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The rise of multi-manager hedge funds has led to a “merry-go-round” of portfolio managers being offered “silly” amounts of money, according to the co-founder of Europe’s largest hedge fund.
Sir Paul Marshall, co-founder of Marshall Wace, told an investment conference in Hong Kong on Wednesday the dominance of multi-manager platforms had reshaped the industry because they were “paying incredible amounts of money to target people”.
“Everybody wants that Cristiano Ronaldo on their team, but there aren’t very many Cristiano Ronaldos,” said Marshall, who co-founded the London-based group in 1997 with Ian Wace. “What’s happening is everybody’s getting paid the same as Cristiano Ronaldo.”
Marshall, who is in the process of trying to buy the UK’s Telegraph Group through his digital media group UnHerd, did not name any individual firms. But his comments reflect how the dominance of multi-manager platforms such as Citadel, Millennium Management and Point72 Asset Management has driven a ferocious bidding war for talent.
With $64bn in assets, Marshall Wace is Europe’s largest hedge fund, on a par with Citadel and Millennium in terms of size.
Multi-manager platforms, which typically allocate capital across tens or hundreds of teams of specialist traders, tend to employ a different fee model to traditional hedge funds.
Rather than the hedge fund industry standard “two and 20” — a 2 per cent management fee and a 20 per cent performance fee — a defining characteristic of the multi-manager platforms is that instead of a management fee they use a “pass-through” expenses model.
Under this model, the manager passes on all costs — including office rents, technology and data, salaries, bonuses and even client entertainment — to their end investors. The idea is that managers invest heavily in areas such as talent and technology, with the cost more than offset by resulting performance. They then tend to charge a 20-30 per cent performance fee on top.
The pass-through model fuels practices such as sign-on bonuses running into millions or tens of millions of dollars, paid sabbaticals and payouts to individual portfolio managers that can be 20 to 30 per cent of profits, all of which are designed to lure and retain the top performers.
Some multi-manager contracts and payouts have even come close to matching Ronaldo’s $200mn-a-year contract with Saudi Arabian football team Al Nassr.
The competition for talent has forced traditional hedge fund players such as Marshall’s firm to adapt. Its flagship Eureka hedge fund this year added a “compensation surcharge” worth as much as 0.75 per cent of the fund’s value, to be used to reward high performers, a decision Marshall said at the time was taken because “multi-manager platforms are driving a bidding war for talent”.
The platform hedge funds’ model had enabled some traders to take “very silly sign-on” bonuses, even if they got fired after two or three years and moved somewhere else, he told the Hong Kong conference. This practice is known in the industry as “surfing the guarantee”.
Marshall said some platform hedge funds operated a “kind of battery-hen farming merry-go-round”, and their high-pay model was “not the right way to build great businesses or even to build a great industry for our clients”.
Chris Gradel, who co-founded the Hong Kong-based investment group PAG, said during the same panel discussion that some staff in his firm’s hedge fund unit had been offered eight-figure sign-on bonuses to move to rivals, a practice he described as “absolute insanity”. Laughing, he added: “We say: you’d better take it.”
The trend was “a temporary phase, it’s a very bad phase”, Gradel added. “It’s good for certain people I suppose . . . but it’s not good for the client, it’s not good for the industry.”
Albert Goh, one of four chief investment officers at the Hong Kong Monetary Authority, the territory’s de facto central bank and sovereign wealth fund, said during the same session that he was grateful for the comments because “we don’t like paying fees”. The HKMA is a major investor globally, with almost HK$4tn ($511bn) in its Exchange Fund.
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