Draft:Multi-portfolio-manager hedge fund

A Multi-portfolio-manager hedge fund (Multi-PM hedge fund for short), or Multi-PM platform, pod platform and pod shop, is a type of hedge fund management firm structure. Capital is allocated on the fund level to multiple portfolio managers which run so called pods. Each asset class or strategy has multiple portfolio managers. The portfolio-manager is subject to a high degree of the entrepreneurial nature and its associated reward, risk and freedom. The portfolio managers are overseen by central risk-management from the fund-level.

The goal of the Multi-portfolio-manager structure is to minimize trading risk and get high risk-adjusted returns, minimize volatility, minimize market correlation and delivering consistent return from its horizontal and vertical approach.

In practice the structure is mostly seen at hedge funds due to the large amount of needed capital.

Terminology

Simple overview of the fund types under the single strategy and multi strategy umbrella.

The term Multi-PM fund should not be confused with Multi-manager fund which represents a custom tailored product which invest in multiple funds. The invested funds at Multi-manager funds are often characterized by that more than one fund is specialized in a specific asset class or strategy. At Multi-PM hedge funds, this characteristic is internalized with the PM level as a platform with multiple pods.

Some sources put the Multi-PM hedge fund structure under the umbrella of Multi-strategy funds. However, as the key characterization of a Multi-PM hedge fund is its vertical nature, e.g. with multiple portfolio managers applying statistical arbitrage strategies, a Multi-PM hedge fund can also be single strategy. A traditional Multi-strategy fund is horizontal but not vertical, with the head of an asset class or strategy also being the sole portfolio manager. Thus Multi-PM hedge fund should not be used interchangeably with Multi-strategy hedge fund.

A blog post and a financial online news site used the term Multi-Manager platform already in 2014.

Multi-PM funds should also not be confused with proprietary trading firms or a trading desk at large financial institution. Even though the former has traders who cross-invest in the same asset class or strategy for the firms book, proprietary tradings firms such as Jane Street Capital LLC or Optiver Holding BV are mainly involved in arbitrage strategies, with the largest part being market making. The later may also have traders specialized in the same asset, but only to conduct trading execution on behalf of the investment bank itself or customers (e.g. large currency swaps) or to engage in market making. Thus trading desks mainly act as a counterparty and rarely do trading in the financial markets in the sense of a hedge fund.

History

With terms changing and often being used interchangeably and its lack on publicized information from the past, it is hard to trace back the roots to the exact first hedge funds or other investment vehicles which could be characterized as a Multi-PM hedge fund. However, in an interview from 2011 with British trader and investor Michael Platt, it was revealed that he already inhabited the main characteristics of a Multi-PM hedge fund at that time: Hiring multiple specialists at each specific asset class or strategy, strict risk-management oversight and strict capital cuts in the case of losses: "[...] but it is the risk management that is the most important thing. The risk control is all bottom-up. I structured the business right from the get-go so that we would have lots of diversification. For example, on the fixed-income side, I would hire specialists. I have a specialist in Scandinavian rates, a specialist in the short end, a specialist in volatility surfing, and so on [...] The deal is that if a trader loses 3 percent, he has to give me back half of his trading line. If he loses another 3 percent of the remaining half, that's it." In 2015 Michael Platt returned all outside money to his investors and turned BlueCrest Capital Management (UK) LLP into a single family office. With billions in assets-under-management and about 170 trading pods it is an rare example of a non-hedge-fund being a Multi-PM platform.

Diversification through different portfolio-managers employing the same strategy or trading the same asset class has been common in some hedge funds for a long time in some smaller form or another. With a small percentage of hedge funds growing larger in assets under management (AUM), competition for top investing talent concentrated on a small number of hedge funds who consistently employed more investing staff. Thus a horizontal and vertical investing approach emerged, with the pod level distinct from the fund level.

