Multi-Manager Hedge Funds: A Meritocratic Paradise or a Revolving Door of Burnout?

Almost all conversations about buy-side roles eventually turn to multi-manager hedge funds, also known as “pod shops.”

There are only a few dozen large funds in this category worldwide, but they’ve greatly impacted the markets and finance careers.

Multi-manager hedge funds promise investors solid risk-adjusted returns with low volatility; no matter what the broader market does, you’ll make money if you invest in them.

They do this by setting up entire teams (“pods”) for specific sectors, having each team learn their stocks or other securities in-depth, and then trading frequently based on catalysts and changes in investor sentiment.

The multi-manager model is much more like “trading” than long-term investing, and for some people, that’s great:

Multi-Manager Hedge Funds Defined

Multi-Manager Hedge Fund Definition: A multi-manager (“MM”) hedge fund, also known as a “pod shop,” is a platform that allocates capital to dozens of individual Portfolio Managers (PMs), allowing each team to independently generate solid risk-adjusted returns while minimizing volatility. These funds are usually multi-strategy as well.

The multi-manager hedge fund model is simple: Raise $10-20 billion, borrow at the fund level to take this to $50-$100 billion, and then allocate this capital to dozens of internal teams.

Some teams might get $100 or $200 million, and others might get $1+ billion, depending on their track records and sector/strategy focus.

The “catch” is that each team also gets strict rules and requirements, such as:

• Performance Targets: Many teams at MM hedge funds aim for “only” 1-5% annual returns at the team level – but since the fund is highly leveraged, these gains get amplified much higher at the fund level.
• Beta-Neutral Portfolios: For example, if the S&P 500 goes up or down by 5%, your team’s portfolio should move by ~0%. Most funds run market-neutral strategies to achieve this (more on hedge fund strategies).
• Pair Trades: To achieve this market neutrality, trades are usually paired so that if you long one company in your universe, you’ll short another company, and the gains come from the spread (more on long/short equity).
• Maximum Drawdown Limits: Because the multi-manager hedge funds are highly leveraged, they do not tolerate drawdowns. So, if your team manages $500 million and is up 5% for the year but then it falls by 4% in a month, you could be in trouble – even though your overall results are positive.
• Factor Requirements: Some teams also structure their portfolios based on “factors,” such as quality, momentum, value, etc., which may also contribute to market neutrality.
• Up or Out: You’ll be fired if you do very poorly (i.e., you lose 10% from your peak AUM). There’s no tolerance for this type of loss because of the fund-level leverage.

What Do You Do as a Multi-Manager Hedge Fund Analyst?

You might think that as a Hedge Fund Analyst, you’ll do deep market research, speak with counterparties, suppliers, and customers, and build detailed financial models to support your views…

…and you would do those things if you were at a single-manager hedge fund.

At a multi-manager, however, you’ll spend more time analyzing the catalysts, evaluating investor sentiment, and poring through data and analytics.

Much of the job is about finding incremental gains because your returns targets are in the low single-digit percentages.

You will do some financial modeling and company research, but it will be more about evaluating factors such as:

• If Company X beats earnings by 5%, how much will its stock price increase?
• If we think Company Y will miss earnings by 10%, should we maintain our current short position or allocate more to it?
• If Company Z announces a new product at this upcoming conference, how much could its stock price increase?

So, expect a lot of quarterly financial projections, quick public comps, and simple DCF models linked to specific catalysts.

Do Multi-Manager Hedge Funds Deliver?

Multi-manager hedge funds have been in the news because they’ve performed better and grown more quickly than the larger hedge fund universe.

The Financial Times had a good feature, with an example graph below:

The multi-managers have been growing at ~6x the industry rate, which has led to a fierce talent war – with some funds offering millions (or more!) in signing bonuses for the best PMs.

Many of these firms have performed quite well, but it depends on the specific funds you’re looking at (the large firms offer many different funds to invest in).

For example, between 1990 and 2022, Citadel’s Wellington fund delivered 19% annualized returns, which some have said is “almost impossible.”

Few other multi-managers have performed anywhere close to that level, but these numbers have pulled a lot of money into the space.

The main reason they’ve done so well is scale: These firms can spend huge amounts on data/analytics teams, get better terms on their trades, and manage risk more comprehensively than anyone else.

The Top Multi-Manager Hedge Funds

If we factor in both assets under management (AUM) and brand name / reputation, my top 10 list would look like this:

You could add names like Renaissance Capital and Two Sigma, but I would argue they’re in the “quant fund” category, even if they’re technically multi-managers.

D.E. Shaw was traditionally viewed as more of a quant fund, but it has diversified significantly over time.

You could also add plenty of other funds, from lesser-known ones with huge AUM (Artisan Partners, Arrowstreet, and Mariner) to better-known funds with lower AUM (Farallon, Schonfeld, Surveyor, and Pine River).

But if you look at any list of the top hedge funds by AUM, the majority will be multi-managers even if they’re not labeled as such.

