Multi-manager hedge fund firms, including Millennium Management and Schonfeld Strategic Advisors, are increasingly turning to an old strategy – investing in other hedge funds — as a way to deploy capital and access new talent, according to a report by Pensions & Investments.
While this approach is not new, the number of funds engaging in external allocations has risen significantly in recent years.
Multi-manager hedge funds, which have experienced substantial growth, are now leading the charge, with around 70% having made external allocations, up from just over 50% in 2022, according to a Goldman Sachs report. These funds typically have multiple, independent portfolio managers across different strategies, with capital allocated centrally.
Goldman’s study, covering 53 firms with $366bn in assets, shows that external allocations are increasingly becoming a key feature of these firms.
External allocations offer hedge funds access to new talent that might not be available through traditional employment models. Amid an intense competition for skilled managers, these allocations help hedge funds tap into promising strategies that may have high infrastructure costs.
A handful of large hedge funds, including Boothbay Fund Management, Millennium Management, Paloma Partners Management, and Schonfeld Strategic Advisors, account for 75% of tracked external allocations. Long–short equity strategies, especially sector specialists, dominate these allocations, followed by quantitative strategies.
External allocations typically take the form of separately managed accounts (SMAs), which allow firms to maintain transparency and control while managing risk and capital efficiency. Paloma Partners, one of the most active players in the space, uses a flexible approach that optimises outcomes for both parties, offering capital and operational oversight to early-stage managers.
Boothbay Fund Management has made hundreds of external allocations, primarily through SMAs. The firm’s approach, which focuses on fee discounts and capacity rights rather than taking a share of a manager’s business, is designed to align with investor interests. This model allows Boothbay to grow alongside successful managers while maintaining flexibility.
Meanwhile, Millennium Management and Schonfeld Strategic Advisors have also been active in backing external managers. Millennium has provided support to several firms, including Helix Partners and Kodai Capital Management, while Schonfeld has backed firms like Aster Capital and Meridiem Capital Partners. Other notable players, such as ExodusPoint Capital Management and Verition Fund Management, are also exploring external arrangements.
While some firms, like Citadel, have remained more conservative with external allocations, others, including Balyasny Asset Management and Point72 Asset Management, have made selective investments in external managers. The trend highlights a shift in how hedge funds are navigating the talent war, using external allocations as a means to source top talent and innovative strategies.
