Citadel, P72, and Millennium reported rare losses across the board in February, as the highly leveraged "multi-strategy giants" aggressively liquidated positions amid a sharp decline

Multi-strategy hedge funds have long been regarded as a safe haven for stable returns, but they are facing the biggest challenge since the early days of the COVID-19 pandemic amid the recent sharp decline in U.S. stocks.

This year, the trade war initiated by the Trump administration, along with ongoing inflationary pressures in the U.S., has led to a fierce wave of sell-offs in the stock market. Against this backdrop, major multi-strategy hedge funds such as Citadel, Millennium, and P72 have been closing positions at an astonishing speed, resulting in rare losses in February:

In February, the Citadel fund fell by 1.7%, the largest monthly decline since May 2021, and the downward trend continued into March, with a 1.7% drop in the first six trading days of March.

Millennium dropped 1.3% in February and continued to decline by 1.4% in the first six days of March. The two trading teams focused on index rebalancing have lost $900 million this year.

The Balyasny fund rose 3.5% in the first two months of this year but has since given back some of those gains.

The second-largest fund under D.E. Shaw & Co., Oculus, soared 36% last year but had dropped 4.4% as of March 7, with a 1.6% decline in just the first week of this month.

Marshall Wace's flagship Eureka hedge fund has lost 3% this month.

Although quickly ending underperforming trades and unwinding positions helps funds control risk and maintain stable returns, when multiple funds engage in these actions simultaneously, it can exacerbate the risk of market sell-offs.

“A herd of elephants trying to squeeze through an emergency exit”

How aggressive is the liquidation by multi-strategy giants? According to Andrew Beer, founder of Dynamic Beta Investments:

It feels like a herd of elephants trying to squeeze through an emergency exit.

Bloomberg cited sources saying that Millennium, which has over 340 trading teams and assets of up to $75 billion, is liquidating a $1 billion financial sector trading account managed by senior portfolio manager Jonathan Philpot, as well as an energy sector trading account managed by Justin Grant. Balyasny has also fired at least two portfolio managers.

The direct cause of the hedge funds' losses is the sharp decline in U.S. tech stocks. On Monday, the Nasdaq 100 index recorded its largest single-day drop since 2022, with over $1 trillion in market value evaporating.

Richard Byworth, managing partner at Syz Capital, stated that large-scale deleveraging primarily impacted equity hedge funds in the healthcare and technology sectors, as well as index arbitrage and stock rebalancing strategies.

A deeper reason is that investors are concerned that Trump's tariff policies could drag the U.S. economy into recession. [Billionaire investor Steve Cohen expressed negative views on the U.S. economy as early as February](https://wallstreetcn.com/articles/3741647?keyword=%E5%8D%8E%E5%B0%94%E8%A1%97%E5%A4%A7%E4%BD%AC%EF%BC%9A%E5%BE%88%E9%95%BF%E6%97%B6%E9%97%B4%E6%9D%A5%E7%AC%AC%E4%B8%80%E6%AC%A1%EF%BC%8C%E6%88%91%E5%AF%B9%E7%BE%8E%E5%9B%BD% The economic outlook is extremely gloomy, and the market may face significant adjustments, which is not surprising at all, shifting towards a bearish stance.

Cohen stated that punitive tariffs, immigration enforcement, and federal spending cuts led by the "Department of Government Efficiency" will have adverse effects on the U.S. economy, predicting that U.S. economic growth will slow from 2.5% to 1.5% in the second half of this year. It would not be surprising if U.S. stocks experience a major adjustment as a result.

Despite suffering losses, Citadel founder Ken Griffin still encourages his team to seize opportunities from this sell-off.

Bloomberg cited sources reporting that in an email he sent this week to the company's co-Chief Investment Officer Pablo Salame and other senior business leaders, he wrote:

Let's go on the offensive.

Has the "Pod Shops" strategy failed?

Multi-strategy funds, also known as "Pod Shops," vividly express their composition. Unlike traditional funds managed by a single team, this model is managed by dozens of different teams. The platform allocates the raised funds to each team while setting risk parameter ranges for each team, allowing them to trade independently in global markets under given rules.

This model enables the fund to quickly adjust its portfolio, eliminate underperforming trading teams, while maintaining stable returns. Its appeal lies in the fact that they rarely incur annual losses, and their returns are relatively stable; they charge clients higher fees, distributing operating costs among investors, thus maintaining high salaries to attract top traders.

Citadel manages over $60 billion in assets. According to LCH data, since its establishment in 1990, Citadel has earned $65.9 billion for its clients, surpassing the cumulative earnings of $58.4 billion from Bridgewater Associates, which was founded in 1975.

In 2022, the U.S. market faced a double whammy of stock and bond declines, with the Nasdaq index experiencing a significant pullback. Against the backdrop of traditional funds being wiped out, Citadel made a staggering $16 billion, breaking the historical record of $15 billion earned by Paulson in 2007 from shorting subprime mortgages, which is known as "the greatest trade ever."

Millennium currently manages about $75 billion and is known for its aggressive risk control, quickly disbanding teams that incur excessive losses. In 2024, Millennium achieved a 15% return, marking its best performance since 2020, comparable to Citadel.

Distributing large amounts of capital among multiple teams helps reduce risk; however, once the market experiences a significant downturn, the performance pressure may lead fund managers to collectively liquidate positions, further exacerbating market sell-offs. Bank of England Governor Andrew Bailey warned last month that the rise of "Pod Shops" poses a threat to financial stability:

Being forced to rapidly reduce leverage in a stressed environment could exacerbate market volatility, and the way compartmentalized funds protect themselves may, in some cases, pose risks to the entire financial system