Nishant Kumar, Katherine Burton, Bei Hu and Siddharth Philip
4 min read
(Bloomberg) -- Multistrategy hedge funds are facing their biggest challenge since the early days of the pandemic amid a market selloff that’s forcing them to unwind crowded trades at a ferocious clip.
Citadel and Millennium Management, the world’s largest multistrats, slumped in February and posted more losses during the first week of March, according to people familiar with the returns.
Some teams managing multistrat firms’ billions have already been stopped out — meaning they were forced to liquidate or trim their positions — as President Donald Trump’s trade war and stubborn inflation pummeled equities.
Ken Griffin’s Citadel sank in early March along with its top peers, which also include Point72 Asset Management and Balyasny Asset Management, according to investors. Citadel’s 1.7% drop in February was its biggest monthly decline since May 2021, and the fund lost an additional 1.7% this month through March 6.
Despite the losses, Griffin encouraged his team to take advantage of the selloff.
“Let’s play offense,” he said in an email this week to Co-Chief Investment Officer Pablo Salame and other senior business leaders, according to a person familiar with the matter.
Millennium sank 1.3% in February and was down about 1.4% through the first six days of March. Two trading teams at the firm focused on index rebalancing lost about $900 million this year.
Balyasny, which was up 3.5% this year through last month, has given up some of those gains, the people said, asking not to be identified discussing private details. DE Shaw & Co.’s second-biggest fund, Oculus, which mostly makes macro wagers and soared 36% last year, was down 4.4% through March 7 after losing 1.6% during the first week of the month. Its flagship Composite fund, little changed so far this month, is up about 1.4% on the year.
Marshall Wace’s flagship Eureka hedge fund lost 3% this month, according to a person familiar with its performance.
The market turmoil has upended several hedge fund strategies, including equities and commodities. While the ability to summarily dismiss underperforming traders and liquidate positions helps firms manage risk and produce steady returns, it exacerbates market selloffs when they do it in unison.
“It feels like herd of elephants are trying to squeeze through the emergency exit,” said Andrew Beer, founder of Dynamic Beta Investments, a firm that tries to replicate hedge fund returns.
Bank of England Governor Andrew Bailey warned last month that the rise of multimanager hedge funds, also known as pod shops, poses a threat to financial stability.
Forcing trading teams to rapidly deleverage in stressful conditions “can exaggerate market moves,” Bailey said on Feb. 11. “There could be circumstances in which the means by which multimanager funds protect themselves in this respect can create risks to the system.”
Manic Monday
The selloff in US stocks, particularly in the technology sector, has contributed to hedge fund losses. On Monday, tech stocks posted their biggest one-day plunge since 2022 — wiping out more than $1 trillion of value from the Nasdaq 100 — as investors ditched longtime market leaders on mounting recession worries.
“Monday was particularly challenging,” said Richard Byworth, a managing partner at Syz Capital.
Major deleveraging mostly hit equity-focused hedge fund pods in health care and technology, as well as index arbitrage and equity rebalancing strategies, he added.
Millennium, which manages about $75 billion across more than 340 trading teams, is liquidating a $1 billion financial-sector trading book run by senior portfolio manager Jonathan Philpot, as well as an energy-sector pod run overseen by Justin Grant, the people said. The firm also lost money on teams led by Glen Scheinberg and Pratik Madhvani.
Balyasny, meanwhile, stopped out at least two of its portfolio managers.
The firms all declined to comment. Philpot and Grant didn’t reply to messages seeking comment.
Multistrats soared in popularity as investors sought steadier returns. They rarely lose money and produced mostly double-digit gains in 2024, generally an upbeat year for the hedge fund industry. Such firms parcel out costs to clients via passthrough fees, which help them invest in cutting-edge technology and compete for talent.
Yet their reliance on leverage and propensity to crowd into many of the same positions worries regulators and investors because of the potential for outsize losses if firms exit those trades en masse. A Goldman Sachs Group Inc. exchange-traded fund that tracks long bets of hedge funds tumbled 6.1% this year through Monday, compared with the 5.3% decline for the S&P 500.
“Leverage plus trade-crowding plus shaky markets has always been a toxic combination,” Beer said. “These markets are the perfect environment for multistrats to battle-test their risk-management systems.”
