One of the most interesting stories in the hedge fund world last year was that BlackRock was in talks with Izzy Englander to buy a stake in his $72 billion hedge fund, Millennium.
It seemed strange at first glance. It’s really strange. BlackRock is all about industrial scale, and while Millennium is a giant in the hedge fund industry, it’s small by BlackRock standards. BlackRock has a larger bond ETF than the entire Millennium, although fee levels obviously vary widely.
Moreover, the touted minority stake is strange for BlackRock, which has previously swallowed targets whole and just quickly remade them in its own image (RIP, State Street Research, MLIM, Mercury, BGI , GIP, soon HPS, etc.). The timing is also terrible as we are currently working on the latter two.
Most problematically, Millennium has been largely closed to new investors for years. The company closed on a $10 billion capital raise last year, but reportedly could have raised twice that amount, and is regularly giving back profits to maintain its performance. BlackRock, by contrast, has no intention of turning down investment funds.
Sure, Mr. Englander may be exploring a succession plan, but what are BlackRock’s motives when it can’t continue to roll out and sell its vast global distribution network?
Maybe this could be a clue. FT Alphaville highlights the following points:
Millennium is the largest retail hedge fund allocator in 2024, with multiple large external allocations. And given that it raised an impressive $10 billion earlier this year, this trend is likely to continue.
Israel “Izzy” Englander’s New York-based company, which manages more than $72 billion, has shown a new willingness to invest capital outside of its internal “pod,” particularly with Diego Megia. transferred billions of dollars to Taura Capital and Scopia Capital Management.
Millennium leverages more external funding, mostly through separately managed accounts, making it an important new source of capital for hedge fund startups. Of Millennium’s 330 trading teams, approximately one-tenth are external teams.
In addition to being the largest multi-PM platform supporter of other hedge funds, Millennium will be the largest allocator of capital to hedge funds across the industry by 2024, according to CapIntro officials.
This is according to Alternative Fund Insights, a hedge fund site run by former Bloomberg News and Eurohedge journalist Will Wainwright, which ranks the most “influential” allocators to hedge funds. is being carried out.
Although Alphaville cannot vouch for its accuracy and methodology, it says its methodology is based on a combination of quantitative (mission and investment estimates) and qualitative (“AFI’s assessment of levels of innovation, interest, and intent”). It seems. countermeasure. However, this aligns well with our understanding of the changing dynamics behind some large hedge funds, particularly Millennium. A company spokesperson declined to comment.
It may seem strange to place hedge fund Millennium high on the list of hedge fund allocation agencies such as Texas Teachers’ Retirement System, CPPIB, Adia and consultants like Alborn. However, as Wainwright points out, Millennium has become a very powerful intermediary, with external investments in 2024 including:
— Taura Capital. London-based Taura was founded by former Millennium manager Diego Megia with $5 billion, about 60% of which came from Millennium. He now plans to raise an additional $1 billion from existing investors, increasing his total assets under management to $6 billion, surpassing the $5.3 billion in day-one assets achieved by peer Bobby Jain’s Jain Global in the summer. surpass.
— Scopia Capital Management. New York-based Scopia is reportedly getting about $1 billion in new external allocations from Millennium. The company has been implementing a long-short market-neutral strategy in equities since 2001.
— Analog Century Management. Val Zlatev, a New York-based hedge fund manager who runs a long/short equity strategy that invests in the hard technology sector, received $1 billion from Millennium.
— Centerline Investment Management. The Hong Kong-based company will receive hundreds of millions of dollars from Millennium for its stock market neutrality strategy.
— Sone Capital Management. Former Echo Street Capital portfolio manager George Panos has launched a new systematic market-neutral hedge fund firm, funded primarily by about $500 million from Millennium.
— Helix Partners Management. Jonathan Heller has raised about $1 billion for his new company, with initial funding from Millennium.
Why would the Millennium do this? One reason is that investor demand for the company’s products is simply voracious, but its ability to meet it is limited, given how rare true alpha really is. By sending checks to some external managers through separately managed accounts and treating them as quasi-pods with leverage but strict risk limits, etc., Millennium can maximize fee generation. In any case, instead of the usual fixed management fee, all costs are passed on to the investor.
