The Multi-Manager Hedge Fund Industry
The Multi-Manager Hedge Fund Industry: A Comprehensive Overview of Strategies, Performance, and Emerging Challenges
– Multi-manager funds have been the fastest-growing and most profitable segment in the global hedge fund industry over the past five years.
Challenges
1. Capacity Constraints: The industry is grappling with limitations on how much they can grow.
2. Talent War: The competition for skilled professionals is fierce and expensive.
3. High Fees: Investors are questioning the high fees and long lock-in periods.
4. Regulatory Scrutiny: Regulatory bodies like the SEC are paying closer attention due to the industry’s growing influence.
5. Performance: Recent performance has not been as strong, and there are concerns about the sustainability of the multi-manager model.
Business Model
– Multi-manager funds employ a large number of specialized traders.
– They use a “pass-through” expenses model, passing on all costs to investors.
– Despite representing only 8% of the hedge fund industry’s assets, they account for 27% of the industry’s holdings in U.S. equities.
Future Outlook
1. New Entrants: Despite high barriers to entry, new firms are entering the market.
2. Talent Management: Firms are trying to cultivate talent internally to mitigate the high costs of hiring.
3. Performance Pressure: With higher risk-free rates, the performance needed to justify high costs is becoming elusive.
4. Leverage Risks: The use of borrowed money to amplify returns could backfire, echoing the collapse of LTCM in 1998.