Employee funds
Hi guys, just curious about whether the large platforms (Citadel, P72, MLP...) let you invest in their funds/have specific employee funds and whether there are any special requirements for it (e.g. minimum seniority) or any other things to know (e.g. employer match, how redemptions work etc)
Balyasny does.
MLP and P72 do as well
And what are the requirements? Can any employee invest (even first year analysts)? How do people use it, as a main investment position or rather diversification among other investments?
Citadel only lets you invest your deferred (and returns it when vested), no ability to put in your own capital. Given how large your deferred ends up as percentage of NW it seems fairly reasonable.
For Citadel, is the deferred invested on a fee-free basis or are you getting the same net returns as LPs?
2 things worth considering:
1) Fund likes your show of confidence and buying into the product, but for the small ticket you put in, it's kind of an admin hassle to them that would not be worth it if you were not an employee. So absolutely don't use it as an ATM. You can add to your investment as bonus gets paid each year, but don't clown around redeeming $50k here and there.
2) it's all effectively short-term capital gains for these funds, so every year you will have to write a check to the IRS for 40% of the profits made the year prior, plus state taxes. That's over 50% tax leakage if you live in NYC or Cali. Worth considering what your net of tax returns will be and managing your liquidity so you have the cash to pay those taxes each year.
Firms that "let" you invest (ie, give you a choice) is unusual. But "require" you to invest is common, especially above a certain income level. Lots of places defer part of your bonus for several years in the firm and you don't get a choice. But if you leave the firm, you typically lose that money. There's also risks of investing money with your employer -- I've seen so many friends with millions of dollars invested in their employer's fund or stock, but then the company suddenly went broke and my friends lost all that savings on the same day that they lost their job (Enron, Amaranth, Lehman Brothers, Bear Stearns, MF Global, too many tech startups to count, etc etc). No matter how awesome your fund's performance is, don't put too many eggs in the same basket as your job's paycheck...
Unless you work at MLP or Citadel
Even then! I was at Citadel in 2008 when we lost over 50%. The firm didn't shutdown, obviously, but we got really really really close.
Diversification is good. Investing all your money in the same company that is paying your salary is a recipe for tears.
The business model and risk management at the major platforms has evolved significantly since 2008. Investing in any of the blue chip platforms is arguably the most diversified thing you can do with your money. That’s why there’s a line out the door to get in.
If you were to invest your own money, which bluechip funds would you invest in? Perhaps just go with the big 4 multimanagers (Millennium, Citadel, Point72, Balyasny)? Or would you throw in some other strategies like Macro as well?
OK if Citadel losing 50% in 2008 doesn't count because risk management has evolved significantly since then, how about a more recent example from a top 10 blue chip platform? How about 2018 when Balasany lost 50% of aum (from 12 to 6 billion, i recall)? Yes, they have since bounced back very well. But that's mere survivorship bias -- they easily could have gone under then and we would have just forgotten about them and now be pointing at some different fund as a major platform that stood the test of time.
Or 2018 is too far back to count? OK, how about 2021 -- remember Melvin Capital? Top tier fund, Gabe Plotkin was a genius protegee of Steve Cohen, everybody was lining up to give Melvin Capital money. Stellar track record for a decade. This GameStop happened, and poof, they lost $8 billion on a single stock and went under...What happened to that fancy risk management?
Want another example from 2021? How about when Archegos lost 36 billion and then collapsed? He had a pretty amazing pedigree (Tiger Cub) and a stellar track record too, until one day, poof, the money's all gone.
Or I had a job offer from Pine River around 2015 which was one of the hottest fund around with like $15-20 billion but then they lost half of it in a year and withdraws took the rest and today they're all but forgotten with only a couple billion left.
Would you be willing to accept my bet that at least one major fund with AUM of at least 20 billion will have losses of greater than 50% *this year*?
We can tell ourselves that *our* funds aren't like that, *our* funds have good risk management. But I've seen so many top-tier funds go under and it keeps happening, so you gotta wonder if maybe our fund isn't really as safe as we think...
This comment is morbidly inaccurate.
Like the others said, Melvin/Archegos/Pine River are all quintessential single managers with concentrated portfolios and highly volatile return profiles. In a way, opposite of platforms.Citadel and many other platforms were indeed down severely in 2008, but factually MM performance since then were signicantly more stable, predictable, and higher sharpe than the rest of L/S equities industry. This is statistically true and irrefutable.It's foolish of anyone to think anything can be stable or high performing forever, but I think a reasonable and logical observer could conclude that MM structurally has tighter risk management and diversified portfolios with in most cases higher sharpe ratios, especially the Big 4 (with Citadel currently in the lead by far) who have both longer history and scale.
Your argument is too black and white. Citadel was down once in 2008 so therefore it must be just like Melvin or other SMs and can fail any moment is just such one dimensional and shallow thinking that our industry should strive to fight against.
Now going back to the original question, I would love to invest a good chunk of my net worth into any of the big 4 because they have been top quartile investment vehicles by any standard measure of return quality (either IRR or sharpe ratio), especially given its low correlation to vanilla risk assets like equities.
Look, I used to work at Citadel - I agree they are very well run and would be a good investment for some (but definitely not all!!!!) of your money. But the quotes upthread ("Investing in any of the blue chip platforms is arguably the most diversified thing you can do") is silly. Do you know how many stocks used to be blue-chip but are now gone? You could not have predicted their fall in advance. I remember when Lehman Brother and Bear Stearns were considered top-tier blue chips stocks, too. And I remember my friend's dad who was a senior MD at Lehman and lost his entire net worth cause he didn't diversify anything away from his employer.
Investing in a diversified portfolio of many blue-chips might be good, but putting your entire net worth into *one* fund that also happens to be your employer? It'll *usually* work out OK, but there's pretty massive tail-risk. And that tail-risk is highly correlated with your employer going broke and firing you during a financial crisis when no one else will be hiring.
My advice: you already have significant exposure to your fund's performance just by working there, and you have even more exposure already if they require you to defer your bonus into the fund for a few years. If they let you voluntarily invest even more, well, OK, maybe invest a little, but don't you think it's good to diversify a large chunk of your bonus away from your employer, just in case?
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