Illustration: Patrick Leger
Hedge Fund Titans Breed a $14 Billion Pack of Startup Cubs
The hedge-fund startups have a lot of investor cash, but no guarantee of replicating their parent firms’ success.
Once, it was Julian Robertson, the founder of Tiger Management, who got to play godfather to a generation of hedge fund stars.
Now, it’s Ken Griffin’s Citadel and Izzy Englander’s Millennium Management who are taking up that role — whether they want to or not.
With the multistrategy hedge fund titans closed to outside cash amid a dearth of talent able to manage their money, Citadel and Millennium traders are seizing the chance to go it alone. And investors are backing them with an avalanche of assets.
Startups run by Bobby Jain, Diego Megia and Todd Barker have raised some $14 billion this year, which hedge fund research firm PivotalPath says is a record. Almost 20 traders from Millennium and Citadel have launched or are expected to join the fray in 2024.
The migration now under way marks a shift in the life cycle of the all-conquering mega-funds, as traders who’ve grown up in their ranks now strain at the leash. Success stories like Woodline Partners, Symmetry Investments, Holocene Advisors and Alyeska Investment Group are a pull factor. The confines of the often-Darwinian pod-shops which traders currently inhabit — risking dismissal for even small losses — are helping to push some toward the door. For others, there’s the question of “what next?”
The choice for Griffin and Englander is whether to fight it — or embrace it, as Robertson did a quarter century ago once his own tigers decided to go out on their own. His firm ultimately burnished the previous generation of entrepreneurs from Chase Coleman to Stephen Mandel to Philippe Laffont.
“Citadel and Millennium are as good a pedigree as you’ll find today,” said Craig Bergstrom, chief investment officer at New York-based Corbin Capital Partners that invests in hedge funds. Yet, “it’s a meaningful transition to go from running a portfolio at a highly-levered platform to generating returns as a standalone fund. Some will be surely be successful, while others will struggle,” he said.
Multistrategy hedge funds exist to make returns irrespective of the market direction, by enabling managers to shift capital at will between “pods” focusing on specific tactics. That has helped them prosper even when others are flailing — Millennium has suffered one annual loss in more than three decades of trading; Citadel has seen two. Both have comprehensively beaten the S&P 500 with much lower risk.
Their performance in good times and bad helps keep investors coming — and paying hefty fees. Some multistrategy firms demand well in excess of the traditional “2+20” hedge-fund charges — 2% of assets, 20% of profits. They pass on the cost of hundreds of traders to investors as well as other expenses which can now total 60 cents of every dollar they make.
Still, the likes of Citadel, Millennium, and Point72 Asset Management are seeing demand outstrip their ability to manage money and find enough top performing managers. While the broader hedge fund industry bleeds tens of billions of dollars in assets every year, Citadel and Millennium have even given back some profits to clients, and Point72 plans to, in a bid to control their size.
That dynamic is helping generate a powerful entrepreneurial force among traders. Veterans like Barker, Megia and Jain who’ve found their successful careers maxed out at their parent companies are ready for a new challenge. One such trader, who is preparing to launch, said he was not getting any younger and it’s now or never moment for him.
Millennium and Citadel have topped the league table in terms of the number of startups they’ve spawned in each of the last three years, data compiled by hedge fund backer Borealis Strategic Capital Partners shows.
One of the recent success stories is Mike Rockefeller, who cut his teeth at both Citadel and Millennium and now runs Woodline Partners after its launch in 2019.
He discussed the pivotal moment in leaving a successful trading career under billionaire Griffin on a Bloomberg podcast last December, describing the switch as “exciting, difficult, scary, wonderful”.
Rockefeller cites tech billionaire Jeff Bezos’ story around the creation of Amazon, Inc. When he sought advice from his boss and hedge fund titan David Shaw about starting his Internet company, Shaw said it would be a great idea for someone who didn’t already have a great job. Bezos instead asked himself what he would regret not doing when he turned 80. He chose Amazon.
That “regret minimization filter” is now helping to lay down a new generation of hedge funds. “We had to make a choice between comfort and creation,” Rockefeller said.
Woodline Partners now manages $8 billion. Others such as Holocene Advisors and Alyeska Investment Group now run $22 billion between them. Several Millennium alumni have made it big too. Michael Gelband’s ExodusPoint Capital Management debuted with $8 billion in 2018 as the biggest ever startup. Feng Guo spun out in 2014 to set up Symmetry Investments, which has grown into a $13 billion hedge fund.
