What are multi-managers? Examples include Lighthouse, Millennium, Citadel, Schonfeld, Point72, Man GLG et al. They do it in different ways but, put simply, a multi-manager would hire, or otherwise engage with, portfolio management teams, which would become reasonably autonomous ‘pods’ within the firm. Each pod would have their own profit and loss (P&L), perhaps even manage their own fund, sub-fund or cell, but would be subject to the firm’s overall risk management and allocation policy and the firm’s strict risk parameters. In many ways, each pod is almost running its own hedge fund within the multi-manager.  

I would recommend readers to the series of articles relating to multi-managers that have been in the FT recently.¹ Unfortunately, the FT has the rights to multimanagerverse so the title to this piece ended up being less superheroic as a result.

This article looks at the impact that multi-managers have had on hedge fund start-ups in the United Kingdom and considers the developing relationship between multi-managers and single managers (the term this article will use to distinguish hedge fund managers that are not multi-managers). 

Starting up: single managers, multi-managers, regulatory hosts and going your own way

Broadly, a hedge fund start-up has a full spectrum of options (and there are a variety of different flavours for each option):

Option 1. Join an existing hedge fund manager – everything aside from portfolio management is done for you and you get access to the firm’s systems and infrastructure. You benefit from the firm’s brand and its capital raising efforts. You might even get your own fund to manage but you won’t get more than a personal brand. Ultimately, you are a cog in a much larger machine. You are not your own boss. Your performance will be assessed by the firm and the firm may decide to part ways if performance is not as expected.

Option 2. Join a multi-manager - everything aside from portfolio management is done for you and you get access to the firm’s systems and infrastructure. You benefit from the firm’s brand and its capital raising efforts. You are able to develop more of a brand for your own business and you may get a fund (or, more likely, a cell in an umbrella segregated portfolio company), which may have your own business’ branding. 

You might even have your own entity that can build up its own brand to an extent. Ultimately, you are one of many pods. You are not your own boss. Your performance will be closely assessed by the firm and the firm may decide to part ways if performance is not as expected. This is much more likely to happen than under Option 1.

Option 3. Use a regulatory host - everything aside from portfolio management is done for you and you get access to the firm’s systems and infrastructure. The firm may or may not be able to assist with capital raising but the onus is on you to raise the capital for your fund. You can set up your own fund vehicle (which may be independent of the host, or which may be provided by the host via a “fund out of the box” or a cell in an umbrella SPC platform). You are able to develop a brand for your own business and fund. You are your own boss (albeit working within the restrictions and parameters of the host). Your performance will be assessed by your investors. The host may decide to part ways, but this is much less likely to be on the basis of performance.

Option 4. Set up your own hedge fund management business - you need to make sure everything is done, and you need to build or buy in your firm’s systems and infrastructure. The onus is on you to raise the capital for your fund. You can set up you own fund vehicle. You are able to develop a brand for your own business and fund. You are your own boss. Your performance will be assessed by your investors. We would note that getting FCA authorised from day one is not very common anymore, although we do still see it. Even the larger UK launches often use a regulatory host, if only to cover the FCA application period.  

The lines are hazy between multi-managers and other hedge fund firms (particularly, multi-strategy firms), on the one hand, and multi-managers and FCA regulatory hosts, on the other. Some of the multi-managers are essentially a form of hybrid regulatory host…with some very crucial differences!

All these terms are certainly terms of art rather than science. The above options should be viewed as a simplification. 

Impact on UK start-ups

Particularly in the last 5-6 years, the multi-managers have experienced outsized growth² as the barriers to entry for new managers remained high and the capital raising environment remained difficult (and the cash incentives of joining a multi-manager remained stratospheric). 

The multi-manager model has certainly had an impact on the number of hedge fund start-ups in the UK and we have often been asked to advise teams proposing to join a multi-manager, where, for one reason or another, the teams have decided not to set up their own business. On the other side of the coin, we are often asked to advise teams that are leaving a multi-manager…

In the event of negative performance, capital can easily be taken away from your pod and your pod could even be closed and you and your team dismissed if performance thresholds are breached. This point cannot be overstated. The multi-managers have a reputation for being pretty brutal.

The barriers remain high for new entrants (particularly those choosing option 4 above) but option 3 (the regulatory hosting route) is very much alive and kicking. Q4 2023 and Q1 2024 are looking to be very active in the hedge fund start-up space in the UK.

Evolution of the multi manager model and its place within the ecosystem

The multi manager model is reportedly facing a number of issues (including the hedge fund talent war) but I would not say that they are (all) in trouble. They are a feature of the landscape and are here to stay. 

They are possibly a victim of their own success in that they have large amounts of excess capital. Barclays estimates that at least 40% of multi-manager capital is allocated to external managers.³ In some respects, therefore, multi-managers could step into the capital allocation role that used to be dominated by the funds of hedge funds back in the day. 

For a single manager, therefore, multi-managers are simultaneously competitors and potential sources of capital (for managed accounts, at least).

Can single managers compete with the multi-manager model? 

Absolutely. 

Single managers can compete with multi-managers with respect to each of the most common concerns levelled against multi-managers:⁴

Fees – when compared to the typical fee model of a multi-manager (i.e., pass through (almost all) expenses plus a performance fee), a good old 2 and 20 seems very attractive (provided the performance is there). 

Technology – multi-managers have invested huge amounts in technology and systems, but outsourced technology is getting better and more affordable. Adam Davies, CEO and co-Founder of RSe, which aims to help single managers close the gap between them and their multi-manager cousins, says: “There are 3 key problems that we identify in whether single managers can complete with multi-managers in the next few years. Problem 1: Does the investment industry best utilise Artificial Intelligence? Problem 2: How do small and medium-sized managers keep pace with the industry giants, who, with deep pockets, can spend millions on developing their own optimisation tools? Problem 3: SMA allocations continue to dominate, with non-pari passu often being the preference.” 

In order to sustain their profit margins amid fee pressure and costly resources for separately managed accounts, outsourced portfolio enhancement tools may be a key levelling factor.

Strategy – investors can invest in the strategy they want without it being diluted by the many strategies that a multi-manager may be running.

Liquidity – single managers should be able to offer better liquidity to investors. It is noted that most multi-managers are locking up capital, whilst sometimes seemingly taking a contradictory short-term view of pod performance.

Leverage - single managers should be able to offer tighter leverage restrictions to investors – multi-managers are infamous for the high levels of leverage that are used. 

Transparency – single managers should be able to offer greater transparency than multi-managers.

Relationship – it should be possible to develop a closer connection and relationship between investor and portfolio manager.

Final thoughts

Multi-managers have very much become part of the equation in relation to both hedge fund start-ups and the flow, the management and allocation of capital in the hedge fund ecosystem. 

The balance between multi-managers and single managers (both with respect to the number of start-ups and with respect to existing single managers) should be corrected in the short- to medium- term. The relationship between multi-managers, single managers and investors will continue to further evolve.

1. See, for example, “Hedge funds make it rain (for banks)” (Rupak Ghose, 21 July 2023); “Are hedge fund pioneers facing the end of a golden era? (Harriet Agnew and Ortenca Aliaj, 24 August 2023); “Across the multimanagerverse” (Robin Wigglesworth, 24 August 2023), “Ken Griffin calls the top” (Harriet Agnew, 4 September 2023).

2. Source: Goldman Sachs

3. Source: Barclays, HFR, HFM, Pivotal Path, Capital Solutions

4. Source: Goldman Sachs