Multistrats become gatekeepers

PREPARING to launch a hedge fund in 2017, Arnaud de Lasteyrie faced a tough choice: limit himself to running money exclusively for a single client or keep chasing to win a diverse range of investors.

The former Societe Generale proprietary trader and his co-founders chose to take the money that was on the table, initially managing cash only for multi-strategy hedge fund Schonfeld Strategic Advisors, accepting the risks to his fledgling firm if it fell out of favour with its sole benefactor. 

Increasingly that route is becoming the most viable option for startups in an era when clients and cash have migrated to the industry’s giants. A growing number of founders are postponing the promise of a co-mingled fund to first manage money for a single investor – mostly via so-called separately managed accounts (SMA). 

“The SMA world has been exploding,” said Ali Benzakour, founder of Envestra Capital at Bloomberg’s Hedge Fund Forum in London last month. “The platforms have more assets than they can deploy, so they’re looking for uncorrelated portfolio managers and are ready to pay crazy amounts.”

Benzakour launched with an SMA in October 2023. He planned to start a commingled fund after securing another investor, but that too became an SMA.

He now runs three separate accounts and is planning to launch a commingled fund in the first quarter of 2026. 

The willingness to start out this way can be seen as tacit acceptance that the multistrats have become so large they are now effectively the industry’s gatekeepers.

While the agreements offer a fast track for hedge fund startups, they also create dependence. If the client pulls capital, the business can unravel overnight, making it a quick start, not a stable foundation. 

Still, some of this year’s biggest startups, such as former Marshall Wace partner Ravi Naresh’s KR Capital, have got into business with multi-strategy firm backing. Others such as Kedalion Capital Management and Sona Asset Management show the rewards that can follow for those that make it out the other side. 

Born from crisis

Managed accounts gained traction after the 2008 crisis when mass redemptions left some investors stuck in hedge funds.

The turmoil exposed the risks of sharing a fund with others that might want to exit illiquid positions at different times.

In response, major investors began demanding that their money be managed separately, a move managers reluctantly accepted. 

While hedge funds previously just wanted to focus on commingled funds, now “there’s a much greater willingness for SMAs to be a core part of someone’s business,” Matthew Barrett, a partner at Tycho Capital, said in an interview at the Kepler Alternatives Summit in September.

Almost half of US-based hedge fund launches took an SMA to start in 2024, up from about a quarter a year earlier, according to a report published by Goldman Sachs Group Inc earlier this year.

Capital deployed through SMAs hit a peak of US$315bil at the end of 2024, up 27% year-over-year and more than double the growth rate of the hedge funds industry.

Goldman estimates SMAs now account for over 7% of industry assets, up from 3.4% in 2010.

With higher interest rates, the driver behind SMA uptake has moved from transparency and control, to capital efficiency, according to Marlin Naidoo, global head of capital introduction and consulting at BNP Paribas SA.

The structure allows investors to use leverage to amplify their commitments, freeing up cash. The mechanism can also carry lower fees and better liquidity.

Ex-Point72 Asset Management portfolio manager Moni Sternbach’s Haverstock Capital is expected to start trading in January with about US$300mil across three SMAs, according to a person familiar with the matter. High demand for the SMA portion has meant the launch of the commingled fund has been pushed back to later in the first quarter, the person adds.

Tudor Investment Corp alum Dharmesh Maniyar is relaunching his macro firm in November. He is offering investors managed accounts and a daily-liquidity total return swap from the start, people with knowledge of the matter said.

The swap will allow investors to get exposure to its strategies without establishing their own SMAs. 

Funds with funds 

While traditional investors like ADIA and the Canada Pension Plan Investment Board continue to make use of SMAs, giant hedge fund firms such as Millennium Management and Qube Research and Technologies are increasingly driving their growth.

Their willingness to fork out cash to external traders comes amid a fierce war in recruitment.

About 75% of multistrategy firms have a portion of their capital allocated to outsiders and 90% of external allocations, almost exclusively via SMAs, were initiated from 2022 onwards, according to another Goldman report last month. 

Millennium now has more than 330 investment teams of which external allocations represent more than 10%. Many trade exclusively for the US$79bil firm. Qube, which manages over US$36bil, has also allocated cash to dozens of external managers. 

Recent beneficiaries include Qin Xiao, the former co-head of Goldman’s global commodities trading team, who has won an allocation from Millennium, and former Citadel money manager Sean Murphy, who is starting with backers including Qube.  

Risks and rewards

Proponents argue that SMAs are a quick way to launch a hedge fund and often come with the benefit of resources and infrastructure from their backers. 

“It’s a partnership model,” says Clark Nicholls, chief investment officer at Aucit IM.

A large allocator’s approval can also help boost a manager’s credibility and make it easier to raise cash elsewhere.

Yet, critics point to the inherent risk. Multi-strategy platforms operate with tight risk limits and have little tolerance for losses. Capital can be withdrawn without much notice. 

Earlier this year, Millennium pulled money from Pamalican Asset Management eight months after the hedge fund started trading, while Balyasny Asset Management pulled cash from Franck Tuil’s hedge fund within a year of backing the former Elliott Management trader.

And while the transparency of an SMA isn’t controversial when the end investor is a pension fund or family office, it can be perceived so when the allocator is a hedge fund itself.

BNP Paribas’s Naidoo said managers are increasingly asking for clauses to protect their intellectual property. 

While it remains notoriously tough to raise cash, it’s still doable the old-fashioned way.

Asfandyar Nadeem started Deem Global in December 2022 with about US$300mil in a commingled fund. The firm now runs over US$1bil. 

Hamza Lemssouguer’s co-mingled credit hedge fund Arini, launched in 2021 along with a small SMA.

The flagship fund has grown to about US$7bil with 95% of its assets in the pooled cash. The firm now runs more than US$13bil. — Bloomberg