The co-founder of the biggest hedge fund in Europe claims that the emergence of multi-manager hedge funds has resulted in a “merry-go-round” whereby portfolio managers are offered “silly” sums of money.
The dominance of multi-manager platforms had changed the industry because they were “paying incredible amounts of money to target people,” according to Sir Paul Marshall, co-founder of Marshall Wace, who made this statement on Wednesday at an investment conference in Hong Kong.
“There aren’t many Cristiano Ronaldos, but everyone wants that on their team,” remarked Marshall, who alongside Ian Wace co-founded the London-based group in 1997. “Everyone is receiving the same compensation as Cristiano Ronaldo,”
Marshall did not identify any specific companies. Marshall is currently attempting to purchase the UK’s Telegraph Group through his digital media group UnHerd. However, his remarks highlight how a fierce bidding war for talent has been sparked by the dominance of multi-manager platforms like Citadel, Millennium Management, and Point72 Asset Management.
Comparable in size to Citadel and Millennium, Marshall Wace is the largest hedge fund in Europe with $64 billion in assets.
Compared to traditional hedge funds, multi-manager platforms usually use a different fee structure since they distribute capital among dozens or even hundreds of teams of specialized traders.
One of the key differences between the multi-manager platforms and the standard “two and 20” hedge fund model is that the latter employ a “pass-through” expenses model in place of a management fee, with two percent going toward management and twenty percent going toward performance.
In this model, the manager charges their end investors for all expenses, including office rent, data and technology, salaries, bonuses, and even client entertainment. The concept is that managers make significant investments in talent and technology, and the performance that results more than justifies the costs. They then frequently tack on a 20–30% performance fee.
Incentives to attract and retain top performers, such as multimillion-dollar sign-on bonuses, paid sabbaticals, and payouts to individual portfolio managers amounting to 20–30% of profits, are all made possible by the pass-through model.
A few multi-manager agreements and compensation packages have even nearly matched Ronaldo’s $200 million annual contract with Al Nassr, the Saudi football team.
Marshall’s firm and other established hedge fund players have had to change in response to the talent competition. In order to reward top performers, the company’s flagship Eureka hedge fund introduced a “compensation surcharge” this year worth up to 0.75 percent of the fund’s value. Marshall justified this move at the time by stating that “multi-manager platforms are driving a bidding war for talent.”
He told the Hong Kong conference that some traders had been able to accept “very silly sign-on” bonuses from the platform hedge funds model, even if they were fired after two or three years and relocated. In the industry, this is referred to as “surfing the guarantee.”
Platform hedge funds, according to Marshall, run something like a “merry-go-round for battery hen farming,” and their high compensation model is “not the right way to build great companies or even to construct a great industry for our clients.”
During the same panel discussion, Chris Gradel, co-founder of the Hong Kong-based investment group PAG, said that some employees in his company’s hedge fund unit were offered eight-figure sign-on bonuses to move to competitors, calling this practice “absolute insanity.” He continued, laughing, “We say you’d better take it.”
According to Gradel, the trend was “a temporary phase, it’s a very bad phase.” “I suppose it’s beneficial for some people, but it’s bad for the client and the industry.”
During the same meeting, Albert Goh, one of the four chief investment officers of the Hong Kong Monetary Authority—the de facto central bank and sovereign wealth fund of the territory—expressed gratitude for the remarks, saying, “We don’t like paying fees.” The HKMA, with approximately HK$4tn ($511bn) in its Exchange Fund, is one of the largest global investors.