Through time those firms who are structured as a Multi-PM hedge fund started to differentiate themselves from traditional hedge funds in multiple aspects:

• The PM level (or pod level) as a clear distinction from the fund level with multiple pods competing for allocation of finite assets from the fund level. Due to their distinction they enjoy freedom of investing and freedom in running their pod in other business aspects and thus entrepreneurial aspects. The term Multi-PM platform emerged as the hedge fund provides capital and infrastructure, and thus also a platform where new portfolio managers can set up their business.
• A pass-through fee model instead of the traditional ,,industry standard" of 2% management fees. This different management fee model finances among others the hiring of portfolio managers from the sell side (e.g. Investment banks) but also from the buy side (which includes competitors).
• Even though they can be single strategy, they are mostly multi-strategy. In addition they are vertical and thus have multiple portfolio managers under a single asset class or strategy.
• Sign-on bonuses, salaries and bonus structures with which most traditional hedge funds can not compete with.

The diversification aspect with more investing staff also grew in popularity after the financial-crisis of 2008 where risk-management in general was set to a higher bar of importance in the financial industry. However, rebounding markets starting in 2010 and the use of high leverage at Multi-PM funds hindered its popularity among most hedge fund clients. Starting in 2017 where general risk-appetite was higher, markets starting to perform at a lower rate and Multi-PM funds have proven their leverage-use and their low market correlation, they started growing rapidly. Starting with the rapid growth they became increased subject to reporting in financial news, thus the terms associated with Multi-PM hedge funds became more well-known to a broader audience.

The strong competition among the largest Multi-PM's for investing talent resulted in huge sing-on bonuses being offered to potential portfolio managers. Top portfolio managers with a strong track receiving a sign-on bonus in the range of $10-50 million is common upon joining a Multi-PM, and in some rare cases even guaranteed payouts in that range for a specific amount of years. Due to these sign-on bonuses, other perks and the general hedge-fund industry compensation structure, Multi-PM hedge funds saw an huge influx in investing staff from 2015 to 2023. Competition for talent is so fierce, that in October 2023, discussion were held between top Multi-PM-firms Millennium Management and Schonfeld Strategic Advisor about a plan whereby both firms would get access to ones trading pods to allocate capital. Plans were cancelled however. Turning into a Multi-PM business or starting a new one requires huge amounts of capital to employ staff in the same level as top Multi-PM-firms, thus the Multi-PM-industry has a high barrier to entry from a capital perspective.

On April 29, 2024, Multi-PM hedge fund Weiss Multi-Strategy Advisers LLC, the hedge fund management company, filed for bankruptcy. The firm did not apply the pass-through model and was left with high costs also in years without performance fee income. The reason for its shutdown was among others the high talent acquisition costs, which were not passed onto fund investors as with other Multi-PM hedge funds who apply the pass-through fee model, and the holding of capital loosing portfolio managers.

The exact amount of Multi-PM hedge funds is not known. Given the fact that employee head count and assets in the strategy are concentrated on a few dozen firms, the amount of Multi-PM hedge funds can be expected to be very small. There are about 10'305 hedge fund managers worldwide as of Q4 2023.

Some of today's most well-known and successful hedge-funds are structured as a Multi-PM hedge fund, e.g. Citadel LLC, Millennium Management LLC, Point72 Asset Management, Brevan Howard, Schonfeld Strategic Advisors LLC and Balyasny Asset Management L.P..

History in numbers:

• In 2022, about 88% of all Multi-PM hedge funds were US based. Up from 69% in 2021.

