BEAT THE PODS: A 7-POINT RECIPE FOR SINGLE MANAGERS There has been some fun discussion here recently about the trend from single manager hedge funds (SMs) to multi-manager hedge funds (MMs or "pods"). Which is very sensical after a year like 2022 where there was a big performance differential between most pods and most SMs. With many SMs well below high-water marks, a year like '22 can also accelerate talent flow to MMs. In my career, I had the really educational experience of both working at a very well run single-manager fund as well as three well run & well known multi-PM funds. In my role now at Fundamental Edge, I have the pleasure to work both with many top multi-PM funds and single-PM funds. Nothing here will be specific to any of these funds, but simply my high level observations & personal opinions. I had a friend at a SM fund a couple weeks ago ask me "Brett, you've worked at both, what advice would you give to SM's to compete against MM's?". I also listened to Vinny & Porter's podcast talking about using their learnings from Citadel to accelerate their family office investing returns. Both got me thinking, and I'm in the process of developing a 100+ page deck with some structured thoughts to do some consulting with funds working through this change in the investment ecosystem. The way I usually use twitter (X) is as a "first draft" of my thoughts. These is my napkin scratch, and I will refine this over time - in that vein I highly welcome your feedback since it helps me improve the thinking. So, here we go, a recipe for single manager hedge funds to compete when "pods are eating the world". KEEP YOUR TALENT. Be honest, you expected point 1 to be "leverage time arbitrage" right? I'll get to that point. But in the SM vs. MM market share game, the foundational job as a SM GP/CIO is to keep your team. The hedge fund world is unique in that even large, well-known single managers might only have investment teams of 6-15 people. And if you've lived in the world, you know that there are often 3-5 truly special investment professionals in that group who have that "nose for money" and are consistent money-makers. I've seen plenty of SM funds gutted by losing talent to MMs. If the firm has a good culture & internal training & development, a "next person up" approach can work. But turnover of your A+ talent in the ultimate human capital endeavor - investing - is costly & risky. My advice? Practice preventative maintenance with your talent. The old paradigm of "you should be lucky to work here and I'll pay you whatever I decide to pay you" for a talented 4-7+ year proven money maker just doesn't work anymore. The pods will give that person a $500m-$1bn+ portfolio, 15%+ payout, usually some nice up-front money and the autonomy and alignment that money maker desires. The pitch is compelling, and lots of the top SM talent is biting. (what shines is not always gold, but we will get to that part). How do you compete? Money is an obvious vector here. But very few SMs will compete with the bull case for a PM at a MM (i.e. if you build a portfolio to $2bn and make 5% on that you are consistently taking home $10m+ as the PM). And by the time that person has accepted the MM seat, more money isn't likely to sway them (and can set a bad precedent). What I think matters more is alignment, visibility & a sense of partnership & shared mission. If you have an investment team of 12, who are the 3-4 on that team you absolutely don't want to lose (CIOs, you know who those are). Maybe make them a partner in the fund. Give them a contractual share in the management fee. Give them a 3-year comp plan with P&L contingencies. Your job is to try to create more visibility & confidence in compensation outlook so that the analyst view the SM seat as a higher multiple, more durable comp stream that that person can build a nice life around, even if that comp level falls short of the MM bull case (which it will). Also, the soft stuff is the big stuff. Celebrate your team's life events, encourage them to bring their kids to the office, do off-sites & outings. Make it a "special" place to work and bring humanity into the day to day. Understand burnout is a common thing in the 4-7 year range and sometimes burnout leads to exploring new pastures. Consider a sabbatical offering. I honestly loved the part of moving jobs where I got to take 1-2 months off between seats. Build that into your talent development plan. Work to really articulate the pros & cons of the SM vs. MM seat. Tactfully walk through the risk of the MM seat - drawdowns, risk model constraints, top-line cost flow throughs, high turnover, etc (this is where I think our content will hopefully be helpful to our clients as we break down the MM approach in excruciating detail). And if all else fails, and you really lose a star, keep an open door. If it were me, I'd let them know they have a seat when they want it. The grass looks greener for them right now, but when they get caught in a 200bps drawdown for positioning reasons and get a capital cut and 2 analysts quit...the grass doesn't look so green. Make it easy for them to come back. And, by the way, the pressure cooker of understanding that way to invest is likely to make them a monster upon return. TIME ARBITRAGE. This one isn't surprising, but it's true. In my MM teams, I always felt like we had a really good sense of the 9-18 month winners, but it is very hard to express those trades and stick with them. I can't just be long UNH, short WBA and wait it out - particularly if UNH is going to have a 10% pullback and WBA is going to beat a quarter & squeeze. I run through this math in my deck, but a 20% drawdown on a 15% of LMV (long market value) position in a $50 vol, $1.5bn GMV book ALONE will hit my 150bps drawdown trigger and give me a capital cut. I simply cannot bear that risk as a MM PM - it is existential, as I then need a full 3% / 1-sharpe performance on my 50% book size just to get back to even. What does that mean in simplistic terms? If I think there is a chance a stock goes down 15-25% before it goes up, I either can't own it or I can't own it in size. With more capital flowing to MMs, and that mathematical constraint true across the board, this behavior starts to create distortions to the price discovery mechanism in the markets. How does that manifest? Via big over-reactions to near-term squishiness. Maybe a good company with a good 3-year story is going to miss a quarter, and due to that overhang the company has underperformed by 15-20%. Have a bias to lean into those trades. The hero MM PM makes money 9-10 out of 12 months and limits losing months to under 100bps. That is done via a very sharp process around identifying inflections, revisions, and catalyst driven narrative shifts. Find the "cheap but no catalyst" stories. Or sometimes the play might just to figure out when pods might want to buy the story and be there 3-6 months before. I came to LOVE situations where there was an obvious catalyst, but the catalyst wasn't coming for 4-6 months. Believe it or not, many traders won't wait that long, but the IRR of waiting can be really superb. CONCENTRATE. I am bearish on single-manager portfolios of yesteryear with 150+ positions. That is too many, in my mind. Markets are growing inescapably more efficient with alpha windows tighter and alpha pools more shallow. How wide is the alpha load on position 150 in that portfolio? I would submit not wide at all. If 75% of stocks were fairly valued a decade ago, my guess is that is 90% today. There will always be anomalies & inefficiencies in markets, but the ecology of players has shifted. The quotient of "dumb money" has decreased due to the secular trend of indexing. Between quants arbitraging systematic, observable anomalies and pods arbitraging inflections & revisions applying their data & corporate access driven approach, anomalies are smaller. So the bar should be higher for ideas in your portfolio. Concentration, to me, is the only way for SMs to survive. Find your great ideas and act decisively. I strongly believe the days of the 40 person,
