Are we at peak pod shop?
Before all the MM bois come shout at me (levered beta etc, lazy LOs etc etc) let me say first that I have immense respect for what the MMs have done and the return they put up. Ken Griffin is a true pioneer.
Now, after a post here that questioned the SM's reason to exist, certain conversations on fintwit and a recent podcast with the seawolf cap guys, I am starting to think we might be at peak pod shop.
A market neutral, mega levered strategy coupled with stressed out, sharp, vampire analysts makes a ton of sense. But at current scale I think it presents an issue for most market participants, and an opportunity for longer duration LO guys that can see through the noise and go back to the fundamentals.
This is because between passive, quants and pods, the amount of capital that really cares about valuations is really a minority at the moment, and you have a mountain of capital with the same strategy of following momentum, calling quarters and other short term trading strategies. A lot of capital now looks at stocks rather than looking at businesses. Which is totally sensible, but at this scale might be problematic. Look at coinbase, a nothingburger business which is running an illegal operation, up well above >100% YTD.
Couple the above with the outsized fees and comp the MMHFs require and I don't know, feels quite toppy to me, and opens up the door for longer term focused investors that are truly able to pick up good companies.
Not sure, but we are at the peak of:
There's definetely a lot of noise around it alright.
I do think MMs (thanks to comp and fast growth) are attracting a lot of the top talent and imagine how good an MM analyst could do if not restricted to calling quarters/flipping new issue at a credit MM. on the other side, you might not be that sharp in a lower pressure environment.
We are 100% at peak pod shop - I think it's likely that one of the newer, less disciplined pod shops (Baly/Verition etc.) that has been recklessly expanding AUM will suffer due to poor risk controls/ not having enough quality risk takers. Whether that causes contagion in the space is still up for debate but current AUM in the space doesn't seem to be sustainable.
I agree with this.
Personally, I think MM strategies have structural advantages at this point and share shift from SMs to MMs is secular.
On the other hand, I think MM demand is going through a local peak and some of these tier 2/3 platforms (or even Corbets & Everpoint) are expanding too rapidly.
We saw what happened with Ravelin and Aptigon when Citadel went from 0 to 1 in those business units in a span of a year.
I think the local trough will come in the fashion of some of these new platforms / rapid expansions failing, but this will not necessarily mean or coincide with SMs regaining share.
funny that you are a PM and calls Balyasny and Verition less disciplined while there are newer multistrats with less constraints. Some of newer firms offer less constraints because they don't fully understand the strategy or product. I think both of them have been out there long enough. If I were to choose the funds to blow up, I'd choose firms with more macro exposures, say BH, Eisler, Capula, etc than traditional equities mmhf.
I think it might get harder for pods to outperform given that there’s a lot more of them all looking at the same stuff. As much as I’d like to think this creates an opportunity for LOs I’m not sure I agree that it does.
Op here. I don't think it'll create opportunity for LOs as an industry, but mostly for smaller, differentiated players.
The business model is better for IPs (why fundraise/deal with operational problems that aren't your core competencies) and to LPs as long as PnL justifies it. The nature of the business definitely makes it hard for new entrants to compete with Ken/Izzy/Steve offering 7-8 (or even 9) figure guarantees.
I honestly don’t think so, especially since the rate environment going forward will play in their favor.
9 figure guarantees?! That sounds crazy talk to me and 95% confident made up. Money doesn’t just fall from the skies and even for big 4, $100m is a looooot of money. I’ve never heard of that at any shop. Are we talking commods or fixed income, not equities?
Not equities (usually Macro Rates/Index Rebal/Commods) - and may or may not be rumor ( https://www.bloomberg.com/news/articles/2023-06-01/top-traders-see-120-million-paydays-as-hedge-funds-fight-for-talent).
For many years, tiger cubs got seeded over and over and many failed. How is a $100mm guarantee any different? You think the $100mm guy has the same risk profile as the $1mm PM?
Disagree, we are at a evolution in what IPs expect from founders and how to net/manage risk across various asset classes. Many SMs will start to move towards more of a multi-strategy setup soon.