Jain, Megia, Barker and other startup founders such as former Citadel trader Jonas Diedrich’s Ilex Capital Partners — who is raising $1.5 billion on top of its near $2 billion haul last year — are just the latest to rejuvenate the elusive animal spirits the industry has long relied upon, on its way to becoming a $4 trillion giant.
Sean Gambino, who closed his hedge fund to move to multistrategy fund Eisler Capital, has struck out on his own again to start Baypointe Partners. Joshua White, who spent 15 years working for Balyasny and Citadel, setup Regents Gate Capital after seeing others succeed. He aims to manage $1 billion for clients including its main backer, Crestline Investors, by the first quarter of next year, according to a person with knowledge of the matter.
Tiger’s Robertson, who died in 2022, was one of his generation’s most renowned hedge-fund managers, spawning dozens of “cubs” — former employees who learned the trade at his firm before heading out on their own. Robertson’s alumni include Coleman, John Griffin, Lee Ainslie, Andreas Halvorsen, Mandel and Laffont.
Just like Robertson, who gave money to his cubs, many of the modern day versions spinning out of the multistrategy hedge funds are being backed by their employers or peers — the next best thing to keeping talent is keeping your money with them. And the checks are only growing bigger.
Megia, a Millennium alumnus, has raised $5 billion, including $3 billion from his former employer.
Millennium is the most aggressive in backing former employees and outsiders with its cash. Roughly 10% of its more than 330 investment teams are external, many exclusively running capital for the $68.8 billion firm. Roughly 70% of the multi-manager hedge funds now allocate to outside traders, according to Goldman Sachs Group Inc.
Others are able to leverage the reputation gained. Jain’s pedigree as the former co-chief investment officer at Millennium won him backing from the likes of Abu Dhabi Investment Authority, helping him to start with the biggest fundraising haul since ExodusPoint Capital Management’s record debut in 2018.
Jain, Megia and Barker declined to be interviewed for this story.
Meanwhile, the Tiger cubs themselves, such as Lone Pine Capital and Viking Global Investors, have started to sprout startups. Most notable among them are Mala Gaonkar’s SurgoCap Partners and Divya Nettimi’s Avala Global, two of the largest launches led by women portfolio managers.
Yet launching a new fund is far from a sure-fire thing. More than 3,000 hedge funds have closed over the last five years, exceeding those starting, according to Hedge Fund Research Inc. A stint at a big-name firm makes those spinouts more desirable for investors — but it can be a lonely experience.
One senior portfolio manager, who spoke on condition of anonymity, said he moved back to a major firm after starting his own fund. He simply never had a life outside of work when running his own shop, he said.
A straight transfer of skills from inside a large firm to a standalone operation may also not cut it. Multistrategy funds keep their traders within tight risk limits. A 5% loss may see capital partially withdrawn and a 7% decline could bring instant termination. This makes staffers risk averse and shy away from taking bolder bets.
A 5% or $50 million profit generated with low volatility on a billion dollar portfolio could be one of the most desirable outcomes for a multistrategy hedge fund. That’s because it leverages its capital multiple times and may have put up only about $150 million in own-funds. It’s almost impossible for a standalone fund running a single strategy to access that much leverage, so the same level of profits is not good enough for clients in percentage terms.
And then there are the softer perks. Access to company management, research budgets, and help building teams are often taken for granted in a big hedge fund ecosystem. History shows a large number of stars who quit banks’ proprietary trading desks after the 2008 financial crisis to start their own hedge funds failed to replicate the magic and had to shut their businesses.
“Platform spin-outs of today have a lot of parallels with the prop-trading desk spin-outs after the crisis,” said Patrick Sheedy, a principal at Borealis Strategic Capital Partners. “For certain highly liquid trading strategies, the platforms provide a tremendous amount of access, resources, and technology that can be tough to replicate.”
That’s not deterring the new generation of hedge fund managers. For many, the impulse is too strong to resist.
PivotalPath is currently tracking about 150 traders who have either launched in 2024 or are aiming to launch by the first half of next year and previously worked at investment firms with more than $1 billion in assets. Nearly a third of them are from leading multistrategy hedge funds.
“The number of overall launches may not be unbelievably impressive from a historical standpoint, but the number of quality launches are,” said Jon Caplis, Chief Executive Officer of PivotalPath. Multistrategy hedge funds are becoming the “victim of their own success.”