and plans to add more, according to Antoine Haddad, the founder of the $1 billion firm.
"The focus is to bring in more strategies that make sense to internalize," Haddad wrote in an email, with a bias toward more niche options.
At former Eisler portfolio manager Sean Gambino's new fund, Baypointe Partners, onetime Crestline executive Mark Walker is recreating an "old-school partnership," he told BI.
Walker was a part of the leadership team at Crestline that turned the alternative manager's fund-of-funds business into a more modern multistrategy fund with some internal PMs. He is now the CEO of Baypointe and said he is targeting pod shop investors tired of the siloed structure found at many of the biggest platforms.
He aims to build a "Seal Team 6" of senior PMs trading specific sectors, with a "completely transparent center book," which sits atop traders' portfolios and pulls its positions from them. Gambino is already trading consumer stocks, and Richard Shapiro, a former Millennium and Wexford Capital PM, will run the center book.
"PMs want a level of independence but don't want to run a business," he said.
While the biggest funds in the booming multistrategy space, which now manage more than $900 billion, according to research from Nasdaq's eVestment, can offer PMs more guaranteed compensation, there are levers smaller firms can pull to attract talent.
A differentiator Brummer and Walker both mentioned is tailoring risk management limits to a PM's strategy and preference. It's an advantage that can only be offered by smaller firms, as the biggest funds have too many moving parts and people to make customized risk frameworks for each of their traders.
"It's all about what you need to do to secure the best talent," said Matthew Glasofer, a partner at Corbin Capital Partners, a $9.6 billion alternative asset manager with a multistrategy fund that only invests in external PMs.
Corbin is not yet bringing traders in-house, but Glasofer said, "We haven't shut the door on anything."
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