The cost of investing with multimanager hedge funds is not a minor issue for hedge fund allocators, said Michael G. Jacobellis, partner and CIO at New York-based New Holland Capital LLC, which invests in hedge funds and credit-oriented solutions strategies.
"We've avoided investing with large managers (when) we can't negotiate fees," Mr. Jacobellis said in an interview, noting that most of the multimanager firms are closed to new investors due to capacity constraints, and "all of the good ones" charge too much.
That said, New Holland occasionally has invested in co-investments offered by multimanager firms, he said.
In 2006, New Holland spun out of APG Asset Management, the asset manager for the €523 billion ($621 billion) Stichting Pensioenfonds ABP, Heerlen, Netherlands, and continued to exclusively manage assets for the pension fund.
In 2020, New Holland moved to a multiclient model and now manages assets on a discretionary or advisory basis for two other Dutch pension funds and one U.S. fund, which Mr. Jacobellis declined to identify.
New Holland Capital managed $21 billion in hedge funds as of July 31.
Capacity constraints are an irritating problem for multimanager hedge funds, said Partners Capital's Mr. Diedrich. "All of these firms would be much larger than they already are" if it weren't for their inability to invest more given market conditions or the type of strategies they run, especially more illiquid investments.
"There is tension over multimanagers being closed to new investors as well as for fees. Half of the world is allocating to hedge funds and they want to pick the best managers, most of which are capacity constrained. The other half want the best managers but don't want to pay the fees," said Kenneth J. Heinz, president of specialist hedge fund data provider HFR Inc., Chicago, in an interview.
By way of coping with capacity constraints, multimanager hedge funds are upping the ante by tightening liquidity for quarterly redemptions so it will take between three to five years to get out of one of these funds, Mr. Diedrich said.
Verition Fund Management LLC, Greenwich, Conn., for example, recently reopened its multimanager fund to new investors, but it is in a share class that allows redemption of only 8.33% of their assets each quarter, down from 25% in the original fund, according to an investor document Bloomberg obtained.
The new redemption restriction means that investors will have to wait three years to get all their investment back.
Verition's 65 trading teams manage a collective $4.2 billion.
Millennium Management, which has more than 265 investment teams, launched a share class in 2018 that permitted 5% quarterly redemptions, down from 25% for the firm's legacy share classes, said the company's Feb. 4 investor letter, part of which was obtained by P&I.
In the letter, Millennium said the reason for the smaller quarterly redemption limit was to "better align the long-term outlook of our investors with our own to the extent possible … with longer-dated capital, we are well-positioned to weather short-term disruptions and maintain flexibility to invest in our business."