(Bloomberg) - It’s a sellers’ market for some prominent hedge funds, and they’re using that advantage to keep client cash locked up for longer.
Izzy Englander’s $57 billion Millennium Management told investors last month that it had raised a record $10 billion for a fund that takes a minimum of five years to exit. At least four other large multi-manager funds have changed their terms or started new share classes this year, all extending the time it takes for investors to get out.
The desire for longer-term capital makes sense. Hiring and retaining multiple investment teams is easier if staff can be assured that the money won’t be pulled over a matter of months. It also helps the hedge funds better plan their spending on technology and other infrastructure.
Investors are complying because, in an industry where many funds have underperformed, these managers produce some of the steadiest returns.
“Part of it is just because they can,” said Rishabh Bhandari, a senior portfolio manager at Capstone Investment Advisors, which runs multi-strategy funds as part of its $9.4 billion portfolio.
Bhandari, who focuses on volatility trading, added that investments on average have become riskier and less liquid.
“As a result, investors are comfortable and willing to exchange longer lock-ups and illiquidity for returns and alpha,” he said.
The manner in which firms are steering clients varies, ranging from unilaterally changing terms to offering lower fees as an incentive to switch.
Ken Griffin’s $43 billion Citadel updated its liquidity terms this year for all investors, reverting to a formula that under certain circumstances limits quarterly withdrawals to 6.25% -- meaning it would take 16 quarters (four years) to fully pull out -- unless the client is willing to pay a fee. Citadel’s funds are currently closed to new investors, so if one quits, returning later could prove difficult.
For the past three years, Millennium has returned cash to clients from its shorter-term fund -- which now accounts for about one quarter of assets -- with a record $15 billion being sent back in 2021. Investors have the option to put that money in the longer-term structure.
Schonfeld Strategic Advisors, with $10.5 billion of external capital, is still offering a shorter-term share class, but it will give clients a fee break if they opt for one that takes three years to exit, according to people familiar with the firm. A Schonfeld spokesperson declined to comment on the exact reduction in performance fees, which range from 12% to 20%, according to the firm’s most recent regulatory filing.
New clients at the $12.4 billion Hudson Bay Capital Management can only invest in multi-year share classes, the longest of which offers a fee break of 0.25 percentage point. The firm told clients in a recent report that existing investors will be grandfathered under the current terms, and any new money they put in will have those terms through March 1.
Other large multi-manager firms haven’t followed suit just yet. They include Steve Cohen’s Point72 Asset Management, which has collected much of its assets through banks that cater to wealthy individuals, and is still allowing investors to pull 25% a quarter. That means it can take them as little as a year to get all their money back.