Multi-strategy funds 2024 "great harvest": the first place return rate exceeds 36%, the millennium created the best of 2020, Citadel asked clients to withdraw funds "was rejected"

As the hottest fund on Wall Street, multi-strategy funds are set to achieve another "bumper harvest" in 2024.

On Friday, statistics showed that over the past year, most multi-strategy funds achieved double-digit returns, with hedge fund giant Citadel reporting a return of 15%, Millennium Management achieving its best performance since 2020, and DE Shaw's second-largest fund boasting a return as high as 36%.

Some smaller funds also performed well, with Schonfeld's fund returning around 20%, and Balyasny's fund jumping to 13.6%, while both had returns of less than 5% in 2023.

It is worth mentioning that as the fund sizes grow, Citadel has proposed allowing clients to cash out some profits, but the vast majority of clients prefer to keep their money in the multi-strategy hedge fund, and DE Shaw has also chosen to return billions of dollars in profits to clients.

With stable performance, multi-strategy funds have become the most influential force among hedge funds, attracting significant capital inflows in recent years due to their ability to ignore market fluctuations, refuse drawdowns, and maintain profitability. These types of funds often charge high fees, recruit top traders, and use leverage to amplify trading volumes for greater Alpha.

Multi-strategy Funds Welcome "Bumper Harvest" Again, Highest Return Reaches 36%

Last year was an optimistic year for hedge funds, with various sizes of multi-strategy funds mostly achieving double-digit returns.

Specifically, Millennium Management achieved a return of 15%, marking the best return for the giant since 2020. This performance is comparable to Ken Griffin's Citadel, which reported a return of 15.1%. In 2022, Citadel's return was nearly 26 percentage points higher than Millennium's.

DE Shaw's flagship multi-strategy hedge fund rose by 18%, having only one year of losses since its launch in 2001, and achieving double-digit growth in 18 of the past 23 years, with an annualized net return of 12.7%.

Meanwhile, the company's second-largest fund (primarily making macro bets), Oculus, soared by 36% last year, and this fund has never reported a loss since its launch in 2004, with an annual net return of 13.7% since inception.

With major economies maintaining high interest rates over the past year, coupled with rising U.S. stocks and the prevalence of Trump trades, some smaller funds also achieved strong returns.

ExodusPoint Capital Management reported a return of 11.3% last year, the best performance since 2020 (which had a return of 13.5%). Both Balyasny and Schonfeld rebounded last year, with Schonfeld's funds returning around 20%, and Balyasny Atlas Enhanced Fund achieving a return of 13.6%, while both had returns of less than 5% in 2023 It is worth mentioning that hedge fund giant Citadel actively invited clients to redeem profits after its flagship strategy achieved about 15% returns last year, but the vast majority of clients chose to keep their funds in the multi-strategy hedge fund.

Citadel currently manages $66 billion in assets and has returned a total of $25 billion in profits to clients since 2017. DE Shaw is preparing to return billions of dollars to clients after its two largest hedge funds achieved double-digit returns last year.

Low volatility, high returns, multi-strategy popular on Wall Street

Earning more with less volatility and lower correlation is the reason why multi-strategy funds are favored by investors.

According to a previous article by Wall Street Insight, multi-strategy funds allow for the simultaneous use of various strategies for investment, such as stocks, bonds, commodities, foreign exchange, and derivatives, following a strategy of allocating capital to multiple portfolio managers ("PMs").

PMs manage this capital independently of each other and are typically compensated based on their own performance rather than the aggregate results of all PMs. Large multi-manager firms can have 100 or more PMs, as diversification among PMs can lead to significant returns.

Under this fund structure, multi-manager funds have turned themselves into Alpha factories: each PM and their team is an independent workshop digging for Alpha, which is then channeled to the entire fund level through centralized position management.

Over the past five years, multi-manager hedge funds have generated higher returns with significantly lower volatility and stock correlation compared to the broader hedge fund and multi-strategy (non-multi-manager) fund landscape.

For example, in 2022, when the U.S. market faced a double whammy of falling stocks and bonds, Citadel earned an astonishing $16 billion for clients. In 2023, despite significant fluctuations, U.S. stocks ultimately surged, and Citadel still made a profit of $8.1 billion, showcasing its ability to ignore market ups and downs, refuse to draw down, and continue to generate profits.

Specifically, led by Citadel, five giants make up the top tier of multi-manager funds:

Millennium, founded by Izzy Englander, is an old rival of Citadel, with both firms established around the same time and managing similar scales, both around $60 billion.

Another giant is the renowned Steven Cohen and his Point72. Known as the "Jordan of the hedge fund world," he has also performed excellently after transitioning to a multi-strategy approach, quickly growing to be alongside Citadel and Millennium as one of the three giants in multi-strategy

DE Shaw is one of the earliest companies focused on algorithmic trading, and later added investments in private equity and long positions; Balyasny's business includes long/short equities, global macro, credit, risk arbitrage, and other strategies, currently managing approximately $30 billion.

Two Major Characteristics: High Leverage and High Costs

One major characteristic of multi-manager funds is high leverage, as these funds typically use varying degrees of leverage to amplify the alpha generated by each manager. Goldman Sachs estimates that multi-manager funds use an average leverage of about 5.3 times.

However, the combination of crowding and high leverage poses a significant risk, with approximately $300 billion in assets combined with an average leverage of 5 times, resulting in about $1.5 trillion of massive capital directed towards extremely similar positions.

With the risk control level of giants like Citadel, this may not be a major issue, but if a smaller, more capable multi-strategy platform faces a liquidation event, could it trigger a chain reaction throughout the entire industry?

Secondly, there are high costs. To attract larger capital scales, fund platforms invest heavily in infrastructure and talent acquisition.

Platforms implement "Darwinism" internally, with strict survival of the fittest. Traders compete for centrally allocated capital. If performance is poor, your allocation may be reduced, or you may be fired. Those who perform well can manage more assets and earn about 15% to 22% of the profits. For external talent, platforms spend lavishly. Signing fees of $10 million to $15 million are not uncommon, with guaranteed payments potentially reaching tens of millions of dollars.

At the same time, executives from major investment banks like Goldman Sachs and Morgan Stanley privately express that they cannot compete financially with these platforms, while traditional hedge fund competitors complain that their hiring frenzy has driven up talent costs across the industry.

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