Why are seats so rare when the space has such large AUM, which is only expected to grow? Why do funds run such lean teams? The AUM to employee ratio can be massive in many places, like Pershing. Why don't they need more people? As certain strategies like global macro have prospered, the number of seats doesn't seem to see a meaningful increase
Whereas banking has so many seats when it is a space with much lower stakes.
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It's simple, all about economies of scale. Six investment professionals can run $100 million and can also run $2 billion. You just open your investing landscape to include larger capitalization companies.
Pershing is a great example. He invests in very large cap companies, holds only a handful of investments at any given time, and concentrates significantly. You don't need a 10+ person investment team to manage that.
Private equity is completely different. You own your portfolio companies, help make strategic decisions, build the right management, do a bunch of add on acquisitions/roll ups. You need more investment and operations professionals in private equity. That said, there is still a good amount of economies of scale in private equity (look at Leonard Greene or Thoma Bravo, massive AUM not that many people), but not as good as hedge funds.
Thoma has 91 investment professionals and AUM of 120 billion = $1.319 Billion per head -- pretty damn impressive demonstrates much larger economies of scale than most HFs out there. Pershing is an outlier with ~10 investment professionals (could be even less) and AUM of 18.5 Billion = $1.850 Billion per head. I am honestly baffled at Thoma's economies of scale given they invest across strategies (Large cap buyout - Flagship, MM buyout - Discover, LMM buyout - Explore , and minority growth - Growth). Would love to learn more about their investment process -- seems differentiated somehow given the efficiency with which they are able to deploy capital.
I think it shows that your finance textbook is correct that most of it is luck rather than alpha creation.
Even the people running the funds, don't think you need more people because they don't believe that more minds will create more alpha.
On the corporate side, I can literally keep adding people until there is no more value for them to create. In HF, I think it's a little bit of an indictment of the whole thing.....they don't see value in adding more people.....because the employees are not adding additional value. We're talking about a global market place. It's hard to argue that there is nothing for an additional employee to research.....even a single insight should earn millions for a hedge fund. Hard not to justify hiring someone for $200K unless you yourself believe that those insights don't actually help.
Finance textbook? What are you talking about. I've worked at a number of hedge funds for a long time now and I can guarantee you more bodies doesn't necessarily lead to better returns. Random research from an analyst in their 20s is not useful. I can call up any sell-side research analyst across wall street in two seconds and get their opinion on their best/worst stock that they've covered for years.
It's all about the skill/judgement of the PM - the person making the decisions. They either are a good investor or not and one person can run an unlimited amount of money if their investing style is scalable. Just look at the best performing PODs at the large multi-manager hedge funds. They can run $1-2 billion with a team of 3-8 people.
Portfolio managers at hedge funds are usually pretty bad managers. You add more people to the firm/group, they will sit around doing nothing cause the PM doesn't want to waste time managing them or constantly talk to them.
prestige is linked to scarcity
They're not that rare, if you include the "2 guys, a dog, and a Bloomberg Terminal" type shops out there. If you're talking about $300mm+ (around the point at which a hedge fund is "legit") shops, the reasons are pretty simple: PMs are greedy and don't want to dilute themselves plus they don't get much marginal return out of the 4th, 5th, 6th analyst hire when they can only manage a few people effectively. In addition, the way most single manager PMs usually also double as CEOs of the fund & head of fundraising so their attention to investing is probably around 60% of their time, further limiting their ability to get much utility out of a 4th, 5th or 6th analyst.
Is there a list of the ~$300M AUM firms out there and their track records? Wonder if there are any funds that are killing it in this size bracket that just choose to remain small because its easier and more lucrative for them
I would too. I would be this is exceedingly rare given the incentives for higher AUM
No lists available but plenty of funds with great records stay below 2bn via returning capital or just not seeking additional AUM from lower quality LPs just for fees sake or cause their strategy doesn’t scale
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