• According to surveys from Q4 2022, in terms of strategy, about 24% are single strategy (15% are macro focused and 9% are equity focused), and 76% are multi-strategy.
• While the rest of the hedge-fund industry grew by 13% from 2017 to 2023, Multi-PM hedge funds grew their assets under management by 175%.
• Multi-PM hedge funds saw from 2017 to 2023 an average asset inflow of $182 billion or 150%. The rest of the hedge fund industry grew their assets by $400 billion or 10%.
• As of Q4 2022, about 68% of Multi-PMs have assets under management in excess of $10 billion. This number was revealed in a survey of 20 key firms published by Goldman Sachs Prime Insights. Research from Barclays Investment Bank estimates the number being seven in total, as of Q1 2024.
• As of Q4 2022, Goldman Sachs Prime Insights estimated that all Multi-PM hedge funds combined have 8% of the whole industry's $3.8 trillion asset under management. Morgan Stanley Investment Management estimated the amount of all Multi-strategy funds combined being 23% or $904 billion.
• According to a Multi-PM index representing 32 hedge-funds, the average 10 year annualized return until 2023 was 7.97% vs an overall hedge-fund index with 4.4% (net of fees). The sharpe ratios were 2.59 and 0.61 respectively, thus Multi-PM hedge funds were 4 times less volatile. Numbers from Goldman for the 5 year period reports annualized average returns of 8.4% vs 6.8%, annualized volatility of 6% vs 13%, and correlation to the market of 0.15 and 0.32.
• Multi-PM hedge fund's head count (including back office) grew about 40% from 2015 to 2023 by 5000 people with its the rest of the hedge fund industry by about 10%. AUM to head count is about $35 million and $473 million on average respectively. At Multi-PM's the ratio of investing and non-investing staff dropped from 60% to 43% in the same period. Thus indicating the rise in compliance operations, back office operations and general administrative task for the often over a hundred pods a Multi-PM usually employs. After being 3% down from January to March 2024, Multi-PM hedge fund Brevan Howard fired 10% of its staff, representing 20 of about 190 portfolio managers and 80 of about 910 back-office employees. Indicating a possible portfolio manager to back-office head count ratio of about 1:4.
• It is estimated that as of July 2023, about 30 Multi-PM firms employ 17% or 9500 investing professionals of the total 55600 in the whole hedge fund industry. All Multi-PM hedge funds combined account for about 25% of all hedge fund employees globally (including non investing roles).

Structure and workings

The organizational structure of a Multi-PM hedge fund consists of the fund level and the portfolio manager (or pod) level (Back office and minor relevant supporting roles excluded).

A Multi-PM hedge fund consists of the fund level at the top and the portfolio manager (or pod) level below.

Fund Level

The fund level represents the operational part of the hedge fund management company. In a more classical hedge fund, only the fund level exists with its operational management and the portfolio managers.

The fund level as a whole is intended to allow the portfolio managers to focus solely on investing as much as possible. At the same time risk management measures are applied to still overview the allocated capital from the fund.

From the fund level profits are distributed to investors (limited partners) of the respective hedge fund(s) they offer.

The fund level usually consists of the following four main roles (excluding back-office staff and minor relevant supporting roles):

• Hedge-fund management
  • As with in any classical hedge fund, the hedge-fund management is among others responsible for fund raising from existing and potential investor clients. Due to the large diversification of specialists, most Multi-PM hedge funds apply leverage to the funds capital. According to Goldman Sachs Prime Insights, the average leverage factor applied at Multi-PM hedge funds is 5.3 on average.
  • They control the flow of capital at the pod level and the fund level. Giving well performing portfolio managers additional capital and cutting or withdrawing capital from less well performing ones. In case of very bad performance according to the guidelines set by the hedge-fund management team, the portfolio manager and his pod might be dissolved.
  • Their direct correspondence are the heads of each strategy or asset class.
  • The hedge-fund management is responsible for deciding the creation of a new pod and its characteristics. At hedge fund Citadel LLC as an example, each new pod is created in cooperation of the newly acquired portfolio manager, the head of the specific strategy and Ken Griffin himself.
• Head of strategy / asset class
  • The head of a specific strategy or asset class is responsible in overlooking each pod, communicating changes, profit targets or other important information. The role is often filled by an individual with extensive knowledge of a whole industry or a specific strategy. They are also often involved from early on in setting up a specific new pod division. They do usually not conduct trading themselves, and thus inherit more an analyst, managerial and advisory role.
  • The head is also responsible in acquiring and developing new solutions which benefit the operations of the portfolio manager and thus generate more profit. E.g., the head of the commodities division might set up a group of ex-academic meteorologists who create mathematical models to predict weather changes over North America with the use of high-performance computers. The software engineering divisions creates an online platform, or adds it to an existing online platform, which is the "end product" usable by e.g. all commodities traders focused on North America.
• Risk Management
  • The risk management division has the important role of overlooking all financial trades and transactions of the portfolio management according to a specific risk profile which varies at each specific pod. Some rules might apply to all pods. The rules a portfolio manager adheres to with his portfolio and the risk management eventually oversees can include: Assets allowed to trade, specific titles allowed to be traded (e.g. only North American business software stocks), daily volume and concentration limits.
  • E.g. a trade like from Michael Burry before the financial crisis of 2007 - 2008 where he bought highly illiquid Credit Default Swaps on subprime mortgages products from large investment banks, would very likely be not possible at a Multi-PM hedge fund.
  • It provides the second layer of risk protection, with the pod level being the first layer due to its portfolio manager diversification.
• Software Engineering / Quantitative Research
  • The software engineering division has the supporting role of creating new software solutions on behalf of the management team or the head of a specific division.
  • Besides such projects, they also constantly work on software solutions in regards to the whole process of order execution, thus influencing speed and cost of trading. More smaller and traditional hedge funds who have a much lower portfolio manager head count, often employee humans who manually execute a trade in the financial market or outsource it to the trading desk of an investment bank. With a Multi-PM hedge fund, and tens of thousands of transactions or more every day, the task is done automatically. As they control the electronic flow of money, they are also involved in the whole development of the risk management software.
  • The software engineering division also maintains and scales the database system with all the data collected daily from trading activities, financial markets and other (third party) sources.
  • The quantitative research division uses high-performance computers to run research ideas. They conduct deep quantitative financial research of all financial markets aspects the Multi-PM hedge fund has interests in. From their research, new strategies can emerge. They may apply mathematics, statistics, physics and other quantitative fields. They might also back-test investing ideas on their profitability and its feasibility. Researchers might enjoy freedom of research but are also conducting research based on ideas from the head of a strategy.

