Special Coverage
Do large, multi-manager hedge funds—‘pod shops’—pose a systemic risk? Some regulators are asking that very question.
What happens when billion-dollar multi-manager funds like Citadel LLC and Millennium Management LLC crowd into the same trades and then exit at the same time? Citadel’s Ken Griffin argues it would be “painful, but not systemic.”
Regulators, however, are less sure. According to a recent Bloomberg report, the Securities and Exchange Commission and the U.S. Department of the Treasury have warned Citadel and other funds that their favorite trades could be destabilizing to financial markets.
The article raised no questions about the role of pod shops, which have emerged as go-to platforms for institutional investors that want exposure to hedge funds through fewer, bigger managers. These platforms are defined by strategies operated by star portfolio managers who have often come over from other established funds or moved their own businesses onto the platform and work within strict risk and performance requirements. The goal is to provide investors with consistent and relatively high absolute returns. As CIO recently reported, these platforms have grown significantly, but the role they play in portfolios is still being debated.
Many investors and some platforms are looking for more customized options. One example is Freestone Grove Partners, which, according to a Bloomberg report, will debut in January. Run by two Citadel veterans, co-founding partners Todd Barker and Daniel Morillo, with $3.5 billion in commitments, the firm is intended to have a more cost-effective structure, with fewer pods, each running more money, allowing analysts to each focus on fewer stocks.
Investcorp-Tages Ltd.’s recent acquisitions of external manager teams could also highlight a slightly different way forward. The firm manages more than $4 billion across a variety of strategies, and its hedge fund business includes a legacy fund-of-funds business defined by custom funds created for institutional investors, as well as an emerging manager seeding program and, more recently, an external manager partnership program.
Investcorp-Tages has been seeding emerging hedge fund managers for approximately 20 years, making it one of the more mature emerging manager platforms. The firm has deployed $1.7 billion to 37 emerging managers over that time. Investors can gain exposure to emerging managers through fund-of fund portfolios or single manager seed deals. Investcorp-Tages provides emerging managers advisory and marketing support as part of its seed investment.
The external manager partnership program has been under development for the past five years. Investcorp-Tages started with a single manager, Paladin, which manages a tail risk strategy, and used that relationship to build out an operational and compliance infrastructure that includes distribution. In September, Investcorp-Tages announced it was partnering with the Engadine long/short equity team, led by Engadine Partners LLP’s founder, Marcello Sallusti, and CEO, Lorenzo Colucci.
Under that partnership framework, Investcorp-Tages will become the investment manager of the Engadine Equity Fund, while Sallusti will continue to be the portfolio manager of the fund alongside his existing investment team. Engadine had been under pressure in 2019 following a bout of under-performance and, according to James Medeiros, president of Investcorp-Tages, “we saw an opportunity to rebuild the business and get it in front of clients because we think it’s a high-quality strategy.” Performance rebounded in 2020 and the strategy has been on a positive run since then.
Similar factors drove a third partnership in November, when Investcorp-Tages announced it had partnered with GAM Investments to bring over star macro-traders Adrian Owens, Rahul Mathur and Scott Watson. GAM has been under pressure to save itself following a failed summer tie-up bid with British asset manager Liontrust Asset Management PLC. GAM has announced several strategic initiatives since then, including the partnership with Investcorp-Tages.
As part of the move, the traders will manage their existing fund, the $235 million GAM Star Global Rates UCITS, but Investcorp-Tages will become the delegated investment manager. The strategy will retain its 20-year track record and core investment team. The fund will also remain on the GAM UCITS platform, rebranded as GAM Investcorp-Tages Global Rates Fund.
Alternative UCITS are available to institutional investors in Europe and provide exposure to absolute return strategies in an onshore vehicle that comply with some allocators’ governance and risk limits.
“We think it’s important for investors to be able to access more than the 800-pound gorillas,” Medeiros says. “We firmly believe that there should be opportunities to access talent: smaller talent, emerging talent, specialist strategies. I think it’s important for the hedge fund business that we have strategies that can run $800 million, $1 billion, $5 billion and do so successfully.”
In 2024, Investcorp-Tages plans to launch and develop new funds and managed accounts with Owens and the rest of the investment team.
Medeiros says the external manager partnerships are part of an ongoing effort by Investcorp-Tages to allocate to and support differentiated strategies, an effort that started with the emerging managers seeding platform. He notes that both emerging and established hedge fund managers face a number of barriers if they want to remain in business. Operational and compliance costs have risen, which gives larger firms an edge when it comes to competing for investor dollars and investment talent. Over time, that means the hedge fund industry could lose high-performing managers and strategies without support.
“We think there’s a middle ground that hasn’t gone fully away,” he says.
Tags: Citadel LLC, Engadine Equity Fund, Engadine Partners LLP, Freestone Grove Partners, Hedge Funds, Investcorp-Tages Ltd., James Medeiros, Lorenzo Colucci, Marcello Sallusti, Millennium Management LLC, pod shops, Special Coverage: Private Markets