According to the cofounder of Europe’s biggest hedge fund, the rise of multimanager hedge funds led to a “merry go round” of portfolio manager being offered “silly amounts of money”.
Sir Paul Marshall, the co-founder and CEO of Marshall Wace told a Hong Kong investment conference on Wednesday that the multi-manager platforms were reshaping the industry, because they “paid incredible amounts of money for people to be targeted”.
Marshall, who founded the London-based company in 1997 along with Ian Wace, said, “Everyone wants Cristiano Ronaldo to be on their team. But there aren’t many Cristiano Ronaldos.” “Everyone is getting paid the exact same as Cristiano.”
Marshall, whose digital media company UnHerd is currently trying to purchase the UK’s Telegraph Group, didn’t name any specific firms. His comments show how multi-manager platforms like Citadel, Millennium Management, and Point72 Asset Management have fueled a fierce bidding war to attract talent.
Marshall Wace has assets of $64bn, making it Europe’s biggest hedge fund. It is on par with Citadel or Millennium.
Multi-manager platforms that allocate capital to tens of thousands of traders tend to use a different model of fee than traditional hedge funds.
Instead of the hedge fund industry’s standard “two-and-20” — a 2-percent management fee and a 20% performance fee — the multi-manager platforms use a model of “pass-through expenses” instead of a traditional management fee.
This model allows the manager to pass on all costs, including office rent, technology, data, salaries and bonuses, and even entertainment for clients, to their investors. Managers are encouraged to invest heavily in talent and technology. The cost of these investments is more than offset by the performance. Then they tend to add a performance fee of 20-30% on top.
The pass-through models fuels practices like sign-on bonuses that run into the millions or even tens-of-millions of dollars. Paid sabbaticals are also offered, as well as payouts for individual portfolio managers of up to 30% of profits. All of these actions are meant to attract and retain top performers.
Several multi-manager contracts have come close to Ronaldo’s 200mn dollars per year contract with Saudi Arabian football club Al Nassr.
Marshall’s hedge fund firm has had to adapt because of the competition for talent. The Eureka hedge funds added this year a compensation surcharge worth up to 0.75 percent of the fund value to reward top performers. Marshall explained that the decision was made because “multimanager platforms are driving the bidding war for talents”.
He told a Hong Kong conference that the platform hedge fund model allowed some traders to receive “very stupid sign-on” bonus, even if fired after two or more years and moved elsewhere. In the industry, this practice is called “surfing guarantee”.
Marshall claimed that some platform hedge funds operate like a “kind-of battery-hen farming merry go-round”, with their high-paying model “not the best way to build great companies or even build a great business for our clients”.
Chris Gradel, co-founder of the Hong Kong investment group PAG said that during the same panel, some employees in his hedge funds had been offered eight figure sign-on bonuses in order to move to competitors. He called this practice “absolute lunacy”. He added, laughing: “We’re saying: You better take it.”
Gradel said that the trend was “a phase which is temporary, and it’s not a good phase”. “It is good for some people, I guess. . . But it’s bad for the client and it’s bad for the industry.”
Albert Goh, who is one of the four chief investment officers for the Hong Kong Monetary Authority (the territory’s de-facto central bank and sovereign fund), said that he appreciated the comments, because “we do not like paying fees”. The HKMA, which has a total of $511 billion in its Exchange Fund, is a major global investor.