‘1019123, 505 Pat How Schonfeld el nto Milennium's embrace | Financial Times
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How Schonfeld fell into Millennium’s
Shaping mut-maraer hedge fund hastened ois
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In March 2020 Schonfeld Strategic Advisors was rocked by the market turmoil unleashed by the
pandemic
‘The New York-based firm's flagship hedge fund was down about 16 per cent and is prime brokers
ect knowledge ofthe
‘were asking it to put up more collateral, according to three people with
[Needing to provide eas in response to a routine margin call as markets moved against it,
‘Schonfeld considered its options. It had previously held informal discussions with Millennium
‘Management abouts potential tie-up, and one idea put onthe table that month ws frit meh,
larger rival to provide some capital, two ofthe people said.
While the talks with Méllennium did not come to fruition, Schonfeld managed to shore up its
position. That spring it raised about S2bn from investors, including in the Middle Bast and Asia,
‘who ad attributed the drawdown to growing pains.
‘But now, following a lacklustre period of performance and third-quarter redemptions of $ibn,
‘Schonfeld has restarted discussions with Millennium.
‘The Financial Times reported this week that the firms were in advanced talks ove a tie-up that
‘would see Millenium pu billions of dollars to work with its smaller rival. The transaction, the
langest deal ofits kind, would be without precedent in the $4tn hedge fond industy.
https:wwwf.comieontentices77133-1296-4Baa-Bcbd-Sbe0 284304 wa‘1019123, 505 Pat
How Schonfeld el nto Milennium's embrace | Financial Times
this rescue act for Schonfeld, asked senior executive at one London-based rival “It's quite
big step to take that moch money from # poet. t's not what you'd do i you had free choice"
“The two firms declined to comment.
‘Schonfelds capitulation to Millennium reflects the changing fortunes of «hedge fund manager that
has struggled to keep up with large rivals. Nether of Schonfeld’s two funds have made money this
year, adding tan underwhelming 2022 in which the firm lagged far behind the kes of Ken
(Griffin's Citadel and Millennium.
‘Between them the two bes-performing names in the mult-manager universe employ hundreds of
‘teams of autonomous and highly specialist risk-takers, which trade a range of diferent strategies
and operate within strict ris limits
‘Schonfeld began life in 1988 as a family office managing the money of founder Steven Schonfeld, a
Tormer stockbroker, and did not open upto external investors until 2015 Sinee then its asets have
srovn dramatically as the multi-mansger mode it runs rose in popularity among investors.
“The fem was among those that picked up inflows when bigger managers such as Millennium and
Citadel were closed to new money with long wating ists to get in. Schonfelds assets have doubled
‘nthe past two years, from about $6bn to $r2bn,
As assets have swelled, Schonfeld has expanded beyond its roots in computer-triven trading,
adding discretionary macro, fundamentsl equity nd fixed income strategies. It hired Colin
Lancaster in May 2091 as global eo-head of diseretionaty macro and fixed income to build out a
‘busines inthis area. But the firm's crown jewels stil its statistical arbitrage strategy, which uses
algorithms to exploit patterns in securities pricing, investors say.
Founder ty Englander Founder Steven Schonfeld
Launched 1989 Launched: 1988 (as family offie)
UM: $60bn AUM:$t2bn
AUM at inception $35mn ‘KUM atinception: $400,000
Employees:5,300 Employees: 1000
Investment reams 300+ Investment reams: 100%
YTD performance 728% YTD performance: 0.8%
‘Schonfeld's rapid expansion was partly enabled by the “pass-through” expenses model thats a
defining characteristic ofthe multi-manager platforms. Instead ofan ansual management fe, the
‘manager passes on all costs — including office rents, technology and data, salaries, bonuses and
‘ven cient entertainment —to their end investors, The ideas that managers can invest heavily in
areas such as staff and technology wit the cost more than offset bythe resulting performance
improvements.
‘One prime broker said Schonfeld had heen “one ofthe biggest payers of sign-on bonuses" that can
‘run into millions of dollars and are one ofthe tols employed to lure portfolio managers in the ws
{or talent that is sweeping across this part ofthe industry. Inthe past tw years, Schonfeld’
Iheadount has grows ftom about 600 to more than 1,000.
