Citadel and Millennium outpace smaller hedge fund rivals

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Big-name managers such as Citadel and Millennium outpaced rivals in the world’s hottest hedge fund strategy last year, illustrating how an arms race for talent and technology is taking a toll on smaller players in the sector.

Ken Griffin’s Citadel gained 15.3 per cent in its flagship Wellington fund in 2023, according to people familiar with the numbers. It told clients in December that it planned to return $7bn in profits to investors and said it would start 2024 with $58bn in assets.

Izzy Englander’s New York-based Millennium, which runs $61.4bn, gained 10 per cent last year, while Steve Cohen’s Point72 Asset Management, which has $31.4bn in assets, was up 10.6 per cent, investors said.

The three firms are among the oldest and best-resourced players in the fast-growing multi-manager sector. All three groups declined to comment.

The gains came as money managers had to contend with a regional banking crisis in the US and a large sell-off in the bond market for much of last year as global interest rates moved higher. The S&P 500 index rose 24.2 per cent in 2023 in comparison.

Citadel’s and Millennium’s gains were lower than in 2022, when Citadel’s main fund gained 38.1 per cent and the firm made a record $16bn in profits, establishing it as the most successful hedge fund manager of all time. Millennium was up 12 per cent while the S&P 500 fell 19.4 per cent.

Multi-manager hedge funds typically allocate capital across tens or hundreds of trading teams that operate a variety of different strategies, and are overseen by a centralised risk management system designed to help prevent big losses. They seek to make money regardless of overall market performance and have been popular with investors in recent years due to their strong risk-adjusted returns.

Rather than the traditional “2 and 20” fees — where managers charge a 2 per cent management fee and 20 per cent of gains — multi-manager platforms are distinctive for their pass-through expenses model.

Instead of an annual management fee, the manager passes all costs to its end investors, covering costs such as office rents, technology and data, salaries, bonuses and client entertainment. These costs should, in theory, be offset by the resulting performance improvements.

But performance last year by some of the smaller players illustrates how some firms are struggling to deliver as spending on technology and talent has eaten into returns.

Schonfeld Strategic Advisors’ main fund gained 3 per cent last year, according to investors, while Dmitry Balyasny’s hedge fund Balyasny Asset Management ended the year up 2.7 per cent in its Atlas Enhanced fund, according to people familiar with the firms. Balyasny runs $21bn in assets and Schonfeld has $10bn.

The pair were among the main beneficiaries of billions of dollars of inflows in recent years when investors clamoured to get into multi-manager hedge funds and the likes of Citadel and Millennium were closed to new money. Fuelled by the pass-through model, Balyasny and Schonfeld hired aggressively, increasing their cost base.

However, with rate rises having lifted the risk-free return available to investors, funds are facing greater pressure to perform. Within the multi-manager sector, investors anticipate that some players with disappointing numbers could be forced to lay off traders, cut costs or potentially team up.

The Financial Times reported in October that Schonfeld was in partnership talks with Millennium that would have seen Englander’s hedge fund put billions of dollars to work with its smaller rival.

But the plan fell through after investors said they would give Schonfeld another $3bn, shoring up its position. The firm said in November that it would cut 15 per cent of its workforce in a cost-cutting drive.

Among other multi-manager funds, Eisler Capital, which has $4bn in assets, gained 9.8 per cent last year, according to a person familiar with the matter. Another newer entrant to the multi-manager space, ExodusPoint, was up 7.3 per cent, according to people who had seen the numbers.

Bloomberg first reported Citadel’s and Millennium’s performance.