The once-booming multi-manager hedge fund sector, pioneered by firms like Citadel and Millennium, has seen its first net outflows in seven years, signalling that investor interest may be fading, according to a report by the Financial Times citing data from a new report by Goldman Sachs.
More than $30bn in client withdrawals were made in the 12 months leading up to the end of June, marking a stark shift in sentiment for one of the industry’s most sought-after strategies.
Multi-manager hedge funds, which operate multiple trading teams or “pods” that execute diverse strategies across various markets, have attracted billions from institutional investors in recent years thanks to their strict risk management and consistent returns, even during challenging equity markets like those seen in 2022.
However, the Goldman report, seen by the Financial Times, points to a “significant turn in the tides” for these funds. According to the data, compiled by Goldman’s prime brokerage division, investor appetite has cooled as some allocators, such as pension funds, feel they have reached their investment limit in the sector.
Weaker returns in 2023 further dampened enthusiasm, especially as performance among firms diverged. While larger firms like Citadel and Millennium outperformed, smaller players struggled. Balyasny Asset Management and Schonfeld Strategic Advisors posted modest gains of 2.7% and 3%, respectively, barely exceeding the risk-free rate. Goldman noted a 13% performance gap between the best and worst-performing managers.
A portion of the outflows – roughly one-third – came from hedge funds proactively returning capital to investors. But the report also attributed waning interest to high fees and rising costs. Multi-manager funds often charge investors via a pass-through fee model, covering everything from rent to bonuses, resulting in annual fees as high as 10% of assets. By comparison, typical hedge funds charge around 1.35% in management fees, according to HFR data.
Despite these challenges, multi-manager funds have continued to expand. Over the past year, they added about 2,400 new hires, increasing both investment and non-investment staff. While the sector’s growth has slowed, Goldman emphasised that it remains “a critical part of the hedge fund industry.”
After a lacklustre 2023, some firms like Balyasny and Schonfeld have delivered stronger returns this year, keeping the sector relevant amid shifting investor sentiment.
