Future of Pods
Citadel’s Ken Griffin Says Multistrategy Hedge Fund Boom Is Over
https://www.bloomberg.com/news/articles/2024-11-1…
What are everyone's thoughts on this article? What are the next 2-5 years going to look like for pod shops?
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I would assume a return to steadier, selective growth. Seems like he's saying the industry and bigger shops especially are approaching critical mass, rather than foreseeing a decline.
He’s moreso saying AUM growth will slow, which if anything, certainly is a less of a headwind to returns than if AUM was growing…
It doesn’t change anything lol
Less "new launch PMs" at the multistrats, more of fostering internal growth within teams (at least on the equities side). There will be more of a focus on how these firms can compress fees (at least a little bit in certain places) to give better net returns. I think the model that Freestone Grove launched with, and marketed as "optimal", makes a lot of sense for mkt neutral equities shops - bigger teams per PM, less overlapping coverage across teams, not just growing without reason. BUT comes at the necessity of great human capital. These firms that have 1 PM and 1 analyst who they hired from a team that went busto at another shop (i.e. Verition) are just ngmi in equities. Alpha is p much 0 sum, so you would rather concentrate your human capital bets as a multistrat on the people who are actually the best (hence the massive guarantees to PMs to defect).
What this means for a junior, in my opinion, is that training is at a premium. Finding a good mentor (be it buyside or sellside) and sticking with them for 2+ years is really how you will be able to get a leg up on the competition in a world where at some shops, there is really no mentorship from day 1 because your PM is too focused on keeping his job into next quarter. You can go two years at C/M in a bad pod and just be throwing darts at a board into earnings with no real process developed. A new promo PM might have not ever trained anybody before - and if they had it probably wasn't when they were also trying to ramp their own book. Not saying this is a massive shift...I think the trend probably started in 2022 or so, but believe this will continue, and believe that the mkt will start judging you less based on company, and more based on mentor
I think I am reiterating things that are already known - but this is where I see the trend.
I was answering this as what I think the shops are actually gonna look like. As far as returns, they will probably stay what they've always been...and AUM will prob not decline, but moreso just stagnate. Every once in a while I could still see a launch or two that scales effectively, assuming they're launching with a great pool of talent.
You're an intern?
Bifurcation, would expect long list of smaller shops to close as let’s say couple billion AuM won’t allow you to grow and pay as largest pod shops. And likely consolidation of pods internally to reduce opex. Lastly, some reversal of pass through costs at some point, likely for tier 2 platforms at some point.
Most tier 2 platforms don't have cost pass-through, which is one of the main reasons they can't hire/retain top talent.
Which ones do have this?
I would assume any platform that offers contractually guaranteed formulaic payouts would have a structure allowing them to pass through the payouts, no? Otherwise the firm would take a massive risk. At least the two tier 2 platforms i worked at had such a structure. Or do you mean passing through other expenses like hiring costs? Here I agree most tier 2 platforms probably would be able to do that
At some point there is going to be too much pod money chasing similar themes. There’s only so much space for a MM style strategy as the major pods run and they’ve grown significantly over the past decade. Not sure how it ends or when though as that point is unknowable.
History suggests that when a strategy gets too crowded, the weak blow up spectacularly though!
I mean think about it. Theres still SM's looking at business quality and MOAT's and PE's. Pods are safe for now
Yeah there’s always gonna be a place for them, the strategy is a really good one, but that doesn’t mean they won’t have really tough downturns like any strategy, may just flush out the weak hands
meant more along the lines of WSO has been sucking them off so hard the past 2-3 years and that’ll change along with LPs blindly upping their stakes with them every year.
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