(Bloomberg) — Hedge fund founders in Asia are jumping ship to global giants from Citadel to Millennium Management as the struggles of capital raising and pressure to make higher returns curb the attractiveness for some managers’ solo endeavors.
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Torq Capital Management Chief Investment Officer Avinash Abraham is closing his firm to rejoin Citadel as a portfolio manager, while macro manager Ayan Sen returned to Millennium this year, marking the end of his more than five-year stint running his own Navik Capital (Singapore), Bloomberg has reported.
Smaller hedge fund firms are facing a difficult capital-raising environment and an increasingly costly war for talent. While there have always been isolated cases and it’s too early to know how many more will follow, high interest rates have driven up expected returns and are forecast to tilt more Asia-based hedge fund entrepreneurs in favor of embracing the bigger global so called pod firms, or platforms.
“It’s just hard to get investors on board, harder now than it has been for a long, long time, because so many investors just pile the money into platforms,” said John Mullally, Hong Kong managing director of recruiting firm Robert Walters.
While some industry followers were surprised when former Balyasny Asset Management Asia head Abraham announced he was shutting up shop in his December newsletter, others before him have made similar moves. Panich Prompat, now a portfolio manager at Dymon Asia Capital, joined Millennium in 2021 after running his firm for three years. Citadel in 2020 hired back Nick Taylor, who set up his own event-driven hedge fund in Hong Kong after an earlier stint with Citadel.
In the three quarters ending June 2023, hedge fund closures in the region outstripped new starts by at least two to one, according to Preqin Ltd. estimates. There were still more funds shutting than opening in the third quarter of 2023, even as the gap narrowed.
Abraham began his investment career as an analyst at Och-Ziff Capital Management, honed his skills at Citadel between 2005 and 2009 before his seven-year Balyasny stint, according to his LinkedIn profile and regulatory records. He founded Torq in Hong Kong in 2016 and won the backing of Blue Pool Capital, which invested billions of dollars for wealthy clients including Alibaba Group Holding Ltd. co-founders Jack Ma and Joseph Tsai. Torq declined to comment further.
From a modest beginning of $160 million, Torq expanded assets to a peak of $1.5 billion in the first quarter of 2022. But the firm struggled to recover after a 3.7% loss that year, despite topping the 16.5% slump in a Eurekahedge index of Asia-Pacific stock hedge funds and the fund’s small gain in 2023.
Investors once favored hedge funds of a moderate size that specialize in a single strategy and charge lower fees. Fledgling funds often produce superior returns, due to their ability to trade in and out of positions unnoticed, as well as explore profitable opportunities too small for larger rivals.
In recent years, however, allocators like pensions and foundations have increasingly gravitated toward large firms whose diverse investment pods help churn out consistent returns, even in market downturns.
Since 2017, 55 pod shops have nearly tripled their combined assets to $368 billion, during a period of tepid growth for the rest of the global industry, according to a September report from Goldman Sachs Group Inc. prime brokers. Armed with fresh money and often an ability to pass on some or all expenses to clients, those firms hired aggressively to maintain their edge. They now command 27% of global industry headcount, the Goldman Sachs report showed.
In Hong Kong, licensed employees of 10 pod shops surged to 596 by Jan. 12, almost three times the 2019 figure, according to Webb-site.com, which aggregates data from the local securities regulator. Their expansion has been increasing industry pay pressure.
Industry veteran and chief executive officer of PAG, Chris Gradel, says some staff from its hedge fund platform business were poached by rivals with eight-figure signing bonuses. Outside direct rivals and banks, the likes of Torq and Pinpoint Asset Management Ltd. have been primary hiring targets, as funds that trade with carefully balanced long and short wagers have historically been a small subset of the Asian industry.
Two portfolio managers who were among Torq’s most senior investors from its early days departed for such rivals in the past year. Martin Kronborg was poached by Millennium and Sojiro Konishi is heading to Balyasny, according to the regulatory registry and a previous Bloomberg report.
Performance Scrutiny
With muted recent performances and senior staff departures, Torq’s assets fell to $693 million, according to the newsletter. In 2019, it abandoned a fee model that passed on some expenses to investors in favor of a 1.7% management fee and 20% performance levy. That meant it would have to dig into its own pocket or raise capital to sweeten compensation packages.
Investors are now expecting higher returns from smaller hedge funds. The yield on 90-day Treasury bills — an indicator of what investors can earn from cash, instead of parking money with hedge funds — touched a more than two decade high in October and lingers above 5%.
Pod shops are notorious for their high staff turnover. Many job candidates still prefer single-manager hedge funds with bottom-up research styles, longer investment holding periods and job security, said Mullally.
Still, “there is a certain degree of inevitability that there will be fewer single-manager shops launched,” he added. “You will see some other single-manager shops inevitably find that it’s just too difficult to lift over time.”
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