Portfolio manager (pod) level

The pod level describes the distinct level with all portfolio managers who each run a team or a so called pod. The fund level is the sole source of capital for the pods, thus the pod level is a accumulation of portfolio managers who compete for finite assets. A Multi-PM hedge fund differs among others from traditional hedge funds in that the portfolio managers enjoy entrepreneurial aspects:

• Even though the fund level takes part in the inception of a new pod and takes part in the process of agreeing on a specific asset class or investment strategy and other parameters, the portfolio manager enjoys freedom of investing and freedom of running his pod.
• E.g. like a personal ,,business", he can hire and fire employees. Like a headhunter, the fund level is responsible in the process of finding suitable talent to support the portfolio manager, if he wishes to expand is pod employee base.
• All pods get a specific performance fee (set by the fund level) from all profits, e.g. 20%. However, consistent performing pods may be in a position of demanding an increase in their cut. The portfolio manager receives all performance profits and can decide how much and to whom he wants to give bonus payments. As an analyst for example could jump ship to another pod in the same hedge fund, portfolio managers are incentivized to pay bonuses accordingly to the analysts performance.

The fund level takes among others the following roles in relation to a portfolio manager:

• Capital allocation / withdraw
• Risk management oversight
• Technological and research support / provision of solutions
• Hiring and appointing talent according to a portfolio manager specific needs
• Back-Office support

Pod creation

A portfolio manager may get hired from a financial firm like a hedge fund or a large investment bank, or requests the creation of a pod himself. Such portfolio managers have high expertise in a specific area (e.g. stocks of established pharmaceutical companies or nickel trading). When established, the pod finds himself under many other portfolio managers trading the same strategy or asset class, and in most cases with the same area of specialty, e.g. Asian technology stocks. Due to the entrepreneurial nature, they do not only differ in the respective exact investment process but also in other areas such as size of staff, working from home and culture.

A experienced analyst who has proven himself in a Multi-PM firm may also be given the chance to set up a pod and thus becoming a portfolio manager making direct investment decisions himself.

Pod example

Besides the portfolio manager himself, a pod usually consists of analysts and / or senior analysts among other potential roles.

Example of a simplified profit flow from the portfolio manager level upwards:

Level	Description	Amount	Sub Amount
Pod Level (PM A - Long/Short Equity - Financial industry stocks)
	Balance (Start of the year)	$500'000'000
	Gross profits from investing activities (5% return)		$25'000'000
	20% Performance Fee (Carried Interest)		-$5'000'000
	Portfolio manager bonus (Paid out as compensation bonus and / or personally reinvested in the fund itself. Depending on the legal structure of the hedge fund a direct investment in ones personal pod may be possible or even required)		-$4'000'000
	Analyst A bonus		- $750'000
	Analyst B bonus		- $225'000
	Intern bonus		- $25'000
	Reallocation from the fund level		$16'000'000
	Additional allocation from the fund level		$250'000'000
	New balance		$766'000'000
Fund Level
	Net profits from from investing activities of PM A	$20'000'000
	20% Performance Fee / Carried Interest (Distributed to the partners / owners of the hedge fund. Paid out as compensation bonus (or dividend) and / or personally reinvested in the fund itself)		$4'000'000
	Funding of redemption requests (1 Year Lock Period) (Funded by less well performing pods)		$0
	Reallocation to PM A		$16'000'000
	Additional allocation to PM A (Funded by capital cuts at other pods)		$250'000'000

