Investment differences between SM and MM
I'm trying to understanding the fundamental differences between SM and MM, like from an alpha-generation standpoint and beta exposure, which one is a better investment for LPs.
So i guess the biggest difference the public knows is that MMs are bigger in scale and therefore operate similar to a corporation, whereas SM operates like a practice e.g., law firm, dental practice. Therefore, you can say that MMs focus more on quarterly performance and there is pressure to perform well in the short term, whereas SMs kind of run their own race since they are a small flexible business. How true is this?
Was wondering if there are any important fundamental differences in investment style and the quality of the funds as a business. I have heard that the different funds in MMs trade with high correlations and therefore do not generate strong alpha. It is hard to recruit an external PM that does not trade with correlation with the others - the standard practice of recruiting someone with 'fit' for the organization is the complete opposite in an MM. Therefore maybe SMs are better positioned to generate alpha?
Is this why the sexiest strongest funds are usually SM (Pershing, Bridgewater, Renaissance, Citadel) as opposed to MM (Blackrock, fidelity)? Do the former actually generate better alpha than the latter? Is this why people kill themselves to break into the former as opposed to the latter?
With all this bigger-picture stuff in mind, is there a difference in recruiting for the 2?
wasn't going to comment because i thought it was a troll post but i don't think it is anymore; you need to do a lot more research.
1) Blackrock and Fidelity are generally long-only asset managers. They're not MM hedge funds.
2) Citadel is an MM hedge fund - they're literally one of the big 4 MMs: Citadel, Point72, Millenium, and Balyasny.
3) MMs are beta/market neutral. They have an even book of long and shorts which protects them from beta/factor exposure. They're the ones going heavy with alpha generation through pair trades and tight idiosyncratic risk limits. There are some SMs that function in market neutral but over longer investment time frames: Holocene is a pretty sizeable one from an AUM POV. Generally speaking, SMs like Elliot, Lone Pine, Pershing etc are smart beta funds, they're taking advantage of secular growth/decline and use factor investing strategies alongside alpha generating strategies.
Pound for pound the MM guys are much heavier on the alpha side. They get deeper on individual names over a shorter time period.
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