Recruiting at Multi-Manager Hedge Funds

Traditionally, most hedge fund recruiting has been “off-cycle,” but some larger multi-manager funds now use a structured recruiting process with headhunters and modeling tests.

(We just had a client who interviewed at one of the top MM funds and had to complete a 45-minute 3-statement modeling test as part of the process – luckily, it was easier than the 3-statement modeling example on this site).

Many funds, such as Point72, now recruit undergraduates directly via programs like the “Point72 Academy.”

So, while a traditional IB background at a top bank helps, you don’t necessarily need it if you start early or get relevant experience elsewhere.

It’s 100% possible to do asset management internships (or hedge fund internships), take the CFA, and recruit for one of these large funds – assuming it’s open to undergrads.

If you’re a more experienced candidate, investment banking is a great background for these multi-managers, but many people also get in from equity research and sales & trading backgrounds.

Your ability to judge market sentiment is crucial, and you develop more of these skills in S&T and ER.

The good news is that since turnover is so high, new spots constantly open at these platform funds – so you might be able to land interviews even if you don’t feel “qualified.”

The interview questions and case studies are not much different, but MM funds are more likely to give you time-restricted exercises for specific companies.

So, you might have to build or finish a 3-statement model and then make a stock pitch based on that.

By contrast, at a single-manager fund, you’d probably get a more open-ended task, such as one week to find, research, and pitch your own idea.

Multi-Manager Hedge Fund Careers

If you do well, you’ll move up to Senior Analyst, then Junior PM or Sector Head, and then a full Portfolio Manager.

We’ve previously covered the hedge fund career path, and very little about it differs for MM funds.

As you advance, you move away from the nitty-gritty work on individual stocks and spend more time managing risk, constructing the overall portfolio, training team members, and publicly representing your firm.

The biggest advantage of an MM fund is that advancement is very objective: If your ideas make money, you’ll move up, and if they don’t, you’ll get fired.

The biggest disadvantage is that turnover and burnout are quite high, and some funds, such as Citadel, are known for churning through their staff.

Also, if you account for the high turnover and the lapses between jobs, the compensation may not be as great as it first appears.

What About Compensation?

On that note, hedge funds traditionally followed the “2 and 20” model, with a 2% management fee on assets under management (AUM) and a 20% performance fee (with some nuances around performance relative to the peak).

But most multi-manager hedge funds now charge pass-through fees, which means they “pass through” their expenses to their Limited Partners and then take a percentage of the profits.

As the FT notes, this means that the LPs tend to pay significantly higher fees in most cases – the equivalent of 3-10% in management fees rather than 2%.

The team-level compensation at a multi-manager might work like this:

Let’s say your team manages $500 million, and you earn 4% on it for the year ($20 million).

Expenses may or may not be deducted from this $20 million depending on how the “pass-through” structure is implemented.

But if we assume a deduction for the fees, which might amount to ~$2 million in this case, that leaves you with a P&L of $18 million.

A team like this might have a PM, one Senior Analyst, and one Junior Analyst.

Your team might earn 10 – 20% of this $18 million, depending on the firm’s policies and fees; we’ll say 15%.

That’s $2.7 million, which means maybe a $150K bonus for the Junior Analyst, a $450K bonus for the Senior Analyst, and $2.1 million for the PM.

These bonuses are awarded on top of everyone’s base salaries, which might be in the $150K – $200K range (these would have been deducted as part of the $2 million in expenses).

On the other hand, if you lost money for the year, you’d earn nothing and be fired shortly.

And a much worse result, such as a 1% return, would result in a bonus pool of only ~$450K if you work through the numbers.

Your compensation here depends almost 100% on your team’s performance, and your bonus could range from $0 to hundreds of thousands (for Analysts) or millions (for PMs).

Are Multi-Manager Hedge Funds for You?

Considering everything above, here’s how I’d sum it up:

Pros:

• The earnings potential is very high at the Senior Analyst and PM levels.
• There’s a logical advancement path that depends on your performance rather than office politics.
• There are many job openings due to the high turnover.
• You get brand-name recognition since everyone knows Citadel, Bridgewater, Millennium, Point72, etc.
• Multi-managers are “hot” as of the early-to-mid 2020s, so there are even more opportunities than usual.

Cons:

• It’s very easy to get burned out, as you’ll be looking at the same companies and doing the same type of work repeatedly.
• It’s more about “trading” and less about investing (but this could be a pro for the right person).
• It’s easy to get fired because there is no tolerance for losses (even small ones).
• The strategy may not stay “hot” forever – even Ken Griffin thinks it’s peaking.

Personally, I don’t “fit” that well with the strategies that MM hedge funds use.

I enjoy trading occasionally, and I’ve made a good amount with some short-term bets, but I wouldn’t want to do it full-time.

I prefer to spend a month doing a deep dive on a company, building a detailed case, and investing based on that – which is a much better match for single-manager funds.

But if you’re more of a trader, multi-manager hedge funds might be up your alley – if you can get in before Ken Griffin starts saying we’re past the peak.