Reflecting on the events of 2023, the year was undeniably significant for multi-strategy hedge funds, commonly known as “pod shops.” Leading the charge, Millennium Management and Citadel reported impressive returns of 10% and 15%, respectively, as per Bloomberg. Riding the wave of such triumphs, 2024 has already witnessed the debut of several prominent multi-strategy funds. At the forefront is Bobby Jain’s Jain Global, which initially aimed for a groundbreaking launch of $8-10 billion, though this figure has recently been adjusted to $6-8 billion.
Although pod shops aren’t a novel concept, their recent surge correlates with increased market volatility sparked by rising interest rates and geopolitical tensions. Multi-strategy hedge funds provide a way to handle this unpredictability by deploying diverse strategies across various pods, each tasked with a unique mandate. Their ultimate aim is to ensure consistent performance while employing substantial leverage, supported by a stringent risk management framework, to draw in investors.
However, this approach brings its own set of distinct challenges. Here are three crucial examples:
Pass-Through Fee Structures – Pod shops have a complex fee structure that passes through to their underlying managers, and this complexity only grows with different asset classes. Additionally, funds that oversee both open-ended and closed-ended vehicles require specialized accounting and investor service teams. It’s essential to have a fund administrator equipped with advanced technology for comprehensive valuation across different portfolios, centralizing these values in real-time. This is vital for effective risk assessment and management by multi-strategy managers.
Reporting Requirements – One appealing aspect of pod shops for investors is access to a wide array of asset classes, more so than what might be available with a single fund manager. Consequently, multi-strategy managers face the responsibility of adapting to their investors’ capital allocation requests. This brings with it the expectation of frequent and transparent reporting on risk, attribution, and performance. Meeting these demands efficiently requires the right mix of personnel and technology, which might be challenging or costly for in-house management by a multi-strategy manager.
Adding New Asset Classes – While introducing new asset classes at an individual fund manager’s level might be a slow and thoughtful process, pod shops often have to move swiftly. This is especially true when new pods need to be added to mitigate risk and bolster new strategies in response to changing macro-environmental conditions. Establishing new asset classes typically necessitates partnerships with specialized entities like prime brokers and custodians. Initiating these new connections can be labor-intensive, particularly when done across various portfolio managers. Therefore, it’s crucial for pod shops to collaborate with service providers capable of delivering comprehensive managed services that take care of the everyday operational workflows, such as reconciliation with downstream settlement partners.
SS&C stands out as a preferred partner for multi-strategy managers, thanks to our superior, multi-asset class, multi-fund accounting solution that does away with the need for separate systems. By focusing on straight-through processing, where user involvement is reserved for validation tasks like reviews and approvals, we offer scalability and risk mitigation across different pods within a multi-strategy manager’s operations. Our versatile suite of reporting tools is customizable for investors and accessible through numerous channels, which is key to maintaining transparency within the varied pods of a multi-manager platform.
For more insights, download our “A Complete Toolkit for Multi-strategy Hedge Funds” checklist and explore the operational capabilities essential for a multi-strategy fund to achieve alpha generation.