Fee structure

Multi-PM hedge funds tend to charge a 0% management fee and a 20% or 30% performance fee. The management fee is replaced by a so called pass-through fee. The pass-through model has no limit since all kind of costs are passed onto the investors in the fund and charged on the assets under management. The main cost drivers are talent acquisition (such as sign-on bonuses and guaranteed payouts) and infrastructure. However, the costs allowed to be passed through can also range to the fixed salaries of staff in years without performance fee income, food and travel expenses, and in some cases even investor client entertainment.

According to a analysis by Barclays Investment Bank, the effective pass-through fee in respect to assets under management is ranging from 3% to 7%, with the exact amount being heavily dependent on the type of Multi-PM hedge fund and its operations. Other sources suggest that the effective ,,management fee" can be high as 10% or more at some funds.

Given their out performance from the rest of the hedge fund industry and their risk adjusted returns, despite the pass-through model, some sources see this as the reason to their popularity and exclusivity among hedge fund investors.

Point of views

Hedge fund perspective

Employing a lot of portfolio managers vertically who invest in the same asset class or strategy gives a professionalized diversification, since experts are conducting the investing trading actives. The goal of a Multi-PM hedge fund is to get the advantages from diversification but without the risk from random or unsuccessful trades that largely outnumber others in terms of wins and losses. In theory, the risk of randomness is therefore protected by the combination of strong risk management and the high expertise from the portfolio managers.

The vertical structure allows to quickly create and dissolve pods without the disturbance of the hedge funds operation. The team from a fired portfolio manager can, with their accordance, easily be transferred to a pod under the same asset class or strategy. In a traditional Multi-strategy hedge fund, e.g. a single profitable commodity trader who leaves the firm might put financial burden onto the hedge fund in addition to the need of finding new investment talent and laying of the portfolio manager's analysts. At Multi-PM hedge funds like Citadel, Point72 Asset Management and Balyasny Asset Management L.P., talent schools exists where well performing analysts or ex-interns are trained into becoming portfolio managers. This has evolved as a reaction to the high hiring costs of outside talent and the advantages of supporting existing employees such as analysts. In addition, the assets under management at hedge funds have increased from to 2008 to 2023 by about $3 trillion, requiring an expanding base of investing professionals. At Point72 Asset Management for example, more than half of the portfolio managers who run a Long/Short Equity pod came from the Point72 Academy program which trains ex-interns becoming analysts and / or their Point72 Launch Point program which trains analyst into becoming portfolio managers.

Hedge funds often have to return profits that exceed the limit their strategy can handle. But with a Multi-PM platform and its vertical structure, capital can be allocated at all times to existing or new pods, thus Multi-PM hedge funds have theoretically "solved" the problem of AUM scalability at hedge funds.

Due to the high competition for investing talent among Multi-PM hedge funds, a portfolio manager with very good consistent performance might be in a position of leverage and can negotiate higher profit cuts and less risk management oversight. Whereby the risk management aspect could cause a conflict in relation to the important role a risk management system takes into place at a Multi-PM hedge fund.