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How Schonfeld el nto Milennium's embrace | Financial Times
‘Schonfelds experiences reflec ancther key dymamic among the platforms. The multi-manager
‘model is significantly more headcount-intensive than traditional hedge funds, and appears to have
less operating leverage as firms grow bigger.
“As assets scale, headcount (and with it their cost base) tends to grow om a linear basis,”
‘report lst year by Goldman Sechs prime brokerage, which estimates that multi-managers account
{or ust 8 percent ofthe hedge fund industry's assets but roughly a quarter of total headcount.
‘But erucaly ifthe amount of money a frm manages desines, costs do not fallin ine with the
decrease boeause it is hard for managers to eu spending a the same pace. That means fewer
investors end up footing larger bil that eats into returns, whieh could trigger more cash being
palled out.
assets stat getting redeemed, the investors that are left behind get let withthe brunt ofthe
oats," the prime broker says. This incentvises clients to "redeem quickly and not get stuck," he
added, "You don't want tobe the lst person left holding the bag.”
‘Accoringto investors, the issue for Schonfeld is thet it has doubled its assets and increased its
cost base through a hiring spree — without putting up the performance figures to mate.
Multi-manager hedge funds have been strong performers
Anualsed return net of fees snc inception,
cece
‘Schonfeld isthe third hest-performing name inthe mult-manager universe over the past three
decades, behind only Citadel and Millennium. But its returns have talled off over the past two
‘years. In the firs ight months ofthis year both its flagship fond and its fundamental equity
strategy are rougly lt, an last year they returned just 4.5 per cent andl per cent respectively,
according to investors
‘Millennium, meanwhile, recorded double-digit returns last year ands up 76 percent inthe fist
three quarters of 2029, while Citadel broke records witha $16bn profit in 2022 and gained 12.6 per
‘cent percent in the fits nine months ofthe year.
‘As returns have dwindled, the terms with which Schonfeld secured money have paved the way for
future challenges.
‘Since it opened to external investors, Schonfeld has offered clients monthly liquidity, whieh allows
‘them to pul their money out once a month. This leaves the business vulnerable to mass
‘redemptions, particularly with returns having declined and ahigher-interest rate environment
meaning investors can park their money in safer assets fora healthy’ retum,
https:wwwf.comieontentices77133-1296-4Baa-Bcbd-Sbe0 284304 3a‘1019123, 505 Pat
How Schonfeld el nto Milennium's embrace | Financial Times
“To ensure the longer-term security ofits busines, Schonfeld has recently been offering ents afee
discount in retwm for new terms under which t would take them 8s long as two years to
‘withdraw all their capital. More than halfits cepital is now locked up until the end of 2024,
according ta person close tothe frm.
‘tn contrast, Millennium has been earlier and more proactive in taking steps to stabilise its business
an proven large-scale redemptions after suffering mass outflows during the financial crisis. In
‘2021 it returned money from a shorter-term shate class tha let clients exit in fll ina year, and
‘moved money toa longer-term share class that would take investors ive yeas to exit in fll
‘Schonfela's 2020 experience prompted it to invest heavily nits risk management process and
diversify eway from its large equity exposure, according to one investor, who said what sets the
firm apast om other multi-managers is its transparency.
Chief executive Ryan Tolkin "is very approachable’, they sad, “TET wanted to talk to any of them T
could and I value that because you don't really gti from other large platforms.”
‘Tolkin has been ezedited with helping to build a busines that has less ofan eat-what-you-kll,
‘mentality than other mult-manager rivals. But investors say he i also adjusting toa rapidly
roving firm that under his watch has expanded beyond its core DNA in systematic trading.
“The g7-vear-ld, whose father Brad is close friends with Steven Schonfeld, according toa recent
‘Business Insider article, joined the firm as chief investment officer in 2013 from Goldman, where
Ine was a part ofthe investment bank’ corporate credit team and worked with Justin Gmelich, now
4 co-