Any negative connotation of investing in outside managers has gone away and hedge funds are increasingly being public about it, said Jon Caplis, CEO of PivotalPath, a hedge fund research firm.
“There are very few funds we speak to now that aren’t investing outside,” he said.
Of the 147 new hedge funds that have launched or will launch from the start of this year through the second quarter of 2025 that are spinning out from funds with more than $1 billion in assets under management, 53 of the launches are coming from multistrategy hedge funds, according to PivotalPath data. And among the 147 new launches, there are likely to be five new multistrategy firms.
How the hedge funds allocate
Four hedge funds account for 75% of the external allocations that Goldman Sachs has tracked. And just over half of external allocations are going to long/short equity strategies, especially sector specialists, followed by quant strategies.
Sources told Pensions & Investments that among the most active firms in the space are Boothbay Fund Management, Millennium Management, Paloma Partners Management and Schonfeld Strategic Advisors.
External allocations can take many shapes and have different terms and exclusivity arrangements.
Goldman Sachs noted that overwhelmingly they are being made in the form of separately managed accounts, or SMAs, “which allow multimanagers the ability to retain full transparency and control, impose risk limits and preserve capital efficiency by cross-margining external managers against internal PMs.”
And while external allocations have grown in recent years — they are not entirely new.
Paloma famously backed D.E. Shaw in the 1980s, which today is one of the industry’s largest hedge fund managers. More recent examples have included Quantessence Capital and Ritter Alpha.
“We support managers in the way that best optimizes outcomes for both parties. Our platform offers a low-risk operational framework for managers focused solely on investing, while our SMA business provides early-stage capital, along with risk and operational oversight, for those aiming to eventually establish their own firm,” said Ravi M. Singh, chief strategy officer at Paloma, in an email. “This flexibility positions us well to attract the best talent.”
Boothbay has been one of the most active firms with external arrangements numbering in the hundreds over the firm’s lifetime, according to Michael Weaver, the firm’s chief operating officer. Boothbay, with $2.3 billion in AUM, allocates to managers for whom they are their first allocation and actively help them set up, as well as to established firms. Boothbay primarily allocates to external managers via SMAs, but also through other structures and arrangements. Examples include Oribel Capital Management, Electron Capital and Statar Capital.
“We consider ourselves an alternative to traditional seeders, primarily because we allocate via SMAs rather than into commingled funds. Additionally, traditional seeders typically demand a share of manager revenue, often in exchange for a multiyear allocation lockup. We take a different approach, negotiating fee discounts and capacity rights, without asking for a piece of a manager’s business,” Weaver said in an email.
He added, “This better aligns with our investor’s interests. Our approach enables us to grow with our best managers at preferential fee terms as a reward for having been an early (or day-one) allocator, without being locked into managers that no longer fit our portfolio.”
Boothbay looks for several key attributes when evaluating managers including pedigree, investment performance, investment philosophy, repeatability of process, risk management and edge.
Weaver said using SMAs provide several benefits including tailored investment and risk limits that can be monitored on an ongoing basis, full position-level transparency, capital efficiency and leverage, and asset custody and operational control. They can also be customized based on circumstances, such as a risk-customized version with lower beta characteristics and tailored risk limits. Boothbay in some cases asks for full exclusivity for a period, but will also pursue limited exclusivity (requiring that they be the manager’s sole SMA) arrangements and nonexclusive arrangements.
“Boothbay’s priority is partnering with attractive alpha generators, using whatever structure works best for the circumstances,” Weaver said. “This flexible approach, in contrast to the ‘one-size-fits-all’ employment structure favored by many peers, helps us attract top talent.”
Millennium has also been active in the space with examples including Helix Partners, Kodai Capital Management, Burkehill Global Management, Taula Capital and Sone Capital Management. Bloomberg first reported that such arrangements make up approximately a tenth of the Millennium’s trading teams. A spokesperson for the firm declined to comment.
Schonfeld has also long backed external partner funds on an exclusive or semi-exclusive basis. A famous example includes Dmitry Balyasny’s Balyasny Asset Management. Other examples include Aster Capital, Meridiem Capital Partners and Parkman Healthcare Partners. A spokesperson for the firm declined to comment.
Sources also pointed to ExodusPoint Capital Management and Verition Fund Management as employing external arrangements. The firms did not respond to a request for comment.
Other firms have not been as active in the space and have done only a few examples of external allocating.
Ken Griffin’s Citadel provided backing to Candlestick Capital, launched by a former Citadel portfolio manager, in 2019. A person familiar with the firm’s thinking noted that external manager arrangements were outside of Citadel’s DNA as a firm. A spokesperson for the firm declined to comment.
Balyasny has made external investments in Landmark Investment Partners and Sparta Capital Management, the latter of which it later withdrew from. A spokesperson for the firm declined to comment.
Point72 Asset Management made an investment in Blue Swell Asset Management. A spokesperson for the firm declined to comment.
Electron Capital, an approximately $3 billion long/short equity manager, has offered SMAs alongside a commingled fund since its launch in 2013.
“The evolution of SMAs in the hedge fund world over the last decade has been transformative. Once a niche offering, SMAs have become a cornerstone of institutional investment, reshaping the landscape of alternative assets,” said Greg Zaffiro, a partner and head of investor relationship and business development and marketing at Electron, in an email.
Many hedge fund managers “now view SMAs not as distinct products, but as ‘access vehicles’ to their core strategies. This approach allows them to maintain investment consistency while meeting diverse client demands,” he added.
Zaffiro pointed to many reasons why investors may want an SMA including to fit specific investment mandates, risk tolerances and regulatory requirements.
And the SMA trend “shows no signs of slowing,” Zaffiro said.
The path ahead
Neal Berger, chief investment officer at Eagle’s View Capital Management, a longtime allocator to multistrategy hedge funds, said he is fine with multistrategy funds making these types of allocations.
“It’s really no different from investing with internal managers and passing through the (compensation) to investors. Given today’s ultra-competitive landscape for talent, funds are trying to source top talent wherever they can,” he said in an email. “If investing through an SMA or an exclusive, the multistrat in most cases is able to garner full transparency into the underlying positions and therefore, manage the allocation in the same manner as they do their internal traders.”
OCIO firm Partners Capital has an early stage anchor program for providing capital to hedge fund managers who are in the process of starting a new firm or are looking for strategic partners or launching new products, said Sam Diedrich, a managing director and head of absolute return. The firm is backing approximately 20 managers a year, he added. A recent example was backing Corbiere Capital, according to a media report.
Diedrich said Partners Capital, like multistrategy funds, is focused on this because of talent.
“If you can augment an employee-type relationship model, which is the traditional model of multistrats, with an external model with very high quality PMs, that's something that certainly warrants looking at in order to just satisfy the demand for new talent every year. So I think that those are some of the dynamics that are really driving this shift and now this different focus,” he said.
Rich Nuzum, executive director of investments and global chief investment strategist at consultant Mercer, expects to see multistrategy hedge funds continue to grow.
“I think the multistrats are innovating,” he said. “‘Well, we won't hire a team. We’ll seed your firm.’ And seeding of strategies is an area of innovation across alternatives. Some of our largest, most sophisticated, sovereign wealth fund clients, family office clients, endowments… even U.S. public funds. They're actively looking for strategies to seed.”
He added that investors are “actively looking for strategies to seed because they believe if they can get in with a good team, when the track record is young and they don’t have a lot of assets under management, they’re going to perform better than if they come in after that.”
