Stalwart hedge funds test their clout with clients
Citadel and Millennium Management make changes that could be tricky for investors
Some of the rare hedge funds earning their keep are about to make it harder on investors.
Israel Englander’s $35.9 billion Millennium Management and Kenneth Griffin’s $31 billion Citadel LLC are rolling out changes that could result in investors facing a longer path to get their money out of a fund or having to pay higher fees.
Millennium has told investors that early next year they will get back their profits. To reinvest that cash with Millennium, the clients will need to sign up for a new share class whose terms mean it would take five years to get all their money back—compared with a year now.
Citadel is tweaking how the firm charges investors in several of its hedge funds. The changes are nuanced, but can result in scenarios where investors pay more.
These two firms are among the exclusive group of hedge funds that have posted a steady stream of profits even as the industry continues an extended drought. Before the volatility and market declines of October, Citadel’s flagship fund was up 13.5% while Millennium’s sole hedge fund had risen 8.3% for the year through September, according to people familiar with the most recent returns shared with investors.
That compared with a 1.4% average gain by hedge funds for the period, according to research firm HFR, and a 10.6% total gain for the S&P 500.
Hedge funds that perform well over long periods can be particularly enticing during broader market declines like the ones this month. The S&P 500 was near correction territory and had lost its year-todate gains through Monday.
“It’s very hard to find someone who can consistently do well,” said Kieran Cavanna of Old Farm Partners, a New York firm that invests $235 million of client money in and alongside hedge funds. “There just is not enough capacity for the amount of money that wants to go into those firms.”
The moves by Citadel and Millennium, which both have wait- ing lists of investors, stand in contrast to the industry at large, where poor returns have forced scores of managers to close their shops or lower their fees. Investors pulled an estimated $12.2 billion out of the industry in the last two quarters, according to HFR.
One profitable fund investors lament as inaccessible is Renaissance Technologies LLC’s Medallion. Renaissance kicked out external investors from Medallion in 2005, leaving only employees to reap its rewards. Fees that year on Medallion, which had returned an average of more than 30% net a year since its 1988 inception, were 5% for management and 44% for performance.
Citadel and Millennium are two of the largest hedge-fund firms in the industry. Each employs teams of traders and pursues, in whole or in part, “market-neutral” strategies that aim to provide returns that aren’t correlated to those of equity or broader markets.
The average annual return for Citadel’s flagship fund was 8.9% for the decade ended Dec. 31, 2017, while Millennium’s fund returned 10% during the same period, said people familiar with the firms. Since inception, they have averaged 19.1% and 14% annually.
Millennium has explored how to raise long-term capital for several years, according to people familiar with the New York hedge fund. This so-called sticky money can bolster a firm’s stability. Investors who opt into the new share class can take out 5% of their assets a quarter.
The new share class doesn’t list Mr. Englander, the 70-yearold founder of Millennium, as a “key man,” meaning clients won’t get a special chance to exit from the fund if he steps away from the business.
Millennium lost about 3% in 2008 largely due to its exposure to Lehman Brothers Holdings Inc.
While it beat both the market and most hedge funds, its assets under management dropped from $14.4 billion in 2008 to $6.9 billion within a year— mostly because investors unable to withdraw money elsewhere turned to Millennium for cash, according to people fa- miliar with the matter.
Mr. Englander made plain his views on investors wanting to redeem early at a 2009 Morgan Stanley hedge-fund conference. When an audience member shouted at a panel of managers to give him his money back, several people in attendance recalled, Mr. Englander said he should have invested in a mutual fund. The audience member wasn’t a Millennium investor, said a person close to the firm.
Chicago-based Citadel plans to return profits to investors in its flagship multistrategy hedge funds, Kensington and Wellington, at the end of the year. Clients who want to reinvest any of the returned money into the funds must pay a new1% annual management fee starting in 2019 on top of fund expenses Citadel already passes on to clients.
The new fee will count toward the performance fee clients pay, meaning that in profitable years the overall amount investors pay will remain unchanged. But a client who exits after a losing year would be slightly worse off.
In two other hedge funds it runs, Citadel plans to start charging clients in 2019 expenses it passes on to them rather than the fixed 2.5% management fee it previously charged. But it is also dropping its performance fee from 25% to 20% for those funds, a global equities fund and a fixed-income fund that together manage roughly $6 billion.
When returns are lower, investors should pay less overall under the new fee arrangement because performance-tied compensation typically makes up much of the expense footed by clients, said a person close to Citadel. But when returns are higher, clients can pay more, said several investors.
The person close to Citadel said Citadel’s and clients’ interests are aligned because Citadel partners and employees are large investors in their hedge funds.
Citadel in 2017 kicked out a number of clients in fund-ofhedge funds, firms that pool investor money and invest it in hedge funds, to focus on direct investors, said people familiar with the matter.