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The modern hedge fund landscape is witnessing a fierce talent war. According to a report from Goldman, multi-manager funds are increasingly balancing their teams with equal numbers of investment and non-investment professionals. As one hedge fund executive vividly described, "These furnaces need fuel."
Historically, these platforms poached talent from investment banks. However, the current trend sees them hiring from each other. This tactic, combined with the use of a pass-through expenses model, often leaves investors shouldering the financial burden of this talent acquisition. With sign-on packages between $10mn-$15mn becoming the norm, and additional perks like upfront payments compensating for lost bonuses, the stakes in this war are high.
But as costs soar, achieving the investment performance to justify them grows more challenging. James Medeiros, president of Investcorp-Tages, notes the increasing client expectations, especially with risk-free rates at 5%. Ermanno Dal Pont of Barclays also raises concerns about whether these funds can continue to produce enough returns to cover their swelling costs.
The future for multi-managers remains uncertain. Some hedge fund investors foresee two potential outcomes: a massive financial hit or a loss of their competitive edge. Borrowing, which multi-manager platforms often rely upon, amplifies both potential profits and losses. Though today's platforms run on significantly lower leverage than the ill-fated LTCM did in 1998, the shadow of major financial collapses still looms large.
Paul Marshall, from the $63bn hedge fund Marshall Wace, remains optimistic, believing that the current platforms are well-managed and diverse. Yet, not everyone shares this confidence. As the industry expands, concerns grow about the broader impact on the financial system. Mike Monforth of JPMorgan warns that those managers not adequately adapting to this rapidly shifting landscape are destined to face challenges.
An emerging threat is that of "crowded trades." As once-profitable strategies become more mainstream, returns are dwindling. Marshall believes that if this overcrowding persists, the platforms might face a gradual decline rather than a dramatic collapse.
In conclusion, while the talent war intensifies, the future of multi-manager platforms remains shrouded in uncertainty. The industry must tread carefully, keeping a vigilant eye on both its internal strategies and the broader financial landscape.
Ref: (2023. August 24) Financial News.
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