My understanding of multimanager fund strategies (Citadel, Millennium) is they have sector specific pods (consumer, industrials, healthcare, etc) that are entirely market neutral, so 100% long 100% short.
This enables each pod to have very low correlation to the market; these uncorrelated pods are then grouped together into one portfolio where risk and leverage is managed by quants.
My question is, well I guess if I'm wrong about any of that please correct me, but presumably the worst performers of each sector aren't way worse than the best. So if a typical manager's unlevered return is 6-7%, the group fund levers the positions to achieve their desired return.
But what if the cost of leverage is higher than 6-7%? Is the strategy still viable? How would the firms achieve leverage?
Typically the 6-7% is excess return. Therefore, the cost of leverage is already subtracted out.
Ok that makes sense. So each pod earns ~8% on a market neutral strategy, minus 2% for leverage costs gets 6-7%?
It still seems like higher inflation/interest rates would kill this? Rates were well above 10% in the 70's.
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