Too Big To Fail?
Revisiting Millennium and Multi-Manager Hedge Funds
Update: Net Interest Extra, my new podcast available to paid subscribers, is proving popular. This week’s episode with James Aitken explores what a former macro investor now in the US Treasury Department is up to. The pipeline of future episodes includes interviews with former partners of Long-Term Capital Management (that story never gets tired), analysts from Goldman Sachs and executives from Blackstone.
In fact, it’s proving so popular that I’ve decided to raise the Net Interest subscription price. Don’t worry though – existing paid subscribers will continue to pay pre-existing rates so if you’re undecided, now’s the chance to jump on board. The raise will come into effect on 20 March so you have two weeks to sneak in at the lower rate. A paid subscription takes you behind the paywall each week, offers access to a fully searchable archive of 200+ issues, and allows you to listen to the podcast. If you’re still undecided, I’ve just unlocked a piece from January: Catch Me If You Can – Time to Overweight Europe? If you haven’t already done so, you can upgrade via the link.
On to this week’s Net Interest…
A few weeks ago, Bloomberg updated its ranking of highest-earning hedge fund managers. Top was Izzy Englander of Millennium Management who earned $3.9 billion last year. Behind him, Ken Griffin of Citadel ($3.2 billion) and in third place, Steve Cohen of Point72 ($3.0 billion). Theirs weren’t the best performing funds of 2024 but a combination of fund size and the accumulated wealth each has invested in their own funds was sufficient to propel them to the top slots.
We’ve talked about multi-manager funds such as these before – initially in So You Want to Launch a Hedge Fund? in April 2023 and then in Peak Pod six months later. Unlike single-manager funds such as the one I used to work in, they comprise a bunch of investment teams all operating autonomously under the umbrella of an overall firm. Capital is allocated from the centre as are the teams’ risk parameters. Ken Griffin was one of the pioneers of the approach; a colleague told Institutional Investor magazine as long ago as 2001 that his goal was “to see if we can turn the investment process into widget making.”
Nearly a quarter of a century on, it’s clear the model works. Citadel’s flagship Wellington fund was up 15.1% last year, maintaining a track record that has delivered an annualized return of 19.5% since inception. In contrast to 2022 when commodities and equities generated the bulk of the return, and 2023 when it was largely commodities, last year most units contributed. “In some years one of our businesses becomes a tall tree in performance terms, and in other years it’s the forest that thrives,” the firm’s chief risk officer told Risk magazine. “And [2024] has been one of those other years.”
No wonder investors want in. When Citadel offered clients an opportunity to redeem profits at the end of 2024, few accepted. That Wellington is down so far this year after losing 1.7% in February is unlikely to shake their confidence. In the past, they’ve been forcibly redeemed – $6 billion was returned to investors in 2023 – and once out, it’s hard to get back in. Many investors have been invested for more than ten years, with the 15 largest (as at end 2023) having been invested for an average of 14 years. It’s the same elsewhere. Millennium returned $15 billion to investors at the end of 2022 as part of a plan to lock them up for five years and Point72, which has also returned capital to investors in the past, has a $9 billion waitlist to get back in.
This rationing of capacity makes it difficult to value multi-manager firms as businesses. They’ve successfully industrialised the investment process, which makes them more investable than other firms whose returns are more volatile. But if you can’t estimate the growth of a business, even within the bounds of a broad confidence interval, it’s difficult to put a valuation on it. When Blackstone first came to the market as a public company, it struggled to attract investor interest. Its model has changed considerably since then but one feature is that it doesn’t turn away assets. Last year, it gathered $172 billion of inflows. BlackRock, a business that also industrialized the investment process by adding equities, international assets, passive and, more recently, alternatives to its original fixed income offering sucked in $641 billion of net flows last year. Each of these businesses is now worth in excess of $150 billion.
This is relevant for Millennium which, according to press reports, is looking to distribute ownership beyond its founder Izzy Englander who currently controls 100%. The firm has certainly grown. When we last discussed Millennium in Peak Pod it had $59.3 billion of assets and 5,300 employees centred around 300 investment teams. It now has $75.8 billion of assets and 6,100 employees in 330 teams.
But even Millennium’s own analysts would struggle to forecast the growth of the business going forward when the firm retains an asymmetric right to redeem investors and freeze new subscriptions at will. There is another way to look at the business though, and that’s as an investment bank rather than an investment manager. It’s an analogy the excellent Matt Levine makes in his Bloomberg Money Stuff column. To develop the idea further, and see where it may lead, read on.