Multi-managers technology edge
Hi all, I've heard a lot of the big MMs advertise their investments in technology and infrastructure, and wanted to see how significant of an edge this actually is relative to 1) smaller hedge funds and 2) retail investors. Is their data "edge" real and if so, how much does this factor into how good their returns are vs. how smart their people are (obviously a smart investor knows how to analyze and interpolate off of data better and a dumbass wouldn't be able to achieve the same calibre of returns even if they were given all the data, but some of it must be the resources). Was also curious if this edge is particularly explicit in some of the big MMs over the others
it’s definitely there, particularly at the larger MMs. i think cit/mlp/pt are pretty similar, having worked at two of them. Maybe the first two are a little ahead of pt72 and bal, but that’s just anecdotal
cit > mlp > pt72 >>>>>>>> bal
Have heard anecdotally it's more cit > p72 >= mlp
When it comes to alt data, p72 is ahead of all of them.
p72 > cit >>> mlp > bam
Really? How
Youll learn
Will not elaborate further beyond saying they're the most astute in alt data - and by a large margin.
Where do you win in fund performance then
I have only isolated alt data -- which as you may know is far from the sole driver of fund-level performance.
Whats driving the returns then?
Number of GLG calls.
from what i've heard from analysts and PMs who've worked at 2 or more of these places, this is 100% accurate
Not to mention alt data but on market positioning these platforms will have better access to data from different banks and have a more consolidated view
IMO alt data in stock picking has become commoditized. Data is often called the "new oil," it's now more of a hygiene factor than a primary driver of superior relative returns vs competitors.
I'd argue that:
A) Vs retail: High retail participation is a double-edged sword. Even if institutional investors theoretically "outcompete" with superior access to alt data, stocks might not move on incremental month-over-month data points if retail investors don't pay attention to them. Many stocks with high retail ownership are more sensitive to thematic views on outlook rather than the sequential deltas that alternative data can provide.
B) Vs less-equipped inst'l money: Large MM platforms have in-house capabilities (such as Excel integrations → indicators → KPI direction → revenue/cost modeling). Smaller hedge funds with tighter budgets can easily purchase off-the-shelf services with only a slight reduction in UX integration quality. Even these services have improved so much that smaller hedge funds and brokers now have access to the specific data that has sufficiently high R-squared to attract investor attention. Consider how channel checks have evolved over the past decade - it's not much of a reliable edge anymore (at least for large caps).
IMO, the edge provided by alt data has largely been arbitraged away.
So where can edge come from?
For multi-manager hedge funds specifically, I'd argue it's:
The goal is to increase probability of positive PNL regardless of market regime. Combine that with a pass-through model enabling high payout ratios, and over time you'd attract the best talent and refine strategies that suit your risk framework.
One potential source of data edge these days could be using high-quality data feeds to optimize risk models and calibrate frameworks dynamically. Having high-quality data allows you to optimize your "optimizers" to hedge unwanted beta against emerging factors that might not be captured by less dynamic (more stale) systems. How often does Axioma update their baskets? Not nearly as frequently as needed to run smart money strategies today.
You need proprietary, high-quality drivers that have been vetted, back-tested, and deemed reliable enough for firm-wide implementation. I believe this is where many larger MM firms have been able to differentiate and deliver consistent risk-adjusted returns, rather than relying on specific alternative data like Apptopia insights for individual stocks.
However, even this edge is being arb'd away through software providers like 3Forge, which enables multi-strategy, omnichannel risk views with the ability to add your own "plug-in" integrations. The same applies to market positioning data provided by brokers on a stock-by-stock and sector-by-sector basis weekly and on-demand. My firm, and I'd assume many others, have direct integration with multiple brokers as it relates to both long and short positioning changes. While helpful, it's just one of many checkboxes. In isolation it doesn't mean much.
/my 2¢
Reminded me of a question I asked before but didn't love the answers - you mention that big data overlays don't give edge, and the edge is in attracting talent. Always hearing "none of these places are that different, its just that one that has "better talent""... WHAT THE HELL IS "TALENT" defined by.
Obviously the largest PMs/Pods are doing something right to consistently perform... hey maybe its just a few of them and its only for a 3-5yr period at a time...(which was still enough to make life changing money, and still enough to give them the benefit of the doubt to get 2nd chances after tough years, and increases the odds of still hitting an ok year every once in a while off the 2nd and 3rd chances... ok I'm making stuff up here obvs)
Back to the question: What makes the best PMs talented in this biz? Strikes me that the intellectual horsepower + experience + raw skills are going to be there for a lot of PMs and pods. It also sounds like everyone is doing the same things sort of... why is one pod at citadel using alt data going to do better than one pod at P72 using alt data, trading the same names, with the same basic processes of analysis.
TLDR: is talent just based on judgement (two people come away with two different views on the same model + facts), or are there any pods running processes/strategies that are somewhat noteworthy for being unique/differentiated?
For clarification the above was relating to firm/platform specifics as opposed to PM/pod specific.
This profession isn't governed by immutable laws like physics or math. While guided by fundamentals and some maths, investing is heavily influenced by hopes, dreams, sentiment, behaviors, and animal spirits. Alpha largely exists due to discrepancies in risk tolerance, and how one captures these counter-positioning surprise factors depends on their individual skillset + how well one monetise that skillset.
One size doesn't fit all. A former sales-trades will probably be decently equipped monetising flow dynamics / factor rotations based on how they interpret the perception of the marginal price setters view of the tape. A deep sector focused fundamental guy/gal might derive their "edge" from an above average ability discriminating information on potential second / third deriv changes in the value chain that will flow downstream in to relative micro bets with high idio.
For the years I've been doing this the only common nominator of these insane PMs who've been delivering MSD sharpe year in and year out for the past decade has been in the "intangibles". E.g. a) "rock solid state of mind" -> relentless focus free from exogenic BS (think health issues, divorces, strict drawdown rules causing stress, changing mandate, etc.) or b) adaptability and pragmatism instead of being wedded to principles or philosophies.
Case in point: Compare how ThirdPoint has adapted under Loeb (shift from activist to structured credit and equity) to say Einhorn (basically a value factor guy at any cost) or Ackman (went from "Baby Buffett" to a string of shitco failures to a phoenix/COVID CDS trade maven... and then back down to whatever this word vomiting garbage he's currently occupying himself with).
I'm reluctant to subscribe to the notion of any investor having an "edge" even if it is a term being thrown around. It implies having a sustainable competitive advantage that can't be replicated. If it's there, I haven't seen it... Only one getting even remotely close to an investing edge is RenTech, but even they have suffered and changed how they monitise. Differentiation on the other hand sounds more like the reality we operate in. Most other MM platforms rely on above average sector focused alloctors under a robust risk framework.
So for me, sustainability and differentiation in our craft comes down to how well we harvest our skill, if we're in a seat that allows us to monetise our differentiation, and how successfully we react to change.
Truly unless you have been in a HF environment be it MM or smaller platform will be hard to grasp how much of an edge the larger players truly have.
As someone mentioned already “alt data” is commoditized and mostly third-party driven now. The major edge is infrastructure. This goes hand in-hand in which MMs have the better business heads (less turnover) and the value business heads add to PMs.
Without infrastructure behind you creating tools, processes to find “alpha” takes up a chunk of the PMs time. Now you can give all the infrastructure/tools/experience/coaching and the PM could fail still. Liquidity/sizing and overall market volatility still is a factor.
On the macro/quant side, Citadel leads in this and at times focusing on building the infrastructure even before finding a star PM. Smaller places cannot afford that luxury you find the star player and build around them.
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