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Categorized | Financial

Investors flee multi-strategy hedge funds

Posted on September 20, 2016

Japanese 10,000 yen and U.S. 100 dollar banknotes are arranged for a photograph in Tokyo, Japan, on Monday, June 20, 2016. Japanese shares fell, with the Topix index dropping for the first time in three days, as the yen rose ahead of the U.K. decision on European Union membership and investors awaited testimony from Federal Reserve Chair Janet Yellen. Photographer: Tomohiro Ohsumi/Bloomberg©Bloomberg

Investors pulled nearly $10bn from multi-strategy hedge funds in the three months to July, as volatile markets left them impatient with funds struggling to emulate the success of industry stars such as Israel Englander and Ken Griffin.

Deimos Asset Management, a multi-manager fund formerly housed within Guggenheim Partners, said this month it was shutting down and returning money, while investors have pulled more than $300m from Folger Hill as performance sagged. Blackstone’s Senfina, another multi-manager structure, had declined by 20 per cent, before clawing back more recently.

    The moves come as lacklustre performance has prompted a broad retreat from the hedge fund industry, but they also highlight how difficult it has been to replicate groups such as Mr Griffin’s Citadel and Mr Englander’s Millennium, which helped to establish the so-called multi-manager strategy.

    Multi-manager platforms were so popular — and mostly closed to new investments — that similar structures had proliferated in recent years. These funds are meant to perform well in bull and bear markets and use leverage to amplify returns.

    “In the case of Millennium and Citadel, that’s what you do get, or close to it,” said Judith Posnikoff at Pacific Alternative Asset Management. “Their success may be due to their long history running these things and their reputation with the underlying traders. They’ve had the time and, given their strong performance, the money to build the whole infrastructure of what is needed to run one of these things.”

    Investors pulled $34bn from hedge funds in the first half of the year, shrinking the industry to $3.11tn, according to Preqin, a research group.

    Since the financial crisis, Citadel and Millennium have produced consistent returns, and attracted a flood of client money. However, they have proved to be the exceptions, as hedge funds struggle to justify high fees against recent underperformance.

    In a multi-manager structure, many traders oversee their own independent portfolios that could exist as standalone hedge funds. But combined under the same parent, the thinking goes, profits are diversified enough to withstand any losses.

    Data from eVestment shows inflows into multi-strategy hedge funds — a categorisation that captures Millennium, Citadel, Balyasny Asset Management and Senfina — rose 27 per cent to $56.4bn in 2015, surpassing all other strategies and dragging inflows into positive territory for the industry last year.

    While performance by multi-strategy funds has rebounded recently, for some it was too late. Investors “reacted quickly to those prior losses”, withdrawing almost $10bn from May through July, according to eVestment.

    “Multi-strategy fund flows had been a bedrock of growth for the industry, and it will be interesting to see if enthusiasm returns,” eVestment said in a note earlier this month.

    Deimos partner Loren Katzovitz said the fund shut as overhead costs had risen too much. He also cited the environment for fundraising, calling it “one of the most challenging in history” and with “little visibility as to when conditions will improve”.

    Investors in Folger Hill, founded by ex-SAC chief operating office Sol Kumin, have lost about 6 per cent this year. That and client redemptions have shrunk assets to less than $750m, from more than $1bn when it started 18 months ago.

    Many of the newer funds were established without a star trader generating revenues, which may have helped the business, people in the industry say.

    While Millennium and Citadel have had their share of mis-steps, they along with DE Shaw and Balyasny were in the game early and captured returns from a surging market after the financial crisis.

    Investors were more forgiving of funds with long records of returns, said Ms Posnikoff at Pacific Alternative Asset.

    “The newer ones, even with heavy backing, may find it hard to really attract and keep the top traders and given how hard it has been to raise money,” she said. “If they run into performance problems, they don’t have the long history to keep clients.”