16, 2019 02:36 PM Chicago titan Citadel just keeps growing. The rest of the city's hedge fund industry, not so much. As investors sour on hedge funds, Chicago players are caught in the $3.2 trillion industry's consolidation that favors megafirms. LYNNE MAREK TWEET SHARE SHARE EMAIL PRINT Bloomberg Ken Griffin Tired of paying hefty fees for mediocre returns, investors have pulled money out of hedge funds in recent years. With less capital to go around, Chicago's hedge funds are caught in the $3.1 trillion industry's consolidation that increasingly favors megafirms. Many of the local firms, including No. 2 Magnetar Capital Partners, have fewer assets today than at their peak, and one returned investors' money this year as it shut down trading for outside clients. At the same time, few new hedge funds have sprung up. Citadel, a notable exception, spawned much of the Chicago industry, with managers breaking away to start new firms, but now those smaller players are having a harder time attracting capital and talent for expansion. "The industry, overall, is not growing the way it has in the past," says Sean McGould, president of Lighthouse Investment Partners, a West Palm Beach, Fla.-area investment firm with hedge fund offerings. "It's become more competitive, and the costs to compete have risen over time." Institutional investors, such as pension funds and endowments, as well as high-net-worth individuals, withdrew an estimated $23 billion from hedge funds in the first half of this year, putting 2019 on track for worse outflows than the $38 billion withdrawn last year, according to Hedge Fund Research. That exodus followed an average hedge fund return of negative 4.75 percent last year, worse than the S&P 500's return of negative 4.39 percent. Average results for 2017 also were subpar. That has raised investors' resistance to paying a fee equal to 2 percent of assets plus 20 percent of any gains, when they could be paying index-linked fees of less than 1 percent. The typical hedge fund pitch—that they'll offer better protection on the downside even if their gains aren't as good—is falling flat for many. Big California pension fund Calpers jolted the industry in 2014 with a move to exit all hedge funds. Institutional investors across the country have followed suit, including some in Illinois, such as the Illinois State Board of Investment. "They've been underperforming index funds," says Marc Levine, who formerly chaired the Illinois investment board. "Over time that shows itself, and over time, the hedge funds will get fired." Chicago's hedge fund industry emerged around the turn of the millennium thanks in large part to Citadel, the hedge fund business founded by billionaire Ken Griffin in 1990. The city's longtime role as a hub for commodity trading advisers and its embrace of 21st-century high-speed trading also contributed to the local industry. Pioneering Chicago fund-of-hedge-fund firms, like Aurora Investment Management, also gave it a lift by making a business of investing in hedge funds. ECONOMIC BOOST Today, the city has a few dozen hedge fund firms managing roughly $70 billion. In addition to the economic benefit of the business, the firms collectively employ thousands of highly paid investment and technology professionals whose spending boosts the city's economy. Citadel, which manages about $32 billion, is one of the largest firms in the world, and megaplayers like it are consolidating their control over the market. As of the end of June, only 6 percent of firms had more than $5 billion in assets, but they've captured two-thirds of the capital. Meanwhile, the overall number of firms has been in decline, with 8,260 remaining, Hedge Fund Research says. Citadel, with about 1,850 employees in 13 offices worldwide, and many large firms have outperformed peers, allowing them to buy superior technology and hire top talent. For Citadel, much of its recent growth has been in New York, the longtime capital of the industry. Meanwhile, smaller Chicago rivals have struggled to expand. One of the largest, Balyasny Asset Management, is trying to right its business after posting a losslast year that forced the firm to cut 20 percent of its staff. Although the firm has improved returns this year, its assets of $6 billion are half what they were. It's hiring more employees this year, with 585 employees worldwide and 130 in Chicago, but often battling Citadel over talent. Follow the money Investors have been withdrawing money from the hedge fund industry, with net outflows in two of the past four years. Source: Hedge Fund Research At the Chicago area's No. 2 firm, Magnetar, its current $13.1 billion under management is also lower than its $14.6 billion peak. Its sale of a minority stake to investment behemoth Blackstone in 2015 was supposed to fuel growth, but instead its assets have since declined. "The industry is being disrupted, no doubt, but Magnetar is staying one step ahead by listening to investors' needs and aiming to identify new sources of diversification that are transparent, affordable and measurably useful," Magnetar CEO Alec Litowitz says in an email. Pentwater Capital Management's $4.3 billion in assets is also down from its peak despite recent growth. At the end of last year, the firm moved its headquarters from Evanston to Naples, Fla., likely for the state's lower tax expense, even though its largest office remains in Evanston. Other Citadel offshoots folded funds. Teza Technologies, founded by former Citadel trading chief Mikhail Malyshev, handed $550 million back to investors in May after a major client pulled its investment, according to Bloomberg. Roundkeep Capital Advisors, another Chicago firm started by a former Citadel manager, shut down in 2012. Most calls to the firms either weren't returned, or, if they were, representatives declined to comment. A lack of transparency is another investor knock against the industry. The related fund-of-funds business has been declining for a decade. Aurora, which had $14 billion at its peak in 2008, shuttered in 2016, and Mesirow Financial's $8 billion fund-of-funds unit was sold last year to Lighthouse. GCM Grosvenor Capital Management segued to custom accounts and private-equity funds. As for Chicago hedge fund startups, there have been few, in keeping with nationwide statistics that show more firms liquidating than launching. Still, a new one may arrive soon. Aquatic Capital Management, led by another former Citadel manager, is expected to open its doors in Chicago this year.
Like everything else in America, those with the best technology combined with the best government connections have the strongest "vacuuming effect" in the winner-take-all country we currently find ourselves in.
There is plenty of money to go around. There is no one winner-take-all for hedge funds. There are many winners, as well as losers. Tech is constantly changing, Palm and Blackberry were once big winners. https://www.investopedia.com/articles/personal-finance/011515/worlds-top-10-hedge-fund-firms.asp https://hedgelists.com/top-100-largest-us-hedge-funds-2018/