Millennium in trading deal talks with external hedge fund

Izzy Englander’s Millennium Management is in discussions to invest billions of dollars with Schonfeld Strategic Advisers in a rare partnership deal between two industry heavyweights, according to people familiar with the matter.

Schonfeld, with about $13 billion of assets under management, would handle money for Millennium, which oversees about $60 billion, the people said. Spokespeople for the two New York-based multistrategy hedge fund firms declined to comment.

Investors have been flocking to multistrategy hedge fund firms like Millennium, Citadel and Schonfeld in recent years, in hopes that their pods of traders will help churn out consistent returns in increasingly volatile markets. Armed with billions of fresh money, they have been locked in a war for talent to continue to power returns.

An increasingly popular way for those funds to manage their soaring assets is to assign some capital to external hedge fund managers, primarily startups. Just over half of all multi-manager hedge funds now allocate to outside traders, according to Goldman Sachs Group Inc.

Millennium has given several billion dollars to hedge funds such as Delta Global Management and Lorenzo Rossi’s Kedalion Capital Management to manage. Such external arrangements make up less than a tenth of Millennium’s teams of traders, and many of the outside groups manage money exclusively for the firm, Bloomberg has previously reported.    

Still, such a heavyweight deal between two direct competitors marks a new frontier.

A potential partnership would allow Millennium to gain access to more than 100 investment teams at Schonfeld, which would remain independent and use the larger firm’s long-term capital to fuel its growth, the people said. Millennium itself has more than 300 investment teams. Both firms employ teams that focus on equity, macro and fixed income as well as quantitative strategies.

Most of the growth in assets in the global hedge fund industry in the last decade have been concentrated in the largest firms. Multimanager firms like Millennium, in particular, by 2022 had a 12% share of assets controlled by firms overseeing $10 billion or more each, up from 7% five years earlier, according to a Barclays Plc report. 

Multimanager hedge funds like Millennium seek to run their investments in a market-neutral fashion, balancing bullish and bearish bets to insulate them from outsized losses from any particular market. Millennium returned 12.4% in 2022, which saw peers that focused on high-growth technology stocks, such as Tiger Global Management and Coatue Management, post double-digit losses. Schonfeld was up 4.5%.

So far this year, those large multimanager firms have posted lackluster returns, as a handful of companies, including Nvidia Corp and Apple Inc. are responsible for 17% of the gain in the S&P 500 through August. 

To sustain returns, large multimanger firms have dangled payouts in excess of more than $50 million to hire and retain the most valued portfolio managers. Those eye-popping rewards have been financed by passing through expenses to investors. At the end of 2022, investors paid between 3% and 7% in pass-through expenses, according to a Barclays Plc survey. 

The Financial Times first reported on the talks.