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 with a specific hedge fund management firm structure. Capital is allocated on the fund level to the portfolio manager level (or pod level) which in turn represents all the different asset classes or investment styles and their underlying so called trading-pods or trading-teams. The pods are lead by a portfolio manager (pm for short) who makes all the final investment decisions. The portfolio-manager is subject to a high degree of the entrepreneurial nature and its associated reward, risk and freedom. The pm is overseen and controlled by tight risk-management from the fund-level.

The goal of the Multi-portfolio-manager strategy is to minimize risk from its horizontal and vertical approach in terms of assets or strategy and staff, minimize volatility, minimize market correlation and delivering consistent returns.

In practice the strategy is often employed by hedge funds, mostly due to the large amount of needed capital to run this strategy.

Terminology

The term Multi-portfolio-manager fund should not be confused with Multi-manager fund which represents a custom tailored product which invest in multiple funds. If the funds are not all managed by the marketer itself, a Multi-manager fund can also be referred to as a Fund of 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 portfolio manager level as a platform with multiple pods.

Some sources put the Multi-PM hedge fund structure under the umbrella of the 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 from a person working in the hedge fund industry and a niche financial online news site from 2014 associated the term as it is known and used today, and also used the term Multi-Manager platform.

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 as Jane Street Capital LLC or Optiver Holding BV are mainly involved in arbitrage strategies and thus also 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. Trading desk mainly act as a counterparty and rarely do trading in the financial markets in the sense of a hedge fund.

History

With terms and words changing and often being used interchangeably in the hedge fund world and its lack on publicized information in the past, it is hard to trace back the roots to the exact first hedge funds or other investment vehicles which employed this strategy. 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 form or another. With a small percentage of all hedge-funds growing larger in assets under management (AUM) due to outperformance of its peers, competition for top investing talent concentrated on a small number of hedge-funds who consistently employed more investing staff and got more complex in their investing structure. Thus a simple a simple horizontal and vertical approach emerged. In addition, the Multi-PM approach also solved the problem of AUM scalability. 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, a platform where new portfolio managers can set up their business
• Different fee structure compared to the traditional ,,industry standard" of 2/20 (2% Management fee and 20% Performance fee). This different fee model finances among others the hiring of many 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-up 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 used 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 their rapid growth the Multi-PM strategy came became more subject to reporting in financial news, thus the terms associated with the Multi-PM strategy becoming more well-known to a broader audience.

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 15% are macro focused, 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 50%. 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 by the 20 key firms published by Goldman Sachs Prime Insights. Research from Barclays Investment Bank as of Q1 2024 estimates the number being seven.
• 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 (also as of 2023). Morgan Stanley Investment Management estimated the number beeing 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%. The sharpe ratios were 2.59 and 0.61 respectively, thus Multi-PM were 4 times less volatile. Numbers from Goldman for the 5 year period equivalent annualized 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 by about 40% from 2015 to 2023 by 5000 people with its peers growing 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 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 pod to back-office head count ratio of 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.

The strong competition among the largest Multi-PM's for investing talent resulted in huge sing-on bonuses being offered today to experts mostly coming from investment banks and non-PM hedge-funds. 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-PM-firms Millenium Management and Schonfeld Strategic Advisor about a plan whereby both firms would get access to ones trading pods to allocate capital. Thus they would be renting out investment professionals to one another. 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 the top Multi-PM-firms, thus the Multi-PM-industry has a high barrier to entry.

The exact amount of Multi-PM hedge funds is not known. Given the fact that employee head count and assets in the strategy are concentraded on a few dozen firms. Thus the amount of Multi-PM hedge funds can be expected to be very small. There are about 11000 hedge fund managers worldwide as of Q4 2023.

Some of today's most well-known and successful hedge-funds employ this strategy, e.g. Citadel LLC, Millennium Management LLC, Point72 Asset Management, Brevan Howard and Schonfeld Strategic Advisors LLC.

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 a) the operational part of the hedge fund management company and b) the actual fund where fundraising and profit distribution happens to investors. In a more classical hedge fund, only the fund level exists with its operational management and the portfolio managers.

The fund level consists of the following three four 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.
  • 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 management and its pod might be dissolved.
  • Their direct correspondence are the heads of each strategy or asset class. With whom they make the specific profit targets, new .
  • 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 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 a 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 platform, which is the "end product" usable by e.g. all natural gas 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 volume and concentration limits in a single title.
  • 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 side 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 markets. 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 apply and use high 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 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 high bonuses.

The fund level takes the following roles in supporting a portfolio manager:

Example of the profit flow (e.g. at the end of a year) from the portfolio manager level to the fund level (and back). And from the fund level to the funds investors:

Level	Description	Amount	Sub Amount
Pod Level (PM A - Long/Short Equity)
	Balance (Start of the year)	$500'000'000
	Gross profits from investing activities (20% return)		$100'000'000
	20% Performance Fee (Carried Interest)		-$20'000'000
	Portfolio manager bonus (Paid out as compensation bonus or is 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)		-$15'000'000
	Analyst A bonus		- $1'500'000
	Analyst B bonus		- $450'000
	Intern bonus		- $50'000
	Reallocation from the fund level		$32'000'000
	Additional allocation from the fund level		$250'000'000
	New balance		$782'000'000
Fund Level
	Net profits from from investing activities of PM A	$80'000'000
	20% Performance Fee / Carried Interest (Distributed to the partners / owner of the hedge fund. Paid out as compensation bonus or personally reinvested in the fund itself. Depending on the legal structure of the hedge fund a direct investment in a specific pod may be possible)		$16'000'000
	Forced 50% profit distribution to Limited Partners (Investors)		$32'000'000
	Funding of redemption requests (1 Year Lock Period) (Funded by less well performing pods)		$0
	Reallocation to PM A		$32'000'000
	Additional allocation to PM A (Funded by capital cuts at other pods)		$250'000'000

Advantages

Hedge fund perspective

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. Also from a cost perspective, the legal and compliance cost alone can accumulate to about $1'000'000. With increasing competition for hiring investing talent and increase in operational complexity, e.g. technological infrastructure, setting up a new hedge fund is very costly. In addition, strategies who are algorithmic and very quantitative may face millions of dollars in computational cost. Even though some top portfolio managers who found their own hedge fund may raise hundreds of millions of dollars, it is rarely the case. Many portfolio managers start very small or turn to the hedge fund seeding industry, which provides an initial investment for fee cuts, equity stakes and/or 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 shop. E.g., Today's biggest Multi-PM firms have huge software engineering departments and Multi-PM hedge fund Citadel, with Citadel Securities, access to their own high-frequency market making infrastructure for conducting trades at lower cost and additional market insight.

Investor perspective