Another (related) motivation is how expensive it has become to hire semi-autonomous corps of portfolio managers, traders, and analysts like Millennium and Citadel. In 2023, Paul Marshall of Marshall Weiss likened multiple managers to “a merry-go-round of battery chicken farming” with “ridiculous” compensation structures. Since then, things have gotten even stupider. A good recent example is the Millennium portfolio manager who left less than a year after being promised a reportedly $50 million sign-on bonus.
Good portfolio managers often want to run their own companies anyway. A good example is Igor Turchinsky’s WorldQuant. The company started as a pod within Millennium, but is now an independent entity that manages some of the funds on Millennium’s behalf alongside traditional hedge funds open to outside investors. Another company is Symmetry Investments, founded more than a decade ago by former Millennium portfolio managers, who are said to still be managing some funds on behalf of their former employers.
This is becoming a bigger and more widespread trend. Last summer, Goldman Sachs’ Prime Brokerage Group found that 69% of multi-manager hedge funds like Millennium now have at least some of their funds managed by outsiders, up from two years ago. It was estimated that this is an increase from 54%. Ten years ago that number was probably close to zero.
Goldman Sachs sees this as a sign of “a new front in the war for talent.” Managers need to be more flexible in how they assemble talented portfolio managers. Below are some details of the Prime Brokerage Report.
The largest category of external allocations is equity L/S, accounting for more than half of the total. This is perhaps not surprising given the ongoing dominance of equity L/S as a strategy within a broader set of managers. Within Equity L/S, most allocations go to sector specialist managers with low net exposure, which is consistent with the profile of PMs that platforms tend to hire. The next largest external allocation is quantitative, accounting for more than a quarter of the allocations we are aware of. This likely reflects the challenges of building a quantitative business internally. External allocation may allow managers to avoid these difficulties while gaining exposure to quantitative strategies. The remaining 20% or so consists of a combination of other strategies across event-driven, macro, credit, and RV.
Overwhelmingly, these allocations are made in the form of Separately Managed Accounts (SMAs), which allow multiple managers to cross-margin external managers against in-house PMs, providing full transparency. and maintain control, impose risk limits and maintain capital efficiency. Having said that, we are aware of a small number of external allocations in the form of funds with single or mixed fund investments, although this is very rare.
Overall, we believe that the growth of the external assignment phenomenon is directly related to increased costs and talent acquisition challenges. This opens up a new pool of potential talent for multiple managers in the form of PMs who want to continue working. their own company. It also allows multiple managers to access strategies more quickly without the frictional costs associated with building infrastructure to support them. Quants are a good example. In addition to this, management’s willingness to accept SMA has increased significantly in recent years in response to challenges in the asset procurement environment. . . This helped increase the supply of potential managers approaching these assignments.
Alphaville has previously argued that multi-manager hedge funds are like a modernized version of the old funds of funds, which have fallen out of favor since 2008. In other words, it’s an easy, one-stop service for hedge fund exposure. Hedge funds have a wide variety of investment styles, but they have strict risk management and are overseen by the likes of Mr. Englander and Ken Griffin, rather than by people who have fallen out of the hedge fund industry.
But Millennium has been far more aggressive in making outside investments than its peers. Of the approximately 330 different trading pods, it is said that approximately one-tenth are currently made up of external managers, and that proportion appears to be increasing rapidly.
Well, we’re now entering the realm of wild speculation, but Millennium appears to be inadvertently morphing into a larger, more expansive hedge fund operation. One that acts not only as an investment intermediary but also as an investment manager. And it’s a more scalable business, and it’s understandable that BlackRock might be interested.
That said, for all the reasons we listed at the outset, we still suspect BlackRock and Millennium’s negotiations will go nowhere (if they haven’t already). And it’s hard to believe that Izzy Englander, whose patience with portfolio managers rivals Alphaville’s with cryptocurrencies, wants to turn her baby into something as gorgeous as a hedge fund platform. It’s difficult.
But it’s still fun to speculate.
Read more:
— Multi-strategy hedge funds are the new and better funds of funds (FTAV)
— DIY Multi-Strategy Hedge Fund (FTAV)
— Entire Multi-Manager Verse (FTAV)