Why so Few Industrials-focused funds?
Name says it all: Why are so many more single manager funds focused on consumer names vs industrials? The number of funds focused on tech is a little more self-explanatory
Industrials seems to be just as large of a sector as consumer
tldr; people are dumb
You get paid on dollars of raw PnL at most single manager funds and your payout is structured like a long call option. Markets are efficient and so the performance of your portfolio hedged to the market should take on approximately a random walk. Since you cannot predict the underlying to your call, you just choose more volatile underlyings. Fund managers prefer to increase raw dollar vol because it increases the value of their option. The folks giving you money are generally the failures of the finance industry and aren’t that smart. They don’t seem to care that industrials has lower vol than tech and so you get an identical 2/20 payout either way. (Take a moment to appreciate just how stupid this is. You get 20% of upside returns only REGARDLESS of how random your upside is whether you manage something with 3% vol or 30% vol). This is why there are so few industrials focused funds.
giving these people more credit, people generally all know that tech/consumer have more return dispersion on a unlevered basis than industrials. This means if you are long short, there should ostensibly be more opportunities for alpha in tech/consumer than in industrials. This common view exists because our industry calculates PnL in dollar terms and does not adjust for volatility. Of course, what actually matters is vol, but the gatekeepers of capital are usually too dumb to realize this. I have never tested this but I doubt idiosyncratic return is a lower percentage of vol for industrials than tech/consumer.
Anchor
Short answer I don’t know - you have a lot of tech funds because many single managers that focus on growth or quality skew toward tech and business services since those sectors tend to be fertile ground for high quality business models and compounders more so than industrials which is heavier on mature, capital intensive cyclicals and such. For a long-biased fund paid on raw PnL, tech-heavy makes sense - especially in the current zeitgeist/regime.
Plenty of single managers do quite a bit of industrials. I think the multimanagers at least in the last couple years have struggled a bit in industrials given the turmoil of tariffs/trade - but I’m not sure about that. You don’t have a lot of consumer, fig or real-estate public equity focused funds either.
If I’m an industrials guy and I’m launching a single manager fund, I don’t think I’d market as an industrials focused fund - it’s not like anyone is clawing for that sweet sweet industrials exposure - so why not leave the door open to doing other sectors as needed. If I’m a tech focused guy in what, in my view, is a tech bubble - maybe I market as such for LPs seeking growth. Also, there’s just more market cap in tech in this market.
Finally, some sectors of industrials are really so cyclically driven that you either are market neutral or basically making macro bets.
So back to short answer - I don’t know why there aren’t many industrial-focused funds, but there’s plenty of work looking at industrials w/in single manager and multi manager funds. I initially did industrials banking because I liked the broad exposure to different business models and wanted to learn how to really model and thing about supply/demand and incremental margins and production dynamic and such. I’m glad I did industrials banking though I’m a generalist now.
See: Anchor Bolt
Didnt they blow up
Had a strong run - running many billions at peak which was like 6 years after launch
My guess is they probably got too big to move needle and investors weren’t happy about flat returns
curious if anyone else has insight
Started by former Citadel guy (a few bigger LS neutral funds in Chicago were founded by former Citadel people). Peaked at $6bn. Didn't do well recently, got caught on wrong side of energy trade and now just family office.
Out of curiosity, what other large LS neutral funds are in Chicago?
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