News Digest: Hedge Fund Allocators Shift Toward Fewer, Larger Firms Despite Crowding Concerns
October 22, 2024
News Digest:
A new Bank of America survey reveals that hedge fund allocators are increasingly concerned about the risks of crowding, yet they continue to consolidate their portfolios into a handful of large multi-manager firms. This trend, which focuses on fewer but larger funds, is exacerbating the very crowding issues that allocators worry about.
The survey, which polled 160 allocators managing $680 billion across 4,300 hedge funds globally, found that the biggest hedge fund managers continue to attract the bulk of new capital, despite rising operational costs. Investors are moving away from portfolio diversification, opting for a “one in, two out” strategy, where a new investment often triggers the redemption of two other funds.
As a result, the industry’s largest firms are growing even larger. During the first half of 2024, $7 billion in net inflows entered the $4.3 trillion hedge fund sector, with multi-manager funds like Millennium and Citadel leading the pack. Multi-strategy funds saw particularly strong inflows, attracting $10 billion during this period. The average multi-manager firm now oversees $1.7 billion in assets, far surpassing the $528 million managed by the average hedge fund.
Approximately 50% of allocators listed crowding—the tendency of funds to pursue similar trades—as their primary concern, especially as large multi-manager funds have been criticized for acting in unison during periods of market volatility.
However, the shift toward fewer large firms has given allocators greater leverage in fee negotiations. As some funds struggle to outperform the risk-free rate in today’s higher interest rate environment, 42% of respondents indicated that performance-based fee hurdles were becoming more common in at least one of their portfolio funds. The report suggests this marks a “buyers’ market” for allocators, aligning their interests more closely with fund managers and creating a more favorable landscape for negotiations.
This consolidation trend reflects a balancing act between the need for performance and concerns over systemic risks, setting the stage for a complex hedge fund landscape as 2024 draws to a close.