Rise of Multi-Manager Hedge Funds Sparks Fierce Talent Bidding War, Raising Concerns in the Industry

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In a recent investment conference in Hong Kong, Sir Paul Marshall, co-founder of Europe’s largest hedge fund, Marshall Wace, delivered a stark message about the escalating competition for portfolio managers, driven by the rise of multi-manager hedge funds. Marshall characterized the situation as a “merry-go-round” where exorbitant amounts of money are being offered to top talent, drawing parallels to football icon Cristiano Ronaldo. The dominance of multi-manager platforms like Citadel, Millennium Management, and Point72 Asset Management has reshaped the industry, leading to a ferocious bidding war.

The Impact of Multi-Manager Platforms:

Marshall Wace, boasting $64 billion in assets, stands as Europe’s largest hedge fund, competing in size with Citadel and Millennium. The fee structure of multi-manager platforms, deviating from the traditional “two and 20,” involves a “pass-through” expenses model. Instead of a management fee, these platforms pass on all costs to end investors, including office rents, technology, salaries, and client entertainment. The aim is to heavily invest in talent and technology, with the cost offset by resulting performance, followed by a 20-30 per cent performance fee.

This model has fueled unconventional practices such as multi-million-dollar sign-on bonuses, substantial sabbaticals, and payouts reaching 20 to 30 per cent of profits for individual portfolio managers. Some contracts and payouts have even rivalled sports contracts, like Ronaldo’s $200 million-a-year deal with Al Nassr. The competition for talent has forced traditional hedge fund players to adapt, with Marshall Wace introducing a “compensation surcharge” to reward high performers in its flagship Eureka hedge fund.

Challenges and Criticisms:

Sir Paul Marshall expressed concerns about the sustainability of this high-pay model, emphasizing that it may not be the right way to build great businesses or industries for clients. Chris Gradel, co-founder of PAG, revealed instances of staff being offered eight-figure sign-on bonuses to switch to rivals, describing it as “absolute insanity.” This trend, though beneficial for certain individuals, raises questions about its impact on clients and the industry.

Albert Goh, one of four chief investment officers at the Hong Kong Monetary Authority, echoed these concerns, stating that they are grateful for such comments as they aim to avoid paying excessive fees. The Hong Kong Monetary Authority, a major global investor with almost HK$4 trillion ($511 billion) in its Exchange Fund, recognizes the challenges posed by escalating fees in the industry. As the bidding war intensifies, industry leaders are grappling with the implications of multi-manager platforms on the overall health and sustainability of the hedge fund landscape.