Why are MM funds doing well right now?
Title says it all. Were MM funds beginning shorting tech earnings starting back in March and rode the wave down? Or maybe I have an uneducated understanding of MM HFs.
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MMs are market neutral and the pods are sector specific (so a TMT pod has to run TMT neutral) so by definition in general MMs are tech neutral.
I’m oversimplifying here but obviously some MM pods run long growth or long software short semis. But MM pods are smaller in position size than a multi B single manager so they are more nimble to flatten their exposure and react to changing market conditions with less trading costs and inertia.
MMs don’t take beta bets buddy
MMs do more than just equities too. Although I think one of the more impressive stats during the market routs is the positive performance of Citadel’s equities fund.
It's very simple actually
Just don't be an unhedged hedge fund
A better question would be under what circumstances will it be the day of reckoning for MMs or why not?
A smart trader I know thinks that if the Fed didn't come in March 2020 a lot of MMs would have gone under because of the amount of leverage they have, similar trades, similar stops.
Either you believe that they are selling some systemic tail a la portfolio insurance or the correlation/diversification makes them immune as it really is like investing in a bunch of different funds.
Interesting thought, but mind expanding here? I guess the assumption is that initial Feb / Mar 2020 vol spikes set off risk models and were it not for vol normalizing post-Fed intervention then you would've had mass degrossings due to breaking through firm-level vol limits? And the MM strategy is relatively crowded so would've been a contagion of unwinds?
Assuming that's the line of logic you're applying (let me know if not), I would test the assumption that, at least on the equities side, these MM books were drawing down anything like the SM long-biased drawdowns you see today. Pretty sure returns on gross were only a couple of hundred basis points down on equities arms of MM platforms through the worst of Feb / Mar 2020 (maybe translating to ~HSD% drawdown on equity). My understanding is that many of the big MMs didn't massively cut books at the beginning of the Feb / Mar vol spikes given they understood this was a non risk model event. So I'm not sure what the impetus for forward degrossings ex-Fed would be if performance wasn't particularly bad (all things considered) and risk managers understood trailing vol-based models were busted for the game that was on the field at that point.
I definitely don't think the MM models are infallible btw. Widespread and sudden degrossings are what kill that model (and it feeds upon itself), rather than directional beta, bc of the presence of high leverage + crowding in ideas. But, I generally feel like investors in that model turned their books over meaningfully by Mar 2020 (i.e. they no longer had the same trades on that were degrossing)
I think what you wrote is too long and misses important subtlety. I'll explain and if you don't believe me than MM is a free lunch.
1) MM inherently has a lot more leverage than SM because they overallocate risk due to correlation benefit. This correlation benefit works most of the time, but it's not free.
2) Gross not net var shock is the unique problem for them where's net var is a bigger deal for SM.
3) for those saying MM has less risk than SM because they are factor neutral or whatever doesn't understand much about the biz or risks beyond their mba class.
4) Similar drawdowns and risk models across funds and PMs is a form of systemic risk especially when cash becomes scarce with correlated posting think LTCM
5) All funds based on constraints inhabit similar trades with similar time horizons and liquidity profiles. Think about equity index rebalance if those portfolios had to unwind who could buy them in a week? All the big players are already near max size. The competitive component forces them to run high risk. It's a one way street.
6) Netting across PMs can be a big issue on net return esp when vol is high
MM books are so much smaller, and a lot more diversified. They have the ability to navigate market vol significantly better because they can trade in and out very quickly. Obviously they’re market and usually sector neutral too. One of the biggest reasons why a fund like Tiger has blown up is because they’re stuck with billions in a couple stocks which they can’t get out of fast enough even if they wanted to.
Disagree on the last point. The privates they are obviously stuck with, but don't tell me you can't blow out of a large position in BABA AMZN etc, because those things trade $bns a day. Even the privates could have been hedged with a dirty QQQ short or such.
These funds have melted because they didn't bother with managing risk, period.
They responded to incentives. It’s easy to stand on our soapboxes now and decry them as idiots / fools. But if anyone here had the opportunity to manage $10s of billions and get paid for public market beta, you’d all do it too.
The problem is the underlying investors who chased performance instead of understanding what they were buying.
Fair. But don’t think blowing out of positions is their style. I completely agree that risk management at so many SM’s are absolutely horrible. But it’s part of their pitch in being able to ride out volatility. It’s worked every time except the past 6 months. (I recognise I’m making a different point here versus earlier)
I'm at a MM now, but I've noticed MM folks on here with some kind of superiority complex over the long-biased and/or unhedged SMs. As if short-term active trading is the only true type of investing. I don't see a market-neutral strategy as inherently better, it's just a different approach. It's intellectually pure in that your return is true alpha, but at the end of the day the LPs don't give a damn about that. They care about consistent absolute returns. Risk limits prevent the damage a single pod can do but in a correlated environment like now, MMs will still get drawn down just as much as any SM.
The reason why these voices are so loud is because there are a million MM seats and people can hop around for a good while before leaving the industry. There aren't that many risk-taking SM seats, and thus less representation here. Those roles are highly desirable, so I dare say it's envy more than anything else.
The representation point is so accurate here.
Was at a MM and now at a SM for a couple years. Most people I knew at my previous fund would go on this site. No one at my new fund (besides me) even knows what it is, which is partially due to the fact that the people at my new fund are much older on average, but the point still stands.
But LPs do give a damn. LPs are not as dumb as you give credit for. They have probably as high of an IQ as you or me.
That’s why MMs can charge 2-3/20-30 and most SMs charge 1-1.5/10-15 nowadays. I’m excluding brand name launches of the decade and outliers (like Melvin or D1) and rather the whole industry.
Run the fundamental analysis on that. What does pricing power mean for the secular trend? :)
And which way do you think the scale will tip further after these past two years? The difference between 2022 and 2008 is that in 2008 - MMs suffered heavy losses and almost went out of business (eg Citadel Balyasny), so there was no MM vs SM comparison to be made. This time the difference is stark.
Why are we focusing on 2022 after market neutral strategies underperformed for the entire decade long bull market?
Anecdotally, I'd add that MM capital is fleeting. Quick to pull out, quick to pile in. SM capital sticks around for the longer term, and that profile, along with the numerous closed-end funds that SM managers have that MMs do not, is a large part of the reason why they can commit to a longer time frame.
It’s 1.5 and 17.5 or 15 not 1 and 10 for like any SM, but yes there is fee compression.
I hardly think it matters when only the 20% pass through is accruing to the IPs at a MM… the founder is keeping almost all of the excess performance fee and the management fee.
a better comparison is that as an employee at a SM you have 1.5 and 17.5 accruing to a group of IPs that is the same size as a pod which effectively has a fee structure of 0 and 20…
nevermind the fact that the implied average var for a SM is 2.5-5.0x higher than a MM book (I.e. MM trying to make 3-5% on gross and SM trying to make 10-15%) which makes the 17.5 much higher EV than the 20 at a MM.
I would say a MM pod managing $1B you will generally generate like $10MM in fees in a solid/good year while a $1B SM will generate ~$15MM from mgmt fee and $20MM from perf fee so total $35MM vs $10MM for a $1B SM vs a $1B pod (which both generally have the same number of IPs). Back office might dent the SM an extra like $2-5MM but the valuing accruing to IPs still is multiples higher at a SM.
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