That's exactly why I think we are at the peak. If the lesson from 2022 that SM took home is that they need to be more like the pods, then yeah, there's probably too much capital in the space.
Fair enough, just giving a different perspective. Think another thread mentioned how SM is just an organizational format truly. When I entered the industry, we were coming off a time where Macro SMs had formed like crazy in the prior 5 years mostly from former heads of bank prop desks. Then during a 5 year grind it became clear many SM firms were netting employees, many people we’re truly not that good and founders stopped even paying a 5yoe analyst even a %book. Now in the last 5 years as macro vol has picked up the MMs have been ahead of the curve and structured things differently where talent/LPs are happy.
Another example, Citadel the gold standard MM as we all know has stopped taking in capital for a while now. Instead they are focusing on raising fees and locking in capital. At the same time, they are hiring and moving people around all the time (without new capital). Are these the attributes of more a SM or early stages MM they were before?
Not on the equity side but from far all I see is a bunch of dudes who own sports teams and their funds got crushed over the last two years. While 5yr+ analysts on here mention their comp has max’d out. 2bn-5bn funds below hwm being mentioned have 2 years left, how aum/ip math is not great but the founder is a well known name.
Is every IP at a fund to blame for owning peloton? Is the guy who helped keep last year to a -5% loss vs -40% not the dude everyone on the street wants to talk to?
These are the major issues I see SM equity guys having to face. The days of having to work for a bank or brand name pay your dues to get/grow capital after 10years when the founder throws you a fancy toy I think is well behind us.
Unclear whether the peak is now but it certainly feels like what always happens happened or at least is happening…
Firm sees increased margins (in this world, returns), capital flows are redirected to firm (e.g. long tech beta to market neultral citadel), firm then proceeds to bring on new capacity/supply (in this case more pods), pods crowd into the same ideas, which eventually will reduce returns.
This is literally textbook. “Capital returns” is a great book on this topic and I’m sure if they could, they would be thinking of shorting multi managers
I don't think we are at the peak today, but it's fair to say we are accelerating towards wherever the peak is. In my mind the ability for pods to continue to scale in the medium-term depends on their collective ability to mitigate crowding risk.
Too much capital chasing same set of names will resulting in more crowding, which will exacerbate moves from drawdowns and erode returns for the whole group. There is still a catch 22 here, as eliminating crowding risk is difficult by definition, and in a perfect world where all pod shops eliminate crowding, portfolios will eventually converge to a more random, less concentrated distribution of securities (which also erodes returns).
Pod shop returns should in theory by competed away to an equilibrium that just barely justifies the fee structure at a certain level of global scale. I have no idea what that number looks like, and in response I imagine there would just be an era of fee compression and/or flows would begin to trickle to other strategies (probably directional ones).
But I anticipate that the directional L/S business will have lost a significant amount of market share between then and now.
Might be a dumb question as I'm not really familiar with the model...but does the rising rates envionrment impact the strategy? Was it really just a benefit of low rates or do the rates somehow wash out? If so how?
If anything higher rates are a bit of a tailwind for these funds. They keep >=50% unencumbered cash that earns short term funding.
How would a SM avoid rising rates? In fact would they not get hurt more by long holding periods?
I guess I don't understand how they are structured in terms of the leverage they are putting on. If they are highly levered, and rates go up, isn't their interest expense rising to a large order of magnitude and thus increasing their hurdle rates? Or is this not how it works?
I think you misunderstand what leverage means in the context of MM hedge funds. They are not 800% long and borrowing tons of cash.
This is slightly misleading - they might not be 800% long but they certainly are levered and if yields go up yes they are paying more to borrow money which increases the "hurdle" rate. Whether or not higher rate environments are more conducive to returns is still TBD
If your question is to do with "initial margin rates" and how they work, yes when trading with the exchange that is a concern. Be it a SM or MM understanding how margin impacts the products you trade and volatility is part of the job. As mentioned, not typical for all pods to be fully deployed all the time and very strong internal cash management teams to focus on that.
Yea, I'm (obviously) not really familiar with how the model is structured. I don't know what it means when they are "highly levered", which I assumed meant borrowed leverage in the traditional sense of the word...but apparently not. What is leverage in the context of these strategies?
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