Portfolio manager perspective

Setting up a new hedge fund has been faced with increasing difficulty over the last two decades in areas such as legal and compliance. Hedge fund manager Roy Niederhofer described in an interview from 2018 the time at his fund creation in 1993: "[...] and someone walked in from a pension fund and allocated money to me when I [his hedge fund] was still in a one bed room apartment. And I think to myself it's just unheard of or unfathomable today [...]". The fund creation, including finding operational and back-office staff, and the fund raising process is also quite time consuming. With increasing competition for hiring investing talent, increase in operational complexity, e.g. technological infrastructure and high compliance standards from investors, setting up a new hedge fund is very costly. The legal and compliance cost alone can accumulate to about $1'000'000. Investors who tend to be less demanding in terms of organizational setup and compliance like family offices only represent 1% of the allocation sources who invest in hedge funds as of Q4 2023. Only top performing portfolio managers may be able to raise hundreds of millions of dollars for their own hedge fund. As of 2021 the average hedge fund size is $340 million, with the median being only $40 million. In addition, strategies who are algorithmic and very quantitative may face millions of dollars in initial setup cost. Most portfolio managers start small and / or turn to the hedge fund seeding industry, which provides an initial investment for fee cuts, equity stakes and / or a direct revenue cut.

Due to their long existence, large amount of assets under management and existing high technology infrastructure and many industry experts as asset class or strategy head, the Multi-PM has emerged as a popular alternative as they offer a platform for a Portfolio Manager to set up his own "shop". E.g., today's biggest Multi-PM firms have huge software engineering departments and Multi-PM hedge funds like Citadel, with Citadel Securities, access to their own high-frequency market making infrastructure for conducting trades at lower cost and additional market insight. Portfolio managers also receive a fixed salary, a sign-on bonus and in some cases even a guaranteed additional payout for the first couple of years.

In return for all the services and infrastructure provided, the Multi-PM platform receives e.g. 80% of all profits. Thus with 20% the portfolio manager would receive the same profit cut as if he had started is own hedge fund with a classic 2/20 fee structure where he returns 80% to the limited partners. Even though he has no direct control over the sum coming from the 2% management fee, he indirectly uses it through e.g. hired talent appointed to him by the fund level, office space, requested technological solutions and the general benefits of the pass-trough fee structure, such as travel and food expenses. A portfolio manager may even spend or requires more capital for non-investing expenses than he would have available from management fees through his own hedge fund.

Well and consistent performing portfolio managers can receive high additional allocations. Money which is already raised or given the size of Multi-PMs, available from a lot of other pods. Thus the portfolio manager can concentrate solely on his investing activities. In an interview from February 2024, hedge fund manager Bill Ackman, who runs a single portfolio manager hedge fund, described his role as a portfolio manager the following: "[...] when you get to a certain scale the CEO becomes like a marketing officer of the business [...]. But when you have investors who give you a few hundred million dollars they want to see you once a year [...] but if you got a couple of hundred of those you find yourself on a plane to the Middle East, Asia and around the country [US] [...] and that takes you away from the investment process".

Due to the fact that risk management is overseen by the fund level, the portfolio manager may feel restricted by the risk management oversight or huge capital cuts from the fund level in cases of bad performance. The capital cuts might be bigger than at a self owned hedge fund where his investors would directly withdraw from him. Also, since Multi-PM's hire portfolio managers with an area of specialization, portfolio managers who where used to trade multiple strategies or assets may find no possibility of setting up a pod.

Analysts

Analysts coming from the "Sell Side" (Advising the "Buy Side" on e.g. corporate transactions) going to a Multi-PM hedge (and hedge funds in general) enjoy much greater responsibility.

Since hedge funds are very merit based, analysts can take part in actual investment process very early on, especially at Multi-PM hedge funds. At a Multi-PM hedge fund, for example in the equity asset class with an fundamental approach, the analyst is usually appointed to a basket of stocks from the industry the portfolio manager is specialized in. The analyst becomes very familiar with them and makes so called stock pitches to the portfolio manager based on his financial models and other ideas. The portfolio manager then may conduct a trade based on that pitch (e.g. long or short a particular stock). The analyst may feel additional burden from responsibility regarding the trade outcome, as with investment banking advise, the outcome in the following years, e.g. after an advised corporate takeover, does not directly affect the investment bank. The amount of stocks being appointed to an equity analyst varies at each portfolio manager, and can range from a few dozen to about 60 stocks. To know each of these stocks extremely extensive, e.g. by reading all available research and being on all relevant industry conferences, can be quite demanding over time.

However, due to their high involvement in the investment process, analysts at at Multi-PM hedge funds can earn mid six figures sums (including base salary). Depending on the pods performance, such sums can be even higher, with some suggesting even seven figures. Given the portfolio manager's independence to run his pod, working environments differ inside the firm and at different firms.